David Foshee - VP and Senior Counsel Daniel T. Hendrix - President and CEO Patrick C. Lynch - SVP and CFO.

Josh Borstein - Longbow Research Kathryn Thompson - Thompson Research Group Mike Wood- Macquarie Research John Baugh - Stifel Nicolaus & Company Keith Hughes - SunTrust Robinson Humphrey.

Good day ladies and gentlemen and welcome to the Q1 2014 Interface Inc., Earnings Conference Call. My name is Sheila and I will be your operator for today. At this time all participants are in a listen-only mode. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. I would like to turn the call over now to Mr.

David Foshee, Vice President. Please proceed, sir..

Thank you, Operator. Good morning and welcome to Interface's conference call regarding first 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 An archived version of this conference call will also be available through that website.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 risks and uncertainties that could cause actual results to differ materially from any such statements, including risks and uncertainties associated with the economic conditions in the commercial interiors industry, as well as the risks and uncertainties discussed under the heading Risk Factors in Item 1A of the company's annual report on Form 10-K for the fiscal year 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 to the most comparable GAAP measures is contained in the company's results release and Form 8-K filed with the SEC yesterday.

These documents can be found on the Investor Relations portion of the company's website, www.interfaceglobal.com. Lastly please note that this call is being recorded and broadcasted for Interface. It contains copyrighted material and may not be rerecorded or rebroadcast without Interface's express permission.

Your participation on the call confirms your consent to the company's taping and broadcasting of it. Now I'd like to turn the call over to Dan Hendrix. Please go ahead, sir..

Thank you, David. Good morning everyone. I would like to start with a quick overview of the dynamics of the first quarter. As you know the first quarter is seasonally slow for us so we are not surprised to see a sequential contraction versus the fourth quarter.

That being said January and February were unusually slow starts to the year due to few different factors. First severe winter weather across the Midwest, South, and the Northeast had an impact. We lost five production days at our U.S. plant, and some of our sales reps lost several days in the field because they couldn’t reach our customers.

As we mentioned in February call the weather also slowed foot traffic at our four stores and caused somewhat of a malaise in consumer spending. Second start-up of our plant in Australia had a significant impact.

As we transition from importing products into Australia from our plants in Thailand and China, to commencement of operations at the new plant near Sydney our shipments declined.

Also following the 2012 fire our delivery lead times in Thailand and China into Australia and all of Asia were considerably drawn out and after 18 months of these reduced customer service levels it was reflected in our demand but even though shipments were down, orders in Australia were up substantially in the first quarter which shows that we are recapturing the market share.

Lastly the Chinese New Year had a more pronounced effect this year. You followed our progress in China since we opened the plant a few years ago. You know that more and more of our sales are coming from local customers as opposed to multinational corporations. This result, that the Chinese New Year had a greater effect on our business.

Orders recovered well in March but it wasn’t enough to get us all the way back to where we expected to be for the first quarter. You know below the surface the undercurrents for our business remain strong; two big points jump out at me. First point, Europe had the breakout quarter we were expecting.

We had strong results across virtually all market segments and countries, with the exceptions of France and Russia. Each of our primary markets in the UK, Thailand and Germany had substantial growth. In fact Germany turned in its best quarter ever.

Second point orders during the quarter were strong with a steep progression from January to March so we are optimist about a quick return in the second quarter to our recent growth trajectory. Based on our order levels alongside our growth platforms I feel confident that the top line increases are coming and I still like our prospects for the year.

In the Americas our non-office sales are robust. The overall project pipeline is building nicely and we believe we have solidly outperforming our competitors. For business in Europe 2012 holds a lot of promise.

It’s been several years since we have seen the growth like we had in the first quarter and indications are that the improving trend will continue and perhaps accelerate over the balance of the year. We have our new plant in Australia up and running and we’ll recapture market share as evidenced by the strong order growth in the first quarter.

Southeast Asia also has a strong pipeline of activity and our expectations for the full year performance haven’t change in this region despite a slow start. China is still a question mark. It depends largely on the level of government directed activity. We also have opportunities below the top line.

We look for gross margin to expand moving forward as we implement further lean manufacturing practices, complete the ramp up of our new plant in Australia in experience larger sales volumes. While we don't expect to cut very SG&A at this pivotal time we do expect to contain it while growing into the current spending level.

I am also very pleased with our product innovations and direction. Our designs on the [TacTiles] manufacturing platform are unparalleled and our point products are having a big impact with the design community. We remain the industry leaders which is a major advantage for us in the market place.

While I am disappointed in the first quarter I am certainly not discouraged by it. I see a lot of positive trends, market opportunities and value drivers in our business that have me optimistic for the balance of the year. With that I will turn it over to Patrick. .

Thank you and good morning everyone. Take a few minutes now to walk through the financial highlights for the first quarter. Sales in the first quarter of 2014 were up 4.1% to $219 million compared to a $210.4 million in the first quarter of 2013. On a consolidated basis there was not a significant currency impact on sales for the quarter.

Gross margin expanded 20 basis points to 34.1% in the first quarter versus 33.9% in the comparable period.

This increase was due to continued manufacturing efficiencies in our European and Americas businesses but was almost entirely offset by the anticipated variances of our new manufacturing facility in Australia, which started production in January.

We expect these operations to normalize in the second quarter of 2014 and expect to see the margin improvement in the region as a result. In the Americas, sales increased approximately 5% due to the continued success of our segmentation strategy. We experienced healthy increases in hospitality, retail, education segments.

In fact all non-office segments were up in the first quarter of 2013. Despite harsh winter conditions impacting the FLOR stores sales and saw an increase of FLOR store sales of 6% in the first quarter of 2013 with momentum accelerating during the quarter. These increases were slightly offset by a modest decline in the corporate office market segment.

We're truly excited about the acceleration in sales in our European business. We indicated that we're starting to see it turn in the fourth quarter and our first quarter performance certainly reflected that. Sales in Europe were up 15% in U.S. dollars or 11% in local currency.

Essentially all market segments were up in Europe during the quarter with corporate office, government and retail leading the charge. The Corporate Office segment was up 13% in U.S. dollars or 8% in local currency. Government was up 26% or 21% in local currency and the retail segment was up 38% in U.S. dollars or 33% in local currency.

Our order momentum in Europe showed double-digit increases each month of the quarter and this trend has continued with April showing fantastic order growth as well. Turning to Asia Pacific we experienced a decline in sales of approximately 17% for the quarter. The decline was primarily within the corporate office market segment.

Geographically the decline was more strongly noted in Australia due to the January start-up of our new manufacturing facility as well as fairly strong currency headwind in the quarter.

With that being said we think there is significant opportunity in the Australian market and our local manufacturing will allow us to regain shares and fully execute on the plan in this area. As evidenced first quarter orders in Australia were actually up 206% in Australian dollars.

Due to the macro-economic concerns in the Chinese New Year holiday the rest of Asia Pacific region experienced decline as well. But it was not as acute as in Australia. We are encouraged with the order pipeline in Australia and we expect better performance in this region throughout the course of 2014.

In the first quarter of 2014 SG&A increased to $62.7 million, up from $57.3 million in the first quarter last year. As a percentage of sales SG&A increased to 140 basis points to 28.6 versus 27.2 last year. The increase was due to higher selling and marketing expenses associated with higher sales volumes and marketing initiatives.

Due to factors discussed above operating income in the first quarter of 2014 was $12 million or 5.5% of sales compared with $14 million or 6.7% of sales in the first quarter of 2013. Interest expense was $5.5 million compared to $6.2 million last year.

Depreciation and amortization was $8.8 million in the first quarter compared to $6.7 million in the first quarter of 2013.

Capital expenditures were $9.1 million in the quarter compared with $14.9 million in the comparable period last year and for the full year we continue to expect capital expenditures to be in the range of $40 million to $50 million.

Quickly to the balance sheet we exited the quarter with $62.5 million in cash compared with $65.1 million at the end of first quarter of 2013. Inventories were $170.5 million at the end of the quarter compared with $157.5 million in first quarter of last year.

Average DSO was 53.2 days versus 53.7 in the year ago period and our inventory turns were 3.6 times compared with 3.7 times last year.

With that I'll open up the call for questions, operator?.

(Operator Instructions). And the first question comes from the line of Josh Borstein of Longbow Research. Please proceed..

Hi, Dan, David and Patrick. Thanks for taking my questions here.

The first one just if you can revisit your gross margin expectations for the year, considering now you have better performing Europe but at the same time some issues with the new plant in Australia, I know you previously talked about 100 basis points gross margin improvement, is that still achievable?.

Yeah we certainly believe that 100 basis points for the full year is certainly achievable. The progression that we saw in Q1 we still had increases both in Americas and our European businesses in the first quarter. I believe the U.S.

business was up 60 basis points and our European business was up 180 basis points in the first quarter and margin, largely offset by the Asia Pacific rebalancing of the three manufacturing faculties. But I think those that situation will be largely rectified in the second quarter.

So we still feel pretty confident about the full year 100 basis point margin expansion year-over-year. .

Great, so the plant in Australia I know you had talked about margins normalizing by 3Q is, are you actually ahead of that timeframe now or are things are on plan with your expectations?.

I think we are a little bit slow to start in the first quarter but I think March will turn the corner and I think we are on track for by certainly by the end of the second quarter will be in good shape across Asia Pacific..

Great thanks.

And then just one follow-up on the order patterns, could you, I know you discussed a little bit them, could you talk about in your major geographies what you saw in terms of your order patterns?.

For the quarter?.

Yes..

Sure. For the full quarter Americas business was up 8.5% European business was up 11% and then Asia Pacific rallied the last six weeks of the quarter and got back to essentially flat, very soon last six weeks of quarter across Asia Pacific. .

Great, thanks very much and good luck..

Thank you and your next question comes from the line of Kathryn Thompson, Thompson Research Group. Please proceed..

Thanks. The first question is on SG&A, two part.

Do you -- you had said an initial bogie of hitting 25% in fiscal ’14, so it’s still achievable? And could you also talk about components of higher SG&A, that on a percentage basis it is a bit higher and so if you could go to the components of what drove higher SG&A in quarter?.

Sure, I mean I think we are -- the trajectory of the top line and the momentum that we are currently experiencing, we did grow, obviously grow into this SG&A level and worked really hard to get to the 25% SG&A levels for the full year, by the end of the year at least.

In particular in the first quarter yeah, there was an additional $2 plus million in selling cost, there was a little bit less than a $1 million in additional marketing cost in Q1 and then the balance was in the administrative area.

You know it was really trying to balance those spending initiatives that we signed off on in the budget season in late December, early January and then had a really kind of unexpected softness in the top line in January-February to kind of pull back fast enough to impact Q1 is kind of a challenge. .

Maybe could you help me that understand what administrative, what’s involved in that if it is more of a one time, is this more an ongoing cost, maybe…?.

That was just -- yeah. It is a combination of number of initiatives. Some e-commerce platform depreciation, few things like that, in areas that we had spent, that fell into Q1. There was a little bit of restricted stock through up expense we had to take in Q1 but fairly normalized levels going forward in the administrative area. .

So how should we think about SG&A going forward?.

In terms of absolute dollars probably a $65 million to $68 million kind of run rate. We will see where the trajectory of the top line goes. .

Okay, and also could you give clarity on pricing in the quarter, if you do have by region?.

Yeah I do. Selling, average selling prices were up in every geography. Average selling prices in Americas were up over 3%, European in euros were up 4% and Asia was up 5% , Australia in Australian dollars was up 2.6% year-over-year. In every category average selling prices were up..

Okay, thank you so much..

Thank you. And your next question comes from the line of Mike Wood of Macquarie. Please proceed..

Hi, thanks. Could you also following up on that last question, typically your SG&A would sequentially go down in first quarter and you mentioned these initiatives that you’ve put in place. But still the ramp you are talking of 65% to 68% level certainly more than the selling commissions would to imply that you should be spending.

So what does that pay off look like? I guess from these initiatives e-commerce et cetera that you expect?.

Well I mean certainly those initiatives that we’ve been in place is going to deliver our expectation of somewhere about 8% to 10% kind of top line growth is what our expectations are around.

And our SG&A did come down for the first by $4 million-$5 million but sequentially going forward there will be an increase as the top line grows through the balance of the year..

Okay I know the four stores you’ve mentioned has had relatively mix performance by location.

What’s your current strategy in terms of opening additional stores you are evaluating potentially moving or closing others?.

I don't think our strategy had changed at all. I mean first quarter was really hard to evaluate due to the weather conditions and truly what we have there, a lot of the better weather related stores did quite well in Q1. But our strategy hasn’t changed in that we are still contemplating three stores in the back half of the year..

Okay, lastly can you give us the actual April order growth?.

April order growth on a consolidated basis was up 3% and that was broken down by geography, Americas is down 5%, Europe up 36% and Asia Pacific down 12%.

I do want to highlight though in the Americas number we do have Easter in the first three weeks this year that was at during the last week of the first quarter last year, so it’s a little bit apples and oranges..

Okay, thank you..

And your next question comes from the line of John Baugh of Stifel. Please proceed..

Thank you and good morning. Staying on the SG&A theme for a second, I think the SG&A component in Europe Dan is high, relative to where the revenues have been and we finally saw some nice progress on the revenue front.

And is that still the case or where geographically maybe did the SG&A fall? And are we going to see if these orders continue in Europe and the revenues are strong, a lot of leverage in that area?.

Right, if you looked at our SG&A profile, Europe SG&A is 30%. It’s had the biggest decline from the '07 and we have now like [12 factor]. We have cut some pretty good cost to keep it at 30%. And we are holding the line on the SG&A in the European business.

One thing I’ve made a decision is to weather and not sort of restructure or de-layer the European business where we have a major market share in most every European country. So the real SG&A issue that we deal with is in Europe and then it’s also in the FLOR stores.

The FLOR stores obviously have 50 plus SG&A percentage and we are trying to fuel the -- there to grow into that one as well. So I've got two pockets that I am dealing with and I think we are going to grow the European business and drive that back down to 25% level..

So were the SG&A increases some of these selling and marketing things you’ve referenced.

Were they Americas focused or where were they?.

Well you have -- we did add a lot of sales people during the year last year. So you have the new sales people that we didn’t have at the beginning of the year. We also opened three more FLOR stores last year, that go in the first quarter numbers. So FLOR accounted for part of it, new sales people accounted for part of it.

And then we -- as Patrick mentioned we had a new e-commerce website what we launched that had some additional cost in it, almost about a $1 million in that. And so I think that those platforms you are going to get growth. Our e-commerce platform I think is best in class. We’ve got a lot of great activity around that, a lot of great metrics around that.

And it's all around how to design your floor, how to design product and the A&D community really are really gravitating to that website..

Got it, and then on the Americas and the performance there, there was quite a dichotomy between non-office and office. Is that Dan a function of, you are just so mature in office that it's just not going to grow obviously we don’t want to see it shrink.

Or are there other particular things going on within office or non-office that are really driving things, or would your product or sales emphasis et cetera?.

No I would say that the office market really has been pretty flat. If you look at the numbers in our industry for the first quarter, in units it was down about 4% and in dollars it was down 0.4%. I don’t think that the market, the commercial market has had any lift yet.

We are very encouraged by that activity and we keep talking about activity and I think the furniture industry is also talking about activity but the numbers are pretty flat as well. I just think we're going out and taking share in non-office segments and have a lot of traction in education and hospitality in particular.

And so our expectation is the office market will rebound. But I don't think we're losing share in the office market, I think it's, it hasn't rebounded yet. .

Okay.

And where is in the non-office areas the greatest opportunity in your mind and I'd love some color on sort of the public spending that affects you, seems like you're gaining share and offsetting may be the macro headwind there?.

Well Dan can talk about what the prospects are for sort of greatest opportunities but just to give you a little color in particular, I mean in the first quarter retail was up 17%, the education market was up 12% and then our hospitality business was up 26% in the first quarter.

I think it's largely in-line with the same areas that we have the greatest opportunity for us. But....

What was government Patrick?.

Up 3%..

Okay, great, thank you. .

Thank you. And your next question comes from the line of Keith Hughes of SunTrust. Please proceed. .

Yeah, following up on your office comments Dan as you look at your order book in office is that showing any signs of life for next couple of months in terms of future shipments?.

I would say that if you look at the pipeline of the office business which is -- we've projects 30, 60, 90 and 180 days in our pipeline. And I would say the office part of that is showing signs of life. We're expecting some pretty good activity coming at the office going forward. .

And Patrick any raw material price hikes in the future of measurable quantity?.

There were none in the first quarter and there are none on the near term horizon. .

Okay, thank you. .

Thank you. .

There are no more questions at this time. (Operator Instructions). We have no more questions at this time. .

Well thanks for listening into our second quarter conference call and talk to you next quarter. .

Thank you..

Thank you. So ladies and gentlemen that concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day..