Hello and welcome to the Fourth Quarter 2024 Interface, Inc. Earnings Conference Call. Please note that this call is being recorded. After the speakers' prepared remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I'd now like to hand the call over to Christine Needles, Global Communications. You may now begin.

Good morning and welcome to Interface's conference call regarding fourth quarter and full year 2024 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. 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.

Thank you, Christine, and good morning, everyone. Interface delivered a strong year in 2024, achieving a 4% increase in currency-neutral net sales and significantly boosting profitability despite continued headwinds in our industry. We're confident that our strategy is working. As a reminder, our One Interface strategy is a multiyear effort focused on building strong global functions to support our world-class local selling team, accelerating growth through enhanced productivity of our commercial team, expanding margins through global supply chain management and simplifying operations and leading in design, innovation and sustainability. I'm incredibly proud of our team and all that we've achieved this year. Let me run through a few highlights of our strategy execution in 2024. Looking at commercial productivity. You may recall that in Q1 2024, we implemented an integrated selling approach combining Nora and Interface selling teams in the US. This collaborative strategy is delivering accelerated results, including double-digit order growth in the Americas region year-over-year. The team is successfully tapping into new opportunities across our product portfolio and we're excited to see Nora sales expanding beyond health care into other high-growth segments. In our continued efforts to globalize our functional team, we appointed our first Chief Supply Chain Officer about 18 months ago to optimize our supply chain globally and drive productivity improvements that will help expand gross profit margins. We realigned our supply chain organization to focus on productivity and continuous improvement in technology-enabled solutions. As a result of this newly globalized supply chain team, we've made significant progress in driving operational efficiencies. Throughout 2024, we invested in automation and robotics solutions at key manufacturing plants, including our carpet tile manufacturing in the US and our Nora rubber plant in Germany, contributing to improved margins and greater operational efficiency. The initial results of these investments have been…

Well, thank you, Laurel, and good morning, everyone. Fourth quarter net sales totaled $335 million, an increase of 3% versus 2023's fourth quarter. This was in line with our implied fourth quarter guidance despite $6 million of FX in the fourth quarter that we did not anticipate. FX-neutral net sales increased 3.4% compared to the prior year's fourth quarter. In fourth quarter, FX-neutral net sales in the Americas were up 9.6% year-over-year. FX-neutral net sales in EAAA were down 5.2%, driven by a softer macro environment. Fourth quarter adjusted gross profit margin was 36.9%, a decrease of 139 basis points from the prior year's fourth quarter as expected because gross profit margin benefited 160 basis points from nonrecurring items in the fourth quarter of 2023. Adjusted SG&A expenses were $90.8 million in the fourth quarter compared to $83.5 million in the fourth quarter of 2023. Fourth quarter adjusted operating income was $32.8 million compared to adjusted operating income of $41 million in the fourth quarter of 2023. The decrease was primarily due to lower adjusted gross profit margin in the quarter, as mentioned earlier, higher sales commissions and higher variable compensation on stronger full year results. Fourth quarter adjusted EPS was $0.34 versus $0.41 in the fourth quarter of 2023. Fourth quarter adjusted EBITDA was $46 million versus $52.2 million in the fourth quarter of 2023. Turning to our full year results. Full year 2024 net sales totaled $1.32 billion, an increase of 4.3% versus fiscal year 2023. FX-neutral net sales increased 4.4% year-over-year. FX-neutral net sales in the Americas were up 8.8% year-over-year. FX-neutral net sales in EAAA were down 1.7%. 2024 adjusted gross profit margin was 37.1%, an increase of 173 basis points from the prior year period, primarily due to strong execution from the selling organization, favorable…

Thank you, Bruce. I want to thank everyone for joining the call today. I would like to give a special thank you to the entire Interface team for their contributions and achievements in 2024. We've made great strides in our business with strong execution of our One Interface strategy in many areas outpacing the industry and achieving success faster than we anticipated. We enter 2025 with strong momentum and expect this to be another year of growth and margin expansion. And while we continue to monitor the dynamic macro and geopolitical environment, we are confident in our ability to deliver long-term value to our shareholders. With that, I will open it up to questions. Operator?

We are now opening the floor for question-and-answer session. [Operator Instructions] Your first question comes from Brian Biros from Thompson Research Group. Your line is now open.

Hey, good morning. Thank you for taking my questions. To start with, I guess, I believe 2024 was the first full year of the One Interface selling strategy. It seems to pay off very nicely. So I guess how are you thinking about that impact to 2025 now? Are we thinking a similar level of benefit as you saw last year, maybe even greater benefit as the process is fine-tuned, improved upon? I know you mentioned you expect to outperform the industry, but any further details of kind of how that looks into '25 would be appreciated.

Yes, thanks. Good morning, Brian. We're really proud of the work that the teams have done with the One Interface strategy and the combined selling team. And as you said, the success that we've seen, if we think about where we were a year ago, we had just announced the new program. We just announced that we were hiring additional Nora sellers and they came online throughout the first half of the year. And the teams were just getting to know each other and operate together as one team. So we're really pleased with the momentum. Americas business was up 9%. It's a fantastic year. And we think we're still in early days. So the combined selling strategy is working, and we expect it to continue to pay off.

I agree, Brian, as you mentioned, the strategy is working. We continue to grow. We continue to take share. And in terms of how that sort of folds into our 2025, we baked that into our guidance. And that's kind of how we're thinking about. Clearly, early days in the year so far, but we entered the year with solid momentum.

Got you. And then I guess for the end of '24 and the start of '25, we heard that, I guess, the office segment in general was getting better. I know that's often on a low base, probably still not as good as other verticals, but there seem to be some momentum building in office. Did you see this across your business? And I guess what are you expecting for office for the full year for '25?

So I'll make a couple of points on office. First, the fact that we grew our business 4% for the year, with Corporate Office being down 1% globally. It's really a testament to our teams driving that diversification and amplifying growing across the market. So we're really pleased with that. And we're confident that we're gaining share in office, which is also great. And we feel really good about office in '25 for really three reasons. First, the return to office mandates are on the rise. So what were the suggestions over the past couple of years have turned to mandates in many cases with more and more companies realizing that in-person work matters. The second, the demand for premium Class A space is also on the rise. So we've been talking about that a lot as companies bring workers back, it's the best buildings that are really getting the most attention. And then the third, when landlords are looking to lease space, they offer more TI dollars, tenant improvement dollars and incentives to their tenants, which really helps. Those dollars usually go to refresh carpet and paint. So that's good news for us. We feel pretty good about 2025 office.

Good to hear. If I can squeeze one last one in. I guess you have a pretty solid balance sheet now, paid off a lot of debt, leverage, I think at 1.1x. How are you thinking about just capital allocation priorities now, given there's less debt to pay off than a year or two ago? Thank you.

Great question, Brian. It wasn't that long ago that we were being pressed to bring down our debt and improve our leverage ratio and we worked hard at that and we've met our commitments around that, which is fantastic. We're going to continue to invest in the business, given the very, very resilient balance sheet that we have now, and the strong balance sheet that we have now. We have some additional investments that we're going to make in our manufacturing facilities, which will make us more efficient and continue to drive profit margin expansion. This is a great space to be and I'll just close by saying with how dynamic the market is right now, this is a great spot to be in to have such a strong balance sheet.

Thanks. I'll pass it along.

Your next question comes from David MacGregor from Longbow Research. Your line is now open.

Yes, good morning, everyone, and thanks for taking my questions. Just while we're talking about capital, Bruce, the $45 million guide for 2025 is up fairly substantially from '24. I'm guessing most of this is manufacturing automation, but maybe you could just talk about that for a moment. And then I guess is it the peak for spending on automation or how should we think about investments in the manufacturing model beyond 2025?

Yes. Great question, David. You probably noticed that we came in a little under what our guide was for last year. So there's a little bit of timing between two years. But the $45 million that we're planning on spending in 2025 is a continuation of some of the machinery that we put in our manufacturing plants in the US. And we're also going to be putting some of that same machinery and some other automation machinery into some of our manufacturing outside of the US. All of this stuff has a great return and I think that we're trying to be really, really wise with only investing capital in proven technology that has proven returns, which is what is the underpinning to this $45 million in 2025.

Great. And can you just address the question regarding is this peak spending in this capital cycle or do you envision that maybe moving higher as you begin to address the non-US?

Well, this is our -- I'm not sure what time horizon you're speaking of. It really depends on, I don't know how far you're sort of like pulling out your lens. But, as you know, we generally spend between 2.5% and 3% of revenue on CapEx, which I think this is in line with that. We would only make investments above that if they had a great return. For example like the machinery that we're putting in now, it has a return of less than two years. And so I'm reticent to tell you that this is the peak forever because if we could find something that yields the kind of returns that we're getting out of this machinery, we would do that again. I think you would want us to. But there's nothing in the foreseeable future that we're sort of saying, gosh, there's going to be a huge spike in CapEx to our knowledge. This is our best visibility on CapEx as we stand today.

Okay. And Laurel, are the capital projects impacting shipments at all?

No, I don't think they're impacting shipments at all. If anything, we're increasing our throughput especially, for example, the investments that we're making in Nora in Germany, we're really increasing our throughput there to keep up with the demand in the US. So there's been no interruptions. If anything, it's helping us service our customers better.

I was going to say, if anything, David, it's actually improving our throughput and improving our automation in our plants so.

Okay. Good to hear. Good to hear. I wanted to ask secondly about the gross margin guide, the 37.2% to 37.4% implies 50 to 70 bps of improvement year-over-year. I mean you've got a lot of moving parts in this gross margin model. Obviously, you got price cost, you've got the Nora mix, the LVT mix, the supply chain productivity with your new Chief Procurement Officer. I'm guessing there's other things in there as well that you'd highlight. Can you just give us a sense of what the puts and takes are behind that 50 to 70 basis point improvement?

Yes. That's a good push. I'll just say, David, it's early days in the year. This is a super dynamic environment that we're operating in. We're incredibly pleased with the progress that we had around gross profit margin in 2024. We have plans to continue, obviously, as you mentioned to expand gross margins in 2025. There's a lot of different pieces to it. It's all those things that you talked about and more. I'll just say that early days and this is our best estimate based on all the puts and takes that we see, but you have our commitment that we're going to continue driving gross profit margin expansion. And obviously that's reflected in our guide.

Right. I guess with Laurel's comments about the growth at Nora, the expansion of the Nora business has got to rank pretty highly within the mix of drivers behind that gross margin improvement?

Yes. I think it's a great point. The more we sell of Nora, especially in the US, the more it helps our mix and our teams are super focused on it and seeing some great success and we're doing everything we can to invest to make sure we support that business and also be more efficient in our plant in Germany. So it will be a big contributor.

Great. Got it. And then I guess, great job in the SG&A management. I mean, just over a period of a few years, in fact, you've done a lot there, great discipline. I guess the question is how much revenue growth capacity remains before you need to start making larger investments in the SG&A? How much leverage opportunity remains at this point?

It's something that we're watching really closely because we do have our pedal down on growth. And with our incentive structure and our commission-based selling organization, we have to make sure we do everything possible to fuel that growth. So it's a real balance. And our approach in 2025 and beyond will continue to be super-efficient on anything that doesn't touch the customer or touch innovation and then be really, really disciplined on everything else. And so we're continuing to look at those investments and what do we need to do to service the growth and how do we get more efficient everywhere outside of that.

David, I'll just say thank you for noticing. I know a lot of One Interface team members listening to this call. And honestly this has been a team effort. And this One Interface strategy, it's another component of how the strategy is working really, really well. We have functional leaders that are taking SG&A management and SG&A leverage really seriously with zero-based budgeting. And so thank you for noticing. And I can tell you, there's just a ton of focus on what you just articulated internally and as part of a key component to driving the business and continuing to improve our margins.

Got it. Thanks for that. Last one for me, just a clarification. You're guiding interest expense kind of flat year-over-year, $24 million, in fact, versus $23.2 million, you're up a little bit despite having paid down $110 million of debt. Is that just rate increases or is there something else going on there that we should be thinking about?

We're getting more and more into just the fixed range. We used, as you know, a bigger component of our debt used to be more variable. And now it's largely fixed. It's largely our bonds that are fixed rates now. And so it's more predictable, and it's obviously, it's lower than it's ever been. So that's just kind of how mathematically penciled out.

Yes. Well, congratulations on all the progress operationally, balance sheet, everything, you guys are doing great job. Thank you.

Thank you.

Thanks, David.

Your next question comes from Alex Paris from Barrington Research. Your line is now open.

Thank you and thank you all for taking my questions. Congrats on the strong finish to the year.

Thanks, Alex.

A couple of questions. First of all, a follow-up on CapEx. So of the $45 million projection for this year, up from roughly $34 million last year. Which is generally, as you said, 2.5% to 3% of revenue. What proportion is maintenance CapEx? What proportion is growth CapEx? This year and then maybe in general?

Good question. About $10 million of the $45 million is investment CapEx in the machinery that we've been talking about and about $35 million is around maintenance CapEx, maintanance and safety in general updates.

Okay. Great. And then a question about return to office mandates. I'm thinking about the recent election, I'm thinking about DOGE, I'm thinking about mandatory return to work for government employees. And I'm wondering what is your exposure to government? I know based on billings, I think, it is 6% roughly. What's the character of the government business? Is it federal? Is it state? Is it local? Is it all of the above?

So if we look at just our US government business, it's a small piece of the total. It's low-single-digits, maybe 4-ish , a little bit more than that percent. And that includes all government buildings. So what we put in that things like museum, research institutions, military locations, including then all government offices, whether they're local or federal. So it's pretty small and pretty diverse. And it's something we're keeping an eye on. And as you said, there's a real mix happening there. There's the return to office mandates for the first time really since before COVID as well as staff reduction. So, not yet sure what that will mean. We're keeping an eye on it, but it's a pretty small and really diverse piece of our business.

Thank you. That color is helpful. And then going just back to some earlier comments. Retail was up for the year. Was it up in the second half and fourth quarter? I know you had an easy comp, I guess, because you had a weak second half in retail in 2023?

Yes, that's right. Retail was up in the back half. And again, it remains a small piece of our total business based on some project deferrals in 2023 that flowed into '24. It was up in the back half, primarily.

I'd just say that was a testament to great customer relations. I don't know if you remember, Alex, but we always said we never lost that business. That business is just deferred. So we kept tight relationships with our customers in that area and we were able to retain that business. It was just the lumpiness of how it sort of rolled in.

Got you. That's helpful. Last question, kind of like the return to office question. With the new administration, a lot of tariff talk is getting tossed around. Yesterday, I guess, they're going to implement Canada and Mexico. I don't think that's much of an exposure for you, but what is your exposure in each of the three main product categories, carpet tile, LVT and rubber?

Yes, it's a great question. Obviously, we're watching it really closely. Based on what was proposed and paused, there's no material impact. But honestly, Alex, no one can really predict exactly where this will all land. We're going to continue to monitor it closely and we'll respond as needed and necessary depending on how all these tariffs and retaliatory tariffs land.

So where are you sourcing your raw material for each of those three product categories?

Yes. Well, let's bring it down into pieces. There's a few things that help us like, for example, with carpet, we manufacture locally in the US and in Europe and in China, for example, US for US, Europe for Europe, China for China. So that's a helper. We do have some sourcing out of Mexico, but it's very limited. It's not big exposure. And if needed, we would rejigger our supply chain, but it's a very small number in terms of tariff exposure with Mexico. And we do not source from China. So that's very helpful for us as well. So I'm not trying to be evasive here. It's such a dynamic environment that we're just watching it and we'll respond and just like every other company, we'll adapt as the tariff situation sort of unfolds and as there's more clarity.

And just to kind of summarize, no impact so far, you're watching closely, but it does look like from the outside that the exposure is fairly limited. And to the extent that there is exposure, you can pivot quickly?

I think that's fair. Try to pin me down. Go ahead.

I was just going to add, Bruce spoke to the carpet tile piece of it. We sourced our LVT from South Korea, as we've shared in the past. And all of our Nora rubber product is manufactured in Germany. So those are our three -- if you think about our three product categories, carpet is really local. South Korea for LVT, which we're confident we can price if we need to. And then Nora we've got -- there's not a lot of rubber alternatives out there. We've got great pricing power there as well. So a lot to sort through, obviously, a lot of uncertainty, but we're in pretty good shape, all things considered, but a lot to learn.

It sounds that right. All right. So thank you very much. I appreciate it. That's all I have.

Thanks, Alex.

Thank you. We are now ending the Q&A session. I'd now like to hand back over to Laurel for final remarks.

Great. Well, I'd like to say thanks to everyone for listening to the call today and especially thanks to the entire Interface team for just a fantastic year. I appreciate it and we look forward to updating everyone on our progress as we go.

Thank you for attending today's call. You may now disconnect. Have a wonderful day.