Interface Inc (TILE) 2003 Q4 法說會逐字稿

Good morning, I will be your conference facilitator. At this time, I would like to welcome everyone to the Interface, Incorporated fourth quarter 2003 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. If you would like to ask a question during this time simply press star then the number one on your telephone key pad. If you would like to withdraw your question, press star then the number two. Thank you. At this time I would like to turn the conference all to Miss Lindsey Hatton of Financial Dynamics.

Good morning and thank you for joining us. Today I would like to welcome you to the Interface conference call. We're here to discuss the company's results for the fourth quarter 2003 which were reported yesterday after the close of the market. The press release from yesterday is posted on the investor relations section of the company's website an archived version of this conference call will be available through that website as well. Hosting the call today from Interface are Dan Hendrix, President and Chief Executive Officer and Patrick Lynch, Vice President and Chief Financial Officer.

I would like to say a word about procedures before we begin. After management has made its formal remarks we'll take your questions. Please note that during today's conference call management's comments regarding Interfaces' business which are not historical information are forward-looking statements.

Forward-looking statement involve a number of risks and uncertainties that can cause actual results to differ materially from any such statements including risks and uncertainties associated with the economic condition in the commercial interiors industry as well as risks and uncertainties discussed under the heading 'Safe Harbor Compliance or Forward-Looking Statements' in item one of the company's most recent annual report on form 10(K).

We direct all listeners to that document. Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995. The company assumes no responsibility to update and revise forward-looking statements they've made during this call and caution listeners not to place undue reliance on any such forward-looking statements.

Lastly, please know this call is being recorded for Interface. It contains copyrighted material. It may not be rerecorded or rebroadcast without Interface's express permission. Your participation on the call confirms your consent to the company's taping of it. Now with these formalities without of the way, I would like to turn the call over to Dan Hendrix. Dan, please go ahead.

Thank you. Good morning and thank you for joining us today. In this morning's call, Patrick and I will discuss Interface's results for the fourth quarter and for the year. In addition, after Patrick's comments on the financials, I will review the initiatives that are shaping the longer term direction of our company.

Since 2001 we've taken many steps to capitalize on our company's strengths and identify and eliminate our weaknesses. Those of you that have been following our industry know the recent environment has been very challenging to say the least and that has slowed the realization of many improvements we've made at Interface. And although the industry appears to have stabilized, it certainly has not rebounded.

We've experienced success in growing our business recently without the help of an industry recovery, we are encouraged by our fourth quarter performance and we are excited to see tangible evidence of our initiatives to drive revenue growth and improve profitability. While we are only in the very early stages of realizing these benefits, we believe that with proper execution and a modest -- I'll say modest industry recovery we'll make a great deal of additional progress this year.

We're committed to ensure that Interface remains the leading player in the modular marketplace and we'll strive to extend this leadership position in each of our other business units, geographies and end markets. With that introduction, I'll turn it over to Patrick to review the financial details of the quarter.

Thanks, Dan, and good morning everyone. I'll start by reviewing the income statement. Sales in the fourth quarter of 2003 were $242.2 million, compared with $232.3 million in the same period last year. Which was a 4.3% increase compared with $237.1 million in the third quarter. The year-over-year increase was due primarily to currency fluctuations that negatively affected the value of the dollar year over year. Gross profit margin for the fourth quarter 2003 was 27.7% compared to 27.8% in the same period a year ago, 27.5% in the third quarter of 2003. The slight year-over-year decrease in gross profit margins is due primarily to intense pricing pressure at the resource service network. However, this effect was somewhat offset by improvements in gross margin in our modular carpet and fabric businesses. SG&A expense in the fourth quarter of 2003 were $58.4 million or 24.1% of sales compared with $57.2 million or 24.6% of sales in the same quarter of last year and $57.2 million or 24.1% of sales in the third quarter of 2003. .

The year-over-year reduction in SG&A as a percentage of sales is attributable to the results of our recent cost cutting initiatives. While our fourth quarter SG&A expense in absolute dollars were $1.2 million higher year-over-year, this is due primarily to the weakening of the dollar over that same period, which resulted in approximately $3 million more in reported SG&A expenses.

We incurred a restructuring charge of $1.6 million during the fourth quarter of 2003 related to the closing of certain branch locations in our resource dealer network and the integration of facilities in our fabrics businesses. After restructuring charges operating income was $7.1 million during the fourth quarter of 2003 compared with an operating loss of $16 million in the fourth quarter of 2002, compared with operating income of $8 million in the third quarter of 2003.

You'll recall we incurred restructuring charge of $23.4 million in the fourth quarter of 2002. Interest expense is $11.4 million in the fourth quarter of 2003 versus $10.3 million in the same period a year ago.

The increase in interest expense is due primarily to the termination of our accounts receivable securitization program which carried a overall lower borrowing rate and the unwinding of an interest rate swap both of which were done in June 2003. Loss from continuing operations excluding the restructuring charges in the respective periods was $2.2 million or $.04 per share in the fourth quarter of 2003 compared with loss from continuing operations of $1.7 million or $.04 per share in the fourth quarter of 2002. .

This also compares with a loss from continuing operations of $2.1 million in the third quarter of 2003. Loss from our discontinued operations was $821,000 in the fourth quarter of 2003 versus a loss from discontinued operations of $12.9 million in the same period a year ago.

After restructuring charges, net loss for the fourth quarter 2003 was $4.1 million or $.08 a share compared with a net loss $30.2 million or $.60 per share in the fourth quarter of 2002. And compared with the net loss of $13.4 million or 27% -- $.27 cents per share in the fourth quarter of 2003. Depreciation and amortization in the fourth quarter of 2003 was $9.7 million. This compares with depreciation and amortization of $7.5 million in the same period a year ago.

Capital expenditures in the fourth quarter of 2003 were $5.1 million bringing total capital expenditures for fiscal 2003 to $15.9 million, which is in line with our prior guidance. Entering fiscal 2004, liquidity is significantly improved as a result of the debt refinancing that we completed earlier this month. This refinancing entailed the private offering of $135 million, of 9.5% senior subordinated notes due in 2014.

The proceeds from this offering are being used to redeem the company's currently outstanding notes due in 2005 and reduce borrowings under the revolving credit facility. As a result of this transaction, Interface essentially will be able to swap debt due in 2005 for debt due in 2014 while maintaining the same interest rate. There are a number of benefits that Interface will be able to realize as a result of this improved debt maturity profile.

Because the pressure of an intending debt maturity been eliminated, we'll now have the flexibility to intensify our focus on the initiatives and strategy that will position the company for sustained long term growth. At the end of the year, we had $16.6 million in cash and had $62 million of available borrowing capacity under our revolving credit facility. We had no borrowings under the credit facility at year-end. In addition, we reduced our bank debt by $5.5 million and paid off $6.5 in industrial revenue bonds that were associated with the discontinued [inaudible] access [inaudible] business.

Now we will go over some details of our individual business units. As we mentioned in our press release our world wide modular business continues to be one of the strongest elements of our growth strategy. Sales in this business were up 11.2% in the fourth quarter 2003 compared with the same period last year. The U.S. modular business performed particularly well in the fourth quarter with a 15% year-over-year increase in revenue.

Our sales in the U.S. corporate office market are steadily improving. We're also seeing encouraging results from our modular business in Asia and Europe. On the market segmentation front, our U.S. modular business shows significant sales improvement from the education, hospitality and healthcare segments in 2003 when compared with the prior year.

Market conditions continued to be soft for our Broadloom business where our fourth quarter sales were down 3% sequentially and 7.6% year-over-year which we believe to be in line with the Broadloom industry. Nevertheless, the improvements we've made in this business have allowed us to sustain three sequential quarters of operating profitability as we continue to identify ways to manage costs and improve manufacturing efficiencies.

In addition, our like our U.S. modular business, our Broadloom business saw sales improvements in the education segment in 2003. We remain focused on strengthening our fabrics business through an ongoing program of consolidation and integration initiatives. Fourth quarter sales in this business improved 2% sequentially and 2.7% year-over-year. It's operating loss was cut in half as compared with the prior quarter.

We have put the necessary systems in place to realize significant improvements in this business and believe we will start to generate profitable results within the coming two quarters. Finally, we continue to manage our service business through an very intense competitive environment. Significant pricing pressure led to declines in fourth quarter revenue and margins for this business. With sales down 2.8% sequentially and 10% year-over-year, clearly the service business was our biggest disappointment in the fourth quarter as it had an operating loss of $3 million compared with an operating loss of $1.7 million in the prior quarter.

However, we're keeping a close eye on costs and we are working to prepare this business for eventual recovery in the marketplace. Now, I'll turn the call back over to Dan.

Thanks, Patrick. I would like to review the ideas and strategies that have been and will continue to be driving factors in the way we run our company.

In the process of assessing our recent achievements and defining our goals for the future, we've identified a number of opportunities that we believe will ensure long term growth and operational excellence. These objectives guided our performance in 2003, and we believe they will be the key to future success in 2004 and beyond.

We refer to the first category of objectives as our platforms for growth, which are not new to you. Which detail the ways in which we plan to profitably expand Interface's presence in each of our end markets and geographies.

Our first platform is to grow our corporate office market share. We plan to accomplish this objective by using our leading design capabilities and our market position to accelerate our modular business into more mature corporate office markets which has recently suffered a protracted decline and is prime for a recovery.

Our second platform is the continued execution of our market segmentation strategy. As most of you know we began this in late 2001 and it really gained traction in 2003, particularly in education and hospitality market segments. We continue to build upon the success of this initiative by further penetrating noncorporate office segments with our modular products.

Exploring opportunities for our fabric business and automotive, industrial and window treatments and enlarging our Broadloom businesses presence in the tenant improvement, education and health care markets. Our third platform is to capitalize on the significant potential that exists for our modular products in the emerging geographic markets such as eastern Europe, the Middle East and Asia which saw significant growth in 2003 and we expect the same in 2004.

Our fourth platform is specific to the residential marketplace where opportunities exist to create demand for our modular products and high-end niche broadloom offerings. In the first half of 2003, we launched InterfaceFLOR, our residential modular bins and the Prince Street House and Home collection our residential broadloom products. We're excited about early successes each has had.

InterfaceFLOR is now being sold in Atlanta Lowe's Home Improvement stores and will be featured in more than 7 million catalog mailings in 2004. Among it's many media hits, the night before last InterfaceFLOR products were used on a popular TV show "Queer Eye for the Straight Guy." In addition, Prince Street House and Home is now sold in 350 consumer retail locations.

Lastly, our fifth platform is to capitalize on the industry leading position that Interface has already established for standardability and environment responsibility. Our customers want sustainable products and we can continue to address this demand by maintaining our commitment to the goal of sustainability and achieving the highest possible standards.

The second category of objectives is our focus on productivity. Our goal is to attain operational excellence in three ways. The first is to by continuing to identify ways to tighten the supply chain. This includes the further implementation of our made to order business model to various degrees across our entire organization in addition to capitalizing on a variety of global sourcing opportunities.

Secondly, we will continue to delever our balance sheet by taking advantage of the precash flow characteristics of our business. Finally, we will maintain our focus on productivity by continuing to reduce our operational footprint where we can and controlling SG&A expenses and realizing the integration savings in our fabrics business and our european modular business. With a combined effect of these two strategic fronts, our platforms for growth and our focus on productivity, we believe that we are building a very profitable Interface for the future. Now I will open it up for questions.

Thank you. At this time I would like to remind everyone if you would like to ask a question, please press star and the number one on your telephone key pad. We'll pause for just a moment to compile the Q-and-A roster. Your first question comes from the line of Keith Hughes from SunTrust Robinson Humphrey.

Thank you. First let me ask you about the service business. How many locations do we have now at the end of 2003?

15.

15.

That is correct.

And Patrick, I think you said it lost $3 million in the fourth h quarter?

Correct.

How much did it lose for the year?

A little over $9 million.

What is it going to take to get it back to break even? More closures? What needs to be done?

It is a combination of cost cutting as well as increasing sales. There's two fronts there, Keith.

Okay. Are the losses pretty much even across those locations?

You've got some that are profitable and some that are not profitable.

And your move into the noncorporate market. Can you give us an update where you are in the mix, corporate versus noncorporate?

We finished the year at 65% corporate, 35% noncorporate. Versus right at 70% last year corporate, 30% noncorporate. The areas we saw some improvement really were in the education and hospitality sectors principally.

That's the tile and broadloom combined?

That question has been withdrawn. The next question comes from the line John Baugh of Wachovia Securities.

Good morning. You mentioned that gross margins and U.S. carpet tile were up year-over-year and I think you said revenues were up 15%, confirm those. And secondly, is the average price per unit of carpet tile in the United States going up or down? Is there a make shift, if it is going up or down, and can you comment on what the core product line in terms of price is year-over-year? Hello?

Mr. Baugh, would you please repeat your question, sir?

Hello? Yeah, it is just me. Oh.

Miss Hatton can you hear me, ma'am?

All you can hear is the operator.

Ladies and gentlemen, this is the operator. I do apologize, but there will be a slight delay in today's conference. Please hold and the conference will resume momentarily. Thank you. Excuse me ladies and gentlemen, this is the operator. Please continue standing by, the conference will resume momentarily. Thank you for your patience. Ladies and gentlemen, this is the operator. I do apologize, but there will be a slight delay in today's conference. Please hold and the conference will resume momentarily. Thank you.

Hello.

Mr. Lynch you may proceed, sir.

We are in the middle of a Q-and-A session.

Okay. You do have a question from the line of Robert Manowitz with UBS.

Good morning. Can you hear me?

Yes. Sorry about that.

No problem. Wondering if there was an effect in the quarter on foreign currency on sales and [inaudible].

There was. There was about a $5 million sales impact. And it had about a $200,000 EBIT positive impact.

Okay. And can we talk a little bit about the breakout of the revenue growth excluding foreign currencies? How does that growth compare in the U.S. to the foreign operations in a local currency basis? And then secondly, can you talk a little bit about pricing versus volume? You went through each category and gave percentage changes year-over-year. It would be helpful to know what is going on with pricing versus volume.

I'll take you through the sales and Dan can give you a little color around the [inaudible]. But the U.S., we will go through modular, the U.S. business was up year-over-year. And local currencies, European modular business was down probably 6 or 7%. In Asia, Asia modular business was up 20% year-over-year. Broadloom, U.S. dollars is down to 7% year-over-year. And [inaudible].

I'm sorry. We're having an awful tough time hearing you guys.

From a pricing standpoint, we actually were able to raise prices in the United States in both our Broadloom and modular business. We actually improved margins in our Asia specific business as well. The pricing pressure comes out of the service business. There's a lot less business that you have got margin in the service business, we were down about 2.5 points in that business. If you looked at the fabric business, there is a little bit of pricing pressure just from the OEM's trying to squeeze the supply chain, but nothing significant. But there is nothing significant.

Last question, how big is the service revenues at this point?

It is annually about $170 million.

170. Thank you. Congrats on the refinancing and on the quarter.

Thank you.

Your next question comes from the line of Lee Brading with Wachovia Securities.

Hi, guys. I wanted to follow up on the service questioning. It seems like that's where you're having the most difficulties right now. From the standpoint, can you give me color on what you are seeing, is it excess capacity, competitive pressures there, and also time line when you think you can make that business break even.

Yeah, I would say that Lee, as you know if the distribution business, people will install it at a lower price. That's part of the issue with the business. The market has been declining. And we're somewhat focused on the office market in the service business. We've had two hits on it. We're now segmenting out in that business, moving out in the education and the retail and so forth. Our plans are to continue to continue to work on the cost-cutting side of it and to grow the top line. If the industry rebounds to some extent this year, that obviously will help the service business. Profitability-wise, we're going to work on it. I don't see it being as negative in the fourth quarter, but I don't see it being profitable this year either.

O.K. and also you mentioned one of your productivity initiatives in the supply chain. I was wondering if you could provide a little bit more detail around that.

I don't know if you remember, but we hired cap Gemini two years ago, in the beginning of 2002. We did a pretty extensive supply chain management study. We hired a guy from Arthur Andersen, a guy named Tim Reardon who sort of helped the business units so we are already on the pretty good supply chain initiatives. But we never really hooked it all up. And now we're hooking it up and leveraging across all of our business units. We're very focused on reducing days outstanding as well as increasing inventory terms to a make-to-order model. We're trying to take the terms from 4.2 to 5.3 in the next couple of years. And that has a significant impact on the reduction of inventories.

And that would be most of you're improvement that you are targeting working capital this year?

Yes, yes.

Okay. Thank you.

Your next question comes from the line of John Baugh with Wachovia Securities.

Hey. I don't know if you heard anything previously, but we'll try it again. Could you first of all, while we're on the subject of capital, I think inventories were up slightly.

Currency, John. That's correct.

Okay. And if by had, forgetting currency for '04, if we had 3, 4% revenue growth, what would you expect inventories to do?

I would still expect inventories to be down, John, with our term improvements that we're targeting.

And back to domestic carpet tile, I think you mentioned 15% revenue increase year-over-year.

Fourth quarter.

Fourth quarter. You were breaking up pretty bad when you were discussing pricing versus units. Were units up less than that?

Actually, units were probably a little bit less, but not much. They were up.

Okay.

We had a 3% improvement in pricing mix in that business for the year.

And that was mix?

Well, it was improving in pricing. It has something to do with mix. Higher end products we're selling [inaudible]. But we actually had a price increase in March and we held it.

Okay. And I think you mentioned on the call that actually the gross margin in that business was up 10 -- no. Did you mention a number it was up on basis points year-over-year.

Just mentioned it improved in Asia as well as U.S. modular, both.

Okay. So would it be fair to say that U.S. domestic tile operating income as a percentage of revenues was up year-over-year? If the sales were up in units in the high--low teens and the gross margin was up slightly?

Yes. That's correct.

And the income operating margin was up. Okay. So in trying to get at -- I think you did $8.8 million of operating income for the quarters just ended excluding the charge. And you did something like $7.5 million last year. You mentioned year-over-year broadloom profits, you had a profit and you had a loss last year. I forget what the number was. You already went through services going from $1.7 loss to $3 million. I guess I'm struggling a little bit. There must have been -- was it start-up losses with the residential stuff? Was it European tile?

Was down. Year-over-year. And the fabric business actually had a pretty big -- it had a $10 million swing in profitability year-over-year as well. Loss.

I'm sorry. The fabric business --

Yeah, it had a $10 million year-over-year differential loss.

I'm doing year-over-year.

Year-over-year. Do you know hat fourth quarter was for fabric?

It was flat year-over-year.

I thought you said operating loss was cut in half from the prior quarter. Was that the third quarter. I'm sorry go ahead.

Going from third to fourth, it was cut in half.

So fourth quarter year-over-year fabrics was...

Right. Operating income.

So it was a loss. But it was a flat loss.

And we spent a million on residential that was not in the margin numbers we talked about.

Okay. Okay.

And we didn't have that last year. We're spending about a million a quarter on residential.

Okay. I think you kind of alluded to this already, Dan, but obviously services is the drag. And one would assume with revenue down 10% year-over-year in fourth quarter, while you like to grow revenue, that's not going to revert immediately. I guess we just have to assume we'll continue to see some branches close and some restructuring charges as a result at least for the first half of '04 would that be a fair assumption?

We will be cutting costs in that business and trying to get it to break even.

Okay. And lastly, Patrick, on the balance sheet, the other current assets number is slipping throughout the year. Refresh my memory on that.

The other current -- oh, that was the assets that were held for sale. The disposition of the raised access [inaudible] business.

I had it at the end of the fourth quarter was $68.8 million and it was $24 million at the end of the fourth quarter. That wasn't all --

That's a big chunk of it.

Okay. And last question, I promise. Any color you want to put on the comment about order rates improving in January? Whether you want to quantify that year-over-year in January or what specific areas you're seeing, Dan?

Actually, we're seeing it across the board, John. January, is always a tough month, because of -- it is right at the end -- you have the end of the year and the weather issues and it is just usually a very soft month. And it was okay for us. I mean, it was we didn't see the normal dropoff you have in January, which is a great sign. And I would say the activity across the board is better. You've been hearing that for a while that activity is increasing. But the projects aren't coming through. We're seeing some of the projects starting to come through. We're encouraged by it all. You can't say that the rebound is here, but it is very encouraging what we're seeing. And I was very pleased with the order activity in January.

Thanks. Good luck.

At this time, I would like to remind everyone if you wish to ask a question at this time, please press star and the number one on your telephone key pad. Your next question is a follow-up question from Keith Hughes from SunTrust Robinson Humphrey.

I got cut off before like others, I think. On the Lowe's business. How many stores in Atlanta are carrying the tiles right now?

We're in 16 stores, Keith.

16. And when do you think there will be a decision on whether you're going to take it out either regionally or nationally at Lowe's.

I think at the end of March they will make the decision.

Oh, that soon. Okay. How has the shelter been so far?

We're very encouraged by what is going on with the Lowe's project.

Okay. And are you willing to give us what kind of start-up expenses we saw in the fourth quarter or second half of the year or anything like that?

Related to the Interface floor?

Yeah, your residential push in general.

I would say it costs us $$4 million for the year.

2003?

2003. That's on the modular side. And it probably costs us less than a million on the broadloom side.

And on the Broadloom business, where is that product being marketed and sold now?

It is being sold in what I call the boutique retail stores, the CCA's, stores out there, DuPont stain master stores out there. We signed up 350 today. Okay. Thank you. And we did about $2.5 million residential last year in the Broadloom business.

All right. Thank you.

Your next question comes from the line of Steve Mitchell with Fidelity.

Good morning. And thank you for taking our call. Can I just confirm that you said for this quarter foreign exchange benefited you $5 million of revenue and $100,000 of EBIT?

$200,000.

Second question, can you give us a sense of what you expect CapEx to be next year?

$38 million, and about $18 million in CapEx.

Okay. It seems like for a while depreciation has been far in excess of CapEx. How long do you think you can maintain operating --

I think we're comfortable where we are in terms of capacity that we have in the market. Bricks and mortars that we have there. There aren't any big items on the horizon that we have, there may be some tufting machines or backing lines here and there. We can continue to operate at an 18 to 20% CapEx level for the foreseeable future.

I would add to that that we invested a lot of capital in the late '90s. We were spending twice depreciation. And we're running at 50% of capacity today. And we're investing in all of the bells and whistles that we need. And if there are paybacks, we invest in payback items. And our maintenance numbers are about $8 million.

Just on the balance sheet -- two items I'm trying to get clarification on. The other assets looks like they were up $38 million. And current liabilities were up $17 million when I compare it to the September balance sheet.

Got to be the assets that were held for sale. There's some currency impact in there.

No, but it went up.

Currency is in there as well. And then other liabilities is the pension liability that went up as well.

We haven't added anything to other assets at all. Except for the -- really haven't added anything to it.

It has to be mostly currency.

Okay. What was free cash flow for the year, please.

Free cash flow for the year was about $16 million.

Okay. I think on your last call, you projected there was going to be $25 million for the year. And then in the middle of the year, you were telling us it would probably be about $30 to $40 million. Can you give us a sense for what went wrong there?

Restructuring dollars. Took some cash. Discontinued operations and then we kind of watched our inventory levels. We didn't drive the inventory leveling down as far as we had anticipated. We're kind of watching the order activity over the fourth quarter headed into the next year.

I would say the biggest disappointment was in inventory.

And with all due respect, it is the same argument and excuse we had gotten on the previous call when you missed during that quarter as well. So what is it -- I guess there is a management credibility issue people are trying to get their arms around when you're giving us numbers which you repeatedly don't seem to hit. Can you somehow get us more comfortable that going forward you'll be able to hit some of the numbers I know you're anticipating getting? I mean -- I'm sure you would acknowledge, pretty meaningful misses on numbers, which is important for a highly levered companies.

In my head, the number we gave was $20 to $25 million in free cash flow. We hit $16 million. The disappointment was in inventory. The $30 million was in the first half of the year. We adjusted that based on the fact that our profitability wasn't there.

Right, you were at 30 in June. September you said 25. And you came in at 16.

I remember 20, 25. I'm not going to argue with you on that point.

All right. Can you just walk us through the decision to -- when you start to refinance the debt coming due that year why you went out and issued more debt instead of issuing equity? It just seemed to us given that some people are apprehensive about buying your stock because of the high leverage situation. The rating agencies who presumably have seen your projections are concerned about the capital structure the company has. Meanwhile you're sitting on stock which has appreciated initially. Why didn't you choose to issue equity.

Well, I feel like our stock sitting at 6 to 8 ranges is too cheap to issue equity. And the capital markets were available to us. I thought we made the right decision to go out and give the company the liquidity to run the business. And wait for the turn in the office market as well as the execution of our segmentation strategy. To go out and sell stock at $6 to me doesn't make any sense today, based on what we believe the value of this company is.

Well, I mean, according to our numbers -- I don't know what numbers you were looking at -- it would have been wildly acretive for you to issue the stock, given where your stock was trading. And look, we are shareholders, and just so you know, there are a lot of people that won't touch this stock because of your massive debt load and the fact you went out and paid 9.5% at a time when the capital markets were very, very attractive or levered companies just puzzled us. But you know, that's your decision to make. Finally, any thoughts on perhaps collapsing the dual classes of stock, or is there a reason why the company needs to retain that?

I don't believe we'll collapse it. It's been in place since we went public. I don't see it changing.

What is the justification?

It's a great poison pill for us to manage what happens to the company.

Does the company not have a poison pill?

Well, we call this the ultimate poison pill?

Does the company have a shareholder's rights plan?

Yes, I think so. Actually, I don't know the answer to that question, but I believe we do.

Okay. Thank you.

Your next question comes from the line of Mike Kinder from Citigroup.

Yes, most of my questions have been answered. One question I had was on taxes. Taxes were a source of cash in '03. What about '04?

There won't be any, Mike. Basically flat. Right. We won't be a cash payer or receiver.

On working capital you talked about inventory turns. Do you have a dollar goal for working capital, up, down or sideways?

I would say there is upside next year, $5 to $10 million.

Thank you.

Your next question comes from the line of Tom Wong with Oakhill Advisors.

Good morning.

Good morning.

Congratulations on a good quarter. First of all a couple of housekeeping items, if I may. On the cash flow side for fourth quarter, how much is the proceeds from asset sales and cash from working capital?

There weren't any asset sales during the quarter.

Okay.

And working capital was a source, let me look for you real quick. It was roughly a source of about $4 million.

And cash restructuring and cash pension?

Cash restructuring was about $1 million. And the pension was $about $2.3 million.

Going forward in '04, how much cash pension contributions do you have to make?

We'll make about $6 million in cash contributions next year.

So I guess we can all make our own judgment on what EBITDA looks like, but the charges will be roughly $18 million in CapEx, no cash taxes, perhaps a $5 to $10 million source in working capital. $6 billion in cash pension and debts -- and obviously you have your interest expense as well.

That's correct.

Those are basically all the items.

Major components.

That's great. Kind of the strategic importance of the service business? Dan, could you perhaps shed some light on the relative ease, difficulty and restructuring that division given that the operating loss has widened in the fourth quarter? And how easy it is to literally close the nonprofitable branches?

There is $45 million in working capital tied up in our distribution channel. And you've got three or four of the dealers that we own in the mix that is really contributing to the significance of that loss. You know, it creates a source of cash if you shut down a particular dealer, because you've got the working capital in there. And you can go to an owned -- excuse me. You can go to an aligned dealer network and independent dealer network to sell in those marketplaces. But I guess you have a write-off when you do, that but you don't have a cash write-off. Strategically we're trying to focus obviously get it back to break even. And where we have the ability to I guess shut down dealers that aren't profitable we'll look at that. Our goal right now is to keep the channel intact and try to grow it.

And regarding kind of the changes in the competitive landscape, I understand some of your competitors tried to have their own dealer network before and decided to pull back. Is there a reason why the strategy is to keep those networks?

We're going to take a hard look at it over the next 24 months. Right now, it is part of our strategic go-to-market strategy. But we continue to look at it and focus on what to do in the service business.

And those distribution networks are all in U.S.?

Yes.

And on the European modular business, you mentioned, it is down 67% year-over-year. Why is that business particularly weak? Is that because the market over there has already matured and so you have less penetration in other segments --

I would say it is a combination that the market has actually declined overall in Europe, depending on the country that you're in, the penetration particularly in the U.K. for modular carpet is very high. It is a 60% kind of penetration in the commercial space. But if you go to Germany, it is a 6% penetration. In France, it is about a 25% penetration. In the U.K. it is very mature. And in Germany, it is not very mature. You have an opportunity to grow on the continent. And the UK has been the one market that has been down that we're actually starting to see that come back in the second half of that year.

And how much --

And sequentially the European business has stabilized if you go from second, third to fourth quarter. In the start of January, it looks very promising.

And how much is U.K. contributing to the European business? About 35 to 40% of that business.

35 to 40%.

Right. And in terms of EBITDA, how much is it from the European modular business?

EBITDA of the European modular business about 16 for the year.

And lastly, I guess in terms of the outlook going forward into '04, you mentioned in January you don't see the normal dropoff. Seasonally you would be. How much has order rates picked up in the fourth quarter and I guess going into the first, second and third quarter, should we be expecting a more flattish environment and really kind of most of the rebound recovery will be backend loaded into the third quarter or you won't see a full rebound into the fourth quarter?

I would say historically -- you've got to go before the huge downturn we have had in the market. Historically, the third quarter is the weakest quarter, usually 20% to 21% of the year. And the second quarter is typically 25%. So it is somewhat backend loaded historically. If you looked at the recovery, obviously everybody says second half of the year, your potential have an office market recovery. You've got the seasonality as well as the fact that people are predicting the second half is going to be better than the first half in the office market. That says it is backend loaded.

Right. But in terms of [inaudible] trends like office vacancy and just kind of a general replacements --

I would say what's going to drive it's catalyst, it is corporate profits. Corporations have been pretty much sitting on the renovation cycle for the last three years. You haven't seen a lot of pull through. And basically corporate profits improving. CEO's decide they want to refurbish their office because they haven't done it for 12 years. That's the catalyst, I think, that will drive it.

Thank you very much.

Thank you.

Your final question is a follow-up question from the line of Mike Kinder from Citigroup.

I had a couple quick follow-ups on the pension. You talked about $6 million in cash contributions in '04. What is your expense?

It is a little bit less than that. Under FAS 87, it is about $4 million annually.

So basically $2 million of net cash above and beyond?

Yes.

And then the other question was, what is your funding position at year end? We were underfunded by about $30 million. Okay. Great. Thank you.

At this time, there are no further questions. Mr. Lynch, are there any closing remarks?

No. Thank you for joining us.

Thank you.

Thank you for participating in today's Interface incorporated fourth quarter 2003 conference cal l. You may all now disconnect.