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Edited Transcript of TILE earnings conference call or presentation 22-Feb-18 2:00pm GMT

Q4 2017 Interface Inc Earnings Call

ATLANTA Feb 22, 2018 (Thomson StreetEvents) -- Edited Transcript of Interface Inc earnings conference call or presentation Thursday, February 22, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce Hausmann

Interface, Inc. - CFO & VP

* Christine Needles

* Jay D. Gould

Interface, Inc. - CEO, President and Director

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Conference Call Participants

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* John Allen Baugh

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Joshua Kenneth Wilson

* Kathryn Ingram Thompson

Thompson Research Group, LLC - Founding Partner, CEO, and Director of Research

* Keith Brian Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Mason Irwin Marion

* Matthew Schon McCall

Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst

* Robert Samuel Aurand

Longbow Research LLC - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Q4 and Fiscal Year 2017 Interface, Inc. Earnings Conference Call. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Christine Needles, Global Corporate and Communications. Please go ahead.

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Christine Needles, [2]

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Thank you, Denise. Good morning, and welcome to Interface's conference call regarding fourth quarter and fiscal year 2017 results, hosted by Jay Gould, President and CEO; and Bruce Hausmann, Vice President and CFO.

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 the 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 1, 2017 which has been filed with the Securities and Exchange Commission. We direct all listeners to that document. The company assumes no responsibility to update or revise forward-looking statements made 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 measure is contained in the company's earnings release and Form 8-K filed with the SEC yesterday.

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.

Now, I'd like to turn the call over to Jay Gould, CEO.

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Jay D. Gould, Interface, Inc. - CEO, President and Director [3]

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Good morning. Once again, I'd like to begin by thanking our Interface teams around the world for delivering a strong fourth quarter, consistent with our expectations and in line with our full year commitments. Our value creation strategy is working in the marketplace. We delivered strong results in the fourth quarter and closed out the year on very solid footing.

I am proud of the team's efforts to meet our commitments for our full year 2017 that we've discussed on each one of our quarterly calls. We delivered a 3.9% net sales growth, which was at the top end of our 3% to 4% range. We exceeded our gross margin target of 38% to 38.5% delivering full year gross margins of 38.7%. That was a 20 basis point improvement year-over-year, but I would say that we delivered roughly a 90 basis point improvement on the core, offset by 70 basis points of decline following the FLOR store exit.

Driven by some currency inflation, higher short-term incentive payments, and increased performance stock-based compensation expense, our SG&A for the year finished at $269 million, slightly greater than our $260 million to $265 million target. For the year, SG&A was 27% of sales, a 50 basis point improvement over 2016. I believe that we are effectively managing the balance of delivering today and investing for tomorrow.

Our full year EPS was $1.18, up 14% from last year. We also returned $91 million back to our shareowners via stock repurchase, and the stock grew 36% during the year.

Turning to the fourth quarter, we delivered solid performance down the P&L, with net sales growth of 11% year-over-year, with contribution across our core carpet tile and LVT businesses. Organic order growth in the fourth quarter was 8%. Our fourth quarter gross margin of 38.2% was up 60 basis points over the prior year, as we continue to see the benefits of our productivity initiatives. We also held fourth quarter SG&A expenses at $71.2 million or 26.8% of sales, which was only a slight increase year-over-year due to higher incentive-based compensation on stronger performance this year versus last, as well as some foreign currency inflation.

Excluding a charge related to the tax act, which Bruce will talk through in much more detail in a few minutes, we delivered an adjusted EPS of $0.32, which is up 14% versus the adjusted EPS in the fourth quarter of last year which excludes the restructuring that we did at that time. Including the tax act and restructuring charges, fourth quarter GAAP EPS was flat year-over-year at $0.07.

Our fourth quarter revenue and order trends are consistent with our commentary during the course of the year. We saw momentum build sequentially with a larger release of customer spending at year end. Regarding our capital allocation, we continue to execute against our previously announced $100 million share repurchase program, and in the fourth quarter, we completed an additional $10.5 million of share repurchases. Overall in 2017, we returned $91.6 million to investors through this stock repurchase program, and this is, as you know, an important aspect of our capital allocation strategy, as we focus on delivering value for our shareowners.

Now I'd like to turn the call over to Bruce for a review of the financial details for the fourth quarter and the full year. So Bruce, please go ahead.

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Bruce Hausmann, Interface, Inc. - CFO & VP [4]

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Thanks, Jay, and good morning, everyone. Before I walk through the results, the U.S. Tax Cuts and Jobs Act, also referred to as the Tax Act, which was enacted on December 22, 2017, resulted in a Q4 charge of $15.2 million, or $0.25 per share, in provisional tax expenses. These expenses are principally from onetime transition toll tax on accumulated foreign earnings and require changes to our deferred tax assets and liabilities. The net cash impact of the transition toll tax, which is roughly $10 million, will be paid out over 8 years. Also, as a reminder, organic sales, organic sales growth and organic order growth adjust to exclude the impact of foreign currency fluctuations and exiting the FLOR specialty retail stores.

Now let's talk through [with] our fourth quarter 2017 results. As Jay mentioned, Q4 GAAP EPS was flat year-over-year at $0.07. Our adjusted EPS of $0.32 was up 14% to adjusted EPS of $0.28 in Q4 of last year. Net sales grew 11% year-over-year. Organic sales also grew 11% year-over-year.

Taking a closer look at our regional net sales in Q4, net sales in Americas grew 12% in the fourth quarter compared to Q4 of last year, with core carpet tile and LVT contributing to the solid performance. Growth in the U.S. business was boosted by continued momentum in Canada and our InterfaceSERVICES business.

In local currency, net sales in EMEA were up 2% year-over-year, while in US dollars EMEA's net sales were up 11% year-over-year, as we benefited from currency tailwinds. Asia Pacific net sales were up 19% compared to Q4 last year, with both Australia and Asian markets driving double-digit growth.

In terms of our global market segmentation, core office was up over the same period last year, and we continued to see increases in non-office segments, particularly in retail and health care in Q4. Q4 organic orders grew 8% year-over-year. Our gross margin of 38.2% was up 60 basis points year-over-year, and this is a result of productivity initiatives, partially offset by raw material cost inflation.

Managing SG&A continues to be a key priority for us. In line with our expectations, SG&A expenses of $71.2 million, or 26.8% of net sales, was up 20 basis points year-over-year on higher incentive-based compensation versus the fourth quarter of last year, due to our performance goal achievement that outpaced prior year.

Operating income of -- margin of 11.5% was up 60 basis points compared to adjusted operating income margin of 10.9% in Q4 of last year. On a GAAP basis, operating income margin was 2.7% in Q4 of 2016, which included previously announced $19.8 million of restructuring in that -- and asset impairment charges.

Net income during the fourth quarter of 2017 was $4.3 million or $0.07 per share, compared to the prior year period net income of $4.7 million or 7% -- $0.07 per share. Fourth quarter 2017 adjusted net income, which excludes the previously mentioned $15.2 million Tax Act expense, was $19.5 million or $0.32 per share. This compares to fourth quarter 2016 adjusted net income of $17.8 million or $0.28 per share, which of course excludes the previously announced restructuring and asset impairment charges.

Turning to full year 2017 highlights. Full year GAAP EPS of $0.86 was up 4% compared to $0.83 in 2016. However, our full year adjusted EPS of $1.18 was up 15% versus 2016's adjusted EPS of $1.03. Net sales were $996.4 million, up 4% compared with $958.6 million in 2016. Organic sales grew 5% in the same period. Carpet tile and LVT sales contributed relatively equally to both net sales and organic sales growth in 2017. Organic orders grew 6% in 2017 versus 2016, and gross margin of 38.7% was up 20 basis points compared to 2016.

SG&A expenses were $268.9 million or 27% of sales, which was a 50 basis point improvement versus 2016. Full year GAAP operating income margin was 11% in 2017 versus 8.9% in 2016, and when you exclude the previously announced restructuring and asset impairment charges in both '16 and '17, our adjusted operating income margin of 11.8% was up 90 basis points versus 10.9% last year.

We reported net income of $53.2 million or $0.86 per share in 2017, compared with $54 million or $0.83 per share in 2016. As adjusted to exclude the Tax Act impact as well as the previously announced restructuring and asset impairment charges, net income was $73.1 million or $1.18 per share in 2017, compared with $67.3 million or $1.03 per share in 2016.

Moving to the balance sheet. We ended the period in -- with total cash on hand of $87 million, debt of $230 million and strong liquidity, as we had $184 million available under our revolving credit facility. Interest expense was $2 million in the fourth quarter, compared with $1.4 million in Q4 last year, and full year interest expense was $7.1 million versus $6.1 million in 2016.

Depreciation and amortization was $37.5 million for the full year of 2017, compared with $36.5 million in 2016. And capital expenditures for the full year of 2017 were $30.5 million, compared with $28.1 million in 2016.

And now I'd like to turn the call back to Jay to discuss our fiscal year 2018 outlook.

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Jay D. Gould, Interface, Inc. - CEO, President and Director [5]

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Thank you, Bruce. Well, as you can see by our 2017 results, we are continuing to focus on execution of our strategic agenda to become the world's most valuable interior products and services company.

Our outlook for 2018 builds on our strategic agenda. We are targeting to achieve 3% to 5% organic sales growth, gross profit margin of 39% to 39.5%, SG&A expenses that will be flat as a percent of sales to 2017, an effective tax rate of 26% to 27%, interest and other expenses that are projected to be $2 million to $3 million higher than 2017 and capital expenditures of $50 million to $60 million.

Based on historic seasonality, current forecast and prior year comparables, we expect our strongest operating income growth to be in the second and third quarters, with softer operating income growth in the first and fourth quarters.

And with that, I will open the call for questions. Denise, could you turn to the questions, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Kathie Thompson from Thompson Research.

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO, and Director of Research [2]

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Wanted to first focus -- circle back up on your commentary on end market and geographic color. I know you talked about Americas and EMEA, but in the past you've been able to talk about breaking out and looking at European sales and APAC sales, just to be able to distinguish between the 2. Could you give a little bit more color on those? And also, what percentage of total revenues hit those 3 end markets, Americas, APAC and Europe?

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Jay D. Gould, Interface, Inc. - CEO, President and Director [3]

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Yes. So the Americas is -- was up 5% in net sales for the year. Europe was flat and Asia Pacific was up about 9% for the year, so that totals out to 3.9% revenue growth.

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO, and Director of Research [4]

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And roughly what percentage, knowing that this number can move around a little bit, what -- roughly what percentages were hitting of total sales in those 3 geographic markets?

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Jay D. Gould, Interface, Inc. - CEO, President and Director [5]

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So the Americas is about 55% of sales, and Europe is about 22% of sales.

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO, and Director of Research [6]

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Okay. And then the balance is APAC?

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Jay D. Gould, Interface, Inc. - CEO, President and Director [7]

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Yes.

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO, and Director of Research [8]

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Turning to your guidance, I guess 2 different things to focus on. First, you're seeing an increase in CapEx into 2018. If you could dig a little bit more and give more clarity of, what are the drivers for the increase? And when -- what type of initiatives are you going to be focusing on and the return metrics for those? And then, also, if you can give just a little bit more color on what you're seeing in terms of current orders, how weather may have impacted orders, and how that, if you -- that impacts the overall flow-through of earnings for the year.

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Jay D. Gould, Interface, Inc. - CEO, President and Director [9]

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Yes. Well, first of all, we typically spend in capital, $30 million to $35 million. In 2017, we are actually on the low end of that, which was disappointing quite frankly, because we had expected to break ground on our new manufacturing facility down in LaGrange, Georgia by the summertime, and we didn't break ground until late November. So you'll see an acceleration, again the $50 million to $60 million of capital spending in 2018 directly -- that increase is really directly related to that investment. As you probably recall, we're in the midst of a $50 million to $55 million investment in those facilities, which will generate a $30 million annualized return. In 2017, we captured $10 million of that. 2018, we'll capture an additional $10 million, and then in 2019, we'll get the last $10 million. So we feel great about the returns. We're actually running slightly ahead of schedule from capturing the productivity savings and are really optimistic about the cost structures that we're putting in place for that facility. You had a question about orders...

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO, and Director of Research [10]

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Yes, orders as you -- as we've entered into the new year we're, kind of, 1.5 months into it. And then, how that impacts your view on -- Q1 being not quite as soft as Q2 and Q3. And just how we should frame that, how much is, kind of, onetime versus something that may be more fundamental?

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Jay D. Gould, Interface, Inc. - CEO, President and Director [11]

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Yes. So orders, as we reported we're -- organic orders, up 8% in the fourth quarter. We're seeing that trend continue during the first 6 or 7 weeks of the new year. I will say that was choppy. I mean, we were soft in the beginning, I think, primarily related to weather in the United States and some of the timing around the holidays, but if you -- again, if you cume it up through the 7 weeks, we're at that 8% to 8.5% growth rate on orders. So we feel pretty solid about that. So the top line in the first quarter will be relatively consistent with that. However, I want to forewarn everyone that our gross margins in the first quarter are likely to be down 100 to 150 basis points versus the first quarter of last year, driven by a few things. One, we've actually had almost 10% less production volume in the first quarter this year versus last year, and we won't make up for that until the second quarter. That was driven off of losing almost 3 days of production in the United States because of snow in Georgia. And we also planned less production in Europe, because last year we ran the plants harder preparing for a second quarter ERP implementation in Europe. We're also seeing some of the inflation that we felt in the fourth quarter of last year flowing through to the P&L here in the first quarter, as it got hung up on the balance sheet as -- through inventory. So -- and also the exit of the FLOR store business will hurt us in the first quarter. So net-net, we're going to see a likely decline of gross margins in the first quarter of 100 to 150 basis points. However, we still feel confident in our range of 39% to 39.5% for the full year.

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Operator [12]

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Your next question comes from Keith Hughes from SunTrust.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [13]

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Little bigger picture question, with the -- with tax reform, your company has, obviously, a lot more discretionary income coming up here in 2018. Maybe not in orders, but have you seen in quotation or just your sales people discussing in the channel, are you seeing any, kind of, pickup in overall business as companies look to expand, renovate, whatever with this extra cash in service-based businesses?

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Jay D. Gould, Interface, Inc. - CEO, President and Director [14]

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Yes. I mean, it's a very active market right now. So we saw an increase in fourth quarter activity, which translated into orders, and we're seeing that here early in the year. So we have a lot of planned delivery for the second quarter, so we're seeing people releasing their capital budgets earlier in the year than we saw last year.

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Operator [15]

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Your next question comes from Michael Wood with Nomura Instinet.

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Mason Irwin Marion, [16]

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This is Mason on for Mike. Can you talk about where LVT gross margins are currently versus your expectations? And also, are you seeing an uptick in LVT orders and wins following your new design launches?

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Jay D. Gould, Interface, Inc. - CEO, President and Director [17]

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Well overall, LVT continues to build momentum on the order books. So when we launched last year, we really didn't get out until March in the United States, and we had a staged rollout. So we continue to see momentum build. Of our 6% order growth in 2017, half of that came from LVT. So we committed to deliver about $25 million, which is, in fact, what we delivered. And the current order pattern, which suggests we will double that in 2018, which is on track with what our original targets were. Gross margins still are running accretive to the overall portfolio. I think I've talked previously, we've model that a little more conservatively for 2018, as we continue our global expansion, we're just being conservative, but right now, if you look at the P&L, the gross margins on LVT are accretive.

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Mason Irwin Marion, [18]

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Okay, great. And then, we know that Europe has historically been a high gross margin business for you. Can you update us on the gross margins there and the SG&A as a percent of sales in that region?

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Jay D. Gould, Interface, Inc. - CEO, President and Director [19]

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Well, we're running about the company average in Europe. So you're right. It used to run higher than the company average, but we're right at the company average on gross margin. SG&A is slightly higher than the company average, but modestly so. I mean, less than a 100 basis points, so the profitability of our European business is still strong.

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Operator [20]

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Your next question comes from Matt McCall from Seaport Global.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [21]

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So Jay, maybe put it all together for me, but the gross margin outlook, you talk about the 39% to 39.5%, if I go back to last quarter, I think what we heard was, you're going to get some gross -- some productivity savings, but you're going to see some raw material inflation, and we're not expecting a lot of net volume growth this year as you worked down some inventory, and obviously worked through the issues in Q1. Can you just break out the parts of what's assumed in your gross margin outlook?

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Jay D. Gould, Interface, Inc. - CEO, President and Director [22]

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Well, yes. We've got 50 to 100 basis points improvement in the core carpet tile business, offset by about 25 basis point impact from the FLOR business. What's driving the core, 50 to 100 basis points, is a combination of pricing and productivity which generates about $20 million of incremental gross margin, which will be offset by about $10 million to $12 million of the anticipated inflation. So that's how we get to our overall forecast, Matt.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [23]

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Okay, okay. The -- so you referenced the buyback, how it's going to remain a part of your capital allocation plans, is the '17 spend going to be a good guide for your '18 plans?

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Jay D. Gould, Interface, Inc. - CEO, President and Director [24]

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Well, we returned $92 million -- $91.6 million last year. We have $39 million left on our current authorized $100 million plan. So far in the first quarter, we've repurchased about $14 million, so we've got $25 million left on that authorization to spend, and the board will determine whether we go beyond that or not.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [25]

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Okay, got it. And then, I apologize if I missed this, the SG&A, you talked about, it came in a little above what you had targeted. Can you talk about what drove that higher spend, and what's going to limit your leverage next year? And maybe anything that's temporary, that may go away or how we should look at it longer-term -- refresh us on your longer-term plans there.

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Jay D. Gould, Interface, Inc. - CEO, President and Director [26]

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Well, our financial algorithm to run the company is to capture 25 to 50 basis points of SG&A as a percent of sales improvement every year, and we did that last year. We got 50 basis points of margin improvement out of that. And so, the target going into '18 was to get it down to 26.5%. We made the decision -- I made the decision to invest an incremental $5 million in our sales force transformation project, which has 2 main components to it. A change in the frontline selling structure in our North American operations. We're basically doubling the number of frontline sales managers and going from a span of control of 15 to 1 to a span of control of 8 to 1. And secondly, we're in the process of implementing the new CRM system, which will provide much more visibility and discipline into our order pipeline. That system won't go live until May of 2019, but we're putting the building blocks in place to be able to do -- to be able to accomplish that. So that's what's influencing the number in 2018.

If you go back to 2017, there's 3 things that influenced our SG&A spending in the fourth quarter and 1 thing in the third quarter, which led to this $4 million higher than the high end of my range of $260 million to $265 million. One was, we had $1 million in the fourth quarter just related to foreign currency translation, so the increase in the euro caused our SG&A expenses to go up when translated back to US dollars. Secondly, we had short-term incentives which were higher than what we expected because the business performed so well, and we had to catch up on some of our long-term incentive plans for exactly that same reason, for the performance of the business. In the third quarter, you may recall, we did make an investment into our selling system as well. I talked about creating the Interface way, and we brought in a consulting company to help us do this, called Miller Heiman, and so it's about creating a more disciplined selling process in our global organization. So those are the things that led up to the $269 million versus $265 million.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [27]

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Okay. And just 2 quick follow-ups to that. The $5 million, and you broke that to 2 components. Is it spilt pretty evenly? Is $2.5 million more permanent with the new management folks? And the other $2.5 million is CRM? Or how do we think about the -- how consistent that spend's going to be out beyond '18?

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Jay D. Gould, Interface, Inc. - CEO, President and Director [28]

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Well, I mean here's my commitment to you, Matt, is that when we get out of '18, is to get back to reducing SG&A as a percent of sales by 25 to 50 basis points. We've got to stick to that algorithm, because we want to get to this 14% operating margin.

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Operator [29]

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Your next question comes from Robert Aurand from Longbow Research.

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Robert Samuel Aurand, Longbow Research LLC - Analyst [30]

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Rob Aurand on for Dave MacGregor this morning. I guess, looking at your full year guidance, this year you had organic growth of 5%, you're guiding to 3% to 5%. Can you, kind of, just talk about the puts and takes? What's going to drop it to the 3% versus what's going to get it to the 5%? And if, I guess, it does drop to 3%, kind of, what would be causing that slowing?

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Jay D. Gould, Interface, Inc. - CEO, President and Director [31]

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Well, if my memory serves me correctly, I think that last year was 3.9% organic growth. No, you are right...

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Bruce Hausmann, Interface, Inc. - CFO & VP [32]

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5% organic and 3.9% net sales, yes.

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Jay D. Gould, Interface, Inc. - CEO, President and Director [33]

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Yes.

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Bruce Hausmann, Interface, Inc. - CFO & VP [34]

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After foreign exchange and exiting the FLOR retail business.

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Jay D. Gould, Interface, Inc. - CEO, President and Director [35]

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Yes. So honestly, we took good market share in 2017, and the question is, will we do the same? If you decompose our growth, so we're talking about carpet tile growth of 1% to 3%. The carpet tile business in 2017 grew between 1% and 2%. We did take some market share there, particularly in the United States. We built the plan around assuming we were going to build -- grow at about the rate of the category. And then, on top of that, we added 2% to 3% on LVT. We think we'll double that business. So I think the forecast range of 3% to 5%, which was an increase from our forecast range of 2017, which was 3% to 4%, and again, depending on what happens with the carpet tile category we'll finish at either the higher or lower end of that range.

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Robert Samuel Aurand, Longbow Research LLC - Analyst [36]

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Okay. And I guess looking at Europe, I mean there's been some industry consolidation there and your competitors bringing on new capacity. Can you just, kind of, talk about how the competitive environment has changed there, and if and how it -- the increased competition is impacting your business?

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Jay D. Gould, Interface, Inc. - CEO, President and Director [37]

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Well, you know to make the common quote, Europe is not Europe. It's very different in different parts of the continent. The U.K. and the Benelux region are very highly competitive. We're seeing a lot of pressure on price points in those 2 markets in particular. Central Europe is actually growing very nicely. Southern Europe, we're seeing some good growth. So it's spotty, we're making the appropriate reinvestments in the growing pieces of the business, so we're redirecting some of our resources from markets like the U.K. into markets like Germany.

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Operator [38]

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Your next question comes from John Baugh from Stifel.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [39]

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I just wanted a point of clarification first. When you talk about organic order growth rates, are those FX-adjusted numbers?

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Bruce Hausmann, Interface, Inc. - CFO & VP [40]

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Yes they are, John. So when we talk about organic, we make 2 adjustments. We adjust for currency so it's currency-neutral, and we also adjust for the FLOR specialty retail stores that we exited out of. So if -- so those are the 2 differences between organic growth and the net sales growth that you see on the P&L.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [41]

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Great. And could you talk about mix and if you wanted to do it by average selling price point? I'm just curious what the mix trends are in North America, and kind of where you're seeing strength in the order book and whether the ASP, if you will, is moving up or down or neutral?

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Jay D. Gould, Interface, Inc. - CEO, President and Director [42]

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Well, in the United States ASPs are moving down slightly. And again, John, I've talked about this balance of getting our price and volume exactly right to maximize our gross margin dollars, which is really where we focus, and so I think that the team in North America has got that balance really well figured out -- at least they did last year as we gained market share and drove a pretty good volume through the plants. Globally, I would say that we're still seeing more of our growth in the mid-to-higher-price point areas, so what we call category 3, which will be price points at around $20 to $22, that was our fastest-growing segment globally.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [43]

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Okay. And I think you talked about your inflation being $10 million to $12 million in '18. Is that -- that's the global number that includes transportation as well as raw materials. I'm just trying to get a sense for labor, I don't know, all the things that seem to be inflating a little bit in the world right now.

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Jay D. Gould, Interface, Inc. - CEO, President and Director [44]

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That's a global, full-in number. And we take input costs and dissect them and really try to figure out, okay, every component of that. I think the good news, John, is we are expecting inflation. I mean, we've built it into our models. We've built it into the -- what pricing we need to take for the year. And hopefully, we've been overly conservative. We'll see as the year plays out.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [45]

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Okay. And it seems like the LVT venture is going well, and I'm just -- I know in the past, you've given some anecdotal commentary around what your -- some of your customers are telling you, and this is all getting out the incremental versus cannibalization question. Is there anything as you get further into this, that gives you more clarity and comfort with what you're seeing?

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Jay D. Gould, Interface, Inc. - CEO, President and Director [46]

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Well, I have to give our development team a lot of credit. We hit the product exactly right. I mean, I think we hit the sweet spot of the market both in product design and price point, and we continue to be blessed with really good growth out of that. I know if you listen to all the industry figures, the fastest-growing part of the LVT business is actually rigid core, which we're not in today. We are looking to get into a product similar to that. I've commented that in the second half of the year, we will introduce another resilient flooring product line into a lead market, which will expand in 2019. Still in development, I think by NeoCon, we'll be ready to show those products to you. But we believe that LVT continues to drive incremental opportunities in the market for us as we're invited into jobs that we weren't previously invited into. So it feels pretty good, John.

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Operator [47]

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(Operator Instructions) Your next question comes from Sam Darkatsh with Raymond James.

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Joshua Kenneth Wilson, [48]

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This is Josh Wilson filling in for Sam. A little point of clarification, so you said the input cost inflation guidance assumes some inflation from current spot rates?

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Bruce Hausmann, Interface, Inc. - CFO & VP [49]

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No. He's asking if it assumes foreign currency inflation, I think.

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Jay D. Gould, Interface, Inc. - CEO, President and Director [50]

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No, no.

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Bruce Hausmann, Interface, Inc. - CFO & VP [51]

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The answer is no.

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Joshua Kenneth Wilson, [52]

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Sorry to clarify, not foreign currency, but like further inflation in commodities or labor?

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Jay D. Gould, Interface, Inc. - CEO, President and Director [53]

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Oh, yes.

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Bruce Hausmann, Interface, Inc. - CFO & VP [54]

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Yes, of course. Yes, input cost inflation is the cost of our raw materials and labor.

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Joshua Kenneth Wilson, [55]

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How much of the 10 to 12 is based on where things stand today versus the average of 2017? And how much is yet to be realized in 2018?

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Jay D. Gould, Interface, Inc. - CEO, President and Director [56]

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Most of it will be realized in 2018. We didn't have as much input cost inflation in 2017 as we expected. It's one of the reasons why our gross margins exceeded the range -- the forecast range that we provided. Once again, we put our estimates together about where we think the commodity markets are going. We know where the labor markets are going already, because we've got those budgets already established. So it's really what happens to the commodity markets. Hopefully, there's upside in that Josh, but you know, we'll see as the year unfolds. I think at this stage, it's a little better to be conservative.

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Joshua Kenneth Wilson, [57]

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Got it. And specifically on transportation costs, could you talk about what ways you might be either exposed or insulated from shortages in truckers or wage inflation with truckers?

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Jay D. Gould, Interface, Inc. - CEO, President and Director [58]

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Well, it's different around the world on how we deliver product. In North America, most of our freight is assumed by the customer. So we're insulated from freight inflation in the United States.

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Operator [59]

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I am showing no further questions at this time. I turn the call back over to Jay Gould.

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Jay D. Gould, Interface, Inc. - CEO, President and Director [60]

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Thanks, Denise. Thanks, everyone, for participating in this call. We're excited that our strategy is working in the marketplace, and we look forward to another very strong year. We appreciate your participation, talk to you next quarter.

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Operator [61]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.