Albany International Corp (AIN) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thanks for standing by. Welcome to the second quarter earnings call of Albany International. At this time all participants are in listen only mode. Later we will conduct a question and answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS). At the request of Albany International, this conference call on Tuesday, August 5, 2008 will be webcast and recorded.

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

Thank you, Bob. Good morning, everyone. Welcome to the Q2 2008 earnings call for Albany International. As always, I'll open with some commentary and then we'll turn the call over to Michael Nahl our CFO and Executive Vice President who will make some amplifying comments about how we think about cash flow.

For the past two years we've been pursuing a cash flow and growth strategy with two near-term objectives -- restore the long-term cash generating potential of PMC, and establish a family of new businesses with significant potential for sustainable and profitable growth.

As we've discussed in recent earnings calls, the primary near-term measure of success for this strategy is strong free cash flow beginning in 2009. Our Q2 2008 results suggest that despite a weak North American paper industry and general economy, the weakening European paper industry and general economy, and growing pressure on costs from rising oil and commodities prices, we are on track toward realizing those two near-term objectives and strong 2009 cash flow.

In PMC, our strategy for the past two years has been to offset the impacts of the maturation of the North American and West European markets by growing volume in these mature markets, growing with the emerging markets in Asia and South America, and reducing costs significantly through a companywide three year restructuring and process improvement program. This is exactly what took place in Q2. Excluding currency effects, global PMC sales were up slightly with increased volume more than offsetting declines in prices, sales were strong in Asia and South America which grew by 7%, and 5% respectively, and despite accelerating inflationary pressures, cost in PMC declined as the effects of last year's plant closures, and establishment of the European shared services center were clearly reflected in operating income.

Excluding the cost associated with restructuring and performance improvements initiatives, Q2 2008 earnings per share, and EBITDA showed strong improvement compared to Q2 2007. About half of that improvement is due to lowering operating costs in PMC.

Expenditures associated with restructuring and performance improvement activities that contributed to these lower operating costs will decline over the next few quarters. SAP expenditures accounted for nearly 40% of the Q2 performance improvement initiatives that we've detailed on Table 3, as the project passed its toughest and most important milestone, the go-live in North America at the beginning of July. We're now planning to accelerate SAP implementation through the rest of the enterprise, and we expect expenditures to decline from the North American go-live peak, and for the project to be substantially completed by the end of Q3 2009.

Machinery low costs associated with the various plant closures accounted for a third of the performance improvement costs on Table 3, and startup costs associated with the new capacity in Asia accounted for nearly 20% of that total. Machinery locations should continue through the year, while the Asian expansion is entering a new and critical phase. Construction in the two plants in China, and in the third plant in Korea should be completed this quarter with operations starting to ramp up no later than the start of the fourth quarter.

Our goal for these plants is nothing short of world-class products made with world-class quality. But that means that we're going to have to go through a measured deliberate pace of scale up over the next few quarters which will depress earnings in Asia because of higher depreciation and under utilized capacity. Once fully operational these plants will dramatically enhance the long-term prospects of our global PMC business.

Regarding the outlook for PMC revenues, as the Q2 increase in PMC volume suggests, our competitive position in North America and Europe continues to strengthen, and we have made good progress on a number of important contract negotiations in both markets. Nonetheless, the short-term outlook for PMC remains clouded by the economic environment, the cascading affects of the rise in oil and commodities prices, and the impact of both on the already struggling paper industry.

In Q2 we did once again see the sharp slowdown in North American PMC consumption at the end of the quarter, and we now expect that pattern to continue through the economic slowdown. Moreover, in four of the last five years, PMC revenues were weaker in Q3 than in Q2 largely because of the effect of summer slowdowns in Europe. Still, the strong Q2 and our growing competitive strength suggests that we should see continued improvement in year-over-year performance.

AEC, Albany Engineered Composites also performed well in Q2. Sales were 96% ahead of last year, and the business broke even for the second and third months of the quarter. New business development opportunities continue to emerge, and we remain optimistic about the near and long-term growth prospects of this business. One indicator of those prospects is the array of customers that we are now working with both on current revenue generating and future business development projects.

On Commercial Engines, our customers include Snecma, Rolls-Royce, Pratt & Whitney, Honeywell, and GE. Our current and future projects range from engine parts for business jets, to regional jets, to the next generation single-aisle aircraft. For Commercial Airframe Applications, customers include Messier-Dowty for the Boeing 787 landing gear struts, and Eclipse Aviation for the E500 very light jet. Finally, from military platforms involving engine, airframe, and other applications, our customers include Boeing, Northrop Grumman, Rolls-Royce, the US Army, and the US Navy.

The primary challenge facing this business is to take full advantage of an expanding array of new business development opportunities, most of which won't generate significant revenue until 2013 and beyond. Most of the costs associated with these new program development activities are including in corporate R&D rather than in segment earnings. So beginning next year, we'll disclose the portion of corporate R&D expenses associated with these new aerospace composite development projects. But for now, the important point is that our optimism about the future prospects of this business is based on a growing stable of new business development projects that are laying the foundation for significant growing and sustainable cash flows at attractive returns.

Opening Door Systems continues to perform exceptionally well. This business does have a season cycle with Q4 by far the strongest. But the top line strength exhibited in Q4 of last year has continued through the first half of 2008 thanks to outstanding performance in Europe in both product and aftermarket sales. We estimate the aftermarket in Europe to be roughly the twice the size of the product market with the potential for operating income at least three times as large. This business continues to demonstrate the ability to grow rapidly while generating cash. The only downside to the doors business right now is it's vulnerability to economic slowdowns which held back performance in North America in Q2, and which will likely affect Europe by the fourth quarter. The increases in energy and materials costs will also dampen results going forward.

The only major business that underperformed this quarter was Engineered Fabrics. Sales were held back by the weak housing market which has a direct affect on about a quarter of the is business. But with this one exception, each of the major businesses performed well despite a weak paper industry and economic environment, and spiraling inflation. We believe this strong performance is indicative of the progress we are making both internally through our restructuring and performance improvement activities, and externally as we strengthen our market position, and it reinforces our confidence that we are on track toward strong cash flows in 2009.

At the same time, because of the economic environment coupled with the seasonal effects in PMC, our short-term outlook is cautious although for all the reasons cited above, we do expect a continuation of the improvement in year-over-year performance.

Thank you and I'd now like to turn the mic--the call over to Michael Nahl who'll amplify on some of these points.

Thank you, Joe. Good morning. First a reminder that the comment about forward-looking statements contained in the press release applies equally to our remarks in this conference call.

We said at the start of 2008 that there would be a lot of noise in the numbers this year. In our financial news release we tried to help you through the noise by issuing a very comprehensive description of our second quarter financial and business results, 17 pages in length. We've been incurring substantial expenditures for restructuring and performance improvement initiatives that have been positioning our Paper Machine Clothing business to assure that we will have a very competitive footprint to serve our global customers and to assure that we will be able to respond appropriately to any aggressive actions by our competitors.

In our news release we tried to provide investors with sufficient information to calculate and begin measuring our progress in generating cash as we approach the year 2009, in which substantial cash generation is expected to begin. We introduced EBITDA as it's clear that many of our investors are focusing on it as a key metric. One measure of free cash flow is EBITDA minus capital expenditures and before dividends. We expect EBITDA to increase next year, and capital expenditures to decrease.

We've invested very heavily in capital expenditures and restructuring in 2007 and again this year. Our 2007 capital expenditures were $149.2 million, and this year we expect to spend another $150 million. Depreciation and amortization in 2007 were $57 million and $5 million respectively, and this year are estimated to be approximately $64 million and $7 million. Next year with our core business strongly positioned globally, our capital expenditures are expected to decline to approximately $70 million with roughly half of that for PMC, and the remainder for our faster growing other businesses. Deprecation in amortization next year are expected to be approximately $73 million, and $9 million respectively.

In 2008, our first and second quarter capital expenditures were $31.7 million, and $41.9 million respectively. We also incurred $28.5 million of cash costs in connection with the net restructuring charges, idle capacity costs related to restructuring, and costs related to continuing performance improvement initiatives.

An independent measure of cash flow that we find useful is based upon changes in net debt. Net debt is a financial measure used in calculating our leverage ratio for the purposes of our principle credit agreements with our bank group and with Prudential Capital Group, and is defined as total debt minus cash and the cash surrender value of company owned life insurance policies. Net debt increased from $363 million at the end of 2007, to $391 million at the end of the first quarter, and at $422 million at the end of the second. During this period of high cash costs for capital expenditures and strategic repositioning, our leverage ratio as defined as net debt divided by adjusted EBITDA, described in our loan agreements increased from 2.49 at the end of 2007, to 2.82 at the end of the first quarter, and 2.80 at the end of the second quarter.

We had expected the leverage ratio to decline even more by the end of the second quarter because we thought the sale of the Filtration Technologies business would have been completed in June. Instead, we received $45.5 million cash for that business in late July. With capital expenditures of over $75 million planned for the second half of this year, we expect our leverage ratio will decline to approximately 2.7 at the end of the third quarter, and 2.4 at the end of the year.

A leverage ratio is important both because it affects our interest rates, and because there are limits in our borrowing agreements as to how much leverage we can incur. Our average interest rate on debt in 2007 was 4.06%, and was 3.72% at the end of the second quarter this year. Our marginal cost of borrowing under our revolving credit agreement with the banks, when the leverage ratio is between 2.50 and 3.0 as it is now, is 125 basis points over LIBOR. Three months LIBOR today is 2.80%, so a new borrowing under the revolving credit agreement would be 4.05%. When the leverage ratio declines below 2.5, the spread over LIBOR will decline to 100 basis points. There are further reductions in rates with declines in the leverage ratio below 2.25 to 1.75, and 1.5. Next year assuming we do not experience a major global recession or require borrowing for a strategic acquisition, we would expect the leverage ratio to decline to well under 2 during the year, for an average spread over LIBOR of approximately 62.5 basis points for the year 2009.

That completes the additional information we thought you might find helpful in tracking our progress in a very important transitional year for the company.

Bob, we'd be happy to take your questions now.

Sure, thank you. (OPERATOR INSTRUCTIONS). One moment please for first question. It'll go to the line of Paul Mammola of Sidoti and Company. Please go ahead.

Hi, good morning guys.

Good morning, Paul.

Hi, Paul.

Are you seeing anything in China right now that would cause you to temper or alter your forecast for the region through the next two years?

No.

Okay.

No, I guess that's the short answer.

Okay, fair enough. Is there any further color on--why PrimaLoft is doing so well, I guess, given the current environment might be a little counterintuitive.

Well, there's not that much more we can add unless we--if you look at the home furnishing segment which is smack in the middle--which is serving precisely in the middle of the retail markets that are being terribly hit by the economy, that clearly got hurt. So although the performance was in the outerwear segment with growth in other countries as well. And so you'd have to say that the performance is despite a real drag on top line from a really ugly retail environment.

Okay, that's helpful, and in terms of VLJ, is there any material weakness you see in their backlog right now, or anything that we should be aware of going forward?

No. No, I mean, they've had a change in leadership, the outside investors from Europe who have infused large chunks of capital are--have taken over the leadership of the company, but no, we're not seeing any impact on our order picture.

Okay, and obviously oil is a primary component of the polymer strand. I guess, are we looking for that to make its way into the model of the cost, into the model through say the fourth quarter into early '09 because like we've said before, there's a lag in terms of when some of these costs actually make its way through.

I think your timing is right. I mean, we've been fairly--in past calls we've been fairly optimistic about our ability to handle raw materials increases, but none of us foresaw the huge spike in oil prices that resulted--

True.

Over the past couple quarters. It has to hurt. It has to have an affect, but your timing is right.

Okay, thank you, and Michael, just one last thing. How much is available on your revolver right now? Obviously a lot of good color in terms of what you'll do, but is there a--what's available there?

Based upon the Prudential cap on the leverage ratio, it's about $45 million, and on the revolving credit about $125 million.

Okay, great, thanks guys.

Thanks, Paul.

And next we'll go to the line of Ned Borland, Next Generation. Please go ahead.

Guys. Let me start with PMC. Joe, can you give me a sense for the new capacity in China, how this ramp is going to play out. I mean, you say the ramp is going to accelerate in the fourth quarter. I mean, can we sort of quantify in terms of operating rates? I mean, we're looking at like 0% to 25% operating rates in the third quarter, getting up to maybe 50% in the fourth quarter, and then building from there in the first half of '09?

Yes, I think that's about right. There's--there are a couple of pieces to this. We're actually adding capacity to that plant in chunks. So we'll add one chunk of capacity, ramp that up in roughly the pace you described. As we're ramping up that first chunk of capacity we're adding a second which will ramp up faster than the rate you describe. And as we're ramping up the second chunk, there'll be a third, and even a fourth over a course of three years.

So--but the toughest stretch, and the one where--the toughest ramp up, and the one where we need to be most careful to get it right from the start, is the first one because this is a greenfield plant with a new team, and the learning curve will be steepest on that first ramp up. So they'll get progressively easier, and progressively more efficient.

Okay, and then in the maturing markets, it sounds from your comments that you picked up a little bit of share. Is this a result of pricing actions, or were there other factors involved?

Well, you know Ned what our strategy is. It's a combination of a slew of factors. We drive our performance in the market based on ability to differentiate and add value to the customer. And our approach on price has been to--as I described a few quarters ago, manage the price premium. If somebody--we hold a price premium around the world. If somebody tries to grab business from us by radically dropping prices, we'll manage the premium down because we're not going to walk away from accounts that we consider critical from strategic accounts. And that's not going to change, but our philosophy, and what drives our behavior in the market is differentiate, add value both in product and in service.

Okay.

We're seeing--if we're seeing the pattern that you think we're seeing, and we think we see the same thing, it's driven a lot more by the value we bring into the market, and our careful management of our price premiums than it is about anything else.

Okay, and then switching over to the composite business. I mean, tremendous growth in the quarter. Seems like there's a lot more players mentioned in the aerospace arena in the release. Are there any near-term opportunities that you can talk about that could make the growth rate better than say the five year average that you've talked about, of 35% a year?

(Multiple speakers) we're expecting [55%] per quarter for the next five years. No, just kidding. We're holding to the 35% per annum compound average annual growth rate. That--so if it--off the base of last year. We haven't really provided any new suggestions of the potential of this business, and so based on performance to date, you have to assume that that 35% per annum is frontloaded and that's the way it's looking right now.

We're not--we don't want investors to extrapolate from this quarter.

Oh, no, I definitely understand you can't double every quarter.

The big--in our minds the big questions about this business have to do with what occurs after the five years, from 2013 to 2018, and that's what I was trying to get out in my commentary. That the expenses we're incurring today on development projects, the R&D expenses, the non-recurring engineering and tooling expenses, are on projects that are going to play out in the next five years. And the question that we're grappling with and will to continue to grapple with over the next year is how big does this thing get in those second five years? And we don't know yet. We don't know yet because it remains to be seen how some of these development projects play out, and how successful we are on some of the new platforms, and whether those new platforms, like the single-aisle aircraft get accelerated given all of the pressures on the airlines from the increase in oil prices, or whether they get decelerated.

So there's a lot of wiggling going on in the growth prospects for this business, but it's all in the second five years. And we--we're--we don't yet have enough visibility on that to provide guidance, or provide some sense of potential. But for the first five years, we--what we see is what we've told you last time, that we tried to give--plant--paint a picture of the growth potential.

Okay, and just on some of those longer term projects, I mean, when--since the lead-times are pretty long in this business, are there--when do you think you're going to know about some of those single-aisle opportunities?

I--there's so much going on now in the aerospace industry. Boeing Airbus are under intense pressure to help solve the airline's crunch from oil prices. They need to come up with some solution, and if it's not moving up to single-aisle, it's going to have to--it could well be a new improved version of engines that bridge them to--more fuel efficient engines that bridge them to the single-aisles. So stay tuned.

As soon as we have a better sense of what's coming, we'll let investors know.

Ned, Joe tried to go a long way to give investors a better sense of just how confident we are in the future of this business by including that list of costumers. This was to try to give you as much of an indication of just how deep the opportunities are. These are real programs that are being worked on with considerable potential.

So far what we've said, Michael and I have said before about competition spill holes, the main competition we're seeing for what we do is other materials. It's how fast those composites penetrate parts that in the past have been handled by metal. And that rate of penetration of composites into new components which works to our advantage is really a function of how much risk the OEMs are willing to take with moving toward entirely new generations of parts and platforms.

Okay. Thank you.

And next we go to the line John Emerich, or Ironworks Capital. Please go ahead.

Hi, Joe, hi Mike.

Hi John.

Hi John.

I think I may have called--figured out that I was confused by a coincidence. If I look at the idle capacity cost in performance improvement initiatives that are in cost of goods sold, and STG&A respectively, they both come out to about $7.9 million each.

That's correct John.

Okay. That's helpful. What was the $2.155 million of other expense in the quarter?

John, where are you looking?

Below--on the consolidated income statement, below the operating income interest expense (inaudible).

I'm sorry, John. Those are mostly currency gains and losses.

But $2 million in net losses--net expense.

Yes.

Okay, and what was the fully diluted share count we were using in the quarter?

I'll check that. Just a one second.

We'll get back to you on that John.

All right, thank you.

Next we'll go to the line of Arnie Ursaner or CJS Securities. Please go ahead.

Good morning. Joe, with your prepared remarks you seemed quite cautious about the PMC segment. The question I have is twofold related to that. Is it based on specific trends such as order rates or backlog work down, or it is a more general macroeconomic concern? And very specifically, with (inaudible) in May much more likely to survive, is it a factor that's changed the competitive dynamic for you?

That's a really interesting question Arnie, and unequivocally the caution is due to the general macroeconomic environment. If our--the way we look at Q2 is it gave everybody a window into what's going on with the underlying--our underlying competitive position which is getting stronger. And we think this quarter gives you a window into the long-term dynamics, but that window gets fogged over by the short-term general economy.

Again, I'm not sure you're being specific enough. Had you seen quite a bit of perhaps ordering activity in Q1, and are building backlog when people were concerned about (inaudible).

First, we're feeling good--the backlog is good, and the combination of orders in hand and what we know about orders on the way from the result of contract negotiations leaves us feeling optimistic about our longer range competitive strength. But--so the caution you're hearing which is very deliberate, and absolutely real is all about the macroeconomic environment and its impact on what is already a weak paper industry.

Not to drill this down further but--

No, you go ahead, keep drilling.

If I can try one more time, did you see cancel--in other words, when you--clients place orders typically they can accept delivery three to nine months later. Did you--are you seeing cancellations or stretch-out's of expected deliveries? Is that part of your concern?

No. No, it's that--it's--that what we have--when we saw this--I'll give you one example. We saw this pattern of falloff in the last couple of weeks of the third month of each quarter. It was a new phenomenon for us, so we went back and did--did a little digging, and sure enough since things have weakened it's there every quarter. And it means that the customers, or a large chunk of the customers are stretching out the life of their Paper Machine Clothing longer than they would--they ordinarily would to get them through the quarter.

So that's the kind of effect we see that gives us pause. The European paper industry likewise, especially the finish paper industry which has for so long been an engine of the European paper industry, is under real stress right now, a combination of factors from currency, to tariffs that the Russian's are putting on exports of timber, to over capacity in Europe.

So we look at our performance, we look at what we have setout to do over the last couple of years both internally and in the market, and we're seeing a lot of progress. We're feeling increasingly confident about our position. We look at the general headwinds around us and whether it's inflationary pressures which will certainly bite into our profits, tough--a weak economy spreading over to Europe coupled with an already weak paper industry, and we look at each other and say we'd have to be nuts be anything but for the short-term cautious. For the long-term we're feeling pretty good.

We're feeling very good.

I just have one more question. You've have a goal--an articulated corporate goal of matching capacity with demand-by-geography. With the likelihood of the China facility which was one of your most significant to date opening in the early part of '09 and ramping, you've done a pretty good job cutting capacity out of the mature markets. When you open China should we expect some more significant facilities rationalization perhaps in places like Europe where you have been supplying China from?

I--the most precise I can be is to say we've--we're nearly two-thirds through a planned out deliberate three year process. Those Asian plants are very important in many ways, the critical piece in that three year process, and it's all designed to optimize our performance, and I don't--I can't go any deeper than that.

Thank you very much.

Thanks, Arnie.

Thank you.

Operator, before we go to the next question, I'd like to give to the answer to John Emerich's question. Our weighted average number of shares used in calculating diluted earnings per share for the second quarter was 30,000,051.

Operator, we'll take the next question.

Thank you. (OPERATOR INSTRUCTIONS). And we'll go to the line of Mark Connelly of Credit Suisse. Please go ahead.

Thank you, Michael, and Joe.

Good morning, Mark.

Hi, Mark.

A couple of things to follow-up on is can you give us an update on how quickly the CapEx falloff in China? You mentioned that the ramps starts in Q3. I think I remember earlier you saying that the CapEx would falloff closer towards to the end of the year rather than Q3, or is it even into Q1? I'm just not remembering.

It's into Q1, and the reason is what I alluded to I think, or what I referred to in response to one of Ned's questions. We've got our first module in place, and we'll start ramping it up shortly, but even as we're ramping that up, we're moving in the final pieces of equipment for a second module that will double the capacity of that plant.

So what--

And then as we're ramping that one up, we'll be move--we'll be finishing off the equipment that will add another 50% of capacity, and then there'll be one more module after that. But the bulk of the investment will be completed by Q1--

Okay.

Of '09.

Okay, fair enough. Back to your earlier comments about the significance of China. Rather than looking at it in terms of your global capacity, and I don't really care how much capacity you've got, I'm more concerned about what your margins are. Historically you haven't made as good a margin in China as you've made elsewhere, and I wonder if you can talk about the potential impact and progression you might expect?

I'm thinking back to the period when we had the Mexico currency devaluation where all of your competitors were effectively blown out of the country, and I'm thinking about the longer term positioning of being a local producer there. Both short-term and long-term wondering about the matching of production to the geography of sales, and how significant that's going to be as we think about the margins for that business.

That's a really important issue that you're getting at Mark, and the short answer is when we produce in China for the Chinese market, our margins--we expect our margins to be as good as they are when we produce in North America for the North American market. Prices are quite a bit lower in China for historical reasons. We're--and our price premium is twice as high there as it is anywhere else in the world. We're working hard in a growing market to get those prices up. But when we make it there and sell it there, the margins are good. The margins have not been good to date because we've been making in Europe, in Euros selling into China the lower price market, and selling in dollars, and you can't make money that way.

So the first step in the--in this process is we stop shipping from Euro--Europe into China and start supplying China from China. So you get a double benefit. Not only do we get the growth in China we're supplying from China, but we eliminate the imports from Europe. So the margins should be good.

Okay. I wonder if we could stay with Europe for a second. Your volumes are up over 8% which is a lot.

Yes.

And you mentioned lower prices, and I'm curious, are those lower prices a function of the contract that you signed two years ago the last time your volumes went up? Or is there more going on? Michael talks about being vigilant about actions from competitors. Some people think [Zerium] is better positioned to survive, but I still look at the European market and say somebody might not be in a position to survive if you guys are gaining that kind of share.

So can you give us a better sense of what the competitive landscape in Europe is right now?

Yeah, let me try to give you the big picture on pricing and the competitive landscape in Europe and North America. Because we're feeling like it is more predictable, we have a lot more visibility about it, and our ability to manage it from--our ability to manage any affects of price instability are much greater, and will get all the greater as those Asian plants come on stream. But here's the key point. As the paper industry in North American and Europe consolidates into fewer and fewer players, and in Europe, Stora, and UPM now account for about 25% of the market. In North America, if you look at the effects of Abitibi Bowater merging, IP Weyerhaeuser, [Dotmar], top five account for more than 40% of the market.

What that means is each contract negotiation, there are fewer negotiations, and each negotiation becomes much more intense, and much more important because in the past, competitors could trade share, you'd lose it one place, you pick it up another. Now with fewer bigger negotiations you lose it there, there's nowhere else--there are fewer places to make it up, so it gets more intense which would suggest a greater potential for price wanes during those contract negotiations. But there are fewer of them.

Secondly, there is a trend as sophisticated procurement practices wash through this industry, there's a trend to go toward fewer suppliers. From sometimes as many as six PMC suppliers to three, both in North America and Europe. So you get fewer negotiations in which fewer PMC supplier are picked. So that's a lot more intensive in the negotiation. That's that bad news.

Good new is, the contracts that result from those are tending to be longer terms. In Europe they used to be only a year, but now they're starting to trend to two to three years. In North America they tend to be three to five years. And as--and the other piece of good news is we demonstrated in Q2, we are able to offset the lower prices that results from people trying to grab our business. We're able to offset it with volume and lower cost, and as these Asian plants come on stream, we're going to be--and as the--all of the effects of the cost cutting come on stream in the North America, we're going to be even more able to offset those lower prices if competitors drive the prices down.

So bottom-line, we think where the pricing situation is going both in North American and Europe there are about three big contract negotiations left. One in Europe, two in North America over the next year, year-and-a-quarter. Once we get through those, we expect a period of relative stability because of the longer contracts, and the likely--and the likely results of those contracts.

That --

I mean, Joe, when I listen to all that, I mean, it sounds to me like somebody's going to get hurt. I mean, others may be convinced its not Zerium, but are you concerned that we may go into a period--maybe it'll play out differently, and people won't just aggressively cut prices, but if you're picking up 8% share somebody's getting seriously hurt, and the consolidation that you've talked about in the past is just becoming more and more inevitable. And I'm just curious whether you're not concerned that we might see a big hiccup in earnings again like we did last time.

Well, first of all, I agree with your basic premise that somebody's going to get hurt. In fact [Cooperaf] who is not somebody we've talked much about, we've talked at all about, is a smaller regional private PMC supplier in Europe of precisely the sort that was really bottom feeding the prices. They filed for bankruptcy, and we think it's direct--a direct effect of the kinds of trends that we've been seeing that we're talking about.

We're feeling, Mark, that there's a big difference between what happened in '06 and what is likely to happen with the remaining big contract negotiations over the last year, next year.

In '06 we were blindsided, and we--and for really the next year, we were--the uncertainties about pricing were a wildcard. We really weren't sure what was coming. We have a much clearer sense of the picture now. We know when the window opens for instability. It's going to be around three big negotiations. We know what's at stake, and we know what we need to do to offset any price instability with volume, and everybody in the industry now knows--hope they know, that if they try to grab business by--from us by dropping price, it's just going to hurt everybody, but they're not going to get the business. So they--

Okay.

So you could see it would be--I think it would be really imprudent for me to say we're not going see a couple--that it's impossible to see some of those shots to earnings as a result of these big contracts. But we think what comes out of that over the quarters that follow those contract negotiations is what you've seen in the last three quarters, an ability on our part to offset price with volume and cost. And we expect to see more stability because of the longer contracts, and fewer contracts, and fewer suppliers to the big customers once we get through this next (inaudible) contracts.

Okay, I just have two more questions, and they're simpler ones. First, why is the European door business doing so well when everything else in Europe sucks?

Boy, it's a great business isn't it Mark? A combination of new products serving what has emerged as a new market segment for machine protection. So imagine you've got a laser equipment in a plant that needs to be protected, and we're finding that high performance doors turn out to be--that's turns out to be a great application for high performance doors, number one.

Number two, growth in the aftermarket as we've discussed. We're systematically trying to expand our presence in the aftermarket. And as we do, it takes time to setup these service operations, but as we do, we see the results, and unlike the product business, you see the results a lot more quickly dropping to the bottom-line.

But Joe, that's more of a change in your strategy over the last couple of years.

Yes.

To focus more heavily in the aftermarket, and so basically what you're saying is that that shift in focus is starting to payoff.

Correct. It's the channel--the channel strategy is starting to payoff particularly in Europe. But that said, we're seeing very strong performance on the product side as well.

And just the last question for Michael. You know how much I appreciate it when you breakout consultant expenses. Can you confirm that the consulting expenses are finished, or that they will be finished soon? And can you give us a rough estimate of when the timing of the SAP charges will finally roll off?

Yes, I'll take the first part, and David Pollock will take the second. With regard to the consulting expense that Mark is referring to, is it was in connection with setting up our procurement organization and that expense is complete. There is no more, and Mark, I love those expenses just as much as you do. With regard to the rolling off of the other expenses, David?

Mark, the non-capitalized SAP expenses is as we described in the earnings release, we're expecting that Q3 and Q4 would be around $4 million per quarter, and that's in comparison to $5.3 million this past quarter. Decreasing to about $2 million in Q1 and Q2 of 2008, and at that point we'd be substantially complete with the implementations.

Okay. Perfect. Thanks very much.

Thanks, Mark.

Thanks, Mark.

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