Earnings Call Transcript - TILE Q3 2025

Operator, Operator

Thank you for waiting, and welcome to the Interface Third Quarter 2025 Earnings Conference Call. I will now hand the call over to Christine Needles from Global Communications. Please proceed.

Christine Needles, Global Communications

Good morning, and welcome to Interface's conference call regarding third quarter 2025 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 as supplemented in our first quarter 10-Q. 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 expressed 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.

Laurel Hurd, CEO

Thank you, Christine, and good morning, everyone. Interface delivered another strong quarter, exceeding our expectations with currency-neutral net sales growth of 4% and significant profitability gains. We saw continued strength in the Americas and increased momentum in EAAA with broad-based growth across all regions, all product categories, and the majority of our market segments. We are pleased with the quality of our earnings. Net sales increased through a balanced mix of price and volume and adjusted gross profit margin expanded by 208 basis points driven by favorable mix and manufacturing efficiencies. This consistent execution underscores the power of our diversified portfolio, the strength of our brand, and ongoing share gains in key markets. I'm proud of the Interface team and their unwavering commitment to serving our customers. Our One Interface strategy is driving these results. As we've discussed before, this multiyear plan is focused on building strong global functions to support our world-class local selling team, accelerating growth through enhanced commercial productivity, expanding margin through global supply chain management, simplifying operations, and leading in design, performance, and sustainability. Since launching our One Interface sales team structure in the U.S. in January 2024, we've been delivering a single cohesive customer experience across carpet tile, LVT, and Nora Rubber. This unified approach has exceeded our expectations and continues to drive consistent quarterly growth. Driven by our combined selling team, Nora Rubber grew 20% in the third quarter and is up 19% year-to-date. To build on this momentum, we will accelerate investments in automation, productivity, and innovation to further strengthen the Nora product portfolio and drive long-term growth. We're preparing for the launch of a new rubber flooring innovation in early 2026 that we believe will accelerate growth in the Healthcare segment, among others. We look forward to sharing more about this on our next call. Additionally, our investments in carpet tile automation and robotics are delivering meaningful productivity gains and margin improvement. These investments are exceeding expectations, improving efficiency, reducing waste, and enhancing service levels. We are now extending these robotic systems to our facilities in Europe and Australia, and we continue to explore and identify new opportunities for automation across the company. From a product standpoint, we continue to expand our addressable market, delivering high design at compelling price points to create new opportunities for growth. During the quarter, we introduced our stellar Horizon's carpet tile collection, which spans a range of price points and supports segment versatility. The collection offers exceptional durability, acoustics, and cleanability while balancing design and functional performance. We also introduced three new resilient products that expand color, design, and aesthetic options across the category. This includes two new LVT styles in the mix and raw materials and a refresh of our norament XP rubber offering. These new and updated styles give customers more ways to specify Interface products across a range of spaces and budgets. We continue to differentiate our portfolio through exceptional design, superior performance, and an unwavering commitment to sustainability. Now let's turn to our third quarter results. We delivered a 4% increase in currency-neutral net sales reflecting strong execution and continued share gains. In the Americas, currency-neutral net sales increased 4% as our combined selling teams drove growth across key market segments. In EAAA, currency-neutral net sales were also up 4% through broad-based growth in all our regions. Turning to market segments, our diversification strategy continues to fuel our growth. Global healthcare billings were up 29% with double-digit gains across both the Americas and EAAA. Our broad and differentiated product portfolio continues to capture opportunities as the global healthcare sector evolves, driven by an aging population, technological innovation, and a growing focus on preventative care. In the U.S., our combined Interface and Nora selling teams are working together seamlessly, enabling us to compete more effectively and win new opportunities as we meet the complex and changing needs of the modern healthcare environment. Corporate office billings were up 5% in the third quarter, and they are also up year-to-date as expected. We continue to see share gains in this segment as companies move to Class A space where our brand strength, design leadership, and broad product portfolio position us to win. Our solutions are well aligned with workplace trends as companies invest in refreshes and adapt environments to meet the evolving needs of a hybrid workforce. And by expanding our product offerings across a wider range of price points, we are capturing new opportunities and broadening our reach. Education billings declined slightly in the third quarter but remain up high single digits year-to-date. We view the slight quarterly decline as timing-related as we are well positioned in both K-12 and higher education underpinned by our design leadership and low-carbon high-performing products. Strong macro drivers, modernization initiatives, and regional migration continue to create meaningful growth opportunities in this segment. Turning to orders. Consolidated currency-neutral orders increased 2.4% year-over-year. Americas was up 1.7% on top of prior year order growth of 17.1%. EAAA was up 3.5%, driven by strength in EMEA and Australia. We ended the third quarter with our backlog up 17% year-to-date, reflecting solid underlying demand. Our strong results this quarter reflect how well our teams are delivering for our customers. That's evident in the recognition we received from the design community. Interface earned multiple #1 rankings in the Floor Focus top 250 design survey, where designers named us an industry leader in service, quality, design, and performance. On the sustainability front, we were named Manufacturer of the Year in Ed's Net Zero Awards and recognized by Metropolis in their Planet Positive Awards for our all-in strategy. These awards acknowledge the bold steps we are taking to be carbon-negative by 2040 without offsets, and they are a testament to the hard work and dedication of our entire team. Looking ahead, we remain confident in our strategy and disciplined execution. Continued investments in innovation, automation, and commercial excellence are strengthening our foundation for sustainable growth. With a talented global team, a powerful brand, and a proven strategy, Interface is well-positioned to deliver differentiated design, strong financial performance, and long-term value for our shareholders. With that, I'll turn it over to Bruce.

Bruce Hausman, CFO

Well, thank you, Laurel, and good morning, everyone. Third quarter net sales were $364.5 million, up 5.9% as reported and 4.2% on a currency-neutral basis versus the third quarter of 2024, both ahead of our expectations. Third quarter currency-neutral net sales were up 4.1% in the Americas and 4.3% in EAAA year-over-year. Adjusted gross profit margin was 39.5%, up 208 basis points versus the third quarter of 2024, driven by favorable pricing and product mix combined with manufacturing efficiencies, partially offset by higher raw material and tariff-related costs. Adjusted SG&A expenses were $90 million in the third quarter compared to $85.5 million in the third quarter of 2024, primarily due to higher sales commissions and variable compensation on increased sales and profits, inflation, and foreign currency exchange variances. Adjusted operating income was $54.1 million, up 24.5% year-over-year. Third quarter adjusted EBITDA was $66.2 million versus $53.7 million in the third quarter of 2024. Third quarter adjusted earnings per share was $0.61, a 27% increase versus $0.48 in the third quarter of 2024. We generated $76.7 million of operating cash flow during the third quarter and ended the period with $482 million of liquidity. Net debt defined as total debt minus cash on hand was $120.4 million, and our net leverage ratio was 0.6x, calculated as net debt divided by the last 12 months of adjusted EBITDA. As part of our balanced capital allocation strategy, we repurchased $0.7 million of Interface common stock during the quarter. Overall, our strong balance sheet provides flexibility and optionality in today's dynamic environment and the ability to continue investing in the business for growth and margin expansion. Turning to tariffs. You may recall, our exposure is limited and primarily tied to imports of Nora Rubber from Germany and LVT from South Korea into the U.S. We continue to offset tariff-related costs through pricing and productivity initiatives. When tariff costs are successfully offset on a dollar-for-dollar basis, we are able to protect our gross profit dollars, but there is a dilutive impact to our gross profit percentage. In the third quarter, tariffs diluted our adjusted gross profit percentage by approximately 30 basis points, and we anticipate a similar dilution of 50 basis points in fourth quarter's adjusted gross profit percentage. In sum, we are successfully managing tariff-related costs, and our plan is to continue doing so. With that backdrop in mind and on the strength of our year-to-date results, we are raising our full-year guidance. For the full fiscal year of 2025, we now anticipate net sales of $1.375 billion to $1.390 billion, adjusted gross profit margin of 38.5% of net sales, adjusted SG&A expenses of $362 million, adjusted interest and other expenses of $25 million, and adjusted effective income tax rate of 26%, capital expenditures of $45 million, and fully diluted weighted average share count of 59.1 million shares. To note, all figures are approximate. And with that, I'll turn the call back to Laurel.

Laurel Hurd, CEO

Thank you, Bruce. Interface delivered another strong quarter with growth in all product categories, growth in all regions, and growth in the majority of our market segments while driving meaningful gross profit margin expansion. We are encouraged by the quality of these earnings and the strong execution in a challenging and uncertain macro environment. I want to thank the entire Interface team for their relentless focus on winning business and serving our customers. With that, we will open up the call for questions.

Operator, Operator

Your first question today comes from Brian Biros from TRG.

Brian Biros, Analyst

Sales were above the guidance range, second quarter in a row of sales slightly above the guidance range. So clearly, something is working over there. Last quarter, you cited strong momentum, and education outperformed a tough comp. It sounds like this quarter, maybe it's health care that's the outperformer. So just curious to hear what the surprise was that drove the sales outperformance relative to your expectations three months ago.

Laurel Hurd, CEO

Yes. Thanks, Brian. And it is health care. We noted health care was up 29% for the quarter, which is above our expectations. We've been really focused on the healthcare segment. Our top three priority segments are really corporate office, education, and health care. But we've been working to expand our product portfolio in health care. Obviously, the One Interface selling teams continue to exceed our expectations. And we grew in health care outside the U.S. as well. So really, really strong quarter that exceeded our expectations.

Bruce Hausman, CFO

Brian, I would just also add, our One Interface selling teams are just executing so strongly. We just continue to upscale the organization, and we continue to see in our selling organization and our customer service organization, a relentless focus on winning for the customer and making sure we serve the customer and, importantly, making sure we win business and take share.

Brian Biros, Analyst

It's definitely working for you guys. On the Nora and the rubber I guess, further investments you mentioned in the prepared remarks. I know you're going to provide some more color, I guess, next call. But any more commentary you can add on the investments you might make there that's across expanding capacity or just more automation in the Nora facility, it would be interesting to hear.

Laurel Hurd, CEO

Yes. We've been making investments all along in Nora, and we will continue to amplify that as our sales growth continues to exceed expectations. So we're doing a few things. One, we're investing in making sure we can support the capacity. Secondly, we are investing in additional productivity initiatives to increase our throughput and also to really help drive efficiencies, and then we're also investing in innovation. So that's what we'll share more about on our next call, but we're excited about continued opportunities to grow the Nora business.

Bruce Hausman, CFO

Brian, I would just add, if we think about CapEx in 2026, it may be slightly up, potentially around $10 or so million compared to 2025 levels as we invest in these productivity initiatives in innovation projects. Again, it's all about growth. It's all about innovation and all about projects that generate margin expansion.

Brian Biros, Analyst

Last question for me on margins. Current guide for the year, it looks like it's 38.5%. It's been a nice step-up throughout the year to get there. I believe maybe the 38.5% level is also kind of the near-term margin level you might have cited in the past that you want to get to that kind of balances price with volume and cash generation. So if you're going to get at that level this year, how do we think about margins from here with all the positive things you still have between mix and efficiencies? Do we see further margin expansions from here? Or do you kind of keep it at this level to accelerate volumes even more? So just curious how you think about margins at this level and going forward.

Bruce Hausman, CFO

Brian, thank you for noticing. As we've mentioned previously, our ambition is to get to 38.5%. And we got a good shot at hitting that number this year. To be fair, we have to deliver a strong Q4, which we intend to do, but it's a challenging dynamic environment and it's a balancing act between taking share, winning for our customers, and also making sure that we can hit that nice sweet spot between taking share and growing the business.

Operator, Operator

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

Alexander Paris, Analyst

I just wanted to say congratulations on the beat and raise.

Laurel Hurd, CEO

Thanks, Alex.

Alexander Paris, Analyst

I have a few questions. I'll start with one about the performance in Q3. How did the momentum shape up in terms of orders? Last time, you mentioned that July was strong and broad-based. How did August and September perform? Also, could you provide an update on October for the fourth quarter?

Laurel Hurd, CEO

Yes, Alex, I would say it's been steady and consistent. The quarter performed consistently, and October has continued in that trend. The Americas look particularly strong. However, conditions outside the U.S., especially in Europe, are more challenging. We are monitoring the order momentum closely, but we feel optimistic about our guidance for Q4.

Bruce Hausman, CFO

Yes, I agree. And Alex, our demand is solid. Our backlog is strong, and we just need to continue executing strongly.

Alexander Paris, Analyst

Great. And then the market segment discussion, health care, up 29% in global billings, corporate office up 5%, great performance. As you said, education declined slightly. Can we put some numbers on that? I mean was it down 3%? Or was it down 8%?

Laurel Hurd, CEO

Down less than 3%. So just down about 2.5% or so.

Bruce Hausman, CFO

Alex, that’s just timing. Things come in uneven phases. It’s up high single digits for the year. We have a strong education business, excellent products, and good momentum. So it’s really just timing in the quarter.

Laurel Hurd, CEO

And not a big quarter for education as well. Q2 is really education season for us. So not something we're concerned about.

Alexander Paris, Analyst

Okay. Great. And then on the gross margin expansion, you kind of listed the things that influenced that. It was similar to last quarter, favorable price and volume as well as manufacturing efficiencies. I think you said last quarter that 80% of the gain was manufacturing efficiencies. Is it sort of a similar thing going on this quarter?

Bruce Hausman, CFO

About half and half. So our manufacturing efficiencies have been working very, very well. And that drove about half of the margin expansion and the rest was a combination of price and mix.

Alexander Paris, Analyst

Great. And then you had a very unusual tax rate in the quarter of 4.8%. How about a little color? And then your guidance for the full year, I know it's on an adjusted basis, is unchanged at 26%. So what special items were in the Q3?

Bruce Hausman, CFO

Yes, thank you for pointing that out. We mentioned this in our press release. In July 2025, Germany introduced tax legislation that will reduce the corporate income tax rate by 1% each year from 2028 to 2032. As a result, we had to remeasure our deferred tax assets and liabilities, leading to a noncash increase in our interest expense of $10.4 million. This adjustment was purely an accounting requirement stemming from the changes in German legislation.

Alexander Paris, Analyst

Okay. That makes sense. But again, you gave guidance of 26% on an adjusted tax basis. So you're adding a $10.4 million back to the tax expense on a nine-month basis to get to that. Because otherwise, it's like 18% for the full year.

Bruce Hausman, CFO

Yes, two different numbers. There's a GAAP number, and then there's the adjusted number. So the 26% is our adjusted effective income tax rate that excludes that pickup related to the German tax legislation.

Alexander Paris, Analyst

Great.

Bruce Hausman, CFO

I appreciate your attention to detail. We have now completed the amortization, and you will no longer see it on the P&L. It will take its course.

Alexander Paris, Analyst

Okay. Got you. So that is a typical add back to gross income to get to adjusted gross income. So there won't be any add back in Q4 and going forward?

Bruce Hausman, CFO

That's right. But of course, there's always a wash, because there was the expense in net income. And so we won't see the expense in net income, and hence, we won't see the add back.

Operator, Operator

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