Interface Inc (TILE) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2014 Interface, Inc. earnings conference call. My name is Tahisha and I will be your operator for today. (Operator Instructions).

I would now like to turn the conference over to your host for today, Mr. David [Foucher].

Thank you, operator. Good morning and welcome to Interface's conference call regarding the second-quarter 2014 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 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 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 An archived version of this conference call will also be available through that website.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 risk and uncertainties that could cause actual results to differ materially from any such statements, including risk 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 1-A of the Company's annual report on Form 10-K for the fiscal year ended December 29, 2013 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 the most comparable GAAP measures is contained in the Company's earnings 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 re-recorded or rebroadcasted without Interface's expressed permission. Your participation on the call confirms your consent to the Company's taping and broadcasting of it.

Now, I would like to turn the call over to Dan Hendrix. Please go ahead, sir.

Thank you, David. Good morning, everyone. I am pleased with the sequential progress we have made from the first quarter to the second as we really began to see our business shape up the way we expected from the start of the year.

In our call last quarter, I made a few points about the strong undercurrents in our business and those undercurrents started to flow through in our results for the second quarter.

The biggest top-line story is the continued growth in momentum we are seeing in our European business where the corporate office segment is coming on strong in several of our primary markets, in particular the UK, Ireland, and Germany. Even better, our second-quarter order growth in Europe outpaced our sales growth, which gives us further optimism about the second half of the year.

Our Americas business also continued its recent string of steady growth with nearly all of it coming in the non-office segments like hospitality, retail, and education. Corporate office sales grew at a moderate rate, which means we're seeing the growth in this business without a true rebound in our bread-and-butter office segment. And we believe we're outperforming the rest of the commercial industry. Like Europe, our second-quarter order growth in Americas also outpaced sales growth.

Results in Asia-Pacific business where a bit of a mixed bag. in Australia, we are seeing the recapture of market share following the start up of our new plant in Minto as revenue approached the pre-fire run rate.

China sales also showed improvement after the slow start we saw in the first quarter. Southeast Asia was essentially even year-over-year due in part to political tensions in Thailand but we still made sequential progress over the first quarter. We are also seeing pockets of growth in other parts of Asia.

FLOR was a disappointment in the second quarter, mostly due to under-whelming results from our summer sale event. As we mentioned in our press release, changes are underway, including renewed emphasis on attracting new customers, opening more stores, and driving overall sales growth and profitability. I really like this business, and we've got many of the right pieces in place with our brand, our products and our sales channels. The key at this point is to drive customer traffic to those channels.

We made sequential improvement on gross margin in the second quarter compared with the first but it was down year-over-year. The margin pressure comes from a few different challenges that we are addressing. First, as a company that leads with design, we are seeing an increase in the number of different SKUs specified on customer orders. This translates into shorter, less efficient manufacturing runs in our plants. Second, innovative new products such as planks and tapestry tufting add to the complexity of our manufacturing processes and there is a resulting learning curve involved for our production teams. And third, the start up of our new Australian plant and rebalancing production among our three plants in Asia-Pacific has impacted margin. Australia results began to normalize in the second quarter, and we expect to complete the ramp up and rebalancing in the third quarter.

We have a number of lean manufacturing initiatives and new technologies that we're implementing to address margin pressures and we're making progress, but it simply takes time for these improvements to take hold. In addition, we are doing all of this without the benefit of a rebound in the higher-margin office market in the US. We believe there is pent-of demand in the US office segment and that rebound is on the horizon, which should unlock more value in our gross margin.

SG&A declined as a percentage of sales year-over-year. We will continue to keep a close watch on these expenses in relation to our sales growth.

At the bottom line, we're pleased with our improvement in earnings per share from the first quarter to the second quarter, and it also is up versus the second quarter last year.

Looking ahead, I like our prospects going into the second half of the year. Our Europe business is the best it has been in years with strong top-line growth and improving profitability profile.

Our Americas business is growing despite a lackluster market without the help of an office segment rebound which is yet to materialize, which we believe is coming.

Australia is beginning to normalize as we complete the ramp up of our new Minto plant and recapture market share.

Our product innovations have been very successful with great results from our planks and tapestry design products. We have several new product designed specifically for hospitality and other non-office segments.

The order trend has been healthy, hitting an all-time record, implying to an improving top-line in the third quarter. We are still well below the record high water mark for orders in Europe, so we believe there is plenty of headroom for growth there.

We have work to do at FLOR and we need to execute our initiatives to expand gross margin while containing SG&A, but overall I feel pretty good about the remainder of the year.

With that, I will turn it over to Patrick.

Thank you and good morning, everyone. Now I will take a few minutes to walk through the financial highlights for the first quarter.

Sales in the second quarter of 2014 were up 7% to $260.6 million compared with $243 million in the second quarter of 2013. On a consolidated basis, there was not a significant currency impact on sales for the quarter.

Due to the items Dan has discussed already, we saw a gross margin decline of 34.7% for the second quarter of 2014 versus 35.4% in the second quarter of 2013. I want to point out the 60 basis points improvement versus the first quarter of 2014, and we expect to see margin expansion continue for the remainder of the year.

Dan has already given you the highlights of the sales comparisons, but just to add a little color, we saw an increase in the Americas of about 6% in total with the largest gains being in hospitality up 30%; retail up 21%; and education up 7%. Only the government segment, down 4%, saw sales decline more than a marginal amount. In addition, the corporate office market in the Americas was flat for the second quarter in a row.

On the first-quarter call, we discussed our excitement about the acceleration in sales in the European business, and the second quarter did not disappoint us. Sales increased 15% in US dollars, 9% in local currency. The corporate office segment experienced a significant increase, 18% in US dollars or 13% in local currency. And the order momentum suggests continued success in the region. Overall, we're very pleased with what our European business has done thus far this year.

Turning to Asia-Pacific, we are happy to see a 5% sales increase in total in the region. This was primarily due to the results in Australia where we saw a 9% increase in US dollars and 15% in local currency. We feel like we're on track there to the pre-fire sales levels in Australia. We hope to see continued sales and operating margins in Australia as we continue on through the balance of the year.

Asia was essentially flat year-over-year with a small sales increase in China offset by Southeast Asia and a slight decline in our Indian market. The sales increases in the Asia-Pacific region were largely within the non-office segments as well.

We continue to make good progress on the SG&A front, showing good year-over-year and sequential improvement as a percent of sales. For the second quarter, SG&A was 25.3% versus 26.5% in the second quarter of last year and 28.6% in the first quarter of this year.

Due to the factors discussed above, operating income in the second quarter was $24.3 million, or 9.3%, compared with $21.8 million, or 9% of sales, in the second quarter last year.

Dan and I both have mentioned we feel pretty good about the progress we made in controlling SG&A in Q2. We still have a ways to go in connection with our continued approach to optimize our cost structure. We expect a restructuring charge in Q3 of around $3 million to $5 million related to some reorganization in our FLOR business as well as some reorganizations in our overseas businesses, as well.

Interest expense in the second quarter was $5.4 million versus $5.9 million last year. Depreciation and amortization was $7.2 million compared with $9 million last year. CapEx were $13 million compared with $18.9 million last year. We expect CapEx again to be in the $40 million to $45 million for the full year.

Turning to the balance sheet, we had $50 million in cash compared with $61.4 million at the end of the second quarter of last year. Inventories were $172.5 million versus $157.7 million, and DSOs were 47.9 days versus 45.3 in the year-ago period. And inventory turns were 4 in the second quarter this year, the same as last year.

That concludes my remarks. Operator, I'd like to open the call up for questions, please.

(Operator Instructions). Mike Wood, Macquarie.

On the SG&A front, you mentioned the objective to keep it in check over the rest of the year. Could you help us quantified that? how much variability might there be based on however sales pans out?

In within the margin, a question. The gross margins being down year-over-year, is that still the Asian plant rebalancing? Has that been fully rectified by the quarter end, or was it reflected in your 2Q results?

Thanks, Mike. Yes, I think the SG&A level will continue to hang around this level. I think that maybe a little bit higher than the Q2 range, that was $65 million to $68 million in Q2 . We will probably move that up a little bit to maybe $66 million to $70 million-ish range in Q3 and the balance of the year on some projected increases in sales. Still planning on balance -- the second half of the year to be mid to high single digit kind of growth top-line for the remainder of the year. So as a percentage, we'd still like to see that down in the low 25s% for the balance of the year.

As it relates to gross margin in Q2, actually, no, it wasn't related to our Asia-Pacific operations at all. And in fact, we saw a nice rebalancing in Q2 and embedded down all of the startup issues that we had in Q1 related to the Minto ramp up and then the slowdown in our Thailand facility, and in fact saw nice gross margin expansion on a sequential basis there in Q2.

Most of the results, gross margin compression really came out of our Americas business in Q2. We had a little bit more of non-corporate office market business in Q2 where the margins are a little bit more compressed, in particular in our services businesses that handles a lot of our large national retail accounts.

Again, our office market was flat again for the second quarter in a row in 2014. And we really just haven't seen the corporate office market come through as we had anticipated at the beginning of the year where the margin profile there is a little bit better than some of the multi-family, hospitality and services components of our business. That is really where gross margins came up a little short in Q2.

Okay. Can you also give the July update? And if you could break out the 10% order growth for 2Q by region, that would be helpful. Thank you.

Sure. Q2 July trend was, in total, down about 4%. The mix across the geographies, the Americas, was up 2%. Europe was down 10%, and Asia-Pacific is flattish here in July.

I do want to call out though, in our European business, we do have a systems conversion going on this past weekend, so we didn't enter orders for a couple of days last week. So probably more realistically down mid-single-digit here in the early part of July in the European business.

The breakout of the Q1 10% order trend was Americas up 10%, Europe up 15%, and Pacific was flat.

Thank you.

Josh Borstein, Longbow Research.

Could you talk about the progression of the quarter, how it played out and if you saw any significant differences in the months that might indicate where the business is heading over the next few months?

I would say if you look at the order pattern throughout the quarter, April was up mid single digits. May was really strong at 15% plus, and then June settled back in around mid to high-single-digit order growth. So, we had a little bit of volatility, but the momentum really has been fairly consistent really for the balance of the year.

Okay. And Dan, when you say that rebound in office in the Americas is coming, what indicators are you looking at to give you that suggestion? What are you seeing that might suggest the rebound is on its way?

The thing that I look at is the activity, the projects that we're actually working on, and our top line is pretty robust. And that has been frustrating because it really hasn't broken loose yet. I think the BIFMA numbers would indicate the same thing.

But if you talk to our sales force and you look at the regions and you look at the architecture billing index and what's going on with the architects, our people feel like it's coming. It just hasn't really -- the projects haven't really come through yet.

Sample orders are up. Projects we are working on are up. The pipeline is pretty robust. We're here waiting for that to break loose a little bit.

Okay, thank you for that. And then last, on the gross margin, how should we think about it for the balance of the year, or for the full year rather, with respect to the informal 100 basis points of gross margin improvement that we had talked about earlier?

I think the progression will continue through the balance of the year. I think we will see some margin expansion through the balance of the year. I think we have the Asia-Pacific situation sorted out, the rebalancing. The momentum in the European business continues.

The question mark really for the balance of the year is how much of this corporate office market with the higher margin profile business will come through. And that is to be determined.

But I still think that there is expansion for the balance of the year. Probably now might not be the full 100% or 100 basis points but we might be in the 75-ish basis point improvement for the full year.

That is helpful. And then if I can just sneak one more in, the business in Australia bounced back nicely. Is that mostly macro, or have you also taken back share from what you ceded from the fire?

Yes, I think it's a combination of both. I think it's some share gains and service and delivery times being collapsed now, our ability to recaptures some market share that we have lost. And I think the general tone across the Australian economy have been decent to good. So, it's been a combination of both really that I think has helped the Australian business in total.

Thank you for the color, and good luck on the rest of the year.

Keith Hughes, SunTrust.

Two questions, one on FLOR. What kind of performance did you see from the unit in the second quarter or first half, however you want to deal with that, and what kind of restructuring -- what type of things are we looking at?

And then number two, in the corporate office space, are there any signs from the order pattern or at least your indication with customers that, in the US corporate office, that's going to improve in the second half of this year?

Well, as it relates to FLOR in particular, I'm not sure. When you use the term units, I don't think you are talking about the division in total. And we saw sales down and an operating loss of $1.7 million for the quarter. If you were drilling down in particular on the stores, the stores themselves were flattish on a year-over-year same-store sales basis and just eked out a mild profitability of 1% as a group on a four-wall basis. So that's a little bit of color around FLOR.

In particular, the reorganization, we're just going to look at what leverage are infrastructure costs or synergies that might exist there, see what opportunities we can probably try to do -- do more with less across that segment.

Like have an SG&A, a hard look at SG&A, is that a fair way to --?

Yes, in particular yes, probably SG&A dollars and so forth on the corporate office market.

Yes, the office market, we have been waiting for the rebound really for probably the last three quarters, and everybody is waiting on the rebound. You are waiting on the rebound. And just the activity is really good, but it just really hasn't come through in the form of orders yet. People are still delaying projects and not letting go of orders.

Okay, thanks.

Sam Darkatsh, Raymond James.

If we could continue a little bit on FLOR, Dan, the integrating of the business and saving some money on the cost side is good. What are you seeing? I know you are changing management so you may not have done a complete deep dive yet, but what needs to happen or change from a marketing standpoint specifically? You mentioned a summer sale that perhaps was a little disappointing. Where do you see a go to market strategy that may differ from how you are marketing currently?

We have tried a lot of things around how to acquire customers around the catalogs, around the Web, around social media, and I just don't think we have been nearly as effective as we can be. So a lot of the focus on really how to go out and acquire customers, how to make the catalog more effective and how to create a mailing list that creates transactions. And so we're going to look at really what is going on in the marketing side to drive customers.

I believe the stores are right. We have created a brand. The product I think belongs in the home and if we can get somebody to walk in that store, typically they buy, or if they go to the Web, they buy. Conversion is pretty good. It's just we don't have enough customers going through those channels yet. And we need to drive the -- so the question is really acquisition of customers.

So, how do you now look at the right size of that business either whether you want to talk about it from a store base or a sales base, store owned versus franchise. How do you look at the prospect of FLOR having going through some of the growing pains you have now?

I think there's 30 major markets in the United States we need to be in. And so we're going to look at getting into some other markets that I think we need to be in.

But the store footprint is not 100 stores. It's probably 30 major markets that I think we should be in. And I think it's a real Web play for us. As people get comfortable with FLOR, they don't really have to go to a store. So, we're looking at what goes on in that geographical ZIP codes around driving business through the Web and through the store. We need to just drive more people there because we will convert them to customers if we can get them in there.

Thank you. Then the next question, Patrick, it appears as though consensus expectations for 2015 are assuming roughly a 30% incremental margin. I know you have talked in the past 20% to 25%. Where would you feel comfortable from an incremental --? I know part of that is going to have to do with volumes, higher volumes, higher leverage. But where do you feel comfortable right now from an incremental margin standpoint?

That's a good point. Yes, historically, that's where we have tried to position the business around the 20% to 25% levels. That is what we geared towards internally around compensation structures and otherwise. So yes, 20% to 25% incremental contribution margins overall is an area where we are much more comfortable.

Okay. And last question if I can sneak it in, Europe really seems like it has turned a corner. Is it beyond UK or is this just UK just kicking it right now?

It is a combination of most of our major markets, the UK, Ireland, the Benelux region, and some strength out of our German business, as well. We're still seeing (technical difficulty) in France, which is a key market, but starting to see some signs of improvement there, as well. But those are the big drivers for our European business.

Where is the SG&A right now in Europe? Is it sub 30% now?

Right at it, yes.

I think it's 29% in the second quarter.

Okay. All right. Thank you both. Thank you much.

John Baugh, Stifel.

I wanted to just confirm or go back. Patrick, you made a 75 bps comment on gross margin. Is that for the year question? I think you did 35.5% last year so you are guiding north of 36% for the year basically?

Yes, we're still trying to work towards that for the balance of the year.

Okay. And then I was wondering if we could talk about SG&A. And you mentioned Europe there. So we're getting leverage I presume on SG&A in Europe. Can you just go around the key business areas and talk about SG&A, where you are getting leverage and where you are not currently and how that may look in the second half?

Yes. We are continuing to see good SG&A really management. We had a nice pretty robust flow through in our European business, as you can imagine. In the earlier, the last question, we finished around 29% but we had really good incremental contribution margins across the European business in Q2.

The Americas business continues to manage SG&A very well at 21% kind of levels. And Asia-Pacific overall was in the 25% range, which historically is where they have been.

So the SG&A management globally really has been pretty good. And the leverage in Europe was great. The leverage across Asia and Americas was decent.

I assume it was negative in FLOR.

Yes.

It was very negative. I would say, John, if you looked at SG,&A where we really need to work on it is China is high. Europe is coming down, and FLOR is we need to do some things in FLOR to drive SG&A down as a percent of sales.

Okay. And then can we talk just a second about the trends you are seeing? You mentioned a little more complex product offering. Have you seen the mix of your business move to more custom work? And is that a result of the product complexity? How do you see that shaping up over the next 12 to 18 months and what can you really do to address it if we are moving toward a more custom trend, more samples, more complex product line?

I wouldn't say it is necessarily custom. I would just say if you take a 5000-yard order, we used to have two SKUs on it. And if you remember, we started driving Design by TILE and created out of standard products that you actually design your own floor. And that has created where, that 5000 order might have nine or 10 SKUs on it, which mean your shorter quarter runs. And so as you have this make-to-order business and the runs get shorter, it creates some complexity. You have to learn how to deal with it within the plants. That is the biggest trend change within that.

Is the answer to though, Dan, maybe you just have to charge more? In other words, there's only so much you can do with a short order in a plant.

We're actually looking at how to charge more for shorter runs and custom orders, yes. We have actually put in some minimums into that to deal with that complexity.

Great. And then just last, housekeeping, any update, Patrick, on the free cash flow for the year?

Nothing further to comment. We're continuing on. We should see some nice cash flow generation through this back half of the year as inventory levels continue to come down, or will start to come down in the back half of the year as we traditionally generate cash in the back half of the year.

And we refinance when?

It is to be determined, but they are callable on December 1.

Thank you. Good luck.

Glenn Wortman, Sidoti.

Do you have any thoughts on what has been holding back the corporate office market? It sounds like you do expect things to improve but anything you could point to that maybe has been stopping things to date?

No. I think part of it has to do with what's going on with creating density. There's been some articles around density as people, corporations are trying to put more people in less space. And I think there was an article in the Wall Street Journal that pointed to this turn that is coming. It just hasn't happened yet. But your guess is as good as mine about Corporate America needs to start letting go of some of its cash and invest in its businesses and that hasn't happened yet.

Okay. And you mentioned you are still well below the record number of orders for Europe. How far below are you?

Well, it is not orders, but top line. We are still about trending towards about EUR40 million top line below the prior peak in 2007.

Okay. All right. Thanks for taking my questions.

(Operator Instructions). Matt McCall, BB&T Capital Markets.

It might help me -- can you run through the geographies, just the percent of revenue by geography? And then you have given some detail around the margin structure of each one of the geographies. But maybe just as an overview, what does that look like, percent of revenue and then margins by geography?

The Americas is 55%; Europe generally 30%; Asia-Pacific 16%. Margin profile is -- EBIT margin in Q1 in the Americas was 11.5%; Europe was right at 10%; and Asia-Pacific as a group was about 7%, with Australia up over 10% and Asia in the mid-single digits kind of range EBIT profiles.

Okay. And you mentioned Australia was getting back to pre-fire revenue run rate. What about the margins there? Where were they? I think you said just now 10%, but where can they go and when can they get there?

Yes, I think we're starting to -- it's only two quarters in post the new facility and still they did a great job on a sequential basis and trending nicely. I think there's still 15% is in the cards. I don't probably see that this year. But the model is built around 15%-plus operating income there and depending on where the trajectory of the top line is, we could see it next year.

Okay. And then let's see. You talked about a restructuring charge. I think it was FLOR restructuring. You also mentioned some overseas initiatives. What is the anticipated savings there, and what is the timing of that savings?

Yes, well we probably won't -- we won't realize the savings until probably early part of 2015. They are still some things to be determined in some areas, but I think the overall savings in total will probably be on a one to one basis, maybe $3 million to $4 million in total, maybe a little bit more of the total restructuring charge.

Okay. All right. And my last one ties all this together. So, if we are going to get $3 million to $4 million from FLOR in Europe, Australia is going to see an accelerating margin as you ramp that plant; you will get the elimination of the mix assuming the corporate office market plays out. Why wouldn't the incremental be better than 20% to 25%? If your core incremental just on your fixed costs is 20% to 25%, you get all these things on top of it, why wouldn't the margin, the incremental margin, next year be better than that normalized range?

It is certainly potential. I just like to -- our expectations and the way we built the business unit around to give them an opportunity to reinvest in other strategic initiatives that they see that we build our business model around at 20% to 25% structure. But it potentially could be better depending on where we selectively choose to make investments, perhaps, next year.

Okay. And I'm sorry, one final one. The SG&A savings, you have given a few comments there. But can you give more examples of exactly what is going on, what you're doing and where the cuts are coming or are they cuts? Is it just management? What is --?

We're not in a position to discuss the particulars on a conference call right now.

I meant more in the past. What has happened, like what did you do to get to $66 million?

The spending -- most of it has just been curbing incremental spend.

Got it. Okay. Thank you.

Kathryn Thompson, Thompson Research Group.

Just first, focusing on pricing, pricing (inaudible) but also just more generally talking about how much pricing in this recovery has been important to you. Have you been able to gain pricing, or are pricing improvements more a function of mix versus just overall strength in (inaudible) the end market take additional pricing. Thank you.

Sure. Pricing across all regions with maybe the exception of Asia were all up in the 3% to 4% range, 2% to 3% range. Asia was down 1.7% on a year-over-year basis.

I think pricing has been a combination of price increases through product introductions that we have done. But it also has been a bit of a mix shift to mid to higher end price points, particularly in our tapestry and some of our plank products where those are in the value chain mid- to high-end price points. So it has been a little bit of both.

Would you say that your end market has been willing to take pricing? And have you seen any change in behavior in terms of pricing patterns this year?

We haven't really seen a significant change in pricing. I think the behavior has been the same. Pricing is always a challenge all the time, but I would say the attitude has been fairly consistent than it has been in the past.

One of the different things, Kathryn, about the commercial market, it is project by project on pricing, so you don't really have a price increase that you go through the distribution channel.

No, understood. Just our thesis is that pricing really has been more important than volume. And (technical difficulty) seeing behavior changes in pricing that would indicate either a positive or negative in terms of how we think about the recovery.

Yes.

So you answered my question. Thank you.

Josh Borstein, Longbow Research.

Just another question on the hospitality sector. Another good quarter there. What are you seeing in terms of the business? Are these growth rates you think sustainable in the near-term?

Yes, would say that the hospitality rollout globally has been, at least in the United States, has been really successful. We're starting to win some major projects around the carpet tile, particularly around planks in that space. So I think the hospitality market, which has an extremely low penetration of carpet tile, is going to grow, the penetration of that. And we're going to lead it. So I think the growth rates for us in the next three years are going to be pretty robust.

And do you think it is getting easier to make the case for carpet tile in the hospitality industry?

Yes. I think it is becoming an accepted platform.

And is that more -- is it becoming more accepted? I know you've had some success in the lower to mid-price point hotels. Is a becoming any more acceptable on the high end?

We are having success in both. We just got a pretty major order from the Waldorf, which is a pretty high-end brand. They are doing the hotel rooms and the corridors with our product.

And then could you just remind us what you think the penetration is for carpet tile in hospitality and what the opportunity might be?

The penetration is very low. It is probably less than 5% in that space. The market is about a $1 billion market globally for the soft floor covering, and so we think the market opportunity is pretty nice.

Great, thank you.

Gentlemen, we have no more questions in the queue, so I would like to turn the conference back over to Dan Hendrix for any closing remarks.

Thank you for listening to our second-quarter call, and we will talk to you in the third quarter. Thanks.

Ladies and gentlemen, that will conclude today's conference. Thank you for your participation. You may now disconnect. Have a great day.