Brinks Co (BCO) 2006 Q4 法說會逐字稿

Welcome to the Brink's Company fourth quarter results 2006 conference call. A replay of today's call will be available starting this afternoon, through February 15th, 2007. The replay number in North America is 1-877-660-6853. Outside of North America, the number is 1-201-612-7415. The pass code for the replay is 286, and the conference I.D. number is 227861. A replay of today's webcast will also be available on our website. [OPERATOR INSTRUCTIONS]

It is now my pleasure to introduce your host, Mr. Ed Cunningham, Director of Investor Relations. Thank you. Mr. Cunningham, you may begin.

Thank you, Forask. Good morning, this is Ed Cunningham and thanks for joining today's call. With me today are Michael Dan, our CEO, and Bob Ritter, our CFO. Today's call will proceed as follows. Mike will review quarterly results, Bob will follow up with some comments, and then we'll open it up for questions. A press release on fourth quarter earnings was issued this morning, it's available on our website at brinkscompany.com. If you which to have the release faxed, please call 877-275-7488.

Now our Safe Harbor statement. This call including the question and answer session may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from projected results. Additional information regarding factors that could cause such differences is available in today's press release and in our SEC filings, which include our most recent Form 10Q and 10K documents. The information discussed on this call is representative as of today only, and the Brink's Company assumes no obligation to update any forward looking statements made. This call is a copy righted work of the Brink's Company and may not be used by a third party without the expressed written permission of the Company. I'll now turn it over to Michael Dan.

Thanks Ed. Good morning, and thanks for joining our call. As I said in the press release, the fourth quarter was a strong finish to a very good year. A year in which our Board and Management team once again demonstrated their strong commitment to delivering attractive returns for all of our share holders. In addition to delivering to record level earnings and cash flows, we executed on a variety of important strategic initiatives, including the sale of BAX Global, the last of our noncore business which generated approximately $1 billion in after tax proceeds. We immediately returned more than $630 million to shareholders, by repurchasing 21% of our outstanding shares. We used another $225 million to fund VEBA, which now has an asset value of $459 million that provides a substantial barrier against our legacy liabilities. We also reduced net debt by more than $180 million and increased our dividend.

At year end, our share price had increased more than 33%, and was up 246% since 2002. We began 2007 as a financially strong Company that is sharply focused on growing two world class security businesses. I am sure everyone listening in today is aware of proposals made by a couple of our shareholders in recent 13D filings. I can assure you that the Board and Management team are actively engaged in evaluating these proposals, and which course of action is in the best interest of the Company. When appropriate, we will disclose our decisions and any actions we feel should be taken. Since we are not at that stage yet, it would be imprudent for me to discuss this in more detail today, or to answer questions about the proposals.

I'll now move on to the fourth quarter results from continuing operations, which reflect strong performance in both of our operating units. Income from continuing operations was $33.1 million, or $0.71 per share, up from the $6.2 million, or $0.11 in last year's disappointing fourth quarter. Total revenue increased 14% to 576 -- I'm sorry, $756 million. About 4% of the revenue increase was due to the weakness of the dollar. Operating profit was $62.5 million, up from the $24.1 million in 2005.

Profits at Brink's Inc. more than doubled over the year ago quarter, I'll provide more detail in a moment. But the strong improvement was driven by solid results in North America, and Latin America, and continuing improvements in Europe, where we are encouraged by the progress of efforts to restore margins to higher levels. Fourth quarter results at Brink's Home Security also showed significant improvement over the year ago quarter with profits up 43%. Earnings were also boosted by a reduction in corporate costs and lower effective tax rate. In a few moments, Bob Ritter will provide more details on some of these items.

In summary, it was an excellent quarter. There is no question that we face challenges in both of our security businesses, but we're making progress and hope to see continued improvement during this year. At Brink's our goal is to sustain the annual operating margin of 7% or better with annual percentage revenue growth in the high single-digits. Our growth at Brink's Home Security is to achieve another triple-double which means annual growth of 10% or better in revenue, profit, and subscribers.

I'll now comment in more detail on each of in the businesses. I'll start with Brink's. For fourth quarter profits of $53.1 million nearly doubled verse the prior year. Total revenue at Brink's increased about 15% to $642.9 million. The overall operating margin for the quarter was 8.3% up from a very weak 4.5% in the previous year. The improvement in the second half of 2006 boosted the full year operating margin 7.3% verse 5.2% in 2005. There were substantial profit improvements across all regions with the exception of a relatively small Asia Pacific operations. North American revenue rose 6.5% to $215.3 million. Operating profit was $17.8 million, up 70% over the $10.7 million earned in last year's fourth quarter. Primarily due to lower benefit-related expenses.

The operating profit margin in North America was 8.3%, up from 5.2% a year earlier. The full year operating margin was 8.4%, up from 6.3% in 2005. On the international side, revenue increased 19.4% to $427.6 million, reflecting increases in all regions except Asia Pacific. Operating profit was $35.3 million, up from a weak $14.7 million in 2005. The overall operating margin for international operations was 8.3%, up from 4.1% in last year's fourth quarter. The full year margin was 6.7% verse 4.5% in 2005.

There was sold profit improvement in Europe, where fourth quarter revenue increased more than 18% to $282.3 million. Operating profits were up substantially over the your ago quarter and were slightly ahead of the much improved profits we reported in the third quarter. We're pleased with the profit improvement we have achieved in the fourth quarter and throughout the second half of 2006. But results are still not where they need to be. The operating environment in Europe continues to be difficult due to a number of factors, including changing regulatory and labor issues, competitive pricing pressures, and higher security threats. Having said that we are encouraged that our restructuring efforts in Europe are taking hold. We've established some positive momentum we hope to sustain throughout 2007. If momentum stalls, we'll be proactive in taking additional steps to improve performance.

Our Latin American operations had a very good quarter with revenue up 30% to $131.5 million. Solid profit growth was driven by strong performances in Venezuela, Brazil, Colombia, and Argentina. Revenue and profits from our Asia Pacific operations were down due to the previously announced loss of our largest customer in Australia. Longer term, our global service business should help us recover and restore growth in this region. As I said earlier, our goal is to achieve an annual operating profit margin of 7% or better.

The biggest opportunity for profit growth is Europe, where we've established some positive momentum. In North America, we'll be challenged to improve dramatically upon 2006 results. We expect a strong performance in Latin America to continue, but as we always remind you, there's more risk and volatility to be considered there. In addition, we, along with the rest of our industry, are dealing with higher insurance costs and changes in insurance programs, due to poor industry performance.

Now turning to Brink's Home Security. Our fourth quarter revenue increased 9.7% to $113 million, due to continued growth in our subscriber base and higher average monitoring rates. Operating profit hit $29 million, up about 43% from a very weak quarter a year ago. The strong profit growth was driven by several factors. In addition to the revenue growth I just mentioned, we had lower costs due to fewer disconnects, and reduced activity in our home technologies segment. The lower costs help push the quarterly operating margin up to 25.7%, compared to 19.7% in last year's fourth quarter. Last year's rate was hurt by higher disconnect related expenses, and higher costs related to home technologies in our Knoxville start-up. The annualized disconnect rate for the quarter was 6.1% versus 8.2% in the fourth quarter of 2005.

You may recall that in last year's fourth quarter, we had a reduction of 5,300 subscribers due to an internal reconciliation of customer accounts. The subscriber base at Brink's Home Security grew by 2.4%, or 26,000 customers during the quarter. Brink's Home Security ended the quarter with a subscriber base of a little over 1.1 million customers, an increase of 10.4% over the end of last year. Monthly recurring revenue rose 13.7% to $33.1 million, so future cash flow continues to grow. Growth in new installations continues to be lower than we'd like to see due to the ongoing weakness in the housing market. This was the case throughout much of 2006, yet we still grew our customer base by over 10%.

In 2007, we expect annual subscriber growth to again be close to 10%. Obviously sustaining longer term growth at current levels depends on our ability to improve the pace of installations. Hopefully, a gradual recovery in the housing markets during 2007 will provide a tailwind for our internal marketing efforts. Our steady growth into small commercial accounts continues on course, accounting for over 7% of the quarter's installations. In summary, it was a good quarter for both of our security businesses. We certainly have challenges, but we are well positioned to continue to improve this year. Brink's Incorporated will continue to pursue market opportunities in it's traditional armored car operations, while expanding further into cash logistics, were the potential for revenue and margin growth is greater.

There are always concerns as we look ahead. For example, there are no guaranteed economic activity in Europe and Latin America will continue at the pace we saw in the fourth quarter. We also have to continue to improve performance on several units in Europe despite the competitive pressures we face. And as most of you know, I am always very concerned about the safety and security issues of our industry. At Brink's Home Security, the slow down in the housing market has had a negative impact on installation growth.

Despite this, we met our goals in 2006. Our goal in 2007 is to achieve 10% or better growth in revenue, profit, and subscriber growth. Our optimism is tempered by the reality that the pace of installations needs to increase in order to deliver double-digit growth over the long term, but we have a very strong brand, highly effective marketing, and excellent customer service. We'll use these strengths to enhance our industry leading performance in the residential security market, as we continue to build our technical and sales capabilities on the commercial side.

As I said earlier, we begin 2007 as a financially strong Company that is sharply focused on growing two world class security businesses. We are well positioned for the future. I am confident the overall performance, financial position, and the growth prospects of the Brink's Company will continue to improve and build value for all of us. Now for some additional comments on our results and financial positions, Bob Ritter.

Thank you, Michael. Good morning, and welcome to all of you listening in on this call. Although I could echo Michael's thoughts on our strong performance for the fourth quarter and the full year, I would like to spend my time putting things in context to help you in working through your models for 2007.

I'll start with Brink's Incorporated. If you'll think back to this time last year, we were coming off a disappointing fourth quarter and a year where Brink's earned only $112 million, a 5.2% margin. But we had a nice tailwind in our pursuit of a 7% plus margin for 2007. Between cost saving from restructuring and an expected hiatus from such actions in Europe, and the freezing of the defined benefit plan here in the States, we identified $35 million in expected operating cost improvements. And on 2005's revenues, this would have amounted 160 basis point improvement in margins, but the rest was up to our people to accomplish. They did a good job and Brink's margins got back to over 7% for the year.

We think 2007 will also be a good year, but you cannot expect to see improvements in margins this year like we saw in 2006. There are no obvious tailwinds today. In fact, there are signs of headwinds to deal with. Certainly we still have operating units that can be improved, particularly in Europe, but competition globally is still pretty stiff, and a few of our larger units turned in margins that they haven't attained in a number of years. It will be a challenge for some of them to sustain those levels. In addition, as Michael mentioned earlier, we'll have to work through the insurance coverage and cost issues. But we have the skill, size, and balance sheet to handle this. Finally, we'll need to keep an eye on foreign exchange issues, particularly in South America.

Our goal this year for Brink's will be to maintain operating margins above 7%, while continuing to grow revenues in the upper single-digit range. Brink's Home Security also had a strong end to a good year. But that performance is also being compared to a 2005 with lower margins than we normally achieve. In 2005, we weathered the effects of hurricane Katrina, higher costs in the development of our Knoxville facility, and inefficiencies at home technologies. In 2006, there were no major physical events to handle and our people did a good job of dealing with the slump in the housing market and the integration of Knoxville with our Irving, Texas facility. We also got a bit of a P&L boost from the slowdown in the housing market. It probably helped hold down disconnects and the related charges.

In addition, with the lower amount of installations, up front charges as a percentage of revenue were lower than we have seen since home technologies expanded a couple of years ago. One note of caution here, though, the relatively high margin earned in the fourth quarter doesn't signal a breakout to a new level of profitability. Operating profit from recurring services in the fourth quarter two years ago was 44.2%, versus the 44.1% earned in our latest quarter. The difference in the overall margins for the two quarters is all in the cost of investments in new subscribers. Relative volumes of new installation were lower this year, and we were a little better on costs.

Looking to 2007, operating profit margins at Brink's Home Security should run in the 22% to 23% range. Operationally, we should perform well, but if the housing market begins to show improvement, we could see up front costs chipping away at earnings again. Of course that's always been a good trade off. Slightly lower earnings today in exchange for higher earnings, solid cash flow, and increased economic value tomorrow.

Looking at other costs within operating profits. Corporate expenses are starting to come down. Even with competition increases and the addition of $7 million in expenses for stock options, total Corporate expense was only up $3.7 million in 2006 over 2005. We expect to make additional progress this year as systems changes and tighter processes allow us to squeeze out costs, particularly on consulting projects.

Let me now spend some time on our legacy liabilities. A lot has happened here in the last 12 months. Almost all of which has been positive. You will notice that in today's release, we have included a table showing our best current estimate of legacy liabilities at year end 2006. In the last year, we have seen the payoff of the multi-employer pension plan liabilities, further funding of VEBA, and sizable investment income. In fact the return on our VEBA's portfolio for 2006 amounted to 13.6% net of fees. The recently signed tax bill also help relieve some of the burden of the health benefit act of liabilities.

The estimates in our December press release turned out to be pretty close. We reduced the liability by about $149 million around $80 million on a net present value basis. And there was also a slight tick up in interest rates and other actuarial issues which helped trim some value from Company sponsored retiree medical and [black lung] obligations. All in all, a very sizable drop in the net present value of the overall liability balance occurred during 2006. From over $670 million at December 31,2005, to just over $210 million a month ago. This will have some positive effects for 2007. Total expenses will probably run in the $14 to $17 million range. Between the contributions and investment earnings in 2006, the VEBA is now funded to a level where there should be very little concern that the comfort it provides will not extend well into the future.

Considering this we have begun to use the VEBA's assets to pay our retiree medical benefits. You can be assured that we will monitor the VEBA funding level and [inaudible] expectations to keep funding at a comfortable position. With this step and the favorable developments noted above, total Company out of pocket spending for legacy liabilities should fall to the low $20 million range this year, versus the $80 million plus that we spent in 2006. We'll have more details on expenses and cash flow projections when we file our form 10K.

Now, to help you complete your models down to EPS for 2007, I would ask that you pay particular attention to the next four points, because they should each impact your expectations. First, interest and other expense, minority interest, the tax rate, and our share count. For interest and other expenses, one very important thing to consider for 2007 modeling is that we won't get the same boost to earnings below the line that we got in 2006. Interest income and other will drop sharply in 2007. We've already distributed or used all of the back sale proceeds. So you should not expect to so a repeat of 2006. And in fact, I expect interest expenses to begin to rise, as well.

Now for a brief note on minority interest. We felt it was time to move it to below pretax income. This is a change in presentation only. The minority interest figures didn't change, so there was no change in net income. Minority interest was only moved to a different position on the income statement after taxes. We think that this is the preferred way to report it and quite frankly this step should make it a little easier for you to model our tax rate.

On taxes, after adjusting for minority interest reclassification, our taxes for the year came in pretty close to our predicted rate. For the year, we had about a 40% effective tax rate. We expect the effective tax rate for 2007 to be between 39% and 41%, not far from where we were in 2006. For shares outstanding, to help you in modeling EPS, the fully diluted share count should be in the $48 million range for 2007.

Now I'll finish up with a few comments on our equity position and cash flow. You may have already noticed that on page 11 of today's release, we included a condensed statement of shareholder equity. Since we do not plan to file our form 10K for about a month, we wanted you to get the chance to see the impact of our adoption of FFAS 158. Basically basically FFAS 158 calls for an adjustment to equity to cover any previously unrecorded amounts associated with obligations for pension and retiree medical plans. You can see that in our case, although the net impact was significant, it was well below earlier forecasts as a result of good investment performance and steady to lower liability values.

Now for CapEx. In 2006, Brink's invested $115 million in capital expenditures. Now, remember, the bulk of this spending goes into branches, trucks, and IT systems that permit us to provide the quality service we are known for and even more importantly to protect our people. In 2007, we expect to spend between $140 and $150 million. Brink's Home Security invested $164 million in 2006. Almost all of this went into subscriber installations. And we're targeting $175 million to $185 million of spending in 2007 to continue building economic value and adding monthly recurring revenues.

On the depreciation and amortization side, Brink's at $96 million in 2006, and we expect to be in the $105 million range this year. Brink's Home Security was just under $68 million in 2006. Look for something in the $75 million range this year. You will also note we ended the year back in a net debt position at $33 million. Although we would be comfortable with a higher debt position, this leaves us a lot of capacity to grow our existing businesses, to develop further value from the Brink's brand through acquisitions, and to take other actions to enhance shareholder value. That's all I have for now. Forask, we're ready for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Jeff Kessler with Lehman Brothers. Please proceed with your question.

Thank you very much, and I don't usually say this, because I'm too old to say this anymore, but congratulations on a great quarter. It was -- it was a good up size surprise, particularly in Brink's Home Security, and I do want to get to that issue in a second. Firstly, on Brink's Home Security, the -- the effects of having a slower housing market, we had hoped to see perhaps some positive effect early on in 2007. That didn't occur, but toward the end of the year, we did begin to see some effects of a slower housing market.

You were a little bit -- I guess Mike you had been a little bit disappointed that there had been not, let's say, a little bit less attrition because of lower movers. Now we're beginning to see the pre-wired business and the lower margins from them help the mix shift. What is going on, and if you could go through what is helping and what is hurting, what are the, I guess, the trends going on right now from a lower housing market that -- and how is that going to tie it into 2007?

Well, Jeff, most of it is -- there's two things that are driving the margins in Home Security in a positive way, and on one hand and a negative sense on the other. But one is the slowdown in new housing-- home technologies business. As you know, we saw the slow down coming really over a year ago, and we began taking steps to slow that business down, and that's actually a benefit to us, because as you know, and in the county model and the home technologies we installed, [inaudible] we lose money, and if we don't turn on the account and start getting the revenue stream, it becomes very costly for us. So our steps at slowing down and trying to get ahead of that curve, were the right thing to do, the smart thing to do, and it's paid off by helping our margins be as strong as they are for the quarter.

Second issue is, is that the quality of the Brink's Home Security team in Texas and in Tennessee has done a great job and kept our disconnect rate very, very low, and that's given us a good tailwind on that operating margin. I don't expect that to continue. One, we resized our Home Security-- home technologies force appropriately. And, secondly, I think our marketing issues are resolved. Early indications for this quarter are that our responses are at historic highs. The competition back in the market place [adds voice], lets position ourselves for additional-- so it's a combination of those factors.

Okay. Related to that maybe this is a question for Bob. On your appendix, according to the-- associated with BHS, the amortization of deferred revenues and the deferral of subscriber acquisition costs both were down year-over-year. Is that reflecting the slow down in your subscriber activity?

Well, the -- they're both actually a little bit different, and I'm just looking back here, just so I can see exactly what you're looking at. Deferral of revenue this year is -- that figure is -- that comes from new installation, so it's not -- it hasn't jumped. The deferral last year, or the one just a above that, the 5.9 verses the 6, with the last year we had higher -- we were not quite as efficient and we had a little bit higher spending associated with that, so it's actually a good sign that we've brought the number down a little bit this year.

And the amortization of deferred revenue is down because, as you know, when we have disconnect, we had a higher disconnect rate in the fourth quarter last year. We actually bring back some of that deferred revenue into income because of it-- because we're writing off everything at the same time, both the assets, deferred revenue are both adjusted [inaudible] disconnect. So that is a reflective of the fact that we have a lower disconnect rate in the quarter.

Okay. Germany where Securitas just sold its business in Germany, and we've seen what's gone on with [Heros]. Mike, can you talk about the situation in Germany, whether or not you're benefiting from any of this? Or-- obviously you probably took a look at the assets that Securitas had. Is Germany a mess? Is there a way for you to make money in that country?

Germany is mess. Securitas, [inaudible] floor, Securicore kept selling the business to their management group. I think that bodes well for Brink's picture in the marketplace, because there's no international player operating in the country now, except ourselves. In the financial institutions, [inaudible] with that situation. On the other hand, the pricing levels in Germany continue to be dismal, at best, and we're getting through that as best we can, the operating [inaudible] is still a money losing situation [inaudible]. And we've got management resources focused on that [inaudible] major issues, and opportunities for improvement [inaudible].

Hello?

Yes.

Okay. Sorry. Venezuela, you read the headlines every day, same as all of us. Obviously I can't predict what Mr. Chavez is going to to, but I assuming that you're operation keeps them happy there, and keeps them-- they probably don't want to make it their own. What I'm more concerned about there is 4X and 4-- and translation. There's an official rate for the boulevard, but that official rate can change if market rates make sure that-- are way out of wack with that. And that's my concern, is are you monitoring that situation to the extent, and can you talk about what type of impact currency translation could have with regard to Venezuela if indeed the boulevard changes?

Jeff, it's Bob, I'll [handle] this one. Yes, we are monitoring it very closely. It's been well over a year since Venezuela had it's evaluation, and there's obviously a lot of speculation as to what's going to happen there. We do not hedge earnings. We only hedge cash flows, because we think the appropriate thing to do for our shareholders is only worry about the cash flows that we have going into or coming out of the country. So we are -- we effectively handle that, and we deal with operational issues within the country. We will obviously, as things change on the foreign exchange front, we will have to reflect that. As of right now, we have no way of guessing what, if anything, will happen down there.

Okay. I'll get off and get back in the queue, let other people get on. But thank you very much.

Thanks, Jeff.

Our next question comes from the line of James Clement with Sidoti & Company. Please proceed with your question.

Good morning gentlemen.

Good morning.

Could you provide us a little bit more information, a little bit more background on the insurance environment? I think both Michael and Bob, you guys mentioned that as being a little bit of challenge in 2007. Can you give us a little bit of background? And also I don't know if it's disclosable, but at Brink's Inc., roughly what percentage of cost is made up by insurance?

Well, in the insurance markets have hardened considerably, particularly in our industry because of very, very poor performance over a five year period. Unfortunately, three of those years, we didn't participate in that poor performance. The last two years, we were not as strong on the security side, so we are being effected to a stronger degree than normal [inaudible] but it is an industry wide problem. Basically the cost of reinsurance drives the market.

One of the strengths of Brink's to mitigate that however, is that we have our own insurance company on one hand and we have the balance sheet that allows us to take more risk and push the insurance market a little bit farther back than our competitors do, and we're using all of those mixes to help mitigate this as best we can. With that said, insurance is still an expense for the Company, and we will have to pass on that cost in the marketplace to make sure we're properly compensated for it. We do not disclose, for competitive reasons, what that expense is, but it can be material.

Okay. All right. Thanks very much for your time.

Thank you James.

Our next question comes from the line of Brian Butler with FBR. Please proceed with your question.

Good morning.

Good morning, Brian.

Just a question on the Brink's CapEx. It seems to be a little bit higher as kind of a percent of D&A as we've seen in the past is that just associated with higher costs from a security point of view, so you're buying more trucks and things like that? Or is there something else going on?

We had a couple of major branch facilities that are being built, and they can cause those CapEx to be a little bit lumpy at times, and the need to increase the levels of security, especially in Europe, is causing our CapEx to rise a little bit.

Does it continue at this level, or does it come back in over the next year or two?

Well it depends on the growth rate of the Company. It costs money to grow, so if our growth rate stays at we think high single-digits, it will probably come down, but if we grow next year a little bit faster, I would tell you that the needs for technology investments, and just the replacement cycle of trucks will probably keep it at that level.

Okay. And then looking at the commercial home -- or commercial alarm monitoring, could you just give a little view of what you think the acquisition opportunities still look like now in that market, after seeing quite a large one recently? And then accent acquisition, how fast do you think Brink's has or BHS has the ability to grow in that market?

Well, we're up to 7% of our installations in the quarter and we continue to add resources and we'll continue to add resources, and I would like to see it around 10% by the end of 2007. But we're taking the normal disciplined approach in doing this Greenfield basically start up of this operation and going forward. On the acquisition side, there's not a lot to pick from on the large areas, but there are some regional players that we look at, and we're the deal stream, we continue to look, but we want to find the ones that will not dilute our ability to maintain the return on capital that we have at Brink's Home Security today.

Okay. And a-- one of-- a question on the pension. What's the current status of the ADO and then the pension assets?

We're in much better shape than last year. We haven't disclosed that yet, but I'm going to guess that we're probably about 1/2 -- reduced the discrepancy or the difference between the two by about 1/2 year-over-year.

Driven by investment performance and the change in interest rates.

Okay. Great. Thank you very much.

Thank you, Brian.

Our next question comes from the line of Jeff Kessler with Lehman Brothers. Please proceed with your question.

Thank you. A couple of follow-up questions. First, Bob, in talking about some of the numbers that you've thrown out, are corporate expenses for the year 2006 look like they came in, the high -- obviously the high 40s. Can you bring that down? I mean, it's been -- we're expecting that to come down, obviously, a little bit, because you've gotten rid of some of the corporate infrastructure from BAX, can that get down into the low 40s for 2007?

That's a possibility. We're -- obviously we're going to do everything we can. There are still a fairly high degree of consulting expenses in here to help us with 404, and a few other issues that we have. We think we're going to be able to do a very good job of trimming those out, and there are a couple of other pockets of expense that we think we can deal with fairly easily, so our goal is to be to push the number down as sharply as we can.

Okay. And related to that, are the same -- on the same-- the other side of the coin, is the net interest expense, which obviously had gone to a positive net interest gains during the year, turn-- went flat in the third quarter. Can we assume that based on current interest rates and where you are -- where your debt balances are now, we're going to be seeing something modest toward let's say what we were at in 2005, or toward that level?

Yes, I would look back at 2004, 2005 to get a better view of what's going to happen. On the interest and other side--we've know, obviously we've cleared everything out [inaudible] so with [inaudible] get any boost from rising some rates there, and we are going to be steadily [inaudible] as opportunities exist. So I would definitely believe that interest expense levels will be heading up this year.

Okay. I'm also interested in the VEBA. The VEBA appears to be at a point at which it's almost overfunded, and it may actually be over funded at this point relative to the MPV that you're looking at, and you mentioned that you've been using some of the VEBA assets to pay down medical benefits. Could you explain that a little bit?

Yes, the VEBA has declined to the -- we have a [inaudible] it's the one plan that goes back to the old coal miners who used to work for us, and we have assigned the VEBA to only pay those expenses, and we started as of January 1. We are now paying all of those expenses from the VEBA It's technically, actually where the Company pays them, and then we reimburse ourselves from the VEBA. You would expect that we will be doing that in time to come. I'm not at all worried about the level of funding versus the liability there, because remember this is a 70 year liability [inaudible] happen between now and then. So we think the -- both we and the investing community should be extremely comfortable with the level of funding and not have to worry about that, that overhang, but it's very prudent for us to be using up that cash now.

Okay. I don't want to push you too much on how much more you have in the VEBA, because that's a -- that gets to be a sticky issue with some folks. The-- one other item, and that is the minority interest expense. Minority interest really jumped in the fourth quarter, and given where I know most of that minority ownership comes from, is it my assumption that Venezuela had an extremely strong fourth quarter?

Well we-- our biggest minority interest in Venezuela and Colombia are right up there, so our-- the fact that Latin America did so well in the fourth quarter is a very good indication of why minority interest is up.

All right so does it-- because minority interest had been running fairly consistent within a fairly -- a fairly steady band of a couple of million dollars for a year or so, now all of a sudden we've got this $3 million sequential jump. Obviously you did very well in the fourth quarter in one given area, so that is something that we can't count on, I suspect, for 2007?

Right. But when we do well, our partners who are with us should be doing well (inaudible) time.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] Gentlemen, there are no further questions at this time.

This is Ed Cunningham. Thanks for participating in the call, and we'll look forward to talking to you again in the first quarter.

Thank you. Ladies and gentlemen, the conference has concluded. Thank you for your participation.