Wednesday, October 26, 2011

Interface 2Q'11 Earnings analysis & opinion

Interface 2Q'11 Earnings: were on the mark.  However, they weren't as good as previous quarters as they missed consensus earnings estimates.  Relative to peers, they were quite good.  However, business intelligence for the industry is pointing towards tough Euro-headwinds.

Interface earnings Highlights:
Investors are requested to view IFSIA's earnings release link, as this article is a commentary of them, not a rehash. Highlights:
  • Revenues rose sharply, up 18% to $268MM
  • Orders grew 13%, and backlog continued to rise
  • Chinese plant, while not profitable, continues to ramp up.  It achieved breakeven performance during the month of June.
  • Operating Margins continued rising (from 9.5% last year to 9.8%)
  • EPS of $20 cents/share slightly missed analysts' estimates.
    What we liked:
    Despite all the talk of a decelerating US economy and Euro-Crises, revenue was quite good, especially compared to competitors.  Margins continued rising, albeit at a slower pace than previous quarters.

    And not so much..
    IFSIA has been able to pass costs through to customers.  We think this is getting increasingly difficult.  Other than higher raw material costs, the company is also getting hit with continued Start-up costs in China, and its relatively new strategy of opening company stores.  These stores don't comprise a large part of Interface's overall costs, but the trend is there.   The company had 5 stores as of quarter's end and several more are expected by YE.  Cash flow from operations was also weak, but likely short-term due to higher inventory (i.e, hoarding) ahead of price increases from its suppliers.  Also attributed to higher receivables and paying off its vendors more quickly.

    We believe the shares of Interface, which had performed quite well until the Euro-Crises reemerged, will be very sensitive to European and US economic activity (regardless of the company's sound business operations).  Also, note the shares have a high Beta, hence higher volatility is to be expected.

    What to look for in 2012:
    As such, we expect Interface to issue a cautious outlook for the rest of this year and into 2012.  We believe there already is a Euro-Crises, and that it's been with us for nearly 2 years now.  In our estimates, things could only get worse in Europe given political deadlocks, austerity measures and a stubbornly tight ECB (on the monetary side).  Traditionally Interface's key drivers were 2, now they are three:
    1. Residential Construction
    2. Commercial Construction
    3. Europe
    On the domestic side, the US economy is also witnessing slower government growth, which should slow demand from that end-market.  We will expand on specific economic data points and charts in our upcoming 3Q'11 review.

    What's happening on the Corporate Social Responsibility front:
    I'd like to highlight this "win-win" situation the company initiated during the quarter.  It essentially participated in a knitting program as it introduced a new floor tile that looks like yarn.

    The project produced a smashing number of squares, nearly 10,000 ! It also produced hats and other knitted garments.  This "Knit a Square" program was part of KasCare, a charity providing warm clothing to orphaned children with AIDS in South Africa.   See these links for additional info: knit-a-square.comknitting-for-charity.

    Background of the company:  
    Interface, Inc. is the world's largest manufacturer of modular carpet, which it markets under the InterfaceFLOR, FLOR, and Bentley Prince Street brands.  Interface's main goal, other than serving its investors, is to help make the world a better place via its widely heralded Sustainability program.

    Disclosure:  The author is long Interface.

    Tuesday, October 25, 2011

    Ray Anderson: In Memoriam

    In Memoriam:
    Apologies for the tardiness of Interface's earnings report, but Ray Anderson's passing came out of left field to me, even more so than Steve Jobs'.  Ray died on August 8, 2011 after a 20-month battle with cancer.  Spent a few emotional nights tearing over the many tributes given to him during his memorial service.  If ANYONE doubted this man's authenticity and sincerity in making the world a better place, I suggest this website:   Below is what might be Ray's last video, when he was receiving chemotherapy.

    Ray Anderson, who was born in Georgia, always talked about climbing the Mountain of Sustainability.  He said he wasn't going to be around to see the other side of the mountain but was happy that we would.  Interestingly, another man from Georgia also had a vision of a "promised land" across the mountain-top; that man, of course was Doctor King.  Anderson and King were two different people, but Oh, in some ways, so much the same!

    Ray, you will be MISSED !

    On September 1, 2011, Ray left 62% of his total assets to his foundation, a trust fund devoted to environmental causes, with the remainder going to his family.

    Thursday, October 13, 2011

    French SRI: European and French CSR Regulations

    Part II

    European (and French) CSR regulation:
    The French have been particularly interested in following the United Nations Principles for Responsible Investment (UNPRI)  Since it was released five years ago, the number of signatories have increased to 800, representing 48 countries managing total assets of $25 trillion.

    During the fall of 2001, amidst the aftermath of September 11, the European Commission ("EC") shed a more peaceful light with its publishing of a green paper, entitled Promoting a European Framework for CSR ("Corporate Social Responsibility").  The paper's purpose was to act as a launchpad for CSR debate throughout the member states. 

    The EC also published a paper entitled "Implementing the Partnership for Growth and Jobs: Making Europe a pole of excellence on CSR" in March 2006.  The significance of this paper was to unify European member states' CSR initiatives.  The report also noted that while CSR was not a substitute for public policy, there were several benefits including:
      • more rational use of natural resources (e.g., environmental aspect of ESG)
      • innovation
      • poverty reduction (e.g, social aspect of ESG)
      • and greater respect for human rights (e.g. social aspect of ESG)
    Drilling down within the EU, there have now been eight countries that have specific national SRI regulations that cover their pension systems.  The UK wrote regulation in 1999, and enacted them on July 2000.  This regulation called for asset managers to release information on their SRI initiatives.  This regulation was enacted by both the desire to enhance consumer protection and to clarify the legality of SRI-oriented pension investment policies.  (Note, the US still needs to clarify the Prudent Man Rule of ERISA regarding how SRI fits into pension management.)  Note that this regulation deals with pensions and not the actual CSR initiatives of companies.   According to Belsif (Belgium Sustainable and Socially Responsible Investment Forum) both the transparency effect and the enforcement of the above regulation has been "rather weak."

    The French were inspired by the United Kingdom's pension fund regulation.  In 2001, the French passed a law requiring that employee savings plans specify their rules for ESG.   A similar law closely followed that same year.  This law requires the Retirement Reserve Fund (which supports the French pension system) disclose how its investment policy guidelines take into account ESG.

    In May 2001, French firms became required to report on ESG issues, initiatives, etc. in their annual reports.  Required firms are those that are publicly traded or regulated.  Please refer to Belsif's website and this link for the actual rule.French legislation.

    On July 24, 2009 several French signatories agreed to the "Principles for Socially Responsible Investing"PDF file.  This document included several guidelines for Paris financial market participants and continued the work done by Paris Europlace and Forum on Increasing the Contribution of Finance to Sustainable Development, which was co-chaired by French President Nicolas Sarkozy.

    The report gave the following recommendations:
    1. facilitate the inclusion of ESG criteria in investors' decision-making processes
    2. clarify and increase discussions with companies so that they're encouraged to release qualitative (nonfinancial) information to the public
    3. and develop accounting standards complementary with the above.
    As the reader can easily determine, ESG/SRI rules and regulations are fairly "light-weight" and inconsistent within Europe and between Europe and the United States.  This website will keep readers updated with any significant new developments.

    Sources:  Belsfi, Novethic, Social Investment Forum, Eurosif, Paris Europlace

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