Executives
Tom Tossavainen - CFO
Michael Grebe - Chairman and CEO
Bill Sanford - President and COO
Analysts
Jen Consoli - JP Morgan
Keith Hughes - Robinson Humphrey
Dan Whang - Lehman Brothers
Jeff Germanotta - William Blair
David Manthey - Robert W. Baird
Jeff Courey - Skystone Capital
Interline Brands Inc. (IBI) Q3 2007 Earnings Call November 2, 2007 9:00 AM ET
Operator
Good morning. My name is Jennifer, and I will be yourconference operator today. At this time, I would like to welcome everyone tothe Interline Brands Third Quarter 2007 Conference Call. All lines have beenplaced on mute to prevent any background noise. After the speakers' remarks, therewill be a question-and-answer period. (Operator Instructions)
Thank you. I would now like to turn the call over to TomTossavainen, CFO of Interline Brands. Mr. Tossavainen, you may begin yourconference.
Tom Tossavainen
Thank you, Jennifer. Good morning and welcome to theInterline Brands earnings call for the third quarter of 2007. We released ourfinancial results for this period last night. If you have not received the earningsrelease, you can receive it by downloading it from our website atinterlinebrands.com or by calling Stacy Thomas at 904-265-5337.
Michael Grebe, our Chairman and Chief Executive Officer, willstart today's call with some overview comments about our financial andoperating results for the third quarter. Bill Sanford, our President and ChiefOperating Officer, will review sales trends in our key customer markets. And then,I will review some key financial metrics. In the time remaining on today's call,we will answer any questions you have about the company.
In our conference call today, forward-looking statementssuch as remarks about future expectations, plans and prospects may be made.Because they are subject to risks, actual results may differ materially fromprojected results. These risks are described in detail in our SEC filings andyesterday's press release.
I will now turn the call over to our Chairman and ChiefExecutive Officer, Michael Grebe.
Michael Grebe
Thanks, Tom. We're happy to report another solid quarter inInterline Brands. Interline posted quarterly sales of over $330 million, quarterlyearnings of $0.49 per share, year-to-date cash flow provided by operations ofover $50 million, and cash and short-term investments on hand of almost $45million, all of which are records for Interline Brands.
Revenue grew 5.1% on an organic daily sales basis, includingAmSan. We also achieved record sales in our facilities maintenance businessdriven by exceptionally strong sales results in the multifamily housing market.This performance offset continuing softness in the pro contractor and specialtydistributor markets, both of which continue to be impacted by the wellpublicized slowdown in residential, construction and remodeling activity.
Our strong performance for the third quarter has againdemonstrated the strength of Interline's proprietary business model, whichallows our management team to rapidly shift resources and deploy growthinvestment as market conditions change.
The facilities maintenance markets, especially themultifamily sector, have continued to build strength throughout the year. We'veinvested heavily during this period, implementing supply chain programs with customers,expanding our renovations division, and adding to our capabilities in theinstitutional facilities MRO market. At the same time, we have reduced growthinvestment spending in the contractor and distributor markets as conditions therecontinued to weaken throughout the year.
Although we have continued to open vendor-managed inventorylocations for our customers, which give us a much higher share of ourcontractor spend, we have stopped opening freestanding Barnett pro centers untilmarket conditions improve.
Interline's flexible operating platform is a keydifferentiator in our ability to continue to grow sales and earnings in a verychallenging environment. I would like to thank my teammates for very solidexecution during this period.
Third quarter revenues were $330.2 million, a 5.1% increaseover revenues of $314.2 million in the third quarter of 2006. Net income forthe quarter was $16 million or $0.49 per diluted share compared to net incomeof $14.2 million or $0.43 per diluted share for the third quarter of 2006, a14% increase.
Operating income for the third quarter increased 6.8% to $33.8million compared to $31.6 million in the third quarter of 2006. As a percentageof sales, operating income was 10.2% in the quarter compared to 10.1% in theprior year period. This change in primarily due to our continued focus onleveraging our operating cost structure even as we continue to investment inorganic growth drivers and also incur higher share-based compensation expense.
During the quarter, we invested approximately $1 million inproven organic growth initiatives, primarily in the facilities maintenancemarkets.
I'd like to highlight that the AmSan integration continuesto proceed on schedule. We have converted a total of 12 AmSan service centersto the Interline operating platform so far this year, two in the secondquarter, eight in the third quarter, and two so far in the fourth quarter.
Our sales leaders and national accounts teams have beencollaborating for most of the year, and we remain bullish on this keyacquisition and on the janitorial or Jan-San market in general. We are on trackwith regards to our cost reduction goals and expect to have AmSan completelyintegrated on to the Interline operating platform during 2008.
EBITDA for the quarter was $37.8 million or 11.5% of salescompared to EBITDA of $35.8 million or 11.4% of sales last year. This is ourhighest EBITDA margin percentage since the third quarter of 2005.
Before I turn the presentation over to Bill Sanford, I'd liketo comment on operating expense trends and margin expansion opportunities overthe intermediate term. As you will recall, our first and second quarteroperating expenses as a percentage of sales were 143 basis points and 86 basispoints higher respectively than the comparable prior year periods.
Our third quarter performance resulted in lower operatingexpenses as a percentage of sales of approximately 20 basis points. Thisimproved performance is a result of tighter management of our operating expensestructure in a challenging market and a reduction of discretionary investment spendingin the contractor and distributor end markets. The 20 basis point improvementin operating expense leverage was achieved despite 20 basis points in highershare-based compensation expense as Tom will describe in a minute.
We continue to see leverage in freight expenses at ournational distribution center, as Jim Spahn, our Vice President of Operations, andhis leadership team focused on ways to optimize our newly implementedtransportation management system or TNS. We also continue to see incrementalleverage in payroll cost as an ongoing efficiency initiative.
I mention these third quarter highlight as examples of thenumerous initiatives we have underway at Interline to leverage our operatingplatform and deliver incremental earnings growth over the long-term. As we saidon our second quarter earnings call, we have plans to reinvest both earningsand investment capital over the near term to position Interline for the future.
We expect to take advantage of the many opportunities we seein the institutional facilities maintenance market and in expanding our Jan-Sanfootprint nationwide. These initiatives will require incremental expenses overthe near term, but we feel they will yield solid market share gains over thenext few years.
I'd now like to turn the presentation over to Bill Sanford,our President and Chief Operating Office, who will provide you with someadditional detail on revenue and growth trends at our key customer markets.
Bill Sanford
Thanks, Mike. Third quarter sales were very strong in ourfacilities maintenance markets, which are served mainly by our Wilmar, AmSan,Sexauer and Maintenance USAbrands. Revenues increased 13.9% on an average organic daily sales basis.
As we mentioned last quarter, we have now owned AmSan forfive quarters, including the entire third quarter of 2006. AmSan is thereforenow consolidated with our other facilities maintenance brands for reportingpurposes. So the 13.9% organic growth of our facilities maintenance brandsreported for the third quarter includes organic growth at AmSan, which as wehave said in the past, has historically been a low single digit grower.
Our other facilities maintenance brands continued to grow atsimilar average rates as they have in recent quarters. Our strategic growthinitiatives in the facilities markets continued to gain customer support and wefeel that we are taking share. The multifamily housing market is particularlystrong, and our Wilmar brand is performing well. We feel that our supply chaininitiatives with our customer continues to drive growth for the foreseeablefuture.
Our professional contractor markets are primarily focused onresidential repair and remodeling, and are served by Barnett, Copperfield, USLock and SunStar brand. Our sales to professional contractors, which represent21% of total sales, declined 10.4% on an average organic daily sales basis ascompared to growth of 8.4% in the third quarter of 2006.
Our pro contractor brand has Interline's highest exposure tonew home construction, and we are seeing soft market conditions in most areasof the country. In addition, feedback from contractor customers indicates thatthe new housing slump and choppy credit markets have begun to impact theremodeling sector as well.
Our response to this slowdown has been to reduce our sellingexpenses as much as possible to reflect prevailing market conditions. We haveconsolidated numerous sales territories during the last three quarters and are retainingour most experienced and effective field sales and telesales reps, to manageimportant contractor relationship.
We have also maintained our focus on the Barnett channelexpansion initiative, which involve deploying the combination of telesales, fieldsales, national accounts and supply chain management strategies in targetedgeographical markets across the country.
Our experience thus far during this recent downturn indicatesthat we achieved higher customer penetration and retention, where we havemulti-channel capabilities and consumption as the primary supplier to acontractor. This compares to a model focused primarily on telesales and directmarketing only where we sometime serve the contractor as a secondary ortertiary supplier.
As Mike mentioned earlier, we continue to make selectiveinvestments in the contractor market, primarily in situations where we can helpcustomers manage their entire supply chain. These types of relationshipsprovide the customer with a very tangible value-add and ramp up the profitabilityvery quickly for Interline.
Our specialty distributor business, which represents just12% of our total sales, was also down 10.4% for the quarter on an averageorganic daily sales basis. Our specialty distributors tend to use Interline asa secondary supplier in these categories, and they often shipped purchases totheir primary suppliers when their business slowed.
We continue to analyze customer buying patterns in thischannel. The ultimate customer that Interline reaches, whether it's through aplumbing or electrical wholesaler, a lumberyard or an independent hardwarestore, is most often a service contractor in the residential plumbing,electrical or HVAC market.
We view the reseller as an important conduit for contractorsthat require a same day pickup channel outside of our local service area. However,we also know that we cannot fully influence buying behavior at the retail ordistributor level, and that this business is subject to the add and flow of thelocal market.
Now Tom Tossavainen, our Chief Financial Officer, willdiscuss some additional financial metrics.
Tom Tossavainen
Thanks, Bill. As Mike mentioned on our last earnings call,our management team is heavily focused on balancing our long-term growthinitiatives with our shorter term financial goal.
During the quarter, we invested approximately $1 million inorganic growth initiatives, primarily in the facilities maintenance market.Despite the impact of this relatively heavy level of discretionary investment spendingand a $0.5 million of incremental share-based compensation expense, we report a14% increase in diluted earnings per share on 5.1% sales growth, and weimproved our operating margins by 16 basis points to 10.2%.
We have been very focused on rightsizing our operatingexpense structure to match current market conditions. Our operating expenseperformance in the third quarter reflects the success that we have had in costcontrol.
Selling, general and administrative expenses as a percentageof net sales were 26.7% in the third quarter or 20 basis points lower than thethird quarter of 2006, and 110 basis points lower than the second quarter of2007. This is our lowest selling, general and administrative expense rate as apercentage of sales since the third quarter of 2005.
Let me again explain why we mention additional share-basedcompensation expense. As we discussed on our last earnings call, as a newpublic company we started issuing and expense equity-based awards in 2005.These awards have an average vesting period of approximately 3.5 years and assuch until we have 4 consecutive years in which we issue equity awards, with 2008being the fourth year, we will have notable incremental share-basedcompensation expense each period.
In the third quarter of this year, this incrementalshare-based compensation expense increased our operating expenses as apercentage of net sales by approximately 20 basis points. So if taken together,we see the business is generating 40 basis points of operating expense leveragein the third quarter. Given current market conditions, we feel this is anexceptional performance.
On a working capital front, our net working capital days aregenerally in line with the prior year at 83 days, although we got there in aslightly different manner. Our days sales outstanding slowed down by 1 day to48 days, while our days payable are 2 days faster at 25 days, primarily due toAmSan mix. These three days of higher net working capital were entirely offsetby 3 days of improvement in our inventory days supply, which went from 63 dayslast year to 60 days at the end of the third quarter.
AmSan is accretive to our inventory turns and turns thisinventory in 8 to 10 times a year range. However, the 3 days of improvement iscoming from our base business as we effectively manage to the inventory demandof our facility maintenance market and pullback inventory stocking levelsassociated with lower pro contractor market demand.
With respect to accounts receivable, like many otherdistributors, we have started to see some slowing of payments, primarily fromcustomers and our professional contractor and specialty distributor end market.This trend was expected given the current, in general, economic slowdown inthese end markets, and we will continue to monitor this area closely. However,at this time, our overall credit quality has not materially changed nor is thathaving a material impact on our bad debt provisions at this time.
Our trade accounts receivable reserve is $4 million lowerthat it was at December 2006. This change is not indicative of material changein the quality of our receivables. Instead, it reflects on an internalprocedure change where we decided to remove from our book any aged balances, whichwere several years ago, and were already 100% reserved for. These aged balanceswere simply being maintained on the ledgers for tracking purposes, which is a verycommon factor.
There was no impact to earnings and there was no impact onour net trade receivable balances associated with this procedure change. Overthe long-term, we are committed to improving in our working capital position,as you can see from the fact that we have taken six days out of net working capitalin the last two years.
Free cash flow or cash flow provided by operations lesscapital expenditures was a record $38.9 million year-to-date through September2007. This compares to $8.3 million for the nine months ended September 2006and $22.1 million for all of fiscal year 2006. As a result, we haveapproximately $16.3 million in cash on the balance sheet and $28.2 million inshort-term investments to support our growth investments and our acquisitionprograms.
Because of the well-balanced and diversified nature of our businessmodel, we have been successful in generating strong cash flow under differentmarket conditions. While our overall sales growth is lower than last year inour pro contractor and specialty distributor end market, we have been able topullback the reins on working capital and generate stronger cash flow than lastyear.
In addition, our inventory management team, led byKen Sweder, has done a great jobimproving our core inventory turns in what is perhaps the strongest period of growthin our facilities maintenance end market. The combination of these two positiveworking capital factors is driving a record free cash flow generation thisyear.
Capital expenditures for the quarter totaled $3.5 million or1.1% of sales. This is slightly higher than in the past, but in line with ourexpectations as we support our infrastructure projects, including our AmSanintegration efforts.
We continue to generate strong returns on tangible capitalwhich was 40.8% at the end of the third quarter. Our overall returns areimpacted by the temporary slowdown in the pro contractor and specialtydistributor end market. It is 1.9% lower than the prior year period.
We remain committed to improving our long-term return.However, in the short-term, we are comfortable with our current investments andreturn levels based on existing market conditions.
At this time, I would like to turn our call back over toMike to discuss our business outlook.
Michael Grebe
Thanks, Tom. Before I turn the call open to questions, Iwould like to discuss our business outlook for the fourth quarter.
Our performance in the third quarter of 2007 was in linewith our expectations. Our flexible business model allows us to capitalize onmarket conditions and we remain confident in our ability to grow sales andearnings over the long-term. We expect our facilities maintenance business tocontinue to perform well for the remainder of 2007. We feel optimistic regardingthe performance of AmSan and the progress of our integration plans.
We expect to continue to invest in proven organic growthdrivers in various end markets. And although we do not expect improvement in thenew home construction or remodeling markets for the remainder of 2007, we willcontinue to focus on building a profitable sales and service platform thatdelivers a strong value proposition for our pro contractor and resellercustomers.
The refinancing that we completed in July of last year combinedwith the strong cash flow generation that Tom mentioned positions us well tomake acquisitions as opportunities arrive. We, of course, continued to activelypursue well-run companies that represent a good strategic fit with Interline. Ourmanagement team continues to move quickly to control our discretionary spend,reassess or defer our investment spend and cut costs where appropriate.
Although our visibility in the pro contractor and specialtydistributor markets remain very low, we feel confident that our facilitiesmaintenance performance will remain strong throughout the year. So we are maintainingour current earnings outlook of between $1.53 and $1.57 per share for 2007. Andconsistent with past practices, we plan to provide 2008 earnings guidance atthe time we report final 2007 results, which is expected to be sometime inFebruary.
Jennifer, you may now open the lines for questions.
Question-and-AnswerSession
Operator
(Operator Instructions)
Your first question comes from the line of Michael Rehaut withJP Morgan.
Jen Consoli - JPMorgan
Hi. This is Jen Consoli on the line for Mike. Good morning.
Michael Grebe
Good morning, Jen.
Jen Consoli - JPMorgan
Two quick questions here, the first is on the gross marginline. I mean you had 20 bps this year-over-year contraction and I know thatAmSan typically gives you a little bit of a benefit there. So with theyear-over-year contraction, aside from the share-based comp, are you stillseeing some pricing pressure in pro contractor or specialty distributor, and isAmSan offsetting that?
Michael Grebe
Let me give you some color on that, Jen. As usual, there area number of puts and calls that make up the trends in our gross margins. On theupside, we continue to see some leverage in our national distribution centersupply chain, which I mentioned earlier, the cost of which is included in ourgross margins. We also have our merchandizing team doing a great job withworking with our outstanding supplier partners to make sure that we staycompetitive in the marketplace. So those were some of the upsides into thosenumbers.
Those were offset by lower selling gross margins in certainareas, and particularly within the pro contractor and specialty distributormarkets that you mentioned. As those markets have significantly slowed, pricesclearly become more of a factor in our customers buying pattern. As much as wetry, as a company, to not chase volume at lower gross margins, we obviouslyneed to stay competitive in the marketplace.
I also mentioned that, as you may recall from last year, wewere able to take advantage of rising copper prices that were pretty high atthat time. And so copper had unusually high margins, mainly because customerswere much more focused on availabilities and price last year. We were also ableto capitalize on demand-driven opportunistic pricing of 10 SEER HVAC equipments,which was still in the loop back then.
Now, we never expected those opportunities to reoccur thisyear. And so, some gross margin degradation was expected. And let's say, thisis an area that we will continue to pay a lot of attention to, and you canexpect us to continue to walk away from a lower margin commodity-driven sales.
Jen Consoli - JPMorgan
Okay.
Michael Grebe
Back to share-based comp, by the way, those numbers are inour operating expense, not in our gross margin numbers.
Jen Consoli - JPMorgan
Right. Okay. And the copper and the HVAC, did that roll offin 4Q to some extent?
Michael Grebe
I guess, to be honest, we will have to take a look at someof that. On HVAC, certainly, we started to fleet inventories of 10 SEERequipment in the fourth quarter of last year. I have to take a look at copper pricing,just to be honest with you, for the fourth quarter.
Jen Consoli - JPMorgan
Okay. And second question was along the lines of lastquarter you mentioned that some of the AmSan cross-selling opportunities were morekind of in an infancy stage as you were focused on systems integration. It seemslike that is going along or according to plan. So can you give us an update onthat, how is the cross selling going, and when do you expect that to really startto kick in?
Bill Sanford
Sure. I would give basically the same answer that I did lastcall, which is that we are still in the very early innings there, or maybestill on the pitchers mount on the side of the diamond where you are stillwarming up. We are still very focused on our integration efforts. We have a lotof plans that we're going to be able to talk to, perhaps in February when we allget back together.
We think there is a lot of greenfield opportunities for us to start toexpand our national footprint in the 25 major metropolitan markets whereInterline has a presence today, but AmSan does not. And then we also feel thatthere is a great opportunity to start cross-selling products. But again, we arestill pretty heavily focused on that integration efforts, we feel like we'reright at that point where we can start to take advantage of it. But you're not seeingthat in our numbers yet.
Jen Consoli - JPMorgan
Okay. Thanks very much.
Operator
Your next question comes from Keith Hughes with RobinsonHumphrey.
Keith Hughes - RobinsonHumphrey
Thank you. Within the apartment business, have you seen thatbusiness in the last quarter to accelerate, decelerate, what's been kind of thetrend there?
Michael Grebe
Our trend in general, Keith, for the third quarter was ourgrowth rates were stronger in the third quarter than in the first and second.The third quarter in multifamily is typically, as you know, one of thestrongest quarters of the year because people are moving out or changingapartments during the summer season to have their kids all in the right spotwhen they start school. So it's typically one of the stronger quarters and ourgrowth rate was up for that market.
Keith Hughes -Robinson Humphrey
And so moving forward when we see facilities maintenancenumber, given your commentary that AmSan is lower single digit growth and Iassume fairly constant, changes either up or down will be caused by the Wilmar business,is that correct?
Michael Grebe
Certainly in the numbers that you see for the third quarter,the multifamily housing brand for which Wilmar is the flagship brand, hascertainly been leading the charge with respect to growth rate. With respect toAmSan, yes, in general our sales trends have been fairly similar there.
Keith Hughes -Robinson Humphrey
Okay. And finally on acquisitions, if you any can give anykind of update there what the pipeline is like financing, options, things ofthat nature?
Bill Sanford
Sure. Obviously, we'll let you guys know as soon as we'reready to do a deal. However, we always feel that acquisitions are great part ofour strategy here. We're actively talking to a lot of great companies and soforth. I'd say we're probably going to stay away from commenting on exactlywhere our pipeline stands.
From a leverage perspective, we had a total pro forma debt toEBITDA ratio of 3.7; you may recall when we acquired AmSan. Right now, we're below3 on a pro forma basis. And so we feel great about our financing positionthere.
Keith Hughes -Robinson Humphrey
Okay. So if the right deal comes along at the right price,you're ready to pull the trigger on?
Bill Sanford
That's s fair statement.
Keith Hughes -Robinson Humphrey
Okay. Thank you.
Operator
Your next question comes from the line of Dan Whang withLehman Brothers.
Dan Whang - LehmanBrothers
Yes, good morning. My first question was regarding your commentaryabout some of the tighter control of operating expenses. And I think youmentioned rationalization of some of your sales force in the pro contractor orspecialty distributor markets. But were there other actions that you took interms of cost control, and in addition, going forward, what other activitiescan you take on?
Bill Sanford
Well, I guess, Dan, maybe just to focus in rightsizing thebusiness for a minute, we have actually about 15% less telesales reps in ourpro contractor and specialty distributor business than we did since December ofthis year. So obviously, we're very conscious of what markets are up and whichmarkets are down, and then adjusting our cost structure accordingly.
I guess, when I discussed our new transportation managementsystem, I was trying to give you a feel for one of the larger projects that we'veundertaken to really try to drive down our operating expense, that TMS packageas it's called. Again, just as one example is a piece of software that governsall of the transportation that we use to move products from our nationaldistribution center to our regional distribution centers and back. And we'reseeing savings in those areas of $100,000 or more per month. And that'ssomething that we just instituted a few months ago.
So really, a lot of the initiatives that you're seeing fromus are similar themes to what we've have done in the past, which is we're goingto upsize or downsize our distribution network if necessary. We're going tofocus on delivering more and more of our product on our own trucks as opposedto paying third-party carriers to do that for us.
And I'd say, Dan, it's a lot of different levers that wepulled across the whole enterprise. There is probably no one major initiativeor, as you know, we've not announced wholesale layoff or anything else likethat. It's just a management team here reacting to business conditions andmaking the right steps to achieve those results.
Dan Whang - LehmanBrothers
Right. And second question was if you could provide anupdate on your private labeling program, I guess, from the company overallstandpoint, and also in regard to AmSan, I think that probably was not asinvolved in that whole private labeling effort versus Interline.
Michael Grebe
Sure. Well, we continue to feel very pleased with our progressof our exclusive brand programs. And as you may be aware, Dan, we continue to expandour overseas sourcing operation. We have over 40 people in Shenzhen,China, and we've now openedup a field office in Ningbo,which is in the northern part of the county, in order to get closer and closerto our manufacturing partners and provide much better quality control.
With respect to AmSan, AmSan actually has very goodexclusive brand recognition. The brand name that they use in that marketplaceis called Renown. And their exclusive brand sales are actually higher as apercentage of sales than Interline's are. Now, I know it may be frustrating but,Dan, as you'll recall, we consider this pretty competitive information. So thedata point we've always been comfortable and given is that our exclusive brandsales are above 20% of our total sales.
Now, I guess, what we see as the interesting opportunitywith AmSan is just making sure that not only do they have the right exclusivebrands or private label brands in the marketplace, but that they're sourcedfrom the right business partners. So we think there is also further opportunitythere. But in general, we feel very, very good about that program and feel likeit's on the right track and has more gas left in the tank.
Dan Whang - LehmanBrothers
Sounds good. Thank you very much.
Operator
(Operator Instructions)
Our next question comes from the line of Jeff Germanottawith William Blair.
Jeff Germanotta -William Blair
Hi. Good morning, gentlemen, and thank you for yourconsistency and reliability.
Bill Sanford
Thanks Jeff.
Jeff Germanotta -William Blair
The question I'd like to drill down on a little bit more hasto do with the facilities maintenance part of the business. And as I thinkabout that, you've really got three components, the multifamily, the commercialfacilities and the AmSan, and collectively they represent 60% plus of sales.Can you give us a little color on how you see each of those three componentsgrowing in the current environment?
Bill Sanford
As Mike just pointed -- this is Bill, Jeff -- pointed out,obviously, multifamily is the star performer right now for the company. And abig part of the success in multifamily is really that we are realizing the workthat we've been doing over the last five or six years on taking customers'supply chains and integrating them with ours. And that forms a very stickyrelationship with your customer, and you penetrate a lot more deeply in thattype of relationship than in a transactional relationship.
The other two brands are not as far along. The other twomarkets are not as far along in that area as multifamily. But we have a lot ofvery solid examples of how supply chain can work with large institutions. And abig example of that is the single site facility where we can deploy Jan-Sanplus all the institutional MROs that we're putting together. And we see thosemarkets with similar characteristics to multifamily in many ways. A lot ofaggregators are in there buying these assets, and those are the people we do agood job with on national accounts.
And so, it's just really a question of time, as Mike said,getting AmSan integrated, because you really can't go pitch yourself as onecompany when you've got two bills for products going to the customer, twocredit reports and things like that. But we are very spiked up about theoverall opportunity long-term.
Jeff Germanotta -William Blair
Thank you. And a follow-up question, do you see yourselves atthis point gaining share in the multifamily market on Home Depot Supply?
Michael Grebe
I think overall, Jeff, we feel that within multifamily weare gaining share. At whose expense that's coming from, sometimes that's hardto tell. But I would say that, overall, we're gaining shares.
Bill Sanford
Jeff, it's Bill again. The real opportunity for us is nothead-to-head necessarily with another big company like ours. It's getting intothese apartment communities and getting the spend that typically goes offproperty to an array of retailers and kind of random purchasing by themaintenance guys. So when we say market share, we believe that is a big part ofour market share gain. It's getting from $50 a unit a year penetration up to a$150 a unit a year penetration, which is really what the customer wants and whatwe aim for.
Jeff Germanotta -William Blair
Thank you.
Operator
Your next question comes from David Manthey with Robert W.Baird.
David Manthey -Robert W. Baird
Hi. Good morning. A question on your repair customers in thepro contractor area. Are you seeing any trend in addition to just the slowingunit volume environment? Are you also seeing a trend of customers gravitatingto the value end of the spectrum for lower price, say, HVAC water heaters,fixtures, et cetera?
Michael Grebe
Not noticeable, Dave. The thing we're seeing in the probusiness is that now that these guys are slower, they are looking more at someof the supply chain things we can offer. And that's a good thing for us becausethey can let us come in, analyze their inventory, analyze their spend.
And a lot of what we do is try to value engineer theirportfolio of products, so that they are using our exclusive brands, which aremore competitive for them. And it always involves comparing products that they'rebuying to lower cost products, which could be just as high quality. But that'swhere we keep people focused. The smart guys are taking this opportunity whilethey have maybe 70% capacity to deploy resources internally to fix their supplychains.
David Manthey -Robert W. Baird
Okay. Thanks. And then, on Barnett or pro contractor ingeneral, do you have any geographic concentration, if you could just remind usif there are any particular states or regions where you are stronger thanothers?
Michael Grebe
We're stronger in the Sun Belt. Barnett grew up in theSoutheast, and so we've got a strong presence all the way over to Texas, probably lower market share in the Western United States and the East.
David Manthey -Robert W. Baird
Okay. And then, final question in terms of sequential trendshere. Could you talk about normal seasonal trends by segments from thirdquarter to fourth quarter? For example, it looks like the pro contractorbusiness, Bill, I think last quarter you said that on a monthly basis the dailysales rate had bottomed in the first quarter. And I'm not trying to call abottom here to turn the trend, but it would certainly seem that what you saw inthe third quarter is the continuation of maybe a bottoming process. Would youcategorize it that way?
Michael Grebe
Dave, it's Mike. I guess, honestly, the way we really lookat it here is we have no other way to look at it than to manage our business ona year-over-year basis. I mean we're trying to make sure that we're gainingground every year and certainly delivering more profitability. And so that'sreally our focus.
We would not want to step out here and try to predict abottom or not. I mean, we just have in the same spot that I think every otherdistributor is selling into that market, and really every other commentator isthat we just have no visibility. It is really tough. So there are some trendsthere that we can look at, but certainly nothing that we would want to say,here is a bottom or not a bottom, we're just not able to determine that rightnow.
David Manthey -Robert W. Baird
Fair enough. Thanks for the color.
Operator
Your next question comes from Jeff Courey with SkystoneCapital.
Jeff Courey -Skystone Capital
Good morning.
Michael Grebe
Good morning.
Jeff Courey -Skystone Capital
A couple of questions. First, on AmSan, now that you havefurther -- you've owned it for five quarters, any more visibility on where inthe $4 million to $6 million of synergies you will end up? And relatedquestion, how much of that is in the '07 numbers?
Michael Grebe
Well, Jeff, you may recall just -- and I know you have beenfocused on this for the group, you may recall that we first announced the AmSanacquisition last year. We said we thought we could achieve $1 in synergies in2006. We thought we could achieve $4 million to $6 million in synergies by 2008,and that we might be on a straight-line basis for 2007 to achieving that.
As I mentioned earlier, I am pleased to say that ourintegration work has yielded results that are ahead of schedule. So the financialresults that we've delivered in 2007 include synergies above that $2 million to$3 million run rate that we had initially expected for 2007.
Now, we still feel there is additional gas left in that tankfor 2007. Some of the next level of synergies will be dependent upon successfulcompletion of our information systems work. And also, as I mentionedpreviously, we're proceeding with that work very carefully. And therefore, we'renot really prepared right now to say exactly how high that next layer is andwhen it might occur. And again, we will be able to give you better color onthat when we give our '08 guidance as part of our 2007 report.
Jeff Courey -Skystone Capital
Great, thanks. And if I can just follow-up on Jeff'squestion earlier, could you flesh out a little bit more on where you are on theinstitutional and non-multifamily, some of the specific verticals you'retargeting which have the potential as a similar market structure to multifamilysuch as school systems?
Bill Sanford
Bill, again. The thing that Interline is good at isdeveloping programs that can be replicated in numerous geographies. Andtypically what we're trying to do is find a senior decision maker at aninstitution of some kind that is willing to control the purchasing centrally inan enterprise. And so, you can talk to a superintendent of a school districtfor example, a healthcare system. We've had some success recently with four privatehealthcare systems that want to have us takeover their supply chains.
And then anything that has a residential component to it isan attractive institution for us. So a university, military, anything where wecan mix the multifamily product line in with the institutional product line isthe target. So education, healthcare, nursing homes, government, lodging arethe markets.
Jeff Courey -Skystone Capital
Great, thanks.
Operator
(Operator Instruction)
And I'm showing no further questions at this time. Mr.Tossavainen, any closing remarks?
Michael Grebe
Thank you, Jennifer. It's Mike Grebe. I would like to thankeveryone for attending the call. Again, I would like to thank my teammates forwhat I think was a very strong quarter in a challenging environment. And we canend the call now. Thank you very much.
Operator
Ladies and gentleman, this concludes the conference call.You may now disconnect.
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