Interface Inc (TILE) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2012 Interface, Inc. earnings conference call. My name is Erica and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to [David Faucher] with Interface. Please proceed.

Thank you, operator. Good morning and welcome to Interface's conference call regarding fourth-quarter and full-year 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 up for Q&A.

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 An archived version of this conference call will also be available through that website.

Before we begin 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 the risks and uncertainties discussed under the heading Risk Factors in Item 1A of the Company's annual report on Form 10-K for the fiscal year ending 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 website, 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 rebroadcast without Interface's express permission. Your participation on the call confirms your consent to the Company's taping and broadcasting of it.

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

Thank you, David. Good morning, and I hope your year is off to a good start. Before I talk about the quarter, I would like to make sure you have noted the migration of our NASDAQ ticker symbol to TILE, representing our status as the only floor covering company in the world dedicated to carpet tile. We are excited about the new symbol and we hope it will be easier for you to keep top of mind when you think of Interface.

Now, onto the quarter. Fourth-quarter sales were up about $5 million year over year to $249.6 million. Growth was led by our Americas division, which was up 8.2% year over year and posted record fourth-quarter sales. The increase is largely coming out of the corporate office sector and from the division's ability to execute on market diversification in segments like education, government and hospitality.

Latin America also was a bright spot for the quarter, with sales up double-digit for the quarter. Asia-Pacific sales were essentially even year over year, with growth in China offsetting declines in Japan and Australia. As we mentioned in the press release, our China business swung to a profitable quarter while our Australian business continues to work through the effects of the fire at the plant in the third quarter.

We are getting better at running that business as an import model as we continue to capitalize on our global capabilities and feed the supply chain with products made at our plants in Thailand, China, Europe and the United States.

On the rebuilding front, we leased a building in Minto, Australia, just outside of Sydney, and expect manufacturing there to be back online before year-end. In Europe, we continue to see signs of stabilization in the UK, Eastern Europe, Russia and Scandinavia, which may indicate we are seeing a bottom in that region. Southern Europe, however, continues to struggle with sovereign debt and economic issues.

Overall, Europe sales in the quarter were down 3% in local currencies or 7% in US dollars, with the strongest segments being government, retail and hospitality. Our consumer business, FLOR, ended the quarter with a healthy year-over-year increase in sales, a consequence of our FLOR store rollout. We opened 11 new stores during the year with a total of 18 locations at year-end, and about half of the new stores are already profitable.

Our commercial business also continues to benefit from a crossover program that brings FLOR products to the B2B consumer. We've identified additional markets for expansion and we look for FLOR to approach $50 million in sales and contribute to the overall profitability in 2013.

Looking ahead, I am very encouraged by our prospects. With the successful divestiture of Bentley Prince Street behind us, we are now 100% focused on the carpet tile business globally. While 2012 was negatively impacted by the fire in Australia, we now have an infrastructure in place to help that business recover.

We expect gross margin expansions in 2013, as we continue to tightly control costs commiserate with sales increases. The macro environment and project pipeline bode well for continued growth in the Americas and Asia. Orders are up 6% on a consolidated basis in the first six weeks of the year, with Americas up double-digit percentage and even Asia-Pacific is up, despite the effects of the fire. Both FLOR and China are expected to contribute to our overall profitability in 2013. And looking across segments in regions around the world, there continues to be significant opportunity for growth in converting floors to carpet tile.

With that, I will turn it over to Patrick.

Thank you and good morning, everyone. I will take a few minutes to walk through the financial highlights for the fourth quarter and year end. One final reminder that given the sale of Bentley Prince Street in August, results for the Bentley Prince Street for the 2012 fourth quarter and year end and all other prior periods have been classified as discontinued operations.

We strengthened our financial position in the fourth quarter with gross margins improving 140 basis points year over year, and holding even sequentially with the prior quarter. We also ended the quarter with a strong cash balance of $90.5 million.

Sales for the fourth quarter of 2012 increased 2.1% to $249.6 million, from $244.5 million in the fourth quarter of 2011. On a consolidated basis, there was not a significant currency impact in the quarter. As Dan discussed, we saw record fourth-quarter sales in our US modular business, primarily driven by our corporate office, education, government and hospitality markets. These results were partially offset from weakness in the retail and healthcare markets.

Europe experienced a 3% sales decline in local currency and was down 7% as reported in US dollars. This decrease was primarily driven by a decline in the corporate office market with some mitigating increases in government, retail and hospitality markets. There remains considerable uncertainty in Europe, but we do see some bright spots including positive performance in the areas Dan just mentioned earlier.

Our Asia-Pacific business continues to feel the effects of the Australia fire, resulting in shipment delays and we believe about $6 million to $10 million negative sales impact during the quarter. While the ultimate impact on profitability is difficult to quantify, we believe the fire negatively impacted fourth-quarter profitability by $2.5 million to $3.5 million.

Aside from the fire, while Australia remains under pressure from challenging year-over-year comparables from strong non-office activity last year, we saw some sequential improvement in both sales and operating income in Australia as compared to the third quarter of 2012.

For the fourth quarter on a consolidated basis, gross margin increased by about 140 basis points to 34.1% compared with the fourth quarter of 2011, and was identical to gross margin in the third quarter of 2012. The year-over-year increase in gross margin was the result of higher fixed cost absorption and higher production volume, as well as continued stabilization of our supply chain with regard to the Asia-Pacific regions. Raw materials during the quarter were effectively flat in fourth quarter 2012 versus the same period 2011.

In the fourth quarter of 2012, SG&A increased to $63.2 million from $59.2 million last year. As a percentage of sales, SG&A increased 110 basis points to 25.3% compared with 24.2% a year ago. The increase in SG&A as a percentage of sales was due to increased selling and marketing expenses, specifically salesforce additions, and costs associated with the continued rollout of our FLOR stores, as well as additional incentive compensation in the fourth quarter of 2012.

While we continue to make the necessary investments in our business to grow market share, we remain keenly focused on SG&A cost as a percentage of sales. We believe we are beginning to see the benefits of these investments with positive order trends in the first six weeks of 2013. Specifically in the Americas where we made the largest investments, orders are up 18%, and Asia-Pacific orders are up 8% despite the fire effects.

Operating income in the fourth quarter of 2012 was $18.8 million or 7.5% of sales, compared with operating income of $14.9 million or 6.1% of sales in the fourth quarter of 2011. Excluding restructuring charges of $2.3 million and expenses of $800,000 related to the fire in the Australian facility, operating income for the 2012 fourth quarter was $21.9 million or 8.8% of sales. This compares with fourth-quarter 2011 operating income of $20.7 million or 8.5% of sales, excluding the restructuring charge in that period as well.

Interest expense in the fourth quarter was $5.9 million compared with $6.4 million in the fourth quarter of 2011. Including the restructuring charge and Australia fire expense, we reported income from continuing operations of $7.4 million or $0.11 per diluted share, compared with $5 million or $0.08 per diluted share in the fourth quarter of 2011.

Excluding the Australia fire expenses from the fourth quarter of 2012 and restructuring from both periods, income from continuing operations was $10.4 million or $0.16 per diluted share in the fourth quarter of 2012, compared with $9 million or $0.14 per diluted share a year ago.

Including the items discussed above, we reported net income for the 2012 fourth quarter of $7.4 million or $0.11 per diluted share. In the fourth quarter of last year, net income was $3.9 million or $0.06 per diluted share.

Depreciation and amortization was $7.6 million in the fourth quarter of 2012, compared with $6.8 million in the fourth quarter of 2011. Capital expenditures for the fourth quarter of 2012 were $12.9 million, compared with $7.4 million in the comparable period in 2011. Capital expenditures for the full year 2012 were $41.7 million.

Turning to the balance sheet, we exited the quarter with $90.5 million in cash compared with $50.6 million at the end of 2011, and $91.7 million at the end of the third quarter of 2012. Inventories were $141.2 million at the end of the fourth quarter of 2012, compared with $140.5 million at the end of 2011, and $147.8 million as of the end of the third quarter of 2012.

Our average DSOs during the fourth quarter were 47.9 days compared with 52.2 days in the year-ago period, and inventory turns in the fourth quarter were 4.6 times compared with 4.4 times last year.

With that, I'd like to open the call up for questions. Operator?

(Operator Instructions). David MacGregor, Longbow Research.

Yes, good morning. Just with respect to China and Australia and everything that you're working on over there, the China plant I guess is operating at full capacity. What percentage of the orders on that plant are from the Australian business versus China?

It's actually not at full capacity. We are running at two shifts, not three shifts.

Okay.

I would say that of the production -- trying to get that in my head -- actually very little of it was for Australia in the fourth quarter. Most of it was for China. I would say 10% might have been for China -- I mean for Australia.

For Australia, right. And you said that you are in the black now with that operation, which is great to hear, but I guess how sustainable is the profitability once Australia ramps back up?

I would say that looking at the pipeline of activity in China related to newbuild, there is a very healthy pipeline of new construction coming through, at least through 2015. So I think we are in the black and we are going to keep it in the black.

Okay. On raw materials, you mentioned you were flat year over year. Patrick mentioned flat year over year, but we are starting to see some inflation in nylon supply channels. So I'm just wondering how you think about raw material inflation over the next 2, 3, 4 quarters.

I know historically you have had a pretty good track record of passing that through, but the last couple of -- say the last year or 18 months, competitive elements have made that a little more challenging than it has been in the past. So I am just interested in your thoughts on inflation and your ability to pass that through.

Well, I would say that we are aggressively passing through raw material price increase. I think we had a slow start, but in the United States we were able to pass it through now. I think that we got a little behind just because we had I think six price increases in six quarters.

I don't really anticipate it being that way this year, but we will aggressively pass through raw material price increases to our customers.

Okay, last question is just on Europe, Dan. I guess the expectations for the first quarter of 2013, last quarter you had indicated that there had been some restructuring aimed at restoring profitability. You were seeing stabilization in the UK, Germany, Scandinavia, Benelux. It sounds like maybe results this quarter came in a little behind where you thought you might have been 90 days ago. How do we think about Europe going forward from a (multiple speakers)?

I would say that we probably anticipated a good result in the fourth quarter out of Europe would have been flat, and we were down 3%. So I think it was within expectation range, and Europe was profitable. The things that I sense is we are not going to see a meltdown in Europe related to the euro, and there's a lot of pent-up demand. Most of the companies in Europe haven't done anything since 2008 crisis.

So I think we are just going to go out and get the business, and hopefully we will have a better playing field in 2013 than we did in 2012. It feels better than it did going into 2012, I will tell you that.

One last quick one if I could for the model. What percentage of SG&A is fixed versus variable?

It is about 50-50.

Okay, thanks very much and good luck.

Kathryn Thompson, Thompson Research.

Hi, thanks for taking my questions today. Just tagging on the SG&A question, what was the split between new stores versus increased comp and also new employees? And how should we think about modeling SG&A going forward?

The previous quarter, you had done a very nice job of getting to a target on a percentage basis at least that you had set out. But this quarter, obviously, is a big swing back. So maybe split out between those three buckets and then how should we think about it going forward?

Sure. If you look at the sequential build, about $2 million of that came through in additional selling costs, and about $800,000 in marketing. We had a little bit of overhang from the Bentley Prince Street, a full-quarter impact of that in the admin area of about $800,000. And then on a sequential basis, incentive comp was about a $1.5 million increase.

But to drill back into your buckets between headcount additions and the FLOR store, it's probably about half and half headcount additions that we did, primarily in the Americas in the back half of last year, as well as the additional incremental five stores that went in in Q4.

Going forward, we are continuing to try to drive it down, but I would say around $58 million or so in first quarter next year is what we are internally targeting.

Okay, great. That's helpful. Also, given that Bentley Prince Street is out of the equation and it's much cleaner in terms of what you report on the modular side, when you said that there was a 4.6% increase in orders, is that -- can you distinguish between is that a 4.6% increase in units or should we think about it differently?

Yes, roughly, you can think about it in terms of unit sales. We did a pretty good job raising prices, but we didn't have significant price increases in 2012 due to raw materials. So yes, that's roughly the same in units.

Okay great.

Materially the same.

You talked about the first six weeks, Dan, seeing some improvement in overall sales, orders up at least 6%. The Americas are up double digits, but how are we doing in Europe and Asia?

Well, Americas was up 18% actually. We said double digit -- I think Patrick gave you the number. Asia was up 8% in the first six weeks. Europe was down significantly in January and rebounded in February, where now it's down 13%.

Thanks so much.

Mike Wood, Macquarie.

Hey, guys. This is Adam for Mike. Just a question on the decision to redo the Australian plant. What made you do that instead of maybe permanently shipping from China?

We are not competitive leadtime-wise. Australia market is three weeks, and the leadtimes from those plants are more like 11 weeks. We had a really custom make-to-order business as well in Australia, and you really can't do that from Thailand or China. And we just felt like the number two market for us that we didn't want to forfeit that to an import model.

Okay, great. And also can you talk about Asia-Pacific growth in 4Q excluding Australia?

Sure. I think if you looked at the buckets, China was up close to 30% in the quarter in orders, and 20% plus in billings. The Southeast Asia was fairly flat, up a little bit, and then Australia was down.

Great, thanks.

Stephen Kim, Barclays.

Hey, guys, thanks very much. Just to follow up on the orders question, can you give a little more color about the breakdown for Europe and Americas as well?

What time period?

The fourth quarter.

In the fourth quarter, orders -- the Americas was up 9.2%, Europe was up 4.5% in US dollars, Asia-Pacific was down 9%, but that was the split between Asia and Australia.

Right.

And that was -- hold on a second, I've got it right here. Asia-Pacific overall up 2.5%, and then Australia down 15% in orders in Q4.

Right, okay. And I know you've talked a bit about the Australia impact from the fire. It kind of caught us a little bit by surprise that it would continue this long. Can you just be a little more -- give us a little more color on exactly what your anticipation is for the bleed-out of that impact; sort of how we are going to see the impact of this fade over the next couple of quarters?

Well, this impact is going to continue on. We are still struggling with 11 week, 12 week leadtimes sourcing as an import-only model, and frankly we will deal with this until the new facility is up in Q4.

Okay.

So we are continuing to have the impact. Sequentially, the impact was -- we understood it a little bit better, but the strengthening in the business seasonally we didn't get to realize the benefit of how that business builds throughout the course of the year. So the impact was a little more meaningful in Q4.

Okay. No, that's fine. And then lastly, obviously, the opening of the four new stores here for FLOR is great. Can you remind us again what your expectation is for additional new store openings in 2013, and remind us again of how you evaluate when or where you may open new stores? I'm just wondering given the success that you've had so far if you are reconsidering maybe having longer-term more opportunities to open stores than you may have thought a year ago.

I would say that we think there's 30 major markets that we need to play in. We have got three on the drawing board in the next four months -- Austin, Minneapolis and Miami. And then a second store in Chicago is the next one. If you look at demographics, density, income, and we have done a pretty good study of where those regions are, and you couple that where you are selling product through the catalog ZIP code wise, and that sort of drives us to where we think we should be.

And has that increased over the last year in terms of have you expanded your view of what you think you can do?

I think the next thing for us to do is test second-tier markets like a Charlotte, and that's something that we will do.

Got it. Perfect. Great. Thanks, guys.

John Baugh, Stifel Nicolaus.

Thank you, good morning. Just a point of clarification. When you give out all of these orders in the Americas was this, is that backing out for retail or is that inclusive of it?

That's inclusive -- the Americas is North America modular, which would include the residential business FLOR as well.

Okay. And then do you have enough FLOR stores open for well over a (technical difficulty) some sense of how they're (technical difficulty) or any metrics how they are ramping?

Same-store sales are up about 20% on a year-over-year basis, and the FLOR stores all in, all 18 stores for the full year were profitable, about 4.5%, 5% as a group to the EBIT line, even with 11 of those 18 stores open less than 12 months.

And is there -- when you look at (technical difficulty) Australia (technical difficulty) will there or will there not be some business interruption in (technical difficulty)?

Yes, we anticipate a business interruption claim, and we expect to file the first one of those type claims by the end of the first quarter.

And would it be your expectation that -- you know, (technical difficulty) to a number, obviously, since these things are negotiated to a degree, but would the expectation -- it would be as you break out these numbers quarterly (technical difficulty) by the impact of the fourth quarter getting half of it, a large part of it, a fraction of it? I don't know if you can provide any color.

Our expectation is to recover all of it.

Okay.

As you know, that's always a negotiation with insurance companies.

Okay.

It is always a fight.

Yes, understood. And the new plant would come online late year -- early fourth quarter, late fourth quarter? When would you expect to be able to transition out of the Chinese factory to get those (multiple speakers)?

Our expectations and timelines say September. Looking back in history, you usually miss that a little bit, but I think for sure we will be open sometime in the fourth quarter.

Okay. And then my last question is switching back to tile in the Americas. I believe you commented that both government and education were up, I think both in shipments and orders -- maybe you could review those numbers again. And my impression was those were challenged end markets with state, local and federal pressures. Could you comment there about market share gains and then maybe prospects for 2013? Thank you.

Yes, I would say that the education -- we have been outperforming that market. If you looked at the education market, it has been under pressure, particularly K through 12, in the public universities, but I think we are converting more of that to carpet tile. And the government business was down most of the year until the fourth quarter.

And was the government (technical difficulty) fiscal year-end spending all that money to catch up (technical difficulty) outlook for 2013?

I am not sure. It is also comparable to -- their year end is in the fourth quarter and it's also comparable to last year. We have got an emphasis on government. We've hired some new people around the government business.

Great, thank you. Good luck.

Matt McCall, BB&T Capital Markets.

Thank you, good morning, guys. So, Dan, I think you provided some anecdotes about margins by geography. I think in the past -- I don't know if your are willing to give those percentages, but if not, can you just talk about it maybe relative to the 9% that you did roughly for the quarter and the year, where Americas, Europe and Asia kind of ended up?

And then I'm trying to basically incorporate what you said about FLOR, what you said about China, what you're saying about the trends in Australia, and what we should expect from a segment profitability perspective this year.

That is a mouthful, Matt.

That was like three questions.

I would say that in the China business, I think we lost about $1.5 million this year. And I think we expect to make $1.5 million to $2 million this year coming up. The same thing in the FLOR store business. We lost about $1.5 million, and I think we anticipate making about $2 million. So those give you sort of those deltas.

The margins in the United States are the best in our business. It used to be Australia until the fire. So we are double digit in the Americas business. Europe is running about 8.5% to 8%. And then you've got the impact of the Australian business. I think Austria is running sort of around the 10%, but it used to be double digit higher than that.

As a group, Asia-Pacific is 11%.

And then how should we expect that to trend? I think I remember Europe having the most leverage in the past. Is that still the case? Should we assume --?

That is still the case. If we could get the top line growing in Europe, you would see some pretty good margin expansion in Europe, and you would drive down the SG&A cost.

Okay.

As a percentage of sales.

So back on the SG&A question. Patrick, thanks for the clarification on where kind of the spending occurred, I think in response to another question. But I looked back at the transcript and you guys had talked about continuing the trend of leveraging that line. What areas I guess surprised you or were above your expectations versus when we had the call in Q3?

I think fundamentally, the decisions we really anticipated further gross margin expansion, to be honest. I think we knew the headcount additions were underway, the overhang in Bentley Prince Street and admin costs wasn't a terrible surprise. Maybe a little bit on the incentive side, maybe $750,000, $800,000 there.

But we really, I would say, knew those SG&A costs were going to come through, but we really anticipated a higher sequential improvement in gross profit margin. We fell a little short of our internal expectations, principally in the Americas division, related to some manufacturing inefficiencies early in the quarter. But from an SG&A perspective, there were a few little surprises there, but thought honestly that we would leverage it or pay for it through additional gross margin expansion.

Okay, so the step down back to $58 million is just -- it's basically --?

That's largely a function of the seasonal build through the quarter where Q1 is always our weakest top line, and the variable comp associated with those lower sales commissions, etc., yield a lower SG&A amount (multiple speakers).

Okay, so just the variability, all right. And then, Dan, I believe you mentioned something about international opportunities, and I apologize, you talked about converting more to carpet tile. Is that -- did I hear that right? Is it an international -- was it an international comment?

No, I think it's the whole non-office conversion, hospitality, education, retail space, healthcare.

Okay.

It's converting those markets from broadloom and even hard surfaces to carpet tile.

Okay. So this is --.

We are having some pretty good success in the hospitality region, and we are going to take that more international, more global.

Okay, okay. So the SG&A spend tied to selling, is that going to remain elevated as you are continuing to pursue some of these relative --?

Well, I would hope that we can get some topline growth in 2013. Our goal is still to drive SG&A as a percentage down closer to 24%, in that range, 23.5%.

Okay.

And we are taking a very tough view of SG&A and making investments in salespeople pretty much, and that's all we are trying to invest in.

Okay, okay. Very helpful. Thank you, guys.

Sam Darkatsh, Raymond James.

Good morning, Dan, Patrick. How are you?

Good morning.

Most of my questions have been asked and answered. Just a couple of housekeeping items. The insurance proceeds -- I mean, obviously, the Australian fire impacts the EBIT line, and the investment community will look at that as operations. Do you know yet when you receive the proceeds what line item that would be on the P&L? Would that be above the line, below the line? How should we readjust our models for that?

That will still be above the line, but probably depending on how material it is if we break it out as a separate line item or not.

Hopefully, it's really material. If you were hitting $2 million or $3 million a quarter of negative impact, I would think the insurance proceeds would be real material, no?

It will depend on how it comes in, yes.

Oh, whether it is drips and drabs or whether it's one big check?

Correct.

Okay, got you. And then I think you mentioned the expectation for the FLOR stores at $50 million. Is that correct for 2013?

That's right. Our internal -- yes, between $40 million and $50 million, and moving from a loss of about $1.5 million to breakeven, to upside at $2 million next year.

So you talked about the same location sales being up about 20% in the quarter. That $50 million, what does that assume on a comp basis?

No, I think it assumes the 15% kind of growth in stores that are anniversary, Sam.

Okay.

We've been doing better than that, but that assumption is 15%. We only have two stores that are over two years old.

I was going to say, because the more stores that roll into the comp base, I would think that your comps would improve, not --.

They would, you're right.

Okay. So the $50 million could be conservative if for no other -- or no? Or am I just --?

I would say $50 million would be a healthy increase from where we are today.

Okay. Last question, I think you touched on it a bit, the raw material environment. You mentioned that I think you maintain the ability to pass it through. Is there a commentary or did I miss it with respect to whether you are seeing inflation over the next quarter or two? Well, benzene is up and I guess caprolactam is down. How does that shake out on an overall basis prospectively over the next quarter or two?

I would say to date, the fiber guys typically talk to us at least a month ahead of a price increase, and we have not had that conversation with them yet. So it has been pretty quiet going into this year.

So at least over the next 30 days, there is nothing expected?

Right.

Yes, through Q1.

Okay. Thank you, gentlemen.

Keith Hughes, SunTrust.

Thank you. My primary question just on the market in the United States, some of the numbers are looking exceptionally well here for the US. What do you think is going on in the market, and is any of this numbers you are seeing share gain by you?

Well, I don't think the commercial overall market is doing that well when I look at the numbers on the commercial side, so I think we're obviously having share gains in the commercial US market. I think there's a lot of pent-up demand. I think corporations, what we are seeing, are hiring again and they're upgrading their offices, trying to go after some of the talent out there.

And this whole thing around creative nesting and density, they are creating the collaborative space and then that plays to us. The office market looks good, but we are also having success in the non-office, and to me those are definite share gains for us.

If we focus in on office specifically, we went through a real soft patch in office in the last year, year and a half. Do you think the corporate activity in office is just picking up across the board?

Yes, I think if you look at the ABI index, you can see that coming through that, and I think there is a lot more project activity in the pipeline related to A&D.

Is there any sub-industry you see in there that looks better than others, or is it (multiple speakers)?

Well, the technology side of it really look good for us -- the Amazons, the Googles and Apple and so forth. So that whole technology quarter has been good, and the banking has actually been pretty good.

Okay, final question. You're probably headed towards a good year here for free cash flow generation. So two questions on that. First, Patrick, what is the CapEx estimate for 2013, and do you have any plans for future free cash flow?

Yes, CapEx next year will be $35 million to $40 million-ish range, comparable to where we were this year. I think we did about $41 million this year. And that is net of all the insurance proceeds of the Australia business and the replacement assets there. So this is just core CapEx spend.

And we are continuing to evaluate our options with our cash on the balance sheet, continuing to look at opportunities for debt repurchases and other opportunities there.

Okay, thank you.

Keith, I would say that we are going to use our free cash flow to do something around what Patrick talked about, sometime this year.

Sometime this year, okay, thank you.

We are not going to let it sit on the balance sheet and grow.

Yes, it's not doing anything for you there. I guess just to build on that, Dan, what is your view and the Board's view on share repurchases in the future as opposed to --?

Right now, we have been pretty conservative with what the rebuild of Australia is going to look like, and we've been conservative. I would say you sort of run the numbers and see which one makes more sense, repurchase the debt or buy back the stock.

Okay, thank you.

(Operator Instructions). Glenn Wortman, Sidoti & Company.

Yes, good morning, guys. Just assuming stable raw materials and pricing for the moment, with the sale of Bentley Prince behind you, can you just give us your gross margin expectation for 2013, and then any longer-term target you may have?

Well, we continue to have expectations that we can continue to leverage this manufacturing base and looking for -- I think we finished the full year at 34% even. We are looking for at least a 100 basis point increase for the full year next year on a conservative basis, if we see a normalized environment that we've seen in 2011 and 2012. And perhaps maybe even a little bit better environment with some top-line growth, we should to be able to leverage that nicely over 35%.

Okay. And then what were your total FLOR sales in 2012? And then, Dan, if you could just update us on any longer-term goals that you have for that business?

Well, we haven't given out that number, but it's around $34 million in sales in the FLOR stores this year, 2012. I have always said that we need to get it to a $100 million business for it to be material to Interface, and that's sort of our goal for the next four years.

Okay. All right, thanks for taking my questions.

Philip Volpicelli, Deutsche Bank.

Hi, Dan and Patrick. This is Sean Wondrack sitting in for Phil. My first question, just housekeeping item; what was your revolver availability at the end of the quarter?

Well, we have both the domestic and the European piece, both undrawn. Order of magnitude is over $90 million of availability under both combined.

Okay, great. And what are your expectations for cash taxes going into 2013?

We will pay around $15 million to $20 million in cash taxes next year.

Okay, great.

All international. We still have a significant NOL in the US.

Okay. Going forward, do you guys have a long-term target leverage profile you expect to stay between?

Under 2 times levered on a total debt to EBITDA basis, and we are underneath that today. So we are very comfortable with where we are from a leverage perspective.

Great. And I believe you guys still have that special 103 call option on your notes. Would you consider applying that in 2013?

Yes, have that in consideration for sure.

Okay, thank you very much and good luck.

John Baugh, Stifel Nicolaus.

Just a quick question on FLOR. Is there going to be a requirement for any voluntary (technical difficulty)?

Sorry, John, you have to repeat that.

I don't think we have had that to date. Obviously, that's a moving target with the SEC what you report on segments. But we don't have -- to date, we are not breaking out FLOR in the segment reporting.

Thank you.

David MacGregor, Longbow Research.

Yes, Dan, in the press release you detail the growth you are seeing in the Americas in each of these verticals; corporate up 16%, education 14%, hospitality up 63%, which really catches the eye. I wonder if you could just maybe -- we've got a couple minutes here -- if you could just drill into that a little further? Is this a function of just adding salespeople and as a consequence share gains, or is there something else that you are doing there?

I would say -- and not to try to give my competitors my roadmap -- but in the hospitality area, we made a pretty big investment in that. We have added salespeople, we have added a lot of marketing literature. We have come up with a concept called Design Your Floor, which customizes what the hotels want. And so I would say that the investments are starting to pay off in the hospitality. And that is one thing I know about hospitality, it's a global business and we think we can leverage that outside of the United States and socialize it.

And then we are having success, particularly in education, with -- I think education is moving to carpet tile. And I think we are leading that and led that in 2002 when it had a low penetration, and we are just seeing the fruits of a lot of that effort there. And we are going to make a big push into healthcare as well, through biophilia and some of the products that we are introducing. So we are investing in all those segments and we are getting some benefit from it.

And just kind of a related question, you mentioned the Design Your Floor offering, I've always thought about you guys competitively as having somewhat of a unique design to order kind of a low-velocity, high-mix model. Competitively, are you seeing other people begin to develop that capability? Are you feeling a little more pressure on that part of the --?

No, I would say that one thing that we are trying and having success in, and we are also paying for it, is that we are going more and more to a small-order custom business, and our runs in the US plant are significantly going down. We are making a lot of runs of 200 yards, and I don't know that our competitors have the stomach for short-order runs the way that we do. And we think it's a competitive advantage if we can get it right.

Right. Are you able to price it appropriately, or is there still some pressure in terms of what you are able to get for that?

No, I would say the US, we had some pretty good improvement in the price. I will tell you that the market for the tenant improvement is expanding from broadloom to carpet tile, and that is a different profile model in the TI. And we are trying to figure out how to play in the TI, the three to five-year lease space. But no, I think that from a margin standpoint and pricing standpoint, we are doing pretty well in the US.

Can you be specific about what the differences are in the TI?

Well, TI is just a low product, it is a low-end product. Average TI is get in for broadloom at $9. So I think there has been some movement into selling $12 carpet tile in that market that we really hadn't been playing in.

But you feel you are appropriately positioned with respect to the distribution, the process, the sales representation?

Yes, we are. We just haven't -- we have had a lot of capacity constraints in the US as we are running it 24/7. So we haven't decided to go into that market.

Right, right. Thanks, good luck.

We have no further questions at this time. I will now turn the call over to Dan Hendrix for any closing remarks.

Well, thank you for listening to the call, and I hope that 2013 is going to be a really good year for us. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect, and have a great day.