Q3 2026 Interface Inc. Earnings Conference Call - INTERFACE INC

Explicit Guidance:

• FY2026 (53-week) Revenue: Reaffirmed range of $1.440–$1.455 billion (revised downward from prior guidance due to softer European demand and timing shifts).
• FY2026 Margins: Adjusted gross profit margin of ~40.4% of net sales (includes one-time IEPA tariff refund benefit from Q2); baseline margin excluding this benefit is ~39.3%.
• FY2026 Expenses: Adjusted SG&A of ~$387 million; Adjusted interest and other expenses of ~$14 million; Adjusted effective income tax rate of ~25%.
• FY2026 Capital Allocation: Capital expenditures of ~$60 million; Fully diluted weighted average share count of ~58.5 million.
• Full Year Earnings: Reaffirmed full fiscal year 2026 adjusted earnings outlook despite revenue revision.
• Long-term Margin Target: Management targets a structural run rate of ~39% gross profit margin and an ambition to reach 38.5% from current levels.

Business-Segment Outlook:

• Product Lines: Expect year-over-year growth for all three categories (Carpet Tile, LVT, Rubber) through FY2026. Rubber segment "Noravant Timber" expanding to more EMEA markets following successful Americas rollout; expected to expand into healthcare and other segments.
• Geographies: Americas showing strong momentum with 6% order growth; EMEA facing softer macro conditions with 7% order decline, though opportunity pipeline remains strong.
• Strategic Shifts: EMEA commercial organization reorganized under a single leader; transitioning to a "one-team" selling structure supported by centralized customer service and analytics in the next fiscal year.
• Backlog: Ended Q3 2026 with backlog up 14% year-to-date, signaling underlying demand.

Market and Competitive Outlook:

• Demand Trends: Americas order growth (6%) and strong billings in Healthcare (+5%), Education (+3%), and Corporate Office (+2%).
• Office Segment: Underlying demand healthy due to return-to-work trends and renovation (R&R) activity, though Q3 growth (2%) was muted by European softness and timing; momentum expected to continue globally.
• Competition: Competitive landscape remains intense with price pressure; company aims to outpace the market and capture share through design leadership and product mix.
• Pricing: Plans to continue executing pricing strategies, particularly in the US, to offset cost inflation and protect margins.

Macro / Industry Outlook:

• Macroeconomics: Europe (specifically Germany, Switzerland, France) experiencing softer conditions and stock market weakness; UK market continues to grow.
• Cost Headwinds: Facing elevated input costs from oil price volatility (range of $90–$115/barrel) and new tariffs, specifically Canadian tariffs estimated at $5–$10 million annually.
• Industry Dynamics: Construction project delays and labor availability challenges cited as causes for conversion lags in Europe, but customers face "ceiling" on delays due to occupancy certificate requirements.

Strategic Initiatives:

• Automation & Productivity: Continued investment in robotics and automation in US, European, and Australian facilities (specifically cutting, packing, and carpet tile manufacturing) expected to drive "meaningful" productivity lifts in FY2027.
• Supply Chain: Expanding automation in U.S. cutting and packing operations; modernizing Noravant manufacturing equipment to improve efficiency and capacity.
• Sustainability: Committed to being carbon negative by 2040 without offsets; recognized as "Decarbonization Strategy of the Year" by EDI.
• Capital Allocation: Balanced strategy prioritizing business investment (innovation/productivity) and M&A evaluation, followed by disciplined debt management and shareholder returns via dividends and buybacks.

Risks and Headwinds to Outlook:

• Timing Volatility: Retail store remodel project timing shifts (projects moving to future quarters) and variability in Noravant installation cycles.
• Macroeconomic Uncertainty: Softening demand in Europe and potential for further currency fluctuations.
• Input Cost Inflation: Unpredictable oil/energy price movements and ongoing tariff impacts (Canada).
• Conversion Lag: Delays in converting order pipeline to billings in Europe due to external construction factors.

Management Tone on the Future:

• Confidence: High confidence in FY2026 earnings delivery and long-term structural margins (~39%) despite revenue headwinds.
• Sentiment: Encouraged by Americas momentum and backlog growth; optimistic about EMEA transformation and "one-interface" strategy execution next year.
• Strategic Outlook: Belief that the reorganization in EMEA and productivity investments will strengthen competitive position regardless of macro environment.

Miscellaneous:

• Fiscal Year Structure: FY2026 is a 53-week year, with the extra week falling in Q1 of FY2027.
• Non-GAAP Measures: Adjusted gross profit margin guidance includes a one-time benefit from IEPA tariff refunds received in Q2.