Interface Inc (TILE) 2012 Q3 法說會逐字稿

A very good day to you, ladies and gentlemen, and welcome to your Q3 2012 Interface, Incorporated Earnings conference call hosted by Patrick Lynch and Daniel Hendrix. My name is Chris and I will be your conference coordinator for today.

Throughout today's conference, lines will remain on listen only. (Operator Instructions) Thank you. At this stage, I would like to turn the call over to Matt Steinberg to begin. Please go ahead.

Thank you, Operator. Good morning and welcome to Interface's conference call regarding third 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 An archived version of this conference call will also be available through that web site.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 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 1-A 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 the 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 express 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. Last quarter we opened by talking about the fire in our Australia plant and it continues to impact our financial performance on the global level. But it is in the context of solid operational performance in many regions and a mixed global backdrop. Overall, the quarter was a testament to our continued ability to execute the benefits of our global positioning and network, and the commitment of our employees in adapting to challenging circumstances and getting the job done to meet our customers' needs.

Now, let me break the quarter down for you. Sequentially, we grew sales by nearly 6% despite the fire, driven by record sales in the quarter in our US modular business and growth in emerging markets like Latin America, China, and Eastern Europe. Sales in the United States were driven by continued growth in the corporate office market and almost all non-off commercial segments. The government segment was the only weak spot due to lower government spending.

The rapid expansion of our FLOR consumer business continued during the quarter. We achieved strong same store sales growth in the period and overall sales were up year-over-year. We remain really pleased with the traction this business has continued to gain in the market.

Our national expansion of the FLOR store network remained on track in the quarter and we added our four stores, Portland, Seattle, Palo Alto, Scottsdale bringing our total stores to 15. We just opened our non-US store in Toronto and with stores in Denver and Manhattan opening in the fourth quarter, we expect to have a total of 18 stores by year end. With the addition of Manhattan, we now have three stores open in New York City. We've also identified additional markets for expansion in 2013.

FLOR stores have been open for more than a year are consistently generating operating profits of about 15%. With the rapid expansion and critical mass largely completed by the end of the year, we expect FLOR will contribute to overall profitability in 2013.

In Europe, conditions were largely as expected. We are encouraged by some signs of stability in mature markets like the UK, Germany, Holland, Scandinavia, offsetting sales declines in Southern Europe, particularly France. On a local currency basis, sales in Europe were up relative to both second quarter 2012 and third quarter 2011 despite operating in our seasonally softest period due to the August vacation season. Our performance in Europe also reflected our restructuring initiatives, which continue to gain traction and generated improved operating margins. Overall, what's going on in Europe validates for me that we are successful in adapting, executing, and gaining share in a very challenging market.

Now, turning to Asia-Pacific, let me first provide an update on our operations in Australia. As expected, our sales in Australia were impacted by the fire that destroyed our Picton manufacturing facility. We capitalized on our global capabilities and are adapting our supply chain with product from our facilities in China, Thailand, and even the United States and Europe. While this is being executed with success, there were as expected delays in shipments that affected sales for the third quarter.

It is difficult to quantify the top line impact of the fire, but we believe it was in the range of $7 million to $8 million in negative sales hit for the quarter. Today, the supply chain is up and running and we're working to shorten the shipment delays and bring the backlog down. It gets better every day so we expect improvements going forward.

I'd like to take a moment here to note that the outstanding job that everyone involved in this issue has done and continues to do, including our customers who are sticking with us, from adapting to this difficult situation, to meeting revised delivery schedules, to maintaining excellent customer service and support. This would not have been possible without everyone's best work and we thank them for it.

In China, we're operating two shifts at the factory and generating near breakeven results. There's been a lot of discussion about the moderation of growth in China, and while we see a little of this in major cities like Beijing and Shanghai, we've also had success expanding our sales efforts into the so-called secondary cities in the Western part of the country.

(Inaudible) last year in the 2012 second quarter, excluding the restructuring and the fire expenses. This was a result of our relentless focus on cost control. We can see it in our SG&A line, which one again improved as a percentage of sales. (Inaudible) continue to diligently going forward. Visibility remains limited, but we are cautiously optimistic about our prospects. Our US modular business continues to have good momentum both in the commercial and consumer markets. Europe is well positioned to operate in the current market conditions, and even better position to take advantage of further stabilization in that market and grow over time.

In Asia, we are encouraged by the order growth scene in China and Southeast Asia, and sales in Australia should improve as delayed shipments flow through and comparisons in that market ease over time. We will continue to make strategic investments to position our business for growth, drive the global market for carpet tile, remain focused on cost controls, and look to eliminate inefficiencies where opportunities present themselves.

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

Thank you and good morning, everyone. I'll take a few minutes now to talk about the financial highlights for the third quarter. Before I begin, though, I just want to remind everyone that given the successful completion of the sale of Bentley Prince Street in August, results for Bentley Prince Street for all periods have been classified as discontinued operations. And additionally, I'd like to note that we have not recorded any amounts for lost profits or business interruptions stemming from the Australia fire. We anticipate being able to recover those amounts in the future.

With that, sales for the first quarter of 2012 decreased 2.4% to $242.9 million from $248.7 million in the third quarter of 2011. Total sales for the quarter were negatively affected by foreign currency effects in the amount of $6 million. Excluding the events, the effects of the currency, sales would have been essentially flat from the year ago period. As Dan discussed, we saw record quarterly sales in our US modular business, primarily driven by our retail corporate office, hospitality, healthcare, and residential markets, and partially offset from the government segment.

Europe is trending positive in the quarter, increasing on a sequential basis in local currency, driven by strong stable performance out of the UK, Germany, Scandinavia, partially offset by softness in Southern Europe, particularly France and Spain. As Dan mentioned, our Asia-Pacific business felt the headwind of the Picton fire, resulting in shipment delays to about $7 million to $8 million negative sales during the quarter. This is roughly in line what we had expected when we announced the second quarter results.

Aside from the Picton fire, Australia remains under pressure from challenging year-over-year comparables, from strong office activity last year. However, we expect to see growth from this region as sales and order have been improving sequentially.

For the third quarter, gross margin declined about 100 basis points to 34.1% compared to the third quarter of 2011 and decreased by 20 basis points relative to the 2012 second quarter level of 34.3%, once the reclassification for the sale of Bentley Prince Street was taken into consideration. The year-over-year decline in gross margin was relative lower fixed cost absorption and lower production volumes, primarily the result of the Picton fire.

SG&A expenses are a bright spot in the third quarter, decreased to $58 million from $62.6 million last year. As a percentage of sales, SG&A decreased 130 basis points to 23.9% compared with 25.2% a year ago. (Inaudible) and we remain focused on reducing SG&A costs as a percentage of sales and we're pleased with the progress we've made throughout the year.

Operating in the quarter was $23.1 million or 9.5% of sales, excluding the charges of $770,000 related to the restructuring of some European operations, an expense -- net expenses of $980,000 related to the fire of the Picton facility from July. Operating income for the 2012 third quarter was $24.8 million or 10.2% of sales compared with operating income of $24.6 million or 9.9% of sales in the year ago period. The negative impact on operating income from the Picton fire was also difficult to quantify, but we believe it was in the range of $1.1 million to $2 million impact during the quarter.

To Dan's point about improving our cost structure in Europe, sales declined 8.2% year-over-year in US dollars. Our efforts resulted in a much smaller decline in operating income and operating margins improved 50 basis points from year ago levels. These benefits are clear relative to this second quarter 2012, as our efforts allowed the business to generate a 40% increase in operating income on revenue growth of 5.6%.

Interest expense in the third quarter was $6.3 million, compared with $6.4 million in the third quarter of 2011, including the restructuring charge and Picton fire expense, we reported net income from continuing operations of $11.1 million or $0.17 per diluted share. Excluding these items, net income from continuing operations was $12.3 million or $0.19 per diluted share.

Depreciation and amortization was $7.7 million in the quarter compared with $7.3 million in the third quarter last year. Capital expenditures were $7.1 million versus $11.9 million in the comparable period in 2011. And for the full year, we expect CapEx to be around $30 million to $35 million. On the balance sheet, we exited the quarter with $91.7 million in cash compared with $50.6 million at the end of 2011 and $36.9 million at the end of the second quarter of 2012, and we recorded $20.7 million in operating cash flow for the quarters. Inventories were $147.8 million compared with $140.5 million at the end of 2011 and $144.8 million at the beginning of the second quarter of 2012.

Overall, the 2012 third quarter represented solid performance. The benefits from our cost reduction efforts continue to flow through our results and expand our margin profile on an apples to apples basis. We generated solid cash flow and operations from a position of strength and positions as well to execute our strategy and adapt to future market conditions.

With that, I'll turn the call back over to the operator for your questions.

Thank you very much. (Operator Instructions) Our first question today is from the line of Stephen Kim from Barclays. Please go ahead.

Hi, guys. It's John actually filling in for Steve today. I recall on the last conference call that you'd indicated that through the first few weeks of the quarter that sales were up low single digits. Just trying to get an idea of how sales trended throughout the quarter, particularly in Europe where you said you're seeing stabilization. You had indicated they were down like 7% for the first month whereas for this quarter they were down 8.2%. Can we maybe just get some more color on that?

Well, in particular around Europe they finished up 3.3% in local currencies and I think that's perhaps what we had referenced. They were down in US dollars around 8% top line. The trend generally throughout the quarter was, July was up slightly, August was flat, and I would say September was the softest of the three months of the quarter. The first three weeks here in October feel pretty good with kind of trending up roughly low mid-single digit top line and order pattern as well.

All right, and do the cost savings that you did get through Europe, what do you expect your incremental margins to be in that region relative to the others? I mean you had previously guided 20% to 25% overall, but how would that be in Europe just through the actions you've taken relative to overall --

Well, Europe in particular as our highest incremental contribution margins due to its heavy fixed cost basis. So historically, those even prior to the restructuring have the biggest benefit from an incremental contribution margin. So they'll probably, historically have been north of the 20% to 25% range, probably in the lower 30sish.

Well, thanks. I appreciate that.

Thank you very much. Our next question is from the line of Kathryn Thompson from Thompson Research Group. Please go ahead.

Hi, thanks for taking my questions today. You typically at least in last quarter's call gave some clarity about the sales growth in your major markets, Asia, Australia, Europe, and Americas. Could you do that not only in local currency as you did for Europe just a few minutes ago, but also what it is in US dollars? And if you could maybe give a little bit more clarity as what we're seeing by region early. I know you mentioned on a broad base where things are going, but by market also where we are going for the early stages of this quarter. Thank you.

Sure. Roughly, our Americas business was up mid-single digits, 6%. We talked about the European business being up 3% in shipments and local currency down 8% in US dollars. Asia-Pacific, which includes both our Asia operations and our Australia business, was down in terms of shipments 20%. That was roughly flat in Asia but 22%, 23% decline in top line in Australia obviously related to the fire. In rough terms, off the order trends here in the first couple weeks, the Americas is mid to high single digits kind of pattern. I'm hesitant to talk too much about our European operations because we did have a bit of a head fake in the early part of the second quarter in Europe in July and then softness in August and September.

But the trend, early stages in Europe are up low double digits in US dollars, actually higher in local currency. Easier comps in the back half of last year, 2011 in Europe, and our Asia-Pacific business continues around the negative 20% levels consistent with the activity with the Australia situation. For a blended mid-single digit kind of order pattern here early in the quarter.

Maybe if you could expand a little bit more on Australia and what residual costs to be associated with the fire going forward, really separating out from how much of the impact is just trying to meet demand versus having to deal with real cost of rebuilding a plant.

Sure. The impact in the quarter, the negative impact was really the result of the lower sales related to delays and so forth. I originally underestimated the amount of time our supply chain would get back up on line in fabric adoption, and the top line impact was a bit more than we originally anticipated, around $7 million to $8 million. And the flow through on that lost sales is translated to about $1.5 million to $2 million of pretax earnings that did not come through in the quarter.

The other incurred -- so we have not recognized any of that lost profits as part of our accounting to date. Thus far, all we have provided for are the incremental costs that we have incurred that we expect will be fully covered under our property claim and a portion of our business interruption claim. So all of that has been neutralized in the P&L. Really just the top line miss has not been provided for on the income statement. I hope that answers your question.

Would you say it's $8 million to $10 million top line loss?

$7 million to $8 million.

I'm sorry, what was that?

$7 million to $8 million.

Oh, $7 million to $8 million. Sorry. Okay.

Yes, we've been trending about $25 million a quarter there and we did $17 million in change in the quarter.

Okay, and then finally just on interest expense updates, what should we expect on a quarterly basis going forward with the closure of Bentley?

Right now, still around the $6.2 million, $6.3 million is probably a good number to model for interest expense for now. We're going to be a little conservative with the cash as we work through the Australia options that we have in front of us.

Okay, perfect. Thank you so much.

Thank you for your question. Our next question is from the line of Mike with Macquarie. Please go ahead.

Hey guys, this is Adam in for Mike. Just a quick question on growth. Can you pick out growth in office versus non-office in the quarter?

Office was on a global basis was roughly flat. So the non-office was down 1% or 2%.

That's all in US dollars.

Yes, that's all US dollars.

Okay, great. And then also just if you could touch on raw material trends in the quarter.

It's really stable. They're really nothing meaningful either way to comment on. No price increases from our suppliers, nor were there any price increases to our customers during the quarter. It was remarkably stable.

Great, thanks.

Thank you very much. Our next question is from the line of David MacGregor from Longbow Research. Please go ahead.

Good morning, guys. Can you just talk about the FLOR stores for a minute and elaborate a little further around the timing of the crossover into the profitable performance?

This is Dan. David, some of the stores take about six months to get up and become profitable, and once you annualize them that's the ones that are running at a 15% operating contribution. We've opened -- this year, we'll have opened about 10 stores to date, and so you have a drag on profitability from the stores that we have recently opened. We'll start anniversarying next year, probably more like 10 to 11 of those stores and we expect that will start contributing to the profitability of the overall business.

What's kind of the productivity per store? Can you talk about revenue per store on average?

Our goal is to have a minimum of $1 million per store once it anniversaries, and in some cases like our New York SoHo store, we expect to get up to $3 million. Chicago should be north of $2 million and that's two of the stores that have anniversaried. But if you look at Atlanta market, you look at a Scottsdale market, those are more like $1 million to $1.5 million revenue stores.

And are online sales significant at this point, Dan?

Yes, I mean online sales are actually more than the store sales to date. We've got that three-prong approach to driving it through a catalog, driving it through the web, and driving it through the stores. Yes, the online business is not insignificant to the overall sales of FLOR.

So can we quantify revenues for the entire enterprise/

We haven't been doing that yet. We're going to come out with that shortly. $30 million is where we're -- $30 million plus this year, headed to $40 million.

$30 million plus in 2012?

Yes.

Okay, terrific. And then Europe, you mentioned in your press release that you were taking share and I was just wondering if you could elaborate which geographic markets, which verticals? A little color there would be helpful. Thanks.

I would just say in Europe in general we know that it's down and we're taking -- our UK business is actually holding its own and it's up. And we don't believe the market there is up. If you go to Germany, Scandinavia, Holland, Eastern Europe, all those markets are up for us. The only area that we're really struggling in is Spain and France. Overall, the European market is not up the way we're up in those markets.

Okay, and from a vertical standpoint?

Most of it is office. You've got about 70% office and 30% non-office there and the office is where the growth is coming from.

Okay, and then there's been some restructuring over there. So can you help us understand just what margins could potentially get to in Europe once you get back to full capacity with this lower breakeven point?

Well, margin profile in our European business is very good right now despite flat kind of top line. They're putting up high single, low double-digit kind of operating income levels. So where they are right now from an operating income profile is frankly very good.

And can you say what level of capacity utilization you have over there? I mean you've talked about --

We're at about 60% today.

About 60% there. Okay, great. Thanks very much, guys.

Thank you for your question. Our next question is from Sam Darkatsh from Raymond James. Please go ahead.

Good morning, Dan. Good morning, Patrick. I'm going to piggyback on Dave's question there regarding the FLOR stores. Can you ballpark quantify the actual dilution in fiscal year '12 from the FLOR store initiative?

I would say we're going to lose a couple million dollars in that business this year. We expect to make money next year in it.

So as I recall, your opening was seven or eight stores next year.

We have identified seven or eight markets next year, yes. And we're going to look internationally to open potentially in London, Shanghai, and Sydney.

So you're looking to do, what, $40 million I think you said by the end of this year. Do you feel you're on track to do $100 million by the end of next year? Or how should we look at -- ?

I would say that would be very aggressive to go from $40 million to $100 million, but I'd say our goal is to grow it 35% a year.

Okay, got it. And then talk about, if you could, your sequential margins. I know Asia is messed up for a lot of reasons, for all the moving parts. But Europe and North America sequentially Q2 to Q3 and what the drivers were of those moves?

I would say the drivers obviously as we've done some cost cutting in Europe and we've done some restructuring in Europe, you're getting the benefit of when you get a 3% growth in local currency in Europe, as Patrick mentioned, there was about a 40% flow through with the growth that we got there.

So Europe has a bit of profitability based on volume and lower SG&A costs, and US is holding a lot on SG&A costs, and you're getting flow through on the top line there as well.

On a sequential basis?

Yes.

Thank you both.

Thank you very much. Our next question is from the line of Keith Hughes from SunTrust. Please go ahead.

Thank you. Dan, in the US, are you getting any indications, maybe not orders, but just indications from customers of kind of burgeoning commercial work, either construction or renovation for '13? Is there an outlook you're developing from your -- ?

We have a pipeline that we look at that goes out to 180 days and I would say that pipeline is not robust-robust, but it's not anemic either. And so I would say that feel like going into 2013, it will be hopefully steady growth, but I don't see it being a breakout growth at all.

Will we see the FLOR store financials broken out in more detail in the future given -- ?

Right now, no. We are trying not to do segment reporting around the FLOR stores. It's not that big yet. But eventually when it becomes material enough, we'll look at that.

Okay, and finally you had talked about the cash conserving around the fire, the expenses associated with that. Beyond that, has there been any more board-level discussion of what future use of the cash flow are going to be for outside?

Yes, I would say that, Keith, we've discussed it in the last board meeting and based on the fact that we're looking to do something else, ready to rebuild that capacity, that we made a decision to be conservative at least in the fourth quarter to see what that might cost us to do before we make some of those decisions.

But no decisions for what it will look like in '13 yet?

No, we will probably discuss that in January.

Thank you.

Thank you. Our next question is from the line of John Baugh from Stifel Nicolaus. Please go ahead.

Thanks and good morning as well, Dan and Patrick. Could you give us the backlog figure at the end of the quarter? And while you're looking that up, the business interruption insurance, would we anticipate getting that in the fourth quarter? And I guess if we do, that would capture from the time of the fire on all of the lost profit.

I would think the business interruption portion of the claim will come in 2013 as that unfolds and those negotiations go forward. In the fourth quarter, we could see some cash recovery around the property and equipment portion of the claim only to come through in Q4.

Okay, and there's a lot of discussion around tile backing systems, Dan. And I wonder if you could sort of share with us what you see happening in the trade and what you're doing currently?

We have two backing systems. Actually, we have a PVC backing system in the United States and in Asia-Pacific and we have bitumen-backing system in Europe. And we also have 100% recycled backing system with Cool Blue that's PVC. And we're not moving away from those backing systems right now at all. I mean, we could but we feel like recycling and taking care of what's out there on the floor around PVC is the right place to be.

Okay, and most of my questions were answered on floor, but I was wondering, you mentioned the three-pronged approach. Is there -- what has sort of been the commitment to ad spend or catalog spend, or however you define it now that you're opening these stores? And how does that look in terms of percentage of revenues? That's something that gets leveraged as you open stores? Do you cut back on -- ?

I would say that we did cut back a little bit of the catalog this year. We were mailing about 5.5 million catalogs and we went to 4.5 million catalogs. So we are cutting back the catalog. We're going to make a pretty big commitment to just the social media and the digital marketing, and I think we can drive a lot through that. We've hired a very good person that came out of the [Zappo] organization who is really I think going to help us a lot around the digital space.

Okay, and did you get your hands on that backlog number, Patrick?

I'm going to actually file a separate with all of the continuing operations, sales orders, backlogs, go back through the past couple of periods and I'll get that published for you.

Great. Appreciate that. Thank you and good luck.

Thank you. Our next question is from the line of Matthew McCall from BB&T Capital Markets. Please go ahead.

Thank you. Good morning, guys. So I think you talked a little bit about incremental margin. I'm just trying to get a handle on the gross margin. I think we talked about targets in the past, maybe Dan, of exiting the year at 35%. I know obviously Australia has an impact there. But maybe just talk about how we should look at gross margin in Q4 out into next year and Patrick, maybe hit on price cost a little bit. Have you seen any relief on the raw side?

Well, I would say if we obviously get top line growth you'll see the expansion of our gross profit margins in Europe and the US, and in China, and in Thailand. Australia is obviously (inaudible) known to us. But I do believe we can get back to the 35%, 36%, if we sort of normalize what's going on in Australia within the other operations.

And Patrick, on the price cost side, was there any pressure in Q3?

No, on either side really, our average selling price trended nicely in the quarter and it was pretty stable from a raw material perspective. We didn't really see much relief and really not a lot of upward pressure either. It was pretty stable.

And anything on the outlook? What's the raw material outlook?

I would say right now it's stable. If you looked at the big inputs that drive nylon yarn, they're sort of trending flat to down a little bit. So I think right now it's pretty quiet around that front.

Okay, and then you mentioned government I think was the only weak spot at least in the US. Could you quantify the impact on year-over-year basis of the government?

Government business was down 10%, 11% in Q3.

And how much is a percent of the total approximately?

We try not to give all of it out to our competitors. We try not to do that.

The comp has to be getting a little bit easier there pretty soon, right?

Yes, I think the government piece hopefully will stabilize here. That's around the world too. Government spending around the world is pretty anemic.

Okay, and then finally, some of the other end markets I don't think you've mentioned airspace. I don't think you mentioned some of those other I guess experimental markets if you will. Any update there and -- ?

We're trying to plow ahead on the transportation and the airplane business, and we're obviously in conversations on that, but it's not material enough to talk about right now.

All right, thank you all.

Thank you very much. Our next question is from the line of Philip Volpicelli from Deutsche Bank. Please go ahead.

Hey, guys. This is Sean Wondrack sitting in for Phil today. Just building a little on the use of cash question, I know that you guys have the ability to call 10% of your notes. I think that's roughly $27.5 million. Has there been any more discussion about that? I know you're trying to be conservative with cash, so I didn't know if that was going to be held off or what you thought about that?

We've had some discussions internally and certainly at the board level as well, and we've elected to at least spend the next two months monitoring our situation in Australia and then perhaps revisit that decision early next year.

Okay, great. And then regarding the outlook for raw materials, and I know you guys discussed what was going on during the quarter, is your outlook pretty much in line with what you were seeing? Or do you expect an uptick or move down a little bit?

Right now, I think we expect it to be pretty quiet, what we're seeing.

Okay, great. Thank you very much.

Thank you for your question. (Operator Instructions) Moving onto our next question and another questions from the line of Stephen Kim from Barclays.

Thanks very much. Guys, I just had a longer-term question for you. One of the things that I found intriguing is the potential for emerging markets to see a need for Class-A office space being constructed. We see that in a lot of the emerging markets, the capital cities particularly a shortage of Class-A. And I was curious if you could share with us a little bit about your strategy as you position the Company over the next several years for attacking that market, and giving particular color, if you can, on in some of these emerging markets is there a substantially different way in which you need to go to market than exists in some of your more developed markets? Or something else that demonstrates your proficiency in attacking those market opportunities? Thanks.

I would say that we took the position of, quite a while ago, to be local in those emerging markets and we have our own sales and marketing people around the world in India, in Russia, in China, in all these markets. And we're unique in that. We have about 700 sales and marketing people around the world and our go to market strategy is really go after the local as well as the multinationals.

And we've been doing it quite a long time and it's not all that different. There's an architect that specifies particularly Class-A space, and you're right, particularly in some of these markets there's not a lot of Class-A space. But we have operations, sales people in Latin America, which is one of our biggest emerging markets. We built a plant in China that serves the Chinese markets. We have a plant in Thailand that serves the Middle East and India markets. And we have a plant in Europe that serves the Russia and Eastern Europe markets. So we're well positioned on the ground in all of those markets.

It represents a little over 10% of our business today, what we call emerging markets.

Does the go to market strategy differ at all in terms of having a direct -- the efficacy of having a direct sales force, selling directly into those markets, I guess I'm wondering whether or not there is in some of these markets a trend or a tendency to maybe have larger distributors, which let's say offer a much broader array of products than, obviously than your sales force would? And whether or not there's anything different about that dynamic in some of these emerging markets versus some of the more developed markets?

We have never found a distributor being able to specify our product, particularly if they carry other people's products. So in our mind, you get it specified and you go direct, and you go to market like you do in the United States. Because a lot of these emerging markets, the architects and designers come from London, they come from New York. And so, to me the go to market strategy with a distributor, you get very marginalized in that conversation and you get very commoditized, I think. So we've never felt like a distributor could actually sell our product.

Great. That's very helpful. Thanks very much, guys.

Thank you. We have another question in the queue from the line of David MacGregor from Longbow Research. Please go ahead.

I wanted to just ask you about mix. Within your order patterns, within your order book, are you seeing any reflection of movement to higher price points?

I would say that we have been pushing the higher price points products. Our big global product launch, Urban Retreat, was at higher price points. But we're also trying to press both sides of that down and up. But if you look at our overall average pricing, it has been trending up and that's because we had significant raw material price increases as well that we've put through, price increases offset.

But I would say we're playing both ends of that, David, lower and higher, trying to expand it.

And so how does the competitive situation develop at each end of that market? Are you seeing -- I know there's been a little bit of consolidation over the last few months. Are you seeing an increase in competitive force towards the lower price points, or is it moving up market? Can you talk a little bit about that?

I would say that if you looked at the lower end of the market, the tenant improvement space, that a lot of the lower end [broad loom] is now being converted to lower end carpet tile, which you hadn't seen before. And I think there is also a tendency to move up, particularly with financial institutions that are looking for wealth, growth, and so forth.

So I'd say it's both. We don't have any more price competition than we had last quarter or a year ago. It's pretty price competitive out there, but we always sell on service, style, quality, design, and so forth.

What would you say the mix is of broadloom versus tile at the lower price points versus at the higher price points?

Oh, I would say that if you're going to the $10 sort of broad loom, it's probably still 90% broadloom.

And what about the upper end of the market?

I think if you look at the commercial market, we think it's about a third carpet tile today. I think office is more like 50% plus carpet tile.

Thanks very much.

Thank you very much for your question. We have no further questions in the queue. At this point, I would like to turn the call back to management for closing remarks. Thank you.

Well, thank you for listening to the call and we obviously hope to report better news next quarter. Thank you.

Thank you very much. Okay, so ladies and gentlemen, that does now conclude your conference call for today. You may now disconnect your lines. Have a great day. Thank you very much for joining.