Q3 2026 Interface Inc. Earnings Conference Call - INTERFACE INC

Explicit Guidance:

• FY2026 Net Sales: Reaffirmed range of $1.440–$1.455 billion (53-week year, with the extra week falling in Q1 2027); revised downward from prior outlook to reflect softer European demand.
• FY2026 Adjusted Gross Margin: Approximately 40.4% of net sales; baseline margin excluding one-time IEPA tariff refund benefit is ~39.3%.
• FY2026 Adjusted SG&A: Approximately $387 million.
• FY2026 Adjusted Interest/Other Expenses: Approximately $14 million.
• FY2026 Effective Tax Rate: Approximately 25%.
• FY2026 Fully Diluted Share Count: Approximately 58.5 million shares.
• FY2026 Capital Expenditures: Approximately $60 million.
• FY2026 Outlook Adjustment: Full-year earnings guidance reaffirmed despite net sales revision; adjusted earnings expected to exceed expectations due to disciplined cost management.
• Run-Rate Margins: Management targets a structural gross profit margin run-rate of ~39% for the second half of the year and full-year 2026.
• Long-Term Margin Target: Stated ambition to reach 38.5% gross margin in a few years, though current structural level is viewed favorably at ~39%.

Business-Segment Outlook:

• Revenue Growth Drivers: All three primary categories (carpet tile, LVT, rubber) expected to grow for the full fiscal year 2026.
• Rubber (Noravant): Expanding "Noravant timber" to additional EMEA markets following Americas rollout; targeting meaningful expansion in healthcare and other segments.
• Carpet Tile: Continuing design-led launches across price points; expanding "Perfect Pitch" collection with new neutrals to meet residential-inspired demand; leveraging "Open Air" platform for accessible pricing.
• Americas: Underlying momentum remains healthy; order growth is up 6% in Q3; key segments (Corporate, Healthcare, Education) showing broad-based demand.
• EMEA: Facing softer demand environment; implementing "One Interface" combined selling structure (single leader, centralized analytics) starting next year to improve competitive position.
• Market Segments: Healthcare leading with strong growth momentum; Education and Corporate Office showing steady renovation activity and "return to office" drivers.

Market and Competitive Outlook:

• Pricing Strategy: Will continue leveraging pricing as a primary lever; U.S. commission-based model allows rapid price implementation globally.
• Product Mix: Shifting growth focus toward most profitable categories and markets to drive margin expansion.
• Competitive Landscape: Market remains competitive with price pressure; competitors face similar inflation/headwinds, creating a "level playing field."
• Order Pipeline: EMEA opportunity pipeline remains strong and up year-over-year; win rates consistent; delay in converting pipeline to orders due to macro conditions, not lack of interest.
• Americas Dynamics: No order cancellations observed; retail remodel timing shifts (projecting into future quarters) and Noravant installation cycle variability noted as timing-only impacts.
• EMEA Dynamics: Projects taking longer to convert to orders/billings due to construction delays, labor availability, and potential budgeting shifts to 2027.

Macro / Industry Outlook:

• European Economy: Softening macro environment, specifically in Germany, Switzerland, and France; UK market continuing to grow.
• Input Costs: Elevated oil prices ($90–$115/barrel volatility) and energy costs acting as headwinds; Canadian tariffs adding $5–$10 million in annualized costs.
• Industry Timing Factors: Construction delays and labor availability challenges are delaying project completions and certifications in EMEA; customers limited in delaying flooring installation due to Certificate of Occupancy requirements.
• FX Implications: Net sales growth cited on a currency-neutral basis (Americas +0.5%, EMEA +0.3% in Q3); outlook incorporates currency impacts.

Strategic Initiatives:

• EMEA Commercial Reorganization: Aligning EMEA commercial organization under a single leader starting Q1 2027; transitioning to a "One Interface" combined selling structure supported by centralized customer service and analytics.
• Automation & Robotics: Expanding robotic solutions in U.S. cutting/packing operations; automation in Europe and Australia showing productivity gains; new cutting/packing automation in Georgia and Australia launching in 2027.
• Capacity Expansion: Automating Noravant manufacturing equipment to drive both efficiency and capacity for growth.
• Sustainability: Targeting carbon-negative status by 2040 without offsets; recognized for Decarbonization Strategy (2026).
• Capital Allocation: Prioritizing innovation/productivity investments; managing leverage; evaluating strategic M&A; committed to dividends and disciplined share repurchases.

Risks and Headwinds to Outlook:

• European Demand: Continued softness in EMEA could impact net sales growth relative to prior expectations.
• Input Cost Volatility: Fluctuations in oil/energy prices and new tariff implementations (specifically Canada) pose margin risks, partially offset by pricing actions.
• Timing Risks: Retail remodel project timing and Noravant installation cycles can cause quarter-to-quarter variability in billings.
• Macro Uncertainty: Broader market uncertainty and construction delays could prolong the conversion of opportunity pipeline into orders.
• Competition: Intense competition requires winning every order on merit despite a level playing field regarding industry-wide cost pressures.

Management Tone on the Future:

• Confidence Level: High confidence in earnings delivery and long-term strategy despite near-term revenue revision; described as "encouraged" by Americas momentum and "optimistic" about Europe's future post-reorganization.
• Hedges/Caveats: Reaffirmed earnings guidance while adjusting sales guidance to be conservative on European conditions; explicitly noted that Q3 underperformance in sales was due to timing, not lost demand.
• Strategic Narrative: Emphasis on "operating discipline," "structural margin expansion," and executing a "multi-year strategy" to outperform the industry.

Miscellaneous:

• Calendar Note: FY2026 is a 53-week year, with the extra week occurring in Q1 2027.
• Award Recognition: Interface named to Newsweek's "America's Greenest Companies" and finalist in Reuters Global Sustainability Awards (Circularity).