Q3 2026 Interface Inc. Earnings Conference Call - INTERFACE INC

Financial Performance:

• Consolidated currency-neutral net sales increased 0.4% year-over-year (YoY) to $366.7 million, slightly below the low end of the guidance range due to timing shifts in retail billings and softer European conditions.
• Adjusted gross profit margin reached 40.6%, an increase of 103 basis points, driven by favorable pricing, product mix, and manufacturing efficiencies that offset higher raw material and tariff costs.
• Adjusted SG&A expenses were $91.5 million, lower than guided, reflecting disciplined expense management and reduced variable compensation.
• Adjusted operating income grew 5.7% to $57.2 million; adjusted net income rose to $39.9 million; adjusted diluted EPS increased 11.5% to $0.68.
• Cash from operating activities was $86.3 million, up from $76.7 million YoY; capital expenditures were $9.1 million, focused on automation and robotics.
• Full-year adjusted gross profit margin guidance includes a one-time IEPA tariff refund benefit; excluding this, the baseline margin is approximately 39.3%.

Guidance and Future Outlook:

• Reaffirmed full fiscal year 2026 adjusted earnings outlook despite revising full-year net sales guidance downward to $1.440–$1.455 billion due to European softness, elevated oil prices, and Canadian tariffs.
• 2026 guidance assumes a 53-week year; expects 39.4% adjusted gross margin (including tariff refunds), $387 million SG&A, $60 million capex, and a 25% effective tax rate.
• Long-term structural gross profit margin run rate is targeted at approximately 39% to 38.5%, with productivity initiatives expected to deliver meaningful lifts into 2027.
• Management expects continued order growth in the Americas and is executing a "One Interface" commercial strategy in EMEA next year to simplify operations and capture future growth.

Business Segments and Product Lines:

• All three primary product categories (Carpet Tile, LVT, and Rubber) grew year-to-date and are projected to grow for the full year.
• Rubber segment: Expanded "Noravant Timber" (woodgrain aesthetic) to more EMEA markets; won the Most Sustainable Product Award at the 2026 Healthcare Facilities Symposium.
• Carpet Tile: Launched new styles including "Between the Notes" (premium) and "Twist in Texture" (accessible); expanded "Perfect Pitch" collection with warmer neutrals.
• Manufacturing: Robotics and automation deployed in Europe and Australia are delivering productivity gains and margin improvements; further automation in U.S. cutting/packing operations is planned.
• Market Segments: Healthcare billings up 5% (following 29% growth in Q3); Education up 3%; Corporate office up 2%.

Market and Competitive Landscape:

• Americas market showed strong momentum with currency-neutral billings up 0.5% and orders up 6%; growth led by healthcare, education, and corporate office sectors.
• EMEA market softened due to macroeconomic conditions (e.g., weaker stock markets in Germany, Switzerland, and France), resulting in a 7% decline in EAAA orders, though the UK market continued to grow.
• Competitive environment remains challenging with price pressure; management believes competitors face similar cost headwinds, creating a "fair playing field" where Interface aims to gain market share through product differentiation and sustainability leadership.
• Backlog ended the quarter up 14% year-to-date, indicating solid underlying demand despite billing timing shifts.

Risks and Challenges:

• Input cost volatility, specifically fluctuating oil prices (ranging $90–$115/barrel) and new Canadian tariffs estimated to add $5–$10 million in annual costs.
• Macro-economic headwinds in Europe causing delays in project conversion and billing timing, though underlying demand remains intact.
• Supply chain and labor availability challenges affecting construction project timelines, potentially delaying orders from converting to billings.
• Timing-related variability from retail store remodel projects and large Nora installation cycles impacting quarterly sales reporting.

Management Commentary and Tone:

• Tone was confident and disciplined, emphasizing that Q3 earnings growth exceeded expectations despite modest revenue growth, driven by strong operating leverage.
• Management expressed optimism about the "One Interface" strategy and the upcoming commercial reorganization in EMEA, noting similar successful execution despite weak macro conditions in the U.S. during the previous rollout.
• Executives highlighted a strong balance sheet, a healthy backlog, and continued investment in sustainability and automation as key pillars for long-term resilience.

Analyst Questions and Answers:

• Gross Margins (Brian Byros, TRG): Management clarified that Q4 margins may imply a YoY decline due to raw material cost flow-through but emphasized a structural run rate of ~39% and reaffirmed the long-term ambition of 38.5%.
• Corporate Office Trends (Brian Byros): Office growth was slightly lower than Q1/Q2 due to European softness, but underlying momentum remains strong in the Americas and globally; orders are taking longer to convert in Europe but no cancellations are evident.
• Cost Inflation & Strategy (David McGregor, Longbow Research): Canadian tariffs ($5–$10M annually) and energy costs were the primary unexpected cost drivers; margin protection strategy involves pricing leverage, productivity gains from automation, and profitable product mix.
• Macro Impact on EMEA Strategy: Management confirmed the EMEA commercial reorganization is proceeding regardless of macro conditions, leveraging lessons from the U.S. to improve efficiency and market penetration.

Other Key Points:

• Interface received recognition for its decarbonization strategy, including "Decarbonization Strategy of the Year" from E3, a spot on Newsweek's "America's Greenest Companies," and a finalist spot in Reuters' Global Sustainability Awards.
• The company's "One Interface" strategy focuses on building global functions to support local selling teams, expanding margins via supply chain management, and leading in sustainability.
• No order cancellations have been observed; delays are attributed to project timing, construction logistics, and macroeconomic uncertainty in Europe rather than a loss of demand.