Armstrong World Industries, Inc. (AWI) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Armstrong World Industries, Inc. Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. It's now my pleasure to turn the floor over to Tom Waters, Vice President in Treasury and Investor Relations. Sir, the floor is yours.

Thanks, Huey. Good afternoon, everyone, and welcome. Please note that members of the media have been invited to listen to this call, and the call is being broadcast live on our website at armstrong.com. With me this afternoon are Matt Espe, our President and CEO; Tom Mangas, our CFO; Frank Ready, CEO of our Worldwide Floor businesses; and Vic Grizzle, CEO of our Worldwide Ceiling business. Hopefully, you have seen our press release this morning, and both the release and the presentation Tom Mangas will reference during this call are posted on our website in the Investor Relations section. In keeping with SEC requirements, I advise that during this call, we will be making forward-looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong, please review our SEC filings, including the 10-Q filed this morning. Forward-looking statements speak only as of the date they are made. We undertake no obligation to update any forward-looking statements beyond what is required by applicable securities law. In addition, our discussion of operating performance will include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of the presentation. Both are available on our website. With that, I will turn the call over to Matt.

Thanks, Tom. Good afternoon, everyone, and thanks for participating on our call today. In the third quarter, we saw a positive commercial volume growth, leading to disappointing top line sales. We were able to deliver adjusted EBITDA results near the top end of our guidance range. In the quarter, we experienced significant positive achievements and, unfortunately, some continuing challenges. Noteworthy for us in the quarter was the start of production at our China heterogeneous flooring plant in August. And that, we have completed our 3-plant construction effort and have dramatically changed our footprint in Asia. This positions us to benefit from the significant growth we expect in the region in the coming years, particularly in our targeted verticals of health care and education. Now closer to home, we announced a $41 million investment in LVT manufacturing here in Lancaster, Pennsylvania. By utilizing an existing facility, we'll be able to accelerate the project timeline and leverage existing infrastructure and plant management capability. Construction will begin in early 2014 and shipments from the plant will start in the first half of 2015. In terms of quarterly financial highlights, we achieved record adjusted EBITDA in our global Ceilings business. This is accomplished with volumes down more than 20% from peak levels and is a testament to our ability to cut and control costs, the right product mix and manufacturing productivity and achieve price over inflation. This result is also partly attributable to our WAVE joint venture, which has also grown profits despite lower volumes. Additionally in the quarter, 2 of our largest shareholders, the Asbestos Trust and TPG, executed a sale of 12 million shares of our stock. Armstrong repurchased 5 million shares as part of the transaction. This investment of $260 million on our part, which was accomplished using surplus cash, will…

Thanks, Matt, and good afternoon to everyone on the call. In reviewing our third quarter results, I'll be referring to the slides available on our website starting with Slide 4, key metrics, as Tom Waters already covered Slide 2, and Slide 3 is simply an explanation regarding our standard basis of presentation. Matt mentioned that quarterly sales grew 4.8% and adjusted EBITDA declined 8.6%. Adjusted operating income and adjusted EPS were also down versus last year by 13% and 11%, respectively. Third quarter free cash flow of $95 million was up from the $78 million generated in the third quarter of 2012. I'll address the drivers of EBITDA and free cash flow in more detail on upcoming slides. We closed the third quarter with net debt of $930 million, up from $784 million into the third quarter of 2012. Net debt was impacted by our recent $260 million share repurchase, partially offset by 12 months of positive cash generation. Finally, our unadjusted return on invested capital on a continuing operations basis was 8.3%, down from prior years as profitability was lower due to our plant startup costs, issues in Wood business, softness in Europe, lower year-on-year pension credit and a higher effective tax rate. Slide 5 details the adjustments we made to EBITDA and provides a reconciliation to our reported net income of $56 million in the quarter. As you can see, there was minimal impact from cost reduction items and foreign exchange in both the current quarter and prior year. Interest expense was lower than in 2012 as a result of our March 2013 refinancing. Tax expense was slightly higher despite earnings being down year-on-year, primarily due to a greater unbenefited foreign losses in 2013 and to the significant foreign tax credit valuation allowance released in 2012. The year-on-year…

Thanks, Tom. As you'd expect, we're now in the midst of our annual operational planning cycle. As in past -- excuse me, as you expect, we're now in the midst of our annual operational planning cycle and, as in past years, we provide specific 2014 guidance on our next earnings call. I did want to take a moment and share a few of our initial insights to help frame what 2014 might look like for us. As we look at the revenue outlook, we're cautiously optimistic about most end markets. North America and commercial markets should continue the modest growth we saw in the second quarter, with office and retail leading the way. In the North American residential sector, we believe new home construction will continue to grow, but the housing starts will likely be up less than the 20% year-on-year improvement we're seeing this year. Repair and remodel activity will likely continue to see modest growth, but to be fair, this is an area where our visibility and confidence are a little more limited. We don't expect much really, if any, sales growth from the developed markets in Europe, but do expect to see growth in Eastern Europe, Russia and the Middle East. Growth in Asia market should continue in the double-digits, but weakness in Australia will suppress our overall rate of growth in the Pacific Rim. Regarding productivity. As you know, our gross margins improved every year from 2008 to 2012 as we shut plants, reduced costs and enrolled Lean through our operations. However, this trend reversed in 2013 as we absorbed startup costs and manufacturing inefficiencies of our 3 new plants in China, which Tom has just discussed, and as we struggled to meet demand in solid wood. In 2014, we'll be back on the path of improving gross margins despite the continuing ramp of our China facilities and expenses associated with the Russia and LVT projects. 2014 gross margin should be about 75 to 150 basis points better than 2013. As I said at the outset, we're still in the process of building our plans for 2014, but wanted to share an early glimpse of our thinking. And then finally, we continue to believe that our mid-cycle guidance of $4 billion in sales, 20% EBITDA margin and ROIC exceeding 15% are achievable from the manufacturing and sales platforms we have in place and under construction. So with that said, I want to thank you for your time today, and we'd be happy to take any questions.

[Operator Instructions] And it looks like our first question on the phone lines will come from the line of Dennis McGill with Zelman & Associates. Dennis McGill - Zelman & Associates, LLC: For the first question, I guess, could you just expand a little bit on a comment that you made about the marked slowdown I think you mentioned in September, and then it sounded like it was across both residential and nonresidential? Can you just maybe be a little bit more specific on what you saw and whether that's your orders, that you're hearing that from customers as well or anything further?

Sure. It was broad-based in both commercial and market segments. We believe that this is not a share issue with us. We think it was market-based. We saw within those numbers -- and again, commercial slowdown, remember, affects both of our businesses slightly differently. When you consider commercial office, that will affect Ceilings more than Floors. Health care, education, probably, somewhat equally. So the dynamics around the segments we pursue affect our businesses somewhat differently. But I'd say within that, the relative performance we saw, health care and education, everything government-funded, continue to get soft and got a little softer. Retail is holding up relatively well and commercial office space softened a little bit and -- as we went through the quarter. Residential demand slowed down, still strong year-over-year, but I think sequentially slowed down as we entered the end of August in September. That's probably -- we would assess that being a function of a little rise in the mortgage rates, some overbuild in the builders and maybe some tightening of the credit restrictions.

Yes. I think that in October we've seen the commercial come back a bit, Dennis, but we've seen residential still be pressured a lot.

Our next questioner in the phone queue will come from the line of Michael Rehaut with JPMorgan. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Just on -- had a couple of quick questions on the Ceilings business. The profitability there continues to be very, very impressive. And I just wanted your thoughts in terms of, as you look at that business over the next couple of years, some of the puts and takes? And if you could just review us, kind of review with us your thoughts on incremental margins there? With the margins this quarter, understandably, that's seasonally a better quarter within the year, but still at around 21%, how much better can that go? And particularly over the next year or 2 -- sorry for the long-winded -- but particularly over the next year or 2, if you have continued above-average growth in Architectural Specialty, which is a below-average margin business, just some of the puts and takes.

Yes, that's a -- those are all very good questions. I -- no, we're not providing specific guidance for 2014 and beyond on this call, but to try to answer your question more broadly, we're confident in the ability of our ABP business, our Ceilings business, to continue to drive profitability and expand margins even in a flat volume environment. And we would expect, as we think about 2014 and beyond, as we said, that we're looking for slight incremental volumes, slight incremental volume increases in the commercial market segment. So that should bode reasonably well for the business. Incremental margins for Ceilings, we said are in the 30% to 40% range. The drivers for our business continue to be really all 4 commercial segments. The remodel and repair business provides very strong margins, very strong mix for us. The business continues to invest in new product introductions and mineral fiber, with improved acoustic and light attenuation properties. We have very solid relationships with our channels around the world. We are seeing very strong markets in Asia, particularly in China and India, as we pointed out, in the Middle East, very strong business and in Eastern Europe. The Architectural Specialties, as you said, is now a global business platform for us. Vic and the team globalized the business structure about a year ago. We've seen strong double-digit earnings and revenue growth as we continue to gain share in a somewhat more fragmented part of the business than we see in mineral fiber. That the combined value proposition is very strong and in the global architectural community -- the ability to combine Architectural Specialties platforms with very strong mineral fiber businesses is a somewhat unique value proposition, and we think that differentiates us. And again, our position in market -- very strong markets like Asia and the Middle East where we see relative strength there, there's a lot of confidence that the business will continue to grow and expand margins as we go forward. Any revenue here or any volume here would help a lot.

And one other point. You are right, Mike, that -- this is Tom, by the way. Third quarter is seasonally the high point for us in our annual quarterly progression of margins. We're pleased that every quarter this year, we've been ahead of the prior year quarter despite the investments in the emerging markets. And that's what gives us confidence in the mid-cycle guidance that Matt talked about in the script that we know -- we believe that that's still an achievable goal for us. And as we've talked before, we -- running through the model and the incremental volumes, we would expect that those incremental rates, we think the Ceilings business on a full year basis could get up to the high 20s as a EBITDA margin. And as you can tell, on an adjusted basis, we were at that point in the third quarter already this year. But again, that's the seasonal high point.

Our next questioner in queue comes from Keith Hughes with SunTrust.

Yes. Kind of a follow-up question to the first one on the October results so far. Within residential, are you seeing a distinction between the renovation or transactional type business versus what you're getting out of the home builder channel in October?

Keith, this is Frank. On a relative basis, they both decelerated in the second, third week of September. Those retail customers where we get POS data, we -- for our category, we saw a deceleration. And we have seen somewhat of a pause in new construction as well. So it's really across both.

Next questioner in the phone queue comes from the line of Kathryn Thompson with Thompson Research Group.

My question is first focused on Wood Flooring. Given some of the hiccups that we've had in terms of pushing through the price increase, but also managing operational inefficiencies with the perverse problem of trying to keep up with demand, how should we think about margins going forward? And then also, is there any type of -- is there any mix that we should take into account when taking into account margins as we model going forward?

Well, Kathryn, that's a good question. I mean, as I said in the prepared remarks, I mean we're not going to provide additional transparency on the segment going forward. The -- I think our biggest single challenge, as we think about the third quarter actual performance versus expectations, was the coming up to speed in terms of capacity in the plants and timing of increases over inflation, and lumber inflation sort of increasing a bit again, at least, on very targeted species. So we -- we're continuing to work on all 4 items. I think our immediate focus or our primary focus at this point is capacity in the plants. We do have, as Frank pointed out, kind of a softening in demand as we entered -- exited the third quarter and entered the fourth quarter, we're -- that allows us to work down some backlog obviously, but that's a little bit of concern as well. So we're going to work the items hard. We expect continued progress. We know where we need to be by the end of the fourth quarter. But at this point, we're a little reluctant to add additional quantitative color on the business segment.

Yes, we're not -- Kathryn, this is Tom. We're not moving off of our mid-cycle guidance expectation for Wood, which is in the mid- to higher-teens for an EBITDA margin. We're just not guiding which quarter that's going to start showing itself because we are facing those headwinds and continue to see volatility in the commodity market.

And I would just -- what I'll just comment with -- I mean, we're seeing progress across all fronts. It's just -- the issue is not that we're not making progress, the issue is we're in pace with the progress in some of the items. So that's how I'd characterize it as well.

Our next phone question will come from George Staphos with Bank of America Merrill Lynch.

I had a 2-part question on pricing. I thought I saw or heard you say that in residential Flooring, pricing was down in aggregate. Was that mostly a mix issue and could you talk to what was driving that? And then looking at Ceilings going forward, how much more opportunity do you think you have to sell higher value and sell higher mix and, for that matter, pricing? Or do you think your earnings leverage from here will really have to come from really from volume?

Yes, I'll -- let me take the Ceilings question first. The business has historically been able to get price over inflation. Even in -- as we've pointed out, we had record earnings with volumes down 20% from the peak. The market rewards mix, so there is a general innovation in mineral fiber ceilings. We continue to see opportunities to drive price near the marketplace. There's nothing that would indicate that we're near the end of that. So as we get price over inflation, the business has worked very hard to continue to refresh its product mix, which drives mix. So I think we're very optimistic that we'll continue to do that. And there's nothing in the external environment that would indicate that the architectural community and the end users are not in the position to appreciate new product innovation using applications. So -- and we are continuing to drive productivity as the plants -- as we fill the plants. Lean has made a significant contribution in the productivity of the plants. We've continued to invest in cross inspection of the plants. So it really is a balanced approach. I mean, this business, even with significantly weaker volumes, continues to execute, price over inflation continues to drive new products in the marketplace, hence mix. We have very solid and very stable and very strong channels to market with our independent channel partners and continues to drive real productivity. So that combination delivers kind of earnings growth and performance that we've seen really for the last year or 2. And then Frank, do you want to take the wood question?

Yes, sure. Just on the price question, just to clarify. In the Wood business, we got price realization just short of $11 million, which covered just over 80% of the in-quarter inflation. To your point on Resilient worldwide, you saw some price degradation about $3 million. Really, the primary driver of that is we're actually seeing deflation in some of the core input costs in the Resilient business, which is resulting in some price give as a result. And that's really across North America as well as Europe.

Our next questioner in queue will come from Ken Zener with KeyBanc Capital.

Perhaps if you could remind us how -- you guys are doing an expansion that will become effective in '15. A competitor is bringing -- also doing some domestic expansion. Can you give us your thoughts on kind of what that means with production coming back into the U.S., I guess taking away what's being imported from China, and what that might mean in terms of the competitive landscape as we move into '14, '15?

Well, yes, Ken. I mean, I'm a little reluctant to comment on what our competitors' investment pieces is, but I think the economic value proposition is the same for both of us. I mean, there's a significant productivity benefit as it relates to supply chain costs and distribution costs and reinsourcing that product in the U.S. We are, as we said in the comments, we believe we're uniquely positioned to achieve this in the most productive way because of the fact that we're using an existing plant but also the specific layout of our plant, the manufacturing, engineering innovations that we'll be able to deploy in making the LVT. So it's a category that, as we've said, is driving the growth inside Resilient. It's growing at a multiple to the marketplace. The margins are very strong. It's a relatively small part of the segment but, as I said, rapidly growing. It is a product line that has a fashion dimension to it, so the ability to keep the product line fresh is very critical to driving value in the market. And of course, the savings from reinsourcing this, with relatively low labor content in the U.S., really makes it a very compelling value proposition for us. And so, that's why we did it. Thank you.

Our next phone question will come from David MacGregor with Longbow Research.

Just looking at the growth initiatives you've got going on, you have a number of different initiatives underway right now. And I'm just wondering if there's any way to quantify the impact that might have had on the earnings for the quarter. I know when you're -- you talked about SG&A being an $8 million delta on the quarter and $12 million year-to-date, is that the right way to think about this or the total -- sum total of all these growth initiatives are actually a greater number than that?

Well, I mean we've got -- the way to think about growth initiatives is sort of 2 dimensional. I mean, we've got geographic initiatives around emerging markets, hence the 3 new plants in China and the upcoming plant in Russia and our strength in the Middle East. So when we think about opportunities, we think that we have underserved opportunities in those 3 markets in the world, and we're investing in them in different ways. We're in the transition year now where we brought up 3 plants in 1 year. The company hasn't built a plant in 15 years, and we brought 3 online in 1 year. So the headwind you see in the expense and related costs is just as we expected, the experiences we brought the plants online. Commercially, we're very happy with the execution across the board in both businesses, Ceilings and Floors, in China and very robust presence in India. So I think financially, as we work through the -- clearly, the expenses have had a little headwind in EBITDA, but certainly nothing more than what we anticipated. Then you have a business adjacency opportunity in Architectural Specialties as we've said. I mean, we've globalized the platform. We've seen significant growth, again, in the Middle East, in China, here in the U.S. So you've got earnings, you've got revenue growth and you have earnings growth at a multiple of the revenue growth as we continue to penetrate, which -- what is a slightly more fragmented opportunity. So those, I think, really are the cornerstone of our growth platform. So it's geographic focus in 2 to 3 emerging markets. It's a product line adjacency that we've organized and energized around, and I would say they are meeting or exceeding the revenue opportunities, the margin opportunities as we work through kind of 1 year transition cost, bringing the plants up to speed.

And David, this is Tom. We have guided on the year. It's going to be about $25 million of startup costs, $10 million to $15 million of manufacturing startup costs and another $5 million to $10 million in SG&A costs. And you can imagine, we've opened these 3 plants through the first 3 quarters of the year, so we've been absorbing those costs through the quarters and we've been adding the feet on the street in the SG&A through the years. So if you just did it simplistically, it's about $6 million a quarter, but that's not really how it's flowing. We haven't guided specifically how it's flowing. But you can imagine the first 3 quarters of the year were the heaviest burden on manufacturing startup of and probably, the SG&A is more back half loaded given the commercialization of these plants.

Our next phone question will come from Michael Wood with Macquarie.

Can you give us some more color on the Russia Ceilings weakness that you called out and what gives you the confidence in the growth going forward? Whether the weakness was specific to the timing of plant investments or whether it was macro?

Sure, Mike. Thank you. The Russian market, first of all, it's not plant investments. It's macro and market. We estimate the market's down about 5% or so. It was tough to begin with -- this has more to do with government investment and the timing of the release of funds for government infrastructure projects as anything else. We keep a pretty close tab on import documentation, so we have a pretty good sense of what's going on with share. And the information we have would indicate we've held, and you could arguably gain share slightly in a soft market. Remember the investment thesis for the plant there was less generate revenue, although we're always all about -- we're about revenue. But more than improve our operating margins, we're avoiding import duties by building a plant in Russia. We were serving our -- currently serving that market today from mineral fiber plants in Western Europe. So the investment theory and the business case for margin improvement from the investment in Russia is still very strong, irrespective of a near-term softness in the market. So the market's a little softer than we outlooked coming in. It seems to be broad-based and macro. We are holding or gaining share with a very strong share position in suspended ceilings in Russia. The plant's on schedule to be -- for a commercial production in early 2015, and the margin benefit from the plant is still intact.

And another thing I'd add, Matt, is that relative to when we announced the plan, the macro was better last year.

Right.

We did better than we thought last year and we were doing slightly softer this year because of the macro environment.

Right.

But in total, our volumes versus where we expected to be at this point are about where we had in the investment thesis. So we're very comfortable with Russia, and we feel like that -- the local projects going very well.

Exactly. And the plant's on track so far, so we expect it to be on track as we roll through it.

Our next phone question will come from the line of Stephen Kim with Barclays.

Yes, it's Steve Kim from Barclays. I just wanted to follow up on the Resilient pricing issue. I know you alluded to the fact that pricing was negatively affected, I guess you mentioned, by core input drivers, some deflation there of about $3 million. But I was wondering if you could help us understand the competitive dynamics in the Resilient Flooring business? In particular, I would think that given the strong history of the company driving margin, that just because your inputs might be down a bit doesn't necessarily mean that, that would necessarily show up on the top line, so I was curious if you could talk about the competitive dynamics. And maybe, is there any geographic element here which is worth calling out? You talked about some de-stocking in China. Just wanted to get a picture of how you see the competitive dynamics affecting pricing.

Yes. I'll frame it, then maybe ask Frank to jump in. But from a -- it's slightly more fragmented. It's a slightly more fragmented market than we experienced in ABP, in our Ceilings business for instance. There are 2 large global players along with our sales that are in Resilient Flooring, and then you have the significant niche players or guys that are only in linoleum, the guys that are only in, predominantly in North America. So it's a bit more fragmented. We have very good line of sight in Resilient Flooring to the input material, so inflation and deflation. The pricing tends to adjust fairly quickly to that given the market structure. In inflationary times, as we have with our Ceiling business where we are priced over inflation, we do have a very dynamic set of markets right now. Most of the developed markets, so for us, that'll be Russia, Europe, North America and Australia, in relative terms, volumes are soft. We had significant softness in Australia. The Western European markets continue to be somewhat soft and, of course, in the Americas, it's kind of flattish. Get that offset by very strong volumes in -- on a relatively small base, so in India, China and Russia. You have the dynamic in Russia or in China, as Frank mentioned, of the de-stocking effect as our distributors in China sort of worked down the inventory of the material we used to import from Western Europe or Australia and sort of stock up in the stuff coming off the new homogeneous line and then, most recently, the heterogeneous line. So you have that kind of sort of cleanup effect, if you will, that sort of pressures volumes in the short term. And Frank, did you want to...

I think you hit the highlights. It really is market by market and product line by product line. And where we're seeing the deflation is both in linoleum, where you have, really, 3 global players, as well as in vinyl, where in North America, you have as many as 4 or 5 competing for the space. So it really does vary by market. And I think Matt said it well, with raw materials there's changes, it tends to be a fairly quick adjustment to price on the market side to those changes.

Our next questioner in queue will come from Nishu Sood with Deutsche Bank.

I wanted to drill down into the fourth quarter sales number. So the $665 million, if I take the middle of the range, it's an 8% increase, if I did my math right, year-over-year. So I just wanted to understand, given the deceleration in September, on resi it's carried over into October. Commercial, there's been some rebound. I just wanted to understand, as you're looking at the fourth quarter, what gives you confidence that you can get back up to that level of year-over-year growth?

Sure. Okay, Nishu, thanks. This is Tom. So we need to start with -- we have the benefit of not having the Patriot divestiture on our base. So if you look at our -- on a constant FX, we did 5% in the second quarter sales growth. We did 5% in the third quarter. Both of those were burdened by the Patriot divestiture in the base, so that rolls off, that's a meaningful contributor on the reason it might be higher. Plus we've been taking significant pricing on both the Ceilings business, so we had a 5% price increase in Ceilings in August. We had several rounds of pricing through this year on the Flooring business. And while we're saying Flooring in the residential side had been softer, the pace in the second quarter was poor, right, we couldn't keep up with demand, so that was 20% unit volume growth there. So really between continued growth, but maybe not at the same core rate as we saw in residential, the pricing and the lack of the Patriot in the base, that's what's leading us to be able to guide at that midpoint of 8% of growth. Thank you for the question.

Our next phone question will come from the line of Bob Wetenhall with RBC Capital Markets.

I just wanted to see if either Matt or Tom could give a little clarity around what you're thinking in terms of CapEx spend for 2014 and whether the big improvement on working capital this year goes away, or are you going to be able to maintain the lower investment level? I'm just to trying to think about this in the context of free cash flow for 2014.

Thanks, Bob. It's Matt. We aren't guiding yet for 2014 CapEx, and we'll provide some more clarity around that early next year. Having said that, the large project left would be the buildout of the Russian plant and, of course, the startup of the new LVT plant here in Lancaster, which begins next year and goes through the first half of 2015. So we -- those would be the drivers of sort of CapEx above sort of the normal running rate, which we have said before is about $100 million. So more to come on that, but those would be the 2 incremental drivers over the normal $100 million kind of running rate. Tom?

Yes, I think that's right. And so it's still going to be a heavier CapEx year because of those projects, but it -- will it exceed this year? We don't think that's likely. On the working capital, we've made tremendous progress. We focused on cash conversion cycle, which is a days-based measure. We're very pleased that in 2010, while we were here and getting going, we delivered 81 days of cash conversion cycle. We've driven that down to, I think, on the year-to-date basis, around 56, 58 days, through really focus on payables and inventory. We've always thought we've been best in class in receivables, so we really have been able to extend out payables, which was a big benefit in the quarter, drive inventories lower. So our objective is to sustain the days. But on a cash flow basis, sustaining days with an expansionary market presumably will lead to some cash drain. So we're always going to keep tight on cash, we might try to drive it further. But given the big releases that have come out of working capital this year, that flow benefits become next year's base, right? So it's harder to anniversary those. But we do feel like we're getting our cash conversion cycle down to the right targeted level for our kind of company. Thanks for the question, Bob.

Our next phone question will come from Jim Barrett with CL King & Associates. James Barrett - CL King & Associates, Inc., Research Division: This may be a question for Frank or Matt. So you're reporting remodeling activity is up slightly currently. Other peers are reporting mid to high single-digit growth in that segment on the high ticket remodeling projects. I'm trying to understand, is there something unusual about Flooring that would explain why it may be lagging other categories? Is it the fact that wood pricing is rising?

Maybe a couple of things, Jim. And I can't speak to competition, but when you look at the mix of products we're in, we don't participate in ceramic which, as a category, is fairly high growth and taking category share from other components. And we don't participate in carpet, which is, I think, benefiting from some fairly significant activity from retailers to try to drive volume. So part of it could be explained by the mix of categories that we're in. And part of it maybe we just have maybe a different outlook. But we see it kind of in the low, at best, mid single-digits in terms of overall.

Our next phone question will come from Keith Hughes with SunTrust.

You referred rare comments to the new LVT facility. Give us kind of an update of your U.S. residential business, what percentage of LVT it currently stands at?

Percentage, just to make sure -- this is Frank, Keith. To make sure I understand the question, specific to residential, what percent is LVT? Is that -- was that the question?

Yes. Currently, how are you using up that residential commercial? Just kind of -- some kind of a sense of how much of the business it represents.

It's -- in order of magnitude, it's around 10%, of the total commercial residential in North America.

Keith, we already do today about $100 million in worldwide LVT sales. We have production, small production in Germany, and we have a small production in one of our North America facilities in the Midwest. Really, the Lancaster production would become the primary insourcing for our Asian production that is sourced from third-party sources. So we already have a meaningful business. And again, the LVT play, while it drives a lot of the improved design and customer service elements that Matt talked about, we do expect it to be a lot like the Russia plant, as a margin-enhancing savings project for us.

Our next questioner in queue comes from the line of David MacGregor with Longbow Research.

Just a follow-up question on the Architectural Specialties business, you kind of laid out a picture for 2016. As we think about the growth in that business going forward, is it largely organic growth or do acquisitions become a factor in your plans? Can you talk a little further about that?

Sure, David. The -- we think, first of all, there's a great organic growth opportunity. So when you look at the market, the geographic markets we're talking about, when you think about the coverage extension and the global architects, we think that the market lends itself to real opportunities. This would be a place where we would look for smaller, what we would call tuck-in acquisitions. It's a very fragmented, competitive landscape. There are a couple of relatively large guys. But it's an opportunity for us to move in and look at smaller regional players that may have product lines or product technology that we find attractive. We did one a couple years ago with Simplex up in Canada. But as we pointed out, we're also making organic investments. We're going to be expanding our metal capability in China inside the complex that houses the new mineral fiber plant. So this is a place where you would look for small modest tuck-in acquisitions if they make sense and we can do them rapidly. Certainly, not a place we're afraid to go and increase our organic investment as well. So it's just a broad opportunity that we think we've been organized much better to address really across the board, not only in the U.S. but around the world.

The other thing I'd add just for clarity on Slide 15, that we did review the business. This doesn't -- the 2016 numbers do not presume acquisitions. So this is what we've got in-house, in our own organic expansion activities. So the lift you see in the Architectural Specialties is not predicated on doing a deal in capital deployment. Obviously, if we can find incremental opportunities to deploy capital and drive this number better, we will, but that's not presumed in the data we provided.

And at this time, I'm showing no additional phone questions in the queue. I'd like to turn the program back over to Mr. Espe for any additional or closing remarks.

Thank you, everybody. We appreciate your interest. We appreciate the questions. We look forward to a very solid fourth quarter and a very robust end of the year. And we appreciate everybody's attention. Thank you very much.

Thank you, presenters. And again, thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation and have a wonderful day. Attendees, you may now all disconnect.

Thank you.