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Interface (NASDAQ:TILE)
Q1 2020 Earnings Call
May 08, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Interface, Inc. earnings conference call. [Operator instructions] I would now like to hand the conference over to your speaker today, Christine Needles, director, corporate communications. Thank you.

Please go ahead, madam.

Christine Needles -- Director of Corporate Communications

Good morning and welcome to Interface's conference call regarding first-quarter 2020 results. Hosted by Dan Hendrix, chairman and CEO; and Bruce Hausmann, vice president and CFO. During today's conference call, any management comments regarding Interface's business which are not historical information, are forward-looking statements within the meaning of the Securities Act of 1933 as amended, and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements regarding the intent, belief or current expectations of our management team as well as the assumptions on which such statements are based.

Any forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could cause actual results to differ materially from any such statements including risks and uncertainties associated with the ongoing COVID-19 pandemic including interruptions to our manufacturing operations and reduced demand for our products, economic conditions in the commercial interiors industry and risks related to lawsuits, investigations and similar legal proceedings that we are subject to from time to time. As well as the risks and uncertainties discussed under the heading Risk Factors in Item 1A of the company's annual report on Form 10-K for the fiscal year ended December 29, 2019 which has been filed with the Securities and Exchange Commission. We direct all listeners to that document. The company assumes no responsibility to update or revise forward-looking statements made during this call and cautions listeners not to place undue reliance on any such forward-looking statements.

Management's remarks during this call also refer to certain non-GAAP measures, the most comparable GAAP measures as well as a reconciliation of the non-GAAP measures to the most comparable GAAP measures is contained in the company's earnings release and Form 8-K furnished with the SEC today which explains why Interface believes presentation of these non-GAAP measures provides useful information to investors as well as any additional material purposes for which Interface uses these non-GAAP measures, each of which can be accessed in the investor relations section of the company's website, www.interface.com. Lastly, this call is being recorded and broadcasted for Interface. It contains copyrighted material and may not be rerecorded or rebroadcasted without Interface's express permission. Your participation on the call confirms your consent to the company's taping and broadcasting of it.

Now I'd like to turn the call over to Dan Hendrix, chairman and CEO.

Dan Hendrix -- Chairman and Chief Executive Officer

Thank you Christine. Good morning and thanks for joining our call today. I hope that every one of their families are safe and they're well. So before we jump into our first-quarter results, I want to give you some context related to our current business conditions, and how we're navigating through the COVID-19 pandemic.

The health and safety of our employees is our first and foremost concern as we work to ensure the strength and stability of our business. We've experienced minor disruptions in operations over the past few months, but I'm pleased to say that our primary manufacturing facilities are fully operational. We talk a lot at Interface about our purpose, leading industry to love the world. And we're seeing it in action as our team step up to provide for our customers and support our communities.

Around the world, many of us continue working remotely as we align with local requirements. In our factories, especially, we've adapted our working environments to reduce transmission risk while continue operations. That includes carefully followed procedures for social distancing, increase cleaning and best practices that allow us to keep our plants running and meet our customer commitments. Our carpet tile manufacturing is well positioned to serve customers around the world with extensive capabilities that we can flex to mitigate interruptions as they may occur.

I'm proud of the agility and ingenuity of our selling organization as they found new and viable ways to connect with our customers. In fact, with reduced travel and remote working, we've been able to connect with designers and specifiers more frequently. We haven't taken anything lightly in terms of the business impact of the pandemic. Our management team acted swiftly to align our cost structure with declining demand to protect the foundation of our company.

We've taken steps to reduce costs to rightsize the business, while maintaining our competitive edge, continue to innovate and launch new products that position us for long-term success. We took a hard look at all discretionary spending and reviewed our strategic projects, making specific choices about what to do and more importantly, what not to do. We introduced voluntary redundancies, furloughs and other time and pay reduction programs while participating in various government-sponsored wage support programs, employee retention schemes and subsidy programs outside the United States. We've also implemented voluntary separations as needed to rightsize the organization.

We've also been scaling production in our manufacturing facilities to meet demand. One of Interface's strengths is its ability to flex production up and down as needed. And roughly 70% of the cost structure in our carpet tile plants is variable. In addition, we suspended merit-based pay increases in 401(k) and nonqualified savings plan company matching contributions.

We also anticipate a significant benefit of lower performance-based compensation and variable commission compensation. With all of these activities, we've taken $80 million out of our full-year cost structure or 20% of our SG&A base. We're diligently managing our cash flow in the quarter with $309 million of liquidity, comprised of $72 million of cash on hand and $236 million of borrowing availability under our revolving credit facility. We've reduced capital spending plans for the year and anticipate that working capital reductions will help fund declining profitability.

We've weathered economic downturns in the past and benefited from a strong and purpose-centered core. This pandemic is uniquely challenging. And while we can't predict what the future holds, I know that Interface is a resilient company that is built to last. With that, I'd like to turn it over to Bruce to discuss our first-quarter results.

Bruce?

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

Thank you Dan and good morning everyone. We had a strong start to the year but began to see impacts of the COVID-19 pandemic as the first quarter progressed, and government orders were issued around the globe. Our global operations experienced a wide spectrum of local government directive. From geographies where social distancing and other measures were required, but construction was still considered essential, the full shelter-in-place lockdowns where commerce was essentially stopped at the government's explicit direction.

The more severe the lock down, the more severe we saw a precipitous decline in revenue. Fortunately, we're mostly seeing customers delay projects and not cancel them. Our backlog is up approximately $45 million from where it was at the end of 2019. That said, at a minimum, there will be pressure on second-quarter earnings as April orders are down approximately 32% and this phenomenon was fairly broad-based with orders down approximately 35% in the Americas, 28% in EMEA and 28% in Asia Pac.

Sources of optimism for us are the growing backlog, a customer base who is mostly delaying orders and not canceling them and signed a stabilization in our recent four week moving average sequential order trends. In fact, we're even starting to see sequential order trends turn up and geographies where lockdowns and restrictions have eased like Australia, China and Germany. We particularly see resilience in our rubber business. Nora is benefiting from a strong pipeline of large healthcare, education and life sciences projects that continue to be supported in major markets.

With that context in mind, here is more information on our first-quarter results. And as a reminder, fiscal 2020 is a 53-week year for Interface, and the first quarter of 2020 had 14 weeks versus 13 weeks in the first quarter of 2019. Net sales in Q1 2020 were down 3% versus the prior-year period including the extra fiscal week in Q1 2020. Organic sales were down 2% which excluded a negative currency translation impact of $5 million in the quarter.

Sales in our Americas business declined 2% in the first quarter with strong January and February results, offset by sharp declines in March. Resilient flooring maintained a strong growth pattern throughout the quarter with declines concentrated in carpet tile. EMEA sales were up 5% in local currency, but up 2% in the U.S. dollars due to currency headwinds.

Similar to our Americas business, strong January and February results were negatively impacted by declines in March. Resilient flooring drove growth, particularly rubber in key markets, such as healthcare, education and industrial. Sales in Asia Pacific were down 15% in local currency compared to first quarter last year, but were down 20% in U.S. dollars, largely due to the weaker Australian dollar.

Our Australian business had a strong start to the year and ended the quarter up double digits in local currency despite flat performance in March. But our Asian business, on the other hand, was impacted by the pandemic earlier in the quarter and was down significantly. In our global market segments, hospitality, living and education had the strongest growth in Q1. We're encouraged by our gross margins despite double-digit percentage production declines in the quarter resulting from temporary plant closures at several of our carpet tile facilities at different periods throughout the quarter.

First quarter gross profit margin was 39.7%, up 60 basis points versus the first quarter gross profit margin last year. And adjusted gross profit margin was 40.1%, a 30-basis-point improvement over adjusted gross profit margin last year. SG&A expenses were $88 million in the first quarter or 30.4% of sales. Adjusted SG&A expenses were $86 million or 29.9% of sales.

Given macroeconomic conditions that we saw in Northern Asia in Q1, along with significant declines in equity market valuations, we determined there were indicators of goodwill impairments. Hence, after discussions with our external auditors and review of the accounting literature, we performed the required analysis that resulted in a $121 million charge for impairment of goodwill and intangibles. This is a noncash charge. Including the noncash impairment charge, we recognized an operating loss of $94 million in the first quarter compared with operating income of $16 million in Q1 last year.

Adjusted operating income was $29 million, up 60% versus operating income of $18 million in the first quarter last year. We recorded a net loss of $102 million in the first quarter and a loss of $1.75 per diluted share. Adjusted net income was $19 million or $0.32 per diluted share in Q1 2020 compared to $8 million or $0.14 per diluted share last year. Adjusted EBITDA was $35 million in Q1, up 10% versus $31 million last year.

Lastly, our balance sheet remains strong as we vigilantly managed cash through this period of declining demand. Even though the first quarter is typically a period where we have heavy use of cash as we fund bonus payments and other prepaid expenses like insurance and taxes, we ended the quarter with a healthy balance of cash on hand and strong liquidity. Net debt or gross debt minus cash on hand was $555 million, and the last 12 months of adjusted EBITDA was $203 million at the end of Q1 resulting in a net leverage ratio of 2.7 times. Calculated as net debt divided by adjusted EBITDA.

Interest expense was $6 million in the first quarter compared with $7 million in Q1 of last year. Depreciation and amortization was $11 million, consistent with last year. Capital expenditures were $22 million in Q1 2020 compared to $20 million in the first quarter of last year, in line with our expectations. With that, I'd like to turn the call back over to Dan.

Dan Hendrix -- Chairman and Chief Executive Officer

Thank you Bruce. As you've heard, we've effectively maintained margins in the first quarter and have acted quickly to protect the underlying fundamentals of the business. However, as Bruce mentioned, we are seeing significant declines in demand as we move through Q2 in varying degrees around the world, depending on the severity of the pandemic. There are some bright spots of order intake activity, and our backlog is elevated.

We expect a uniquely challenging environment in the second and third quarters. Because of that, combined with a significant level of uncertainty in the market in general, we are withdrawing our 2020 guidance. As described earlier, we've adjusted our cost structure and have taken significant steps to align our business with declining demand. We anticipate our cost reduction initiatives to result in total year SG&A expenses of approximately $320 million to $330 million.

We've also moderated our capital spending and anticipate $45 million to $50 million of capital spending including planned investments in backing and tuck-in technology in the Americas. Going forward, our maintenance capex run rate should be around $20 million annually. We will continue to rightsize our spending as this year unfolds. Our fundamentals are strong, as is our culture.

We will continue to invest in our Climate Take Back mission including the launch of an industry-leading carbon-negative products later this year. This is an exciting innovation that will allow us to continue to partner closely with our customers to reduce our carbon footprints and address climate change. This is a win-win for the planet and our business as we will also be reducing manufacturing costs with this investment. COVID-19 will change office and other built-based design needs.

Temporarily, longer-term or in seismic shift, we have already begun working with our customers to develop foreign solutions to help them design for social distancing. Our modular carpet tile, rubber and LVT products provide enhanced way finding, place making, zone creation and transit flow, giving people in this space important visual cues to maintain social distance while working effectively primarily across the industry as we all adapt to these new workplace requirements. In fact, we're making immediate changes in our own headquarters in Atlanta that we plan to share with our customers as an early prototype. While the commercial fully market overall faces significant challenges, we do see continued interest in our rubber flooring products, particularly in segments such as healthcare, education and life sciences.

Our Nora products are well suited for healthcare space is because of their durability, seamless installation, ability to mitigate infection risk issues. I've been pleased to see our team move quickly to support hospital conversion projects like the one in Miami Beach Convention Center and the first coronavirus treatment hospital located in Wuhan, China. It's a point of pride to be able to support these types of frontline efforts. Without a doubt, we know that the pandemic is change the world and that business must adapt to an unknown future.

It is during these times that we can use our size and speed and execution to our advantage, evolving our strategy to these new requirements as they develop and leading the way with our own innovative new products and solutions. In closing, I want to thank our employees around the world for their commitment to our business and focus. Your health and safety and that of your families is so important. I'm incredibly proud of your adaptability and resilience.

Thank you also to our customers and shareholders who continue to support Interface. I remain confident that we have what it takes to emerge from this crisis as a stronger and more nimble company than ever before. With that, I'll open it up for questions. Operator?

Questions & Answers:


Operator

[Operator instructions] Your first question comes from Kathryn Thompson of Thompson Research. Your line is open.

Kathryn Thompson -- Thompson Research Group -- Analyst

Hi. Thank you for taking my questions today. First, is the many changes that you made in response to COVID-19. Could you talk about any changes that may end up being semi-permanent, this a trend that we've seen with so many companies that you've been forced to be nimble to adjust.

But then when the dust settles, there's a realization that some of the changes may be more permanent. But also maybe enhancing in terms of how the company operates going forward. Thank you.

Dan Hendrix -- Chairman and Chief Executive Officer

Yeah. Hi Kathryn, we're looking at how to redesign Interface. I think every company is looking at how to redesign Interface. And a lot of these costs will obviously be permanent reductions.

I can't give you a number. The variable comp part will not -- that won't bounce back. But we're looking at the whole organization about how the new world is going to act. And my goal is always to try and drive SG&A down to -- 30% is too high.

My goal is to drive it closer to 27%.

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

And I'll just add to that, Dan. Kathryn, some of these changes are going to be permanent for our customers which we view as an opportunity to bring new products and help them in new ways to design their office in this new environment that we're in. So interestingly enough, we view COVID-19 obviously there's a lot of headwinds and a lot of challenges that the business and the global economy is going through. But I think we can make some hay out of this for the business.

Dan Hendrix -- Chairman and Chief Executive Officer

Yes, so do I, for sure.

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

I think this plays actually to Interface's strength. Kathryn, that we've always been a very innovative company. And we tend to -- we love change as a company. And I think we'll adapt better than most to this new world.

Kathryn Thompson -- Thompson Research Group -- Analyst

OK. Perfect. I appreciate the color you gave on the writedown in your prepared commentary. Could you flesh out a little bit more because you really gave two buckets of fall in equity value and Asia.

But is there any relation to Nora, and just kind of the timing and the magnitude of fleshing out the components of that writedown. Thank you.

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

Yes. Kathryn, this is Bruce. Interesting enough, as we mentioned in our prepared remarks, Nora is doing -- is incredibly resilient through an environment like this. You have to think about goodwill as sort of like a bucket of water, where all of the goodwill since inception of the company, is combined into one bucket.

Now then we do allocate it among regions. We allocated among Americas, EMEA and Asia Pac. And there's some fairly -- I'm sure you're conversant with this. There's some fairly technical accounting literature that governs this.

We have to go through your steps. And since we saw the COVID-19 fairly early in our business in Q1 with Asia and some triggering stuff happening on in -- particularly in China, that made us be a little bit proactive around that analysis. And so we worked really closely with our external auditors, and we took a really hard look at the accounting literature that governs it, went through our quantitative analysis. And as a result of that, we followed the literature, and we did take that goodwill impairment charge.

But I just want to make sure that you're aware, it's a noncash charge that hit that comes off the balance sheet.

Kathryn Thompson -- Thompson Research Group -- Analyst

OK. And then a final question for the day. Really more focused on your U.S. business.

We've heard really kind of confirming what you said about healthcare, education, a few other categories, seeing some good demand. There's actually, given backlogs, at least with some of your -- some folks in the industry, have a little bit of a hard time meeting demand which seems completely counterintuitive to employment numbers. I wanted to see, are you seeing a similar trend on your business, particularly for your Georgia operations? And maybe flesh out just what you're seeing in terms of the ability to meet demand given the realities we face in the marketplace?

Dan Hendrix -- Chairman and Chief Executive Officer

I -- we have a very flexible plant in Georgia. Obviously, we only have one plant that's in Troup County. We haven't had really any issues with shutdowns, some of our competitors have had issues with shutdowns, particularly in the United States. So we can definitely ramp up to meet demand.

You can imagine some of the markets that have been hit the hardest, New York City, Boston, have been hit really hard. Our East business and our West Coast business, we can't ship it in the West Coast, but our orders are really good. So we don't really have a problem meeting demand. It's fulfilling our backlog.

It's a matter of cities opening up where we can actually do commerce and ship.

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

Yup. And Kathryn, this is Bruce. I would just add to that. One of the strengths that I've noticed in Interface through this whole process is just the flexibility of our plants globally to flex up and down based on demand, and we've seen that around the world.

We've seen that in Australia. We've seen that in China. We've seen it in the U.S. And I just want to thank our colleagues who are probably listening to this call right now at their amazing capabilities at flexing up and down as needed.

So the other thing I would add too, and we mentioned this in the prepared remarks. The more severe the lockdown the more severe -- or the more difficult it's been to get product to the customers. But when the lockdown ease, we're able to get that product out because the customer's able to take delivery of it.

Dan Hendrix -- Chairman and Chief Executive Officer

We haven't had any supply chain issues with our suppliers at all. So we -- we're very fortunate with our supply chain.

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

And that's true as well, Kathryn, with LVT and rubber. So we've been fortunate not to have those disruptions.

Kathryn Thompson -- Thompson Research Group -- Analyst

Perfect. Thank you very much and good luck.

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

Thank you.

Operator

Your next question comes from Mike Wood of Nomura. Your line is open.

Mike Wood -- Nomura Instinet -- Analyst

Good morning and thanks for all the information on April. First, can you update us on whether or not in this scenario that you're currently looking at with the April order trends, whether or not you envisioned reaching any covenant limits, and whether or not you've had any preliminary discussions with lenders on getting those waived?

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

Yeah. Mike, this is Bruce. We have no indication of tripping any covenants in Q2. We're obviously keeping a close eye on it to see what the implications are for Q3 and Q4.

We've had really good open dialogue with our banking group, and who remain incredibly supportive, we have over a 20-year relationship with them. And their feedback to us is, hey, let us now, we're here to support you if we need to go back. If things get worse in Q3 and Q4, and we need to go back and have some discussions, please let us know, we want you to continue supporting Interface.

Dan Hendrix -- Chairman and Chief Executive Officer

Yeah. And just to keep tackling -- Bruce and I tackling this. But the thing that gives our bank a lot of solace is that we have a lot of liquidity. We have $309 million of liquidity.

So we don't have to go back to the banks to ask for liquidity.

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

I'll just add a little bit more to what Dan said. We've done a really good job at acting quickly, at taking costs out of business in the right areas. So that I think it's -- their feedback to us has been, it gives us comfort that you've got a really solid management team that's being proactive and making the right -- and basically controlling your own destiny.

Mike Wood -- Nomura Instinet -- Analyst

Thanks for that. And Dan, I recall historically, demand volatility would cause some pretty major manufacturing inefficiencies, given the changeovers that have to occur. Can you talk about how manufacturing is different now in terms of handling that demand volatility given the Troup County initiatives that you've worked on? I'd just love to hear what's changed what you'd expect for decrementals, shorter term?

Dan Hendrix -- Chairman and Chief Executive Officer

Well, we've created a long-term -- the long run plan in the short run plant. We actually modernized Troupe County. I would say in '08, when production went down 25%, and you throw out the Bentley broad-line business. I think we saw 200 basis points in degradation in the gross profit line.

But our mix is different today. LVT is a big part of the mix, that's higher gross profit margins than we have in the carpet tile business. To me, the Nora rubber business is high-margin business as well, and it's got a pretty good demand strength. So I'm pretty confident that our just profit line is going to hold up in a really good way for us.

Mike Wood -- Nomura Instinet -- Analyst

Great. Finally, you'd mentioned you were seeing some delays but no cancellations in backlog. From just your historical work dealing with that, do cancellations typically occur upfront or is there still potential that the delayed work could get canceled? Thank you.

Dan Hendrix -- Chairman and Chief Executive Officer

Yeah. I would say that when they ordered -- when they entered the order, it's a contract. There's a purchase order that goes with it. And they have a project they want to finish.

And I would say that from a finishing project standpoint, historically, they finished the refurbishment project or they finish the new build-out, so I don't anticipate a lot of cancellations related to our business. We never have seen that. I don't think we're going to see it this time either.

Mike Wood -- Nomura Instinet -- Analyst

All right. Thanks. Good luck.

Dan Hendrix -- Chairman and Chief Executive Officer

Thanks Mike.

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

Thanks Mike.

Operator

Our next question comes from John Baugh of Stifel. Your line is open.

John Baugh -- Stifel Financial Corp. -- Analyst

Thank you. Good morning and I hope you're well. Let's see. Let's start with, I don't know, pre virus, and I understand that's different in Asia versus Americas and timing.

But trying to get a sense as you look to Q1, where the carpet tile business is tracking, pre virus impact. And how much that impacted the quarter thereafter. And of course, you've got an extra week and so I assume there's some kind of high single-digit benefit, if I were trying to adjust apples to apples?

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

Yeah John. This is Bruce. When we started the year, January and February, we were -- we started off super strong, very, very strong year. And really, as you mentioned, we saw some virus stuff going on in China in early Q1.

But if you think about it, Europe and Americas, it was a great start to the year. And so what really started setting in and slowing things down was really in later March which is why we're -- we provided so much commentary about Q2 is we wanted you to have the heads up that there will be pressure on Q2 because that's when all the lockdowns came in place. And as I look at this, we have so many supportive customers. There's so much activity out there.

It seems to me the biggest indicator is how severe the lockdown. And then when does the lockdown ease? And that's one of the biggest indicators to me, of when the business comes back and the pace of the business.

Dan Hendrix -- Chairman and Chief Executive Officer

Yeah. We're seeing that in markets where they're easing the lockdown. We're seeing the return of business, I wouldn't say at the normal levels, but it's bouncing. It's starting to move up.

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

Coming back, exactly.

Dan Hendrix -- Chairman and Chief Executive Officer

That gives me a lot of encouragement.

John Baugh -- Stifel Financial Corp. -- Analyst

Yeah. OK. And maybe to help us -- you mentioned $45 million backlog. So what is that -- and that's on March 31, I assume, what does that percentage change year over year? And then maybe square that up with the commentary around what's transpired in orders in April, and then we've seen a really ugly ABI indication which is I guess an early, early indication of what future orders might be.

I'm just trying to get a sense where you think the orders are around the business actually bottoming and going to improve from here forward. It sounded like that's the case of last few weeks or if we expect some sort of out month or quarter impact from ABI coming off? Thank you.

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

John, this is Bruce. I'll -- just a few points, and then I'll hand it up to Dan for more color. The $45 million is actually as of the end of April, pardon me. So if you look at our -- how much our backlog is up at the end of April, that's the number.

And I think that the point we're trying to make there is that again the risk of being competitive. Once when the lockdowns happen, the customers aren't able to take the product. But when they ease, we're able to get the product out. So we're seeing a lot of pent-up activity that we're able to deliver on once things ease...

Dan Hendrix -- Chairman and Chief Executive Officer

Yes -- that's great.

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

I don't know if you have any commentary on the ABI. So.

Dan Hendrix -- Chairman and Chief Executive Officer

No, I can imagine that's down right now. I mean nobody is working right now.

John Baugh -- Stifel Financial Corp. -- Analyst

What is that percentage, Bruce, of the $45 million?

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

What is the $45 million as a percentage of total backlog? Yes. I guess, it's probably around 25-ish percent.

Dan Hendrix -- Chairman and Chief Executive Officer

Yes. I think we're 200 -- end of the year.

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

That give us a hedge. Obviously John, when the markets open up, that gives us a hedge that we can shift into the second quarter to some extent.

John Baugh -- Stifel Financial Corp. -- Analyst

Got it. And then my last question is simply around free cash flow for the year. You've obviously went through the first quarter which is, I believe, historically, your big use quarter. How -- obviously, it's contingent on where orders and revenue and earnings, all those things.

But I'm just trying to get a sense from the latter nine months of '20, whether you think you'll be a cash user or neutral or maybe generate cash?

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

Yeah. John, this is Bruce. So one of the key headlines I want to reiterate is that we are vigilantly managing cash. We're looking at it twice a week, and we're looking at our uses of cash.

We're looking at our liquidity and we're looking at opportunities to free up working capital. And I'm sure you saw that in our Q1 results. We freed up, normally -- which is normally a big use of cash quarter for us. We did a nice job at managing working capital.

For example, freeing up $32 million in working capital on the accounts receivable which we're watching very closely as well as inventory. So we think that we're going to be a generator of cash this year, and we're going to do that in a variety of ways. We're going to do that by managing our expenses in line with our revenue reality. And we're going to do that by looking -- continuing to look for working capital opportunities, and we're going to control our own destiny as we want as we go through this.

John Baugh -- Stifel Financial Corp. -- Analyst

Great. Thanks for the color and good luck.

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

Thanks John.

Operator

Your next question comes from Keith Hughes of SunTrust. Your line is open.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you. Looking at second and maybe third quarter, given where revenue is at, what kind of decrementals on EBITDA or EBIT margin are you expecting to see?

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

So Keith, that's a really good question. We were trying to give you an indication around the pressure around Q2 with orders, I'll just reiterate the numbers. We have total company orders down at the end of April, 32%. It really depends on how quickly these lockdowns ease.

And as we mentioned, we got that backlog that once the customer could take products, they'll be able to -- we can -- that's revenue that comes right out of the gate. And as we lockdowns ease, we -- in certain geographies, we're already seeing our orders start to pick up. So it really depends on how all of that plays out. And I'll just get back to controlling our own destiny.

If that is not coming to fruition, we've already taken $80 million of costs out of the business. And we'll just have -- we're going to keep an eye on it.

Dan Hendrix -- Chairman and Chief Executive Officer

We'll continue to rightsize the company.

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

We'll continue to rightsize it based on where the top line is going.

Dan Hendrix -- Chairman and Chief Executive Officer

The one thing that I do like Keith, is I like our manufacturing profile that we can flex it down or up, particularly our carpet tile business to maintain a good margin level. So I like where we are on that part of it.

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

Yeah. Keith, this is Bruce again. So -- and just to give you a number on that, about 70% of our costs in our carpet tile plants are variable. So as we're able to -- and we have, as we mentioned earlier, a really nimble structure where the plants are demonstrating ability to flex up and down depending on demand.

And so that gives us a lot of -- not -- oftentimes, we talk about the SG&A line. But to Dan's point, there's a lot of flexing that goes on, on the cost of goods sold line as 70% of those costs are variable in these carpet tile plants.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

OK. Kind of switching to the April comment, the 32% decline. Is there a notable difference in the decline between carpet tile, Nora and LVT in the month?

Dan Hendrix -- Chairman and Chief Executive Officer

LVT is actually growing which is super encouraging. Nora continues to stay strong, especially in those long-term specification contracts that continue to be supported around healthcare, life sciences, government jobs which is great. The resiliency of both Nora and LVT has been fantastic. I would say carpet tile has been the one that has been the softest.

You can probably imagine. And as you know, a good portion of our business there is made-to-order. So it's not surprising. And that's why we're encouraged when the lockups ease that made-to-order business starts to come back.

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

It's still down in the 30s percent.

Dan Hendrix -- Chairman and Chief Executive Officer

Yeah.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

I'm sorry. I'm lost. You're saying LVT is up in April, is Nora up in April?

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

Nora is slightly down in April.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

I mean that would imply your carpet tile business is off. I don't know, 50%, 60%, something like that. Is that magnitude...

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

No. It's down in the 30s. Yup, Keith.

Dan Hendrix -- Chairman and Chief Executive Officer

Remember that's the core of it.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

OK. All right. I'll talk to you about that offline. And I guess final question.

You've given us the North America shipments, assuming you've given us the numbers by region for the first quarter, a negative 2% in North America, positive 2% excluding currency in Europe. All those included the extra week. Is that correct?

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

They do.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

OK. All right. Thank you very much.

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

Bye Keith.

Operator

[Operator instructions] Next question comes from David MacGregor of Longbow Research. Your line is open.

David MacGregor -- Longbow Research -- Analyst

Yes. Good morning everyone. Just a few questions from me. First of all, can we talk about raw materials this year? I know you use a lot of recycled fiber, but also you're purchasing commodities and I wonder if you could just give us some help on how we should think about your expected '20 raw material cost line?

Dan Hendrix -- Chairman and Chief Executive Officer

I anticipate our raw material costs coming down, particularly with yarn and are backing anything tied to oil prices. There's a delay when that happens. But we're actually baking in pretty good raw material price increases going into the year, and I think we'll get a benefit that we'll see some raw material price decreases this year. To the extent of it, depends on what oil prices do, what demand does.

David MacGregor -- Longbow Research -- Analyst

So you're saying a net decrease?

Dan Hendrix -- Chairman and Chief Executive Officer

Yes. I anticipate that.

David MacGregor -- Longbow Research -- Analyst

OK. I mean, I don't want to press this too much further, but can you give us any sense of magnitude around that? Do you expect it to be a substantial decrease or are we thinking something a little more incremental?

Dan Hendrix -- Chairman and Chief Executive Officer

I would say incremental today, depends -- we have a pricing that's tied to caprolactam in the pricing in Nylon 6. And so the delay in that's about three months, and so we'll see the second half where that actually plays out. But I expect it not to be significant, but it won't be insignificant either. It's going to be a benefit to us.

David MacGregor -- Longbow Research -- Analyst

OK. What about production curtailments? How should we think about production curtailment through 2Q and 3Q and potentially 4Q as well, I guess?

Dan Hendrix -- Chairman and Chief Executive Officer

Well, we're flexing the manufacturing to demand. I would say that we're on short times in a couple of our plants. We're ramping up our Americas plant today to meet some of the demand as the markets open up. But to give you a percentage of what the curtailment is, we're just meeting demand based on where we are around the world.

Our China plant is back up and supplying the China market. Australia is on a short ship, but now it's actually ramping up as well. So it's kind of hard to tell you around the world where that's going to be. But we're going to flex it to demand, and we're hoping that we'll see a bounce back in -- particularly in the third quarter.

David MacGregor -- Longbow Research -- Analyst

Are you up and running in Europe?

Dan Hendrix -- Chairman and Chief Executive Officer

Oh, yeah. Yes, we are.

David MacGregor -- Longbow Research -- Analyst

OK. I guess just on Europe, I guess what insights are you able to draw from your experience there over the last couple of months that might help you in terms of reopening here in North America?

Dan Hendrix -- Chairman and Chief Executive Officer

Yeah. They're just starting. The U.K. is just now considering opening up.

Spain is now opening up as well in Italy. We're seeing a little bit of positive activity there. France is still very well -- not very much shut down. So we don't really have a really good insight into Europe yet, except we're starting to see a little benefit in the U.K.

and a little benefit in Spain.

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

And Germany.

Dan Hendrix -- Chairman and Chief Executive Officer

And -- Yes, in Germany as well. Those are the markets. I will tell you, China, we're starting to see that actually come back, and that gives me a lot of encourage as that market opens up.

David MacGregor -- Longbow Research -- Analyst

Yeah. Thanks a lot Dan.

Operator

There are no further questions at this time. I will now turn the call to Mr. Hendrix for closing comments.

Dan Hendrix -- Chairman and Chief Executive Officer

Well thank you for listening to our call and please, please be safe, you and your families, and we'll talk to you next time. Thank you.

Operator

[Operator signoff]

Duration: 42 minutes

Call participants:

Christine Needles -- Director of Corporate Communications

Dan Hendrix -- Chairman and Chief Executive Officer

Bruce Hausmann -- Vice President of Finance and Chief Financial Officer

Kathryn Thompson -- Thompson Research Group -- Analyst

Mike Wood -- Nomura Instinet -- Analyst

John Baugh -- Stifel Financial Corp. -- Analyst

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

David MacGregor -- Longbow Research -- Analyst

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