Earnings Call Transcript - TILE 2026-11-06

Operator

Hello, everyone. Thank you for joining us and welcome to the Interface 3rd Quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Christine Needles, Corporate Communications. Christine, please go ahead.

Christine Needles, Analyst — Corporate Communications

Good morning, and welcome to Interface's conference call regarding third quarter 2026 results, hosted by Laurel Hurd, CEO, and Bruce Hausman, 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 8K furnished with the SEC today. Lastly, this call is being recorded and broadcasted for Interface. It contains copyrighted material and may not be re-recorded or re-broadcasted 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.

Laurel Hurd, CEO

Thank you, Christine, and good morning, everyone. Interface delivered a solid third quarter. Adjusted earnings growth exceeded our expectations, and billings increased across all three of our primary market segments, demonstrating broad-based demand and continued momentum in the business, particularly in the Americas. These results reflect the strength of our diversified portfolio and our execution, and I'm proud of our team and their unwavering commitment to serving our customers. In this dynamic environment, we're continuing to execute our One Interface strategy to drive industry outperformance. As we've discussed before, One Interface is a multi-year strategy focused on building strong global functions to support our world-class local selling teams, accelerating growth through enhanced commercial productivity of our commercial team, expanding margins through global supply chain management and simplifying operations, And leading in design, performance, and sustainability. We continue to invest in design and innovation that expands our addressable market and grows our diversified product portfolio. All three of our product categories, carpet tile, LVT, and rubber, are up year-to-date, and we expect each to grow for the full year. In rubber, building on strong early momentum, we're expanding Noravant timber to more markets in EMEA, following the initial rollout in the Americas, Germany, and the UK. As we've discussed before, Noravant combines the durability and performance of rubber with a distinctive wood grain aesthetic. We believe it represents a meaningful opportunity to further expand in healthcare and other market segments over time. This early momentum is being reinforced by growing industry recognition. Noravant Timber recently won the Most Sustainable Product Award at the 2026 Healthcare Facilities Symposium and Expo, highlighting our unique position in this category. In carpet tile, we continue to deliver a range of styles across price points, with several launches in Q3. From the more design forward between the notes at the premium end, to twist and texture at the more accessible end. We're building on what we've learned with our highly successful open-air platform, driving more opportunity at accessible price points while delivering the level of design our customers need. We also expanded Perfect Pitch, one of our most popular collections, with new warmer neutrals as we're seeing growing demand for these residential-inspired colorways across market segments. Turning to manufacturing and supply chain, our investments in automation and robotics continue to deliver productivity gains and margin improvement, while reducing waste and enhancing service levels. The robotic solutions we brought online in Europe and Australia earlier this year have been a success. In addition, we continue to uncover new efficiency opportunities across the business, including expanding automation within our U.S. cutting and packing operations. Now let's turn to our third quarter results. Consolidated currency neutral net sales increased 0.4% year-over-year. In the Americas, currency neutral net sales increased 0.5%, with growth across our key market segments of corporate office, healthcare, and education. Two timing-related items affected sales in the quarter. As we've discussed previously, retail is a small percentage of our overall net sales. However, the timing of several store remodel projects had an outsized impact on the Americas growth this quarter, as those projects shifted into future quarters. Second, the timing of Nora's installation cycles can create quarter-to-quarter variability in billings, which we experienced to this quarter. Importantly, we have not lost this business. These are timing shifts, not a change in underlying demand. Underlying momentum in the Americas remains healthy, and we are encouraged by the strong order growth in the quarter. In EAAA, currency-neutral net sales were up 0.3%, despite a more challenging demand environment, particularly in EMEA, which represents less than 30% of net sales. While market conditions in Europe softened during the quarter, we're encouraged by the progress we're making to simplify the organization and strengthen the business for the future. We're taking proactive steps to improve our competitive position and capitalize on future growth opportunities. We've aligned our EMEA commercial organization under a single leader, who is now building out the leadership team. Next year, we'll move to a one-team selling structure, supported by centralized customer service and commercial analytics. This will create a simpler, more consistent commercial model across Europe. Building on what we've learned from our one interface, combined selling teams in the U.S. Turning to our market segments, our diversification strategy continues to drive growth and strengthen the business. We saw growth in all three of our primary market segments this quarter, led by health care, with billings up 5% on top of 29% growth in the third quarter last year. Our one-interface combined selling teams in the U.S. continue to open doors with healthcare customers, while the long-term demand drivers in this market remain favorable. Education billings were up 3% in the third quarter. We remain well-positioned across both K-12 and higher education, supported by our design leadership, low-carbon, high-performing products, and a broad range of price points. Corporate office billings were up 2% in the third quarter. Underlying demand remains healthy as companies are bringing people back to the office. Renovation activity is steady, and customers continue to move towards high-quality, Class A space, where our brand, design leadership, and broad product portfolio keep us well positioned. Turning to orders, our consolidated currency-neutral orders increased 1% year-over-year. Orders in the Americas grew 6%, reflecting continued momentum across the region and the benefits of our one-interface combined selling teams. These teams are helping us deepen customer engagement and capture additional growth opportunities. EAAA orders declined 7% as the macro environment, particularly in Europe, softened in the quarter. We ended the third quarter with our backlog up 14% year-to-date, reflecting solid underlying demand. On the sustainability front, we were recognized by EDI for decarbonization strategy of the year and named to Newsweek's list of America's greenest companies. We were also named a finalist in the Reuters Global Sustainability Awards in the circularity category. These awards acknowledge our bold steps to be carbon negative by 2040 without offsets and speak to the hard work and dedication of our entire team. As we look ahead to 2027, we remain confident in our strategy while recognizing the continued uncertainty in the broader market. Third quarter order growth in the Americas is an encouraging sign of the continued momentum we are seeing in the region. In EMEA, although market conditions remain softer, we are focused on actions within our control, including simplifying our operations and enhancing efficiency to strengthen our competitive position and support long-term Across the company, our continued investments in automation, productivity, and innovation are strengthening our foundation for sustainable growth. With that, I'll turn it over to Bruce.

Bruce Hausmann, CFO

Well, thank you, Laurel, and good morning, everyone. All comparisons provided are year-over-year versus the third quarter of 2025, unless otherwise noted. Third quarter net sales were $366.7 million. Up 0.6% as reported, and 0.4% on a currency-neutral basis. This was slightly below the low end of our outlook range, primarily reflecting the shift in timing of certain retail billings that Laurel mentioned and softer conditions in Europe. Third quarter currency-neutral net sales were up 0.5% in the Americas and up 0.3% in EAAA. Third-quarter adjusted gross profit margin was 40.6%, up 103 basis points, driven by favorable pricing, product mix, and manufacturing efficiencies, which more than offset higher raw material and tariff-related costs. Third-quarter adjusted SG&A expenses were $91.5 million, compared to $90 million in the third quarter of last year. SG&A came in lower than we previously guided, reflecting discipline, expense management, and lower variable compensation and commissions. Third quarter adjusted operating income was $57.2 million, up 5.7%. And third quarter adjusted net income was $39.9 million, compared to $35.9 million. Third quarter adjusted EBITDA was $69.3 million, up 4.7%, and third quarter adjusted earnings per diluted share was $0.68, up 11.5%. The strength of our operating discipline enabled us to deliver adjusted earnings growth ahead of our expectations, even with modest net sales growth in the quarter. With these results in mind, I'll turn to capital allocation. As a reminder, our capital allocation strategy is balanced and disciplined. First, we prioritize investing in the business in areas like innovation and productivity to drive growth and margin expansion. Second, we focus on managing leverage through a disciplined use of debt. Third, we continue to evaluate potential M&A opportunities that align with our strategy and that can accelerate growth and margins. Finally, and importantly, we remain committed to returning excess cash to shareholders through a combination of dividends and disciplined share repurchases. To recap our progress against these objectives in the third quarter, we generated $86.3 million of cash from operating activities, compared to $76.7 million in the third quarter of last year. Capital expenditures were $9.1 million, which included continued investments in automation and robotics. to support our growth and efficiency. We also returned excess cash to shareholders through our quarterly dividend. Turning to our outlook, we are reaffirming our full fiscal year earnings outlook, supported by our strong third quarter earnings performance and continued operating discipline. At the same time, we revised our full fiscal year net sales outlook to reflect softer Your conditions and you're up. Our outlook also incorporates higher input costs from elevated oil prices and new tariffs affecting our business in Canada. We remain confident in our ability to deliver on this outlook, supported by our solid backlog, a healthy balance sheet, and our continued focus on cost discipline. For the full fiscal year of 2026, which, as a reminder, is a 53-week year for Interface, with the extra week occurring in the first quarter of 2026, we anticipate net sales of $1.440 to $1.455 billion. Adjusted gross profit margin of approximately 40.4% of net sales. Adjusted SG&A expenses of approximately $387 million. Adjusted interest in other expenses of approximately $14 million, an adjusted effective income tax rate of approximately 25%, fully diluted weighted average share count of approximately 58.5 million shares, and capital expenditures of 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.

Laurel Hurd, CEO

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?

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.

Brian Byro, Analyst — TRG

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.

Bruce Hausmann, CFO

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 that were previously sitting on the balance sheet are flowing through in the 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 second half of the year, if you look at it for the full year, structurally, we're around 39%.

Brian Byro, Analyst — TRG

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

Laurel Hurd, CEO

Yeah.

Brian Byro, Analyst — TRG

Hey, thanks, Brian. Corporate office. Sorry. Yeah, go ahead.

Laurel Hurd, CEO

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 appreciate you acknowledging that.

Brian Byro, Analyst — TRG

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?

Laurel Hurd, CEO

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.

Brian Byro, Analyst — TRG

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?

Laurel Hurd, CEO

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 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.

Brian Byro, Analyst — TRG

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.

Laurel Hurd, CEO

Thanks, Brian.

Operator

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

David McGregor, Analyst — Longbow Research

Good morning, everyone, and thanks for taking my questions. I guess I wanted to just ask about sort of 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.

Bruce Hausmann, CFO

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.

David McGregor, Analyst — Longbow Research

Are you able to quantify that?

Bruce Hausmann, CFO

I can annualize it for you. The Canadian tariffs are in the range of $5 million 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 million to $115 million a barrel, so it really, really changes a lot. 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.

David McGregor, Analyst — Longbow Research

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 importantly?

Laurel Hurd, CEO

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.

David McGregor, Analyst — Longbow Research

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?

Bruce Hausmann, CFO

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 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.

Laurel Hurd, CEO

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.

David McGregor, Analyst — Longbow Research

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 a 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 pre-sale indicators, 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?

Laurel Hurd, CEO

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.

David McGregor, Analyst — Longbow Research

Yeah. I mean, the office furniture guys are seeing exactly the same thing. So it's visible in 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?

Laurel Hurd, CEO

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.

David McGregor, Analyst — Longbow Research

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?

Laurel Hurd, CEO

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.

David McGregor, Analyst — Longbow Research

Got it. Thanks very much.

Laurel Hurd, CEO

Thanks, David.

Operator

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.

Laurel Hurd, CEO

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.

Operator

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