Carlisle Companies Inc (CSL) 2007 Q1 法說會逐字稿

Good afternoon.

At this time I would like to welcome everyone to the Carlisle Companies first-quarter earnings conference call.

(OPERATOR INSTRUCTIONS).

I would like to turn the call over to Mr.

Rick McKinnish, President and CEO.

Sir, you may begin your conference.

Good morning, everybody.

Welcome to Carlisle's first-quarter earnings call.

With me is Carol Lowe, our Chief Financial Officer.

Our format today is going to be the same.

We'll have some brief comments followed by a question-and-answer.

If you are a new investor, please go to the Web site, which is Carlisle.com.

This provides you with a description of the companies in each of our reporting segments and some other information.

This is the first down quarter for this management team.

We don't plan to make this a habit.

So, with that, I will now turn it over to Carol.

Thank you, Rick.

I will start off by apologizing for my voice.

This spring pollen season has really taken its toll.

As we discussed during our fourth-quarter call in February, we expected a tough year-over-year comparison for the first quarter of '07, primarily due to the record performance of our construction materials business in the first quarter of 2006.

Extremely warm weather and strong demand carryover from a hurricane impacted fourth-quarter '05 resulted in record results for the start of 2006.

The consolidated modest sales growth and first-quarter diluted earnings per share of $0.54 reflect much less favorable conditions for our construction materials business for the start of 2007.

Rick will provide you with some additional color on the segment operating results but I would like to offer a few comments on the construction materials segment.

If you neutralize the impact of the earnings from Icopal, Construction Materials EBIT margin for the first quarter '07 was 10.3%, which is comparable to the EBIT margin for the first quarter of 2005 and compares favorably with EBIT margin of 8.7% for the first quarter 2004.

While we experienced significant growth in our TPO sales, results for Construction Materials were negatively impacted by severe weather conditions in critical higher margin EPDM markets.

For example, in Chicago, through the first eight to ten weeks of 2007, the average days on the roof per week were 2.5 versus four days per week in 2006.

Competitive pricing pressure on our insulation products also impacted the first-quarter earnings.

As insulation-only suppliers responded to our growing presence, the reaction is as we expected, and we remain confident in our strategy to provide warranted roofing systems across North America.

This morning's earnings release also noted that we have changed our method of accounting for all inventories to the FIFO method.

Previously, approximately 56% of our inventories were valued on the LIFO method.

We did not make this change to bolster the first-quarter 2007 results.

In fact, had we remained on LIFO, after-tax earnings would have been higher by $1.2 million.

We changed our costing method to value inventories consistently across all our businesses to provide a better matching of revenues and cost of sales as well as to better reflect the actual flow of inventory.

The change in inventories from LIFO to FIFO will result in tax payments of approximately $16 million, spread over a period of four years.

In your review of the first-quarter '07 results, you most likely noted an increase in our SG&A as a percent of sales of 110 basis points.

Carlisle has increased its sales, marketing, technical and administrative support across many of its operations to provide the infrastructure for organic as well as M&A driven sales growth.

The first quarter is also a very active period for trade shows, sales meetings, and customer events.

Full-year '07 SG&A is estimated to be consistent with 2006, at approximately 9.5% of sales.

Carlisle's effective tax rate of 31.5% for the first quarter of 2007 compared favorably with the first quarter of '06's effective rate of 33.1%.

The decrease is primarily due to the Made in America tax deduction, which doubled at the beginning of '07.

The effective full year rate for 2007 is currently estimated at 32%.

Now I would like to add just a few comments on the balance sheet.

The decrease in cash and short-term debt reflects the redemption of $150 million in senior notes in January of 2007.

Our net debt to cap, including the receivable securitization, at March 31, '07 was 24%.

Working capital as a percent of sales remains flat at approximately 21% as compared with the full year 2006.

The increase in inventories is due primarily to the previously discussed poor weather conditions that impacted our Construction Materials segment.

Production for Construction Materials was not significantly reduced in the first quarter on an anticipated strong pent-up demand for the remainder of 2007.

I want to give you a few data points that I provided on the February call and hopefully this will answer some of the standard questions we receive each quarter.

Our CapEx is currently estimated at 75 to $80 million for all of '07.

Depreciation and amortization expense is estimated at approximately $60 million, and this does include amortization related to the recently announced acquisition of the Insulfoam business.

Our pretax pension expense is estimated to be flat with 2006 at approximately $6 million.

Stock option and restricted share expense will be approximately $8 million pretax in '07 and this compares with about $7 million in 2006.

Our cash flow from operations is currently estimated at $175 million.

Net interest expense is estimated at $24 million, and this does reflect the $160 million related to the acquisition of Insulfoam.

Also, our corporate pretax expenses are estimated at approximately $30 million for 2007 versus approximately $28 million in 2006.

And the main reason for the increase is the stock option and restricted share expenses.

With that, I will turn the call back over to Rick for his comments.

Thanks, Carol.

I'm going to start and make a couple of comments about each of the reporting segments.

The first segment is Construction Materials.

I think Carol has already touched on several things but I would like to add a couple of comments.

First, our most profitable product line, as everyone knows, is EPDM, which is sold primarily in the Northeast and Upper Midwest.

This business was down 25%.

The key point here is that we're absolutely confident that we've had no loss of share.

This was all driven by the weather.

In contrast -- which I think is a good contrast -- our TPO product, which is sold primarily in Southern regions continues to grow and grew 25% in the quarter.

As noted in the press release, we have had price erosion, primarily on insulation, in the face of rising raw materials and transportation costs.

The demand going forward looks solid.

So we are announcing a 5% price increase for insulation effective July 1, to cover recover these cost increases.

The management teams -- on each of our business, they update their earnings forecast every month.

Our roofing business is still forecasting record earnings for 2007 in spite of a slow start.

We have communicated many times how weather affects the roofing business.

Harsh winter weather decreases the first quarter but improves demand in later periods.

This is the primary reason we do not provide quarterly guidance.

To benchmark ourselves after this first quarter, we wanted to go back and look at the last first quarter with similar weather, which was the first quarter of 2004.

The earnings this year in '07 are 137% higher than three years earlier in 2004.

The next segment is Industrial Components.

Both our specialty tire and wheel and industrial belt businesses had solid performances or improvements for the quarter.

I think something worth noting -- we're currently developing over 50 new tires for the construction and ag markets in our new plant in China that we acquired in the first quarter.

This business now has a real plan for growth in some new markets, and we are excited about that.

The Specialty Products segment, which is our two braking businesses, is the same message we've had the last several quarters.

Our off-highway business is doing quite well.

Our on-highway business is averaging the results down significantly.

The press release notes new senior management for the on-highway system business -- friction business.

Longer term, we expect this segment to have double-digit margins -- not in 2007 but, longer term.

The Transportation Products segment -- this is our specialty trailer business, Trail King.

They are doing well but had a difficult comparison.

They made 14.6% EBIT on sales in the first quarter.

This is solid performance in this space and they should have another very good year.

Our General Industry segment was disappointing, quite frankly.

Johnson Truck bodies, that makes refrigerated trucks bodies, had a terrible quarter and this offset strong performances especially from our wire and cable business, Tensolite.

The comparisons here will get more positive as we go through the year.

We expect both Tensolite, our high-performance wire and cable company, and FoodService to have a record earnings year in '07.

I would like to switch gears and make a comment about SG&A.

I think Carol has already touched on it.

Our SG&A was up 13.7% on a 1.8% revenue increase.

That's unacceptable.

The largest portion of this is in the roofing business.

The overhead has been added in roofing to handle growth.

The management team has reviewed this and based on strong outlook still fills their current level of SG&A is correct.

On a consolidated basis, over the last 10 years, we have consistently lowered SG&A expenses as a percent of revenue.

That trend will continue and we're going to -- we're reviewing SG&A as we speak and every expense will be analyzed and we will take corrective action where appropriate.

I'd like to make a couple of comments.

We've made several acquisitions this year.

I'm just going to talk about the two largest ones.

The first, early this year was the new tire plant in China.

I've already mentioned that this targets the construction and ag markets.

I will say this year, the startup costs are negative.

This provides significant upside for 2008 but, the startup costs of this new plant is now in our guidance this year.

And that is a change from the first of the year because we acquired it in January.

The more recent acquisition and a lot larger is Insulfoam.

Insulfoam is a manufacturer and marketer of expanded polystyrene insulation with $200 million in revenue.

Insulation is our single largest product line and also has been our fastest-growing product line the last three years.

In today's environment of energy awareness, we like insulation.

Insulfoam is the clear number one in their space.

Their next competitor, number two in the space, is one-half Insulfoam's size.

EPS or expanded polystyrene products, are used in commercial roofing, our current strength, but are also utilized in wall systems, a clear adjacency or logical extension of our business.

Insulfoam has been consistently profitable for many years.

It has an excellent management team and provides new markets and synergies with our Construction Materials businesses.

This transaction will close this month in April and be accretive this year.

Now, my last subject is guidance.

Quite frankly, we expected to raise our guidance with the acquisition of Insulfoam.

But, offsetting the accretion from the Insulfoam acquisition are several changes from the first of the year.

The first change was the lawn and garden market, which we discussed at the end of the year.

Inventories were better.

The lawn and garden market was reasonable in the first quarter but the market demand has been revised downward to flat versus 2006.

This is a material change from the major OEs or customers in this space.

And it has affected our guidance.

We have startup costs for our new tire plant that I mentioned that was acquired in the first quarter.

Although a negative for this year, very positive long term.

But, it's dilutive this year.

Our Construction Materials business will have a record year but their forecast has been revised slightly to reflect their first quarter.

And, as everyone knows, there has been a softening of demand in some of the trucking business, based on the emissions changes and bills in '06.

And so we've seen softness in our Johnson Truck bodies and in our trailer business.

These factors offset the accretion from Insulfoam and that we are in essence maintaining roughly the same guidance we had, which is a disappointment.

I will say that on the acquisition front, even though we've announced these two, our acquisition pipeline remains robust and we want everybody to stay tuned as far as acquisitions because the Insulfoam in no way represents the bulk of what we're talking about on the acquisition side.

So with that, Carol and I are finished with our portion and we will turn it back to the operator for some questions.

(OPERATOR INSTRUCTIONS).

Deane Dray, Goldman Sachs.

Rich and Carol, on the commercial roofing side, can you size for us what the weather impact is?

And then we'll talk about what the impact on pricing and your increased costs.

But just the expectation that that weather -- we've been through this before -- that's going to come back next quarter.

But if you could size for us what that weather impact is?

Well, Deane, EPDM was down 25% with no loss on share.

That's all weather.

That's a major product line for us.

I mean Carol is looking at her numbers, but that's -- I don't know, $25 million, Carol?

I guess I'm looking at it in terms of margins, and I mean it's a significant portion of it.

I guess, Deane, we don't like to break out the product lines and give specific information about each product line.

Yes, the dollars of PPO that grew 25% basically almost offset the dollars of EPDM that we lost due to weather.

There's a mix change there, Deane, as we've talked about many times.

I mean, the EPDM margins are slightly higher.

Good.

And then, your prepared comments regarding costs and pricing, just kind of walk us through because I think in some cases you were interchanging costs for pricing.

So give us a sense of what's going on on the pricing side on both product lines and then you can also size for us what the cost issues are regarding raw materials and transportation.

So, two separate discussions, please.

Okay, well, I mean the pricing in insulation has eroded -- and I'm rounding -- let's say about 5% over the last year.

Now, quite frankly, it was eroding in the second, third, and fourth quarter of '06.

The price erosion in the first quarter was more modest.

It was very slight.

It was less than 1%.

But in comparing to a year earlier, first quarter '06 versus first quarter '07, we've got about a 5% price erosion in the marketplace.

And on top of that, we've had cost increases; I mentioned raw materials; I mentioned transportation.

This product has a lot of transportation costs associated with it.

So, to offset that, which I should've been clear, the 5% price erosion, really, we're initiating and announcing right now a 5% price increase effective July 1 on insulation.

Does that help any, Deane?

It does.

And on the price erosion, is that a function of more capacity?

You've been adding a lot of capacity here.

So are you contributing to that or is there anything on the competitive side that's leading to this price erosion?

Well, there's no question, Deane, I think Carlisle has contributed to that, and there's a whole host of things going on.

But we think the cost increases -- I mean, demand looks solid.

The demand environment still looks -- John Altmeyer and the management team have just -- the one thing about the first quarter, they've had all the major roofers to certain locations.

They've had a number of meetings in the space and the demand looks robust.

And so, in light of strong demand and cost increases, we believe that it's appropriate to get a price increase.

It just so happens to offset if we can get it -- and I can't predict but we're going to try to get it -- it will offset some of the price erosion.

But it's driven by cost increases.

Got it.

And then over on the lawn and garden side when you talk about flat demand, is -- how much of this is housing related -- a housing derivative?

Or are there any weather dynamics this spring?

Well, I mean you've touched on.

There is some housing -- it's housing related; both lawn and garden works off household formation, and housing is always involved.

There's been some weather, no question.

One of the things that has hurt us, we're being told by some of our major customers that just the weather in some areas, people just don't go do the normal kinds of purchasing and it's -- we've had some very cold weather in certain areas that slowed up the lawn and garden launch.

But with that said, my point is '06 was a very difficult year in lawn and garden.

It was a down year.

All our major customers -- we've got probably 90% of this market in pneumatic tires.

And our customers went into '07 feeling like '07 would be a nice improvement over '06.

And so it's pretty material to us that now the consensus that we get across our customer base is a flat lawn and garden '07 to '06, which is a disappointment.

And quite frankly, we've had to bake it into our guidance.

What about your inventory on this side?

Has that been already adjusted or should we expect to see some inventory that has to get worked off to go?

No.

I mean, listen, roofing -- any time the business slows down unexpectedly, like roofing has an inventory situation, we still think it's appropriate but it will be adjusted.

And yes, there will have to be some adjustments in our tire business because of the change in schedule in lawn and garden.

So, you are correct.

That will play out in the second and third quarter.

Understood.

Last question.

On the China plant, you said going into construction in ag, would that also include any potential going into some of the mining type of applications?

Because I've seen numerous references about a shortage in mining tires.

Dean, our current plans -- that's another step up on size and durability and so we're kind of making logical extensions.

Over the next -- we see a lot of room to run here in basic construction and ag and we want to make a certain impact there.

Mining is a specialty tire.

It's of interest but quite frankly, it's more in the three to five year time-frame.

Fine.

So, what are the size tires you are doing for the ag and construction in China, approximately?

Well, I mean, for years, we've focused on tires with wheel diameters 15 or 16 inches wheel size and down -- I mean smaller.

So we're moving up to the '20s.

The way this works, you go from 16 inch into the low '20s and so probably over the next 18 months we'll be focusing on that next increment of size.

This gets into 40 horsepower ag tractors.

We are already in the skid steer business.

But we want to expand that offering.

So it's just visualize a gradually increasing size up through the specialty tire and wheel business.

Peter Lisnic, Robert W.

Baird.

Rich, I'd like to just go back through that -- the pricing discussion that you just had.

And I just want to be clear.

With this price increase that you're putting through, the 5%, do you plan on offsetting all the increased transportation and materials costs?

That's correct.

Now this price increase is on insulation and it's to offset -- I mean, Pete, as you know, you don't get very much dollars worth of product in a truck -- a 40-foot trailer of insulation.

We're shipping air.

And so these transportation costs and some raw materials have had an impact.

And that's coincided with some price erosion.

So we're just determined to go back and recoup these cost increases.

How confident are you in an environment where there was 5% price erosion last year, how confident are you that you'll be able to maintain share in an environment where you are raising price?

What are the odds that your competitors will do the same?

Well, I mean, we'll see.

They are experiencing the same kind of cost increases we are.

We have a certain position to market.

I'm sure that there will be issues.

This business is local, it's regional.

The competitive dynamics vary from location to location.

I will say that there is a warranty here that many of our competitors have been reasonable.

We think historically when we absorb these kinds of cost increases, the industry has a history of trying to recover cost increases.

So we feel fairly optimistic, Pete.

Okay, fair enough on that.

Then if you kind of look at the TPO business, I would think that that would be a business that would also be -- I don't know, primed for more entrants or more competitive pressure, if you will.

Can you maybe give us just a quick synopsis of what's happening in TPO in terms of competitor expansion?

Any sort of price pressure you might be seen there?

And kind of what the outlook for the TPO product looks like?

That's a good question, Pete.

And I think there's something -- everybody in the world is more and more interested in TPO for obvious reasons.

TPO grew once again for us in the first quarter 25%.

We think we've got a very good position here.

I think we've got some leadership.

We're determined to continue to work on our costs and everything.

But I will tell you what's happening is, we think that TPO is becoming accepted to replace the asphaltic solutions.

So, we see a lot of demand improvement here.

This has been a slow trend to develop and the modified bit and the built-up roofing and we think that TPO is going to make serious -- has been making serious inroads against the asphaltic solutions.

And we think that trend is going to continue and probably accelerate.

And for that, which is a major change, there is a lot of demand here, quite frankly.

We've analyzed all the announcements.

A lot of companies make announcements.

And if we factor in the capacity for all the announcements that have been made about TPO, we still see robust demand.

And quite frankly, we've been investing here in new technology.

We're going to continue.

We just approved some confidential investments at our last Board meeting that relate to this business.

So, what we are determined to maintain our leadership and we think there's going to be a lot of demand based on everything we know.

It sounds like you are going to increase capacity in that business, is what you are saying.

Well, we have been.

Yes, well, it will continue I guess is what my point is.

It's going to continue but more -- on top of that because we see robust demand, major shifts.

And on top of that, there's a lot of things to do to -- and coupled with insulation, and coupled with a whole host of things.

We just bought an expanded polystyrene insulation business that some areas of the country like that insulation for commercial roofing more than they like polyiso.

And what we benefit from now is it's a tougher sales job to go and say don't use styrene.

We offer polyiso.

Well now we offer both.

And we will let the value and the value characteristics of each one dictate and can provide the customer either one.

So, this is all part of our commitment to the space, Pete.

Okay, but you wouldn't look at that EPS market as something that's got the same kind of growth characteristics as polyiso, would you?

We look at the EPS market, quite frankly, and our acquisition of Insulfoam as probably the finest growth platform from an acquisition standpoint we've ever bought.

This is what we've told our Board.

This is a growth platform for us for a whole host of reasons, and we are excited about it, and stay tuned, Pete, because this story has not been written yet.

So, yes, we see it as an exciting growth platform.

Okay.

All right.

One more question, if I could.

Just on the EPDM side, you said it was down 25%.

And I know you won't give us the number but can you give us a sense as to what expectations were for the quarter?

Were you looking for like a plus 1 or a plus 2?

Because I know it was a difficult comp last year, or was it minus 2, minus 5?

Just something to give us a ballpark as to what minus 25 means.

Well, we were expecting low single digit growth.

(OPERATOR INSTRUCTIONS).

Saul Ludwig, KeyBanc Capital Markets.

On the acquisition, how much would that accretion have been?

Let's say we didn't have all these other headwinds that have popped up.

How much would the accretion have been?

Saul, we typically don't start off.

But somewhere between $0.05 and $0.10, to give you a little bit of a range there for partial year.

For like eight months.

And then, the China startup costs which have emerged on the scene, is that a big number?

Well, I think it was only $250,000, $300,000 in the first quarter but that was just a start.

You know, we just bought it.

Yes, I mean what did you think that is going to be for the year?

Oh, I think it will be a couple million dollars for the year.

And this lawn and garden unabsorbed overhead that you're going to have because you're going to have to cut back production, we went through that, was it back in '05, and the numbers really got hit pretty hard.

Should we be sort of taking a meat ax to expectations for the balance of the year in your Industrial Components group?

Well, there's no question that our Industrial Components group has had to revise their schedules down because of this.

It's in our guidance.

Yes, I would look for some low double-digit -- I think we're up 16%, Saul, in the quarter.

It's probably -- it's going to come down from that

So we should see an increase in earnings but pretty modest?

Yes.

Okay.

The -- in the TPO where your sales were up 25% it's very, very impressive.

Were your profits in TPO up commensurate with your revenue growth or were there other pressures that caused your TPO profit growth to be less than what your revenues are growing?

Or did you get leverage from that 25% growth?

Well there's no question that we got leverage.

I mean the TPO has had very little price erosion.

It's been -- as compared to insulation.

It's just -- without getting in too much detail, it's a negative product mix change in the -- for EPDM to shrink 25% compared to any other product we've got.

And so I wouldn't read -- as we've grown TPO and insulation, Saul, which we've been doing consistently for the last three or four years, you can go back and look at the margin history here.

It's just -- that's why the first quarter as you know we've made a few bets through the years on the first quarter.

It's so volatile for us because it's -- EPDM has real exposure in the North in the first quarter.

But we've maintained pretty reasonable margins in this business growing insulation and TPO and EPDM is shrinking.

But it's just a big swing for us in the -- this is their small quarter of the year.

And to have that product shrink 25%, that is historic (multiple speakers)

Well, I understand that.

But my question was, if we're just looking at TPO, whatever its profit contribution was last year, did it increase commensurate with your sales growth in TPO?

Yes.

I mean the TPO margins -- but remember, with every piece of TPO we sell insulation.

I mean, 90%-some.

So, it was the insulation contraction and the EPDM contraction that were much bigger negatives than the positive of TPO?

Yes.

The insulation business grew but the pricing and cost increases.

Those were bigger factors.

In other words, the factors -- if you want to look at the magnitude, the two primary drivers, drop in EPDM which created negative mix and price erosion and cost increases on insulation.

I mean, I haven't -- TPO to me was a neutral.

I didn't see much change in margins on TPO.

Okay.

Rick, to maintain that guidance at $3.15 to $3.25, in the face of some of the other headwinds that you enunciated, something has got to really hit the cover off the ball as we look at the last three quarters of the year.

Where are we going to see that whopping big earnings increase?

Which businesses are going to really drive it home because you've got to have pretty sharp earnings increases to get to the let's call it the midpoint of the guidance.

Well, as I said earlier in my comments, now our roofing business is still forecasting a very good year.

Tensolite is forecasting a record year.

FoodService is forecasting a record year.

Our off-highway braking business -- I mean our trailer -- I mean we've got some tough comparisons, Saul, but quite frankly, we've got very solid plans here.

I mean, remember, the shortfall in roofing -- I mean the question to ask yourself, has our roofing model changed?

We're suggesting to you it hasn't.

The first quarter is what it's always been.

And we've got a number of businesses that are forecasting record years.

Then finally, you were glad to hear about the pipeline being filled with some acquisitions and maybe some more deals coming down the pipe.

Is it possible that if you get some other deals done by the middle of the year that they could be somewhat additive to what we are already talking about?

Absolutely, Saul.

That's why I made the point we're disappointed.

We expected to raise our guidance with the purchase of Insulfoam.

And not being able to do that for the reasons I spelled out earlier.

So yes, we're looking at deals in our space that are accretive and there is some upside there.

So, if you are successful in closing some of those deals, the $3.15 to $3.25 -- if all those estimates that went into that play out as you think, there's some upside to that number if these other acquisitions come through as you hope they will.

That's correct, Saul.

In other words, we don't -- obviously, we only put an acquisition into our guidance after we get it.

So, the future acquisitions that we are suggesting we're going to be able to do -- there's none of that in the forecast.

And then just finally, for Carol, you know, your accounts receivables were $320 million.

Last year, in the first quarter they were only like $227 million.

What sort of drove the huge increase year to year?

Well, part of it, Saul, is the effect of the securitization (multiple speakers)

That would explain about $50 million, because last year you had 132 and this year you had 70.

So that would be $50 million.

And we also -- the increased revenues for tire and wheel are sitting within the receivables balance as well.

And they have longer dated terms for some of the first quarter getting ready for the spring lawn and garden season.

We've always talked about how we have long dated turns in the first quarter (multiple speakers)

You're not concerned about that jump?

No, we're not.

Okay, good.

Thank you very much.

Robert Fetch, Lord Abbett.

In regards to the stock option expense this year, do you expect to be purchasing an equal amount of shares to offset that?

Yes, Robert, as we have stated before, our long-term -- our Board is committed to maintaining a certain number of shares outstanding and neutralizing the effect of stock options, so we've bought some shares back, recently to do that.

But based on a full acquisition pipeline at the current moment, and some better uses of cash, I don't know if we're going to do that in the next six months because of our acquisition pipeline.

But, yes, our long-term method here is to buy in shares to offset stock options.

Okay.

And in your Construction Materials, what percent roughly of the sales is insulation versus roofing material?

We don't break out the separate product lines within Construction Materials.

Yes, but the price degradation in the last six months of last year into this year was completely unrelated to the roofing and it was all insulation?

Yes, for the most part.

We have said that insulation is our single biggest product line and we have talked about that.

So you can kind of do some estimates there.

But, yes, there's been -- prices move around.

Each job is bid.

But the primary price erosion is in insulation.

And pricing, if it was down say year to year or say sequentially over the last number of quarters by 5%, where the material costs increased in Transportation, was it actually a greater amount than the reduction in price?

I don't have the details in front of me exactly updated.

The price erosion -- I don't have that number.

But as you know, transportation costs have gone up and some raw materials have been very volatile and I don't have a number off the top of my head, Robert.

The only reason I ask it that way is, if you just assumed insulation is maybe half the business and 5% on that, kind of have a 15, $14 million EBIT swing in that segment, kind of suggests that pricing was only a portion of that decline and actually the cost increases were more likely greater.

There's no question.

I mean, I think you are onto something there.

We just don't have the number in front of us.

There's no question.

It's a combination of price erosion and cost increases.

We are announcing a 5% price increase July 1 and obviously the EPDM that we have talked about.

And on the overall inventories, as reported, they look like they are up about 5% on a 2% increase.

You suggested that tires are probably going to be a portion of that.

But with some of the sales that did not occur in the period because of the weather and construction, where actually is more of the product that is yet to move that is likely to move in the next few quarters?

The increase in the inventories is primarily -- from year end, it is primarily at the Construction Materials group because of the weather impact.

They've got a buildup in inventory that will work its way through the system in the second and third quarter.

Yes, and typically when you've seen some deferred business because of weather, can the roofers generally catch up?

Well, the history has been that there is a hell of an effort to catch up because they are not getting paid.

And snow, ice, wind, rain and, yes, there is an effort.

And Carol, I think, gave you some specific numbers about I think it was Chicago region.

So, yes, they have a very high incentive to catch up.

We told you we have taken our forecast down slightly.

Still record year for our roofing business, but took it down because historically, when you have had a quarter that bad you can't catch it all up from the original forecast.

And have the weather conditions actually created more demand, just with some of the severe rain conditions part of the country has seen that aren't even in the demand forecast yet at this point?

Yes.

Now we don't -- we really -- I mean typically, we get too pessimistic when we go through a situation like this.

We have not historically -- you are absolutely right, Robert.

Future demand should get better because this weather tears up roofs, and so we will have to see.

But we're still planning and the management team quite frankly a lot of optimism for a very good year here.

Okay.

And just thinking forward to some of the swing factors, in regards to China, you talked about some of the startup costs this year in the millions.

Will they largely have expired by the end of this year?

And I think you earlier said that you would expect to be getting some meaningful production and accretion from there next year?

Robert, I will tell you -- the management team believes they will break even in the fourth quarter.

I just articulated it's going to be bad news this year and it's going to be positive in '08.

So, that's the debate we have.

But you're very close here.

We think this -- remember, we were buying and reselling $60 million, $70 million worth of tires here with no margin.

We are now going to make them internally.

That's 15% on $60 million.

It doesn't take you long to do the math.

But my point is, this is going to be an '08 event more than an '07.

Okay.

And so, the production you will be getting will largely be replacing existing business or will these new programs that you talked about -- the 50 new projects -- is that actually going to be meaningfully additive?

Well, there's a meaningfully additive portion of that.

Out of the -- there's about 15 items that -- of the 50 that are existing items.

Robert, on the year-end call, Rick talked about how (technical difficulty) initially it will be replacement that we were doing buy for resale on the trailer tires, and it would be 50 to $60 million.

But that with the new products we expect the revenues generated from this facility over the next couple of years to equal $100 million.

Okay, thanks.

That's a good number.

In regards to the FoodService, we haven't really talked too much about that.

But, any meaningfully new programs or products that are going to be drivers over the next 12, 18 months?

Yes.

I mean this business is just initiating -- there's products that go into bars and portable bars and new kinds of storage things.

We're getting larger and larger products.

For commercial food service.

We're expanding our brush line.

We're spending a lot of time in Asia.

We'd like to create some advantages with certain items.

Our FoodService business I think has a very solid and robust growth plan.

And Tensolite I would guess is largely going to be driven incrementally by the new large programs that we'll be launching on the commercial side as opposed to say the business or military as we look into '08, '09, and '10?

No question about it.

Tensolite has raised their content on the latest Boeing, which is going to be primarily an '08 event.

But, still some nice things this year.

Tensolite really has got a three-year growth plan that is pretty much in the bag.

And our whole challenge here because of the growth in aerospace is to use their new acquisition in China that we've announced -- it's a small acquisition -- to renew our efforts with new products in test and measurement, which is a very strong area for us, and other areas of microwave communication.

So we're going to enjoy our content and this latest surge in commercial aircraft but we're working hard and have made an acquisition in Asia to grow in the test and measurement and microwave communication area, which is another area of strength for Tensolite.

Tensolite I think -- we believe it's a growth platform.

So, to the degree Tensolite has been performing as it has been in the recent past before these major new programs are actually start launching and shipping, where has the current strength been coming from?

Is it also still the more commercial than military or business jet?

Yes, absolutely.

It's commercial and test and measurement and microwave communications.

It's a whole host of things.

The ramp-up at Boeing on their new ship set is going to be more '08 and they are going to have a record year this year.

But what I'm saying is, the beauty of that business is, once you get the record this year we will have a better record in '08.

But these other markets provide additional opportunity for us.

And then, I guess the other piece of the truck market like it is for a lot of the class 8 related guys is down and depressed this year.

Expectation is as far as any pre-buying for 2010 that might occur in '08, '09 at least tends to provide some visibility that whatever happens this year, the year beyond that ought to be better off -- a trough period.

Would that be an expectation for yourselves?

Yes, Robert.

I will say, the disappointment to me -- we've all known forever about the pre-buying, the emissions change.

This is old history.

So what you do, you go to these customers -- everybody knows about this.

And you say what is your forecast, what is your schedule for '07?

What is going to be -- what is this?

So you get this data, then we hedge it because we don't believe it and then they come in early and change their schedule so much it goes past our hedge.

And that's what we have had to deal with here and so you're absolutely right.

Now, I will say most of our businesses that are exposed to like class 8, there's a heavy replacement content like in the braking business and so we've got some opportunities there.

And quite frankly, we plan to grow our braking business through this period.

Robert, as an example, the strength of the franchise for our on-highway braking business, our OE was down 26% for the first quarter because of the pre-buy on the environmental changes.

But, despite that, our on-highway braking business had an increase in sales of 5%.

And again, because as Rick noted, they have a strong after market share and they are continuing to pick up new customers and we will have growth in this business despite the fact that the OE is going to be down anywhere from 25% to 30% for the full year.

Okay, so you don't expect the OE brakes to be down much more on a percentage basis in the next few quarters than the first quarter?

No, they are expected to be about within that range.

Okay.

Then lastly, I guess the other swing factor will be what happens in the wheel area in regards to the lawn and garden market next year.

Are you talking about '08?

Yes.

Yes, well, obviously, one of the things we're doing here, just so you know, used to, we were 90% lawn and garden in our specialty tire and wheel business and we've been drawing that down.

Our strategy throughout this is to get through these cycles.

And as we go into construction ag and other business we've already gotten into, Robert, our exposure to lawn and garden is going down.

We still like lawn and garden and we're committed to it.

I will say that we are also raising prices in our specialty tire and wheel business.

We're raising prices in our braking business.

I didn't talk about it much but we still have some volatility on the cost side, on some raw materials.

And in general, we're going for price increases across the bulk of our businesses right now.

Well in the lawn and garden you might as well because the manufacturers have been raising their prices to customers.

So, might as well get your share.

All right, Robert, thank you.

There are no further questions at this time.

Well, we would like to thank everybody for taking the time to participate or listen to our call.

And I think, Carol, you're finished saying what you're going to say?

I'm done.

Okay, Carol says she's done so I'm done.

And we look forward to talking to you after the second quarter.

Thank you.

This concludes today's conference.

You may now disconnect.