Thank you for standing by. My name is Bailey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2024 Interface Inc.’s 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] I would now like to turn the call over to Christine Needles, Corporate Communications. You may begin.

Good morning, and welcome to Interface's conference call regarding third quarter 2024 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. To begin our call, I want to thank the Interface team for an impressive quarter. Our strong results reinforce the fact that our One Interface strategy is working and yielding tangible results. The strategy is focused on building strong global functions to support our world-class local selling team, accelerating growth through enhanced productivity of our commercial teams, expanding margin through global supply chain management and complexity reduction, and leading in design, innovation, and sustainability. We're in the early stages of our multi-year plan, and we're encouraged by the results we're seeing across the business. We've talked about the new integrated selling approach that we implemented in Q1 of this year, which combines Nora and Interface selling teams in the U.S. These coordinated teams are continuing to yield tremendous results in the Americas business, resulting in currency-neutral net sales up an impressive 18% in the quarter. We're seeing momentum in Nora Rubber sales expanding beyond Healthcare into other growth segments including education, biopharma and manufacturing. Our combined selling teams are effectively unlocking new opportunities across the product portfolio while enhancing the customer experience. This is what we'd hoped to see and we're encouraged by the team's progress. Additionally, we recently added the Nora brand to our refreshed brand attitude Made for More. This platform brings our brands closer together to drive consistency in how we show up for our customers. It creates efficiency in our marketing and brand efforts and ultimately provides additional sales opportunities. Turning to our financial results, we delivered a very strong third quarter with currency-neutral net sales growth of 10% and significant profitability expansion. We continue to drive strong momentum in the Americas and as mentioned, currency-neutral net sales were up 18% year-over-year, continued market share gains. In EAAA, currency-neutral…

Well, thank you, Laurel, and good morning, everyone. Third quarter net sales totaled $344.3 million an increase of 11% versus the third quarter of 2023. Third quarter FX neutral net sales in the Americas were up 18% year-over-year, driven primarily by strength in the Education market segment as well as strong retail billings. FX neutral net sales and AAA were flat year-over-year and on an FX neutral basis EMEA was up 2%, Asia was down 1%, and Australia was down 9% year-over-year on a strong prior year comparison. Third quarter adjusted gross profit margin was 37.5%, an increase of 158 basis points on raw material cost deflation and higher fixed cost absorption due to increased volume compared to the same period last year. Adjusted SG&A expenses were $85.5 million or 24.8% of net sales in the third quarter compared to $79.2 million or 25.5% of net sales in the third quarter last year. Third quarter adjusted operating income was $43.5 million up 34% versus adjusted operating income of $32.4 million in the third quarter last year. The increase was driven by higher net sales and higher gross profit margins in the quarter. Our third-quarter effective tax rate benefited from the release of a $2,700,000 valuation allowance. This is driven by strong business performance in the U.S. and lower interest expense from accelerated debt repayment. The release of this valuation allowance was unique to Q3 2024 and is not expected to recur. Third-quarter adjusted EPS was $0.48 versus $0.28 in the third quarter last year. Third quarter's adjusted EBITDA was $53.7 million versus $43.7 million in the third quarter last year. We generated $76.2 million of cash from operating activities in the third quarter. In line with our capital allocation strategy, we repaid $51.3 million of debt in the third quarter…

Thank you, Bruce. I want to thank everyone for joining the call today, and I would especially like to extend my thanks to the entire Interface team. Our results this quarter demonstrate the strength and effectiveness of our One Interface strategy, and I'm incredibly proud of the progress we have made across all areas of our business. As we look ahead, our focus remains on investing in the business, operational excellence, and delivering value to both our customers and shareholders. We are confident in our ability to navigate the dynamics of our current market while seizing opportunities that align with our long-term vision. With that, I will open it up to questions. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Kathryn Thompson of TRG. Your line is open.

Hi, thank you for taking my questions today. First, I want to focus on non-res repair and remodel and we've heard very, a few companies this earnings season talk about an improvement in activity in non-res repair and remodel and you seem to be seeing that as well, given the pace of orders in the past few quarters and bigger growth this quarter in education and health care. Could you -- how would you characterize the state of non-res repair and remodeled leading into 2025, and how does it compare to going into the current year last year? So really what's the pace now going into next year and how does it compare to last year at the same time as you think about momentum?

Thanks, Kathryn. First, I'd say I'm really proud of the progress that the team's made. 18% net sales growth in the Americas is a really, really strong quarter. And as you said our order book also looks good. So we're saying I think we're definitely outpacing the market with respect to the total market. We're feeling really good about the corporate environment is we're continuing to see more and more activity as people are bringing more associates back to work. So those projects are coming I think stronger certainly than a year ago. Our optimism is building. With respect to that, as you said, our Education business remains very strong as we're selling the full product portfolio. Seeing a lot of growth across our Nora products as well in Education both in K through 12 and Higher Ed. So I think we're optimistic that the momentum is building. And within that, we are proud of the team's ability to take share.

Kathryn, I agree. The other thing that was really interesting to me on our earnings this quarter is that year-to-date all three product lines were up both in price and volume and we couldn't say that last year. So it's just another testament to the momentum that we're seeing in the business, the momentum that we're seeing now versus a year ago. So great momentum inside the business and great to see the volume up as well as us being able to hold price in the market.

Okay. Helpful. And then just a follow-on to that on order growth in the Americas. Can you give any detail on the breakout across verticals or products? That's leading to growth.

Yes. We don't give a ton of detail on that breakout. The one thing that we did mention in the prepared remarks is that our Healthcare orders were up double digits in the quarter. So we're feeling optimistic about that Healthcare business and those orders will read through over the coming quarters. Some of those take longer to read through. So that's good momentum for us in the future.

Okay, great. Thanks so much.

Yes.

Your next question comes from the line of Alex Paris with Barrington Research. Your line is open.

Hi, guys. Thanks for taking my question. Congratulations on another beaten raise.

Thanks, Alex.

I just had a question kind of following up on Kathryn’s regarding billing. So again, education was up very strong, up 18%, corporate office was up 2%, kind of bucking the industry trend, and you made some favorable comments about return to office. I just thought whatever additional color I can get in those two categories, but also wanted to talk a little bit about retail and Healthcare. So retail is finally up from down last year due to project delays. So what's going on in retail? I'll start there.

Yes, great. So our retail business did come back as we had expected. And again this was really project delays last year. So in the back half of last year, we had several store remodels that were delayed and pushed into the back half of this year and those read through in the quarter. If you look at the Americas business as an example for that 18%, about 8 points of that growth was the retail comeback, which we had expected and then 10 points of growth across the rest of the market. So a strong quarter for retail, which is exactly what we had expected. We expect that also to carry somewhat forward into the fourth quarter. And then our corporate office business, it does continue to perform really well. It was actually up mid-single-digits in the Americas, so even stronger than our globally our 2% growth and our teams are really winning projects, as Bruce said, across all categories. So they're doing an incredible job with these One Interface selling teams of selling the full suite of products across LVT, carpet tile, and also Nora Rubber. So strong growth in corporate as well.

That's great. And then Healthcare, you said that orders were up nicely, which is great. But revenue net sales were down in Healthcare slightly. What do you attribute that to?

Yeah. Healthcare for us those projects get installed over time, so the time horizon is a bit different. The double-digit order growth in Healthcare is really encouraging and a testament to the team. Again, the combined selling team is really focusing on the end market and we expect those orders to read through. Those projects get installed sometimes over one to two years. They're bigger projects and the orders come in, in bigger chunks, but they also get the billings read through in bigger chunks over a longer period. So we're encouraged that we saw that level of net sales growth in the quarter, while Healthcare was not as strong, and then Healthcare orders up, which shows that momentum will continue to read through in the future.

Does that strength in orders in Healthcare translate into higher net sales in Healthcare in the fourth quarter?

I would expect it to. I think it also will flow through into next year. So again some of those projects are like small medical buildings and those will turn in the quarter. Some of those projects are large healthcare systems that may have multiple buildings and multiple floors that get installed over 12 to 18 months.

Great. That's I appreciate that color. And then I might have missed it, but did you comment on billings across product categories? I think you said they were up year-to-date in all three carpet tile, LVT, and rubber.

That's right.

Great.

Alex, our billings were up with price and volume, which is also which is a great sign, so in all three product categories year-to-date.

Great. Were they up in the third quarter or just up year-to-date or both?

Two out of the three were up and they were up with volume. So, yeah, that's again an encouraging sign that it's really encouraging to see how much volume has come back while we're able to hold price. So all encouraging stuff on top-line.

Absolutely. Thank you. Then the final question from me, great outperformance on the adjusted gross margin versus your guidance. I think you had guided to approximately 36%. It came in at 37.5%. What is your long-term target there? I think you want to get back to pre-COVID levels. What is that? And then how long will it take you to get there? Is it like a 50 bps per year sort of thing or is it faster, sooner?

Alex, you're right. Exactly. Our ambition is to get back up to 38% to 38.5% and we're really encouraged by the progress that we're making. We haven't given a specific timeline. We're honestly just trying to get there as fast as we can and again encouraged by the progress.

And I would just say Alex the good news is that you kind of mentioned it. We brought up our gross profit margins in Q4 and for the full year. So if you sort of think about our prior guide for Q4, it was around 34.1%. We brought that up 80 basis points in Q4 to 34.9% as our midpoint guide and for the full year, as you pointed out, our prior guide was 36% and now we brought it up to 36.6%. So really good strong momentum on that gross profit line on [indiscernible].

Great news. Thank you so much. I appreciate the additional color. I'll get back into the queue.

Thank you.

Thanks, Alex.

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

Yes. Thanks for taking my questions and good morning to everyone. Congratulations on all the progress, tremendous to see. I guess, what percentage of wins at this point have more than just carpet tile, so include the LVT and the Nora versus how that KPI might have stood a year ago or 18 months ago?

Yes. It's a great question David and not something that we disclose regularly. I would say it's increasing for sure. An example I would say is in our education space where we had primarily initially we were just selling carpet tile in education, we broadened that nicely to include carpet tile and LVT as pretty standard in selling to the education space, and what we're finding now is Nora is also included in those both in K through 12, but also in higher ed. So for example, we're getting lab spaces and other spaces in higher ed, which we maybe hadn't had as part of that portfolio in the past. So it's definitely increasing and encouraged by what we're seeing there. I think there's more to go.

That's encouraging. And I guess this is all just one interface. It's not necessarily evolving preferences with the customer. It's more you're taking share in those categories with an increasing presence.

Yeah. It's interesting. When we think about what we did with the One Interface selling teams, which hit as you know starting in January, part of that model was that we increased our feet on the street for our Nora brand by about 20% to really round out the combined selling teams and make sure we had enough coverage on Nora to execute that model. What we're also seeing is that we actually put the Nora brand in the hands of all of our Interface sellers by changing our compensation structure so that now we're selling as one team and compensating as one team. And so the energy around that rubber is a great solution for a lot of flooring opportunities and we've really got an amplified effort across our entire Interface selling team in addition to that increase in feet on the street specific to Nora. So we're really seeing a multiplier effect there that's stronger than we anticipated.

And so with the growth in Nora and just in terms of penetrating your existing base and then in addition to that you're talking about growth beyond Healthcare. How do you stand in terms of available capacity at Nora? Do you have the capacity to support how much growth? And when do you have to start deploying capital to expand that?

Yeah. It's a great question and we're talking a lot about that. I think the good news right now is we've got we invested in some automation equipment in Nora that is live now that's really helping us to increase our throughput. So we have what we need. I think we'll continue to invest in that space and you may see some additional investments in Nora as we continue to grow. But we're continuing to kind of bring on more and more people to support the growth and also continue to invest in automation. So I think we're in good shape. We're talking about it every day.

Got it. On the raw materials, how much of the benefit that you achieved well, first of all, maybe can you just talk about what price cost might have contributed to the gross margins.

David, it was a blend between -- if you look at the 158 basis points of gross margin expansion in Q3, it was a blend of raw material cost deflation and also higher fixed cost absorption or lower cost per unit on higher volume and part of the contribution of that was that we actually beat our revenue number in Q3. So compared to where we thought we would be in Q3, we had more throughput through plants, which helped us a lot on our fixed cost absorption. And on the raw side, things are leveling out from an inflation-deflation standpoint, but we did get a little bit of year-over-year lift in Q3 that will start to moderate as we move into Q4. And all of that's built into our guide.

And David, I'd just add to that also. When our Americas business is up 18% that regional mix impact also helps us. So that flows through as a benefit as well.

That's true.

I guess I'm trying to get a sense of how much benefit there is from just movement in the raw material markets themselves in terms of the price you're paying for these factors versus some of the benefit associated with bringing on a new supply chain leader and really getting much more process-oriented around procurement?

I think it's a combination of all those things. And you put all of those positive pieces in and it's really -- it blends into the 158 bps as Laurel mentioned. Laurel had a really good point that the geographic mix helped us a lot as well, offset a little bit by the retail mix. So there are lots of pieces in there.

And I think a lot of the things that we're seeing with respect to our investments in automation are yet to come. As we've said, we're I'm pleased with the progress. We now have I think it's three machines up and running maybe the fourth is live by now in our Georgia facility that will really help with the automation there. But that's going to continue to play out over the next year.

And that's versus I think you had one line up and running last quarter?

That's right. That's right, David.

Okay. So good progress there. I guess just thinking through to 2025 and I'm not sure obviously there's a lot of uncertainty still remaining with regard to what ‘25 may bring. But I'd be interested in your thoughts in terms of your ability to maintain kind of a gross margin progression, not so much based on what the market may bring because as we've said that's uncertain, but just based on the idiosyncratic drivers that you've got in place, the automation, the procurement, the one interface initiatives. What do you think that could contribute to gross margin progression as you move into the next year?

As we've said our ambition as you know is to get back to 38%, 38.5%. I think we're from a timing standpoint this year, I think we'll be ahead of where we thought. So I'm encouraged by that. And yet we still have a lot yet to deploy that I don't think is reading through the P&L yet. So I'm encouraged that we'll continue to make progress. And as you said, the market will ride that and see where that takes us. But we're through all of this, we've just said we're going to not pay so much attention to what the market is doing. We're going to do everything we can to continue to drive market share gains and growth which and then also the supply chain initiatives all that is within our control to drive that. So I think we're feeling good.

Okay. And then just wrapping up for me. I guess a question on SG&A. You're guiding to $345 million this year of SG&A. I guess a couple of questions here. How much revenue growth can you support based on kind of that level of spend? I'm guessing you're going to get some inflation there in 2025, 3% inflation will be an extra $10 million but maybe offset that with some productivity and maybe offset increasing growth spending with CapEx in non-growth SG&A. I'm not sure how you approach that. But I guess the question is just how much upside is left in terms of your ability to grow revenue of SG&A before you have to really take SG&A to the next level.

So as we've said, we've been really focused on being efficient in our SG&A. And we'll make investments very thoughtful and intentional investments that we believe will read through to growth. The great example of that is adding the feet on the street to the Nora business which is paying back in dividends and we're analyzing all of that to see how much more do we need in 2025 to deliver the growth expectations that we have for ourselves and yet we'll be very diligent on anything that doesn't touch the customer, the innovation, or the product design and development. So it's a dance as you know, right? We need to make sure that we fund the growth. We'll be really intentional. We do a lot of test and learn to see whether or not things pay back. So we're putting really good money to work for us and then being really efficient on anything that doesn't touch the customer.

Great. Well, thanks very much for answering my questions, and congratulations on all the partners.

Thanks, David. Appreciate it.

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

Well, I want to thank the entire Interface team for an excellent quarter. Congratulations to the team and thanks everyone for listening to the call and have a great day.

Thank you. This does conclude today's conference call. You may now disconnect.