Interface Inc (TILE) 2007 Q3 法說會逐字稿

Thank you for your patience in standing by. Your Third Quarter 2007 Interface Earnings Conference Call will begin shortly. Again, thank you for your patience in standing by.

Good day, ladies and gentlemen, and welcome to the Third Quarter 2007 Interface Earnings Conference Call. My name is Latasha, and I will be your coordinator for today. At this time, all participants are on a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr. Bob Joyce, from Financial Dynamics. Please proceed, sir.

Thank you, operator. Good morning, and welcome to Interface's conference call regarding third quarter 2007 results. Joining us from the company are Dan Hendrix, President 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 the financial results.

We'll then have time for questions.

If you have not received a copy of the results release, which was issued yesterday after the close, please call Financial Dynamics at 212-850-5600, or you can get a copy off of the Investor Relations section of Interface's website. An archived version of this conference call will also be available through that web site.

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 condition, the commercial interiors industry, as well as risks and uncertainties discussed under the heading, Risk Factors, in Item IA of the Company's most recent annual report on Form 10K 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 statement.

Lastly, please note that this call is being recorded and broadcast for Interface. It contains copyrighted material and may not be rerecorded or rebroadcast without Interface's expressed permission. Your participation on this call confirms your consent to the Company's taping and rebroadcasting of it. With these formalities out of the way, I'd like to turn the call over to Dan Hendrix. Please go ahead, sir.

Thank you, Bob. And good morning to everyone. Let me start by saying that the third quarter was our best quarter ever. From a continuing operations standpoint we achieved record levels of operating income, operating income margin, and income from continuing operations.

These record results were made possible from our growth in revenue, with sales increasing 19% compared with the third quarter last year, as we continue to build market share and benefit from market trends toward our modular carpet solutions.

Our results were also buoyed by a lower interest number, a difference of almost $2 million year-over-year, as a result of our debt-reduction strategies that are beginning to pay off. And with the redemption of our 7.3% senior notes, which occurred at the very end of the third quarter, coupled with strong cash flows in the fourth quarter, our interest expense should continue heading south.

Our performance for the third quarter was once again driven by our modular carpet segment, with sales increasing 25% year-over-year. The strength in modular sales was broad-based, as revenues grew more than 20% to record levels across each of our key geographic regions, the Americas, Europe, and Asia Pacific. Our modular growth came from both the continuing strength of the corporate office market and from our segmentation strategy. The office and non-office growth rates were essentially neck and neck.

On the segmentation side of things, the institutional hospitality markets once again had the largest gains.

Notably for the first time ever, Europe modular non-corporate office sales growth rate outpaced its corporate office growth rate, which shows that our segmentation strategy in Europe is gaining further traction. Overall, the increased sales in our modular carpet segment drove its improved profitability with operating income up 45% compared with the same period last year.

Our floor residential carpet tile business continued to perform well, reporting its best quarter yet with both sales and orders up substantially year-over-year. Our Martha Stewart Collection of Floor Carpet Tiles has been launched and is doing well.

And as planned our Rug-in-a-Box product was rolled out in September to approximately 1,500 Target stores around the country. The product has been in the Target stores about a month. The initial sales are lagging our expectations, but it's early.

In our Bentley Prince Street segment overall revenues were moderately lower compared to the third quarter of 2006. However, the modular component within Bentley Prince Street segment had strong sales growth, which was in line with the demand we're seeing in our Modular segment, and which is indicative of the shift we have seen in the broader market-to-modular solutions.

We report operating income of $1.3 million in the Prince Street business, which is disappointing, since it was down from prior year, mainly due to disruptions from the installation of a new carpet tile backing line that will help the improved profitability of net business. And I expect the improved profitability to start occurring again in the fourth quarter.

The sale of our Fabric division which was completed in the third quarter also strengthened our balance sheet and contributed to our debt reduction strategy. We are now focused on floor coverings only, and we're now 90% modular in our sales.

We continue to see solid order growth in the third quarter with consolidated orders increasing 10% year-over-year, and the modular carpet segment orders increasing 14% year-over-year.

While this is somewhat more moderate growth compared to what we saw in the second quarter of 2007, we believe that the second quarter orders were positively affected by announced price increase, which resulted in some pull-through of orders in advance of the price increase. We also think the second quarter orders were also positively affected by our bigger presence in the institutional marketplace comprised of education and governmental purchasers, which has a busy buying season during that time of year.

I'm glad to say the first few weeks of the fourth quarter consolidated order rate have climbed back over 15%.

We entered the final quarter of 2007, which is usually historically our strongest quarter of the year. I believe the opportunities for Interface have never been better. We're very bullish about our marketplace and its shift to modular carpet.

Overall, we're growing our share in the expanding market. We continue to benefit from the secular shift toward modular applications through our segmentation strategy and from the penetration of carpet tile in emerging geographic regions such as India, China, Middle East, and Eastern Europe.

There's a lot of activity in the project pipeline, particularly in the United States. We were pleased with the pickup and orders during the first three weeks of the year -- I mean, the first three weeks of the fourth quarter.

In addition, we have a healthy backlog of orders up $30 million since the beginning of the year. With this momentum we're looking forward to a record finish in the fourth quarter.

Now, I'll turn it over to Patrick so he can give you some details of the quarter.

Thank you and good morning everyone. I'll now take a few minutes and outline some of the financial highlights from the quarter. Sales for the third quarter of 2007 were $279.5 million, an increase of 19.3% compared with $234.2 million in the third quarter a year ago.

As previously announced, the company sold its Fabrics division in July of 2007. And therefore the financial statements for the third quarter of 2007, in all other periods presented, now reflect the Fabrics division as discontinued operations.

The third quarter represents our 18th consecutive quarter-over-quarter improvement in sales. Currency changes positively impacted sales by approximately $7.2 million, and operating income by approximately $1.1 million during the quarter.

Gross profit margin in the third quarter of 2007 was 35%, compared with 34% in the third quarter of last year. SG&A expense in the third quarter of 2007 was $63.2 million, or 22.6% of revenue versus $54.4 million, or 23.2% of revenue a year ago. The reduction in SG&A expense as a percentage of sales is the result of our ongoing cost control measures.

Operating income for the third quarter was $34.8 million, compared with operating income of $25.5 million in the third quarter of 2006. As a percentage of sales, operating income increased from 10.9%, in the third quarter of last year, to 12.4%, which is a record operating income margin for the company.

Interest expense for the third quarter 2007 was $8.6 million, versus $10.5 million last year. The nearly $2 million of lower interest expense reflects our actions to reduce debt.

We expect further improvement as we begin to realize the full benefits of the redemptions of the outstanding 7.3% senior notes, which took place at the very end of the third quarter.

In the 2007 third quarter, income from continuing operations was a record $15.2 million or $0.25 per share compared with income from continuing operations of $9.5 million or $0.17 per share in the third quarter of 2006.

The third quarter of 2007 results included expenses on after-tax basis of 700,000 or $0.01 per diluted share for the premiums paid in connection with the redemption of the Company's 7.3% senior notes versus, 100,000 on an after-tax basis for premiums paid on repurchases of those notes in the prior year period.

Including results of discontinued operations, we recorded net income of $8.6 million, or $0.14 cents per share in the 2007 third quarter, compared with net income of $9.1 million or $0.17 per share in the 2006 third quarter. Depreciation in amortization in the third quarter of 2007 was $5.1 million versus $5 million a year ago. Capital expenditures in the third quarter of 2007 were $9.6 million, versus $5.4 million in the 2006 third quarter.

Turing to the balance sheet at the end of the third quarter of 2007, we had $77.5 million in cash. During the quarter we continued to improve the balance sheet with a reduction of outstanding debt of $81 million, again, primarily, due to the redemption of the senior notes. We currently have no borrowings outstanding on our domestic revolving credit facility. We have $7.2 million borrowed outstanding under our overseas line of credit.

Average DSOs during the third quarter were 52 days in both the third quarter of this year and last year. Our inventory turns were 5.7 versus 5.5 in the third quarter of last year.

Now I'll take a minute and review some of the details from the individual business segments.

We continue to see strong year-over-year growth. In our modular segment in the third quarter of 2007 total sales from the module segment grew 25.5% to $242.9 million from $193.6 million in the same quarter last year. As Dan said, performance in the segment was strong across all geographic regions.

Operating income for the segment increased 44.9% to $35.2 million, or 14.5% of sales from $24.3 million or 12.6% of sales in the third quarter last year, primarily driven by our higher revenue levels.

At Bentley Prince Street, sales were down 1.3% to $36.6 million, from $37.1 million in the third quarter last year, and operating income was $1.3 million compared to $2.2 million in the third quarter of 2007.

And I'll turn it back over to Dan with the final remarks.

Yeah, before we open it up for questions, I'd like to share with you a few highlights from this year's Ford Focus magazine. It's a survey that's about 250 design firms in the United States. It just came in last week.

"For the ninth year in a row, Carpet Tile was named the number one hot product, and for the fourth year in a row, Interface was ranked number one in the best overall experience."

Obviously, we're very thrilled with these results, and I hope it gives you a sense of what U.S. customers are saying about Interface and about our products.

With that said, I'll open it up for questions.

(OPERATOR INSTRUCTIONS)

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

Hey Dan, hey Patrick, how are you?

Hi, Sam.

A few questions for you. I guess I'll hit the difficult one first. This is the first quarter in a -- in a while that the book-to-bill ratio was under one, and I'm just curious as to whether that to you indicates a longer term trend going forward. I know -- I know you're talking about a re-acceleration of orders in October, but what gives you confidence that you can maintain a sales growth north of 10% or 15% or so in the foreseeable future?

Well, first of all, we had a book-to-bill ratio in the fourth quarter that was the same, last year, just to give you a data point.

All right.

I would say that the order activity if you look at United States, the order activity, there's just a lot of business out there. I hate to say some of it got delayed with the crisis that we were having in some of our dealers, from a credit standpoint, didn't place the orders because they knew we would ship it to them.

I would say that some of that is freeing up today, and when you look at the activities, some of the major projects are coming through in this quarter.

If you look at Asia Pacific, it's on fire. If you look at Europe, I'm so pleased with what's going on in Europe with double digit growth, and the profitability expansion there. And so I don't really -- and we got emerging markets that represents over 10% of our business now that are growing very fast.

We're not tied to a U.S. office market, and we're mid-20's in that exposure. And so I'm just very bullish about what's going around the world, and I think the U.S. is clearly got a lot of growth left.

When I talk to our sales force, I talk to John Wells who runs that business, he's saying the activity is clearly out there, and design firms are busy. They just nearly can't do the work, so, just a question of when it's going to come through, not if.

Do the corporate versus the non-corporate demand either in the quarter or what your expectations are, are they still running similar, or is non-corporate now exceeding corporate?

Now, they were neck-and-neck in this quarter, Sam. We put -- that was actually in the script, but they were about the same percentage growth in the third quarter.

And you suspect that that's going to -- that that relationship holds in the near term?

Yes, I would hope. Believe it or not, that the non-office outpaces the office. Because that's the much bigger segment than the office. So if we do our job, the non-office out to outpace the office.

Got you. A couple of bookkeeping questions, or housekeeping questions. Did you mention, Patrick, and I missed it, the amount of the carpet tile backing costs in BPS in the quarter?

It was probably $400,000 or $500,000 impact.

And let me explain that a little bit, Sam, because you can't put it in a press release or a script very easily. What we have today is the backing for that business at Bentley Prince Street, which is in California -- it's down in LaGrange, so it's tufted in California and shipped to LaGrange and back and then shipped back to California to be shipped, and when you have a mix change to modular carpet, it's very expensive process and the margins really are going to be positively impacted when we start backing out in California.

So, you have this whole shift to modular within Bentley Prince Street, and it's very costly to back it in LaGrange and ship it out.

So, will there be further costs to this in Q4, or will Q4 be more of a natural --

I think Q4 will be more of a natural -- we're not going to crank that line up until Q1, but I think that from a disruption standpoint, the line is in, and we're commissioning it so you won't have all that disruption you had before.

Any other bottlenecks in the U.S. that --

No.

Okay. Two other quickies, and then I'll defer to others. With oil costs rising, I think you said you instituted a price hike, would you -- are you seeing something on the costs side over and above that, or are you suspecting further price hikes given where oil is now? Can you give a little color to that?

We really have not had the noise that we're going to see some price hikes to date, not to say we won't, but we really haven't heard that noise today.

And last question, I guess by year end, your debt-to-cap should be pretty close to where I would think your optimal capital structure would indicate. What are your thoughts with free cash flow usage perhaps in 2008 in terms of your -- where you'd like to see it go?

Well, you're right. We're pretty much at the --we'll be 45% in a debt-to-cap at the end of this year. And that opens up, obviously a possibility to stock buybacks and so forth, and we're not -- I'm not pushing to be an investment grade and have no debt, so we have a lot of options what to do with our free cash flow. Invest in capacity in the modular business; buy back stock, increase dividends, whatever. Those options are open for our Board to discuss, and we will.

Do you have a preference?

Well, I can't make the Board call. I personally have a preference, but I'll wait for the Board.

I see. Okay. Thank you much.

Your next question comes from Keith Hughes, with SunTrust. Please proceed.

Hey, Dan, can you give us an update of Bentley Prince Street? How much of that business is tile right now?

25%.

25%.

It's been at 25% for a while, has it not?

No, it's actually -- I think we'll end the year closer to 30%, if you look at the third quarter and fourth quarter.

Is the new backing line -- will that accelerate that now?

No, wait. Yes, it will. It will make it a lot easier from a service standpoint. Our lead time out of California for that product --

(inaudible).

-- are not market (inaudible) --

I'm not sure about -- (inaudible).

Well, then we --

I think they revised it down. I know he said he was taking his down.

(inaudible). One other question. Until you make the decision you talked about as a response to Sam's question, would you still be in the market to buy back some of the outstanding bonds?

Of course, yes.

Okay. And on inventory, where do you stand versus orders and inventory right now? Are you a little low, or in line, or what's your feeling there?

I think our inventories will come down in the fourth quarter. They typically do.

that's usually our best as far as working capital reduction a quarter, because you have a lot of people that want product delivered in the fourth quarter before their -- before they lose their budget, so you have a lot of stuff coming out of inventory. So I think you'll see that come down in the fourth quarter a little bit.

And on the use of cash, would acquisitions be part of that?

No, there's not really any acquisitions out there that I think we need in portfolio. I think there's tremendous head-room in modular carpet on a global basis.

Right.

When you talk about all the different segments that you can put it into, I just don't think we need anything from an acquisition standpoint to grow the business right now.

Good deal. Do you think we'll have a more definitive kind of corporate statement on the use of cash, at the next conference call?

Probably in the February, yes, the February meeting.

All right. Thanks a lot.

Thank you.

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

Good morning.

Good morning.

Interest expense. By my calculation, that's 9.5 and 10.375 or about $31 million of gross interest. Will there be other interest, Patrick, and then will cash that you're building offset that? How do we think about interest expense in '08?

Correct. And yes, it will be interesting, kind of related to the $75 million to $100 million in cash that we should have. There was a little bit of interest expense overseas as we tried to recreate (inaudible) some of that cash to utilize my NOL here in the United States and get that interest expense overseas to reduce some of that taxable income. But going forward, you should look at interest $7.5 million to $7 million go-forward basis on a per-quarter basis.

Okay. Great. And then the order rate of 14% in carpet tile, Dan, did that differ geographically much?

Yes, the strongest was Asia, then Europe, then in the U.S. lagged behind.

Okay.

We don't give it by region, but I'll give you that soon.

And that pick up you've seen since the fourth quarter started, is that in broadloom only or is that in carpet tile also and then if it is in carpet tile, is it picking up in the U.S., or is it just picking up in Asia and Europe?

Yes, it's picked up. You look at sequentially where the U.S. is, it's picking up in the U.S. from the third quarter and it's also picking up in broadloom.

And it's picking up in Europe and Asia, so it's pretty much across the board.

Okay, great. And then, help me understand the Bentley hit on the backing line. I'm confused; it hit the third quarter, and it's not going to start running until the first quarter. But the impact will be less in the fourth quarter.

Dan, we had a lot of disruption associated with clearing out space for the line and installing the line. Every time we've put in new packing technology it always disrupts the plant. So you're going to have that disruption. You won't get the benefit of the cheaper backing, but you will -- you won't have the disruption that we had.

Okay. When do we -- is it second quarter when we see --

No, it will be commissioned in this first week in January.

Yes, but you probably have some start-up or whatever, so, I mean, I guess we would expect to see benefits from --

I think you'll see benefits in the first quarter, John.

Really? That soon. Okay. Good.

Comment on average selling price per square yard, meter, or whatever you track?

I would say the average selling price is not moving up much. We haven't had a price increase except for the one we had in June. So I would say the average selling price might be up a few percentage points, but it's not big. This is all organic growth.

Okay. And then, just a comment, and we watch this architectural billings index. I don't know how good that is, but it's plunged the last two data points, August and September. And yet you say, John's out there in touch with these guys every day, and there's a lot of business out there. Make that link or help me understand, kind of.

I don't look at that one. I just go by what the activity is at design firms, and there's a lot of activity out there project-wise that we're working on. Our project pipeline that we track is full.

Okay. Is it your sense, Dan, that maybe you're picking up share still and the market really has weakened some but you're picking up some share, or is the whole market still very strong?

I think the market is not as weak as we think it is, but we're obviously picking up share. We're outpacing the market in the United States.

All right. And then, I know you're not to give me numbers of profitability in modular by geography, but some kind of sense for where Asia and Europe are in terms of catching up with the U.S. would be great.

I would say Europe and the U.S. are now comparable, and Asia I think will be there in the fourth.

Wow, great. And last one, bottlenecks, was it Australia, Asia in general --

In Asia, we have bottlenecks in our Australian plant, for sure. We're running it 24/7 and that's the only place we have bottlenecks today that's impacting business.

And that gets resolved by --

It will be -- we put in a new backing line in Australia that's now running, and we should be seeing the benefits of that in the fourth quarter. That's part of the profitability enhancement there. And then we'll just continue to invest in Australia when the U.S. can meet demand. But we don't really have a bottleneck in the U.S. today.

Great. Thank you very much. Good luck.

Your next question comes from the line of Stephen Kim with Citigroup. Please proceed.

Hi. Good morning. This is Mark Montana on the line for Stephen. Regarding the strong second quarter orders, I seem to remember there being a few price increases over the last 18 months or so. Was there something in particular about this price increase which caused an increase at the end of the quarter?

It was pretty close to the end of the -- it was in June --

Okay.

Typically you pull -- you pull business through so people get ahead of the price increase, and we didn't have one last June, a year ago.

Oh, okay. So it was more of a (inaudible) --

Right.

-- phenomenon? Okay. And then regarding also the increased orders, could you quantify your change in exposure to the institutional marketplace?

We don't quantify that. We give so much out now that -- my competitors see what they're doing with all the data we give them, but that's one thing we don't give.

Okay.

I would say that institutional is the biggest segment that we have, besides corporate office.

Okay. Okay. And then, secondly, over the last few quarters, it seems sort of that the order trends exhibited in the prior quarter are equating just consistently slightly lower sales trends in the subsequent quarter? Is there something in particular causing this as if recent or is it certainly merely due to the fact that these orders typically provide only six weeks or so?

Well, they're only six weeks, but you know if you look at last year's third-to-fourth, billings were ahead of orders last year third-to-fourth.

Right, yeah. I just noticed that in the last few quarters, just wondered if there was something in particular.

No.

Okay. Great. Thank you.

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

Thank you, ma'am. Good morning.

Hey, Matt.

Dan, first on the comment you made about the project pipeline, can you tell us how that stacked up versus say last quarter, last year, in the U.S., maybe either the size of the project pipeline, maybe any differences in the size of the projects, and then any color across the difference segments, is it office projects, is it hotels, is it institutional? What can you tell us?

Our project pipeline, we look at it 30, 60, 90, and out over 180 days. And when you look at it, it is as robust as it's been all year, which gives me a lot of comfort that we got a lot of work that we can go out there and get.

We don't break it down by segments. We don't -- we could, but I don't look at it that way. Our sales force looks at it that way.

But I would say that our business sin the United States is 50% office and 50% non-office in that pipeline, and I would say that the projects probably fall out the same way.

And then the strength in the project is it across the globe as well?

Yes, oh, yes, Europe and Asia are probably stronger than the U.S...

Okay. And we talked about -- I think you just mentioned in one of the previous questions that some of the -- you actually felt some pressure -- relative pressure, I guess, in the margin on, from Asia, Asia running below the overall modular average. Can you quantify that at all?

We probably left $1 million dollars on the table in Asia related to the Australian plant running 24/7 and trying to keep up with that.

So that will not recur in Q4, or --

We ran it very well in September and we're running very well in October.

Okay. And then --

The confidence like I had to tell John Baugh that I think Asia will catch back up in the --

Right, right, right. That's good. And let's see. You talked about the Bentley Prince Street pressure, I understand was that the backing line is not going to cause pressure, it's going to cause some benefit as you move into Q1. I think you talked about an 8% type of target there. And originally I think it was on a run rate, and I understand the impact in the near term. Is that our run rate for this year, are we talking about a first half of next year? Is that the type of number we're looking at? I'm trying to get the benefit of --

I would say that I'm very -- I'm disappointed that we have not been able to really break that 5% and head toward 8%. I would say next year, if you're modeling it out, I would be in the 6.5% to 7% range. I wouldn't model in 8%.

Sure.

But I would say that once you hit a 7%, 8% on the Bentley Prince Street business, it has a very low asset base, that you do return a pretty nice cost of capital and have some pretty nice cash flows because the capital investment in that business are very low.

Okay. And to get to -- other than this backing line, is it really just volume, is it really -- or is it more of a mix shift that's going to get you to 8?

Well, I'd say it's the modular shift, which once you get the back line there; modular is going to be more profitable than the broadloom piece. And I think we just got to be better in operations. I've been very disappointed that we continue to have operational hiccups there, and we need to get better in operations. And if you get the top line growing to between 5% and 10% you can get to that number.

Okay.

You have the modular shift, and you perform operation in the plant.

Okay. And the final, I don't know if you can quantity this, but you talked about a couple of times that the pressure to order is in Q3, but the price increase, the credit market issues, can you maybe talk about orders that were -- that the magnitude of the pull-ahead versus the delayed orders?

Yeah, you talk about the pull-ahead; you're probably talking about you pulled ahead $8 million to $9 million on orders in that quarter. If we went back and looked at it, when we looked at the order rates and that's sort of what the business felt like they pulled ahead.

If you look at what got delayed, that's really hard to quantify. You don't go out there and ask why they delayed an order, but I would say that some projects got delayed.

Was the magnitude roughly in line with the --

Matt, I don't want to go out there and speculate on that. I can tell you that the order -- the dollars coming through now are better in the fourth, and that's some of the orders that we got that we thought we were going to get in the third that were big project orders, and a couple of them that came through.

Okay. Okay. Thank you, guys.

The next question comes from the line of Chris Van Ens with Wachovia. Please proceed.

How's it going, guys?

Hey, Chris.

Hey, on the SG&A to sales line, the year-over-year improvement, can you just remind me generally on some of the measures you guys have taken to contain that ratio?

Nothing unusual than we have in the past. We've been judicious about some of our marketing spend. Historically a lot of the cost for the residential initiative was front-half loaded so a lot of that has already occurred in '07; some of the catalogs and merchandising and so forth is the front-half.

We have not had in the third any of the unusual one-time -- the incentive costs, but nothing out of the ordinary that we haven't been doing in the past.

Chris, I would say we took a philosophy when we had the downturn, that if it doesn't increase sales or it doesn't increase productivity, then we don't need that cost. And that philosophy, we pretty much have held that through this whole upturn. And so we're very very good about making sure that if we increase a cost that it's going to increase sales or productivity.

Okay. And then, with a strong growth, I mean, especially in modular, are you guys seeing any sort of relative weakness on any of these sort of nonresidential sub-segments at all?

No, but if you look at -- and one reason we probably haven't seen some of the weaknesses is because modular penetration of some of these sub-segments are so low.

So if you go into hospitality and the penetration of the hospitality market's less than 10% in modular, so you have an opportunity to take share even if the segments are sort of weak. Same thing in education, the penetration is fairly low, and so we really haven't seen -- and if you go out to Europe and Asia, the penetration is extremely low.

So, we're not a proxy for weakness in that segment overall, because we don't -- we have such opportunities to increase business in those segments that we're not as focused on what's going on from a overall macro standpoint in those segments.

And then, Patrick, I might have missed this, but did you give a Q4 CapEx forecast and then maybe a '08 one as well?

I have not, but I would imagine CapEx will probably in the $10 million to $12 million range in the fourth quarter, and frankly we're still evaluating the '08 CapEx number right now. We're going to undertake the budgeting process and go into our strategic review process in December.

Right now it's -- it's unclear right now, the CapEx, but I sense it will probably be in the $35 million to $40 million range excluding perhaps maybe a large investment in the new facility somewhere in the world, but kind of to be determined right now.

Okay. Well, thanks, guys.

Sure.

Your next question comes from the line of Jeff Kobylarz with Stone Harbor Investors. Please proceed.

Good morning, guys.

Hey, Jeff.

Three months ago with your second-quarter results you said that you thought you grew twice as fast as the industry. Do you have a comment what your guess is for this third quarter?

Probably the same or better.

Okay. And a question about the restrictions on water use in Georgia, can you say just how that will impact you and how important water is to your manufacturing?

If you looked at our eco-metrics online, Jeff, we reduced our water consumption by almost 90% in our Georgia plant. We have very little water use in our Georgia plant.

Okay.

It's really only in the latex mixing that we have water. I mean it's important, that you mix latex, but our usage is very very low.

Okay. All right, good. And can you say what percentage of your revenues were international this quarter?

It's comparable.

It's been running - -it's been running internationally 41%, it's probably very similar, because both -- all the businesses are up almost the same.

Okay. And then, lastly, just -- can you say where demand is coming from? Do you have a feel what the mix is between new builds and renovations?

We're still around 80, 20. We track that pretty religiously, and in the United States it's still at about 80/20.

Okay. Great. Thanks very much.

(OPERATOR INSTRUCTIONS)

Your next question is a follow-up from Keith Hughes with SunTrust. Please proceed.

Yes, just real quick. You'd mentioned the residential products and the prepared statements. Can you give us an idea of what kind of run-rate that's on; is it still losing money?

Yes, still losing money. We're investing with Martha Stewart and Target rollout. Run-rate wise we'll approach the $30 million as we've been saying all year.

All right. Thanks, Dan.

In the U.S. You throw in Europe; you'll be approaching almost $50 million.

Did you make money in Europe in that business?

We're getting ready to be break-even there.

All right. It's one -- any one specific country in Europe you do best in residential tile?

We do very well in the U.K. and Germany, and a little bit in France.

All right. Thank you.

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

Yes, Patrick, the D&A I think you said was 5.1 and a quarter, is that right?

That's right.

Okay. And then is there a similar run rate then going forward, or does it pick up a little bit with increased CapEx?

It might pick up in the second half of next year; some of those projects that we're doing this year will come through.

Okay. So we're looking at a delta between CapEx and D&A of $15 million to $20 million before the decision on whether to build this new plant or not?

That's correct.

Okay. Thank you.

And I show no further questions in the queue. I would now like to turn the call over to management for closing remarks.

Well, thank you guys for listening to the call, and I hope we're going to report a great fourth quarter. Have a good end of the year. Thanks.

This concludes the presentation, and you may all now disconnect. Good day.