Albany International Corp (AIN) 2007 Q2 法說會逐字稿

Welcome to the Albany International second quarter 2007 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, with instructions given at that time (OPERATOR INSTRUCTIONS) as a reminder, at the request of Albany International, this call will be webcast and recorded.

I would now like to turn the conference over to our host, President and Chief Executive Officer, Dr. Joseph Morone. Please go ahead.

Thanks, Julie. Good morning, everyone. Welcome to Albany International's Q2 2007 earnings call. As always, I will start with some comments and then turn the mic -- turn the call over to our Executive Vice President and CFO, Michael Nahl, who will make some amplifying comments this time, primarily about our balance sheet. And then, of course, we will go to your questions.

In our last three earnings calls, I focused on progress toward our short-term objectives of returning to Q2 2006 profit levels by Q4 of 2007, excluding the expenses associated with our cost reduction and performance initiatives. In Q2 and early in Q3, we took or announce plans to take what we believe to be the remaining steps necessary to achieve that short-term objective. As a result, we are increasingly confident that, barring any additional instability in the PMC market, we will return in Q4 to the profit levels that we had been experiencing just before last year's price disruptions in the European PMC market.

As discussed in each of the earnings calls since third quarter of last year, we have been focusing on three factors to drive the improvements in profit -- cost reduction and process improvement, gradual recovery of PMC revenue, and continued growth in the emerging businesses. Since our last earnings release, we have made the most significant progress on the cost reduction process improvement front. Our European PMC business successfully started operation at its new central administrative services center. We announce the closure of three PMC manufacturing facilities and one Albany Door Systems facility. And we switched over our first business unit, Albany Engineered Composites, to SAP.

Previously we estimated that the combined annualized savings from cost reduction and process improvement activities initiated since Q3 2006 would be at least $0.45 per share by the end of 2007. That is a run rate of $0.45 annualized by the end of the year. We now estimate that with the added impact from the actions announced since our last earnings release, total annualized savings from all initiatives taken or announced since Q3 2006 will be at least $0.50 per share by the end of the year, growing to at least $1.00 per share by the end of 2008.

Q2 also saw continued stability in PMC revenues. While sales were 3% lower than they were in Q2 2006, they were 6% higher than the low point in Q3 2006. Q2 2007 orders in Western Europe are 16% higher than they were in Q2 '06, as gains in order volume continue to offset lower average prices. Moreover, several important multi-year contracts were successfully completed in both Europe and North America, which further reduces the likelihood of a return to the instability of last year.

To be sure, the risk that competitors will respond to our growing market strength with additional price cuts is ever present and the consolidation of the paper industry in Europe and North America, particularly in Canada, continues. But we enter Q3 with confidence that our strategy of maintaining a steady price premium based on the benefits we deliver to our customers, that strategy is the right one, both for the short-term return to Q2 '06 profit levels and for the longer-term objective of steady profit growth in PMC.

The third factor that we have been focusing on is continued growth in the emerging businesses. Compared to Q2 '06, Doors grew by 13% and Applied Technologies by 20%. But despite the top-line growth, the lack of profits in our Doors and AEC businesses contributed to the Company's lower-than-expected earnings in Q2.

AEC, that is Albany Engineered Composites, lost $1.8 million in Q2, or $0.05 per share. We had expected AEC to breakeven this quarter. The reason for the loss is that at the very time that AEC was staffing up to meet a strong order backlog and an accelerating stream of new business opportunities, shipments to key three key customers were substantially lower than expected because of delays in their production schedules. We expect a sharp increase in sales as those shipments begin to flow in Q3 and the business to be profitable in the second half of the year.

As for Albany Door sales, despite $33.3 million in Q2 sales, the business only broke even. We have been engaged in a businesswide set of process improvement activities, but these clearly have progressed at too slow a pace and costs of operation, particularly in Europe, are simply too high. We took steps in Q2 to reduce cost, most notably through the announce shutdown of manufacturing operations in Sweden, and we expect that by Q4 of this year, operating margins will return to their customary levels.

During Q2 we acquired the assets of business of R-Bac Industries, founded in 2004 by Paul Reilly and Ted Burbach, pioneers in the North American high-performance door market. Since its inception, R-Bac has been by far the fastest-growing company in the North American high-performance door market. Its productline complements Albany's and the combined businesses make Albany Door Systems the largest supplier of high-performance doors in North America, with the most complete productline. R-Bac will be fully integrated into Albany's North American Doors' operations by the end of the year and the combined business will be led by Mr. Reilly.

The market strength and North America of Albany R-Bac along with a strong worldwide order backlog and continued expansion of the aftermarket business in Europe suggests that the short-term growth potential of this business should exceed our previous estimate of a 5% to 7% compound annual growth rate.

In sum, we remain on trend toward our target of a return to Q2 '06 levels of profits by Q4 '07. On the cost reduction front, we believe that the actions taken or announced to date will fundamentally lower the cost structure of the Company. In the PMC market, while the underlying risks associated with competitive behavior and paper industry consolidation remain real, we believe that our revenue outlook is considerably more stable that it was a year ago and that our market position is even stronger. And in the emerging businesses, while a lack of profitability in two of our critical businesses contributed to lower-than-expected overall results in Q2, strong orders in both businesses and lower cost in the Doors business should bring higher sales and better profitability in the second half of the year.

Looking beyond our short-term Q4 target, the actions we have taken since Q3 of '06 [argo] well for our long-term cash and growth strategy. A significantly lower cost base and recovering revenues in PMC, a strong PMC productline, continued progress in our Asian expansion, and accelerating growth in AEC and Doors are all reasons for optimism about the long-term viability of our strategy of growing profits in PMC while growing profitably in the emerging business.

Now let me turn the call over to Michael Nahl, who will add his comments and then we'll go to your questions.

Thank you, Joe. Good morning. We refer you to the comment about forward-looking statements, which is contained in the press release, and we note that the same statement applies to our remarks in this conference call.

Some of you may be wondering why our release and earnings call are a week later than you expected. We wanted to make sure that we would be able to share with you the specific actions involved in the additional restructuring savings we are announcing for the first time late last week. We would not have been able to do this had the earnings announcement preceded the public announcement of the closure of our East Greenbush plant and the discontinuance of dryer fabrics manufacturing in Menands.

In general, I expect that we will also be reporting at about this time in future quarters, although some quarters we may be a little earlier or later. We will probably no longer announce tentative release dates several quarters in advance, rather we expect to announce the date of each quarterly earnings release and phone call around the end of the quarter. This way we can determine the earliest optimal release date, given what is going on at the time.

We know that many of you would like to know how large the charges will be in the third and fourth quarter for the most recently announced closure of operations. As we indicated in our financial release, we are not at this time able to estimate the charges that we'll incur in connection with these specific plans and closings until we are further along in the process. As I pointed out in our first-quarter call on April 27, our recent experience in North America has been that for every dollar of charges we have realized about $0.80 to $1.00 in savings. In any event, we will disclose these costs as soon as we reasonably can. As for the savings, they are part of the dollar per share effects that Joe included in his remarks.

At a time when financial markets are reeling from risk aversion and widening credit spreads, it may be helpful to recall that Albany International has in place very solid financing with substantial undrawn availability. Specifically, we have a $460 million revolving credit facility with our bank group, currently at LIBOR plus 75 basis points and with undrawn availability of over $400 million. That is costing us 17.5 basis points. The revolving credit agreement matures in April 2011. We have a $150 million note with a fixed 5.34% interest rate and an average maturity of October 15th, 2015. And we have $180 million of convertible bonds with a 2.25% interest rates and first reduction redemption opportunity of February 15, 2013. We also have cash of $60.7 million and we have company-owned life insurance policies with cash surrender value of $43 million.

In the second quarter, the average interest rates for our $410 million of debt was 4.1%. Over 80% of our debt was fixed-rate and virtually all of it is long-term. Our net debt as defined in our credit agreement, which subtracts cash and the cash surrender value of our company-owned life insurance policies, was obviously only $306 million at the end of the second quarter 2006. Net debt is expected to peak around the first or second quarter of the 2008, excluding the effect of any potential enabling acquisitions for our Applied Technologies or Door Systems business. After that peak, net debt is likely to decline significantly over the rest of 2008 and to decline very substantially starting in 2009 and onward.

For investors using their own cash flow models, here is our current rough estimate of depreciation and amortization for 2007, 2008 and 2009. For depreciation, $60 million in 2007 and $68 million and $72 million for 2008 and 2009, based upon current exchange rates and expected capital expenditures. Amortization for the three years is currently estimated to be approximately $5 million this year, $11 million next year, and $10 million in 2009.

A few balance sheet items that increased in the second quarter deserves an explanation. Accounts receivable rose $16.2 million for the quarter, of which $4.6 million was for currency translation, with the remainder of the increase principally due to timing of shipments. Inventories increased by $12.5 million in the second quarter, of which $4.3 million was due to changes in currency rates.

In a period where we have announced the closing of operations at two manufacturing facilities in Europe and three in North America, including the Collinsville dryers facility last year, it is essential to issuer an orderly supply of products to our customers. Inventories also increased in Door Systems and Applied Technologies, as sales increased 13.3% and 19.9% in those businesses.

In our last conference call on April 27, I said in answer to a question about how I felt about 2007, "don't get carried away with the '07 numbers, which are really irrelevant to the cash flow implications of what is going on." I urged investors to not increase any short-term quarterly projections it just because we got off to a very strong start in the first quarter. The main point about not overreacting to quarterly numbers this year is just as valid today as it was then. We continue to make substantial progress doing exactly what we said we would do -- focus on objectives that would enable us to return to Q2 2006 profit levels by the fourth quarter of 2007, excluding the expenses associated with the cost reduction and performance improvement initiatives, and even more important, restore the cash generation capability of our core PMC business and accelerate our profitable growth in our emerging businesses.

Since our last conference call, we have made very substantial progress on all fronts, although the most visible in our second-quarter results was on the cost reduction front. As Joe explained, we have now implemented actions to achieve annualized cost savings that will have an effect of at least $0.50 per share annualized run rates by the end of 2007 and at least $1.00 per share by the end of 2008. And we are well along in our strategic positioning for growing profits in Paper Machine Clothing and for profitable growth in Applied Technologies and Door Systems. The implications of those actions are substantial for our prospects of long-term cash generation.

That completes my comments. [Julie], we are ready to take questions now. Operator?

(OPERATOR INSTRUCTIONS) Mark Connelly with Credit Suisse.

Thank you. Can you hear me?

Yes, we can.

Hi, Michael and Joe. A couple of things on PMC first. If we start with North America, you talk about production inefficiencies. Do these closures addresses those inefficiencies or are there new problems that have crept up? I'm just trying to get a sense of how much this is the solution to the problem and how much more work there might be to do?

Good morning, Mark. This is Joe. The closures address the inefficiencies and the work is never done. But there is a direct line between the statement about the inefficiencies and the closures.

Okay, fair enough. Looking at PMC in Europe, you've got volumes up, prices down. Do these new multi-year contracts basically mean that prices are going to stay down and you are going to have to get the margin back exclusively -- maybe not exclusively, but mostly on the cost side? Do these contracts sort of box you in now?

Let me tell you how we think about that. There are really two sides to this. For our purposes internally when we model this business, we assume that we are locked in and then we ask, now, what do we need to do assuming no growth in PMC revenue? What we need to do to assure growing profitability? And we think we are well on our way to doing that. Assuming no growth, were going to generate a lot more profit in cash. And you saw -- we talked about some of the actions that we've taken in Q2 and after Q2 that guaranteed that.

That said, a large part of our efforts is to move the top-line and one of the reasons that we put so much emphasis on our product pipeline and are increasingly excited about our product pipeline (technical difficulty) new product pipeline is precisely to move the top-line. For us, the most important -- the significance of those multiyear contracts is that it suggests stability going forward, it suggests that we're in a very different place then we were a year ago at this time, where we were coming off a strong first half, looking at a lot of instability coming. Now we are almost at the exact opposite position -- a uninspiring first half, but looking forward we see strong orders, we see multi-year contracts, we see a strong product pipeline, and we're in a much stronger position to handle any instability should it arise just because were at a substantially lower cost basis.

I don't want to say the risk is gone from this business. It is still there and it's the risk we always talk about, consolidation of the paper industry that you know all too well, Mark, and the pressure that can put on some of our competitors as we grow market strength, put on some of our competitors to cut prices. But right now, we are feeling there's more stability in the market than there was a year ago and the contracts are evidence of that. Sorry to be so long winded.

That is helpful. Michael, you gave us some helpful numbers on depreciation and amortization. Can't you remind us what the spending progression is in Asia so that we can get the CapEx side of this right? And when those plants are expected at this point to start generating incremental revenue?

Sure, Mark. In Asia, we talked about a program of a total of about $150 million over a few years and specifically what we have said is that the Company expects to be -- to have our capital spending in the range in the lower end of the $160 million to $180 million range this year, including in the $160 million this year approximately $100 million related to the previously-announced PMC expansion in Asia and Latin America and the pressure (technical difficulty) $35 million for strategic initiatives in the emerging businesses, the balance for ongoing operations. Capital spending for 2008 is expected to be $100 million and will be substantially complete -- and will substantially complete the previously-announced PMC expansion. Beyond 2008, the Company currently expects annual capital spending to be about (technical difficulty) to $60 million a year, including currently foreseen opportunities for strategic growth investments in the emerging businesses.

65 is what we (inaudible) --

65.

Okay, that is very helpful. So the --

-- 160,180 followed by 100, followed by 65 going forward, then you've got a pretty good sense of what the flow is going to be.

Okay. Joe, a question on the Door business. You've talked over the last several quarters about repositioning that business, you talked about fixing it or selling it. And now, it is not performing and you are growing it. Can you give us a sense of what the real plan is here? Because that business doesn't appear to be working very well right now, why are we putting more money into it?

I have to tell you, Mark, I'm actually very excited about where this business is going right now. In -- I told you what I thought about our performance this quarter, it was disappointing and were going to fix it. But if you get past -- you get underneath that performance, this is looking more and more like a compelling growth business. It plays out differently, I think we talked about this before, it plays out very differently in Europe than it does North America than it does in Asia. And in Europe, we are increasing -- we know that we've got the right model for the aftermarket, we've tested it out in a couple of regions and it is working. And now, were trying to roll out that model to other portions of Europe, particularly Northern Europe.

In North America, the market is -- the structure of the aftermarket is very different. There's a well-established channel already in place, so we have to work through that channel to get to the aftermarket and work with it. And so acquiring R-Bac broadens our productline, makes us the broadest and largest high-performance door manufacturer in North America, which gives us a lot more influence and visibility with those already-established aftermarket channels. So the -- in many ways, the goal is the same in both grow the product business and have a greater presence in the aftermarket business, but how that plays out in Europe and North America is very different. The step were taking in North America helps both to grow the product business and gives us a lot more influence in the aftermarket.

Okay, that is helpful. And, Joe, on a similar note on strategic businesses, you talked about Engineered Composites, which sounds like maybe it is mostly a timing problem, maybe not completely. In past quarters, you talked about Filtration Technology as a growth area and that obviously was a decent business for Albany years ago. Is that a business that is ramping back up?

Let me just address your Composites comment and then I will come to the Filtration. It is -- from what -- from everything we can see, it wasn't partially a timing issue, it's entirely a timing issue. And we expect a strong second half as the timing of those shipments kick in as expected.

Now there's another subterranean theme that we talk about a lot about internally, which comes through in these comments. It is easy to -- not easy, it's easier to rapidly grow a business with the enormous potential that this Composite business has without paying attention to profitability. But I think what you learn over time is those kinds of businesses are the ones that have trouble later on once it is time to turn to profitability. And we feel that disciplined growth, rapid but disciplined growth is what were trying to achieve here with Composites and that is why the lack of profitability in Q2 was worth noting. Even though the growth projections are very strong, every quarter we have with this business gives us more confidence that this is a very exciting future growth business with sustainable sources of advantage.

We didn't mention anything about the Filtration business and maybe we should have. They had a great quarter. It was strong growth, driven primarily by sales and orders of filtration bags to the power generation market in China. We have been investing in that business. including building a plant in China, which is now producing the product that is supplying that rapidly-growing power gen market. They had a great quarter. Does that answer your question?

Yes, that is fair. I'm just wondering -- hadn't really heard it. Okay. And just one last question, I promise. On dividends, you raised your dividend recently and obviously it wasn't a very big increase, but typically, we get companies raising dividends after their reporting good news. These numbers are obviously not great. Can you talk about the Company's dividend policy and the decision to pay the dividend when you did?

For the Board, it was an unremarkable decision. It was business as usual and suggested, in our minds, fundamental confidence that we're on the right track. As Michael suggested, the numbers bounce around. We've said all along -- and he hasn't pounded the paint, he's come close to it -- that '07 was about the underlying trends, restoring profitability after what happened in Europe, and setting ourselves up for serious cash generation at the end of '08 and into '09 and beyond.

If you look at those underlying trends, number one, we said were going to take out cost, strive to get to the lowest cost possible; number two, we want to stabilize PMC and gradually see improvement in the PMC market; and number three, we want to grow those emerging businesses. All three of those trends from our point of view are absolutely on trend and if anything, in each of them were ahead of trends. If you just take the cost number, we said we take $0.45 out by the end of the year and now we're talking about $1.00 by the end of next year.

Okay, very helpful. Thank you.

[Hamza Mazari], Credit Suisse.

My questions have been answered. Thank you.

Ned Borland with the Next Generation Research.

Good morning, guys. I just had a follow-up question on one of Mark's questions about the orders and the multi-year contracts. You had a 16% increase in orders. What role do the contracts play in that number?

They help. Let me just repeat what I said before. I think this is the most comprehensive comment I can give you. Q2 -- the end of Q2 and beginning of Q3 2007 feels like the exact opposite, mirror opposite of Q2 '06. We're coming off a very strong first half and feeling the clouds were -- the clouds on the horizon were moving fast in our direction. We talked about that in the call. And we saw a lot of instability coming in Europe.

And we're feeling we're in the opposite position now. I think that order picture suggests it and the contracts reinforce that. The significance of the contracts are it's when you have a contract negotiation, major contract negotiation, that the window opens for instability for a competitor to try to disrupt -- the window opens for competitors to dramatically drop prices in order to try to grab business. That usually occurs during contract negotiations. So the fact that we got through more important contract negotiations without that is a sign of stability.

And then, listen, hovering behind all this, another reason that we feel that the beginning of Q3 '07 feels very different from the beginning of Q3 '06 is we're very excited about our product pipeline right now. And we were just beginning to reorder and restructure -- just completing the restructuring of our R&D activities a year ago. It's a year later and we're seeing a lot of momentum.

Okay. So are some of these orders are they kind of scored as sort of blanket orders? Are deliveries longer than twelve months out or are they -- I'm just trying to get a sense for how you guys account for orders?

They are more of a short-term predictor of shipments than they are long-term. The contracts are really more of an agreement on general terms for sales and also in ordering of -- by the customer of who their preferred suppliers will be. But then the actual orders are booked over the course of the life of the contract.

Okay.

(multiple speakers) -- agreement, the way that plays out in the market are the orders.

Okay. On Composites, you had the timing issues. Are those timing -- I just want to get a sense for how pushed to the right some of these timing issues are. You said second half, they're going to come back?

Yes. Yes, it really is -- if this wasn't a small business, if this were a few years later in the development of these businesses, I think these what you would consider in the aerospace industry normal delays in shipments would be obscured from view because they'd be absorbed in a larger sales base. We're still working off a small base.

But to just give you a sense of how real this is, one of the delays was for a part that will be used -- that will be sold onto the Dreamliner. And that is a very real phenomenon. That is coming. But the -- our customer who supplies Boeing had some production delays, which then lagged back to production -- to shipment delays on our part. So it's very real.

That is all for me. Thanks.

Arnie Ursaner with CJS Securities.

Staying right on Engineered Composites, first, you mentioned your net sales did increase 35% year-over-year, can you give us the actual sales number please?

Arnie, we haven't yet broken out Composites from the segment and we do -- I think we have mentioned before that we do intend to create a separate segment I think probably next year.

How much would sales have been up had these shipped, maybe that is another way to get a sense of the magnitude of the shortfall and delays, if you will?

They were well short. I think you will see the practical answer to that in the second half, when you see whether in fact the rate of increase is substantially higher than the 35% in the second half.

Okay. Again, it's a little surprising to see three --

Just as a backdrop, remember that we are managing this business for rapid growth. So we are adding a lot of staff, a lot of development capability at the same time. There were two factors at work here. One was a very temporary delay in releases from our customers. At the same time, we've got the pedal to the floor on ramping up our talents and capability.

I guess I'm a little unclear why a modest delay in shipments would have caused a pretty decent size loss in the quarter?

They're three very big customers.

And have those shipment occurred yet in Q3, because you mentioned they should begin to flow in Q3. Have they already shipped?

We can't disclose that information, but I think you should pay attention to the tone of our comments.

Okay. Shifting to PMC for a second, you mentioned that you had growth -- North America was flat and you had growth in Asia. How far down were sales in Europe?

Sales in Europe I believe we said were flat -- what we said was compared to Q3 '06, sales were flat.

In your prepared remarks what you said is that American net sales were flat, Asia sales and orders improved, sales in Europe declined. So given -- North America was flat and Asia was up --

Well, Q1 Q2 there was some decline in Europe. We measure ourselves on progress were making in Europe against the Q3 low point. The main story in Europe is orders are very, very strong right now.

What I am trying to get to is if the decline in Q2 was more timing as you shifted orders into Q3? Because like you said, the 16% growth is pretty impressive.

Yes, I mean it is more -- if you look at the Q1 to Q2 fluctuations, we think of them more as seasonal fluctuations, month-to-month fluctuations. That is where we keep going back to Q3 of last year, that is when you really want to see fundamental change. From our point of view, the most important message about Europe is that orders at this point in the year are 16% higher than they were last year at this point. The trends are going in opposite directions Q2 '06 versus Q2 '07.

Question for Michael. Michael, I think your 160, just to clarify, includes or does not include the 11 million or so for the SAP system?

Does not include the investment for the SAP system.

So that is another 11 million or so?

Yes, it's in that range.

Okay. And going to the Door business for a little bit. You mentioned in your prepared remarks you have a strong worldwide order backlog. Can you quantify that, please, or give us a sense of that? And then I have another follow-up there.

Well, we don't quantify, haven't quantified orders. This business has been grand pretty rapidly the last few quarters and relative to that strong growth, we think the order backlog is strong. As I said to Mark, we are excited about where this business is going.

The backlog you have, typically how long would take to ship that backlog?

It's a good predictor of short-term sales.

So we should have a high degree of confidence in the back half of the year?

You should.

Not the back half of the year. With regard to specific question about the orders, the next couple of months. It's indicative of our confidence in the second half.

I don't know if you remember, but this business is seasonal and the fourth quarter is the strongest quarter.

Going back to the Door business, again, one of the other questioners commented that you thought about getting out of this business, but I think part of the fact holding you back was your view that the aftermarket opportunity was substantial and you wanted to test it and get a pretty good feel. In your prepared remarks, again, you're talking about continued expansion of the aftermarket business and you're raising your view of the outlook for the business. So can you expand a little better about what you are seeing in aftermarket and, again, I'm balancing very strong revenue growth with pretty poor profitability.

Well, we are too. I didn't in anyway try to mince words on how we feel about the profitability of the business in Europe. And that has to change and it will. But if you get past that and look at the fundamental growth prospects in this business, what we've said before is we always viewed this business as a product business. And then as we started -- and it had good growth prospects, 5% to 7% per annum growth prospects, except in recession, as a product business.

But then as look at the possibility for the aftermarket, we see even more potential. What we have learned a we've started experimenting in the aftermarket is that, particularly in Europe, which is, right now, the core of this business and where the majority of sales and profit come from, we believe that we know the model required to grow in the aftermarket. We have tested it out in a couple of important regions, it is working, and now we are trying to roll out that model into other regions of Northern Europe, in particular.

And final question for you, Joe. Since you let out that you are involved in the composite part of the seven -- of the Dreamliner, the 787, can you give us the dollar content per ship set you anticipate having on the 787 since the program is just ramping up? You let it out of the bag, now you got to quantify it.

Michael is prepared to give you all those details right now.

You are terrific, Arnie. You really get right to the heart of the matter, you'd know we're not going to give you that, but nice try.

But you're indicating you're on the 787, you just said that. So could you quantify the dollar content? I'm not asking you to say who you are subcontracting for or otherwise, but what is your dollar --

We're not prepared to do that now.

We are hopeful that we will be able to be that in a future quarter.

Okay. Look forward to seeing you next week at our conference. Thank you.

(OPERATOR INSTRUCTIONS) John Emerich with Iron Works Capital.

Hi, Michael and Joe. Just to clarify, I've tried to do this a few times, my own fault for not getting it down. But the Q4 profit guidance that you are referring to -- always referencing Q2 of '06, is that basically implying that the operating margin, or the operating dollars, profit dollars will be roughly equivalent to what it was?

Operating dollars before special items.

Profit dollars before special items. And in those special items, I think last time we spoke when you were in Chicago, you were saying -- I wrote down that the SAP spend was actually going to make a high, if you will. Q4 was a big quarter for spend is that part of the special or expenditures or is that capitalized anyway?

Yes and yes. There will be some SAP spend that will hit every quarter and so when were talking about returning to the profit levels, we mean before the SAP and other restructuring kind of costs.

What is the -- if you make up a number -- if you spend $3 million in the quarter on SAP, how much that is being expensed versus capitalized? Michael, any rough idea?

Let's ask our controller, Rick Carlstrom, if he's had a rough estimate.

-- (inaudible) but it's going to skew more to the expense side as we go (inaudible)

Did you get that, John?

I did, thank you. And Michael, the tax rate kind of for the second half and into next year, I don't know if you want to say on more of a normalized basis.

I think you should use the 25% rate for the balance of the year and obviously we look at it every quarter.

Okay. And lastly, Albany Doors, you know -- not to beat it to death -- the margins have been declining kind of for the last two and a half years. Joe, when you say you expect it to return to the customary margins, what do you mean by customary? It's been a pretty broader range and a downward slope for the last ten quarters or so, I think. What --

I think as a first, which we won't be satisfied with, is that the margins of Q4 last year, we should see this year, but on significantly higher sales. But that won't be good enough from our point of view.

Yes, I mean even at that level it's not earning very good cost of capital, I don't think, or a good return on capital.

We are acutely aware that, John.

Okay, thank you very much.

Mark Connelly with Credit Suisse.

Just one more question. I'm looking back at my notes, you've now closed in the last couple of years the dryer plant in the U.S., the dryer plant in Canada, press plant in the U.S., and a seaming operation last year. Can you talk about what is driving these closures at this point? I mean, I remember a time when you were exporting a meaningful amount of stuff from Canada. I don't think anybody does that anymore. Can you give us a sense of what is driving these closures? Is it principally declines in the North American business or is it shifts in where you are producing stuff?

Its multiple variables. You also missed the small press plant in Europe, which we closed in Q2. The -- it's everything we have been talking about, Mark. On the one hand, it is the consolidating paper industry. The paper industry isn't just consolidating, as you know, machines that are being shut down are a lot less efficient than the machines that remain operating. And so the amount of paper machine clothing consumed as you go to fewer machines declines and as the efficiency of paper machine clothing grows, that also leads to lower consumption.

So there is a market effect, that is one thing. But just as important, maybe even more important, we've been going from business that was structured as many individual profit centers to three global corridors. And in the process of doing that, we find that we have -- as we operate a lot more efficiently, we have a lot more capacity than we thought we had. So it is both the combination of trying to respond to market trends and get ahead of market trends and also optimize our own performance internally that leads to those kinds of decisions.

Okay, that is hopeful. Thanks, Joe.

Thank you. We have no further questions.

Thank you all for participating and look forward to talking to you on our next call or at the investor meetings in between. Thank you.

Thank you. Ladies and gentlemen, replay will be available at the Albany International website. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.