Good morning. My name is Jeannie, and I will be your conference operator today. I would like to welcome you to the Q4 and Full Year 2023 Interface, Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Christine Needles. You may begin your conference.

Good morning, and welcome to Interface's conference call regarding fourth quarter and full year 2023 results hosted by Laurel Hurd, CEO; and Bruce Hausmann, CFO. During today's conference call, any management comments regarding Interface's business, which are not historical information, are forward-looking statements within the meaning of federal securities laws. Forward-looking statements include statements regarding the intent, belief or current expectations of our management team as well as the assumptions on which such statements are based. Any forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could cause actual results to differ materially from any such statements, including risks and uncertainties described in our most recent annual report on Form 10-K filed with the SEC. The company assumes no responsibility to update forward-looking statements. Management's remarks during this call also refer to certain non-GAAP measures. Reconciliations of the non-GAAP measures to the most comparable GAAP measures and explanations for their use are contained in the company's earnings release and Form 8-K furnished with the SEC today. Lastly, this call is being recorded and broadcasted for Interface. It contains copyrighted material and may not be rerecorded or rebroadcasted without Interface's express permission. Your participation on the call confirms your consent to the company's taping and broadcasting of it. After our prepared remarks, we will open up the call for questions. Now I will turn the call over to Laurel Hurd, CEO.

Thank you, Christine, and good morning, everyone. Interface delivered a strong finish to the year with fourth quarter sales and margins coming in ahead of our expectations. Our performance in 2023 through a challenging macro environment reinforces our confidence that our strategy is working. We entered 2024 with solid momentum in our business in many areas outperforming the market as we continue to activate our diversification strategy and deliver strong commercial execution. Overall, in 2023, our team did a great job holding price and driving increased margins through favorable product mix, while we also benefited from raw material input cost deflation, specifically in the fourth quarter. Digging into our product category results, we delivered a stronger-than-expected quarter in carpet tile with low single-digit growth in global billings for the quarter. This is well ahead of industry trends, reflecting share gains in this important category. This is a testament to the strength of our commercial execution, new collections that have strong momentum and the importance of our low-carbon footprint products. On the Nora Rubber side, we delivered another solid year in this category in 2023, although we continue to experience softness in Asia. We had another record year for LVT. Global billings surpassed $165 million in 2023, up 10.5% compared to 2022. We're outperforming market growth in this category as well, with LVT billings in 2023 up double digits in the Americas, our largest market, compared to industry-wide benchmarks that show LVT growth in low single digits. We're encouraged by these share gains as customers increasingly show preference for the design and performance of our flooring solutions. Turning to our market segments. We're pleased with our continued progress to diversify our business. Today, I want to start with looking at corporate office, which exceeded our expectations in 2023 and the fourth…

Well, thank you, Laurel, and good morning, everyone. Fourth quarter net sales totaled $325.1 million, a decrease of 3.1% versus 2022's fourth quarter. FX-neutral net sales declined 4.5% year-over-year. Fourth quarter FX-neutral net sales in the Americas were down 4% year-over-year, and we saw particular strength in education and corporate office, offset by softness in the retail sector, driven mostly by project deferrals. FX-neutral net sales in EAAA were down 5.2%, driven by a softer macroeconomic environment. Fourth quarter adjusted gross profit margin was 38.3%, an increase of 507 basis points from prior year's fourth quarter, primarily due to strong execution from our selling organization to hold price, favorable product mix and raw material input cost deflation, partially offset by unfavorable fixed cost absorption. We had a few items that benefited our adjusted gross profit margin in the fourth quarter, which contributed 160 basis points in Q4 and 40 basis points for the full year of 2023. For example, we received an R&D credit and an energy subsidy from the German government in the fourth quarter, which reduced our cost of sales. These are benefits that we do not expect to recur going forward, which is reflected in our guide. Adjusted SG&A expenses were $83.5 million in the fourth quarter compared to $79.4 million in the fourth quarter of 2022 as we focused on strong cost controls and efficiencies offset by inflation. Fourth quarter adjusted operating income was $41 million compared to adjusted operating income of $32 million in the fourth quarter of 2022. The increase was due to higher gross profit margins in the fourth quarter, which I described earlier. Fourth quarter adjusted EPS was $0.41 versus $0.31 in fourth quarter of 2022, and adjusted EBITDA was $52.2 million versus $41.3 million in the fourth quarter of 2022. Now…

Thank you, Bruce. I want to express my gratitude to our team for their hard work this past year. Overall, we navigated a dynamic market. And while there is still some uncertainty ahead, we are seeing positive momentum as we enter 2024. I am encouraged by the progress we are making with our One Interface strategy, combined with strong commercial execution and operational discipline. We remain focused on delivering against our growth priorities. We're amplifying our efforts against high-growth segments like education and healthcare, while gaining share in corporate office. We're also leveraging our selling system as a competitive advantage in aligning our biggest opportunity geographies. And we're focused on delivering innovative designs and differentiated low-carbon products to build on our strength in the premium specified market, while we continue to offer the right product mix and expanded selection to meet our customers' needs. We look forward to sharing more updates on our progress in future calls. Thank you. With that, I'll open it up for questions. Operator?

[Operator Instructions] Your first question comes from the line of Kathryn Thompson with Thompson Research Group. Your line is open.

Hi. Thank you for taking my questions today. I just wanted to see if you could review. It was great to see the momentum in carpet tile. But overall, for Q4, could you review volumes and pricing trends? And if you're able to break it out by Americas versus Europe, Africa, Asia and Australia, that would be great. But really mainly volume and pricing initially, and then have a follow ups on cash generation.

Good morning, Kathryn, this is Bruce. So if we just focus on carpet in Q4, pricing was up around 6% and volumes were down around 2%. So we saw actually a nice momentum going through the quarter. And if we look at total company around all of our product lines, pricing was up around 4% for the quarter.

Okay. Great. And then just in terms of - you've done a really nice job of paying down debt and cash generation in the year. When you frame the year, where does this put you in terms of free cash generated thus for the quarter for the year? And you hit your bogey of being below two times for leverage. What now? Kind of once you've hit your bogey?

Yes. Great question. So our capital allocation strategy remains the same right now. We're going to continue focusing on paying down debt, while also investing in the business. And you probably noticed our CapEx guide was $42 million this year. We have some equipment that we're going to invest in, in our plant, which we believe is going to help lower our costs, our operating costs and also increase our gross profit margins. So it's a bit of a balancing act. But for sure, paying down debt is a top priority still. And as you mentioned, thank you for pointing it out. Our free cash flow generation was great this year. We generated a lot of cash, and we were very disciplined in paying down debt. I probably noticed our net debt to adjusted EBITDA was 1.9 times. So we're below two, which is fantastic.

Okay. Great. And then just a final cleanup call, cleanup question. Could you just also clarify what your adjusted gross margin, you said it was in prepared commentary? And then just the puts and takes for your margin expectations both gross profit and SG&A for 2024. Thanks and good luck.

Sure. Thank you, Kat. So if we think about a baseline adjusted gross profit margin for the year, it was 35%. As we mentioned in our prepared remarks, we had 40 basis points of nonrecurring pickups in Q4 -- I'm sorry, for the full year, our -- in Q4, it was 160 basis points of nonrecurring pickups. The baseline for Q4 was 36.7. So I'll just note that if you go off the baseline, we had -- and you compare where we landed this year compared to our guide, our midpoint guide, we're planning on 70 basis points of year-over-year improvement on our adjusted gross profit margin line. But as you model that out, please note that Q4 will have a really tough comp given the fact that we had 160 basis points of nonrecurring pickups in Q4 of this year that we'll have to lap next year in Q4. And then we're just going to continue. I think you asked about SG&A. We are going to continue optimizing our SG&A spend. And our One Interface program continues to give us opportunities to leverage our SG&A globally, operate as one company. And I think we're demonstrating that and we're really running the company as one across the globe, which gives us a great opportunity to leverage our scale.

Your next question comes from the line of David MacGregor with Longbow Research. Your line is open.

Hey, good morning. This is Joe Nolan on for David.

Hey, Joe.

Hi. I just wanted to start. You guys talked about some input cost deflation [ph] in the fourth quarter. Can you just talk about what is baked into your guidance for raw materials in 2024? And maybe talk about some of the moving buckets within that?

Sure, Joe. So we are -- we had -- starting in the back half of last year -- of 2023, we did start to see some deflation in our purchases, and we saw some benefit of that in Q4 of 2023. We'll see -- continue to see some benefit of that going into 2024. And as I just mentioned, we're planning on coming off of our baseline adjusted gross profit margin, we're planning about 70 basis points of year-over-year improvement and about a third of that is going to be generated by raw material deflation and the other third will be generated by pricing and the other third will be generated by productivity.

Got it. Okay. That's helpful. And then could you please just give us an update on the One Interface initiative and what you expect that to contribute to 2024 results?

Yes, I'd be happy to. Thanks, Joe. We're really pleased with the progress. And I think what you can see in 2024 will be -- I think we're starting to show some proof points of that progress, both with some of our new collection launches and our results in Q4. You'll see that continue to strengthen. As we mentioned in the prepared remarks, we'll have more global collections launching at Clerkenwell and NeoCon that we really expect to contribute to our growth. And then we have this pilot that we launched this year in the Americas with our combined selling team. So as you know, our Nora business we acquired in 2018, and we've been doing a really great job infusing design into what's really a technical sale. And we're taking it a step further in the Americas. We've been really reluctant to fully integrate the selling team because it really is a different sale. When I go out to a Nora customer, I'm suited up head to toe in a bunny suit kind of crawling around on the hospital room floor versus what our Interface sellers spend a lot of their time with architects and designers and end users. But what we found in the example that we gave on a hospital campus, they love the Nora brand. And Nora has been sold in every operating room, in every one of their facilities around the world. And yet we haven't necessarily landed the LVT or the carpet tile in patient rooms and waiting rooms. So now we're launching combined selling teams, which have on quota. And when you have a variable comp structure and you align those selling systems, so we've seen some really strong results with order generation up double digits in those pilot markets. So we're rolling that across the Americas. We launched that in January. We had our selling teams together in the past few weeks and are really excited about the results there.

That's great detail. Thanks. I'll pass it on.

Your next question comes from the line of Keith Hughes with Truist. Your line is open.

Thank you. Within the revenue guide for the year, it's a flat, modestly up. Could you just talk about how you think the various end-user markets will be performing under this point?

Yes. Hi, Keith. As we mentioned, our retail end market has been challenged starting in the back half of last year. And as we mentioned also, it's largely one customer and we see that continuing in the first half of this year. And the good news there, we haven't lost that business. They've just delayed their store remodels, which we do expect they're going to have to remodel at some point, but we're being conservative about how we're thinking about that. So that's, I think, the biggest headwind that we've got in the first half of the year, and then we'll be past that comp in the middle of the year. We are seeing strength in corporate as people are returning to work and that Class A space is really where we're seeing the most activity. And again, we believe we're gaining share there. So we're not naive to the market dynamics, but we're cautiously optimistic that corporate will continue to hold in really steady. And then healthcare and education, we're continuing to see growth there and expect that to continue.

In the corporate office comment you just made, is that from remodel activity? Is that what's driving it? So it sounds like it's going to be a positive number based on what you just said?

Yes.

Or is it remodel and new construction?

We're primarily seeing the strength in remodel for sure. It's people moving their spaces. There's a lot of movement with return to office and people wanting to refresh their space, either encouraged to bring people back or in some cases, they are moving to new space that's smaller, but that activity is really good for us, and we're capitalizing on it. It's definitely the remodel side of it.

Okay. And final question on revenue guide. What's the -- are units and pricing flattish in this scenario? Or is there some residual pricing that's still going to be flowing through beginning of the year?

We think there's a little bit of residual price. We do a pretty good job when we roll out pricing to hold it. We'll do that often times with new collections and other things that we're able to hold. So there's a little bit of price and then units about flattish, maybe down a little bit.

Okay. Thank you.

Yeah.

There are no further questions at this time. I will now turn the call back over to Laurel Hurd for closing remarks.

Great. Thank you, and thanks to everyone for listening to the call today. Thanks to the entire Interface team for their continued efforts, and we look forward to keep everyone -- keeping everyone posted on our progress.

This concludes today's call. You may now disconnect.