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Executives

Daniel Hendrix - President & Chief Executive Officer

Patrick Lynch - Senior Vice President & Chief Financial Officer

Analysts

David MacGregor - Longbow Research

Kathryn Thompson - Thompson Research Group

Steven Kim - Barclays Capital

John Baugh - Stifel Nicolaus

Matthew McCall - BB&T Capital Markets

Sam Darkatsh - Raymond James

Keith Hughes - SunTrust Robinson Humphrey

Glenn Wortman - Sidoti & Company

Sean Wondrack - Deutsche Bank

Interface, Inc. (TILE) Q4 2012 Earnings Call February 15, 2013 9:00 AM ET

Operator

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. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to [David Jose] with Interface. Please proceed.

Unidentified Speaker

Thank you, operator. Good morning and welcome to Interface's conference 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 & 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 downloaded off the investor relations section of Interface's website, and archived version of this conference call will also be available be through that website.

Before we begin the formal remarks, please note that during conference call, management's comments regarding Interface's business which are not historical information are 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 and the commercial interiors industry as well as the risk and uncertainties discussed under the heading risk factors in item 1a of the company's annual report on Form 10-K for the fiscal year ended January 1, 2012, which has been filed with the Securities and Exchange Commission. We direct all listeners to that document. And 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 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 released in 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 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.

Daniel Hendrix

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 on to the quarter.

Fourth quarter sales were up about $5 million year-over-year to $249.6 million. Growth was led by 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-digits for the quarter. Asia Pacific sales were essentially even year-over-year with growth in China offsetting declines in Japan and Australia.

As we have 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 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 have leased a building in Minto, Australia, just outside of Sydney and expect manufacturing there to be back on line before year-end.

In Europe we continue to see signs of stabilization in the UK, Eastern Europe, Russia and Scandinavia, which may indicate that we are seeing a bottom in that region. Southern Europe however continues to struggle with it sovereign debt and economic issues. Overall, Europe sales in the quarter were down 3% in local currencies or 7% in U.S. 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 sore 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 continue to benefit from a crossover program that brings four products to the B2B consumer. We have identified additional markets for expansion and we look for FLOR to approach $50 million sales that 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 cost, commensurate with sales increases. The macro environment and project pipeline bode well for continued growth of the Americas and Asia. Orders were 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.

Patrick Lynch

Thank you and good morning, everyone. I will take a few minutes to walk through the financial highlights for the first 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 2012 increased 2.1% to $249.6 million, from $244.5 million in the fourth quarter 2011. On a consolidated basis that was not a significant currency impact in the quarter. As Dan discussed, we saw record fourth quarter sales on or U.S. modular business, primarily driven by our corporate office, education, government, and hospitality markets. And 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 U.S. dollars. This decrease was primarily driven by 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 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 to 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 a result of higher fixed absorption and higher production volume, as well as continued stabilization of our supply chain with regard to the Asia Pacific region.

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 to 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 sales force 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 have made the largest investments, orders are up 18%. In Asia Pacific orders are up 8% despite the fire effect. 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 Australia 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 to $6.4 million in the fourth quarter 2011, including the restructuring charge in Australia fire expense reported income from Canadian 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 2011. Excluding the Australia fire expenses from the fourth quarter 2012 and restructuring from both periods, income from continuing operations was $10.4 million or $0.16 per diluted share in the fourth quarter 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 and 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, where it was $6.8 million in the fourth quarter of 2011. Capital expenditures for the fourth quarter of 2012 was $12.9 million where it was $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 third quarter 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 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 would like to open the call up for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of David MacGregor with Longbow Research.

David MacGregor - Longbow Research

Just with respect to China and Australia and everything that you are 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?

Daniel Hendrix

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

David MacGregor - Longbow Research

Okay.

Daniel Hendrix

I would say that of the production, I am 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.

David MacGregor - Longbow Research

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.

Daniel Hendrix

I would say that looking at the pipeline of activities in China related to new build, 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.

David MacGregor - Longbow Research

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 am 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 -- especially the last year 18 months, comparative elements have made that a little more challenging then it has been in the past. So I am just interested in your thoughts on inflation and your ability to pass that through.

Daniel Hendrix

You know 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 that through now. And 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. So we will aggressively pass through raw material price increases to our customers.

David MacGregor - Longbow Research

Okay. Last question is just on Europe, Dan. I guess the expectations for the first quarter of '13, last quarter you indicated that there have 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....?

Daniel Hendrix

No, 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. 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 is a lot of pent up demand. I mean most of the companies in Europe haven’t done anything since '08 crisis. We are just going to go out and get the business and hopefully we will have a better playing field in '13 than we did in '12. It feels better than it did on in the '12, I would say that.

David MacGregor - Longbow Research

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

Patrick Lynch

It's about 50:50.

Operator

Your next question comes from the line of Kathryn Thompson with Thompson Research. Please proceed.

Kathryn Thompson - Thompson Research Group

Just tagging on the SG&A question. What was split between new stores versus increased comp and also new employees and how should we think about modeling SG&A going forward. In 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 there is a big swing back. So maybe split up between those three buckets and then how should we think about it going forward.

Patrick Lynch

Sure. If you look at the sequential build, about $2 million of that came through in additional selling cost 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 $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.

Kathryn Thompson - Thompson Research Group

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. And you said that there was a 4.6% increase of orders. Is that -- it seems between, is that a 4.6% increase in units or shall we think about it differently?

Patrick Lynch

Yeah. That’s roughly you can think about in terms of unit sales. I mean it was -- we did a pretty good job raising prices but we didn’t have significant price increases in 2012 due to raw materials. So, yeah, that’s roughly the same in units. Materially the same.

Kathryn Thompson - Thompson Research Group

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

Daniel Hendrix

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

Operator

Your next question comes from the line of [Mike Blue] with Macquarie. Please proceed.

Unidentified Analyst

This is [Adam] for Mike. Just a quick question on the decision to redo the Australian plan. What made you do that instead of maybe permanently shipping from China?

Daniel Hendrix

We are not competitive. Lead time wise Australia market is three weeks and the lead times from those plants is more like 11 weeks. We had a really custom, made 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.

Unidentified Analyst

Okay. Great. And then also can you talk about Asia Pacific growth in 4Q excluding Australia.

Patrick Lynch

Sure. Well, actually, if you look 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.

Operator

Your next question comes from the line of Steven Kim with Barclays. Please proceed.

Steven Kim - Barclays Capital

Yeah, just to follow up on the orders question. Can you give a little more color about the breakdown for Europe and Americas as well.

Patrick Lynch

What time period?

Steven Kim - Barclays Capital

The fourth quarter.

Patrick Lynch

Sure. In the fourth quarter, orders, the Americas was up 9.2%. Europe was up 4.5% in U.S. dollars. Asia Pacific was down 9% but that was split between Asia and Australia and that was -- Asia Pacific overall up 2.5% and then Australia down 15% in orders in Q4.

Steven Kim - Barclays Capital

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

Patrick Lynch

Well, this impact is going to continue on. I mean we are still struggling with 11-week, 12-week lead times. So we are seeing it as an import only model and frankly we will deal with this until the new facility is up in four. 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 than Q4.

Steven Kim - Barclays Capital

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 am just wondering, given the success that you have had so far, if you are reconsidering maybe having longer-term more opportunities to open stores than you may have thought a year ago.

Daniel Hendrix

I would say that we think there is 30 major markets that we need to play in. We have got three on drawing board in the next four months, Austin, Minneapolis and Miami. And then a second store in Chicago is the next one. But 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.

Steven Kim - Barclays Capital

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

Daniel Hendrix

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

Operator

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

John Baugh - Stifel Nicolaus

Just a point of clarification. What do you feel about all of these orders with the Americas, is that backing out for retail or is that inclusive?

Patrick Lynch

That includes -- the Americas is domestic North America modular, which would include the residential business FLOR as well.

John Baugh - Stifel Nicolaus

Okay. And then having the FLOR stores open for well over a year (inaudible) either profits or any metrics how they are ramping?

Patrick Lynch

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

John Baugh - Stifel Nicolaus

If you look at (inaudible) from the Australia, (inaudible).

Patrick Lynch

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

John Baugh - Stifel Nicolaus

And would be your expectation then (inaudible) number obviously but could you think (inaudible) the expectation for B2B as you break out these numbers quarterly trying (inaudible) quarter -- for half of it, a large of it, a fraction of it. (Inaudible)

Patrick Lynch

You know our expectation is to recover all of it.

John Baugh - Stifel Nicolaus

Okay.

Daniel Hendrix

As you know that’s always a negotiation with the insurance company. So it was always a fight.

John Baugh - Stifel Nicolaus

Understood. And the new plant would come online probably late this year, early fourth quarter, late fourth quarter. When you would expect to be able to transition out of the Chinese factory, get those....?

Daniel Hendrix

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

John Baugh - Stifel Nicolaus

Okay. And then my last question is switch back to (inaudible) both government and education (inaudible) were up. And maybe (inaudible) numbers again. My impression was those were tailing end-markets with state law federal pressures. Can you comment there about market (inaudible) and then the prospects for (inaudible)?

Daniel Hendrix

Yeah, I would say that the education, we have been outperforming that market. If you looked at the education market, it's been under pressure. Particularly [K-312] 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.

John Baugh - Stifel Nicolaus

And was the government with the fiscal year end, spending all that money (inaudible)?

Daniel Hendrix

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

Operator

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

Matthew McCall - BB&T Capital Markets

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, and what you're saying about the trends in Australia and what we should expect from a segment profitability perspective this year.

Daniel Hendrix

That’s a mouthful.

Matthew McCall - BB&T Capital Markets

That was like three questions.

Daniel Hendrix

I would say that in the China 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. Same thing in the FLOR store business. We lost about $1.5 million and I think we anticipate making about $2 million. So that gives you some of those deltas. The margins in the United States are the best in our business. It used to Australia until the fire. So we are double-digits in the Americas business. Europe is running about 8.5 to 8. And then you got the impact of the Australian business, I think Australia is running around the 10 but it used to be double-digit, higher than that. As a group Asia Pacific is 11%.

Matthew McCall - BB&T Capital Markets

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...?

Daniel Hendrix

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

Matthew McCall - BB&T Capital Markets

And so back on the SG&A question, and, 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?

Patrick Lynch

Well, I mean I think fundamentally the decisions, we really anticipated further gross margin expansion to be honest. I mean I think we knew the headcount additions were underway. The overhand in Bentley Prince Street and the admin cost wasn’t a terrible surprise. Maybe a little bit on the incentive side, may be somewhere [50] 800,000 there. But we really, I would say, knew these 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 was a few little surprises there. But thought, honestly, that we would leverage it or pay for it through additional gross margin expansion.

Matthew McCall - BB&T Capital Markets

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

Patrick Lynch

That’s partially 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 commission etcetera yield a lower SG&A amount.

Matthew McCall - BB&T Capital Markets

Okay, so just a 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. Did I hear that right? Is it an international, was it an international comment?

Daniel Hendrix

I think it's the whole non-office conversion, hospitality, education, retail space, healthcare. It's converting those markets from broadloom and even surfaces hard surfaces to carpet tile.

Matthew McCall - BB&T Capital Markets

Okay. And so this is...?

Daniel Hendrix

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

Matthew McCall - BB&T Capital Markets

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

Daniel Hendrix

I would hope that we can get some top line growth in '13. And our goal is still to drive SG&A as a percentage down closer to 24, in that range, 23.5. And we are taking a very tough view of SG&A and making investments in sales people. Pretty much and that’s all we are trying to invest in.

Operator

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

Sam Darkatsh - Raymond James

Most of my questions have been asked and answered. Just a couple of housekeeping items. The insurance proceeds, 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?

Patrick Lynch

That would 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.

Sam Darkatsh - Raymond James

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?

Patrick Lynch

It will depend on how it comes in, yeah.

Sam Darkatsh - Raymond James

Whether it's drips and drabs or whether it's one big check?

Patrick Lynch

Correct.

Sam Darkatsh - Raymond James

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

Patrick Lynch

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

Sam Darkatsh - Raymond James

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?

Daniel Hendrix

Well, I think it assumes the 15% kind of growth in stores that are anniversary, Sam. But we have been doing better than that but that assumption is 15%. We only have two stores that are over two years old.

Sam Darkatsh - Raymond James

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

Daniel Hendrix

They would. You are right.

Sam Darkatsh - Raymond James

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

Daniel Hendrix

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

Sam Darkatsh - Raymond James

Okay. And last question, I think you touched on it a bit. The raw material environment. You mentioned that 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? I think 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?

Daniel Hendrix

I would say, to date, the fiber guys typically talked to us at least a month ahead of a price increase and we have not had that conversation with them yet.

Patrick Lynch

So it's been pretty quiet going into this year.

Sam Darkatsh - Raymond James

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

Daniel Hendrix

Right.

Patrick Lynch

Yeah, through Q1.

Daniel Hendrix

Right.

Daniel Hendrix

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

Keith Hughes - SunTrust Robinson Humphrey

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

Daniel Hendrix

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 are obviously having share gains in the commercial U.S. market. I think there is a lot of pent up demand. I think corporations, what we are seeing, are hiring again and they are upgrading their offices, trying to go after some of the talent out there. And this whole thing around creative nesting in density. They are creating the collaborative space and that plays to us. The office markets look good but we are also having success in the non-office. And that, to me, those are definite share gains for us.

Keith Hughes - SunTrust Robinson Humphrey

If we focus in on office specifically, I mean 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?

Daniel Hendrix

Yeah, 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.

Keith Hughes - SunTrust Robinson Humphrey

Is there any sub-industry you see in there that looks better than others, or is it...?

Daniel Hendrix

Well, the technology side of this really looked good for us. You know the Amazons, the Googles and Apple and so forth. So that whole technology core has been good. And the banking has actually been pretty good.

Keith Hughes - SunTrust Robinson Humphrey

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 '13 and do you have any plans for future free cash flow?

Patrick Lynch

Yeah, CapEx next year will be 35 to 40ish range, comparable to where we were this year. I think we did about 41 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.

Keith Hughes - SunTrust Robinson Humphrey

Okay. Thank you.

Daniel Hendrix

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.

Keith Hughes - SunTrust Robinson Humphrey

This year, okay. Thank you.

Daniel Hendrix

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

Keith Hughes - SunTrust Robinson Humphrey

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

Daniel Hendrix

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

Operator

(Operator Instructions) Your next question comes from the line of Glenn Wortman with Sidoti & Company.

Glenn Wortman - Sidoti & Company

Just assuming stable raw materials and pricing for the moment, so 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?

Patrick Lynch

We continue to have expectations that we can continue to leverage this manufacturing base looking forward. I think we finished the full year at 34%, even we are looking for at least 100 basis point increase for the full year next year, on a conservative basis. If we see a normalized environment -- we have seen in '11 and '12, and perhaps maybe even a little bit better environment with some top line growth, we should be able to leverage that nicely, number of 35%.

Glenn Wortman - Sidoti & Company

Okay. And then what were your total FLOR sales in '12? And then, Dan, if you could just update us on any longer term goals that you have for that business?

Daniel Hendrix

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

Operator

Your next question comes from the line of [Philip Wocely] with Deutsche Bank. Please proceed.

Sean Wondrack - Deutsche Bank

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?

Patrick Lynch

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

Sean Wondrack - Deutsche Bank

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

Patrick Lynch

We will pay around $15 million to $20 million in cash taxes next year. All international. We still have a significant NOL in the U.S.

Sean Wondrack - Deutsche Bank

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

Patrick Lynch

Under two-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.

Sean Wondrack - Deutsche Bank

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

Patrick Lynch

Yes. Have that in consideration for sure.

Operator

Your next question is a follow-up question from line of John Baugh with Stifel Nicolaus. Please proceed.

John Baugh - Stifel Nicolaus

Just a quick question on FLOR. Is (inaudible) to be a requirement for any voluntary (inaudible)?

Patrick Lynch

Sorry, John, you have to repeat that.

Daniel Hendrix

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

Operator

Your next question is another follow up question from the line of David MacGregor with Longbow Research. Please proceed.

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 and?

Daniel Hendrix

You now I would say in the -- and not trying 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 one thing I know about hospitality is it’s a global business and we think we can leverage that outside the United States and socialize it. And then we are having success particularly in education with -- I think education is moving the carpet tile. And I think we are leading that -- we led that in 2002. We even had a low penetration and we are just seeing the fruits of a lot of that effort there. And we are going to make big push in the healthcare as well, through (inaudible) 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.

David MacGregor - Longbow Research

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?

Daniel Hendrix

I would say that one thing that we are trying in having success in and we are also paying for it is, is that we are going more and more to a small order custom business. And our runs in the U.S. plan are significantly going down. We are making a lot of runs at 200 yards. 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 that we can get a ride.

David MacGregor - Longbow Research

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

Daniel Hendrix

No, I would say in the U.S. 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’s a different profile model on the TI and we are trying to figure 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 U.S.

David MacGregor - Longbow Research

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

Daniel Hendrix

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

David MacGregor - Longbow Research

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

Daniel Hendrix

Yeah. Yeah, we are. We have had a lot of capacity constraints in the U.S. as we are running at 24X7. So we haven’t decided to go into that market.

Operator

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

Daniel Hendrix

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.

Operator

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

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