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’ll be your conference coordinator for today. [Operator Instructions] Thank you. At this time, 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 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 An archived version of this conference call will also be available through that website.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 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 the 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 rebroadcasted 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 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 mix 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 customer’s 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 U.S. 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 in almost all non-office office 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 in this businesses continue to gain in the market. Our national expansion of the FLOR store network remain on track in the quarter and we added four stores, Portland, Seattle, Palo Alto, Scottsdale, bringing our total stores to 15. We just opened our first non-U.S. store in Toronto, and stores in Denver and Manhattan opening in the fourth quarter. We expect to have a total of 18 stores by year-end. The additional of Manhattan, we now have three stores opened in New York City. We’ve also identified additional markets for expansion in 2013. More stores that have been opened…

Thank you, and good morning, everyone. I’ll take a few minutes now and talk about the financial highlights for the third quarter. Before I begin 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 would like to note that we have not recorded any amounts for loss profits or business interruption stemming from the Australia fire. We anticipate that we would recover those amounts in the future. With that, sales for the third 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 a record quarterly sales in our U.S. modular business primarily driven by our retail corporate office, hospitality, healthcare and residential markets, 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 U.K., Germany, Scandinavia partially offset by softness in Southern Europe, particularly France and Spain. As Dan mentioned, our Asia-Pacific business felt a headwind of the Picton fire resulting in shipment delays to you about $7 million to $8 million negative sales during the quarter and this 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. Although, we expect to see growth from this region in sales and orders…

[Operator Instructions] Our first question today is from the line of Stephen Kim from Barclays.

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

While I’m particular around Europe, they finished up 3.3% in local currencies, and I think perhaps that was what we had referenced, they were down in U.S. dollars around 8% top line. The trend generally throughout the quarter, 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 due to 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’d previously guided like 20% to 25% overall, but how would that be in Europe just due to the actions you’ve taken?

I mean in 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 incremental contribution margin. So they’re probably, historically have the north of 20% to 25% range, probably low 30s-ish.

Okay, all right. Well, thanks, I appreciate that.

Our next question is from the line of Kathryn Thompson from Thompson Research Group.

Hi, thanks for taking my questions today. You typically at least in last conference call with some clarity about the sales growth in your major markets, Asia, Australia, Europe, Americas. Would you do that not only in local currency as you did for Europe just a few minutes ago, but also 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 were going, but by a market also where we are going to 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 of being up 3% shipments, and local currency down 8% in U.S. 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% to 23% decline in top line in Australia, obviously related to the fire. In rough terms the order trends here in the first couple of 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 that early stages in Europe are up low double-digits in U.S. 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. Yeah, I think Asia is actually up.

Yes for blended mid single-digit kind of order pattern here early in the quarter.

And maybe if you guys expand a little bit more on Australia and what the residual cost to be associated with fire going forward?

Sure.

And really separating out from, how much of the impact is just trying to meet demand versus having to do 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 and our supply chain will get back up online 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 a $1.5 million to $2 million of pretax earnings, but did not come through in the quarter. The other incurred, so we have not recognized any of that lost profit 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 in the income statement. I hope that answers your question.

Just like $8 million to $10 million top line loss?

$7 million to $8 million.

I’m sorry, what was that?

$7 million to $8 million…

$7 million to $8 million, sorry, okay.

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

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

Right now we’re still around the $6.2 million, $6.3 million, is probably a good number to model for interest expense for now. We are 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.

Our next question is from the line of Mike Wood from Macquarie.

This is Adam in for Mike, just two quick questions on growth. Can you break 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 U.S. dollars?

Yes, that’s all in U.S. dollars.

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

It’s very stable. There is 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.

Our next question is from the line of David Macgregor from Longbow Research.

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

This is Dan. Typically, stores take about six months to get up and become profitable. And once you annualize that’s the ones that are running at a 15% operating contribution. We’ve opened, this year we will have open about 10 stores to-date, and so you have a drag on profitability from the stores that we have recently opened. We’ll start anniversary-ing next year by 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 other stores that have anniversary. But if you look at Atlanta market, you look at a Scottsdale market does more or like $1 million to $1.5 million revenue stores.

Okay. And are online sales significant at this point Dan?

Yeah, I mean online sales were actually more than the store sales to date. We’ve got the three-pronged approach is driving through a catalog, driving through the web and it driving through the stores. Yes, our 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 up with that shortly I mean $30 million is where we’re at -- $30 million plus this year headed to $40 million.

$30 million plus in 2012?

Yes.

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

I would just say in Europe, we generally know that it’s down and we’re taking our UK business is actually how resonance up and we don’t believe the market there is up. If we 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. But the overall European market is not up the way we’re up in those markets.

Okay, and from a vertical standpoint?

Most of its office, I mean you’ve got about 70% office, and 30% in non-office there and the office is where the growth is coming from.

Okay. And then there’s been some restructuring over there. So could you help us understand just what margins could potentially get to in Europe once you get back to full capacity with this lower break-even point?

Well, I mean in the margins profile, our European business is very good right now, despite flat kind of top line. I mean they’re putting up high-single, low double-digit kind of operating income levels, I mean 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 talked about...?

We are about 60% over there.

About 60% there?

Yes.

Okay, great. Thanks very much guys.

Our next question is from Sam Darkatsh from Raymond James.

Just piggyback on Dave’s question there regarding the FLOR stores. Can you ballpark quantify the actual dilution in fiscal year 2012 from the FLOR store initiative?

I would say we’re going to lose couple of million dollars in that business this year – we expect to make money next year.

So as I recall your opening was seven or eight stores next year, so that…

We have identified seven or eight markets next year, yes and we will 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 or did you feel you’re on track to do a $100 million by the end of next year or how should we look at asset?

I would say would be very aggressive to get from $40 million to $100 million, but I’d say our goal is to grow at 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 costs cutting in Europe and we’ve done some restructuring in Europe. And so you’re getting that benefit of, when you get a 3% growth in local currency in Europe. As Patrick mentioned there was about a 40% flow through in the growth that we got there. So Europe has moved profitability based on volume and lower SG&A costs. In U.S. is probably inline on SG&A costs and you’re getting flow through on the top line there as well.

On a sequential basis? Okay. All right, thank you both.

Yes.

Okay. All right, thank you both.

Our next question is from the line of Keith Hughes from Suntrust.

Dan, in the U.S., are you getting any indications maybe that orders, but just indications from customers of kind of burgeoning commercial or either construction or innovation for 2013, here in outlook you’re developing from your…?

We have a pipeline that we look at that close up 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.

Okay. Will we see the FLOR store financials broken out more detail in the future?

Right now, 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 talked about the cash conserving around the fire and expenses associated with that. Beyond that has there been any more board level discussion of like future uses of cash flow are going to be for…

Yeah, I would say that Keith, we discussed that in the last board meeting, and based on the fact that we are looking to do something in Australia 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.

No, decisions for what it will look like in ‘13 yet?

No, we will probably discuss that in January.

Okay. Thank you.

Our next question is from the line of John Baugh from Stifel, Nicolaus.

Could you just give us the backlog figure at the end of the quarter?

Yes.

And while you are looking that up, the business interruption in terms of what we anticipate getting that in the fourth quarter and I guess if we do that would capture from the time of the fire on and 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 would see some cash recovery around the property and equipment portion of the claim only to come through in Q4.

There is a lot of discussion around tile backing systems Dan., And I wonder if you could sort of share with us what you see happening the trade and what you are doing currently?

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

Okay. And most of my questions were answered on FLOR, but I was wondering, you mentioned a three-pronged approach. Is there, what is sort in the commitment to ad spend or catalog spend or, however, you define it, now that you are opening the stores and how does that work in terms of percentage of revenue. That’s something that gets leveraged as you open stores, do you cut back…

Yeah, I would say that we did cut back a little bit to catalogue this year. We remain on about 5.5 million catalogues here with the 4.5 million catalogues. So we are cutting back to 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 that digital space.

Okay. Did you get your hands on that backlog number Patrick?

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

Great, I appreciate that. Thank you, good luck.

Our next question is from the line of Matt McCall from BB&T Capital Markets.

So I think you talked a little bit about incremental margin, I’m just trying to get a hang on the gross margin. I think we talked about targets in the past maybe gain of exiting the year of 35%, I know obviously Australia has an impact there. But maybe just total, how we should look at gross margin, Q4 out into next year? And Patrick, maybe on price costs 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 U.S. and in China, and in Thailand and Australia is obviously [Audio Dip] 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 is there any pressure in Q3 or is there…?

On either side really our average selling price trended nicely in the quarter and it was pretty stable from the raw material perspective. We didn’t really see a 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 are 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 it was the only weak spot at least in the U.S.. Could you quantify the impact on the year-over-year basis of the government?

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

And how much is it as a percentage of the total, approximately?

We try not to give all that out to our competitors.

Okay, it’s down 10%. The comps got to be getting a little bit easier there pretty soon, right?

Yeah, I think the government pieces hopefully will stabilize here. That’s around the world too, I mean 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 aerospace, I don’t think you’ve mentioned some of the other, I guess experimental markets if you will, any update there on the progress?

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

Okay. Alright, thank you.

Our next question is from the line of Philip Volpicelli from Deutsche Bank.

This is Sean Wondrack sitting in for Philip 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, and I think that’s roughly $27.5 million. Has there been any more discussion about that, I know you are trying to be conservative with cash, so I didn’t know if that was going to be held off or what thought about that?

We’ve had some discussions internally, 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, I know you guys discussed what is going on during the quarter. Is your outlook pretty much in line with what you are saying, or do you expect has an uptake or I mean down a little bit?

Right now I think, we expect it to be pretty quiet today what we are seeing.

[Operator Instructions] Moving on to our next question, another question from the line of Steven Kim from Barclays.

Guys, I just had a longer-term question for you. One of the things that I found in trigging 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, then exists some of your more developed markets, or something else that demonstrates your proficiency in attacking those market opportunities? Thanks.

Yes, 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 these markets, and we’re unique in that. We have about 700 sales and marketing people around the world. 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 is an architect that you that specifies particularly Class A space. And you are right, particularly in some of these markets, because there is not a lot of Class A space. But we have operation sales people in Latin America, which is one of our biggest emerging markets. We built a plant in China that service the Chinese market, we have a plant in Thailand that service the Middle East and India market, and we have a plant in Europe that service Russia and Eastern Europe markets. So we are well positioned in on the ground in all of those markets, representing 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 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 is 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 people’s products. So in our mind, you get a specified, you go direct and you go-to-market like you do in the United States of, because a lot of these emerging markets, the architects, designers come from London, they come from New York. And so to me, the go-to-market strategy with the distributor, you get very marginalized in that conversation, and you get very commoditized I think. So we’ve never felt like the distributor can actually sell our products.

Great. That’s very helpful. Thanks very much guys.

We have another question in queue from the line of David Macgregor from Longbow Research.

Wanted to just ask you about mix, and 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 that’s because we had a significant raw materials price increases as well that we’ve put through price increases to offset. But I would say we’re playing both ends of that David lower and high, trying to expand it.

And so how does the competitive situation developed at each end of the market? I know there’s been a little bit of consolidation over all 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 that if you look 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 particular with financial institutions that they’re looking for a wealth, growth and so forth. So I’d say it’s both, I mean we don’t have any more price competition than we had last quarter or a year-ago. It’s pretty price competitive out there. We always sell on service, style, quality, design and so forth.

Would you say the mix as a broadloom versus tile at the lower price points versus at the higher price points?

I would say that if you’re going into the $10 sort of broadloom, it’s probably still 90% broadloom.

Yeah. And what about the upper end of 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% carpet tile.

Okay. Thanks very much.

Thank you very much for your question. We have no further question in the queue. At this time, I’d now like to turn the call back to management for closing remarks. Thank you.

Well, thank you for listing 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.