Carlisle Companies Inc (CSL) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Carlisle Companies Inc. third-quarter conference call. (OPERATOR INSTRUCTIONS).

It is now my pleasure to introduce your host, Mr. Rick McKinnish, President and CEO of Carlisle Companies.

Thank you.

Good morning everybody.

Welcome to the Carlisle-third quarter conference call.

With me today is Kirk Vincent, our CFO.

Our format is going to be consistent with prior quarrels.

Kirk is going to summarize the financials and turn it back to me for some comments about each operating segment and some comments about outlook and guidance.

So with that, I will turn over to Kirk.

Thank you, Rick, and good morning everyone.

As you may have seen in our press release, this conference call and corresponding charts are being made available on our Website.

To see the chart, you can go to www.carlisle.com and click on the "Third-Quarter Conference Call" icon at the top of the home page.

Okay?

Let us go to the numbers.

Yesterday Carlisle reported third-quarter 2003 net earnings of $24.5 million on record third-quarter sales of $550 million or 80 cents per diluted share compared to 19.9 million or 65 cents per diluted share from $500 million of sales in the third quarter 2002.

This 23 percent increase in quarterly net earnings was driven primarily by a $50 million or 10 percent increase in net sales.

Almost $40 million of the increase in sales was from organic growth with the remainder coming from acquisitions offset by divested shares.

Third quarter results also include approximately 10 cents per share in restructuring charges and a positive 3 cents per share effect from a lower tax rate as we have reduced our 2003 federal income tax rate from 33.5 percent to 32.5 percent.

For the first nine months of 2003, net sales of $1 billion 579.6 million increased 5 percent over net sales of $1 billion 507.4 million in the first nine months of last year.

Again, most of the $72.2 million increase in sales came from organic growth with about $25 million coming from acquisitions offset by divestitures.

Net income in the first nine months of 2003 increased a substantial 22 percent on a year-over-year basis.

Nine-month net income increased from $57.5 million or $1.88 per diluted share before the effect of a FAS 142 non-cash charge taken last year to $70.2 million or $2.28 per diluted share in the first nine months of this year.

I will not spend much time discussing the segments as Rick will comment on each segment later in the call, but I do want to point out that compared to last year five out of our six segments showed increased sales in the quarter and four segments showed improved earnings during the quarter.

One segment, our Automotive Components segment, showed declining sales and earnings as they incurred $2.7 million in restructuring expenses during the quarter.

The General Industry segment showed flat earnings on improved sales.

However, the General Industry segment's earnings before interest and taxes or EBIT of $5.5 million included $1.8 million in restructuring expenses.

Without these restructuring expenses, the General Industry segment's EBIT would have increased 32 percent.

Total pretax restructuring costs in the quarter equaled $4.6 million, 86 percent of which were cash charges.

In spite of these restructuring costs, Carlisle's third-quarter 2003 EBIT increased 14.7 percent from $34 million last year to $39 million in 2003.

Our EBIT margins increased from 6.8 percent a year ago to 7.1 percent this year.

For the first nine months of this year, our EBIT margins also improved from 6.7 percent to 7.3 percent on a $15.5 million increase in EBIT.

Backlog improved 30 percent or approximately $80 million on a year-over-year basis and 12 percent or approximately $40 million from the end of the second quarter this year.

Rick will talk more about backlog during his comments.

Corporate EBIT expense declined $1.6 million from the third quarter 2002 to the third quarter 2003 due to one-time expenses incurred last year.

Let us talk a little bit about cash now.

Net cash provided by operating activities was $102.6 million in the first nine months of 2003 versus $159.9 million in the first nine months of last year.

Working capital this year has increased by $23.8 million in the first nine months of the year compared to a $14.4 million decline in the same period last year.

The increase in working capital is needed to support our increased sales volume and backlog.

Inventories are also up in our foodservice position as a result of the June 2003 Flo-Pac acquisition, and at some of our other businesses, such as our Engineered Products division, we have billed inventories in anticipation of third quarter plant shutdowns.

In spite of all this, we have been able to reduce inventories by $5.6 million and receivables by $14.3 million from the end of the second quarter, and we have paid down about $52 million in debt during the third quarter.

Year-to-date we have reduced our debt by about $20 million.

This year's capital expenditures of $29.4 million are slightly above the 27.5 million of a year ago, and dividends at $19.9 million are slightly above the $19.3 million paid in the first nine months of 2002 as we increased our annual dividend for the 27th year in a row.

For all of the above reasons, free cash flow which we define as cash provided by operating activities less dividends, CapEx and the effect of the Company's securitization program, was $43.3 million in the first nine months of this year compared to $76.2 million in the first nine months of last year.

For the most part, I have already discussed year-over-year changes to the balance sheet.

The $65 million increase in receivables from the beginning of the year was a result of higher sales and increased receivables of some of our seasonal businesses, such as our Construction Materials and Carlisle Tire and Wheel businesses.

The $16.3 million year-to-date increase in inventory is to support the increased sales volume and as a result of the June 2003 acquisition of Flo-Pac.

There is also a small increase in property, plant and equipment from the beginning of the year as a result of the acquisition of Flo-Pac.

Prepaid expenses are up $24.3 million from the beginning of the year, primarily as a result of timing differences on percentage of completion contracts where we have expenses in excess of billings.

On the liability side of the balance sheet, short-term debt has declined as the result of the repayment of bank debt in the third quarter.

Accounts Payable are up 50 million from 12/31/02 as a result of our increased business activity and as a result of increases in deferred revenues of progress billings in excess of expense, primarily in our general industry segment.

Accrued expenses are up $33.6 million, primarily to reflect increases in federal, state and local tax accruals.

With that, I would now like to turn the call back over to Rick McKinnish, Carlisle's President and Chief Executive Officer, for additional comments.

Thanks, Kirk.

I would encourage any investor that is not familiar with Carlisle to go to the WebSite, because when I go through each segment, we will list on each of the views you will see the companies within this segment and you will see the products that they make.

It would probably help an unfamiliar investor.

The third segment I am going to talk about is Industrial Components.

This is our Tire and Wheel and our Power Belt companies.

This segment grew organically 8.4 percent in the quarter.

This was partially offset by the sale of our Power Transmission European operations in December of '02.

The organic growth in this business year-to-date factoring out the divestiture last year is 5.7.

This segment incurred a $300,000 severance charge in the quarter at our Power Belt business.

We continue to find consolidation opportunities between these two companies in this segment.

Power Transmission has had $550,000 of severance year-to-date.

This is the only segment where raw materials were a significant issues in the quarter.

They have been very volatile.

I will give you some numbers.

Our raw material cost in this segment are up $9.3 million year-to-date.

We have partially offset these raw materials increases with 4.7 million of selling price increases.

This nets a 4.6 million reduced margin year-to-date.

This issue will get resolved long-term, but it has been compounded by the volatility of raw material prices they go into the rubber business.

For those of you out there that follow other tire companies, you will not be surprised by this information.

We also continue to be excited about our new Belt plant which is on the campus of the Tire and Wheel Company in Southern China.

This business will start contributing to the P&L for us in 2004.

To date we have been ramping it up rapidly, but as you know, when you start up a new plant, it does not contribute much financially in the first 12 to 18 months, but we are really looking forward to 2004 in our Belt business.

The next segment I would like to talk about is construction materials.

If I were presenting these numbers into a live auditorium, I would not say a word because there is really nothing to add.

We had organic growth of 17 percent in the third quarter.

We grew across all product lines.

Even our mature rubber membrane product grew almost 17 percent.

The MiraDri acquisition that we made earlier accounted for 6 percent of the growth in the quarter.

This acquisition is folding nicely into our coatings and waterproofing business.

There is no question we have talked about weather in the past.

The wet first half of the year drove some very nice sales growth in the third quarter.

It is very interesting to see that the areas of significant sales growth are East of the Mississippi where we had the wet weather.

We had some mediocre comparisons out West where they are suffering from a multi-year drought.

I would make a comment about Icopal, which is our joint venture in Europe.

We are a 25 percent owner.

They had a favorable comparison in the third quarter.

They are still negative year-to-date, but they were favorable in the third quarter.

The Automotive Components, the sales decreased.

We have talked about it before.

It's attributable to some timing on some major programs.

We are going to have one more quarter of these negative comparisons.

The operating loss in the quarter includes a $2.7 million charge associated with the closing of the manufacturing plant in Erie, Pennsylvania.

This plant was our highest cost plant in this company.

We are relocating equipment to three other plants, all of which are lower-cost and are closer to the customer.

The 2.7 million charge in the third quarter is the majority of this issue.

We will have some small charges related to this closing in the fourth quarter.

This business is going to get better.

We are looking forward to favorable comparisons beginning in 2004.

On one historical note, historically over the last twenty years, over 95 percent of our business has been based on the domestic auto companies -- what we used to call, The Big Three.

We are very pleased that we are able to talk about now 34 percent of our new business is coming from the transplants.

This includes Toyota and Nissan.

We are so excited about some new business that we were now ramping up on on the new truck program, the Titan truck at Nissan.

The next segment is Specialty Products.

This includes our Heavy Friction company and our Off-highway Breaking company.

We had weak demand in this area again in the quarter and some very competitive pricing conditions, but our loss in the quarter was added to by a $400,000 plant closure and severance costs.

We have new management in place in this business.

They took their positions early this year, and we expect improvements in '04.

Transportation Products is the next segment.

This business experienced some smaller improvements in the market during the quarter, and sales were up about 6 percent.

It is the first time in years that we really confirmed a slightly higher activity level in the heavy construction market.

Hopefully this is the beginning because this business has been severely depressed for several years.

Our businesses have remained profitable, but it appears that the worst is over and things will get better.

The last segment I want to talk about is General Industry.

I think in summary that the improvements at our Foodservice company, the improvements at our Process Systems company, and the improvements at Johnson Truck Bodies, these were offset by a restructuring charge that Kirk has already talked about.

I will say that backlog -- we have been in some businesses here in dairy and food that have been severely depressed.

Our backlog is finally going up and it is going up quite a bit in all of our food and dairy related businesses.

For the first time, we are seeing some signs of capital spending improvement in these channels.

We believe this backlog will continue to grow in this segment, which will improve a very troublesome area for us.

I am going to switch gears now and talk about some overall consolidated numbers for the quarter.

Our organic growth rate for the quarter on a consolidated basis was 7.7 percent.

It would have been higher except for the shrinkage we have talked about in automotive.

We grew all areas in the Company except automotive.

Our plant utilization in the quarter was 72 percent.

This compares to 67 percent last year.

The unabsorbed overhead at Carlisle total for the quarter was a -23.7 million.

As I have talked before, this negative overhead variance will disappear when our plant utilization get somewhere in the mid-80s of utilization.

The 23.7 million of unabsorbed overhead this year compares to 19.4 million of unabsorbed overhead last year.

So your first question is, how could the unabsorbed overhead go up when the utilization got better?

And the reason is all these severance and plant closure costs are the difference.

So we really did not take advantage of the better utilization because of the restructuring.

We did have a trend change in the quarter on selling prices that I think you might find interesting.

We have been talking about selling price erosion for the last several quarters as most companies are.

We have had selling price deflation consolidated in our company between $1 and $2 million a quarter.

Selling prices in the third quarter inflated, increased by 2.2 million.

This is a very positive sign for us.

I cannot predict a trend here, but it is very nice to see price erosion change to price inflation in the third quarter.

We are not depending on it, but it is a very nice change.

Raw materials prices were flat in the quarter except for the area in the Industrial Components our Tire business that I talked about, but we have lower prices elsewhere.

So on an overall basis, our raw materials prices were flat.

I want to change subjects to backlog.

Because we have seasonal businesses, the only appropriate way to view our backlog is to the same date last year.

On that base -- in other words, do not compare our backlog sequentially.

Our backlog last year at the end of the third quarter was 269 million.

Backlog this year, 350 million.

That is up 30 percent.

We believe this backlog should continue to grow in the fourth quarter.

We have seen increases in activity in our Construction segment, Industrial segment and across our General Industry segment.

Now I will comment about backlog that relates to the fourth quarter -- the majority of increase in our backlog or in our long cycle businesses; the capital spending businesses in our food and dairy businesses.

These will start converting to revenue in '04 and are not much of a factor in the fourth quarter.

But the backlog is probably the clearest way that we can state that we have seen improvement in most of our markets.

Now I want to make a few comments about guidance.

I am sure we are going to get some questions.

We have narrowed our guidance to the upper end of our previous guidance.

We are now at 270 to 280.

Our focus is to continue to execute improvement projects.

We took a 10 cent per share charge in the third quarter.

We have taken 14 cents per share charges year-to-date.

We have additional improvements that we want to make in the fourth quarter, and this guidance is about providing us the flexibility to continue to make improvements short-term to support significant earnings growth in 2004.

With that, I want to turn it back to the operator, and we would really like to have some questions.

(OPERATOR INSTRUCTIONS).

Deane Dray, Goldman Sachs.

Good morning, Rick and Kirk.

The first question relates to the kind of surprising news, encouraging news, that you are getting some better pricing.

Can you walk us through the segments?

My guess is you ought to begin with the Construction Materials because that one has a history of sometimes getting pricing but sometimes giving it back.

So take us through the segments where you are getting better pricing, and what does that tell you about the economy?

Well, obviously, Deane, one of the factors in this -- I did not want to get too complicated in the beginning -- is the raw material issues.

I talked about the price increases in our Industrial Components sector.

We did get price increases, but they were less than the raw materials increases.

But with that said, that is an unique situation in industrial.

But really the pricing at Syntec was flat to slightly improved in a couple of areas, not much change.

The consolidating number is 2.2 million of price increases in the Company.

So they are all over the map really, but as I look across the page, they are just very minor changes in each business.

But instead of being slightly down, they totaled slightly up.

So I don't know that there is a trend there.

I would just simply say it is a welcome from several quarters of price erosion.

Would you say (multiple speakers) that the pricing is a factor of changes in supply and demand in these markets or whether Carlisle is offering a better product that they can get a better price for?

Well, I think the answer to that would be it is so early at the end of the quarter it would be what the other companies say about their pricing.

I am just identifying that we have seen some favorable trends.

They are very minor, so they really don't conform a trend.

I don't know.

I am anxious to hear because we are announcing, first, what some of the other industrial companies are saying.

I don't know if there is a trend here or not.

But I think part of it is our leadership in some of these key markets.

Just on guidance, could you give us a sense of where you expect to focus structuring activities in the fourth quarter?

Just again size that for us?

Well, the focus on restructuring is going to continue to be -- obviously the construction area is not restructuring.

They are having a very good year, and we think that is going to continue.

The restructuring is going to continue in automotive, which I talked about.

It is going to continue in the General Industry segment.

As far as the scale, I really don't want to start predicting short-term.

I am saying in our guidance we have left ourselves some flexibility.

That is why we tightened our guidance but did not raise it after we had this quarter.

I just want to stick with that.

I do not want to limit the kind of actions we are going to take; that is why I want to stay away from short-term comments about restructuring.

Okay.

That is fair.

Thank you.

Wendy Caplan, Wachovia Securities.

Thank you.

I would just like to step back and think strategically for a second.

You and I have talked about, as I am sure you have with other folks as well, divestitures in the business, parring the businesses ad nauseam.

Could you talk today about which businesses or groups of businesses that you would identify as being the biggest "problem" businesses for you?

How do you see those problems evolving over the next 12 plus months?

While, Wendy, I mean I have talked consistently about where we are allocating more resources to, and that is I think pretty clear out there.

You are asking about where they problems are.

I would characterize that as we have got a lot of good businesses that have underperformed.

I have talked before in the past about similar businesses in the General Industry segment that have been, quite frankly, a drain on our performance the last several years.

We see tremendous opportunity to improve these businesses.

I think we are showing the first signs of that, and we talked about the backlog.

So I really don't want to get into -- we see the opportunity to improve these businesses.

Whether we divest and when we divest, we're going to be in charge of that.

We don't have any fire sales there.

So I cannot really predict the timing on divestitures, except to say right now we see the opportunity to improve these businesses.

If they don't fit us long-term, we're going to get a lot more money for these businesses than we would have gotten over the last 18 months.

Does that help any?

I am not sure, but I will say yes.

Can we go on and talk about the auto business.

You predicted that we would have one more quarter, the fourth quarter, of negative comparisons and then things would start to look a little better.

What are your internal assumptions for auto production on North American auto production for '04?

I doubt have those in front of me on auto production.

I will tell you that the culture we have in Carlisle, quite frankly, is we don't care what the auto production is going to be next year.

We are going to take the steps to take a fairly pessimistic view of it and have a favorable comparison.

But I really don't have in front of me what is in their forecast for next year on auto production.

Okay.

You did talk about the heavy construction market improving.

Can you give us a little more detail on that in terms of exactly where you are seeing it?

Well, obviously our Trail King Company supplies heavy construction trailers as an example or significant outlet for our Trail King Company.

This has been a severely depressed market based on a bunch of leases and rentals, and that whole thing imploded a year and a half to two years ago.

I am just saying that for the first time in several years our third quarter we are up a little bit.

We are seeing signs in quote activity.

Our backlog has improved.

So we believe we have seen the bottom of the market working its way through all these rentals and lease units.

But, once again, I want to caution this is a very modest trend I am talking about.

It was only up I think 6 percent.

But we have seen an improvement.

One more question.

Your CapEx this quarter, the first nine months, can you just help us to understand how you're spending that money, where it is going?

Well, it is going into Construction Materials.

We will probably have some announcements.

We probably should be making more announcements.

We have just broken ground.

We're building a new insulation plant in the Southeast for our Construction Materials company.

We are excited about that.

We have not had a competitive offering because our installation plants are in the Northeast and upper Midwest.

That is going to help, so the resources are being allocated to businesses we have leadership in.

Construction jumps to mind.

Our Tire and Wheel Company is ramping up with new products.

So you can look at our margins and determine where we are allocating resources.

I will tell you our CapEx, because we've got very good infrastructure, our CapEx here is around 40 million.

That is what was last year; that is what it is going to be this year, and we've got the ability to grow the business with this utilization with a good product development effort with a CapEx around 40 million.

And the split of that in terms of maintenance CapEx versus what we might call growth CapEx?

I would say about 20 million of the 40 million I would call business maintaining kinds of CapEx, and then the other 20 million is new products, growth kinds of agendas.

So our business maintaining CapEx is around 20 million.

Thank you.

Michael Harris, Robert W. Baird.

Rick, judging from your comments already on this conference call, it does not sound like we are going to get a lot of specifics regarding target cost restructuring actions in Q4.

But can you confirm that the vast majority of these restructuring actions will be completed heading into 2004?

Okay.

You are saying can I confirm that the majority of these restructuring will be completed at the end of '04?

No.

At the end of '03 heading into 2004.

'03.

I would agree with that comment.

In other words, we think at the end of this quarter, the fourth quarter, that we are going to have the absolute majority of what we have got on the table finished to answer your question.

But we are reserving the right to continue.

Remember, a lot of these projects have less than twelve-month paybacks.

So that is why I refuse to get into all kinds of short-term work, short-term forecasting.

If I find a project tomorrow that I am going to get my money back in 90 days, I am going to do it.

I understand.

There is going to be a certain level of pay-as-you-go restructuring as you go forward here which makes sense considering the diversity of the businesses that you have.

I think an important quite is you quantified it earlier, you have had about 14 cents restructuring thus far this year, and if you add on whatever you're going to add-on in Q4 and if you think that by and large the majority of the restructuring is done, that means that is that much less of a drain for '04 earnings, plus you have the cost-savings kicking in as well.

That leads me to my next question, and I know you are hesitant to give any numbers.

Can you give us some type of an appreciation of the cost savings that you could see flow through to the bottom line in 2004?

I think I just started that with the kind of payback.

Kirk talked about the percentages of these charges that were cash.

Real of thumb in cash restructuring, the paybacks are a year or less.

The non-cash restructuring depending on leasehold improvements, what kind of life you set up, the payback is longer.

So when you see a restructuring like we are doing, that a great majority is cash, it has a very fast payback.

So you are absolutely right that there is no question that we expect a lot of the restructuring that we are doing in '03 to come back to us in '04.

Okay.

I actually wanted just to hear you confirm that.

So that makes me feel better.

I was going to ask you for an update on the acquisition divestiture front, and I was more interested on the divestiture front.

You commented earlier that you have what you view as good businesses with strong end markets and things may be starting to turn around.

But are you less committed in divesting certain businesses today than what you were six months ago?

No.

I am just saying that we are going to do it on our timing, and we are going to do it at the right value points.

Quite frankly, we are excited about the opportunities to improve many of these businesses.

Okay.

Fair enough.

Just two minor points.

I just wanted to conform there was a minimal impact on foreign currency in the quarter, which is usually the case?

On topline or bottom line you're talking about, Mike?

Topline.

Topline year-to-date is around 14 million.

Very little price negative effect bottom line year-to-date, maybe 200,000.

Okay.

That is reasonable.

The other question is you kind of alluded to this earlier in your prepared comments, but can you quantify Icopal's contribution to the other income line during Q3?

Yes.

Compared to total contribution or compared to '02 third quarter?

I just want to know what the income was in Q3.

3.3 million.

Okay.

That seems reasonable.

About 800,000 better than last year.

Great.

That is all I have for you.

Saul Ludwig, McDonald Investments.

Nice to eke out a good quarter there.

Your sales were up 50 million.

That is terrific.

If you look at the operating income before corporate and before the charge, you do that arithmetic, you would see that the divisional EBIT would have been up $8 million if you exclude the charges and exclude the corporate.

If you look at $8 million EBIT on $50 million more sales, is that the right type of bring down to the bottom line that a $50 million sales increase should give you?

Well, I think it shows you are on the right track.

It shows if we can get some volume into our facilities, we can drop more of the revenue down to the bottom line.

There was nothing unusual in that 50 million or in that 8 million improvement that you pointed out that would lead me to believe it is a onetime event.

My question is really why wasn't it more?

And particularly in the third quarter where you have had some price increase and no material costs increase, and that taking everything together, you had a favorable variable margin spread if you will and selling price over cost.

I am wondering why there was not more operating leverage?

Well, seasonality is part of it.

You know the auto industry takes a shutdown in the third quarter.

The Tire and Wheel takes a shutdown in the third quarter for the same reasons.

Seasonality has a lot to do with that.

It is a slower quarter overall, and it shows up in the EBIT line.

Kirk, while we have got you there, help us a little bit with the tax rate wiggle there?

Well, as you recall from the second quarter, we received a tax refund.

We booked the interest in the second quarter.

We did not book the refund.

We looked our tax risk exposures were audited through 99.

We had very little exposure we think, so we thought it was prudent to bring the tax refund back to the shareholders for improved earnings.

So we dropped our rate by 100 basis points for the year.

But I have to tell you I think we are looking at maintaining that lower rate for next year also.

So we should be looking at a fourth quarter tax rate of 32.5 and 32.5 next year?

That is correct.

That is good news.

The next item.

With revenue, do you think granted that some of that backlog and improvement is targeted for next year, but the fact remains whatever was going on gave you this $50 million revenue increase in the third quarter.

Should we see a revenue increase $40 or $50 million in the fourth quarter the way the picture looks today?

I am not going to go there.

Is there anything you see business trend-wise that sounded like when Rick was talking about different businesses, he was talking positively.

We did not hear about any negative trends.

No.

That is correct.

You know -- things are more positive than they have been in quite some time.

Rick, in our prior conference calls, you have talked a lot about the importance and emphasis you're placing on new products.

We did not really cover that in today's call.

I wonder if you might talk a little bit about new products -- where they are making a difference, and where they might make a difference going forward?

Well, obviously I did not spend as much time because I thought we had a decent revenue increase.

Really in our key companies -- I could talk forever -- our guys at Syntec are just executing at a high level.

They continue to be the leader in new products.

They are out there with all kinds of new products for reroofing.

They are adding accessories into their white membrane line.

Those are all new for us.

There's just a lot of good activity, and it shows up in their revenue.

Remember, new construction was down in the mid-teens last year.

It is down depending on whose study you want to read between 3 and 6 percent this year, and we are growing revenue in the '20s.

So, no, Syntec is absolutely performing at a very high-level on new products.

Our Tire and Wheel and Belt businesses I have talked about in prior periods are coming out with new products.

We've got a lot of new business in our Belt business at (inaudible).

We're going to produce 4 million belts in China next year into totally new areas that we did not have before.

So our Tire and Wheel Company is making movement in the utility vehicle market.

You have got Kawasaki, Polaris, Toro, the Easy Go Club Cart (ph).

We've got a lot of new products for utility vehicles which is a fast-growing market.

Ranchers use them.

It's between a truck and a golf cart, so I could go on and on.

We've got in -- our Foodservice business is introducing a raft of new products.

Their business has been dampened with some travel- related issues, but it is going to be much stronger coming in with these new products.

So we have got a hefty focus and will continue to have.

As I have said before, we believe we can go back to organic growth rates like we used to do in the '90s.

Remember, this company from '91 to '97 we grew organically at a pretty decent rate.

Hopefully with just modest help from our markets, we can get back on that track.

And just finally, on the acquisition opportunity front, what do you see in terms of the deal flow?

In other words, when you look at what your company spent for acquisitions in the last couple of years it has really skinnied (ph) down from what the historical pace was.

How do you read the deal flow opportunity at this time?

The deal flow opportunities are getting better.

I am disappointed that we have not been able to make some other deals.

We are spending more and more time on it.

There is more fertile ground out there.

As you know, it is unpredictable.

But hopefully our track record the next couple of years will be much better on deals as far as the volume.

As you noticed, our balance sheet continues to be more capable all the time.

You're going to end the year with probably under 30 percent debt to cap ratio ex- any acquisitions in the fourth quarter?

Yes.

That is right.

Keep up the good news.

Godfrey Birckhead, SPK-Brooks.

Good morning.

Just to continue on this line that Saul tried to pursue with you of topline growth.

Is unit demand better, the same, or worse than you had started the quarter with?

I have talked about pricing.

The unit demand -- the volume increase, Godfrey, is the great majority of the sales increase.

In fact, I will give the numbers.

Of the 50 million sales increase, 2.2 million was pricing.

The balance is volume.

That suggests that the number was what? 10 percent year-over-year for the sales?

Yes.

Okay.

So that suggests that the unit demand was up 8 or 9 percent or something like that or more?

More.

It is up 48 -- the unit demand is up 47.2 (multiple speakers)

Exactly.

So that is pretty damn close to 9 percent or something like that.

I guess to ask the same question he asked in another way, can that kind of unit demand continue into the -- and given the backlog you have -- can that continue into the fourth quarter?

Well, I addressed that, and I will do it again.

The log increase in our backlog is up 30 percent;

I think it is up 80 million, almost $80 million.

The majority of that increase are in long cycle projects, CapEx type projects, that will really start generating revenue in '04.

I wanted to make that point because obviously you see this revenue increase.

Even with this revenue increase, when our shipments are up 50 million, we built our backlog.

Okay?

But I am trying to make the point that don't overreact to the backlog.

It is really in my mind a significant '04 event because of the long cycle nature of the new backlog.

Right.

But on the other hand, Rick, you have some of your markets -- I mean, was it 80 percent of your markets of your businesses in really three of the segment categories, the Construction Material, the Industrial and the General Industry -- at least I think that is correct.

You have seen a change in some of these markets.

I guess it is a fair question.

Can that continue at least in a general sense?

In other words, are we just talking about a blip here that you had an extraordinary third quarter, or is this something that you think will continue?

I am not predicting how much organic growth today.

We're going to come out in February obviously with some detailed guidance on '04, but this trend is going to continue.

I have said that most of the markets we are in have bottomed, and we are seeing some improvement.

I just don't want to predict short-term how much it is going to be in the fourth quarter.

I think you have answered that.

Okay.

Let's go to the next question.

The Chinese plant you said would produce 4 million belts; right?

That is the plan for '04.

Can you give us the sales number that would go with that?

What potential sales number would go with that, please?

No, I really cannot.

I have not calculated what the product mix will be.

The point I was making about that is since the time we bought Power Transmission from DayCo, we started construction of a new plant in China on the Tire and Wheel campus.

That has not contributed a penny to earnings yet.

But it will start contributing in '04, and to us, that is significant.

We think good things are going to happen as we execute this project and drive these things into the marketplace.

We're excited about our Belt business, but I cannot really talk you about the dollar amount today.

But you can use your imagination.

Okay.

And all that stuff will be sold in the Asia-Pacific market?

Some will be in Asia.

The majority will come to North America.

Will you be able to enlighten us as to the sales capacity of that plant at sometime in the future?

Sure.

All I can say to you is it's going to go up every year.

Okay.

CapEx is going to be 40 million; depreciation, please?

Depreciation is going to be flat with this year.

We are running -- through nine months, we are running about $47 million.

So the year will be, what, 60 million or something?

Yes, that is right.

As Rick said, we have close some plants, but we are adding new plants, too.

So let's stick with that 60 million.

One other previous questioner was asking about the restructuring and whether there would be the question I had down to, going into '04 and you answered that by saying, as of now you have no plans, but if something came along you will take it on a "catch as can" basis (inaudible).

As I understand from your earlier comments, the cash charges were 4.6 million, and you said that -- the total charges were 4.6 million and 86 percent of that was cash charges.

If you do the math on that, it comes to something like 3.2 million.

So am I correct in thinking that you would recapture then next year that 3.2 million in '04?

Is that the way I should be thinking about it?

We will recapture some of that in the fourth quarter, but most of it is coming in '04.

Right.

So the math is basically correct.

Some will come in the fourth quarter, and some will come next year.

Exactly.

In that business that you sell to Boeing and then telecommunications business, can you give us a review of what is going on there?

You have not mentioned that.

That is our Tensolite Company, and they have improved performance in the third quarter.

They have obviously taken a lot of actions over the last several years.

Tensolite has shut down three plants in the last two and half years.

They have got this behind them, they had a favorable comparison in the third quarter, and we are excited about the future there.

They have very strong share in commercial aircraft.

They are working on additional business in Europe.

They are in the microwave communication area, all this broadband and wireless.

So we're excited about Tensolite.

They have been through a very tough period of time with commercial aircraft and the telecom meltdown, but they have got it behind them, and comparisons were much improved, very favorable in the third quarter.

Can we give somebody else a chance here?

Absolutely.

(OPERATOR INSTRUCTIONS).

Robert Atchinson (ph), Avage (ph) Capital Management.

Rick, you mentioned the $4.6 million drag in the IC group based on the raw material price increases and your timing of the flow-through on that in terms of your own ability to raise prices.

Could you help us understand what a normal expectation is for how long it takes to essentially recapture that lost profitability?

Well, Robert, let me get my number here.

The raw materials increases were 9.3 million.

We recovered 4.7.

Normally the timing gets done in about six months.

It has not happened this year.

It has been the volatility.

Available has gone up and down, and specifically -- this is not occurred in our other businesses -- the natural rubber, which has some political elements, and (inaudible) rubber or synthetic rubber, both these have been unbelievably volatile this year -- up/down, up/down -- and this makes it very difficult -- cumbersome -- to negotiate by the time you get an appointment scheduled.

So what I am trying to relate to everybody is it was a 9.3 million of negative raw materials increases.

We only got 4.7 million of it back in price increases, and we will get this resolved over the next six to 12 months.

Help me with that.

I want to make sure we all understand.

Does that mean we should think that there is $4.6 million improvement in EBIT that we should consider as possible for just that group specifically over the next six to 12 months just from the pricing coming more in line with the raw materials?

Well, I hate to see you add that into your model, but I would say this -- historically we eventually get these raw materials issues resolved.

Our competitors want to recover these raw materials increases just as badly as we do.

So in the next six to 12 months, you're right.

I cannot predict the future on this, but normally we get these issues resolved.

Raw materials could go down or price increases.

Is there anything that you know of, just as you look around the marketplace and think about your share or other players' shares and their own desire for profits or your own, that should preclude that from happening this time?

No.

The 20 year history is that is what happens.

Obviously I don't know, but that is why I brought it up.

I think there has been a little bit of a anomaly here, and we will normally get this taken care of.

And, quite frankly, we think some of the raw materials are going to cycle back down.

So anyway it was a 4.6 million reduced margin year-to-date.

Just on the construction side, can you step back with us for one second and talk about what you think is going on competitively, where it seems like you are really gaining share and gaining ground relative to the competition because it looks like the numbers are quite a bit different from what we're hearing about in the industry?

Well, I have been consistently saying, Bob, to everybody that we have been building momentum in this business.

The management team, they are really executing.

They have just developed a lot of new techniques, rather than just price.

They do project bidding work.

They have got new software on energy management.

They are just bringing, I think, new and innovative approaches to roofing.

As you know, you do this and you do this and all of a sudden it starts building momentum, and I have been talking about it for four or five quarters.

I think this is just another example with some help from the market because we did have some weather help.

But I think you're right, and you are on to something.

I follow everybody in this industry very closely.

I have not heard anybody yet talking about a 23 percent revenue increase.

So this business is just building leadership.

We have got only one other formidable competitor that we deal with.

A lot of other businesses -- and I am not going to tell you -- but a lot of other businesses in this segment do not have the model to compete.

You need to provide multiple solutions and insulation into this marketplace, and you just do your homework on who provides the complete solution and who just has bits and pieces.

I think you are also saying, and we agree, that this is ripe for additional consolidation.

We would like to participate in that.

Lastly, if I could, the auto side, I know there is a whole host of assumptions, but you say that you expect an increase in sales in '04.

If we just have flat vehicle sales, what sort of an increase are you thinking about to try to sets some sort of assumption and tell us what you are gaining in terms of content in '04?

Richmond McKinnish Well, when I talk about favorable, and I am predicting, and I said I don't care what the auto bills are, favorable earnings comparisons.

Okay?

We are taking the steps internally, and that is a key part of our culture that I keep talking about.

We really don't want to spend our time talking about all this economic data.

You drive things so that the worst scenario occurs, and many times it will.

You got improvement in earnings.

So we don't have a very favorable view of automotive in volume in revenue next year.

It will be up, but very slightly.

We have a much more favorable view of earnings with all the steps we just talked about.

Thank you very much.

There are no further questions at this time.

I will turn the floor back over to you for any further remarks.

Thank you and we really appreciate everybody taking the time to listen or participate in our call.

Thank you very much, and that concludes our call.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time, and have a wonderful day.