Carlisle Companies Inc (CSL) 2005 Q2 法說會逐字稿

Good morning, everyone and welcome to the Second Quarter Earnings Conference Call for July 19, 2005.

Your host for today will be Richmond McKinnish, President and Chief Executive Officer.

Mr. McKinnish, please go ahead, sir.

Good morning, everyone and welcome to Carlisle second quarter call.

With me is Carol Lowe, our Chief Financial Officer.

Hopefully you have already seen our press release that contains a lot of information.

You can also follow and get information about the second quarter on our website, which is carlisle.com.

We recommend to everybody to try to follow along on the website.

With that, I will turn it over to Carol, who will briefly summarize the numbers.

Thank you, Rick.

As we review the second quarter and year to date results this morning, I will try to refer just to results from continuing operations, unless I specifically note they include discontinued operations.

I am also going to try to keep my comments limited to significant items so we can quickly move to the operations discussion with Rick followed by the Q&A.

Our second quarter sales and earnings were up 9% year-over-year on organic growth of approximately 45 million, representing 81% of total growth.

Second quarter '05 earnings of $1.41 compared with $1.30 per diluted share for 2004.

As noted in our release, the '05 earnings reflect an ongoing labor dispute at Johnson Truck Bodies, which produce quarterly net income year-over-year by $0.08 per diluted share.

This labor dispute has reduced year-to-date income by $0.10 per diluted share.

The work stoppage began in April '05 and was disclosed in the first quarter 10-Q.

Rick will provide some additional color on this here in his remarks.

We benefited in the quarter from a resolution of certain legal actions, which contributed $0.08 per diluted share.

We have signed a confidentiality agreement related to the resolution of these actions and will not be able to have any further discussions on the matter.

I want to note that the increase in our corporate expenses for the second quarter and year to date 2005, reflect unfavorable currency fluctuations associated with subsidiary debt denominated in foreign currency.

Increased loss from the sale of receivables under the securitization program required to support our ongoing organic growth needs, and the increased Sarbanes and audit fees.

These professional fees will be lower in '05 than they were in '04; however, the compliance expense was heavily loaded in the last half of 2004 while the expense is more evenly reflected across all of 2005. 2004 expenses were also lower on adjustments for legal and insurance reserves based on favorable actual experience.

Our loss from Discop (ph) includes additional pre-tax impairment for the automotive business of 13 million.

We have seen a continued deterioration in the state of the US auto industry, and based on this management thought it was prudent to reevaluate the business at the end of the quarter.

The impairment represents our assessment of the fair value of this business at this time.

We continue to put a lot of effort into the sale of the business and remain committed to its disposition.

Our year to date operating cash flows from continuing operations of 20 million as compared to 54 million for the first 6 months of '04. 2004 includes 38 million contributed from the company securitization program.

There was no contribution of operating cash flow from this program in the first half of 2005, as utilization of the program was 120 million at the end of 2004 -- December 31, 2004 and at the end of June 30, 2005.

Demand for the construction material segment required continued investment in inventory to meet customer service expectations.

We're very comfortable with the current inventory levels for construction materials.

They represent less than 2 months of current demand.

Following an unexpected soft lawn and garden season, production will be adjusted in the second half of the year for certain operations in Industrial Components segment to reduce inventory levels.

I would like to note that Carlisle Tire & Wheel contributed 36 million of free cash flow for the quarter.

We're very pleased with their contribution to cash flow.

Our total company DSOs are 49 days for '05 as compared with 51 days in '04.

Overall, we're very comfortable with the current working capital level while -- but it will come down as we progress throughout the rest of the year.

During the quarter, we repurchased approximately 200,000 shares under our board approved repurchase program, for which we still have authority to repurchase approximately 800,000 shares.

With that, I will turn it back over to Rick for discussion on the operations.

Thanks Carol.

I will start with the Industrial Component segment.

That consists of our Tire & Wheel business and Industrial Belt business.

The most important market for both these businesses is lawn and garden.

It's well documented already that the lawn and garden market was soft in the quarter.

Several large participants in this market have discussed a cool, wet spring driving lower demand.

In spite of this market softness, we grew about 3% organically in this segment.

Long term, the lawn and garden market feeds off household formation, growth in housing, and an aging population.

These are all positives.

The second quarter was driven by inventory issues, some weather issues, and some uncertainty related to change in ownership at a major OE.

We remain very positive about the lawn and garden business.

What was really disappointing to us was the earnings.

We had several significant actions, which reduced our earnings in the quarter.

The first was a layoff at our Pennsylvania tire plant, where we recognized the soft demand in lawn and garden.

We have built inventories in anticipation of better demand.

So we decided to cut back and reduce our schedule.

We reduced our schedule in Pennsylvania from 7 days to 5 days and had a layoff.

On the belt side, the plant closure costs associated with the previously announced shutdown of a high-cost belt plant in Minnesota is occurring in the quarter.

We also have startup costs at our 2 other belt plants in Kansas and China related to this plant shutdown.

This plant was an Pirelli (ph) belt plant that Dayco bought from Pirelli.

And it's a sizable operation.

And really this shutdown is occurring over all the quarters this year.

These actions contributed to a 5.6 million negative overhead variance to the prior year.

The next segment is Construction Materials.

This is primarily SynTec, our commercial roofing business.

And they continue to execute their long-term plan very well.

What's striking to me about their results is their ability to post these improvements with continuous plant start-ups under way.

Congratulations to John Altmeyer and his entire team.

The income that was recognized from Icopal is in the press release.

I would simply add that the comparisons on this joint venture in Europe should be more favorable going forward.

We have got a lot of plant startup activity underway at SynTec.

I would like to give you an update on a couple of things.

We announced earlier that we were starting an ISO plant or insulation plant in Texas.

This just started up in July.

Inventory is being built for an August market launch.

We are excited about that.

In addition to that, we talked before about a new TPO plant in the West, in Utah.

This will provide white membranes for the Western market.

It's on schedule for a third quarter startup.

We are excited about this new capability to improve our value to our Western customers.

The next segment is Transportation Products.

The largest player, the majority of this segment is Trail King, which manufacturers specialty trailers.

Their largest market is heavy-duty construction trailers.

And this management team has gotten some leverage of an improving market.

Congratulations to Jerry Thomsen, the General Manager and his team.

The next segment is Specialty Products.

That's our 2 break-in companies.

They had a very disappointing quarter.

It was driven by Altec, which our shoe rebuilding operation.

They were the largest factor in the deterioration of EBIT in the quarter.

The earnings were up for the year.

The disappointment is the second quarter.

We put new management in place in Altec in the second quarter and we anticipate improvements going forward.

The next segment is General Industry.

The story here, as Carol has mentioned, is a strike at Johnson Truck Bodies.

The strike began in the first week of the quarter, and it drove a year-over-year reduction in earnings at Johnson Truck Bodies of $3.8 billion change, pre-tax.

You don't hear very often about labor issues from Carlisle, so I think I want to give you a quick summary.

Over 92% of our revenue comes from operations without a collective bargaining agreement.

In other words, 92% of our revenue comes from union free operations.

Johnson Truck Bodies participates in a specialty truck body business, refrigerated truck bodies.

Over the last several years, profits have been declining at Johnson Truck Bodies.

The major factor is rapid increases in their healthcare costs.

Last year, in an effort to better manage our healthcare costs across all of Carlisle, we developed a national medical plan for all our employees.

Enabling our smaller companies to access larger, more efficient insurance goals.

We are very pleased with that and we're satisfied that we are in a position to better manage medical across all of Carlisle in the years ahead.

With that said, Johnson Truck employees are going to be in this plan.

We are very comfortable with our current situation at Johnson Truck.

It's being well managed by the management team.

The biggest impact is in the second quarter.

And these impacts will minimize over time.

I would suggest to you that too many companies settle labor disputes focusing on short-term results.

We are not going to do that and remain determined to fix this cost problem for the long-term.

Other items in General Industry, our food service business continues to grow.

It grew organically 10% in the quarter, but it had a flat earnings comparison and that was driven by some special action, they initiated and completed the shutdown of a plant in California.

Moving these operations to their other two plants.

On the acquisition front, we announced late yesterday the signing of a definitive agreement to purchase 100% of Kete for $36 million.

Kete is a manufacturer of heavy friction and shoes for Class 8 trucks and trailers.

They're located in China.

We will start with the question, why did we buy it?

This is a market we understand.

We have been participating in this market since 1948 with our Motion Control Company.

Motion Control is historically one of Carlisle's better businesses. 70% of the available market is replacement or after market.

This acquisition brings some new technology.

It brings significantly lower costs and opens up some related markets to us.

Kete has modern equipment and is well managed.

We feel strongly that this was the missing ingredient for Motion Control and will ignite profitable growth.

In addition, our overall acquisition opportunity or pipeline continues to improve, but the mission remains the same, we are going to acquire where we have leadership.

I would like to make a comment -- a couple of comments about guidance.

When we initiate guidance at $4.10 to $4.25, we included and recognized the cost of 3 plant closures.

Two are a bit behind us, and the largest one, the belt plant, in Industrial Components segment will continue the balance of the year.

The only changes are a soft lawn and garden market that we've talked about, and the strike at Johnson Truck Bodies.

With that said, we remain comfortable with our guidance of $4.10 to $4.25.

Now, we're disappointed with 9% earnings growth.

That doesn't fit our template.

But we have placed a lot more emphasis on the long-term trends.

Our second quarter this year is 60% better than our second quarter of '03.

That's the improvement in a two-year period.

That concludes our presentation.

I would like to turn it back to our operator, Michele, for some Q&A.

Thank you.

We will now begin the question and answer session.

[Operator Instructions].

Please go ahead if you have any questions.

Thank you.

Our first question comes from Deane Dray.

Please go ahead.

Thank you.

Good morning, Rick and Carol.

Good morning, Deane.

For Industrial Components, when we look at the margin hit there, you gave the issues being related to the plant closure in Minnesota and the startup operations.

Could you give us a sense of what the contribution of each of those is?

How much is the plant closure costing you?

I'll tell you Deane I put out a total number of 5.6 million, and that includes all three of those items.

That was the delta.

And so, really, I didn't bring with me the detail there.

How much of that is mixed, do you think then?

I'm just trying to get a sense of where the business is going, and has the lawn and garden business even after the wet spring picked up more recently?

Well, I will tell you that a very small part of that was mix.

The lawn and garden market, as you know, I think the basis for your question, is a very good market for us.

And normally when the lawn and garden business shrinks, our product mix worsens margin.

But I will tell you in this care we're still analyzing the numbers, but the growth in ATV, quite frankly, offset.

So, really, the mix was a very small percentage of the deterioration.

The deterioration -- the primary drivers were the layoff and the change in schedule at the tire plants and, of course, the plant shutdowns we've talked about at the belt plants.

Okay.

And then, on the labor dispute, worst case for third quarter if it doesn't get resolved we would see another $0.08 hit, is that the way we should think about it?

No, it is going to diminish; probably wasn't that clear about it.

The $0.08 should be the maximum.

It is going to diminish.

But, we have put in our guidance a long-term view that we are going to -- quite frankly, we're not in a hurry to settle this.

This is a nice specialty company that we need to fix it.

And so, in my guidance there is no resolution of this, this year.

Okay.

So that's in your number?

That is in the number.

And then, it looks like you've changed how you're calculating organic growth looks like.

Well, previously you were including FX.

So the organic growth number you're providing that excludes FX?

Yes.

We thought it would be more clear to break that out separately and not allow it to be mixed in with the organic growth.

Good.

And what was it last quarter -- first quarter, excluding FX?

Let me...

It was 15%, was what he reported.

Right.

I think we also talked about the amount of the FX.

Didn't we have that in the quarter?

I don't have it in front of me, Carol.

It was 2.3 million ...

Okay.

...related to foreign exchange rates for the first quarter.

So if we could do that...

That was included in the organic growth number that we gave of 79.1 million.

Okay.

And then the last question is since you've added some capacity in the insulation business, if we were trying to do a same-store sales of this quarter organic growth versus last year, so I would want to separate out the new production on insulation, what would that organic growth rate number look like then?

Deane, that's a good question.

I mean we're growing -- same-store sales are growing.

Okay?

The only exception, we had some softness in our Chicago insulation operation.

But, the other operations have all grown, same-store sales have grown, and of course, we have the new capability that has come on in Florida that has been running for us this quarter and that explains a lot of the growth.

But I've not netted out the slight softening in Chicago with the growth in the other mature plants.

But they're all growing except Chicago.

Yes.

That probably wasn't clear.

When you say organic revenue growth for Carlisle as a whole is 6%, if I want to strip out the incremental sales from insulation this quarter, is that 2 percentage points of that?

Deane, you said 6%.

Are you talking about construction materials?

No, overall Carlisle.

And you said what percentage organic growth?

6%.

I don't -- I mean, again, with the insulation, some of that is replacing what we were doing and about to resale with our own production.

I mean we don't have that in front of us in terms of what the exact same store comparison is.

Okay, we can do that offline.

Thank you.

Thanks Deane.

Thank you.

Your next question comes from Wendy Caplan.

Please go ahead.

Good morning.

My first question is about -- on highway business.

I would have thought that that would have been extremely strong given what the truck market is doing.

Can you explain the discrepancy?

Well, there's a couple of issues here.

And of course, we just purchased some additional capability in China.

Number one, our OE business, Wendy, was up 39% in the quarter.

I'm talking on-highway Class 8 truck.

And that's to your point that business has grown, but because of our limited capability, that created a terrible mix problem for us for which the margins in the aftermarket are substantially higher than the OE.

So our OE business grew 39%, which shrank our aftermarket business, so we had a mix problem.

And there also was a large factor there, which I mentioned earlier, there were some operating problems at Altec, which is our shoe rebuilding operation.

We take shoes from the fleets, rebuild them, and return them with our friction on them, and that's a growing business.

We had some operating issues and we changed management, and that was a negative in the quarter.

Okay.

Again, on the backlog, you stated in your press release that it was down 7% sequentially.

I would have assumed that since -- well, I'm assuming that Johnson truck bodies is in that backlog.

Given the strike that the backlog would have been a little more favorable on a sequential basis, can you explain why not?

Well, the biggest things for backlog -- remember Wendy, our backlog -- the roofing business, our business is so heavy replacement, which operates without a backlog, but the biggest single driver in there is our cheese and process equipment business.

They tend to dominate our backlog because they have long cycle times.

They will take in order and it might last for 18 months.

So, we've had a large project, some $70 million, in New Mexico that's nearing completion, and that's the biggest single change in our backlog.

I don't know; if you'll go back and look, we've been reporting a lower backlog for the last several quarters, and obviously, our revenue is growing.

So SynTec operates without a backlog.

But the biggest single reason for your question is a major cheese project that's going off the books.

But, are there truck bodies in the backlog as well?

We don't know.

And there's less because we were unable to supply all of those.

Our output at the truck body business is half right now.

We are producing product at half the rate, and so the backlog -- our customers are reflecting that.

Okay.

And finally, the Kete acquisition that you announced yesterday, can you give us some details as to the size and impact on earnings for that business?

I mean, normally with acquisitions, Wendy, we disclosed it's a $36 million purchase price acquisition.

I'm excited about it.

I gave you 4, 5 strategic reasons on why we bought it.

But I would simply say that it's going to be nicely accretive in '06.

I mean it's going to be more accretive than you think by the size.

This is what I mean by nicely

So, did you -- can you give us some indication as to what you paid for it?

Should we assume its roughly onetime sales and therefore --?

I've disclosed in that release.

It was 36 million purchase price.

Right.

But how much was at the revenue base at Kete?

I normally don't -- I'm going to only disclose the purchase price.

Other terms we don't disclose.

Okay.

Thank you.

Thank you.

Thank you.

Your next question comes from Peter Lisnic.

Please go ahead.

Good morning.

Rick question on industrial components, when you have these, what I'll call temporary issues, when you look at the earnings potential of the business, what do you see in terms of maybe looking out in '06?

What kind of EBIT or operating margin you can you get to with these initiatives that you are taking?

Well, I mean there have been a lot of different issues here.

First, as we've said, we're disappointed.

I mean this performance is unacceptable.

Okay?

So you can well imagine, there's a lot of analysis and actions being taken.

Some of it we can explain.

The belt business, we've been clear for the last few quarters that we are undertaking, quite frankly, an enormous project to dramatically improve our belt business.

And we think '06 will be a breakout year for the belt business.

On the tire business side, they've grown in spite of a soft lawn and garden business.

We've had some issues where inventory was out of line with the demand at lawn and garden that we talked about.

But this business is going to be historically a double-digit EBIT business.

I think its -- check, it's a double-digit EBIT business now -- slightly under.

So, I would say that this business more than any other drove part of the large earnings increase between '03 and '04.

So it was a tough comparison for the industrial component segment.

They had record results last year, and with the special actions and a soft lawn and market, it's a negative comparison.

But we've talked about lawn and garden, why we feel good about that market long-term based on household formation and housing.

So we're going to take the steps and take a hard look as we analyze the quarter on what other actions we can take going forward.

But this is still a very investable business.

But it sounds like you've got at least a couple of quarters of initiatives that are really going to maybe hide the earnings power of that segment.

I had remarked that the shutdown of this large belt plant, the old Pirelli belt operation is going to continue the balance of the year.

And so you're right, that's a major factor and it's in our guidance.

Okay.

And then, just to continue with belts, the international belt business was down, according to the press release.

Any insight as to why or what's going on there?

I will say, Peter, one thing, we're putting more and more information in these releases.

Remember, when you are shutting down a plant of this size and you are moving the capability, the other locations including Asia.

There are a lot of issues ongoing.

And quite frankly, the international business, that's a fact that is in the release, but I would relay that more on just having product.

When you do a move of this size, long-term we are excited about the cost savings, but short-term there is a bunch of this location on products numbers.

And so don't read anything long-term into that.

Okay.

Okay.

Okay.

Fair enough.

And then some more color commentary on construction, if you would.

You had mentioned in the first quarter that you may have seen some put forward demand with some of the price increases that you had put through.

Can you may be give us a breakout of what volume look like, what pricing look like and just how that impacted profitability in the construction materials segment in the second quarter?

Well, I mean, I think it's a good question Peter.

Let me say, on a consolidated basis, we have fully recovered the raw material increases.

That's true in our tire business.

That's true in our roofing business.

It is true across the board.

Now, we've got some areas like the tire business, where we have not fully recovered some freight, utilities and things like that.

But specifically, on your question of construction materials, yes, they have gotten price increases to offset the raw material.

And I don't think we have in front of us -- may be Carol does.

It is probably for the quarter.

Pete, it is about an even split between price and volume.

Okay.

And again the price increases cover the raw materials increases.

It is not an amount beyond that.

So, it's about an even split between volume and price for the quarter.

Okay.

And then one last question, if I can.

You took a relatively sizable write-down in the automotive business.

Does that reflect or should be read into the fact it may be it's a little more difficult to sell than you originally had anticipated?

I know you're still looking to sell it within the year, but can you kind of give us a read on what buyers are thinking or what the buyer market looks like for that business?

Yes.

Well, I mean good question.

I mean, the process continues -- the formal process.

We're fairly -- we're moving along.

And we anticipate getting something done.

But the overall environment for this property has deteriorated somewhat.

And so we take a look -- we take a look every quarter at what we think is fair market value.

And decide to take that write-off.

But we still are on track, on schedule, and determined to get this project accomplished this year.

Okay.

That is all I had.

Thank you very much.

Thank you.

Thank you.

Your next question comes in from Godfrey Birckhead.

Please go ahead.

Yes.

Good morning.

Can we go into the breakdown on your topline between price in unit sales, please?

Godfrey, I guess we typically don't give out a lot of information on that.

We in total for the quarter for all the Carlisle, it was predominantly price increases to cover raw material costs.

Okay.

It varies segment-by-segment.

But again other than what we just provided on construction materials, we wouldn't go through segment-by-segment and provide that much detail.

But overall most of it was price, is that what you just said?

Yes, for the quarter most of it was price.

Again to cover and just keep...

I understand.

... material cost.

I understand.

And you have achieved, and as you said in the answer to last question you have pretty much achieved the price increases that you hope to obtain?

Yes.

In other words that's correct Godfrey.

Our issues on earnings in a couple of segments do not relate to raw material increases.

Okay.

So that -- okay.

You shared with us in the past what's your capacity utilization was.

Can you tell us what that was in the quarter, please?

Godfrey, for the quarter, second quarter '05, for the total Company is 79% versus 77%.

Second quarter '04 year-to-date the utilization for '05 is 80%.

That compares to 76% ...

Okay.

...year-to-date '04.

Okay.

And you have talked about the unabsorbed overhead.

Where does that stand now?

The unabsorbed overhead is negative for the year-over-year comparison by approximately 19 million.

So 19 more that was last year?

Yes.

Why is that?

Well, Godfrey that's -- we are shutting down plants.

You know, we talked about 3 plant closures.

A lot of issues, a work stoppage were you don't produce but you got expenses.

And all those reasons we talked about.

Okay.

Next question other income -- can we take that apart?

We had $4.3 million against 2.5 million last year is that Icopal?

Icopal is included in that for that quarter is about 600,000 as we indicated for '05.

Also included Godfrey is the $3.6 million gain from the legal proceedings.

We also have certain insurance gains related to a small fire.

That was about 1.4 million.

1.4 insurance else?

We also had a gain on the sale of property.

And it was just indicated in the earnings release of approximately 1.1 million for construction materials.

Okay.

And then loss of sales receivable is about $1 million.

That's a securitization program.

And that was a loss?

Yes.

And how much was that again?

It almost 1 million.

Okay, $1 million.

Okay.

So, if I add that all up and take the $1 million out, I'll get the 4.3 hopefully, right?

You should be pretty close.

Yes.

Okay.

Thanks Godfrey.

Can I just ask, capital expenditures, depreciation and amortization and tax rate?

And then I'll shut up.

The tax rate is 32 on a quarter percent.

It is expected to remain at that for the year.

Okay.

The depreciation will be fairly consistent with last year.

It should run consistent with the quarter.

It will be up a little bit because of the CapEx.

But you should be able to analyze the second quarter numbers.

Okay.

Second quarter by four?

Right.

And then the D&A?

That is the depreciation and amortization.

Okay.

Thank you very much.

Thank you.

Thank you.

Your next question comes in from Saul Ludwig.

Please go ahead.

Hi.

Good morning everyone.

Good morning Saul.

Just back on this the 5.6 million hit in the industrial sector, you said it was a combination of the lawn and garden weakness and also the moving of the belt plant and the started-ups of the other 2 plants.

Could you kind of try to break that down for us?

And then relative to the component that relates to the belt plant, you say you're going to have more of that in the second half of the year.

How much might that be?

And then what's the savings coming out the other side?

So, okay, well, I mean, as you know Saul, when we are laying off people and reducing the -- I just try to capture that whole total, it's 5.6 million swing.

You guys got to have that nailed down between the different divisions?

Well we got it.

I don't think that's kind detail we want to get into right now on the call.

Really the 5.6 million is the change.

Those key factors contribute of 5.6 million negative shifts in overhead.

There are other factors in there.

There is some -- a couple of freight issues, and the couple of claims on healthcare but predominately it's those factors.

And it was 5.6 million.

And we're doing a lot of analysis now, but I don't want to talk about right now. 5.6 million Saul is the number, is the change for that segment.

What are you baking into that -- those impacts, both again going forward you going to have the reduced production schedules in lawn and garden to reduce inventories.

And you going to have -- is that the belt plant actually closed or is it going to take more time to actually get it closed?

It is going to take us, at least through the third quarter.

I think quite frankly even getting close - that's why I am saying it is going to play out the balance of the year.

It's in our guidance.

Saul.

Right.

So what the -- what do you save by closing this belt plant and moving that production to other plants after you get it all running the way you think it should be running?

Is this going to save you 5, $10 million next year?

No.

We think long-term and we get it finished, it's 3 to $6 million saving.

Okay.

Yes.

Okay.

And Johnson Truck Bodies, is that plant running or they shutdown?

What's the nature of this labor dispute and what's the resolution?

Is it just getting them to agree to the new healthcare plan or talk a little more about that issue?

Well, I mean the plants running is up and running.

We have about 17 people crossed the picket line.

We've hired 17 employees cross the picket line.

We've hired some replacement workers.

We're currently producing 4 truck bodies, and we need to produce 8.

So we're ramping up to do that.

Now the issue is healthcare.

The healthcare costs at Johnson truck bodies are enormous then they make us uncompetitive.

And we're going to change that.

We're asking employees that Johnson truck body to take the same healthcare program that I have.

And all the employees are roofing have, and tire business have.

So we feel pretty strongly about this.

And like any labor dispute it's always you know, you get involved in all kinds of situations.

This is a beauty of our diversified structure.

This is a beauty of us being 92% non-union.

We think that stacks up very well with most industrial companies.

And so we're in a position -- and we are mentioning the medical cost, but there are some other issues.

We are in a position, we believe, thinking long-term, to fix the model at Johnson Truck Bodies and make it a nice specialty niche company and return it to the kind of returns that we expected when we bought it.

And so that's what is all about.

Basically the strike is on.

You're trying to negotiate.

There is no new contract.

And you are working sort of hand to mouth with the temporary and with the guys across the picket line.

But the strike goes on with the end date uncertain.

That's correct.

So what I'm saying to you is we're going -- it's going on until so we get the resolution we want.

And it's in our guidance now.

I mean, we're not expecting resolution this year.

So you got these problems baked in all the rest of the year?

Yes.

Then why did you say, it cost you $0.02 in the first quarter, you said it cost you $0.08 quarter.

Strike didn't start until April, why did it cost you $0.02 in the first quarter?

This is the slowdown fall and the work force, because they were coming up on this issue.

Okay.

We have certain costs associated with getting ready for the labor negotiation.

Okay.

And then just finally, are you going to have any startup costs with the 2 roofing plants in this third quarter that will be noticeable and identifiable?

Will things maybe manage without any great identifiable costs?

Well that's a good point.

So that's why I try to make the point on the call that I am impressed with how they've been starting up plants.

Remember we've been steadily starting up plants.

They've started up 2cuttings in waterproofing plants.

They started up a couple insulation plants.

You've not seen any interruption or disturbance in that numbers.

And quite frankly they're getting better and better at it.

So, we anticipate good start-ups.

Obviously the TPO start up in the third quarter is larger.

But we have done 2 TPO start-ups in the last 5 years.

So there is high level of confidence.

And we hit some things in our guidance.

Sure.

But all I can say to you is that they're doing a good job on it and it's baked into our guidance.

Great.

Thank you very much.

Thank you.

Thank you.

Your next question comes from Richard Glassmore.

Please go ahead.

That is Richard Glass but -- from Morgan Stanley anyway.

If I can just a go back over, just want to make I understand.

Your guidance includes the cost of closing 3 plants over the course of the year, is that right?

That's correct.

And there's no resolution of the strike in those numbers either?

That's correct.

Okay.

Someone ever tell you, you guys might be too conservative.

And then have you broken out what the cost of closing those 3 plants are?

I m not sure about the inclusive in that 5.6 million number you're talking about or greater than that?

I don't quite understand that?

The 5.6 million was the impact in the second quarter.

I really don't want go beyond that.

Richard, as you know, these plant closures and moving to fairly fluid situations.

Lot of issues, the people leave early, what happens etcetera, etcetera.

And so we preferred to quantify more accurately after the quarter is over.

So all I can tell you is that was -- the items I talked about on the call were about 5.6 million in Industrial Components in the second quarter.

And I can tell you that we've done a pretty good job of estimating.

It's baked in our guidance to balance of the year.

I don't want to talk about what that may be in the third or fourth quarter.

But Rich we will -- within our 10-Q, when we talk about exit and disposal activities for significant items, we will disclose the amount that are known at that time.

So we....

...

Second quarter.

Yes.

It will be in the second quarter 10-Q that we will file in early August.

We will work on those estimates.

Fair enough.

We would get a better understanding, is what you're saying?

Yes.

And then in terms of raw materials, it seems with the steel price and some of that stuff coming back, which has hurt you, what is baked in your guidance on that end of things?

I mean does that start being a better comparison or is there nothing baked in on that end?

No, I mean right now -- and I think you have categorized it.

We see a calming down of raw materials.

We have been through some crazy times.

But the balance of the year looks fairly calm on the raw materials side.

So, our best guess is baked in our guidance.

Okay.

So, when do we get the easier comparisons in terms of year-over-year for something like steel?

So, I mean, we've already seen some benefit from the steel in terms of the change.

Steel in the second quarter only represented it about 15% of the raw material costs versus 24% overall.

Where we still have some pressure as relative to rubber and chemical.

So, we're -- because we are diversified, we have a lot of pressures from different types of raw materials.

So, some of the steel impact favorably is already showing up in the numbers.

That has been offset by some of the pressure from chemicals.

We have also seen increased freight costs as well because of the price of oil and gas.

Okay.

And in terms of your acquisition is that -- should we look at that as sort of a standalone or is there any benefit to be gained from either moving any manufacturing over there that you might do in another location?

Or are you saying it's very accretive, just on this basis?

Well, first of all maybe I -- this is so far from a standalone, I mean we've been in the heavy friction business since 1948.

This is a competitor to Motion Control.

They are located in China.

And so basically this business is being absorbed into -- day one our Motion Control operation, and we believe this is a significant event.

We needed the technology and a lower cost from Asia to go with the strength that Motion Control has in a leadership position in this heavy friction business.

So, I am just very comfortable saying that it is a $36 million acquisition.

That's what we paid for it.

And it's going to be nicely accretive or more accretive than you think by the size of the acquisition.

And that's really -- we don't divulge the terms for these, but it's not a standalone by any stretch.

It is a dead fit.

We are buying a competitor and folding it in for our Motion Control Company.

Okay.

I guess it was not clear, then is the accretion that you are talking about achievable just as a standalone operation, but it sounds like that taking advantage then a lower cost manufacturing in technology?

Okay.

I agree -- question.

Yes, it would be accretive as a standalone, but it's not going to be a standalone.

I got it.

Okay.

And finally, what else are we saying in terms of -- we still working on other acquisitions and divestitures?

Yes, absolutely, I mean, I try to add some color to that that the -- we think our acquisition opportunities, our pipeline, is really -- we are bullish on that as we've been in sometime, and we think that we will look back on '05 -- sometime in '06 as a very productive year for acquisitions and divestitures.

So, the work is ongoing.

Our strategy that we articulated being more focused and focusing on certain companies.

We continue to go down that path.

And I realize there is some frustration on the timing on all of this, but I like to tell you, is that we're continuing down the path and we expect progress.

All right.

Thank you.

Thank you.

[Operator Instructions].

Thank you.

There are no questions at this time.

Well, thanks everybody for joining our conference call.

And we look forward to talking to you again at the end of the third quarter.

Thank you.

Thank you very much.

This thus concludes this conference call.

Please disconnect your lines and have a wonderful day.