Interface, Inc. IFSIA (IFSIA)

Q2 2010 Earnings Conference Call

July 29, 2010 05:00 pm ET


Eric Boyriven - FD

Dan Hendrix - President & CEO

Patrick Lynch SVP & CFO


Keith Hughes - SunTrust

David MacGregor - Longbow Research

Eric Glover - Canaccord Adams

John Baugh - Stifel Nicolaus

Matt McCall - BB&T Capital Markets

Glen Wortman - Sidoti & Company

Carl Reichardt - Well Fargo Securities



Good day ladies and gentlemen, and welcome to the second quarter 2010 interface earnings conference call. My name is Stacy and I’ll be your conference moderator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the presentation over to your host Eric Boyriven of FD.

Eric Boyriven

Thank you, operator. Good afternoon and welcome to Interface’s conference call regarding second quarter 2010 results. Joining us from the company are Dan Hendrix, President and Chief Executive Officer; and Patrick Lynch, Senior Vice President and Chief Financial Officer. Dan will review highlights from the quarter as well as Interface’s business outlook. Patrick will then review the company’s key performance metrics and financial results. We will then open the call for Q&A.

If you have not yet received a copy of the results release which was issued after the close of market today, please call FD at 212-850-5600 or you can get a copy off the Investor Relations section of Interface’s website. An archive version of this conference call will also be available through that website.

Before we begin the formal remarks, please note that during today’s conference call management's comments regarding Interface’s business which are not historical information are forward-looking statements. Forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from any such statements including risks and uncertainties associated with the economic conditions in the commercial interiors industry as well as risks and uncertainties discussed under the heading Risk Factors in Item 1A of the company’s annual report on Form 10-K for the fiscal year ended January 3, 2010, which has been filed with the Securities and Exchange Commission.

We direct all listeners to that document. Any such forward looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995. The company assumes no responsibility to update or revise forward-looking statements during this call and cautions listeners not to place undue reliance on any such forward looking statements. Management's remarks during this call refer to certain non-GAAP measures, a reconciliation of these non-GAAP measures to the most comparable GAAP measures are contained in the company’s results released and Form 8-K filed with the SEC today, each of which can be found on the Investor Relations portion of the company’s website

Lastly, please note that this call is being recorded and broadcasted for Interface. It contains copyrighted material that may not be rerecorded or rebroadcast without Interface’s expressed permission. Your participation on the call confirms your consent to the company’s taping and broadcasting of it.

With these formalities out of the way, I’d like to turn the call over to Dan Hendrix. Dan, please go ahead.

Dan Hendrix

Thank you and good afternoon to everyone. We are very pleased with our second quarter results. We were able to build upon the improvements we began to see in the first quarter, generating solid year-over-year growth in sales, orders, margins and earnings.

Our sales increase in the second quarter was due to largely to the ongoing recovery of the corporate office market globally. This improve within our corporate office segment is being driven by release of pent-up demand with a focus on office refurbishment, which we believe is resulting from tenant turnover as new tenants look to update their interiors. We also continue to experience a positive sales impact in the investments we made in our in-market diversification strategy as non-office segments such as retail, institutional and hospitality improved compared with last year and emerging markets made a nice sales contribution in the quarter.

The revenue growth drove our second quarter gross margin expansion both year-over-year and sequentially and the combination of entry sales enhanced manufacturing efficiencies and cost reduction initiatives led to a significant improvement in operating income.

Looking regionally, our Asia Pacific division once again delivered excellent results with sales and profitability up impressively year-over-year. Australia which is now our third largest market was the key driver of strength in the region with continued significant improvements across all segments. China also grew rapidly.

As previously discussed, we are building a new carpet tile manufacturing plant in China to capitalize on the opportunities we see in that market. And after a few construction delays, we are on track to begin production at this facility in the fourth quarter. Our Americas moderate business had another solid performance with a third straight quarter of year-over-year sales improvement. The corporate office segment led the game with strengthening demand from financial services sector followed by the technology sector and then energy and utility sector. Non-office segments also performed well in the Americas, particularly government hospitality and retail.

Moving on to Europe. We are now beginning to see some very welcome improvement. Despite relatively even sales compared with the prior year period, second quarter profitability increased as a result of greater manufacturing efficiencies in our cost control initiatives. Most encouraging about Europe is that orders climbed 20% in local currency during the quarter, setting up for a second good half.

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