Interface, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Interface, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Christine Needles. Thank you. Please go ahead.

Good morning and welcome to Interface's conference call regarding third quarter 2020 results hosted by Dan Hendricks, Chairman and CEO, and Bruce Hausman, Vice President and 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 statement, including risks and uncertainties associated with the ongoing COVID-19 pandemic and those described in our SEC filings. 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 the call for questions. Now I'd like to turn the call over to Dan Hendricks, Chairman and CEO.

Good morning and thank you for joining us today. Before we discuss financial results for the quarter, let me first talk about the status of our business and what we're seeing in the marketplace. Thank you to our interface team for your hard work this quarter as we continue to manage through COVID-19 pandemic. and the ongoing impacts on our business. We remain focused on managing the things that we can control while continuing to invest in initiatives, specifically our product innovation pipeline and selling system that will set us up for long-term success. I am very proud of the team for providing best-in-class service levels while ensuring the safety of our people. Though our net sales were down 20% in the third quarter versus last year, I'm encouraged by some early bright spots in the business. Third quarter orders increased 11% sequentially compared to the second quarter, potentially signaling stabilization. We saw modest sequential improvement across all product categories. We're beginning to see modestly improving trends in Europe. In particular, we're having a standout year in our Nora rubber business in Germany. And our business in China has returned to growth. Australia seems to have a better handle on COVID-19 than most of the world. And more people are returning to the office in Asia Pacific. Our work from the home is less common. This is a positive signal for us with half our revenues outside the United States. We maintain healthy adjusted gross margins of 37% in the third quarter despite a 31% decline in carpet tile production. This reflects the strong capabilities of our supply chain and operation teams and the flexibility of our 70% variable manufacturing cost structure. We remain committed to right-sizing the business to maintain our profitability when necessary. We have taken actions to realize $80 million of annual run rate cost reductions in response to the pandemic and anticipate four-year 2020 adjusted SG&E expense of approximately $310 million. Overall, we have made progress expanding our product lines. In 2016, Carpetile made up nearly 100% of our revenue. Today it is only two-thirds of our sales. We've quickly grown our LVT business since launching in 2017, and we acquired Rubber business in 2018. We believe Rubber and LVT have doubled Interface's total addressable market from about $4 billion to approximately $9 billion. And there's an opportunity for additional reach in the $10 billion commercial software economy market with the ongoing conversion of Broadloom to CarpetTiles. To further strengthen our competitive position, we also continue to expand our market presence and end markets beyond the corporate office. This includes healthcare, education, life sciences, hospitality, retail, consumer, and multifamily, where we compete on design, innovation, service, price, and sustainability. In the past few years, these efforts have resulted in major shifts in our revenue composition. The commercial office market, which used to represent the majority of our revenue, is now less than half our business. This diversification helps us to adapt during times of economic and market volatility. In the current environment, we are capitalizing on opportunities in hospitality, where hotels are renovating and remodeling while at limited capacity. And we see the same trends in health care and education, especially K through 12. In addition, the direct consumer e-commerce platform of our Ford business is having an exceptionally strong year, growing double digits. With COVID-19, we're seeing a change in design needs in schools and offices. Renovations and remodel compared to new construction make up about 80% of our commercial business, and we expect to get traction accommodating redesigns that address social distancing measures as large companies and businesses begin to reopen. Our products can help to address these challenges with design elements like pattern and shading to guide traffic direction, zoning, and other visual cues. Ultimately, companies still view office space as a necessity for culture and innovation. As they say, culture beats strategy every time. We anticipate demand to pick up in the coming quarters, and we believe there will be a recovering office market in the second half of 2021. According to a recent Gensler study, 44% of employees prefer to be back in the office full-time, while 44% prefer a hybrid office-home arrangement. This bodes well for the comeback of the office market. We're also increasing our focus on the U.S. commercial dealer discretionary market through value-engineered product and increasing selling focus from our sales force. Our objective is to take our fair share of this $2 billion market opportunity by focusing on the dealers and offering high-designed products at low to mid-price points. I'm also very excited to share an important milestone in our sustainability journey. In October, we rolled out our first carbon-negative carpet tile, measured cradle-to-gate. We launched this new product as part of our latest global collection called Embodied Beauty, along with our new non-vinyl, bio-based Sequest Bio and Sequest Bio X backings. These new backings are our first non-PVC product offerings in the United States, expanding our market opportunity with a growing customer base that prefer a non-PVC option. The Embodied Beauty styles are currently available in the United States, and we expect to launch them globally in 2021. We are encouraged by early demand from our customers, many of whom care about embodied carbon in their built space, and have made their own commitment to be carbon negative in the future. We firmly believe that the demand will only increase as more companies set carbon reduction targets and is a big step toward our commitment for Interface to be carbon negative enterprise by 2040. With that, I'd like to turn the call over to Bruce to discuss the financial results for the third quarter.