Interface Inc (TILE) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Interface, Inc. Earnings conference call. My name is Pam and I will be your operator for today.

At this time, all participants are on listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Matt Steinberg. Please proceed.

Thank you, Operator. Good morning and welcome to Interface's conference call regarding second quarter 2012 results. Joining us from the Company are Dan Hendrix, Chairman and Chief Executive Officer, and Patrick Lynch, Senior Vice President and Chief Financial Officer.

Dan will review the highlights from the quarter as well as Interface's business outlook. Patrick will then review the Company's key performance metrics and financial results. We will then open the call for Q&A.

A copy of the earnings release can be downloaded off of the Investor Relations section of Interface's web site. An archive version of this conference call will also be available through that web site.

Before we begin the formal remarks, please note that during today's conference call, management's comments regarding Interface's business, which are not historical information, are forward-looking statements. Forward-looking statements 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 economic conditions in the commercial interiors industry, as well as 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 January 1, 2012, which has been filed with the Securities and Exchange Commission. We direct all listeners to that document.

Any such forward-looking statements are made pursuant to Private Securities Litigation Reform Act of 1995. 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 refer to certain non-GAAP measures. A reconciliation of these non-GAAP measures to the most comparable GAAP measures are contained in the Company's results release and Form 8-K filed with the SEC yesterday. These documents can be found on the Investor Relations portion of the Company's web site, www.interfaceglobal.com.

Lastly, please note that this call is being recorded and broadcasted for Interface. It contains copyrighted material and may not be rerecorded or rebroadcasted without Interface's expressed permission. Your participation on the call confirms your consent of the Company's taping and broadcasting of it.

With these formalities out of the way, I'd like to turn the call over to Dan Hendrix. Please go ahead, sir.

Thank you and good morning. Before I get into our quarterly results, I want to update you on two recent events. First I've had an update on the fire that occurred on our facility in Picton, Australia on July 20. Let me begin by saying that we are thankful there were no injuries as a result of this incident. However, since our announcement last Friday, we have learned the damage to the production facilities is such that it is a total loss. Of course, we have business interruption and property damage insurance and we're working closely with our insurers to prepare the claim.

It has been less than a week, but already we are implementing a plan to ship production to nearby facilities in Thailand and China with a goal to have a make-to-order business within a five-week time, supplying product out of Thailand and China.

It's worth noting that our local, regional, and corporate teams did an outstanding job implementing a complex business continuity plan in record time. By Monday morning, our Australian customer service center was at work taking orders and connecting sales reps to customers with open orders. It is a credit to the brand that we have built in Australia that every customer we contacted agreed to work with us on extended lead times. Drawing capacity from the other two plants in the region demonstrates the strength of our global platform that we've talked about so much. It is gratifying to know that in this crisis we are well-positioned to rebound and draw on regional strengths, efficiencies, and compatibilities.

We will continue to provide you with updates on the Australian situation as next steps emerge.

The other big piece of news announced yesterday is that we have signed a definitive agreement to sell Bentley Prince Street to Dominance Capital, a private equity investment firm and partnership with members of the Bentley management team, for $35 million in an all-cash transaction. This is a good opportunity for both Interface and Bentley Prince Street. For us, it will allow us to redeploy our capital and resources into our core Interface modular carpet tile business, creating the opportunity to generate greater returns and value. We are pleased to make this announcement.

Now let's turn to our financial results for the second quarter of 2012. Overall we generated good sales levels, recorded nice incremental contribution margins relative to first quarter levels and benefited from the efficiencies that come with many of the restructuring initiatives that we previously discussed.

The Americas continues to be the bright spot with continued strong growth in the quarter. After a tough start to the year, order momentum is building. And while conditions remain challenging in Europe, I'm encouraged by our performance and recent trends that we're seeing in those markets.

Orders are moving in the right trajectory as well. We finished second quarter with orders of $280 million, down approximately 4% versus the prior year. Factoring in the effect of currencies, orders were flat with our book-to-bill greater than that of the first quarter. Our backlog increased by $21 million in the quarter and by $35 million since the start of the year.

On the sales front, similar to the first quarter, we were up against a tough year-over-year comparison. That said, we grew sales by more than 9% on a sequential basis versus the first quarter. This increase was driven primarily by sales growth in our Americas modular business, including record second quarter sales in both the US and Americas overall. We see continued demand across most of our major market -- major end use markets in the Americas except for the government business.

We also owe some good news to the continued strong performance of our FLOR consumer business. Through the second quarter FLOR generated growth of 21% with same-store sales up 41% year over year.

We had a slight operating loss in the quarter, which was anticipated as we continue to ramp up the FLOR retail footprint. Several FLOR stores generated an operating profit. We expect to open eight new FLOR stores over the coming months, bringing our total store count to 19 by the end of the year, and we remain on track to open future locations in each of the top 30 markets in North America. Our investments in FLOR continue to be an integral part of our strategic investment initiative and our success to date in the consumer market is proof positive that the consumer likes carpet tile and it's a growth opportunity for us.

Turning to Europe, challenging conditions in that market continue to reflect the broader economic environment there. Overall markets in Europe appear to be stabilizing with pockets of uncertainty continuing where they are expected to be.

While Europe's sales declined on a year-over-year basis, they were largely flat relative to the first quarter levels. It is worth breaking down the performance in Europe in the second quarter on a geographical basis. Sales erosion occurred in the Southern European regions while sales were relatively flat in the UK and up in Germany and Holland. The negative currency impact is significant to Europe's top line. On a local currency basis, sales in Europe declined only 2%, but were down 13% as reported in US dollars. More recently, specifically in June and July, we have seen improved activity in Europe in local currency terms and we anticipate the full benefits of the Shelf plant closure will begin to be realized in the third quarter. We are optimistic that we will continue to see improved performance in Europe going forward.

Business in Asia is up sequentially with Mainland China up sequentially as well. And July orders in Asia were up nicely. So we anticipate a better second half of the year in that region.

Australia continues to feel the impact of a difficult year-over-year comparison owing to the construction boom and government stimulus spending that characterized most of 2011. As a result, Australia was sequentially flat from the first quarter to the second quarter and down compared to the second quarter last year.

Efficiencies and price increases are paying off in the form of improved gross margins during the second quarter. While raw material costs remained relatively flat in the -- to the first quarter levels, we expect costs to decrease during the course of the year and should see gross margin expansion opportunities as a result.

We had a successful quarter in controlling SG&A expenses, which were down approximately 100 basis points as a percentage of sales year over year.

Looking ahead, we remain encouraged by Americas order trends, particularly in the United States, while the pipeline of pent-up demand in the corporate office market continues to be good. We're also seeing the benefit of non-office market conversions to tile, in particular in education and hospitality.

Emerging markets are a bright spot as well, particularly in Latin America and with market expansion in Eastern Europe, Russia, and Mainland China continuing. India, also an emerging market for us, is moderating. And the government segment is down significantly almost everywhere except the UK.

Because uncertainty continues in Europe, we will continue to balance tight controls and cost reduction efforts in that region with the strategic investments that are necessary to realize growth opportunities in higher-performing markets.

With that, I'll turn it over to Patrick.

Thank you and good morning, everyone. I'll take a few minutes to talk to the financial highlights for the second quarter.

Sales for the second quarter of 2012 decreased 4.9% to $254.6 million from $267.6 million in the second quarter of 2011. Our sales performance reflected a gradual improvement in the US modular markets as the quarter progressed, particularly in the corporate office market, hospitality, and education markets. Our European modular business is somewhat stabilized despite contending with an uncertain economic environment and currency headwinds. And our Asia-Pacific business continues to feel the effects of reduced government spending, particularly in Australia, compared with the year-ago period, combined with general economic uncertainty and the slowdown of economic growth in China.

Total sales for the quarter were negatively affected by foreign currency effects to the amount of $7 million in the quarter. Gross margin declined by about 220 basis points to 33.2% compared with the second quarter of 2011 but increased 50 basis points on a sequential basis. The decline in gross margin was a result of lower fixed cost absorption on lower production volumes as well as higher raw material costs, which remained up around 2% on a year-over-year basis. We're starting to see some benefit to gross margin from the Shelf shutdown. It had about a $1 million positive impact in the second quarter and we expect to reach the $8 million to $9 million annual run rate by the end of the year. We will continue to monitor the economic landscape closely as the market continues to change, but do not have any additional price increases planned in the foreseeable future.

SG&A expense in the second quarter of 2012 decreased to $62.6 million from $68.6 million last year. As a percentage of sales, SG&A decreased approximately 100 basis points to 24.6% compared with 25.6% a year ago. On prior calls we've mentioned our cost focus on reducing SG&A and we're pleased to see sequential improvements as well.

While we've made excellent progress on the cost-savings front, we remain committed to aligning our cost structure with evolving market conditions and initiating additional cost-reduction actions as these opportunities arise.

Operating income in the second quarter of 2012 was $22 million or 8.7% of sales compared with operating income of $26.1 million or 9.8% of sales from a year ago. Interest expense in the second quarter was $6.1 million compared with $6.8 million in the second quarter of 2011. Net income for the 2012 second quarter was $10.3 million or $0.16 per share compared with $12.8 million or $0.20 per share in the year-ago period.

Depreciation and amortization was $7.3 million in the second quarter compared with $8.6 million in the second quarter of 2011. Capital expenditures were $11.3 million in the second quarter compared with $8.5 million in the second quarter of 2011. For the full year, we continue to expect capital expenditures to be around $35 million. Now I'll take a few minutes and review some of the details of our individual business segments. Our modular carpet segment continued its strong performance in 2012 second quarter. Sales were $229.5 million, only down 4.6% from the year-ago period, reflecting a record second quarter performance in our Americas business, as well as in certain emerging markets such as Latin America, which was more than offset by softer results from our European and Asia-Pacific regions. As a percentage of sales and operating income for this segment was 10.5% compared with 11.2% last year.

Bentley Prince Street generated sales of $25.1 million in the second quarter of 2012, down 7.4% from $27.1 million in the second quarter of 2011. Bentley also incurred an operating loss of $1.2 million in the period compared to an operating income of $96,000 in the prior-year period. As a result of the pending sale of Bentley Prince Street, the segment will now be classified as discontinued operations beginning in the 2012 third quarter.

Turning to the balance sheet, we exited the quarter with $36.9 million in cash compared with $63.1 million at the end of the second quarter and $50.6 million at the end of 2011. As previously announced, in the second quarter we paid off the remaining $11.5 million of our former 9.5% senior subordinated notes. Inventories were $173.7 million at the end of the second quarter compared with $171.9 million at the end of the first quarter of 2012 and $166.1 million at the end of 2011. Our average DSOs in the quarter were 47.3 days compared with 52.2 in the year-ago period. And inventory turns in the second quarter were 3.9 times compared with 4.2 last year.

Overall we're pleased with our results for the second quarter of 2012. The quarter reflected improving financial performance, solid operational execution, and continued growth for our market position.

Looking ahead for the remainder of 2012, we've seen initial signs that the demand picture is improving but still remains cloudy overall. As evidenced by order rates, we have seen improving conditions across the Americas during the quarter while Europe and Asia-Pacific remain challenging. Having said that, the several initiatives we took to improve our cost structure to better align our business with market conditions have translated into improving margins on a sequential basis and indicate that we are heading in the right direction.

Overall we'll remain focused on cost control while executing on our FLOR retail business expansion and other strategic initiatives as we continue to further enhance our position as a global leader in the carpet tile market.

Now I'll turn the call back over to the Operator for your questions.

Certainly. (Operator Instructions). Questions will be taken in the order received. (Operator Instructions). And your first question comes from the line of Mike Wood with Macquarie. Please proceed.

Hi, good morning. You dropped to 37% of the sequential sales improvement from 1Q to the operating margin line. How should we think about this going forward given the fact that you've made some restructuring in the Americas region, but then you also have this Shelf benefit coming in the second half.

Yes, I mean, I think on a sequential basis you should still continue to look at incremental contribution to margins in the 20% to 25% kind of range. That's what we're comfortable with right now.

Great. And the stability in Europe that you had mentioned, can you just describe is that in terms of sequential continuation of improvement in orders or can you also comment about requests for prices there?

Well, it's improvement in orders. If you look at it on a local currency basis, we're up about 7%. We have --

In the first three weeks.

In the first three weeks, yes. And the stabilization really in that mix is that our Southern Europe piece seems to have stabilized. It's only down slightly and it was down significantly in the second quarter. And we're seeing some growth coming out of the other parts of Europe, Scandinavia, Holland, Belgium, Germany, and even Eastern Europe and Russia.

Thank you.

And your next question comes from the line of Kathryn Thompson with Thompson Research Group. Please proceed.

Hi. Thanks for taking my questions today. When you had your last call, the first seven, eight weeks of the quarter, you saw some nice volume increases, mid to high single digits if you look back at the last record, implying that trends decelerated pretty sharply in the second half of Q2. Could you clarify what happened intra-quarter and then break out sales growth for your major markets? That would be US or, you know, the Americas, Europe, and Australia and Asia.

Yes, I think it's a combination of two things the first couple of weeks heading into Q2. I think Australia actually started the quarter pretty strong and turned out to be softer than we had anticipated in Q2. Asia was a bit softer as well across the region. And I think the currency impact in Europe late in the quarter had a bigger impact than we had originally thought heading into the second quarter. That was offset by acceleration really across our Americas modular business throughout the quarter. So it was kind of a combination of all of those factors early in the quarter versus the conditions late in the quarter, too.

Did you want sales by major region?

Yes, that would be great. Thank you.

Was that part of your question?

Yes.

Well, just generally speaking, broad brush, major geographies, overall sales in the Americas was up 6% in the quarter, Europe was down 2% in local currency, down 13% overall, that's dollars, and Asia-Pacific was down 17% in the quarter for a blended -- and Bentley Prince Street was down 7%, so a blended down 5% for the quarter.

And how about the first three to four weeks?

Really -- the focus really there is on the order trends in the first three weeks. And the Americas business is up double digits the first three weeks. Europe is up 7%, Dan already referenced, in local currencies, down 7% in US dollars. And Asia-Pacific down overall 8%. So we're up low single digit overall in order trend for the first three weeks of Q3.

Okay. And what charges or should we expect for the Australian fire and how should we just in terms of expectations of it's obviously a little bit bigger than you had -- originally had hoped, but what should we think in terms of charges and think about that plant going forward?

Well, I believe the, you know, we're still working through the details around this, but we will be able to account for the activities around this fire in a separate line item on the income statement. I believe it will still be above the operating income line, but we'll be able to capture a lot of the pluses and minuses of the activity, as well as the insurance and proceeds against it, so we'll be able to identify it and isolate it. At this time I don't have a range of what the magnitude of what that plus and minus will be, but it will be pulled out separately from the continuing operations so to speak.

Yes, and we -- and Kathryn, we do have business interruption insurance as well, so there is a loss/profit component of that insurance.

Okay. And you said that -- I didn't quite catch in your prepared comments that you're able to get orders up within the next four to five weeks.

We will be manufacturing in Thailand and China and creating a make-to-order model that delivers product into Australia in five weeks.

Okay. All right. And then finally on the Bentley Prince Street sale, just from a practicality standpoint in terms of modeling going forward, obviously there's some amount of SG&A and other related operational cost that were with Bentley. How should we think about, you know, what's the impact to SG&A and just any other operational cost that were associated with Bentley so we can think about modeling going forward and also just any other commentary in terms of multiple.

Sure. I would anticipate when we close the transaction, we'll be filing the pro-forma financial statements at that time. But for kind of quick-and-dirty modeling purposes, the modular and the Bentley Prince Street segments have been broken out historically separate in the financials, so you'll be able to identify the sales and operating income from the Bentley Prince Street segment pretty easily. In order to work through the gross margin and SG&A, they would historically have around about a 25% gross profit margin, so you can back into what the SG&A number is for your models. And you probably also need to include about an additional $2 million for the back half of the year of under-absorbed or unallocated costs that will remain with the business in the back half of 2012. They were carrying some allocated cost and we'll still carry -- there will still be about $2 million worth of that cost that will flow through our income statement in the back half of the year, which will kind of neutralize the interest savings associated with the debt reduction. So it will be effectively neutral from an EPS perspective.

Okay. And speaking of interest expenses, any change in the -- your overall forecast for the year?

Well, we'll be, you know, pending the successful completion of the transaction have some proceeds that we'll be looking to primarily reduce debt with.

Okay. All right. Thanks so much.

Thank you.

And your next question comes from the line of Matt McCall, BB&T Capital Markets. Please proceed.

Thank you. Good morning, everybody. So following up on one of the previous questions, margins by region, any commentary you can provide there about the quarter?

Not in particular. I mean, overall modular margins were almost double-digit. We're pleased overall with where the Americas was in particular. Europe held in t here nicely, mid to high single digits, and a nice double-digit number at -- in the Asia-Pacific region as well.

Okay. And so in Q4 of last year obviously some gross margin issues. Have those issues been fixed? I guess looking back at the first half of last year, we were 35.4% gross margin; 33.2%, nice improvement from where we were in Q4, but what's -- I guess what's holding you back from getting back to that 35% level?

I would say we're on our track to do that. When we start realizing the full benefit of Shelf, that's going to improve the gross profit margin nicely. When you back out Bentley Prince Street, obviously that's going to improve the gross profit margin. And I think we're going to continue to see improved margins coming out of the Americas business at the gross profit line. So I think the trends are all pointing toward we're going to get back to the 35% gross profit margin shortly.

Okay. And then, Patrick, could you talk about the allocated costs or the costs absorbed by Interface from the Bentley Prince Street. Is that $2 million going to be -- is that kind of -- you annualize that as $4 million annually? Is that the way to look at it that we need to assume that going into next year as well?

Well, I mean, the hard part is we have to provide some transition services, so we have a period of time of somewhere between three and nine months from -- that I'll have an opportunity to address our cost structure over that time. But in the short-term period, $2 million is about what you should look at at least through the balance of 2012. And we'll have an opportunity to revisit that cost structure early 2013.

Okay. Okay. And then final question, price/cost, Dan, it sounded like you expected some cost to ease and you pushed through price. What was the impact on price versus cost in Q2 and how can you quantify the opportunity if there is one in the back half?

Well, I would say that just overall that the comment relates to I think the input cost that go into making nylon yarn are starting to turn down. And so there's a lot -- I would say the pressure on raw material inputs is downward, not upward, and that's the opposite of last year. So I think there's an opportunity for us to see our input cost trend downward. And last year if you remember we were fighting it the other way. And we continue to raise prices within our businesses or at least realize the price increases that we put in in March. So I think you've got an opportunity to expand margins on price versus input cost in the second half of this year.

Okay. And just, I'm sorry, one more follow-up. Patrick, you talked about that 20% to 25% operating contribution margin to assume in the back half. Is that exclusive of anything like price/cost or the Shelf benefits? Is that just on the core business?

That's on the core business, correct.

Okay, thank you guys.

Thanks.

And your next question comes from the line of David MacGregor with Longbow Research. Please proceed.

Yes, good morning, everyone.

Good morning.

Hey David.

So subsequent to the fire in Australia, you're going to move that production to Thailand and China. How does that higher level capacity utilization in those plants impact profitability in that part of the world?

It will help the profitability within the China and obviously the Thailand plant because you're going to get more throughput. You're going to have a more efficient plant in those two locations.

And do we see some offset associated with some of the charges that maybe won't make it into the separate fire impact line item offsetting that benefit? Or is there a net benefit here?

There's -- I'm sure there's some unseen costs that we'll have. I mean, if you look at the insurance contract, in theory we're supposed to be covered. But it's not always perfect as you well know.

Right. Do you think there will be some net benefit to that part of the world from this sort of consolidation of manufacturing?

There could be. I guess the biggest question we have is can we actually support and grow the business from those two markets from China and Thailand. We think we can. And so there is an opportunity to have a net benefit, yes.

What's the deductible on the insurance?

Oh, $250,000. And there's $800 million in coverage.

Good. Thank you very much.

And your next question comes from the line of Sam Darkatsh with Raymond James. Please proceed.

Good morning, Dan and Patrick. How are you?

Hey Sam.

Most of my questions have been asked and answered. Specific to the US corporate market, I know you were talking about Americas overall, the order trends continue to look good, I mean, what we see. I know you guys lead or carpet leads BIFMA a little bit, but orders in BIFMA have been a little sluggish and certainly still down on a year-on-year basis and you're showing -- can you see what your -- say what your corporate orders look like? Are they also accelerating? Or is it more the segmentation that's doing real well ?

And the corporate orders are up 5%, but the segmentation is really accelerating as well.

Yes, I think we're, you know, over the second quarter looking back to the strength in the education market was a highlight for us in Q2. It was a pleasant, positive surprise being the education market up 13% in the quarter in the face of some pretty tough budgetary constraints, et cetera, so pleased there, and then also in the Americas on really gaining some traction on hospitality where we've made some really nice investments and starting to see the benefits of those efforts.

And is July a particularly easy comparison? Could that help explain why all of a sudden orders look so much better? Or is the comparison basically similar?

It's similar. July -- I mean, our third quarter orders weren't all that bad last year.

Yes, $285 million in total versus $290 million.

Yes, last year.

And the progression of that through the quarter was basically -- last year was pretty -- there wasn't a, you know, July was really bad and August and September were great, that kind of thing?

No, we go four, four, five, and they're almost flat line.

In fact, I would say, Sam, that we started seeing the slowness in September after the European crisis last year.

Very helpful. Thank you much.

It was front-loaded, not back-loaded.

And then next question comes from the line of Keith Hughes with SunTrust. Please proceed.

Yes, a couple of questions. Dan, to your comment on raw materials, have you seen indications of nylon cost coming down? Or are you just looking at the various inputs that --

I'm looking at the inputs and asking my guys why not.

Is there anything on the horizon where it's going to come down, any kind of rumors of a cut or things of that nature?

No, I keep -- I don't project that. I just know that we follow what's going on with benzene and caprolactam and there's been a, you know, all of that stuff that, you know, China was sucking a lot of that into the China markets and that has moderated.

Okay. I know we're going to get some pro forma stuff, but just in general, if you look at modular versus Bentley Prince Street, what -- were there dramatic differences in gross profit between those two businesses?

Yes.

Yes.

The gross profit margins in the modular business were north of 35% and historically Bentley Prince Street ran around 25%.

And then on -- you're going to end the year given this is going to be a cash-generation year plus the proceeds from the deal with a pretty healthy cash balance. You talked about paying down debt. You really don't seem to have much coming due near term. What debt would you be paying down?

Well, we have the 7.625% senior notes. We have a feature where we can repay up to 10% of the note annually at a fixed price I believe at 103.

And would you consider using some of this cash for share repurchase?

Certainly a consideration.

And acquisitions, is that something you're not looking at doing other than little bolt-on-type deals?

Correct.

Right now we don't really see anything out there that would help our strategy. We think we've got a lot of headroom in the modular arena globally.

Okay, that's all for me. Thank you.

And your next question comes from the line of John Baugh with Stifel Nicolaus. Please proceed.

Good morning.

Good morning.

Hey John.

I guess I want to start out with the fire and the accounting. The little experience I've had with business interruption is you lose the revenue, but you recapture in a line item the lost profit. But it sounds like by moving production, you won't necessarily lose a lot of revenue, but it does sound like deliveries might get extended. So how do we think about a revenue impact from all of this in Q3 and Q4?

Patrick Lynch I think we -- the first -- I mean, the revenue impact will happen in the month of July and then we'll set the supply chain up to deliver that. And I guess Australia runs about $20 million a quarter.

25.

So, yes, oh, excuse me, $25 million a quarter. So you can assume that we're going to lose probably five weeks to six weeks of sales in this quarter.

Okay. And then after that --

-- normalize and be just like it was before.

Okay. Super. And then on Bentley Prince Street, refresh my memory. I k now in the past when we've talked about strategies, part of the rationale for holding it was they do a lot of carpet tile and you create a carpet tile competitor when you make them independent. They're producing that time completely in their own facilities or is it there's no supply agreement between you and Bentley Prince Street going forward?

Yes. I mean, John, that business if you remember was pretty ring-fenced, I mean, a while ago. And so they pretty much have been independently making their own carpet tile in that facility for five years. So there's no supply agreement going back and forth between us and Bentley.

Okay. And then I wanted to get back to your improving order trends in the Americas, which certainly counters the trend in the economy. So I wanted to get your sense because I know your business isn't tied perfectly with the economy and decisions are made on projects months, quarters, sometimes years in advance. So is it your view that you're gaining market share or that events three, six, nine months ago in terms of decision-making are resulting in the orders and shipments now, but the current events where things are slowing will ultimately result in lower orders and shipments later?

Yes, I would say that I still believe there's pent-up demand in the corporate office market. I mean, when we started this year, we talked about there was a lot of activity with A and B firms. And that activity is continuing in the corporate office market. I think that pent-up demand is starting to flow through, which we talked about in the first quarter and we saw it accelerate in the second quarter. And also I think we're having a lot of success in conversion of broadloom in particularly education and particularly hospitality. Our government business is down significantly, but the other -- those other businesses are up. And so this whole secular shift to tile that we've been talking about for 11 years, I think we're having more and more success at doing that. I'm very happy with the education business being up double digit and I know the market's down double digit. So that's just a tribute to the conversion of tile into that marketplace.

Terrific. And then my last question is on FLOR. Tell us --

John, I do want to give one other plug is that in the Americas business we have Latin America and we're doing extremely well in Latin America.

Great. Thank you. On FLOR, what is the current or maybe projected for '12 or maybe even '13 when you have all 19 stores open? How much of the revenue is going to come from the stores, how much will come from catalog, mailer, Internet? And what is the sort of profitability of those two streams of revenue if you will? I'm trying to drive at are we heading to profitability almost certainly just because the stores are a drag when they open and as they mature they become profitable? Or do woe still drag because there are all of these catalog, mail costs, et cetera?

I think when the -- when you get let's just say 20 stores and you get an anniversary of one year and you get maturity in those 20 stores, I think we'll have a profitable FLOR business,. And I think the catalog business will -- it's a three-prong marketing. You've got the store, you've got the catalog, and you've got the web. And where we have a store in those ZIP codes, the web does very well. You get conversion because they can go see and feel it. So I, you know, I would say that by the end of the -- in the fourth quarter we should see profitability hopefully coming out of the FLOR business overall.

Thanks and good luck.

Thank you.

And your next question comes from the line of Philip Volpicelli with Deutsche Bank. Please proceed.

Hey guys. Thanks for all of the color on the call. This is Sean Wondrack sitting in for Phil. I was taking a look at your cost-savings actions and I think you guys had said you expect to generate annualized of about $11 million beginning in Q1 '12. How far have you guys gotten with those and when do you anticipate that they will have entirely flowed through the P&L? Thank you.

Yes, those restructuring initiatives were completed at the end of 2011. We identified I think $2 million in cost of sales and $9 million in SG&A identified with the fourth quarter restructuring charges. And those were done and completed and have seen the full benefits of those for the prior two quarters. Now the Shelf restructuring, which we announced in Q1, most of that activity was completed in early May. We got a portion of that in cost-of-goods-sold benefit in Q2 and expect to see the full benefit of that $8 million to $9 million run rate starting here in Q3/Q4.

Okay, great. And can you quantify how much of cost of goods sold was impacted by the cost savings in this quarter?

$2 million related -- I'm sorry, $1 million related to the cost to Shelf and $500,000 related to the $2 million that we identified at the -- in the Q4 restructuring.

Okay, great. All right. Thank you very much.

(Operator Instructions). And your next question comes from the line of Keith Hughes with SunTrust. Please proceed.

Yes, just two follow-ups. Dan, when do you think you're going to close the divestiture?

About -- targeting in about three weeks, around August 15 or so.

And then moving forward, this would take away I guess segment reporting.

Effectively yes.

And is there any chance you would start breaking out the FLOR business in a little bit more detail for us?

Well, we certainly can take it into consideration. We'll have to look at the rules and requirements associated with segment reporting, et cetera, but we'll take a look at it. It hasn't been a consideration to this point. But we'll take a look at it.

All right, thanks.

Sure.

And your next question comes from the line of Glenn Wortman with Sidoti. Please proceed.

Yes, good morning. I just had one question. If you can, can you just break out your exposure within Europe by country?

We don't do that except we do tell you what the UK is. The UK represents a little under 30% of that business. And I would say that the Southern Europe, I'll give you that, is probably about 15% to 20% of that business.

Okay, okay, thank you.

And with no further questions in queue, I would like to turn the call back over to the management for closing remarks.

Well, thank you all for listening on the conference call and hopefully we're going to have a better third quarter. You guys have a good third quarter yourself.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.