Interface Inc (TILE) Q3 2026 Earnings Call Transcript

Approximately $60 million. As a reminder, our full year adjusted gross profit margin guidance includes the one-time benefit of the IEPA tariff refunds that we received in the second quarter. Excluding that benefit, our baseline full year adjusted gross profit margin for the year is approximately 39.3%. And with that, I'll turn the call back to Laurel for concluding remarks.

Thank you, Bruce. Interface delivered a solid third quarter in a dynamic environment, and we're encouraged by the momentum we continue to see in the Americas. We grew global billings in all three of our primary market segments, and our operating discipline drove adjusted earnings growth ahead of our expectations. Our one interface strategy, together with the transformation underway in EMEA, prepares us well to navigate the softer European environment while strengthening our competitive position for the long term. With a solid backlog, a healthy balance sheet, and a connected global team, we are reaffirming our full-year earnings outlook and remain focused on delivering sustainable, profitable growth. I want to thank the entire Interface team for their relentless focus on serving our customers every day. And with that, I'll open it up to questions. Operator?

We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Brian Byros with TRG. Brian, please go ahead.

Hey, good morning. Thank you for taking my questions today. On gross margin for Q3, slightly below guidance, but still very good. Margins for Q4 look to imply, I think, down year every year on input costs and some of the other stuff you mentioned in the prepared remarks. Can you just talk a bit more about the puts and takes in the quarter? For Q4, and then how we should think about gross margins into next year.

Yeah, good morning, Brian. What you're seeing is exactly what we talked about last quarter in Q4, and it's really just the flow through and timing inside the quarter of how the raw material costs are that were previously sitting on the balance sheet are flowing through in Q4. I think the important thing that we are really focused on is looking at the run rate of gross profit margin, which is around 39%. And so if you look at the if you sort of step back, and don't just look at just a quarter, but if you sort of look at it for the for the second half of the year, if you look at it for the full year, structurally, we're around 39%.

Got it. It's impressive. You've been able to hold it at that level with all the headwinds that have come at you.

Yeah.

Hey, thanks, Brian. On corporate office. Sorry. Yeah, go ahead.

Hey, Brian, it's Laurel. I was just going to jump in on that, and I appreciate you saying that. As you know, our... Our stated ambition for, you know, a few years from now was to get to 38 and a half percent. So the fact that we're at 39, we feel great about that with all the volatility. And we're not going to stop, right? We're going to continue to press forward on all of our growth initiatives and our margin expansion initiatives. So we're working through it all, but I appreciate you acknowledging that.

Yeah. On corporate office, I think you mentioned it was up 2% in the quarter. Good to see continued growth there. We've heard some pretty good trends from office R&R and the return to work kind of driving growth there. I mean, maybe we would have expected to see a little bit stronger growth this quarter. I think you had pretty good growth numbers in Q1 and Q2 from office. I just kind of just want to understand, is that momentum for office R&R still there?

Yeah, it is for sure. And I think we're feeling good about the overall office environment. As you said, there's a ton of R&R work happening. And some of that has to do with the softness in Europe that we're seeing. We did grow office in Europe, but that market just softened a bit. And if I comment on Europe for a second, the macro environment became a little more challenging in the quarter. Our dock market, so Germany and Switzerland as well as France were softer, but our UK market continued to grow, which is encouraging. And then when we look at our opportunity pipeline development across Europe, it looks strong. Up year over year. Our win rates are consistent. Our activity is good. It's really just taking a little bit longer for opportunities to convert to orders and then orders to convert to billings. So that's really the lag that we're seeing, I would say, from the office side. A lot of momentum still everywhere across the globe.

And the last one for me, I think, still on Europe there, then, you're rolling out kind of the one interface selling strategy across Europe next year, it sounds like. Do you need the macro in Europe to come back and be stronger to really execute on that strategy, or can you still execute it to pretty much the same degree, regardless of the macro?

Yeah, it's a great question. I'm thrilled about the progress that we're making there and that we've embarked on the journey to take the all of the. Learnings from the US and the success we've had to Europe, we've aligned that commercial organization under a single leader, where previously it was run as really three separate selling organizations. And that leader is building out their selling team now. And the next year, we'll start to move to the one interface selling team structures. That will be supported with centralized customer service, commercial analytics, really running the playbook and all of the lessons from the US that resonate for Europe. And if I think about that, it's a good time to do it. So we'll do that. We've done that. The macros weren't great in the US when we started that, and we still were able to methodically drive consistent growth. And so we're happy that we're doing that now. And if I think about it. Coupling this commercial reorganization with all of our productivity initiatives to strengthen our supply chain and margins, and then also while expanding our addressable market with new designs and innovations, putting all that together, I'm really optimistic about the future of our business in Europe.

The rollout across the U.S. seemed very successful, in my view, so excited to see how that goes in Europe next year. I'll pass it along. Thank you.

Thanks, Brian.

Your next question comes from the line of David McGregor with Longbow Research. David, please go ahead.

Good morning, everyone. Thanks for taking my questions. I guess I wanted to just ask about how much of the cost inflation occurred in the quarter was not expected as you came into the quarter, in other words, came about during the quarter.

Yeah, the additional costs that we saw were principally related to Canadian tariffs. That was new inside the quarter, as well as we did see some oil. Obviously, some of the energy costs increased during the quarter. The good news is that we were able to offset, you know, most of that. We largely came in at our guide. I realized it was a point for Q3, and we're holding and reaffirming our earnings guidance for the year. But to be fair, we did see additional cost increases kind of rolling through, and those were the two main ones. All right.

Are you able to quantify that?

I can annualize it for you. The Canadian tariffs, you know, are in the range of 5 to 10 million annually. The oil prices and the energy prices are changing daily. And so there is a piece of that that's rolling through. And honestly, the oil has bounced around from 90 to 115 a barrel. So it really, really changes a lot. It bounces around daily. So we're watching it closely, and what we've done is we've activated plans to do everything we can to offset those costs, and we've been successful in doing that.

Right. Okay, good. And I guess, you know, that kind of feeds into the next question, which is, you know, how are you planning to protect margins heading into 4Q and into 2027, more

Yeah, we'll continue to execute on pricing. So we've been doing that pretty effectively. I think about our model in the U.S. It actually is really effective in that we have our commission-based selling organization, and we can put price in the market pretty quickly, which is what we've been doing. Where, you know, our sellers are quick to get that action. And we'll continue to do that across the globe. So first, pricing is a big, important lever. And then second to that is productivity. And we've been driving just a ton of productivity projects, continuing to invest in automation that drive efficiencies and those continue to pay back. So we'll push on both of those. And then the third piece is really mixed as we've been driving, importantly. You know, putting our growth aligned with our most profitable categories and markets.

Right. What do you think productivity can give you in 2027? Just given all the investments you've made in automation, I would think it's a meaningful number, but what's a good way to think about that?

David, it'll be, we're, of course, not providing 2027 guide right now, but, you know, as you've seen this year, the productivity has been rolling through the P&L, and we've. We've done other initiatives this year that'll activate. We get a partially partial productivity lift this year, and then it rolls through into next year as well, as well as a multi-year rollout around these productivity initiatives. It's meaningful, and that's how we're able to get the gross profit margins that you're seeing.

It is meaningful. I'll just jump on that as well. You know, some of the things that we've done with the automation in our carpet tail manufacturing in Georgia, we've rolled that now to Australia and Europe, and we're seeing those read through favorably. And then we've got some additional automation in our carpet tail manufacturing in, again, in Georgia and in Australia around cutting and packaging, which is. Also, you know, that'll go live next year, which should also be meaningful. And then we continue to invest in Nora. And the nice thing about our Nora investments is they help us not only with efficiencies, but also with capacity. So modernizing our equipment there and automating does it does, you know, it pays dividends for us to support the growth that we continue to see in Nora.

Sounds good. I wanted to maybe ask you a little more about some of the discussion on the previous question about market conditions, and you were talking about sort of the timing delay that occurred in the third quarter. The discussion was around office. I'm guessing it's around everything, not just office. But what are you seeing in terms of pre-sale indicators? If this is a timing issue, are the underlying pre-sale indicators still positive and pointing towards good growth? Are you seeing order cancellations, or is this really just kind of things just taking longer to transpire?

Yeah, I think there's, and I put this sort of in two buckets. So in the Americas, I would say, our momentum remains really strong. And it's strong in office, it's strong in all of our key end markets, healthcare and education. We had two specific timing. We have a lot of items in the quarter that affected the Americas, and the first is retail. And you'll remember, David, over time, we have a bit of quarter-to-quarter variation in our retail store installations, and that happened in the quarter. We didn't lose that business. That will come in future quarters. So that's sort of a unique item. And then we've also shared that our Nora projects, those are larger projects that can cause some variability quarter to quarter. And so that's the situation in the Americas. There was a bit of retail and a bit of Nora timing variability. So we haven't seen any order cancellations. We haven't seen a slowdown in momentum. What I was referring to on this delay in or sort of, you know, pausing delay and orders was specific to Europe. So that's really where we've seen. And we've got a ton of opportunity. Our opportunity pipeline looks strong. The activity remains good. Our team was at a trade event two weeks ago. There was a there was a bunch of momentum there. It's really just converting that pipeline into orders and billings, specifically in Europe.

Yeah. I mean, the office furniture guys are seeing exactly the same thing. So it's visible at a number of different points. How much of this do you think is just construction project delays and the ability to get the construction work done to get ready for the installation of your product? How much of it do you think is just budget exhaustion because of inflation and some of this work just needs to get pushed forward into the 27 budgets? I mean, to what extent do you think those factors are coming into play here?

I think there's probably all of that. I think there's some labor availability challenges and other things. But I think the good news about our category, and we've discussed this, is customers can only push the timing so far. One, they need to refresh their spaces, but also for projects that are. In flight, you know, the flooring needs to be installed to get their certificate of occupancy. So that really helps us to get the projects over the finish line.

Right, right. Last question for me is just, you know, how would you characterize competitive conditions right now and how they're evolving as inflation becomes more of an issue for everyone?

Yeah, it's a good question. I would say, you know, we have great competitors and I think we're all faced with the same challenges. So we're responding accordingly. There's a lot of. There's a lot of price in the market, and yet it remains competitive. We need to win every order and every job every day, and we feel like we're doing a good job. We feel like we're taking good market share and outpacing the market, but everyone's faced with the same challenges, which in some ways makes it certainly a fair playing field, and we need to win on our merits every day.

Got it. Thanks very much.

Thanks, David.

There are no further questions at this time. I will now turn the call back to Laurel Hurd, President and Chief Executive Officer, for closing remarks.

Great. Well, thank you all for joining us today, and thanks again to the Interface team for everything you do, and we look forward to speaking to you again next quarter.

This concludes today's call. Thank you for attending. You may now disconnect.