Strategic Exchange: Interface and Nora, Engineered Floors’ new carpet tile plant - July 2018

By Kemp Harr

Key economic indicators continue to point to positive conditions for growth in both the commercial and residential flooring markets. The GDP 2.9% growth forecast for 2018 puts the U.S. in the second position behind China for rate of growth. The U.S. unemployment rate remains below 4%. Consumer sentiment is hovering at 100-very near the top of the range. Housing starts are around 1.3 million-the highest number since 2007. Spending on residential remodeling is projected to grow 7% this year. And the Architecture Billing Index remains above 50, indicating growth in the nonresidential construction sector.

The only real flag, economically, is the threat of inflation. Consumer and wholesale prices are rising at a 2.5% rate-well above the average of the past couple of years. The rising price of oil is a significant contributor because it impacts both raw material prices and freight delivery costs.

The 50th edition of NeoCon is behind us, and the vibe from the show was both upbeat and nostalgic. The workplace continues to evolve, as do the furnishings and finishes that adapt to those changes. The pendulum has swung from telecommuting back to collaborative offices but with that comes a more relaxed, homey feel. Fortunately, floorcovering plays a crucial role in creating workspaces that Millennial employees seek for their purposeful employment in a tight labor market. Read more about the trends in our NeoCon highlights article that starts on page 47.

During the show, more than one supplier lamented to me I love all the energy and enthusiasm, but where are the orders? suggesting that sales to this sector continue to be soft. We also hear that there continues to be a lot of churn among the designer reps as they leave one firm to join another. People who understand this business know well that having the right rep is as important as having the trendiest new product or brand message.

INTERFACE ANNOUNCES PLANS TO ACQUIRE NORA
The biggest news this month from the supply side of the business is Interface’s acquisition of Nora-the leading global brand in the rubber flooring business. Interface is paying $420 million “in a stock purchase transaction” for a company that initially brings $280 million in incremental revenue. Sounds high, but I’m no expert on price to sales ratio valuations. I did see where Nora’s gross profit margins were running at 45% and operating income margins were closer to 11%, so it could equate to $30 million in bottom line earnings without factoring in synergies-and also before you factor in closing costs.

From a synergy perspective, all of Nora’s reps-I’ve heard there are 50-will be selling Interface and vice versa. From a product line perspective, it’s safe to say performance rubber flooring is tangential to carpet tile-it’s related but also opens some new doors. Nora’s core segment focuses are healthcare, education and industrial. Nora’s headquarters is in Weinheim, Germany with distribution centers in Salem, New Hampshire and Shanghai, China. The company has 1,100 employees worldwide. Nora has twice the global marketshare of its nearest competitor, which is Tarkett’s Johnsonite.

The best part of this news-for those who know Jay Gould’s history at American Standard of being part of a team that split the company into parts and sold them off-is that it now appears that Jay and the Interface board have a different set of plans for Interface. In this era of continued consolidation, it’s refreshing to see Interface’s leadership has a longer-term strategy: to become a performance player in the flooring business, as opposed to the latest acquired brand by Shaw, Mohawk or Tarkett. It’s also refreshing to hear there will continue to be a Nora brand.

ENGINEERED FLOORS’ NEW CARPET TILE PLANT
Conceived back in 1914, the first paved highway that ran north and south between Miami, Florida and Chicago, Illinois was called the Dixie Highway, and it was funded by a group of businessmen, entrepreneurs and state government before eventually being taken over by the federal highway department. Several sections of the road still exist today but much of the traffic now flows on I-75. Folks who aren’t in a hurry still use Old Dixie Highway today, and among its distinguishing characteristics are the massive old growth trees that line the road and, in many places, meet 20 feet above the road to form a tunnel of foliage.

This road is an important part of carpet industry history because its route through Dalton, Georgia is where Catherine Evans Whitener launched the roadside tufted bedspread business that ultimately led to the development of the tufted carpet industry.

I bring it up now because, to get to Engineered Floors new carpet tile plant, you drive down Old Dixie Highway and it’s the first massive structure south of Dalton on the outskirts of town. And it is a sight to see: 550,000 square feet of 40’ tilt-up concrete walls with insulated walls and ceilings. Half of the property is covered by this new building, but about a third more of the acreage has been graded and paved for future expansion. Once inside, it’s pure white interior illuminated by the latest in LED technology and a modern forced air system designed to keep the building cool in the hot Georgia summers without using chillers.

About a third of the interior space has racks and doors for distribution, and the other two-thirds is dedicated to manufacturing for four product lines: modular carpet for the Pentz, J+J Flooring and EF Contract brands, plus Kinetics-the firm’s PET textile composite offering. On the far end of the building is a 500’ Tuftco coater that’s actually four lines in one-with ovens, pre-coater, Mahlo pattern straightening and beta gauges, shearing, polymer sheet extrusion, calendering and roll-up-all built in line with j-boxes to ensure that each process can run at its own pace. Some of the measuring equipment has nuclear components-clearly the latest in manufacturing technology. Just as impressive are the die-cutting presses and packaging equipment that utilize German presses and Japanese robot arms. Quite a juxtaposition to the 100-year-old highway that meanders by on the east side of the property.

So, what are we looking at here? This is the fourth state-of-the-art carpet plant, built by a privately held company that didn’t even exist ten years ago-a firm with revenues approaching $900 million that could potentially surpass $1 billion by the end of this year. This facility has an estimated production capacity of 21 million square yards per year, in a commercial carpet tile market that currently consumes 150 million yards and has been growing 6% a year.

But what’s different about this plant versus EF’s first three? First, this one serves the commercial market, a $6.1 billion market (at wholesale value) that is 55% carpet, two-thirds of which is modular tile. Secondly, this is only a finishing plant. All the yarn and tufting operations take place at other facilities. And lastly, price-in this market-is not as critical as aesthetics, durability, customization and service. That’s not to say that this operation can’t excel and potentially shift share, but the commercial market dynamics are different from the residential market. Success in this market is dependent on relationships with designers, end-users and contractors, and these relationships take time to build. Let’s watch closely to see what happens next.

RESISTING THE RACE TO THE BOTTOM
The two fastest-growing flooring categories are LVT on the hard surface side and modular carpet on the soft surface side, and the next year will be an interesting one from a producer margin perspective as capacity outgrows demand.

Compared to LVT, imports of carpet tile are much less of a factor, and the bulk of the battle will be fought on U.S. soil. Today, the business is nearly all commercial, but there is speculation, as installation labor becomes more of a factor, that we will start to see modular carpet move into American homes. For now, focusing solely on the commercial market, we’re seeing a 6% annual growth rate. But on the manufacturing side, we’re seeing two new massive tile plants open in the last two years, in addition to Mannington Commercial losing a chunk of its demand as Engineered Floors moves to its own new plant.

The dynamics in the LVT business are much different. China remains the primary source of supply, more of the product goes into residential than commercial, and price is a bigger factor in residential than it is in commercial. Today, the growth rate is somewhere around 25%, but this could start to taper off at any time. From a supply perspective, large investments are being made both in Asia and in the U.S. on additional capacity.

In both product categories, it is smarter to differentiate with product attributes like added durability, better aesthetics, more comfort underfoot, better warranty, cleaner air, cleanability, better sustainability stories, or even heritage in the business. It is not wise, however, to lead with a lower price. Those that do so will end up losing in the end.

If you have any comments about this month’s column, you can email me at kemp@floorfocus.com.

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