Aaon Inc (AAON) 2008 Q2 法說會逐字稿

Good day and welcome to today's AAON Incorporated second quarter earnings performance conference call. Just as a reminder, this call is being recorded.

At this time I will turn the call over to Mr. Norm Asbjornson.

Good afternoon. Welcome to AAON's second report. And with me is Kathy Sheffield. I would like to read a forward-looking disclaimer to you. To any extent any statement here in deals with information that is not historical, including the outlook for the remainder of the year, such statement is necessarily forward-looking and made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. As such, it is subject to the occurrence of many events outside AAON's control that could cause AAON's results to differ materially than those anticipated. See the risk factors contained in the most recent Securities and Exchange Commission filings, including the annual report on Form 10-K and the quarterly report on 10-Q. Again, thank you. And I will turn it over to Kathy Sheffield our Vice President and in charge of Finance.

Good afternoon, welcome to our second quarter conference call. I would like to begin by discussing the operating results for the three months ended June 30th compared to the three months ended June 30, 2007.

Revenues were up 6% to $74.8 million from $70.8 million. The increase in the sales were attributable to an increase in our volume. Our diversified product mix, an excellent response to many of the new and redesigned products and also to price increases. Gross profit increased $15% to $18 million or 24.1% of sales from $15.6 million or 22% of sales. The increase in the gross profit was a result of higher sales. Our price increases and also production and labor efficiencies. Selling, general and administrative expenses increased for the second quarter by 15% to $6.1 million or 8.2% of sales from $5.3 million or 7.4% of sales. The increase in the SG&A was primarily related to an increase of selling related expenses, warranty expense related to the higher increased sales, profit sharing, that is also related to increased net income and an overall increase in general and administrative expenses. Our operating income increased 16% to $11.9 million compared to 15.9% of sales from $10.3 million or 14.6% of sales. Net income increased to $7.8 million or 10.4% of sales from $6.9 million or 9.7% of sales. The increase in the net income resulted from our higher sales volume and improved productivity. Our diluted EPS was $0.43 per share versus $0.36 per share compared to same quarter last year. Our earnings per share for the three months were based on 18.145 million shares compared to 19.336 million shares in the same quarter a year ago.

Moving now to the six month results. Revenues were up 8% to $140.2 million from $129.5 million. Gross profit increased 7% to $33.6 million or 24% of sales from $31.3 million or 24.2% of sales. Selling, general and administrative increase for the six months by 9% to $12 million or 8.6% of sales from $11 million or 8.5% of sales. Operating income increased 6% to $21.6 million or 15.4% of sales from $20.3 million or 15.7% of sales. Net income increased to $14.2 million or 10.1% of sales from $13.2 million or 10.2% of sales. Diluted EPS was $0.78 per share versus $0.69 per share a year ago. Earnings per share for the six months were based on 18.302 million shares compared to 19.492 million shares.

Looking at the balance sheet, we see that the Company's current asset ratio is approximately 1.7. That was due primarily to our dividends payable, our higher accrued liabilities and part of the higher accrued liabilities were based on increased warranty expenses, accrual and our commissions. Capital expenditures for the six months were $1.4 million. Those expenditures related to new equipment and also to an office renovation in the Tulsa location. Shareholders equity per share as of June 30th was $5.23 compared to $5.29 last year. We also paid cash dividends of $2.9 million and also bought back stock in the amount of $17.3 million.

I would now like to turn the call back to Norm who will discuss our results in further detail, along with our new products and the outlook for the remainder of the year. Norm?

We are very pleased with the sales performance we had. The economy is a little bit soft in the commercial end. It has been for most of the year and doesn't have any defined direction at this point whether it is going to get stronger or not but it appears pretty stable at this point. The energy issue has become more and more important and we have done a lot of things to address energy in a positive fashion and it has helped our sales effort. Probably, the one that is more of a change than anything though is because of Montreal protocol, which the US is adhering to and the phase out of the older type of refrigerant by 1st of January 2010 with a new, more environmentally friendly refrigerant called R-410. There has been a dramatic switch over to 410 by our customer base and so there's been both of benefit and a problem there. The benefit being that we were totally ready for it. And therefore, probably got some sales because we were ready for it. The negative be, of course, it's a massive change in engineering on every product that uses refrigerant and not because we hadn't done the engineering, we had. But it is just the conversion from largely using one kind of refrigerant to largely using the other and the change in some of the componentry that had to change to make it happen. We are very pleased that it has pretty much happened in AAON. And we are rapidly getting to point where only the R-410 refrigerant is being bought by our customers.

We have continued to have growth in some of our new product offerings. Some of those are in the split system market out of our Longview facility, air handlers and condensing units, as well as increase in chillers made up in Tulsa, added considerably to it. We have been talking about the residential issue for some time and we are into selling that now on a very modest scale. And the reason for that is the residential market is under severe stress as you are no doubt aware, and therefore, it is not a good time to go in there and do a lot of work to try to get what ever business there is in there and better spending our time in the commercial market, which is much more healthy market place. A lot -- there has been a definite decided change in the product that we are selling to some of those new products and also going into some of our larger tonnage products. And diminishing a little bit in our smaller tonnage products. And that's primarily due to being a soft market, the competition is very strong at this point in time but also, the new things which we have been introducing have been into our new larger tonnage equipment and they are definitely technologically advanced products more so than the industry is. And sot it's been an appealing -- more appealing part of our product line. We are at this point in time moving that technology down and we are in the the present process as we speak of going into about another 20% of our business with some of these more advanced technology, which will mean once we get there, which will happen by October, we will have gone by somewhere around 40% of our market being with basically foam construction and direct dry blowers is the main two things, which effect the rooftops and air handlers. Rooftops are just in the two larger sizes right now. And third size is presently being introduced into the marketplace, which is when it is into the marketplace by October, would be our shipping. What we will be shipping in October. We will at that point be some where around 60% of our dollars will be with the newer products. And so, we are progressing very well in that area.

Our backlog at this point in time is at the end of June was $67.110 million, which is about $10 million less than it was a year ago. The primary reason for being about $10 million less than a year ago is the fact that as I spoke earlier, the market has not been real strong but the more defined answer to why we are sitting where we are is the fact that our capability of building product has improved considerably from a year ago. And so, we have been able to ship our product more when the customer wants it and therefore, diminish our backlog by shipping more when the customer wants it. To give you a feel of how much that has changed, during the month of June, we shipped a little bit over $30 million, which annualized, of course, would be $360 million plus. And if we had pushed it a little bit we could have made it annualized at $400 million. So our capacity is as we have been speaking for a long time in improving. And with all the new products we are bringing out we are hoping we will be able to utilize more fully all the capacity. We didn't -- in order to do that $30 million in June, did not have to run a lot of overtime and we did it basically without a lot more people than we have been doing say a year ago, due to the improved productivity of the Company. Productivity has been enhanced considerably over the past year. Somewhat by the new equipment and others just by learning how to help people better and people learning what they are doing more than they did before.

As was noted in category Kathy's talk, a lot of things were up and down a little bit in the margin area and the sales and the price increases. A reasonable amount of that increased sales, of course, was due to the cost increases -- the price increases that we put out but the other part of it probably was primarily due to the productivity increase. We probably didn't increase our prices as fast as what our material costs were because they have been coming pretty strong and they are continuing. In fact, they appear to be moving up accelerated at this point in time. We have been notified of price increases on significant components that we buy of up to 15% to occur yet this year. So, it is a very inflationary environment that our industry is living in. And what effect that will have upon future sales, one doesn't know. But it is, we are in an inflationary environment.

The SG&A expense basically as you can see, we are running along at 8.2% for the last three months and 8.6% for the six months. We see that running somewhere between 8.5% and 9% for the remainder of the year. So no significant change in that area.

Operating margins, were 15.9 for the quarter and 15.4 for the year. Net income was up 8% to 14.2 compared to 13.2 last year. The CapEx was only about 1.4 so far. And we are still sticking with somewhere in the $ 7 million to $10 million for equipment in the Tulsa building expansion. The building is just beginning to come out of the ground now and just beginning to start using a lot of money to pay for the building. It will, when it is completed, further improve the productivity. And obviously give us more future capacity than even we have at the present time.

The one other question that will come up is what is happening to the Canadian facility, and as we spoke last time, we had to raise the price considerably for all business we did in the United States due to the exchange rate between the Canadian dollar and the US dollar changing very substantially during the latter part of last year. And that, of course, raised our price to our US customers by a considerable margin. In addition to that, we raised it enough so that we should have a chance to make some money up there, which we weren't making and the net result is a great drop off of US orders, which is the majority of the business. The net result is, we are down to producing approximately one-third of what we were say a little over a year ago. And we have diminished the size of the operation accordingly. We are real close to breaking even at it. The jury is still out as to whether we would be able to make any money there or where we are going. It does seem to be stabilized at about this much. And it seems that we are getting orders at about this level. The longer that occurs, the longer it is we are going to be able to get it making money. That's not for certain.

New products and everything we talked about, a little bit. One of the big issues is, on the energy issue, we are doing a lot of things which are quite new to the industry and quite effective on improving efficiency. We have some test jobs out that look like they have improved our energy efficiency and some new technology somewhere up to maybe 20%. We are still analyzing position on that. Making sure that what we believe is happening is truly what is happening.

If we look at our business segments, retail is pretty soft. Office buildings are not too bad. Medical and healthcare is pretty good. Education is quite strong. Manufacturing is probably so, so and another is going along pretty well. No real signs of any increase or decrease in those at this moment in time.

The outlook for the purchase -- stock purchasing program is that starting Friday, we will be back in the market again. We now are down out of that initial 1.800 million shares roughly that we have authorized in November of last year. We have remaining to be purchased, about 330,000 shares out of that.

The biggest concern I have at this point was pointed out on the front page of the Wall Street Journal on August 1st last Friday. It was a big article headlined, relative to Wal-Mart. And warnings they have about a Bill which had passed Congress but had not gotten through the Senate last year. One that's called the Employee Free Choice Act, which would make it possible for unions to unionize by simply getting in 50% of the individuals to sign a card and never have a secret ballot, which almost assures if that passes and according to what Senator Obama is saying that he will do is he will have that passed within the first 100 days of his administration. If that is going to occur, that's going to effectively unionize the United States all the way down to very small companies and I have real qualms about where that is all going. Because the history of unionization compared to the world economy has been very bad in the past 50 years in the United States. So, wherever we have been heavily unionized in whatever industry, it seems to have moved offshore. That is by far my biggest concern with the future. Everything else is quite manageable.

With that, I will turn it over to you for question and answers.

Yes, thank you very much. (OPERATOR INSTRUCTIONS) First we will hear from Jon from Kansas City Capital.

Good afternoon, Norm, Kathy.

Good afternoon.

Hi.

There were a number of things you talked about that had an impact on your margins in the quarter, the mix, productivity improvements and so on. I am trying to get a better handle on what is more permanent and long-lasting, obviously mix can shift, what do you see out there in terms of anything more permanent, more permanent increase, in gross margins? How sustainable are these margins, I guess?

I think they are probably at about where we might have a chance to sustain them. I don't think there is a lot of upside left. The productivity improvement is one that will stay and that has happened without any special things going on, I guess. It is improvements we made and methods that we do things and improvements and machinery to do them with, and education of our people and improvements of that nature. So, that is probably pretty solid.

The biggest, and no one has to do with the material side of it. And we have been able to manage that reasonable well with the price increases this past year. To where we may have lagged a little bit and we may -- in that and picked it up with the labor improvement is the way it kind of looks. But, it is definitely still with us and we are still going to have to be going forward with fairly significant, fairly regular price increases as we have. And maybe even increasing the size of them. And maybe increasing the frequency of them. Because as I said, we have been notified of a component costs and not steel, not copper, not aluminum, but some of the components we use. Some fairly significant increases about to fall on us right now. And they have been all year. But, they are not being any less now. They are being at greater percentages.

Do you anticipate or how much do you anticipate prices might have to be raised in the subsequent months here to offset that and do you think there will continue to be a lag here? And how proactive are you going be on those - passing those price increases -- cost increases through?

We just put through a cost increase the last one was effective the last part of June. It looks like we are going to have to have another one within the next 60 days. We're debating about about the magnitude of it right now. We're collecting our data. As to how much we are going to have to have. And so, I am a little premature to talk. It would be a minimum of 3%. Might be up to 5%.

Will some of the cost increases that are coming, will that influence some of the backlog, the profitability on some of the orders that are in the backlog?

Obviously, the cost increases that come along are going against it already -- predetermined price on the product. So that is going to effect it. We have had improvement situation from that last price increase. And if you were going to draw two curves they are going cross here someplace, exactly where I don't know. But we got a little more price increase than what we've used up in cost increases right as of this moment in time. That is obviously switching every day that goes by and we will be running behind and our cost increases that we put in back in May won't be adequate for what we will be shipping here in another month or so. And then, we'll have another one going in and it will go through a similar type of a cycle.

We have done well as you can see from our numbers at holding our own. But not gaining great ground but considering that it is a pretty competitive environment we are living in, we are very pleased with it.

Thank you, Norm.

Next, we will hear from Frank from The Robins Group.

Congratulations, Norm on a very nice quarter and you and your entire staff.

Thank you, Frank.

Can you expand on Canada a little bit? I am a little bit lost as to what type of revenue numbers you are really expecting to come out of Canada.

$0.5 million to $700,000 a month.

Okay. That's probably for the balance of this year and maybe what did you do in the first half?

We did a little over $3 million in the first half.

Okay. On that. And Kathy, can you help us out a little bit with what we ought to expect around numbers for share count going forward, with the repurchases and the weighted average and it is a little bit beyond me.

Okay. It is kind of a hard number to give an exact number to, Frank, because there are so many things feed into the number. Based on the buy back stock option, exercises the market price. But, if we were to throw a dart at it we would guess maybe -- approximately 18 million by the end of the year.

By the end of the year. And ratchets it down from the current quarter. From the third and fourth quarters now.

Yes.

Okay. On that. And back to Canada, Norm, I would imagine saying $0.5 million to $700,000 a month is a little bit below your expectations. Do you think you can break even at that level?

Last month on run rate we lost about $20,000. So, it is very close to break even, not quite. Obviously the overhead starts becoming more and more significant. We've gotten the price up to where if we can get a little bit more volume we'll make money. That's the whole question is -- how much volume can we get at the price level we have to have to make money. Right now, it seems like we can get about somewhere between $0.5 million and $0.75 million. And that seems to be about where we are running, which is -- it looks real good until you get picking up the overhead part of the Company and then it doesn't look so good. If it gets up $0.75 million and starts for $1 million, and we hold the price relative to material and labor costs, on the factory -- where it is now, we'll definitely be making money. If we can't do that and it looks like it is getting sicker, worse case, we will have to close it down. We are sitting there wondering where it is going ourselves. But we know what we have to to do both ways.

Kathy, the shares repurchased in the quarter. And maybe while Kathy is looking at that, Norm, I took your comment on the backlog to mean that the lead time to ship something -- bigger, bigger products now is less than it used to be. So we should expect you to work with a smaller backlog going forward?

That is a correct statement. In the past what has happened, because there is a little cyclical-ness in our our marketplace; we would normally get a big surge of orders in the second quarter and somewhat into the third quarter. And we would fall behind a little bit. And our backlog would build and we would be extending our lead time out. With the equipment we've been buying and the things we've been changing, we didn't have that occur to us this year. If the customer wanted to ship it in six weeks, we shipped it in six weeks. And, so consequently, we didn't get the backlog built up because of our inability to ship. We were able to ship when they wanted it. Which from a standpoint of a heathy company is obviously more attractive because the customer after all, we are satisfying him. Ultimately we will do more business with him than if we were always a little bit late with our shipments.

Okay.

On the buy back shares, Frank, on the open market in the second quarter, we purchased 697,358 shares.

All right.

However, if you add our 401-K buy back program and our director buy back program the total ended up being about 742,000.

You spent how much money on that, the 14.4? Or 15.4?

For the quarter?

Yes.

Yes, little over 15.

All right. Thank you very much. I look forward to your success.

Thank you.

Next we will hear from Joe from Sidoti and Company.

Good afternoon, Norm, Kathy.

Hi, Joe.

Hi, Joe.

Norm, could you talk about the response on price increases and if it is effecting your sales volume at all and -- that you anticipate any volume decrease on any level? And maybe especially on the replacement side of the business?

Well, we are fortunate, Joe, I have been in the industry an awful long time and the industry acted very immaturely for many, many years. It is now acting like we've got more well informed business people running our competitors. Because they are all raising prices like we are. So their situation is not a great deal different than ours. And we are all kind of going up hands in glove, if you will, because of the necessity to have it and we all see it similarly as it appears and therefore, we aren't handicapped by the fact that we have to go up with our price. And so I don't see that being an issue. I the past, many times people didn't recognize they were getting in trouble until after they were in big trouble. That doesn't appear to be happening anymore.

The thing we think is going to be our big help to improve our competitive situation is what we are doing with energy and with a better quality product. We are making significant strides, particular in the energy area. And while that's on everybody's plate, we believe we are outrunning the competition in this area at this point in time. We feel that our ability to take market share is going to be enhanced as we go forward.

Great. Your sales growth sequentially slowed down quite a bit quarter-to-quarter, was this the labor shortage anything to do with this? And if so, how much did it have to do with it or was it mostly market-related?

It was mostly market related. The labor thing had us deeply worried for a long time because in Oklahoma, in the greater Tulsa area, which is where most of our stuff is built, we were running down in the two-point something percent unemployment earlier this year and it has gradually moved up into the vicinity of 4% or maybe slightly over 4%. And as it moved up we have been able to slowly get some good quality people to work for us. But what we did, due to position we were in early in the year, we analyzed everything we were doing about how could we do it better. We found a number of ways to do things better. That's what gave us the productivity increase, which means we didn't need the people as madly. The people's shortage or the ability to grow it from people did not really hurt us very much. It is basically been the market conditions that held us where we are volume wise.

And Kathy, your gross margin increase about 200 basis points. Do you have any idea of how much that was effected or how much volume and price increases and product mix? If you can give a percentage on each of those out of the 200 basis points? Have any idea how much that breaks down?

I am sorry, but I don't have any numbers to break it down for you.

Okay. Norm, how about the floor by floor products? Anything new there? Any increased interest?

Well, we put out a pre-production run of whole quantity of three for about $50,000 so far. And we continued to finish off and get everything better for manufacturing of it. To the point that we have a trailer with three products, three new products on it, running in the United States at the present time from city to city. And the products were showing on there -- one of them as the floor by floor unit, which seems to be getting a very good reception. We think that's going to be very good.

One of the catches is we don't have production line set up for it yet, that is going to be put up in the new building. When we do that later this year. We can build it however, but not in a really good environment to build it -- not in a real high productivity methodology because we won't be on a line that it is designed to be built on.

The other two products on the trailer. It is a small tonnage, competitively priced water chiller. Built in our Longview facility. And then the third one is what I spoke of earlier, the new 16 through 30-ton of rooftop unit with -- employing the two-inch foam and the direct dry blower and a whole lot of other new innovations in it. Those three items are on the trailer going from city to city as we speak.

Okay. Great. Finally how much does your new products make up say last three years of new products. Or however you track that? Of your -- make up of your total sales.

Well, we have got several different once to talk about and depends on which time frame we're getting in. If I can use your three-year thing, that would be shorter time frame than some of the new products. Some have them been out four years. Four or more now. And it is in the three-year time frame, we're probably building about 30% of the dollar volume in those new products right now.

Thanks a lot, guys.

Thank you.

Next, we will hear from Graeme from Bares Capital.

Congratulations, Norm.

Thank you.

Just looking at your cash flow generation, it was very strong obviously. It could have been stronger if the AR hadn't increased. Is there anything unusual going on with AR?

No, Graeme there really isn't. The main issue with the the AR being higher is just because of the volume that we had in June.

Okay.

The volume, of course tells us how much money we have to put in reserve for bad debts and reserve for all the warranty and all the other issues that we have to be concerned with. And doesn't necessarily reflect that we have had the problems because the problems are the anticipated problems that is we put it in. But that surge of orders we have had that we produced basically in June drove it up.

Okay, that makes sense. Norm, how it the order growth look in July and the first part of August? You still comfortable with how that's progressing?

We started out, as I mentioned after the the first quarter and had a weak order input. That is modestly improved since that time and still appears to be modestly better than it was a year ago. Whether it is more than a price increase very much. It is not a lot than the price increases but it does appears to be a little more than what our price increases would reflect from year-to-year. At this point it looks solid where we are. And doesn't show us any sign of going up and looking at some of our competitors who have had a little bit of a downturn, it appears we are doing well in the marketplace.

Then the last thing, I know you said you are sticking to the $7 million to $10 million in capital spending for the remainder of the year. What about next year? I mean, how much capital is required to complete this renovation or expansion at Tulsa? And just trying to get a feel for what the next CapEx might look like.

From an equipment standpoint, it is going to be modest just like it is modest this year. And as I said, we have the equipment now. We are on a run rate we could manufacture $400 million a year with what we have got at the present time. So, it is very modest whatever we spend on equipment next year. It will, again, come back to whether our confidence level of what is going forward will tell us we should go ahead and straighten out some of our building needs or whether we shouldn't. We're at a point where that if we felt it was necessary, we could run on a low CapEx if we had to. And if we think the things look good and things are going to go forward fairly well, we'll going to build another section of building up, because we are stressed out pretty well on the warehouse for purchased materials. We have a lot of the stuff sitting outside, as a matter of fact. And we don't feel comfortable with that. That would be another thing we would like to get underway. It will be dependent on how we see the future of the year.

Net result, to answer your question, the CapEx won't be anymore than it was this year even on the optimistic side and it could be less by quite a bit.

Okay. One more thing for you. Given the strong balance sheet. You guys are, as far as innovation, ahead of most of the competition. And given your small size, it seems like you might be a logical acquisition target for a larger player. Has there been any activity on that front and what's kind of interest level in having those types of discussions?

I am paid to look out for the interest of the stockholders and if somebody comes along and offered what appeared to be a very good price for it they would be able to own it. If they come along and look for a bargain there, they aren't going to get it. And so far, there are a lot of people wanting to talk to us but they are all bargain hunters. Being a major stockholder I'm not about to want to give my money away anymore than I want to give your money away. That's kind of where it is. If they really get serious and they want to pay what this Company is worth, then they'll get the Company, I suppose. If they think that there is a bargain here because everything we are doing is long range and we have a lot of very, very advanced things going on in the Company that are far ahead of what I believe what a lot of the people are doing. I am not going to give it away. Because we spent a lot money getting a lot of it.

All right. Okay. Thanks a lot, Norm.

We will hear from Shaun at Kennedy Capital.

Hi, Norm, how are you?

Very good, thank you.

I was talking to a few people in the retail industry about Wal-Mart. You mentioned energy is your focus and according to them Wal-Mart is serious about that. Almost versus the cost of putting potential units on their buildings. They want more energy efficient units. Have you even anything on that end?

It is kind of a funny thing. Because we raised our price more than Wal-Mart wanted to pay for it. We lost their day-to-day business, for the most part. And yet on the six prototype stores, which have been built for the very, very concerned energy issues, say we build them all. We are getting ready to build more for them and we had meetings with them about this because we are -- from an energy standpoint -- more capable in their opinion than anyone else to do what they think needs to be done. So, they are buying that from us, which ultimately would say that if somebody else can copy what we're doing and do it cheaper, then we won't get the business if they choose to go forward with it, which it appears they do -- are going to go. If nobody else can figure out how to do it for what we can afford to do it for, then we will get the business. That's where it is at this point in time. We built six super centers for them with very advanced energy saving ideas that they have been wanting to do. So in that area, as I say, we are very advanced in knowing what to do with energy.

We have a small, let's say, a fast food store that we have done for one of the big national fast food people and we are having a hard time coming to grips with it. But we have a lot of energy saving going on at the meter. Every month it gets metered and they check how many kW you're using, it is a very, very good and so, it is not just the big stores, the big things that we are getting ourselves lined up for. Some of this is brand new to us. It's brand new to the industry. And we are just getting it organized to go after it really well at this point in time. If people really want to get serious about energy, w are there with them. We can do something for them.

Thanks for the color, Norm

(OPERATOR INSTRUCTIONS) Next we will hear from [Corey] from GMT Capital.

Congratulations on another strong quarter.

Thank you.

Thank you, Corey.

Just one housekeeping. Or two housekeeping questions here, and one would be if you have a backlog number? And then two, if there is a breakdown on your top-line growth here between price and the units for the past quarter? I will hang up and listen.

Yes, I gave the backlog here a little bit ago. It's $67,110,495 as of June 30th. Okay. That is for all three facilities. If we were to break it down, the backlog is pretty much steady in the Tulsa facility from a year ago. The backlog is up from the year ago in the long, or no -- it is about balanced out in the Longview facility and all the shortfall in backlog is connected to our Canadian facility. And by that, by shortfall what I talked about, I also mentioned we are down about $10 million in backlog from last year. And virtually all of that is in backlog and in the Canadian facility.

Thank you for the clarification there. And any color you can give on the breakdown on the top-line growth.

Somewhere around 75% of it is cost -- is price differentials and 25% of it is real growth.

Okay. Thank you.

Right.

It appears we have no further questions. I will turn it back to Mr. Asbjornson for closing remarks or comments.

I thank you for being interested and joining me on the the conference call. Kathy and I appreciate your interest. We don't see any real bumps in the road as far as that you probably aren't familiar with. The business environment, while it is kind of rocky right now, it doesn't appear to be heading one way or another that we can notice. And as I expressed earlier, my big, long-range concern has to do with this possibility of the United States basically being unionized. That worries me tremendously.

And beyond that. We have optimism that for sure we are going to do like I said. We are going to have a strong third quarter and as far as we can see it will be a record breaking year for us in both volume and bottom line. Kathy.

Thank you for attending the call today and we will speak to you again in November when we have our third quarter results.

Thank you, people.

That does conclude today's conference. We thank you for your participation and ask that you enjoy the remainder of your day.