Carlisle Companies Inc (CSL) 2006 Q3 法說會逐字稿

Welcome to today's teleconference. [OPERATOR INSTRUCTIONS].

Later there will be an opportunity to ask questions during our Q&A session.

I will now turn the program over to Mr. Richmond McKinnish.

Mr. McKinnish, you may begin.

Thank you.

Welcome to Carlisle's third quarter earnings call.

With me is Carol Lowe, our Chief Financial Officer.

We're going to provide a very brief summary of the third quarter, quite frankly not much has changed from our prior calls.

We're going to provide some color on '07 and after that, we'll turn it back to Kevin for some Q&A.

So with that, I'll turn it over to Carol.

Thank you, Rick.

As reported in our earnings release, our organic sales growth rate was a strong 16.3%, EBIT increased 31%, our EBIT margin improved 100 basis points and income from continuing operations increased 21%.

We want to point out that the 2005 third quarter results included a one-time tax benefit of $3 million, or $0.10 per diluted share.

There is no similar tax benefit in the 2006 reported numbers.

You should take this into account when evaluating the year-over-year performance improvement.

Rick will highlight for you some additional color on the strength of our end markets, especially commercial construction.

Right now, I would like to focus my comments on the change in segmentation, highlight a few balance sheet items, and hopefully clarify the operating cash flow numbers so you can gain an understanding of the year-over-year comparison for the nine months ended September 30.

As I'm sure you have noted from our release, we have returned to the five financial reporting segments.

This segmentation is the same as the segmentation prior to the management reorganization in November 2005.

Carlisle is still managing its businesses under the three operating groups of Construction Materials, Industrial Components, and Diversified Components.

The segment presentation is utilized for external financial reporting purposes only, and represents expanded disclosure requested by the SEC.

As often noted in our earnings release, we issued $150 million in ten-year senior unsecured notes maturing to replace the notes that are maturing in January 2007.

The proceeds from the August notes will ultimately be utilized to pay off the notes maturing in January '07.

The 6.125 note issued in August '06 will favorably impact interest expense versus the 7.25% notes that mature in early 2007.

For 2006, the negative arbitrage associated with the issue of the August notes is less than $0.01 per diluted share, because we use these proceeds to reduce short-term revolver borrowings and the use of the trade receivables securitization facility until the $150 million '07 notes mature in January.

The issuance of the note impacts the balance sheet and the cash flow statement.

First, I'm sure you noticed the $234 million increase in receivables.

Approximately $138 million of the increase is the result of utilizing these previously mentioned notes to reduce the receivables sold under our securitization facility.

The remaining increase in receivables is primarily due to the increased trade receivables for our construction materials group on significantly higher quarterly sales.

We have had no meaningful change in our DSOs, and our working capital as a percent of sales is approximately 16% compared to the same period last year when it was about 20% of full twelve months sales.

The increase in short-term debt from year end 2005 reflects the reclassification of the January '07 notes from long-term to current.

Long-term debt at September 30, '06, includes the new notes issued in August.

Including the utilization of the receivable securitization as a component of debt, our debt-to-capital of 34% at the end of September '06 compares very favorably to a debt-to-capital of 40% at the end of 2005 and a debt-to-capital of 42% at September 30, 2005.

While the utilization of the August note proceeds to reduce the sale of trade receivables under our securitization facility was prudent capital management because the securitization facility is one of our lowest costs of capital, it did result in $138 million reduction of operating cash flows.

If you want to compare the '06 operating cash flows with 2005, you would want to neutralize the impact of the securitization.

We want to also remind you as we disclosed in previous quarters, the 2005 operating cash flows included approximately $40 million related to the collection of trade receivables from the automotive business which we sold in 2005.

If you take the reduction of the securitization facility and the collection of the automotive receivables into account, operating cash flows for 2006 improved 34% over 2005.

Our industrial components group continued to be the largest contributor to Carlisle's operating cash flow.

And with that, I'll turn it back to Rick for his comments on the operating performance.

Thanks, Carol.

I'll start by fleshing out one of the numbers, Carol gave you a 19% growth number for the quarter.

There's three key elements in it.

The organic growth rate was 16.3%, the acquisitions -- we made couple of small acquisitions in the braking area last year, that was 2.2% on the growth rate and exchange rate was only 0.4% which rounds to a 19% overall growth rate.

Let me start with the largest business, construction materials segment.

That's primarily our commercial roofing business.

Our growth in sales for the quarter was 33%.

The growth consisted of 2.5% in price increases with the balance slightly over 30% growth in units.

This market continues to be very strong.

A key driver in the growth is the western regions of the U.S. and Canada.

Our growth rate in these western areas year-to-date -- this is a year-to-date number, now, is 76%, reflecting the new capabilities put in place over the last several years as we've talked about most of those assets are in Utah.

The margin decrease in the quarter had three key elements.

The first was unrecovered raw material increases.

That was $3.6 million, unrecovered raw material.

I just mentioned that we got price increases, but the volatility in the raw material environment just moved a little too quick for us and we ended up $3.6 million short on recovering raw material.

Our roofing business has had a small joint venture in China, quite frankly, too small to even talk about, we had decided to go a different direction in China.

To that end, we've written off the entire joint venture this year, but the impact in the third quarter was $700,000.

The other factor is a slightly unfavorable product mix.

Those elements are the reason the margins contracted in construction materials.

The next segment is industrial components.

That's our specialty tire and wheel business and our transmission belt business.

We're tired of talking about it, but the lawn and garden business remains soft, a soft lawn and garden offset growth in our other product lines.

The third quarter in this business always reflects OE shutdowns and changeovers.

It's really better to look at the year-to-date numbers.

Our outlook for business has improved going into '07 for several reasons.

First, we've had the best new business booked in some time, it's the strongest in several years and we have significantly lower inventories in the channel.

While the EBIT margins year-to-date in this business are 8.6, that's disappointing to us but reflecting on the raw material increases in the soft lawn and garden market, this business continues to show the strength of their business model compared to others in the same space.

Specialty products we're breaking out again.

It consists of our two braking companies.

One is off-highway braking, focused on heavy construction and mining and the other makes on-highway brakes, primarily for class A trucks.

This segment, like Industrial Components, has an OE content and these OE shutdowns and changeovers reduced margins in the third quarter.

We have not been happy with the performance in our own highway business, we've made management changes during the quarter.

This business has underachieved for several years and it's diluting the fine efforts of our off-highway braking business, which has double-digit margins and is performing very well.

We're excited about that business going forward.

The transportation segment, this consists of our specialty trailer business.

The exposure in this business is to the energy business, they're in both wind and oil businesses.

They're particularly strong with the specialty products, the wind turbines you're reading a lot about now.

That's a strong niche area for this business.

They're very strong in highway construction, infrastructure rebuild, when you think about our specialty trailer business, think about heavy construction.

Don't think about lighter construction, which you would associate with the home builder.

We're not really exposed to home building very much.

We're currently investing this this business, you can see the margins to broaden our capability, a great management team, we think we're one of the best companies in this space and the outlook going forward remains very healthy.

The last segment is general industry.

This consists of our food service business, which makes plastic permanent ware, Tensolite, our wire and cable company serving aerospace, and high speed interconnect markets and Johnson truck bodies that makes refrigerated truck bodies.

All three businesses contributed to the improvement in the quarter.

We're quite pleased with Tensolite's current performance.

We haven't talked about them in some time.

They've been a long-time supplier in commercial aircraft space.

As you know, this is a late cycle business, it's trending better, but looking forward, we're really excited about our content on the Boeing 787, it's significantly higher, about ten times our content on any other ship set in the past.

I'd like to switch gears and give you some comments on our outlook.

We will provide, as we normally do, specific earnings guidance for 2007.

We do that during our February '07 call.

We're optimistic about 2007 for several reasons.

First, our commercial roofing business serves a late cycle market.

All the professional forecasters, I think the Dodge report is a good example, they're all forecasting good robust growth through '07.

In addition, we have real momentum in the western regions as described earlier.

Our largest single product line in this business is now insulation.

According to the American Institute of Architects, buildings account for 48% of U.S. energy consumption.

There is clearly a renewed interest in energy efficiency and insulation is a very cost effective improvement.

We see this daily as the average thickness of insulation that's ordered from us, the average thickness of insulation continues to increase, enlarging our market.

We're optimistic about '07 because over 60% of our portfolio serves late cycle markets.

We're optimistic going into next year because the lawn and garden channel enters next year on a significantly better inventory position, providing opportunity for a much better comparisons.

And finally, the raw material cost environment that we've spent so much time talking about the last several years, the raw material cost environment is probably the most favorable that we've seen in over three years.

We'll have a lot more detail about that when we get to February, but this is the best raw material cost environment we've seen in some time.

We also have a number of acquisition opportunities, quite frankly, unless the fit is absolutely perfect, the pricing is not to our liking at the current time.

And that's one of the reasons that we've not been acquiring at the rate of many of our peers.

We don't think the pricing environment quite frankly today is the right value, although there are opportunities, basically exist when you're buying a competitor.

It has to be a pure bolt-on consolidation and and a very important market niche for us.

Those things still work, but the values aren't there unless it's an absolute bolt-on.

We'll still see a lot of opportunities going forward.

We think we'll be much better acquiring going forward.

For these reasons, and our confidence that we can continue to improve most of our businesses, we're focused on '07 and look forward to getting there.

And with that, I'll turn it back to our operator for Q&A.

[OPERATOR INSTRUCTIONS] Deane Dray, go ahead, please.

Good afternoon.

Hi, Rick and Carol.

First question, Carol, you took us through the cash reconciliation, that was very helpful because in this whole interest rate arbitrage, there were a lot of moving parts, will you still use the accounts receivable securitization going forward?

It will depend on how much is generated, the cash from operations.

But our expectation is when we have to pay off the maturing bonds in January of 2007, we will utilize the securitization facility.

Again, it is our lowest cost of capital.

The securitization typically runs us about 50 basis points less than our revolver.

So it affects operating cash flow, but if you neutralize it, you'll see the improvement.

At that point on operating cash flow, in your reconciliation, the adjustments to '05 and '06, you said operating cash flow was up 34%, but it still looks as though year-to-date your cash conversion is well below 1.

Closer to maybe 50%.

Is there a reason why you're not getting the same cash conversion so far year-to-date in '06 versus '05?

A lot of it is because of the demand on working capital that supports the increased growth for construction materials.

From a DSO standpoint, anybody in a commercial construction business has a higher DSO rate.

We run a little over 60 days for construction materials group versus Carlisle's overall average which is less than that.

It's slower, and as we've grown the construction materials business, when you compare '06 and '05, that's the drag you see on the conversion rate, plus we moving and expanding in the west as Rick has described has required the investment in inventory for the new TPO facility in Utah as well as the new insulation facilities that we have added.

We have to have the insulation to be ready to ship because of the robust demand within commercial construction, that's kind of a drag as well.

While you're on that topic, the amount of working capital that's being consumed on the insulation capacity, how much did that represent on the topline?

I asked this question in previous quarters.

We're trying to get a same-store sales view on organic growth.

You're reporting 16.3, but you've had new insulation manufacturing capacity come online, how much did that contribute to the organic growth this quarter?

I don't have those numbers broken out and part of the problem with us breaking them out is because the sales of the insulation stand alone by itself, but it's also sold as part of the total system with the membranes and I just have the consolidated numbers.

I don't have any of the detail.

I'll take that up offline.

And regarding the whole resegmentation of the segments and good thing we kept our model with all the old information, we can roll that out.

Will that old previously reported quarters where you had the five segments, is there any restatement going on there and will you restate for the past four quarters?

Deane, we will on our Web site over the next month.

This is a realtime change we've made here.

We will update the quarterly numbers to reflect that.

The only change that you're going -- what you're going to see is with systems and equipment.

A piece of that was previously in transportation products and a piece was also previously within general industry.

Actually, the largest piece was within general industry.

So we'll have to pull those numbers out o out and we will get that reflected on our Web site.

Deane, I want to add, when you use the word restatement, no change here to earnings per share.

Of course.

I just meant in terms of the allocation of revenues and operating income by these segments.

It's just a change in how the pieces are sorted, not in the total.

Good.

And then, on construction materials, it looked as though -- it was very helpful how you broke out the contributions to the margin decrease year-over-year.

When we look at the incrementals in commercial construction, what's your expectation on incremental margin basis.

If you're growing that fast, you would expect to see a little more operating leverage in this business and it really didn't come through this quarter.

Deane, obviously that was key for us.

First off, it was a brutal comparison to last year, but with that said, we flushed out three major reasons.

I will say that John Altmeier and his team have been starting up a number of plants, I didn't talk about that because they're getting pretty darn good at it.

But they've got a new insulation plant starting up in western Pennsylvania.

We're continuing to -- this business is growing over 30% and there's always issues, productivity issues when you're growing at that speed.

There were other little things there, but in general do an above average job on these things.

The other story was unrecoverable raw materials.

We'll have to see how this plays out.

We don't see any meaningful changes long-term in the margins of the business.

I will say that we've always talked about that the strategy here, I think I was clear sometime earlier on the call that the strategy here is a growth strategy.

The returns on invested capital in this business are very, very attractive and so our strategy is growth, it's consolidation and it's never been a margin improvement strategy.

It's a growth strategy a good time to restate that.

I will say that we don't plan -- that's how we spelled it out to have margin erosion in the business, we think we can maintain margins.

Terrific.

And Icopal on the quarter?

Flat to last year?

Right.

We have in the earnings release that it was approximately -- the EBIT impact was $4.2 million, so exactly the same amount for the two years.

And are they seeing any sort of of the uptick in the commercial construction in their markets?

They've seen some uptick.

They got off to a terrible start with some weather.

They've made a couple small acquisitions, we're optimistic going forward into '07, but this is becoming a year with just very modest improvements for the year.

They are up on a year-to-date basis.

They're up on an EBIT level about $1.5 million year-to-date '06 versus 2005.

But was flat in the quarter, Deane.

Thank you.

Let's take our next question from the site of Peter Lisnic.

Go ahead, please.

good afternoon, Carol, good afternoon, Rick.

Good afternoon.

Rick, if I could ask a quick question on pricing and roofing, do you expect to recover some of those increased raw materials you saw this quarter and the next quarter?

Well, Pete, we're out there, our intentions are to recover this raw material.

We get these jobs -- the beauty of the business is there's thousands of customers and the complexity is each one is its own negotiation, but our intent is to recover all our raw material increases and historically we've been able to do that, and there's timing in the third quarter,, but we've also introduced a lot of capacity and we're growing faster than the overall market.

If I could follow that up with, is the raw material pressure that you saw in the quarter more on the insulation side of things or more on TPO or EPDM?

The unrecovered raw material is on the membrane side than the insulation.

And we should see that pressure ease because of what oil has done?

Absolutely.

That's why I mentioned for '07 --who knows what's going to happen in raw materials, but I'm just simply saying today this is the best environment for raw material costs we've seen in several years.

Okay.

And if I could parse apart your comments on growth a little bit more.

You talked about the western U.S. and Canada being up 76%, but I imagine that's in the whole growth story for Mr. Altmeier's business.

My guess is you're growing east coast and for lack of a better term, gaining share at different price points within the market, i.e., Versico Can you give us insight into what the other growth drivers behind the business has been?

you're right.

I just singled out talking because we've spent so much time talking about the western region, because that's working, but the growth for Altmeier's business is across the board.

He's growing all elements of his business.

It's just the growth rate is higher where he's geographic expanding into some fresh territory, the west.

The growth is across the board, southeast, northeast, upper Midwest, which are strong territories for this business, but obviously the 76% growth in the west is driving up his 30 some percent growth rate.

He's growing in the mid-teens in mature areas.

Back to the earlier questions about same-store sales, he's growing across the board.

Is there a way you can put a box around how big the western U.S. is now for you and how big it can become?

Well, we think there's a lot of room to run here.

I think the west is a good example if we bring our strategic model, it has a certain power.

We hope to be able to continue to look for more products and more capability.

We think there's a lot of room to run here.

Two-thirds of this market is replacement.

And we're talking a lot now about robust commercial construction but that really pertains to new construction.

So we're also growing our share and performing well in the replacement side or rebuild side.

We just had a series of meetings.

We're energized, this is a growth business with a lot of opportunities.

I think that we animal have probably in the mid-20s as far as share of this market.

Who knows.

It's hard to get the exact numbers.

But we estimate we're somewhere around 25% of the overall commercial roofing market.

So there's a lot of opportunities here to do some things.

Okay.

All right, that's good color on that one.

If I could quickly switch gears to industrial Products.

Anything in the quarter about cost or underabsorption.

Relative to a lot of people's expectations, the numbers there were not as strong as what was expected.

I'm trying to get clarity on profitability in that business.

This is a very seasonal business, we had a major public company in lawn and garden released last week, they're a household name and they're lawn and garden because was down 38%.

We've gotten through this period better than almost everybody in the space because we have a high share of the commercial lawn and garden business.

The story in the third quarter, it's historically-- the margins were better than last year in spite of raw materials, but they're historically a lot less.

The margins are historically about half.

If you look at the year-to-date margins in about half.

If you look at the year-to-date margins in industrial, you see 8.6.

The third quarter margins in industrial, 4.1.

That really -- my problem with the business is the year-to-date margins ought to be 11 and that's a function of soft lawn and garden and volatile raw materials.

But really if you look at other businesses that are reported on lawn and garden and other businesses with a heavy exposure to rubber and a barrel of oil, this business shows the strength of its strategic model.

We're excited about next year because the inventories have been stripped down.

The story in lawn and garden is the demand, but it's very much an inventory cycle.

Each industry has a different inventory cycle.

Lawn and garden in our estimation sometimes takes two years to complete what we call an inventory correction or inventory cycle.

And based on all the information we've got, we think that inventory cycle portion of this downturn is behind us as we go into '07.

But this business really is -- it's historically got a soft third quarter and I'll go back and look, Pete, but I think the margins have historically been around four to five EBIT margins in the third quarter.

And Pete, the other thing to highlight too, I'll mention it again, the cash flows generated by industrial components is significant for Carlisle while their margins underperformed some of the other businesses, they represent in excess of 40% of total cash flow from operations for the company.

So while their margins may be a little bit lower, they're making a significant contribution to the Company's cash flows.

Okay.

You have mentioned that before and thanks for that.

Rick, I guess I'm going to play evil analyst, as you sit here today it sounds like the outlook is better with the inventory that's been taken out of the channel.

And you also mentioned year-to-date operating margin of 10 or 11, I think you said 11%.

Is it safe to assume that this business, you think, can return to double digit operating margins next year, without providing next year's forecast?

The management team believes that they can do it.

I don't want to get too specific for '07, we'll do that in February.

Every business in our portfolio, Pete, we believe is a double digit EBIT business or it wouldn't be in our portfolio today.

We've had trouble getting there in a few businesses, industrial is the largest one, but we're comfortable.

I'll give you more color in February, but the management team and we believe it's definitely a double digit EBIT business.

Okay.

Fair enough.

Thank you very much.

We'll take our next question from Saul Ludwig.

Please go ahead.

Good afternoon, Carol and Rick.

As you know natural rubber prices have been plummeting, natural gas prices have been falling and those are two pretty important products for you.

Should they be a beneficiary right now in the fourth quarter?

Well, Saul, as you know better than anybody, those trends were not beneficiary in the third quarter.

Right.

That was a late quarter event and everything you just described.

Do we anticipate -- yes.

Now, this varies all over the place, Saul, because of some contracts and etc.

Is there a favorable trend in raw materials today?

Yes.

But I really think to unwind some of the things we've done, it's more of an '07 event.

Okay.

With regard to -- You talked about one of the factors in roofing was mix, a little unfavorable mix.

Could you amplify what you mean by that and what do you think about mix going forward?

Everybody gets nervous when we get into a lot of detail here.

I will tell you a very attractive element of this business is accessories, almost like any business that analyze, Saul, sometimes it's the smaller pieces and accessories are a profit sweetener.

They take labor off the roof.

When we talk about mix in many cases, it's -- it relates to the amount of accessories.

Now currently, because EPDM is mature, we have more accessories that go with a rubber roof today than accessories that go with a TPO or plastic roof.

So I want to be careful here.

When we sell a rubber roof, the overall margins can be better because it has a higher accessory content.

So, yes, this time of year there was a little less volume in the rubber membrane and a little less volume in accessories because of that -

And a little less rate of growth.

Hopefully I noted, that was the last item on my list.

In order of priority or magnitude, it was unrecovered raw material, it's that write off of the joint venture.

The unfavorable product mix was low in the quarter.

The one off was the write-off of that joint venture that would be about $0.01 a share?

That's correct.

What's your take of the firestone acquisition of the business and do you view that as a nonentity relative to Carlisle or the industry, or is it a plus or a minus, how do you read that?

Very clear, very positive.

Any consolidation in the space we view as favorable.

Okay.

And that would manifest itself, what, in better pricing or --?

Saul, I'll leave that to you to come up with something like that.

I'm just saying we view consolidation favorably in that very important market to us.

And finally in all the discussion we've had today, you haven't mentioned power transition belts.

I know you've put in a new President there, I think you talked about that on the last conference call.

How did they perform this year compared to last year and what do you see going forward with regards to that business?

We see a lot of opportunity, we've got new management.

It was improved in the quarter, it made some modest improvements in the quarter.

We look for continued improvements in '07.

A lot of work to do, heavy entry barrier, one major global competitor.

There's a lot of opportunities there and -- but it was just a modest improvement in the quarter.

We think the improvements can accelerate, but the management team -- I'm saying probably modest improvements to late '07.

And just a final question, I think this is kind of the time of the year where your lawn and garden customers, the MTDs, Deere, Toro, et cetera, give you guidance in terms of how your production should play out in the first quarter.

And I know you began -- this time last year you got modest guidance and you performed appropriately.

What are they telling you now in terms of what you should be doing with your inventories and -- not inventories, but your production levels as you go into the first quarter?

One thing is clear and I think we've already noted, they are determined -- they've been very aggressive at stripping out inventory across the who had so when they enter '07, they're in much better shape.

It's in our guidance, Saul.

They continue to produce less in the fourth quarter than they did a year ago.

They're all determined, they've given up on '06 and are determined to go into '07 with a much better inventory situation.

And the outlook in the first quarter seems more reasonable.

But the lower production in lawn and garden in our guidance in the fourth quarter.

And when you look to your fourth quarter, what's going to be your toughest comp as you look at the different segments, or do you see all of them showing improvement over the same quarter a year ago?

The roofing business had a hurricane last year and thank goodness we don't have a hurricane this year.

Those thing are minor blips, but no question last year in the fourth quarter there was some accelerated activity based on the impact of Katrina.

That won't be there this year.

That might be a little tougher comparison, but this business obviously has been growing across the whole country, so we're looking for solid comparisons.

But roofing won't have a hurricane for the fourth quarter.

How about the other two segments, Rick?

Saul, you've got the guidance and have got about one of the best models I know about.

I don't know about that, sometimes it fails me.

To finish up, any comments in the fourth quarter comps for industrial products and diversified?

Not really, Saul.

I think it's all wrapped up in our guidance.

Who knows.

We think there's going to be continue to be pressure in the fourth quarter in lawn and garden because of things we've already talked about, but it's in our guidance.

Great.

Thank you.

[OPERATOR INSTRUCTIONS] Brendan Hartman.

Good afternoon.

Thanks for taking my question. carol, can we go back to Saul's question on the raw materials.

I know some of the businesses are on LIFO and some are on FIFO, is the tire and wheel business that has a mix of those two, or is it other segments as well?

Definitely within tire and wheel, they have a mix of LIFO and FIFO.

So if we assume their company average, you turn your inventories five times a year or a little better maybe, so it will take a quarter roughly for that to show up if indeed we get -- does not coincide with purchased contracts rolling off as well?

Let me add one thing.

When we start talking about that -- the lower raw material price comes in almost immediately in purchase price variance.

It will show up.

My only comment is that sometimes to unravel your hedge, your contract, it takes a few months to unwind and access the lower cost raw materials, but we'll get the benefit of lower raw materials very quickly in our purchase price variance, and we don't have to sell it to take advantage of it.

Okay.

So it's not like you're sitting on big, long-term rubber contracts or anything like that?

No.

I'm talking about something we're going to unwind in a couple of months.

It's already under way.

We don't enter a lot of long-term purchase contracts, unless we see something extremely advantageous, which we haven't in quite a while.

In the past, you've given us utilization rates for the different segments, can you walk us through that?

I think, actually, we have stopped giving it for the segments and we were giving it just on consolidated basis.

Year-to-date utilization for '06 is 77% and for 2005, for the nine months ended September 30, '05, it was 74%.

And it would be a reasonable assumption it's higher in the roofing business?

Yes, the roofing business has a better utilization, obviously based on the growth that they've been able to get.

Their utilization is up.

But, Rick, you measure that on a three-shift basis, or can you add a shift to some of these--

It's run on three shifts.

Okay.

And then final question, if I can, just tying it all together.

Your CapEx is starting to decline when you normalize some of the cash flow items.

Clearly your company is throwing off a lot of cash.

Rick, at the same time, and I totally agree with you, you don't want to go out and overpay for something, but we've been talking about that for a while.

And I guess if you buy into the soft landing scenario and don't think we're going into some kind of a downturn and given your comments on '07, that's what you're thinking.

At what point do you say, hey let's start returning cash to shareholders because we can't find anything than other small bolt-on acquisitions and we're over capitalized?

Well, Brendan, you're asking good questions.

The subject you're talking about is reviewed at practically every Board meeting.

We look at our allocation resources, capital allocations and we talk about that when we go do conferences with investors.

There's no question that we're going to be taking a look at that.

I guess, Brendan, I think our track record speaks for itself in that when we take the cash and we invest it in the businesses for organic growth and for these bolt-on acquisitions, the returns that we're able to give from a return on invested capital are for the long run and benefit our shareholders better than just a one-time cash return or any repurchase of shares.

We think the best utilization is for us to continue to invest in organic growth as well as to look for good bolt-on acquisitions at the right price.

Absent those opportunities, obviously we would look at share repurchase or one-time dividends, but we believe we can give much greater value by investing in the business.

I agree, Carol, I've been a large shareholder for a long time.

I think you guys are doing a great job, but at some point, and I think your stock is still attractively valued relative to a lot of other stocks out there and M&A deals going on, but at some point -- as an investor, I can find other investment opportunities and I don't want you to overpay for something, but at some point I'd like to see some capital returned to the shareholder base.

We hear your comment, Brendan.

All right, guys, thanks.

Thank you.

Let's take our next question from Beth Lilly.

Go ahead, please.

Good afternoon, Rick and Carol.

Hi, Beth.

I wanted to ask about two things.

First question is, on the Specialty Products side, Rick, you were very clear about your frustration with the on-highway braking business, and I wanted to explore that a little bit more with you in a sense of, can you talk about what's going on in that business, and you said, quote, the business has underachieved for many years.

Having watched your actions in the past, when something hasn't achieved for many years, it's either up or out.

My words were, it's underachieved for several years.

Our own highway business makes heavy friction for class A trucks.

It's been one of our better businesses. 70% of their market is replacement.

They're a leader here.

We've made some investments.

This is a business we bought a new plant in China.

We think it gives them a distinct advantage, our customers in the space are telling us that we have -- that we're the company to be with, but we just underachieve with this and that's why we made the management changes during the quarter, bringing in new general management and a new CFO, it's just simply under achieved.

We still think it is a growth platform for the future.

We think we have a sustainable competitive advantage and quite frankly, just kind of embarrassed that we've got the best business model strategy in the space and are achieving returns.

So hence we made a change and we think -- in fact, we have the management team, they're sitting down the hall right now as we speak and we're going to review that business again, as you can imagine, every few weeks until we get it right.

But this is upside to me.

We take a hard look here and we don't find anybody in our space a competitor with this strategic platform that we have and we're committed to going forward.

There's an opportunity here, for some dramatic improvement in '07.

And the on-highway -- so the acquisitions you did in the quarter in the specialty business, were they on or off-highway braking companies?

Beth, we had one of both.

In July of 2005, we acquired the China operation that Rick referenced, and that was for the on-highway and in the fourth quarter 2005, we acquired assets from Arvind Meritor from their off-highway braking business.

And is the on-highway braking business profitable?

It was not in the third quarter.

Okay.

So that's the reason for the significant decline in the margins?

Yes.

Plus, as well, just the third quarter is not strong for either of these businesses relative to their performance the rest of the year.

They're up in the quarter, year-over-year, on a margin standpoint.

Beth, their margins are better in the third quarter than they were a year ago.

Specialty Products, we're talking about.

Yes.

They're better.

But our off-highway braking business has very high margins.

Okay.

And this -- what is the highest margins have been in the Specialty Products business, have they gotten to 12%?

They've been in excess of 12%.

Yes.

Okay.

And can those margins get back to in excess of 12%?

Yes.

And your question is when, because we're not going to address that.

Right.

Okay.

And my second question is a follow-on on the lawn and garden side.

You said that you were optimistic about '07 on the lawn and garden side and you had strengthened the commercial side and all the lawn and garden side had talked about strengthening the commercial, but the problem has been the residential, is that a fair statement?

That's absolutely correct.

Okay.

So when you say you're encouraged about '07, is it because you're going into '07 with low inventories and you see strength on the residential side, or can you go into a little bit more detail about why you're encouraged?

My reason I gave earlier is simply that there's two elements in that downturn in lawn and garden.

One is the softness in the residential, what we call consumer lawn and garden.

The other one is an inventory cycle or inventory correction reflecting the soft demand.

And my point is simply that based on the information, we have 80 some percent market share in consumer lawn and garden, pneumatic tires, and commercial lawn and garden.

So we've got a pretty good eye to the market and what I'm simply saying, it appears to me that the inventory piece of this downturn is going to be behind us when we get into '07.

But I'm not forecasting at all.

A lot of people in the area are talking about a soft landing in housing, but I'll leave that to them.

I'm simply saying that the inventory in the channel is much better and we should have that behind us for '07.

But the demand issue is still up in the air.

Okay, okay.

Great.

That's helpful.

Thank you very much.

We'll take our next question from Wendy Caplan.

Go ahead, please.

Thank you.

I apologize if this was covered, I missed the beginning of the call, but I wanted to understand -- Rick, I don't think I've ever heard you speak so unequivocally about growth at the company.

Can you walk through for us, if you haven't, and I apologize if you've gone through this, we can do it later, but can you speak to what you see as the biggest growth opportunities?

Most of the acquisitions seem to be bolt-ons.

Is it new products, is it new geographies?

How should we think about growth?

And what over a cycle would be your comfort level in terms of the Company's growth on the top line?

Wendy, I'll give you -- some of this we've already, and we can do some of this offline, but I simply made the point that over 60% of our markets are late cycle.

I think the commercial construction business, it's well documented what's going on there, we're in the middle of the runway there.

Everybody is talking about robust growth.

We have a lot of momentum with our geographic expansion.

We've grown 76% in commercial roofing in the West, year to date, that's a year to date number.

I see the lawn and garden business, which has been a drag for us the last year or so, the inventories are much better going into '07.

Part of this has been demand and part of it has been an inventory cycle.

That appears to be behind us the circumstances, the inventory cycle.

We have a lot of strength in our late cycle businesses, our construction businesses, our trailer business, our aircraft aerospace business, we've also just had some excellent results getting in on new programs, a reference to 787, which is going to be out there, but our content on the Boeing 787 is ten times what we've ever had.

We've been a supplier to Boeing for 40 years.

We do have a sense of optimism and we believe -- I know everybody is sick of me talking about it, but we think we're going to be a very good acquirer of bolt-on companies.

I know you don't believe me today, but we know how to do it, we know what to pay, and we've had some discipline through, this but the pipeline is full with companies in our space and so we're bullish about that.

But we think we can sustain an above average organic growth rate.

Forgetting the acquisitions, but the acquisitions we're comfortable with is going to be a sweetener going forward.

Wendy, I would say that we've covered a lot of this already on the call and obviously feel free to call and we'll give you more information.

That would be real helpful.

A couple other little things.

You mentioned some management changes, should we anticipate others going forward, or are we pretty much where we want to be?

Well, I'm sure all my employees are listening and we have a standing rule here, 10% EBIT.

If you don't make 10% EBIT you're on probation and you don't want to stay on probation for an extended period of time.

How long is probation?

Probation varies.

If are the raw materials have gone up $80 million and your market is down 30%, we tend to lengthen the probationary period.

And one more thing on cash deployment, you feel it sounds comfortable with the fact that their acquisition out there for you, if not -- What would be number two and three in terms of the choice, dividends or buybacks?

Well, can I tell you that funding an organic growth rate, which we're doing in some of our businesses is our number one priority, we've followed that closely by bolt-on acquisitions and that's a very strong second.

And then we look at a whole host of other things in the growth area, but quite frankly we believe right now, we talk about share buybacks and dividends, but we think we've got better uses of our cash today.

We're kind of excited about the opportunities to grow the business organically, we're going to use cash for that and bolt-on acquisitions.

We think that will be the number one and two uses of our cash over the next couple of years.

And just one more quick question, the backlog, as it increases is it really kind of across the board, or any segments that seem to have greater contributions?

Wendy, what we presented there that construction materials breaking the specialty trailer and the wire and cable, they're all contributing, not one significantly over the other for those and obviously by absence of mention, it means the other businesses are flat to slightly down.

But Wendy, I would just add, and I know you know this, but for our other listeners, we don't talk about backlog much when 70% of your business is replacement.

There's no backlog in the replacement side.

Our roofing business, our most important business functions basically without a backlog.

The only place we have backlog that matters is OEs, which where there's a backlog.

We constantly tell everybody, we publish the backlog, we talk about, but don't use the backlog as any barometer for us for any future earnings growth.

Thank you very much, Rick.

Thanks, Carol.

We'll take our next question from David Fondrie.

Go ahead, please.

Could you talk a little bit about or update on what is happening on discontinued operations?

You went from a slight gain last quarter to a loss of $0.15 this quarter?

The discontinued operations issues -- as we announced, the main businesses that are there is systems business as well as the Walker stainless group.

We signed a definitive agreement in April and we had a news release that announced that.

We're going through the final iterations of regulatory approval across nine different jurisdictions across the globe and finalizing that and would expect to close that transaction within the fourth quarter.

We announced that early fourth quarter in October, we had sold Walker Equipment to Insight equity.

We're bound from discussing any details of that transaction.

Let's just say it was sold for more than book value.

We will have details of that when we report fourth quarter numbers.

The loss that you see for the quarter was not related to either of those businesses.

And that's still the largest part of the assets held for sale that you see on our balance sheet.

The loss actually related to one piece of it was from follow-up for our automotive division, that was sold in 2005.

There were various types of guarantees for leases and other things that we continued to evaluate based on the ongoing struggle for the automotive business and that is reflected within those numbers.

Thank you.

Saul Ludwig.

Hey, Rick, you talked about funding organic growth, and that's great, you guys have done a great job.

But now you're finishing, just completing your third roofing plant and I think there's been some other additions to capacity.

Where do you go from here?

The cap spending, do you see that declining next year meaningfully from this year?

Or investment from more capacity in '07?

The question about the cap spending, too, Carol.

I'll give you something before Carol.

First off, I think, Saul, we've had several questions on this.

I think there's a trend that's going to transition here quite frankly.

We still see opportunities to grow organically.

Scale is more modest than some of the roofing situations.

Although we plan additional investments in roofing, but I think the trend that's going to happen is you're going to see less cap spending and more bolt-on acquisitions over the next couple of years.

That's what I see.

We've been patient, but we've got a lot of good opportunities in our space from a bolt-on acquisition.

We still have opportunities, but that blend of very few acquisitions and mostly organic cap spending, that's going to reverse itself over the next several years.

And Saul, we have not quantified the number for '07 our operations are putting together their '07 operating plans.

We'll gave forecast for CapEx when we have our February call.

What's it going to be for this year, Carol?

We're looking at probably a little bit less than $100 million.

It depends on how some of the projects roll out in the additional TPO investment and the west coast what that looks like.

Timing for that and when we might do it and everything and we have not finalized all those plans.

But should be less next year?

Yes.

Great.

Thank you very much.

Thank you.

We have no further questions at this time.

Well, thank to everybody for joining us on the call and we look forward to talking to you again in February.

That concludes our teleconference.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference, thank you for your participation and you may disconnect at any time.