Carlisle Companies Inc (CSL) 2004 Q3 法說會逐字稿

Good morning and welcome to the third quarter earnings conference call for October 20, 2004.

Your host for today will be Rick McKinnish, President and Chief Executive Officer of Carlisle Companies.

Mr. McKinnish, please go-ahead.

Good morning everybody and welcome to our third quarter conference call.

We appreciate you taking the time to join us.

With me today is Carol Lowe, our Chief Financial Officer, and Phil Aldinger, our Controller.

We are going to follow the format that we used in last quarter.

We're going to briefly highlight the quarter.

And we're going to use the Q&A period to focus on your areas of interest.

So with that I will turn it over to Carol.

Thank you, Rick.

Good morning everyone.

As highlighted in this morning's release, Carlisle reported record net sales and income from continuing operations for the third quarter and nine months ended September 30, 2004.

Year over year quarterly net sales grew by 17 percent, of which substantially all of this growth was organic.

Acquisitions, net of divestitures, contributed 2.8 million to the quarterly sales growth.

Third quarter '04 earnings from continuing operations increased 30 percent over 2003 to 32.1 million or $1.02 per diluted share.

Year-to-date earnings from continuing operations were 96.3 million, or 3.06 per diluted share.

As noted in our release, Carlisle has reduced its estimated tax rate by .25 percent to 32.25 percent for the nine months and full year '04.

This reduction recognizes an adjustment in the Company's average state tax rate and resulted in a favorable impact to earnings for the quarter of 1 cent per share.

Earnings from continuing operations included charges for exit and disposal costs of 3 cents for the 2004 third quarter, and 6 cents for the nine months ended September 30.

Net earnings, including discontinued operations, were 28.9 million, or 92 cents per diluted share for the third quarter 2004, an 18 percent increase over the prior year.

Net earnings for the nine months period were 90.1 million, or 2.86 per diluted share, a 28 percent increase over 2003 earnings per share of 2.28.

Now I want to take just a few moments to review a couple of items on our cash flows.

As you noted in the release, our year-to-date cash flows from continuing operations are below 2003 operating cash flows, as increased revenues and continuing strong demand have required an increase in our working capital.

The $56 million increase in receivables, including the effect of the securitization program is driven by $103 million increase in sales during the last two months of the third quarter 2004 as compared with the same period in 2003.

Our days sales outstanding have shown no meaningful deterioration at 54 days at the end of September '04.

The $47 million increase in inventory largely resides at Carlisle SynTec and Carlisle Tire & Wheel, as both of these companies are experiencing record levels of demand.

Inventory turns of approximately 7 times are higher than turns in '03.

Our capital expenditures are up approximately 25 million, primarily as a result of our continued investment in the businesses of our Construction Materials segment.

With that I will turn it back over to Rick to review operating performance.

I'm going to make a few comments about our large businesses, and then I will tie back hopefully some of our consolidated numbers from an operating perspective and a few comments about our outlook.

Our first segment is the Industrial Components segment.

And the largest company in this segment is our Tire & Wheel business.

They continued to have very nice growth.

They grew 25 percent in the quarter.

They've got improving markets, especially the lawn and garden, but they've also introduced an array of new products that we have talked about in the past.

And so they continue to have some very nice growth.

But the earnings at Tire & Wheel were very disappointing in the quarter.

I will give you the key ingredients.

During the quarter we absorbed 9 million of raw material increases.

These were rapid fire increases.

And we had many cases where steel was going up about every 14 days.

So it was 9 million of raw material increases in the quarter.

We got some selling price increases in the quarter of 6.4 million.

This nets to 2.6 million penalty of unrecovered raw material, and that is greater than the margin erosion that you see in the segment reporting.

We had some large contracts with several OEs that we held up on because the contracts quite frankly didn't expire until the first of October and the first of November.

We are going to get these increases in the fourth quarter.

The management team at the Tire & Wheel business is very confident that the raw material increases that they have absorbed can be fully recovered.

On a year-to-date basis in our Tire & Wheel business these raw material increases have cost us 12.5 cents a share.

The next segment is Construction Materials segment.

This consists of our commercial roofing business, Carlisle SynTec.

They continued to have very good organic growth.

They grew over 23 percent in the quarter and this was across all product lines.

But I would highlight one product lines I think it of particular interest.

It continues very strong growth, and this is our installation products.

Our installation products grew 46 percent in the quarter.

It has been growing at a very high rate for some time now.

We just opened our third insulation plant in northern Florida.

This plant is already sold out, and we opened it up in the third quarter.

We have broken ground on other plant -- insulation plant in Texas.

We're very excited about the opportunities in this product line.

What we're really doing here is developing capability in regions of the country that were underserved by our roofing business in the past.

On a raw material increase note, SynTec absorbed 4.2 million of raw material increases in the quarter, and recovered 2.6 million of that in selling price increases.

So they had an unrecovered raw material of 1.6 million.

That explains the margin changes in that segment.

Steps are underway to fully recover all the raw material increases.

And we think we will have that -- we have announced price increases for January 1 and April 1 of '05.

Now on overall basis, we added 70 basis points to our EBIT margin in the quarter, and this was very disappointing considering the revenue increases that we had.

I am going to take you through the major ingredients to the quarter on a consolidated basis.

First, plant utilization in the quarter.

Obviously that went up on this higher volume.

The plant utilization was 79 percent in the quarter, which improved from 72 percent last year.

This higher utilization resulted in our unabsorbed overhead improving by 9.9 million.

Unabsorbed overhead was a -23.6 million third quarter last year, and was reduced to 13.7 million this year.

As we have said before, these variances go away for us when the utilization gets in the mid '80s.

During the quarter we absorbed 17.8 million of raw material increases.

And these were partially offset by 11.5 million of price increases.

This nets to 6.3 million pretax.

Or after -- effective for taxes it was 14 cents a share in the quarter of unrecovered raw materials.

So the leverage that we would normally get out of this growth was severely dampened by these raw material increases.

Year-to-date, for those of you that track this, the year-to-date raw material increases are 33.8 million.

And we've gotten year-to-date 19.5 million of selling price increases.

This nets to about 33 cents a share of unrecovered raw materials.

The other items that was not talked about in the past that I want to mention -- all the costs that we have in a decentralized Company to comply with all the new Sarbanes-Oxley regulations that has resulted in charges to us -- outside charges year-to-date of 4 cents a share.

I would just comment on an overall basis that we're getting price increases.

The environment to get them is really the best I've seen in some time.

And we think that all these raw material increases, whenever this peaks that some month after it peaks these increases will be margin neutral for us.

We will fully recover all the increases.

Switching subjects to capital spending, as you note in the press release, we are up 89 percent year-to-date.

But I want to emphasize this is not business maintaining expenditures, these are growth expenditures.

The number one preferred use of funds in Carlisle is to fund organic growth opportunities at our leadership companies.

This growth comes in two forms.

It could be new products through existing channels, like our Tire & Wheel business we just talked about, and our roofing business, Construction Materials business.

The other form is new capability placed in underserved regions.

And that is what we're talking about in our roofing business in the insulation.

We believe excessively funding organic growth opportunities in our market leadership companies increases competitive pressure in these preferred markets leading later on to more acquisition opportunities.

I would add that bolt-on acquisitions remain a very high priority for our capital.

But we're very excited about the opportunities that we are identifying to continue to grow very fast or very good rates organically.

I will switch now and finish on outlook.

You noted in the press release that we're raising our guidance.

It was 3.50 to 3.60.

We're raising it 10 cents a share to 3.60 to 3.70.

In the fourth quarter, based on timing and raw material increases that we received late in the third quarter, the fourth quarter will continue with unrecovered raw materials.

We also will spend a lot of money on Sarbanes-Oxley in the fourth quarter.

And we estimate that on a preliminary basis to be 2 cents a share.

So the story in the fourth quarter really continues.

The whole message year-to-date is that we've got improving markets.

We've got new products.

We are pleased with our organic growth rate, but it is being severely dampened by multiple increases in raw materials.

Our operating management is very confident, and we spend a lot of time on this, that these cost increases will be fully recovered.

I would add that in our large business units, our Tire & Wheel business, our Power Transmission business, our Roofing business, the outlook on future demand remains very positive.

With that I would turn it back to the operator and we would like to get some questions.

(OPERATOR INSTRUCTIONS).

Mike Harris.

Rick, you quantified the negative net raw material variance in Q3 of 14 cents.

Do you expect to have a native impact in Q4?

Can we get just an appreciation of the magnitude of Q4 versus Q3?

Well, I wasn't going to forecast that, Mike, because we really haven't finalized that estimate.

We have gone out with a lot of price increases, quite frankly, for October 1, November 1, and January 1.

We had a steel increase a few days ago.

We don't know if that is going to stick or not.

So it is really so fluid.

We really I think have got our arms around it from an overall standpoint.

And it is in our guidance, but I would hazard to guess right now.

We don't think it is going to the any worse than it has been year-to-date.

What we think right now is it is going to decrease.

But I said that quite frankly a quarter ago and we had more increases in the third quarter than we had in the prior quarters.

So I hate to forecast that.

I understand.

You know with oil above $50 and the unprecedented increases in steel costing in Q3, that is a reasonable cautionary comment.

I will live on here.

Just within the Automotive segment, did it affect the tooling issue?

You had in our press release you received a 1.1 million settlement I believe in the quarter.

But you also incurred an additional 2 million in costs.

And this is in addition to the 3.4 million you identified last quarter.

Can you just give us an update on the likelihood of recovering these additional costs from your customer?

I'm reading the press release.

The Automotive business continues to be very disappointing.

We had talked about a new program that we had received that resulted in some losses.

And the 1.1 million was the cash settlement we got in the quarter.

There is additional monies coming that relate to that program.

Some of them are in next year, which I don't think we talked about in here.

And there is about 400,000 and some coming in the fourth quarter.

The 2.5 million loss, Mike, really relates to the third quarter of '03.

Oh, so that's the prior year.

Yes.

Okay.

Because you have here the third quarter also included -- I'm sorry -- that did not read that way in the press release.

Mike, the third quarter also included approximately 2 million of losses for the excess manufacturing and inspection.

There was an additional 2 million.

Exactly.

That's where I'm going with that.

There's a part of this we're not going to recover for past production.

We're not going to recover the full amount, however as Rick indicated, we have been successful in getting price increases for going forward, and we did receive a sediment to recover some of what we had lost.

Just to make sure that I'm clear, because this has been a meaningful impact on quarterly EPS the last two quarters, notable at least.

You received 1.1 million settlement in this quarter.

You're expecting another 400,000 in Q4, and additional monies coming in '05.

But you don't expect to fully recover your losses incurred on this issue?

Correct.

And just, Rick, last quarter you made a comment that demand was pretty strong at the beginning of the quarter, commenting that the phone was ringing off the hook.

Just today relative to the last conference call, how would you describe the demand environment, still very robust, or have you notice any weakening in any areas?

No, I would say that I tried to talk about in outlook -- in our large businesses quite frankly the demand has exceeded our capability.

That is in our roofing business, and our Tire and Wheel business.

And the demand -- our outlook today is still just as robust.

The one area -- so basically across 80 percent of our revenue the outlook is very robust.

We're starting to see some preliminary signs that all these steel increases are approximately starting to have some negative effect on the outlook in the trailer business.

But that is a small part of our business.

So to answer your question, our large businesses the demand outlook remains very robust.

Okay.

And then just talking about a couple of your divisions here.

Within Power Transmission division, I am estimating organic sales growth was 4 percent.

That was a little bit lower than what I was expecting.

How did this track relative to your internal plan for that division?

Okay.

Power Transmission is within the Industrial Components segment.

Yes.

Okay.

And we've made a note in the press release that it grew about 4 percent.

And that was in line -- pretty much in line with our forecast.

And the other thing for them is they are running full out.

Part of the limitation in some of their sales growth is having the production capacity to meet the demand.

And as we have indicated previously, we are expanding the campus in China for more belt productions.

And we're also doing some expansion for their Fort Scott, Kansas production facility.

So part of the limitation in that growth is just purely our production capabilities at this time.

Plus too you're probably going up against pretty difficult prior year comp as well.

And then in Food Service, 3 percent growth year-over-year.

Just kind of I wanted to ask you how did this track relative to your plan?

Our Food Service business has been slightly behind our planning.

A few weaknesses in a couple of areas, but nothing -- our sanitary maintenance, we have had some issues on supply, but we remain very positive about this long-term and very committed to it.

But you were right, it did not grow as much in the third quarter as we had planned.

Okay.

Just a couple of more questions and then I will hop off.

Johnson Truck Bodies, a little small.

It had an 8 percent decline in revenues.

I just want to ask you, Rick, did the temporary rescinding of the hours of service rules a few months ago regarding truckers' driving hours have anything to do with the weakness here?

No, this was -- Johnson Truck Bodies last year set a new record -- earnings record, revenue record by 40 or 50 percent.

So it was a very difficult comparison for them quite frankly.

And this is a very solid little niche business, double-digit margins.

It just ran up again against a very tough comparison.

Okay.

And then lastly, you had some acquisition benefit in the quarter.

There were some divestiture.

There's FX.

Can you just give me what you estimate your organic growth was in the quarter for the Tire & Wheel division within Industrial Components?

And then the organic growth rate for the General Industry segment overall?

Just a second.

The organic for the third quarter for Tire & Wheel was 19 -- actually rounded it is 20 percent.

And what was the other?

General Industry.

The General Industry in total?

Yes, we won't go get into all the various moving parts within that.

It is 4 percent.

4 percent.

Okay.

The thought that's all I had.

Thank you.

Deane Dray.

I would like to visit the price increases that you have been able to put through so far.

So the first question is, do you have a sense for the price increases that got put in late in the third quarter how much of that benefit are we going to see in the fourth quarter?

I guess the price increases -- if you go back and look -- we could probably give them by quarter, but the price increases have been going up.

In other words, we're getting more price increases with each quarter.

You would expect that because we give our customers a couple of months of lead time, in some cases more.

We anticipate that the price increase that you actually get benefit for is going to continue to go up every quarter.

How about the magnitude?

Can you give us a sense for like SynTec what the percent of price increase on balance has been, and the same thing for the other major businesses?

Are we talking about 1 or 2 percentage points or something higher in aggregate year-to-date?

When I gave out -- I thought I gave out the individual -- for the quarter SynTec got a 2.6 million price increase in the quarter.

That is the only information I gave out.

But they are looking for more price increases going forward.

Is about 2 percent year-to-date.

Their price -- combination price mix change is 4.1 million.

That's for SynTec?

Yes.

Okay.

And then when you say SynTec is going to put through further increases January 1 and April 1, are they always that far out?

And do you get a certain amount of pull in benefit from that at the old prices?

And what is a competitive response expected out of your primary competitor in SynTec?

Let me -- I guess the most important question -- so far we have been getting price increases, obviously not fast enough and not enough.

A lot of the raw material increases that we're talking about SynTec got -- a lot of it was late in the third quarter.

But they are getting price increases.

The primary issue here is the ISO, the insulation.

And we're getting price increases on insulation.

And quite frankly if you look at the last two or three quarters and the next quarter could be as much as 20 percent.

Now the overall atmosphere in that market is very good.

The management team at SynTec is confident they are going to fully recover these raw material increases.

Our largest competitor has also had similar price increases.

So is not just Carlisle. (indiscernible) price increases.

Okay, thank you.

And then on the separate topic, the expectation for looking at some of your other underperforming businesses.

Last quarter you had some declared as discontinued.

Is there an expectation there could be more of those?

What might the timing be?

And how are you thinking about that in terms of redeploying capital at Carlisle?

Obviously we're redeploying and allocating capital into these core businesses or leadership businesses we call them.

We continue to look at our portfolio.

We have identified three businesses that were put in discontinued ops.

This is ongoing.

In other words, these businesses will get to double-digit EBIT margins and/or above-average returns on capital employed.

They're not going to be in our portfolio.

And we are frustrated, and I think should be criticized that we have not made more progress faster.

But we have a plan and we're executing it.

And I realize this may be painfully slow to everybody, but we're still comfortable that we going to make progress with each year.

Our portfolio will be more focused.

And we will have fewer and fewer of these odds and ends that don't contribute.

Saul Ludwig.

You keep eeking it out there.

On the working capital, you had a $271 million increase in your revenues year-over-year.

And you have consumed -- when you adjust for your receivable sales, it looks like about $75 million in working capital.

Is that ratio appropriate?

Are you satisfied with that and figure about 25 percent of sales increase that it required additional working capital to support that or should that be better?

Our working capital as a percent of revenues, it is up.

It is about 16 percent right now compared to 12 percent of revenues.

It's a big difference.

Yet it is.

But I guess to meet the current sales demand for SynTec and Tire & Wheel and, as Rick indicated, they are very positive about their outlook for demand, they need to build inventory.

They don't have the production capacity to meet the demand unless they build inventories.

And they will continue to do this through the fourth quarter.

It will be easy for them to right size inventories if they're missing demand projections.

They can take extended holidays throughout the early part of the year.

So we're very comfortable with the inventory level.

And also to get some of the customers to take the inventory and carry it through their chain will extend some dating terms, which that will drive up receivables for those as well.

I am going to add to what Carol just said, because I don't what you to read into it that this is the new ratio of working capital to revenue.

Quite frankly, in our key businesses we have been surprised at the strength of the demand.

We have been unable to satisfy the demand.

Our service has suffered.

We have identified the bottlenecks.

There they are in specific areas.

And we're going to fix it.

So I think long-term we will return to a more typical ratio of working capital to revenue.

But right now until we get some new capacity in place and do some things differently, we have also had -- we shut down our plant in Trinidad.

So we took 1 of our 4 tire plants out of production.

We purchased a lot of tires to satisfy customers at, quite frankly, a very high expense.

So there has been a number of issues in satisfying demand.

And a I wouldn't -- I don't think this increase in working capital to revenue is a long-term trend.

I guess is my point.

With regard to demand being so good, are you satisfied with the pace at which your managers are moving their prices, or should they be doing even a better job given that the environment for price increases is good?

And just are you happy with the pace at which they're moving these prices?

No.

No, I think -- I have spent more time on price increases -- why we're not more aggressive -- why we're not speeding it up.

Why should a raw material supplier give us two weeks notice and we want to give our customer three months notice.

Yes, there is contracts and there's issues involved, but to answer your question, we're not at all satisfied, and we're determined that we're going to get better and better at this.

We have not done as well this year on getting raw material that I think that we should have.

No question about it.

And the environment to get it quite frankly -- to get these price increases is the best I can remember.

You're right.

So you're right.

I don't know how we stack up with our other industrial.

We have a fair share of OE business, and you to have contracts.

But I will tell you we're going to have fewer of these contracts.

And these contracts are going to give us more flexibility to move through raw material increases.

I think we just got lulled into 15 years of no inflation, and that has cost us this year.

So you're right, I characterize it to this (indiscernible) force.

We have not gotten the leverage out of these improving markets.

Okay.

Carol, what was Icopal's earning contribution this quarter versus same quarter a year ago?

It was down slightly.

Hold on one second, let me look at that.

Included in the other income expense, Icopal contributed 300,000 for the quarter.

What was that?

Yes, 300,000 less for the quarter.

Okay.

What were the actual numbers?

It is 3.2 million for '04, and 3.4 for '03.

So it is 200,000 (inaudible).

Good.

On the subject of Icopal, you have got the new CEO in there, Rick, and there were some talk about maybe a need to do some restructuring, and it would obviously impact your earnings.

In your guidance for the fourth quarter, A., is there anything in there -- are you baking anything in for some more restructuring charges either at Icopal or elsewhere throughout the corporation?

Let me touch on Icopal.

We're very pleased with the management we've got in place now.

All the right things are being done.

A lot of this decrease in the quarter was currency related, I think, but Carol could probably correct me on that.

But we don't anticipate -- Martin, our new CEO, is identifying quite frankly some growth opportunities.

We have been doing restructuring.

He's been taking out headcount in certain areas and just absorbing it.

So we don't anticipate anything unusual from Icopal in the fourth quarter.

How about elsewhere throughout the corporation where each quarter you had a little something, are you going to take another whack at Automotive?

Yes, I think we put it in our press release.

It was a couple of cents a share.

Outside discontinued.

And those efforts continue.

I would just make a quick comment about, we put three small businesses in discontinued.

And we've had these businesses for sale for quite some time.

And quite frankly we're accelerating the process.

I think we could be criticized for not getting enough done.

And so several of these businesses we're doing various things, getting more aggressive as far as disposing of these assets.

And that is why quite frankly we have a lot more activity in discontinued in the quarter than anybody would have probably thought.

But we're going to get these businesses behind us.

Two of the smaller businesses that we're being very aggressive have been consistently losing money for some time now.

And we want that out of our system this year.

So quite frankly we're almost in a liquidating kind of situation.

We're no longer trying to sell an ongoing business, we're trying to sell just the assets.

And we're shutting down.

So the shutdown type of expenses were incurred in the third quarter.

But no, I see it -- nothing major, Saul, just an ongoing activity.

Okay.

And just finally, over on the Transportation business were you had the 30 percent sales increase and no increase in profits, you talked about price increases in Tires.

You talked about price increase in roofing.

What is the problem over in the Transportation Products, and what is likely to be done about it?

Well, raw materials and that -- and back to the same subject.

Why aren't we getting raw materials?

And there was quite frankly a product mix issue also.

We took a large order at lower margins, and it was poor performance, Saul, in that segment.

It sounds like -- you have talked about the fourth quarter.

You've also been pretty emphatic about getting -- catching up, let's say by the first of the year in terms of raw material pricing recovery.

You ought to be keyed up for a tremendous year next year if we don't have any other surprises if you will on the raw material front.

I agreed.

I think I would probably characterize that.

The attitude in our operating unit management quite frankly right now is just about as positive as I have ever seen it about '05.

Wendy Caplan.

I am very concerned about the margin.

And the two businesses that represented -- that represent 80 percent of profits in the quarter -- the Construction -- and actually I'm looking at Construction Industrial Components.

Those two segments have horrible incremental margins, 18 percent and 7 percent respectively.

And that is after adding in the game in terms of the pricing.

What else is going on here?

And I guess that speaks to my next question which is you raised your guidance but consensus is way above that.

Where do we have it so wrong?

And if you can address some of the -- and one more -- the issue of -- we talked about pricing and materials but what about availability, how is that looking?

Let me start -- let's take Industrial.

The EBIT margins you're talking about went from 7.4 percent to 6.3.

And the unrecovered raw material was 2.6 million of EBIT, and that is the difference.

Now we have talked about it.

In nd other words, are we happy that we didn't recover all the raw material in the quarter?

We're not happy, but we're not concerned.

I guess all I can say is that we're confident that the some material increases do not represent a long-term change in our margins.

So our math says that the unrecovered raw material in Industrial fully explains the reduction in margin.

And the same really I thought was through -- help me Carol -- with the Construction.

Now there's a small amount was Icopal, which Carol just quantified as 200,000.

But that is unrecovered raw material.

And so -- and I think I said it several times in the conference call, we're confident that this will be margin neutral.

That we will fully recover these raw material increases.

The problem is that they have been multiple -- they just kept occurring.

I think for whatever reason that maybe we've had more problems with this than some of our peers, but that is how it has affected us, in our Roof business and our Tire & Wheel business.

But it doesn't -- even if I add back those numbers and say that you recovered everything, the incremental margins are still a very, very poor in those two businesses.

And I guess I'm wondering if there something else going on that is keeping the margins from getting to where it should be during a time of what appears to be pretty decent demand?

On Construction Materials if you add back the 1.6 for the quarter, the margin is 16.4 percent compared to 16.5 percent last year.

So I guess I don't know how you're coming up with a significant deterioration.

And then Icopal was down 200.

It is not the margin itself, it is the incremental margin -- the margin that we get on every additional dollar that we sell.

And that is what I'm looking at.

And that is really quite weak.

You know most companies in the industrial space report that they at least are attempting to get a contribution margin of 30 to 40 percent on every financial dollar, and yours is significantly below that.

And my question is, is it just -- is it something inherent in the business, or is there something else going on that is keeping those incremental margins so low, not the operating margins.

Okay.

I understand.

I think it is a good point.

We have not gotten the letters now.

There has been a lot of things -- we were not prepared for the demand.

I have noticed some of my peers have talked about the ramp up cost.

Our Construction Materials business is starting up three new plants, green field sites.

Industrial Components business, we shut down a tire plant.

We are moving that capacity to China and to our U.S. plant.

There is a lot of just activity there.

I think it is a good question.

We have not done any analysis -- you are right -- on the incremental situation.

We also -- I will say, Wendy, are being very aggressive in Construction Materials in how we're pricing, for example, insulation.

We would like to be a consolidator in that industry.

The returns on capital and the margins in Construction Materials are every good.

We've got a lot of competitors where the margins aren't so good.

And quite frankly we have a long-term plan there to consolidate the industry.

So I could -- there's a lot of issues there.

But you're right, today, short term I would categorize it -- I would agree with you -- very weak performance from us on the margin side in the quarter.

And, Rick, is there any issue of availability of materials?

Are you seeing that, or is it if you want to pay up, you can get it?

There has been some issue in that.

That is one of the reasons that we're having difficulty pushing back.

Historically we could push back some of this raw material.

Because we've got very high shares in some of these markets, and if you want to sell your raw material into this market channel, we do have some power.

The problem is that along with the barrel of oil it is an availability issue because of high demand.

And this is has emboldened many suppliers to start giving us, quite frankly, 14 day lead times.

And we're getting materials for the most part, but we're paying the higher price.

And we're paying it with very little notice.

And that is driven by very tight and supply demand situations.

But you made the case, and I think it was a good point, that your suppliers are giving you two weeks, yet you're giving your customers two months to kind of get the price through.

Are you tightening that kind of -- that cycle?

Yes, we're tightening that cycle.

We're talking about this all the time.

I will say -- I don't know -- when you got a contract with a major OE and you have their business, do you violate the contract to put a price increase in before November 1, or do you wait?

And so in many cases we have elected to honor these contracts and do it for the long-term perspective.

And I am anxious to see -- we probably -- maybe we have not pushed through the raw materials as aggressively as some of our peers.

And if that has been the case then I think we're learning from this.

But I don't think -- and I want to restate, that that these raw material increases will be a factor long-term in our margins.

You're probably right about that.

And just to clarify, you said that -- I was getting confused about the impact.

Year-to-date raw material costs -- increased costs -- have penalized results by 33 cents per share.

Is that overall?

Is that correct?

That's correct.

(OPERATOR INSTRUCTIONS).

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Operator, are there any more questions?

Yes, please standby.

Trey Ogolepski (ph).

I think I threw a wrench into the works by entering a question.

I apologize if this has already been hit, but again a little follow-up on some of the price increases and kind of the nature of them.

If you believe what the stock market is telling you, steel prices are going to turn around and go right back down to I guess 200 bucks a ton or something.

What is your ability to hang onto those price increases you are passing through in those circumstances?

It is all over the map.

Obviously in some cases we have a lot -- major OEs are following this just as closely as anybody.

And there's a lot more discussion of steel surcharges at the moment, because they think they are going to come back down.

And so we've got cases -- I don't want to generalize too much -- where we can embed this in the base price.

And we've got other examples with our larger customers where there are surcharges that fluctuate with the latest information.

So I can't give you a weighted average effect right, now but it is all over the place.

Yes, historically we do better when raw -- during raw material deflation.

Okay.

Basically in terms of talking about the lag you're seeing in getting the price increases, you would expect at least the same contracts to be honored when material prices were going back down.

Is that a fair assumption?

Yes.

Each contract has its own ingredients, but yes, that is a reasonable assumption.

I also wanted to talk about what you described as a very tight supply demand market again along this same lines.

Are you seeing any alleviation of that?

Are you having more access, and are you seeing a softening in prices?

You mentioned I guess a price about two weeks go, you're not sure if it is going to stick?

Obviously I was talking about steel.

Steel has really penalized our Tire & Wheel business.

Our Wheel business is steel.

And it has just been multiple increases.

And we had an increase announced maybe three weeks now.

But I will say that there's a lot of people predicting it is going to soften.

And I can't predict it.

I've been trying to predict this all year, and I can't.

Normally, historically with each successive price increase on these commodities, less and less of the price increase sticks.

That has been the historic way it works.

First increase, second, third and less and less stick.

A lot of this has been sticking because of the supply demand.

There has been a lot of availability issues.

Well, I can't predict.

We've got baked into our guidance what we know about the fourth quarter.

You'll have to turn to somebody else to predict what steel is going to do.

I am more wondering -- you mentioned the availability issues.

Have you seen any alleviation in there that could be kind of a leading indicator?

No, we still looking at -- we're looking at strong demand in some of our key businesses, and there's still some availability issues.

And as far as I know that has not changed in the last 30 days.

Brendan Hartmann.

Carol, can you just clarify on the working capital?

So in terms of the timing issue am I correct in hearing you that we shouldn't expect a significant improvement in those metrics until the beginning of -- the first quarter of '05?

Yes, that's accurate.

And then, Rick, a question on just if you could give us more color on this revenue growth.

You guys really are generating 20 percent type revenue growth in these two core businesses.

What I want to understand is how much of that is market share gains and you ramping up capacity with these new plants, and how much is it just -- how much is the market itself going, because clearly the market is not growing 20 percent?

There are several ingredients here.

We've got some market share growth.

We've got the base market growing and improving.

We've got some price increases that you need to factor in there, and we've got new products in that channel.

But that is exactly what I'm trying to get the break down of, those different elements.

I could tell you that less than half of this organic growth rate is the market.

I mean -- I don't know -- it is 30, 40 -- it is less than half of the growth.

And then there's new products, there is some price increases and some share gain; the share gains being the smallest factor.

Does that help in giving you some (inaudible)?

Yes, but when you say share gains, how do you measure it?

When you open a new roofing plant that is clearly that is incremental share, correct?

Not -- this could be -- yes, there is some new share there.

What we're trying to do is offer a better value proposition, shorter lead times, lower costs to customers in a certain region.

And we do that with insulation by having a factory in that region.

There might have been some cases before where we've bought and resold some insulation from another supplier.

So the color is less than half is the market growth.

And there are new products, selling prices and some -- and the smallest factor is share gain.

Our Tire & Wheel business is getting more share gain, but the roofing business quite frankly is not a share gain scenario.

Our roofing business is new products.

We have been growing our offering in the reroofing business.

It is very much a new product kind of scenario, and some market improvement.

There are no further questions at this time.

We would like to thank everybody for participating in the call.

And we look forward to talking to you in February for our fourth quarter call.

That concludes this conference call.

This concludes today's call.

Please disconnect your lines and have a wonderful day.