Bruce Hausmann: Hey, Keith. Good morning. This is Bruce. In our fourth quarter, if you kind of double-click down on the growth components, we mostly grew on price. Volume was flat year-over-year in the fourth quarter. And if I’m guessing you’re going to ask about next year, we think that, yeah, that’s right. I know you’re going there. If you think about next year, I think you can €“ obviously, we don’t know for sure. But I would think about it in terms of, sort of a 70%-30% mix, probably 70% based on price, 30% based on volume. We’ve got a nice wraparound impact coming where we’ve put pricing into the market. And we’ll get the wraparound impact of that as we go into 2023.
Keith Hughes: Okay. Great. And then the first quarter, there’s another margin year-over-year gross margin step back, is that still cost well over price? Are there other contributions?
Bruce Hausmann: Keith, it’s actually €“ that is what I was referring to with Kathryn. It’s the inflationary inventory. As you’ll appreciate, it’s just the flow between raw materials going into manufacturing and then actually hitting the cost of goods sold line. It’s the flow. We had double-digit inflation that we incurred in our raws in 2022. The good news is that it has eased. Now, we’re anticipating single-digit inflation in 2023. And if you put all of that into the mix, again, this is guide. That’s what you’re seeing there is €“ you’re seeing that inflationary inventory flow through the cost of goods sold line in the first half.
Keith Hughes: Okay. And I guess a question for Laurel. You talked about SG&A, 23% long-term goal. You made a lot of nice progress on SG&A as a percentage of sales for the last couple of years, but as you €“ in your work stepping back, why are you stepping back in 2023? What are the drivers for that? And will 2024 begin to move down under the plan?
Laurel Hurd: Yes, it’s a great question. And we are stepping back, I will say that we’ll modify with the market as we have shown great discipline in SG&A, as you’ve said, over the past couple of years, really watching our dollars. We are wanting to make sure we make some investments for growth as we continue to fuel the growth, particularly in the U.S. market and driving innovation. One of the focuses that we have is new accelerating our product development in innovation. We’re preparing for NeoCon now. We got a lot of new innovation hitting the market, and we want to make sure we invest for the long-term. At the same time, as I said, as we put the operating model into effect, 2023 will be a transition year, and we do expect 2024 to step back down.
Bruce Hausmann: Yes, Keith, I’ll just add to what Laurel mentioned. There is no loss of focus on G&A guaranteed. And I think €“ and we appreciate all of your feedback around the progress we’ve made there. I can guarantee you this management team around the world is focused on every single SG&A dollar, every single SG&A initiative, and making certain that we don’t spend any dollar that’s not needed to fuel growth. We’ve got good SG&A to fuel growth. We’ve got bad SG&A that were €“ the so-called bad SG&A. By the way, people like me in finance are the so-called bad SG&A, but we’re doing everything we can to manage it very, very effectively.
Keith Hughes: Okay. And actually one more, if you allow me for Laurel. You talked about investing more of your dollars on the higher margin in the Americas business, which is a margin. What does that signal for the other regions? They’ve been margin underperformance for a long time. Does that signal a strategic change or is there a consideration of a strategic change to maybe not all of the EAAA, but at least parts of the EAAA medium-term?
Laurel Hurd: Yes, that’s a great question as well. And I’d say, we’ve been really scrutinizing the P&L country by country. And as Bruce said, our strategy right now is to focus on the profitable markets. So, there’s certainly more outside of the U.S. that continue to be very profitable for us, but we want to leverage our global scale and have shared resources helping support some of those markets to improve their profitability.
Bruce Hausmann: Yes, Keith, I’ll just add to what Laurel mentioned. We’re going to be differentially investing our next dollar in those higher-margin markets, where we can get the best return. And then we’re going to be €“ I’ll just reiterate what Laurel said, we’re going to be taking these shared resources so that we can leverage margin expansion in the other areas of the company where they can use shared resources to help improve their margins.
Keith Hughes: Okay. Thank you.
Operator: Your next question comes from the line of David MacGregor with Longbow Research.
David MacGregor: Yes, good morning everyone. I guess I just wanted to be clear on, kind of the cadence you’re thinking about with respect to the performance targets under the new strategy. You characterized 2023 as a transition year, and then there were some comments around SG&A into 2024. The numbers you shared with us, the 38.5% gross margin, the 23% SG&A, are those numbers achievable in 2024 or how are you thinking about just the timing on this?
Laurel Hurd: Yes. Great question. I appreciate it. Look, this is a longer-term approach over the next, I’d say, three years. I don’t think we’ll get there in 2024. There’s so much uncertainty on 2023 right now, which is why we’re hesitant to put a pin in exactly what year that will happen. We expect to make significant progress in 2024 and it will probably take us another year.
Bruce Hausmann: David, I agree with everything Laurel said. It’s interesting. We’re trying to strike the balance of €“ we’ve got the pedal down to make sure that we expand the margin profile of the corporation. At the same time, we didn’t €“ folks like you do a really, really good job at scrutinizing and criticizing the numbers given the macroeconomic conditions. And we’re also very aware that, hey, it is a fact that global economic policies tightening around the world. And so, what we’re going to do is we’re going to continue tightening up the margin structure of the company and controlling everything that we can control, while also being really well aware of what’s going on in the macro environment. And we’re trying to be realists as we navigate through 2023. And as we take the company forward to grow the top line and to expand the margins.
David MacGregor: Great.. Laurel, if you think about, sort of Interface and how the company has evolved, initially from a carpet €“ modular carpet tile company, you added LVT, then there was the Nora acquisition. As you think about this new strategy, how do you think about your product portfolio right now? Are you contemplating within this? Maybe not initially, but at some point further into the program, adding other product categories and expanding the portfolio or are you satisfied with these three categories you have now? Maybe talk a little bit about the portfolio?
Laurel Hurd: Yes, it’s a great question. I love the portfolio that we have right now. We’ve done a really nice job, as you said, expanding LVT. We’re seeing some great success with selling the combination of carpet tile and LVT. Customers right now, especially in the office market, are really looking to add flexibility to their space. They’re not quite sure what their spaces are going to look like over time, and carpet tile is a great solution to add that flexibility to their space in combination with LVT. And then our Nora rubber business, as you said, is fantastic. It’s been a great way to diversify our portfolio and really growing nicely in the health care market. So, we like what we have today. Those carpet tile, LVT, and rubber are three core pillars of our growth long-term, but we’ll continue to look for opportunities as we move forward.
David MacGregor: Okay. And under this new strategy, just talk about, sort of the longer-term CapEx plan here. You’ve kind of been tracking around the $30 million level. You went through the project there for a few years. And it came up the other side. $18 million last year seems like it probably bounced down on a maintenance level. How capital intensive is this are you contemplating at some point as you execute the strategy, having to address capacity and make bigger investments?
Bruce Hausmann: David, you probably saw our guide. Our CapEx guide for the year is 32 million. We are in really, really nice shape around not having to invest an additional, I would say, incremental CapEx above maintenance for the foreseeable future. As you mentioned, we’ve done some big investments in our plants. And so, the chapter that we’re in is, we are going to optimize and leverage those investments that we’ve made in the past, which is a great position to be in. And I think if I were to put a number in a model, sort of long-term, we generally think about maintenance CapEx being around 2.5% to 3% of net sales, which is pretty close to our guide. And we think that being on this maintenance CapEx program for the foreseeable future is going to be able to help us achieve our strategy and hit our goals.
David MacGregor: Okay. And can you talk about your expected cash conversion in 2023? I guess, working capital being the bigger variable in there. And just you mentioned in passing, I think, Bruce, you made the comment that as you think about debt, you want to repay debt, that was a priority within your capital allocation. My recollection is that your debt is largely term debt. Are you talking about debt repayment and what the options might be for you there?
Bruce Hausmann: Yes. Great question. I will start by saying we do have a balanced capital allocation strategy. However, our Number 1 objective is to pay down debt. And that’s where we’re mostly focused, especially as we enter into 2023 followed closely behind to that is obviously investing in the business and one €“ and that’s €“ and that’s the 32-ish million that I just mentioned of CapEx and obviously, making sure that we fund initiatives that the business needs to be funded with in order to achieve its growth. And again, that’s all baked into our guide. We €“ if you think about cash, I think that there’s going to be some €“ our cash flow should be a lot stronger in 2023 than it was in 2022. And there’s two things that, kind of €“ that impacted it in 2022.
One was we had inflationary inventory. And again, that was about $33 million of the inventory balance that’s sitting on the balance sheet at the end of the year was all inflationary. So that was a one-time use of working capital going from 2021 to 2022. The other thing that’s kind of interesting, I’m not sure if you heard this in our prepared remarks was that we had that cyber event in November. And so, some of our billings in November shifted into December, which meant some of our cash collections shifted from 2022 to 2023. So, all of that is good news for cash flow in 2023, and all of that will help us in 2023 from a cash perspective.
David MacGregor: And what is achievable in terms of debt repayment? I mean, you’ve talked about that at, sort of high-level terms, but I wonder if I could push you to be a little more specific about your goals there?
