Prepared remarks
Hello, everyone. Thank you for joining us, and welcome to the Interface Second Quarter 2026 Earnings Call. Operator instructions were provided. I will now hand the conference over to Christine Needles, Corporate Communications. Christine, please go ahead.
Good morning, and welcome to Interface's conference call regarding second quarter 2026 results, hosted by Laurel Hurd, CEO; and Bruce Hausmann, CFO. During today's conference call, any management comments regarding Interface's business that are not historical information are forward-looking statements within the meaning of federal securities laws. Forward-looking statements include statements regarding the intent, belief or current expectations of our management team as well as the assumptions on which such statements are based. Any forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could cause actual results to differ materially from any such statements, including risks and uncertainties described in our most recent annual report on Form 10-K filed with the SEC. The company assumes no responsibility to update forward-looking statements. Management's remarks during this call also refer to certain non-GAAP measures. Reconciliations of the non-GAAP measures to the most comparable GAAP measures and explanations for their use are contained in the company's earnings release and Form 8-K furnished with the SEC today. Lastly, this call is being recorded and broadcast by 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. After our prepared remarks, we will open up the call for questions. Now I will turn the call over to Laurel Hurd, CEO.
Thank you, Christine, and good morning, everyone. Interface delivered another strong quarter, exceeding our expectations, achieving 4% year-over-year currency-neutral net sales growth, building on 7% currency-neutral growth in the second quarter of last year. Growth was broad-based across regions, product categories and primary market segments. We saw healthy contributions from both price and volume, reflecting the strength of our diversified portfolio. Profitability also improved significantly this quarter, driven in part by the IEEPA tariff refunds we recognized. More importantly, continued operational execution improvements also contributed to margin expansion, highlighting the underlying strength and durability of the business. Our strong results continue to reinforce that our One Interface strategy is working. As we've discussed before, One Interface is a multiyear strategy focused on: building strong global functions to support our world-class local selling teams; accelerating growth through enhanced commercial productivity of our commercial teams; expanding margins through global supply chain management and simplifying operations; and leading in design, performance and sustainability. We continue to invest in design and innovation that expands our addressable market. Noravant Timber, the rubber flooring innovation we launched earlier this year, which combines the durability and performance of rubber with a distinctive wood grain aesthetic, is gaining momentum in the market. At Clerkenwell Design Week in London, it was named Best Product for Health Care, and we're seeing encouraging specification activity from leading design firms. We believe Noravant represents a meaningful opportunity to further expand in healthcare and other segments over time. We also continue to expand our reach across price points, with two notable additions to our carpet tile offering. First, building on our highly successful Open Air platform, we launched Open Air Neutrals at Chicago Design Days. This offering extends the collection to warmer, more neutral tones and works seamlessly across our carpet tile, LVT and nora rubber flooring portfolios. Second, we previewed Twist & Texture, which pairs textile-inspired design with an accessible price point and quick delivery, giving customers the options they are looking for and continuing to drive share gains in the market. Clerkenwell Design Week and Chicago Design Days provided strong platforms to connect with customers and the design community and to showcase our latest products and innovations. The interest we're seeing across the portfolio reinforces our confidence in the innovation investments we're making to expand our addressable market. Turning to manufacturing and supply chain. We're continuing to invest in automation and robotics to improve efficiency and expand margins. Last quarter, we highlighted the robotic solutions we brought online in our carpet tile manufacturing facilities in Europe and Australia. I'm pleased to say that investments are exceeding expectations. We've also added new packaging automation in Australia and continue to invest in robotics in Germany to enhance efficiency in our rubber business. Overall, these investments are helping us reduce costs and support sustainable growth as we scale. I'd also like to share a few highlights from our recently published 2025 Impact Report. Sustainability is core to Interface and central to how we create long-term value for our employees, customers, shareholders and the planet. In 2025, we reduced our product carbon footprint across all product lines by 4% compared to 2024. We achieved this improvement through material and manufacturing innovations. Across our portfolio, 51% of materials are now recycled or bio-based, the highest in the commercial flooring industry, with innovative materials like captured carbon helping to further drive carbon reduction. In addition, 79% of our manufacturing energy came from renewable sources. Overall, we cut our global greenhouse gas emissions by 36% compared to our 2019 baseline. We are focused on reaching our 2030 science-based targets and making progress towards our ambitious all-in goal to be carbon negative by 2040, without offsets. Before we move to the financials, I'm proud to share that we were recently certified as a Great Place to Work in all 14 countries where we are eligible. This represents 95% of our global workforce, including those in the U.S., Germany, The Netherlands, China and Australia. Attracting and retaining great talent remains a crucial part of our success, and this recognition reflects the strength of our culture and the engagement of our teams around the world. Now let's turn to our second quarter results. We delivered 4% year-over-year currency-neutral net sales growth in the second quarter. In the Americas, currency-neutral net sales increased 3% year-over-year, driven by our One Interface combined selling teams and demand across our key market segments. In EAAA, currency-neutral net sales increased 5%, driven by stronger volumes and encouraging broad-based growth. Turning to our market segments. Our diversification strategy continues to drive growth. Healthcare had a standout quarter with global billings up 19% on top of 28% growth in the second quarter of last year. nora continues to be a meaningful growth engine in this market segment, and we continue to benefit from our combined Interface and nora selling teams in the U.S. Education billings were up 5% in the second quarter on top of 11% growth in the second quarter of last year. We remain well positioned across both K-12 and higher education, supported by our low-carbon, high-performing products, broad range of price points and our design leadership. The market continues to benefit from strong macro drivers, including renovation, modernization initiatives and new construction activity. Our ability to serve projects across a wide range of budgets is helping us win. Corporate Office billings were up 5% in the second quarter on broad-based global growth, where we continue to gain share. One factor contributing to our success is the Interface Design Studio, which pairs customers with experienced Interface design experts who help bring projects to life from concept to completion. By making it easier to evaluate flooring solutions across our portfolio, our Design Studio strengthens customer engagement and reinforces our competitive position as organizations make specification decisions. We continue to see healthy underlying demand, supported by return-to-office trends, renovation activities and an ongoing flight to quality in Class A space where our brand, design leadership and broad product portfolio are well positioned. Turning to orders. Consolidated currency-neutral orders increased 5% year-over-year. Orders in the Americas grew 5%, while EAAA increased 6%, driven by strength across all regions and supported by continued development of our product portfolio. Backlog was strong at the end of the quarter, up 22% year-to-date, reflecting continued momentum across the business, giving us confidence to raise our full-year guidance. With that, I'll turn it over to Bruce.
Well, thank you, Laurel, and good morning, everyone. All comparisons provided are year-over-year versus the second quarter of 2025, unless otherwise noted. Second quarter net sales were $395.7 million, up 5.4% as reported and 3.8% on a currency-neutral basis. Second quarter currency-neutral net sales were up 3.5% in the Americas and up 4.5% in EAAA. Second quarter adjusted gross profit margin was 45%, up 524 basis points. Higher sales volumes, proactive pricing, favorable mix and manufacturing efficiencies drove 131 basis points of that improvement, reflecting the strong operational execution that Laurel referenced. The remaining 393 basis points were driven by a $15.6 million benefit from IEEPA tariff refunds and represented approximately $0.19 of earnings per diluted share. As a reminder, this tariff refund was not included in our full-year guidance that we provided last quarter during our Q1 2026 earnings release. Second quarter adjusted SG&A expenses were $103.1 million compared to $93.4 million due to higher sales commissions and variable compensation on increased sales and profits and foreign currency exchange variances. Second quarter adjusted operating income was $74.9 million, up 34% compared to $55.9 million. Second quarter adjusted net income was $51.5 million compared to $35.4 million. Second quarter adjusted EBITDA was $87.7 million compared to $64.8 million and second quarter adjusted earnings per diluted share was $0.88, up 47% compared to $0.60. With these results in mind, I'll turn to capital allocation. As a reminder, our capital allocation strategy is balanced and disciplined. First, we prioritize investing in the business in areas like innovation and productivity to drive growth and margin expansion. Second, we focus on managing leverage through a disciplined use of debt. Third, we continue to evaluate potential M&A opportunities that align with our strategy and that can accelerate growth and margins. Finally, and importantly, we remain committed to returning excess cash to shareholders through a combination of dividends and disciplined share repurchases. To recap our progress against these objectives in the second quarter, we generated $38.4 million of cash from operating activities and capital expenditures were $12.2 million, which included continued investments in automation and robotics to support our growth and efficiency. We also repurchased $8.8 million of Interface common stock and paid our quarterly dividend, reflecting our ongoing commitment to return excess cash to shareholders. Turning to our outlook. With a healthy backlog, strong order momentum and the margin performance we achieved in the first half, we are raising our full-year guidance. A few dynamics are worth noting as you think about the balance of the year. Second quarter margins benefited from proactive pricing implemented to offset raw material cost increases that will flow through the P&L in future quarters. We also recorded a $15.6 million tariff refund in the second quarter that equates to roughly 105 basis points of our improved full-year margin outlook. This is reflected in our updated full-year guidance. We are not assuming any additional refunds going forward. With that in mind, we anticipate, for the third quarter of fiscal 2026, net sales of $370 million to $380 million; adjusted gross profit margin of approximately 40.8% of net sales; adjusted SG&A expenses of approximately $100 million; adjusted interest and other expenses of approximately $4 million, an adjusted effective income tax rate of approximately 27.5% and fully diluted weighted average share count of approximately 58.2 million shares. And for the full fiscal year of 2026, which, as a reminder, is a 53-week year for Interface with the extra week occurring in the first quarter of 2026, we anticipate net sales of $1.455 billion to $1.485 billion; adjusted gross profit margin of approximately 40.6% of net sales; adjusted SG&A expenses of approximately $395 million; adjusted interest and other expenses of approximately $15 million; an adjusted effective income tax rate of approximately 26% and capital expenditures of approximately $60 million. And with that, I'll turn the call back to Laurel for concluding remarks.
Thank you, Bruce. Interface delivered a strong second quarter, and we're encouraged by the momentum we're building across the business. Growth was broad-based across all regions, product categories and primary market segments, reflecting the strength and diversification of our business. Our strong financial position provides us with the flexibility to continue investing in the business while also returning capital to shareholders. With strong order momentum and backlog entering the second half of the year, we are well positioned to deliver another year of strong performance. I want to thank the entire Interface team for their continued execution and their passion for serving our customers every day. And with that, I'll open it up to questions. Operator?
Questions and answers
Operator instructions were provided. Your first question comes from the line of Brian Biros with TRG.
Can you talk about the margins for Q3 and Q4 a little bit more? Q4 seems to imply a decline year-over-year. It sounds like that's mostly the timing of the flow-through of the increased cost that you already put price through. So maybe just a little bit more finer point on the puts and takes for that would be helpful.
Yes, you got it, Brian. It's just the timing of the flow-through. We feel really good about the gross margins, not just the historical performance that we're seeing throughout the year, but also about our forward projection. If you look at the back half in total, gross margins are around 39% in the back half in our guide, which is ahead of our ambition, as you might remember. And if we can achieve that for the back half, it'd be up about 60 basis points. And if we can achieve that for the full year, we'd be up about 100 basis points off of our baseline. So we feel really good about gross margins going forward.
That's a good lead into my next question, which was going to be about gross margin going forward. I know long-term guidance before was kind of the 38.5%. And I think it kind of ramped up a little bit to 39%, which I think is what you delivered last year. And you said you might finish above that this year even without the tariff refund. So is there a different view of margins going forward? Or how would you phrase that at the moment?
Yes. The way we're thinking about that, Brian, is you think about the back half run rate around 39%. We feel really good about that. Again, that will be up about 60 basis points year-over-year off of our baseline. We feel really good about the run rate for the full year being up about 100 basis points off of our baseline. And as we move into the year, we're going to continue to navigate it and continue — we know that we have — our job is to continue improving margins. And we feel really good about how we're going into the back half and how we're going into the future periods.
I'll just add on that, Brian. We're committed to continuing margin expansion. So we're ahead of where we thought we'd be. We continue to outperform. Our productivity initiatives are delivering ahead of our expectations. And yet we know it's a really volatile marketplace. So we're watching that, but we feel really good about our ability to continue to grow our margins.
Understood. On the guidance raise, it seems like it was mostly on the Q2 beat maybe, but you also talked about the increase in backlog and the order momentum giving you the confidence to raise the guidance. So just trying to gauge, I guess, if there's anything in the second half that is slightly expected to be better than you previously thought or if it really is just the Q2 beat?
Q2 came in ahead of our expectations, as you said, and we're pleased with that. We feel good about our momentum, which — we felt good about our momentum last quarter as well when we provided full-year guidance. So, nothing has really changed on that front. We still feel good. We came in a little bit better in Q2, and we'll see what happens for the back half.
And Brian, coming off of a really strong quarter and strong first half operationally, it was great to see all the broad-based growth globally across all of our geographies, all of our products and all of our key market segments. So it gives us confidence in the solid momentum going into the second half, which we feel really good about.
Great. And then last one for me, I think, just on Education, up 5% in the quarter on an 11% comp, which I think was also then on a 13% comp a year before that. So great growth there over the last two to three years. Can you talk about the strength of that market and your position there? I mean it seems like the more approachable price points are working. And I just want to make sure that we aren't confusing the trend there of the lowering percentage, just how larger numbers work.
Yes, exactly. We feel great about our Education business, as you said, a strong quarter on its sort of growth on growth on growth. And as you said, it's becoming a much bigger piece of our business. So to grow on top of it is really impressive. I think it's a few things. We love the macros in the Education space. There's a lot of activity there, both in K-12 and higher education. But we remain really well positioned. Our approachable price points in both carpet tile and LVT have definitely helped us gain share there. And we're also selling nora, especially in K-12, which is one of our fastest-growing markets as well. So we're finding that selling across the portfolio is helping us grow that market as well.
Your next question comes from the line of David MacGregor with Longbow Research.
Congratulations on all the progress. Obviously, a lot of focus around gross margins here and just what you have been able to accomplish. And I realize there's a lot of moving parts. You talked about sales volume and pricing and mix and efficiencies. Can you help us understand just kind of maybe bridge for us the 131 basis points and just help us understand the composition of that growth? How much of it is volume leverage versus the mix, the pricing and the efficiencies?
As you pointed out, David, it's a mixture of all those things. The automation and robotics that we have put into our manufacturing facilities are a large piece of that 131 basis points of operational improvement. I think the key thing that is encouraging to us is these are durable and structural changes that we made to the business, which really help us on a go-forward situation. So that obviously has informed our strong guide around gross margins in the second half of the year.
And maybe mix as well, if you could talk to the contribution from mix. It sounds like nora was pretty strong.
Yes, mix definitely helps. That's one of the things I love about Laurel. She has really helped ingrain that into the organization, how important that is, really focusing on mix, and it's around geographic mix and product mix. And that's a huge helper, obviously as well, in helping us to improve our margins.
And also, David, the price that we took helped read through as well. So it was a mix of all those things.
We mentioned we did take some proactive pricing. We're seeing — as you're aware, David, we mentioned this on our last call — we're seeing low single-digit inflation cost increases in our raw materials. So we did do some proactive pricing in Q2. And obviously, as you know, the mechanics of the accounting, those costs sit up in inventory and flow through the P&L in future quarters.
Right, which gets back to your timing observation around Q3 versus Q4 gross profit.
Exactly. That's just how they flow.
Sure. Within nora, and I realize you've got a mix there of different products. You talked about Noravant and the progress you made there with the PVC-free product. But can you just talk about norament and data centers and the extent to which you feel you're succeeding with that product in heavier gauges in data center markets?
Data centers are still small for us. It's something that we've had some success in, but really where we're seeing the success is in labs. We've got strong performance in bio, in labs, and in higher education. A lot of our corporate relationships that historically we've sold carpet tile and LVT to — some of the large pharma or biotech companies — we're now selling nora and norament into their labs. So that's the play that has been really successful for us.
Okay. And just sort of leveraging off the story of success, maybe just talk about product innovation as a driver behind expanding total available markets and what that might represent as you think longer, maybe two to three years out, how you are expanding the total available market? You've got the medium price point now with the carpet tiles as well. So I realize it's happening in a number of different places within the mix. But how should we think about that as a top-line driver?
It's a great question, and we're really focused on the product portfolio. We think about it in two buckets. First is how we drive market share gains in our existing markets, and we're focused on that day in and day out. Then we focus on where and how we can best expand our addressable market in a way that suits our brand, holds up our margin requirements and fits our selling system. A few examples: there's the approachable price point in carpet tile, which has been really successful. We're expanding the Open Air collection, and we're launching the next platform on that. We've done that consistently across other product forms. In LVT, we have a more approachable price point and a thinner gauge. We also have some noraplan rolled goods that are at more approachable price points. Then the other example is Noravant and our first launch of Noravant Timber, the wood grain look, which takes all the benefits of rubber and adds a new design element, with the primary incremental opportunity in patient rooms, as we've discussed. That's really going after the premium end of the vinyl sheet market that we don't play in today. So we're thinking about it systematically, category by category, and how we can continue to expand the market.
With all that Laurel articulated, it's helped us diversify the company, and we're seeing the results of that in the P&L. We're able to say quarter-to-quarter — and we've been able to say this for a while — all product lines are growing and we're growing in our key market segments consistently. This quarter, we grew very broadly across geographies. It's encouraging to see the innovation really kicking in on the P&L and in the results.
Yes, it definitely is. And just to tie this back to capital allocation, do you feel like you've got sufficient capacity in place right now to support the expansion of your total available markets?
At this point, we feel good about our ability to support demand. The productivity and automation investments in our nora facility in Germany do a few things for us: they improve efficiencies, automate some of the toughest jobs to fill and help drive more throughput. That enhances customer service levels and increases available capacity. We are watching it regularly to see if we need to continue to expand and invest, and we'll do that as required.
Got it. Last question for me is just, you mentioned back to the office or back to work as a driver in the Corporate segment. Where do you think we are in that journey? Are we in early innings, mid-innings, late innings? Just what's your sense from what you're hearing back from your sales people?
In Corporate, we've said for a while we feel really good about the corporate space, and it fits so well with the Interface brand and our value proposition because there is a strong return to work. I think it's accelerating. People are really coming back to work around the world. The need to update the office space to the new ways of working is happening. We're seeing a lot of renovation work. It feels on the early end of that, certainly as more companies bring people back. We're seeing more renovation and redesign as companies redefine collaboration spaces and quiet spaces for focused work.
How much forward visibility do you have on that?
It's based on talking to customers and the trending we get, and thinking about the work that's coming through the A&D firms. We see it in our opportunity pipeline and in the order book as it flows through. A lot of it is feeling the market and getting out there with customers.
One of the great dynamics of our business is lease turn rates. When leases turn, it typically means some sort of renovation or remodel around, often flooring and paint. As leases turn and companies think about the design of the future of their office, landlords sometimes provide tenant improvement dollars, and that all goes into the mix around the R&R work that we're seeing in office, which is helpful for our business.
Are you still seeing pretty high levels of tenant improvement budgeting?
Yes, we are.
Yes.
Those dollars are still there. Congrats on all the progress.
Your next question comes from the line of Alex Paris with Barrington Research.
Congrats on the beat and raise. I got a couple of questions. First off, performance was led by Healthcare with global billings up 19%. Corporate and Education were both up 5%. Are there any other markets to call out, customer segments to call out beyond the big three, government, retail, et cetera?
No. The big three really account for the majority of our business and our primary focus. Government was up a little bit. Our retail business was up a little bit. So nothing really notable outside of the ones we've highlighted.
All right. Then perhaps we can dive a little deeper into Education. Q2 is really the education season, but I think that also bleeds into Q3 as well. What does Q3 look like?
Most of the billing has happened in Q2 as we ship the product in time for renovations that happen before kids go back to school. We had a really strong Q2 and feel good about where we are for Q3 as well.
Yes. And it's coming off of double-digit growth. I feel really good. Education is — we have such a great value proposition in that space. We feel really good about our momentum there and about our value proposition for the future.
And within education, what are the strong product lines? Obviously, you talked about design leadership, low-carbon, high-performing products, carpet tile, LVT, maybe some additional color there on product categories.
In K-12, our carpet tile does well in the approachable price points. Brighter colors are strong for that market. We have new collections that are doing well there, and LVT has historically been strong in K-12 as well. nora has been a strong growth driver in K-12, starting in cafeterias where maintenance teams appreciate the product for ease of cleaning. In higher education, it's really across categories: LVT in living spaces, carpet throughout education buildings, and nora in labs and science spaces. So it's a cross-category sell there as well.
Great. And then regarding the tariff refunds, I think you had said last year that about 15% to 20% of your COGS are subject to tariffs. What did you pay in tariffs in 2025? And is this one and done?
It still holds true that about 15% to 20% of our COGS are subject to tariffs. We're paying those every day. The refund that we got was the IEEPA tariff refund, which was a one-time refund related to the Supreme Court ruling that deemed those tariffs illegal. We filed for the refund, and that was for tariffs we paid as a blend of last year and this year. But we're still subject to tariffs and we're still paying tariffs every single day going forward. That's baked into our guide.
So the $15.6 million you got, that's part of the new revised full-year guidance?
Correct. And the ongoing tariffs — around 15% to 20% of our COGS subject to tariffs — are in our guide as well.
Got you. And then on proactive pricing, just to be clear, you said you're seeing raw material cost increases, inflation, and this is an attempt to get ahead of those increases.
Yes. We have taken price across the market, globally, in response to the known increases in our input costs. Our teams are effective at executing price increases. I'm proud of the work they've done to get ahead of it; it flows through the P&L over time with inventory.
Great. And then last question for me. Repurchases in the second quarter, repurchases in the first half: I think it was $8.8 million in the second quarter and around $21 million year-to-date. Is this new or accelerating? It is opportunistic, obviously. What color can you put around share repurchases?
You have the numbers right: around $21 million year-to-date. Our thinking is disciplined and opportunistic. We're going to continue to return excess cash to shareholders through share repurchases and through dividends. That's a key part of our balanced capital allocation strategy.
And how many shares did you repurchase in the second quarter? How many shares did you repurchase year-to-date?
Around 310,000 shares in the second quarter. In the first quarter, it was about 461,000 shares.
Your next question comes from the line of Reuben Garner with Benchmark.
Congrats on the strong quarter. Healthcare and Education obviously very strong. If you said a Corporate or an office growth rate, I didn't hear it. But just curious, what the opportunity is to see an acceleration? You mentioned return to office. There's also some other pretty strong leading indicators, whether it's lease turnover, absorption, general business confidence recoveries that have been on the way up. How do you think about the office portion of your business going forward? And can you remind us what percentage of your business that is today? I know it's probably much smaller than it was even just a few years ago.
The Corporate Office grew 5% in the quarter. We had strong, broad-based growth across the globe. We're seeing the return-to-work trend helping us. There's also a flight to quality — companies updating Class A space. I'm fighting a cold, so excuse me. The underlying trends are strong around the globe, and we're continuing to see that. We sell across the product portfolio, leveraging the Interface Design Studio to help customers design for the new ways of working. When they work with our customers, we sell across LVT, carpet tile and nora.
Office is around 44% of our total billings year-to-date.
Great. And then new products-wise, I can't remember the name of the product, but at NeoCon there was a new healthcare product launched. How has that launch gone? Is that a meaningful portion of the growth that you've seen? Or is that something that will take more time to be material within your Healthcare results?
Noravant Timber is the new product that brings benefits of rubber with a wood grain look showcased at NeoCon. That's not really reflected in our Q2 Healthcare numbers. We just launched it to the market; NeoCon was the first place we showcased it and got samples to our sellers in late Q1. That process starts with sampling and mockups. We're pleased with progress to date; it's early days. It will be a meaningful new platform for us. We've gotten strong specs from A&D customers and some major healthcare systems, so we're confident, but the impact will be more over time.
Got it. Last one for me. SG&A spending was a little higher. Can you talk about a couple things? One, is that where we would see the bulk of the freight inflation impact? Two, are there offsets in selling expenses or otherwise to think about going forward relative to the mix benefits on the gross margin line?
Freight mostly lands on the cost of goods sold line, not SG&A. The increase in SG&A dollars is mostly due to variable selling commissions; we overachieved the high end of our net sales guide, which resulted in higher variable sales commissions. We also had increased variable compensation across employees based on stronger sales and business performance. Foreign currency translation into U.S. dollars also increased the dollar amount of SG&A you see on the P&L. We are disciplined about SG&A, know where every dollar is spent, and we regularly discuss the need to be thoughtful and generate margin expansion on that line.
I'll add that we're focused on disciplined SG&A. Bruce is an excellent partner in ensuring we remain disciplined. We are investing in the front end of the business — sales commissions, the selling organization, innovation — and tightening everything that doesn't touch the customer or innovation.
Your next question comes from the line of David MacGregor with Longbow Research.
I thought I'd circle back with a couple of bigger picture questions. You had mentioned that you're ahead of plan on the gross margin journey. How much of this is about the destination or terminal rate? As you implement all these changes, do you see the terminal gross margin rate moving higher, or is this more pulling things forward faster while the ultimate terminal rate remains similar?
Appreciate the question. If you remember, our target was about 38.5% as our destination by 2030. We're ahead of where we thought we'd be and we're higher than expected because price, mix and efficiencies are coming together. That said, it's a dynamic world with input cost volatility and tariffs. We haven't stated a new destination, but our goal is to continue improving margins and navigate uncertainty while driving growth, innovation and mix to expand margins.
I guess second question: as you talk to architects, designers and corporate sponsors, to what extent have they moved from thinking about workplace outfitting as a pure expense to thinking of it more as a recruiting and retention strategy? Are they investing in the workplace to attract and retain talent?
Absolutely. Initially, companies focused on bringing people back. Many realized that returning people to the same office didn't meet new needs. They found employee dissatisfaction around lack of collaboration spaces and quiet rooms for calls. Companies now see the need to invest in the office to attract and retain talent. Our conversations aren't about just color — they're about the environment they want to create: collaboration spaces, quiet spaces for focused work. Customers want to solve for those things, and we help them do that every day. It's much more about human capital management and having a workplace that supports recruitment and retention.
We're also seeing this become more data-driven. Employee engagement surveys are increasingly used, and many ask about the work environment. Improving the space is a tangible way companies try to improve engagement scores. We see customers doing the same thing; it's a tangible lever to improve engagement.
Great. One more: AI. Are you seeing AI as a reason for customers to pause spending? Are you hearing people wait to see how AI impacts headcount or real estate plans?
We get the question about how AI will impact the workplace, but we are not seeing it slow demand. If anything, companies are looking to get ahead and encourage workers to come back. We're not seeing customers pause projects on the basis of AI; they're moving to invest in the workplace to attract talent.
There are no further questions at this time. I will now turn the call back to Laurel Hurd, President and Chief Executive Officer, for closing remarks.
Well, thank you all for joining us today. Thanks again to the Interface team for everything you do, and we look forward to speaking to you again next quarter.
This concludes today's call. Thank you for attending. You may now disconnect.