Carlisle Companies Inc (CSL) 2007 Q3 法說會逐字稿

Good day and welcome to this Hawk Corporation third-quarter earnings conference call.

Today's call is being recorded.

At this time I would like to turn the call over to Mr.

Ronald Weinberg.

Mr.

Weinberg, please go ahead.

Thank you for joining our call.

The purpose of the call is to discuss our third-quarter earnings, which we released last night.

Conducting the call today are myself, Ron Weinberg, Chairman; Joe Levanduski, our Vice President and CFO and Tom Gilbride, Vice President of Finance.

As you know, we released the earnings last night for the third quarter, and during our call today, we will review the financials and give you an operating report on the business.

After that, I will open the call up to questions.

I would like to remind you that statements made during this conference call which are not historical facts may be considered forward-looking statements.

Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied.

For further information concerning issues that could relate materially or could materially affect financial performance related to forward-looking statements, please refer to our quarterly earnings release and periodic filings with the SEC.

Let me begin with some comments on the financials, and then Joe and Tom will go into more detail, and I will also cover some broader points that I want to make.

We had a very nice quarter.

Sales were up 2.6% for the quarter and for the nine-month year-to-date 7.7%.

Our income from operations, as you see reported, was down 28.8%, and I will comment on that in just a minute because there is an aberration which drove that factor.

More importantly in our mind is the fact that the nine-months results were up 48% at the income from operations line.

Now let me comment on this.

A year ago, for those who follow the Company may recall, we had what we have called pricing actions, which were price increases across several of our categories and several of our customers.

Some of them when they were finally implemented involved a retroactive component which stretched back even into previous periods.

So you had price increases which hit in the third quarter of last year which drove up the earnings beyond on a onetime basis, if you will, and those changed the comparisons or softened the comparisons, if you will, when you are comparing this year to last year.

And so that theme will play certainly through even sales, operating income and gross margins for the third quarter of this year, and then on a more modest basis, it effects the nine months because of the longer period.

If there were not those retroactive price increases, we would have shown favorable quarter comparisons and certainly favorable year comparisons just to give you a flavor.

We are not going to quantify them beyond that though for both competitive reasons and reasons of nondisclosure agreements with our customers.

Our were earnings per share for continuing operations for the quarter we reported were $0.18 versus $0.14 in the prior year and year-to-date $0.59 versus $0.03 in the prior year.

So we have continued to post steady gains.

At this time we're not issuing guidance yet for '08, although Joe in a few minutes will comment on the guidance outstanding for '07.

Through '08, though, we will be continuing with our present strategies.

The first thing I will comment on is that as we have continually talked about our focus on operations going back six months, a year, two years, we were getting Tulsa up to speed, bringing it on stream and then getting it up to speed.

And we have continued to work on operations, and it, of course, reflects not just Tulsa but it is leaning out our entire system in response to the lean philosophies we have in manufacturing.

We continue to work on that.

And I think it is fair to say that we have got continued play to continue doing it.

It is not a stream that has run out, and we will be working on that further this year and in '08.

The markets have been strong and particularly in Europe, and we see a continuation certainly in Europe.

And China has been functioning also as a backstop for our strong growth in Europe as we move production there.

So that reflects both our philosophies of leaning out manufacturing and supporting Europe, which has got capacity issues if we were not able to use China.

We're seeing good growth internationally.

The Russian market is coming on, and we are beginning to work in that arena.

And we have recently just done a technical education trip throughout Asia and Russia to acquaint the market and educate the market on our products.

Very, very well received.

We're very enthusiastic about that.

We have talked in the past about our alternative energy initiative through fuel cells and that continues.

It is too early to quantify it, but as we are working along, it relates to a project that we are working on for fuel cells with our customer, UTC.

And these are stationary fuel cells that supply standby power, emergency power, remote power and in our opinion has enormous market potential.

It is one of those things where we have not quantified the future, but we think it can be very attractive, and there will be more talk about that as the projects develop.

With respect to the SEC investigation, I will comment on that in that there really is nothing new to report.

For those of you who are not familiar with it, it relates to a trade made in our stock by a hedge fund in mid-06.

The Company is cooperating fully in the SEC's gathering of information, and when there is something more to say, of course, we will report it.

We continue to look at acquisitions.

Our strategy is to focus on the friction and friction-related space.

We're continuing to do that, and it involves talking to a selected group of targets that would be of interest to us.

And again, when there is nothing teed up ready to announce yet and when there is or if there is, we will be commenting on it.

Another point I will comment on is our stock buyback.

You will recall that we announced a $4 million stock buyback which we began I think it was about a year ago, almost a year ago, and we are in the midst of that.

We have completed the repurchase of approximately $3 million worth of stock.

We by at selected times when our trading window is open and available to us, and we will continue to do that from time to time.

At this point I will turn this over to Joe and to Tom, and we will take questions when they finish commenting.

Thank you, Ron.

Good morning, everybody.

I just want to start with talking about the income statement.

Our revenue for the third quarter, as Ron mentioned, up 2.6% to $54.3 million, up from $52.9 million in the third quarter of 2006.

The comparative, as Ron mentioned, was dampened by the effects of the retroactive component of pricing actions that were reported in the third quarter of 2006.

On a full-year basis, the increase was 7.7% to $171.5 million versus $159.3 million for the nine-month period ending September 30 of '06.

Our friction segment was up 7.8% to $161 million, up from $149.4 million.

This set a new nine-month record for the division and is a significant increase over the prior year.

Racing was up 6.1% on a year-to-date basis to $10.5 million versus $9.9 million for the comparable period.

The effects of foreign currency exchange rates accounted for approximately 2.7% of the consolidated net sales increase of 7.7%.

To give a little flavor of revenue by market for the nine-month period, our largest sector, which is construction and mining which today represents about 42, almost 43% of our total revenue for the nine-month period, was up 16.6% for that nine-month period ending September 30 of '07.

Our agriculture market was up 16.3%.

Aerospace and defense were up 3%.

Our Hawk brake line was up 7.1%, specialty friction up 9.3%, and racing was up 6.1%.

The only market that we are reporting that was down but not down as significantly as what we had originally anticipated was the heavy truck market, which was affected by the changes in the standards that took place on January of this year.

That market was down 18.8% for the nine-month period ending September 30 of '07.

Our quarterly comparatives as we keep alluding to on a gross margin and operating income basis have been skewed by the 2006 retroactive pricing actions and the timing of recording our incentive compensation expenses for both periods.

Improvements in operating efficiencies are probably more readily reflected in the year-to-date gross profit and operating margins for our organization.

Our gross margin percentage improved to 23.8% from 22% in the same period of time last year.

Operating income as a percentage of sales for the nine-month period improved to 8.6% versus 6.3% last year.

Our legal costs associated with the SEC investigation amounted to approximately $400,000 for the quarter and $1.3 million on a year-to-date basis.

Our year-to-date operating margins, excluding those costs, would have put the operating margin as a percentage of sales to approximately 9.4%.

Interest expense for the quarter amounted to $2.3 million and $7.4 million for the year, which reflected lower debt levels and the results of the bond tender which we completed in August, and that was $22.9 million of bonds that we retired during that tender.

Our interest income was $1.1 million for the quarter and $2.9 million on a year-to-date basis, reflecting our cash position largely driven by the sale of our Precision Components group, which we finalized in early February of this year, and the cash being generated by our operations.

For the third quarter, we did recognize in the other expense line of our income statement a $600,000 pretax non-cash charge relating to the write-off of deferred financing costs associated with the bond tender.

This nonrecurring charge equated to roughly $0.04 a share on an after-tax basis that negatively impacted both the quarter and the nine-month earnings per shares that -- earnings per share number that we are reporting.

Our effective tax rate, our outlook for our effective tax rate for the 2007 year, which we held at the end of the second quarter, was 46.9%.

Based on our revised earnings guidance, which I will touch upon in a moment, we have adjusted this expectation to 43.1%.

This change brought the quarterly earnings effective tax rate down to 31.7%, reflecting the true-up of the provision reported at the end of the second quarter.

The earnings guidance and the effects of the effective tax rate brought on by improved earnings outlook for our domestic operations.

As Ron mentioned, our earnings per share from continuing operations for the quarter was $0.18 per share on a fully diluted basis versus $0.14 a share in the third quarter of '06 and $0.59 versus $0.03 per share for those same periods on a nine-month basis on continuing operations.

Including discontinued operations, the earnings per share on a fully diluted basis $0.18 per share versus $0.22 in the third quarter of 2006, and on a nine-month basis, we reported $1.76 for the nine months ended September 30 of '07 versus $0.45 in the comparable nine-month period last year.

In the guidance perspective, we have reaffirmed our revenue guidance of between 224 and $226 million versus $212 million that we reported for the full-year of 2006.

This represents 5.6 to 6.6% increase over the 2006 results.

And based on our continuing operating improvements and mix of expected revenue, we are pleased to increase our full-year operating income guidance to 17 to $19 million for the 2007 year.

That changes our prior expectation in our range which we had previously posted of 14 to $16 million.

Turning to the balance sheet, our cash and cash equivalents plus marketable securities at the end of June was $93.5 million.

The same number at the end of September was approximately $74 million or a reduction of $19.5 million in cash for the quarter.

The major drivers of this change was the $22.9 million required by the bond tender, plus $200,000 in accrued interest that was paid in August.

And we also incurred $800,000 of cash spent on the stock repurchase program in the third quarter of this year.

Offsetting those negative cash impacts were a positive cash flow coming from our operating results.

Working capital has actually decreased by $2.5 million from December 31, '06 levels, driven largely by reduced inventory levels reflecting the intense focus on lead management and shop floor efficiencies at all of our operating units.

Accounts Receivables have the increase which reflects the higher sales volumes being experienced.

Our average days of inventory to give a sense of the improvements that have been made at the end of September 30 of 2006, we had 92 days of average days in inventory.

At the end of the same period in 2007, that number had been reduced by 13 days to roughly 79 days of average inventory on hand.

Our DSO actually improved despite the increase in total receivables as improved to 64 days at the end of September of 2007 versus 66 days at the same time last year.

The last thing I want to point out in our balance sheet is the long-term debt that we currently have on our books.

It reflects the post-tendered bonds that are outstanding of $87.1 million.

With that, I will turn the call back to Ron.

Okay.

Thanks, Joe.

At this point we will take questions from anyone that would like to ask them.

(OPERATOR INSTRUCTIONS).

Joe Giamichael, Rodman & Renshaw.

Congratulations on the quarter.

I do not think there's too many surprises on this, so my questions will be limited.

I want to touch upon the SG&A which came and well below my expectations, and that included the $400,000 in legal.

So I guess operational-related SG&A was 72, which is very low for you guys.

I know you do not give specific line guidance, but you guide around it by giving the operating income targets.

Can you tell us what happened in Q3 so we get a better understanding between the gross margin and SG&A interplay as we go into Q4?

Well, one of the things that I mentioned, Joe, in terms of our change from quarter to quarter, if you are looking at SG&A from third quarter of last year to third quarter of this year, one of the significant drivers and one of our main philosophies in our organization is rewarding our employees based on incentive compensation, which is the variable expenses tied to the various metrics.

In the third quarter of last year, those amounts happened to be higher than the third quarter of 2007 due to the fact that we were working our way through the Tulsa and starting to get up to speed in Tulsa and the surrounding sister companies.

So the third quarter as our our expectations for the full-year results of 2006 started firming up, we ended up booking higher levels of incentive comp to reflect the progress that was being made to date.

In the third quarter of '07, it is more of a normalized rate based upon our expectations for the full year.

We have obviously started off with two very strong quarters prior to the third quarter.

So we had heavier incentive comp in those two quarters.

So in a strange way, our quarterly comparative from incentive comp actually shows that 2006 is higher than 2007.

On a year-to-date basis, the opposite is true where our incentive comp is actually higher in 2007 versus 2006.

So it is more of a timing of how we report our incentive compensation from that standpoint.

But that is a significant driver in terms of our SG&A change from year-to-year.

One of the other things that are impacting us and has impacted us from an early part of 2007 into the third quarter is the fact that as is normal in operations of our size, we have had some positions that we are in a position of filling, some spots within our roster that have left us at various times earlier this year.

We have a very rigorous process of finding the top talent within our organization whether it be engineering or finance or anything within our organization for that matter.

So it does take a significant amount of time.

As we look forward and not to place any sort of guidance on this, but obviously our intention is to fill those positions, and we should anticipate to see those costs reflect itself in future quarters.

Got it.

Okay.

Just I want to get a better sense of what we're seeing in the tax rate.

I know this is usually skewed upward due to the Italian operations.

In the text you indicated that the net sales from foreign facilities grew significantly as a percentage of sales, yet your tax rate dropped.

Where are those sales coming from that would help to sort of normalize your traditionally very high tax rate?

I will let Ron touch upon the sales question, but the effective tax rate is kind of a blend of a higher tax rate in our Italian facility and the fact that we were operating with domestic losses or domestic lower earnings levels within our organization.

But the normalization or the reduction that we're reporting is really more guided toward the fact that our domestic earnings picture in our outlook is improving, and our Italian or our European operation continues to maintain a positive operating result.

So it is not so much that it is being skewed by anything happening with Europe as it is more being affected by the positive things happening domestically.

Got it.

Okay.

Ron, I do not know if you want to touch upon the Italian question that Joe --

Can you repeat the question, Joe?

I was focusing on the tax part.

I was just trying to get a better sense of why the effective tax rate was as low as it was when you indicated in the text that the net sales from foreign facilities had grown significantly as a percentage of sales.

I thought it had sort of the opposite effect.

Well, no, what you are seeing is foreign sales have been strong.

They have been so strong in fact we reached the point of it is not always as efficient to be running at 110%, and that is why we are moving things to China.

But I think Joe answered the key question.

It relates more to domestic than it does to foreign.

Just to give you a -- (multiple speakers).

I was just going to follow-up with saying that I think in the second quarter we actually announced that we actually acquired some land adjacent to the Italian operation, and our contemplation and it is still being formalized is to expand that facility to give them additional capacity because they are doing so well.

Great.

Just one last question.

From what we are seeing and hearing from OEMs, the domestic capital equipment demand has been softening with the exception of ag really.

I know you touched upon this, but sort of by end market and geographies, can you tell us what you are hearing from your customers?

Well, we are not getting a clear picture because Joe said everything -- every sector except for heavy truck was up.

And I think -- let me give you a sense of this, and it is hard.

Our numbers don't really telescope it perfectly because they are all up and they are up nicely.

What I think is happening is there are certain sectors that obviously are very strong.

Natural resources, mining, agriculture, military have been strong.

So where there would be pockets of softness that I do think are there, especially related to construction or home construction or anything related to residential, is probably beginning to be there someplace, but I really cannot prove it for you with our numbers.

We're not seeing anything dramatic.

It could be a little bit in certain segments of construction.

But see construction goes with mining for us, so it still looks strong on a macro basis.

Got it.

Thank you.

Congratulations on the quarter.

I will let somebody else ask about the share repurchases.

Robert Labick, CJS Securities.

This is Casey Flavin sitting in for Bob.

Your gross profit declined in the quarter both year-over-year and sequentially.

Can you give us a sense of what factors impacted margins in the quarter and what your outlook is going forward?

Well, from a quarter to quarter basis, one of the main drivers is the retroactive price actions that positively impacted the margins in the third quarter of 2006.

So from a comparative basis, that is the major driving component of that change.

From a quarter to quarter basis, it is really driven by sales volume.

Our volumes were significantly higher in the first two quarters versus the third quarter, and mix does come into play as well from that standpoint.

Our actual on a nine-month basis, as I reported, our gross margins actually improved to 23.8% for the year versus 22% for the nine-month period ending September 30 of '06.

Okay.

And heavy truck you mentioned was down obviously in the quarter.

Can you give us a sense of what you expect to see in Q4 in '08, as well as some of the aftermarket trends that you are seeing and your ability to gain penetration there?

Well, in heavy truck in '08 I'm not going to comment on Q4.

I mean it will trail what is going on now.

We're not going to guide to the detail.

But in '08 call it the general forecast for heavy truck is it will begin to rebound.

Now the interesting thing about what you are seeing, we were down I think it was 18 or 19%.

The interesting thing is that the forecast early on in this year called for heavy truck to be down 30 to 40%.

So ironically enough we are pleasantly surprised that it is only down by what it is, and I'm sure you are aware of the background.

It was a lot of run-up purchasing to an emission standards change that started in '07.

So we see further buying in '08 for it to begin to come back.

Yes, the one thing that is out there on the horizon for truck is that there is another emission standards change, which I'm not too fluent in terms of what it actually calls for.

But there's another round of change expected in 2010.

So the wisdom in the marketplace today is based upon a lot of the trade journals and people who are really following the truck builds is that the second quarter of '07 was going to be the worst part of this downturn and then slowly see gradual ramping up where some of the forecasts that I see it out in the marketplace call for new truck builds in 2009 to be equivalent or similar to those that were experienced in 2006 because you will be on page with the same sort of buildup or run-up of advanced buys in advance of the 2010 emission standards change.

So obviously we're watching that closely, and we continue to keep our pulse on the marketplace as we determine our expectations for 2008 and 2009 for that matter.

One of the questions you asked was with regard to aftermarket.

Most of our truck aftermarket is done through our OE domestically in the United States.

But we have aggressively expanded our aftermarket sales efforts outside the US with distributors, and we're making good progress there.

So we do have significant aftermarket activity coming out of Mexico, out of areas of Europe.

Russia is a new area we have gone into.

So we are seeing nice growth levels in the aftermarket business outside the OE realm.

Great.

Thanks.

And lastly, can you give us a sense of the acquisition timeframe in Friction Products?

Is it still possible to be a first-half '08 event?

And can you also remind us of what your criteria is, whether it is immediately accretive or is that not necessarily the case if it is strategic in the future synergies?

Yes, I think our criteria are the following that we're focused on friction and friction related.

Our filter looks to things that are accretive whether it is right away or certainly sometimes you have some synergies to pick up in the short run.

In terms of a timeframe though, I cannot really give you one because when you are talking about acquisitions, those are things that are out of our control.

We are talking to a seller, and they have certainly at least half the say in the timing of a deal.

So there is nothing that is ready to be announced or close to being announced.

We're searching the market.

There are people for us to talk to, and we're talking to them.

[Ivan Marcuse], KeyBanc Capital Markets.

Two quick questions.

With oil I think it is right now $98.

Are you guys feeling any raw material pressures, and are you going to have to raise prices?

Can you give me a little color on that?

Well, you know I think when oil goes up like this, I mean it has been going up recently, of course, it will always put some pressure on energy costs and utilities, and they are going to be a fact of life.

We're not seeing anything -- in other words, oil is not our raw material.

It is not like we're a plastics manufacturer, so we feel it that way.

No, I understand that.

But in general most raw materials and commodities throughout the markets are feeling some upward pressure.

So I was just curious if you are seeing any of that and if you could comment on any of that?

Yes, that is what I was about to say.

When one commodity goes up, many of the others do also.

As we have said before, that is favorable to our mining business.

Now what that means, though, is that then you have to look to our ability if there were to be price increases to pass them on.

And I think we have demonstrated and been very sensitive to watching those things and trying to remain neutral to it.

So we are on top of it.

We track it carefully.

And when it is as broad as it is right now, our customers understand because they are seeing the same thing everywhere.

So I think it is fair to say we're going to be able to keep pace with whatever happens to come along.

Right.

And then my second question is, the fuel cell technology, when do you think you will be able to quantify or give some sort of outlook of what you think you are going to be able to capture from this opportunity?

My sense is within the next six months we will be able to talk a little bit more with more clarity about it.

What is going on right now is there is a customer.

There is demand.

In other words, we're dealing with a product that we know there is demand for, and there could be something beyond demand.

And by that I mean when you are talking about alternative energy and fuel cells, it could be something very exciting.

But we are not able to really try and quantify what that will be at.

We're in the process of developing the products, gearing up for production.

And we will have more to say about it.

As that happens, I think we will have some better sense of it over the next six months.

Tyson Bauer, Wealth Monitors & Co.

A quick question.

One has to do with given you don't know exactly where the end products end up utilized your component products as far as international versus domestic, are you able to get any sense of any benefits you have been receiving from a weaker dollar either directly or indirectly that may displace some weakness in certain pockets domestically?

Not really.

I mean our facilities ship within sort of the region.

We have seen the strengths in ag and construction both the US and Italy have distinct customers.

So we're not seeing one taking away from the other.

So Italy has seen some strong growth both in their ag and construction, but it is all -- their basic business is European based.

The US is primarily U.S.-based and to your point where it eventually goes somewhere.

We're not seeing any impact as it relates to Europe being reduced because they can get a better product -- (multiple speakers)

But I think you are right though.

We cannot put our finger on it and just say, well, Caterpillar called up and ordered more because of the dollar.

But it has to be benefiting us.

When you see as dramatic a change in currency as we have seen, it has got to be helping our US production, our US sales position.

Or conversely it means that a foreign competitor has got to really cut margins to stay in the game.

It has got to be helping us.

Before you've mentioned that you may have an international flavor in M&A activity if you go that route, does this hinder your ability to seek opportunities, or does this actually heighten your aggressiveness to go after and get more exposure on the international market?

We have not -- well, first of all, we're not intensely engaged with anything overseas right now.

So there's no way I could kind of put a price on whether that has raised a multiple if we are looking at a dollar acquisition.

But it does not -- when you say does it hinder or hamper our ambitions to go overseas, we are not -- you know, there are certain markets we would like to be in and we look and we're trolling there, but those things are not really currency related so much as the fact that if there's a market we want to get into and we are not there, we would be interested in it.

We have talked about, we have got an interest in Eastern Europe.

We have got an interest in India, but we don't have anything really I would say hot right now there.

Okay.

Regarding -- you may not be able to comment on the investigation status -- have they given you any kind of updates that you can share publicly?

And when does it get to a point where it just does not make any sense for the investigation to go on?

Well, we don't have anything to say about either one of those.

The second one certainly is not our decision, and the first one I have commented with really everything we know right now.

Eli Lustgarten, Longbow Securities.

A couple of quick questions.

One, tax rate for '08, does it stay at 43.1 or go back to 47?

Do you have any feel for what we should be assuming for next year?

At this point we have not completed our 2008 annual operating planning process, so it is really premature for me to be talking about a 2008 effective tax rate.

Obviously our goal all along as our domestic efficiencies continue to benefit us, our expectation would be that the effective tax rate will start somewhat normalizing.

But at this point it is too early for me to be talking about 2008.

Are you expecting to go up or down from 43.1 is what I was trying to ask.

I mean I'm not looking for precision; I'm just looking for ballpark.

Again, we don't really have the information available to speak to the effective tax rate for 2008.

Let's try the fourth quarter.

By your guidance you are assuming a very similar sales number in the fourth quarter and flat to weaker profitability if you put a 17 to 19 million operating EBIT number out.

Is that mix, or is there something else going on that caused the profitability to weaken in the fourth quarter?

Well, if you look at the upper end of our guidance range for the full year and just do the math, revenues will be up slightly higher than what we reported for the fourth quarter of '06.

Fourth quarter of '06, we reported $52.8 million --

I'm looking versus the third quarter that we just reported.

Yes, versus the third quarter this year -- (multiple speakers)

Just reported.

In other words, you forecasted effectively the same sales level and the same profit level as the upper end of your range.

Right.

It would be flat on both top-line and bottom-line.

So basically if we finish at the top end of our range, it would be somewhat identical to the third quarter of this year.

So it was back to the top end of the range is something that -- is that seasonality or something causing this year to see weakening -- a potential weakening of the numbers from where they are?

I think you do have a seasonality issue here; really not so much seasonality but just number of workdays.

Fourth quarter for us compared to third quarter we will have plant shutdowns.

The other problem we always have in the fourth quarter tends to be our customer working capital management in which we -- not that we are at their whim, but we do have fluctuations in shipments.

So that is probably the biggest reason that we're showing the flatness third quarter to fourth quarter in operating income.

Okay.

If we talk a bit about the main trends also, the heavy truck market is off at least 30 to 40%.

I mean Volvo is down 55.

Most of these guys are down over 50 actually this year, and you are down 18.8% year-to-date.

So there's something very different happening to your business than what is going on in the marketplace.

Is that mostly aftermarket difference?

Is that some European, some share gains or something?

Because you are down better than half -- (multiple speakers)

Well, the explanation that we think is the fact that we have a ware part, this aftermarket there's more aftermarket replacement parts in a ware part.

So it is the aftermarket that is driving it?

You have not looked at what the truck market is different between OEM and aftermarket at this point?

Yes, and remember our OEM customers serves an aftermarket, you know, as well.

Alright.

Let's go back to the construction and mining up 16.6.

Have you (inaudible) go back to that overseas market, the domestic market for mining equipment is down between 10 to 15%.

Virtually all domestic market and construction equipment in this country is down between 10 and 15% this year.

Now across the board other strength is outside the US.

Now once again is that aftermarket sales driving it, or is that the export products driving the market up, or do you have any sense of that?

I think there's somewhat of a combination.

I think when you talk about those numbers in construction, a lot of that has to do with new home constructions.

No, actually new home is bigger than that.

That's the total -- whether it's small, medium or large, it it is pretty much across the board.

All virtually every class in North American construction equipment sales are down between 10 and 15%.

But our numbers is construction and mining.

Yes, well, mining is down actually the same amount also in this country.

(multiple speakers) -- outside the US is very strong.

But North American markets are weak across the board.

Again, we go to the aftermarket flavor of our OE business.

I mean the construction and mining for our product lines have been extremely strong.

We have not really not any kind of pure marketshare wins of any significant size.

We continue to take on new business awards and new product introductions.

But what we're seeing right now is just continued use of our products and replacement of our products in the aftermarket side.

Our problem is we sell directly to our customer, and it shipped to a warehouse in the US.

We do know a lot of that is eventually going out to export to the international facilities versus domestic facilities.

But we do not have -- we're not able to break that down just because we are shipping to a single point.

Yes, we don't have the visibility on that.

And on the other side, the aerospace markets are actually considerably stronger than the 3% gain you are showing, you know, year-to-date.

So I'm just trying to understand is that just again some inventory adjustments, or is there something going on there?

Nothing we can identify.

You know, in a period like this, we can get inventory fluctuations or anything.

[Barry Posternak], [Rayborn Capital].

Congratulations on the quarter.

Just a couple of things quickly.

On the -- you moved to the increase in US income as a percentage of total and the effect that had on your tax rate.

Is that a trend you see continuing in the future where the U.S.-based taxable income or U.S.-based income would increase as a percentage of the total?

Well, again we are not in a position to talk about guidance for the 2008 year.

However, the things that we have been talking to that would probably flavor a response to that is our focus on lean manufacturing throughout our organization.

Our operating units both domestically and in our foreign operations have been focused very significantly on improving the profitability and pull-through of our revenue dollars to the bottom-line by better managing our shop floor production methods and techniques and inventory level management.

So what we are -- and I guess a correlation to those things we expect to continue, that focus we will definitely continue.

I know our guys are all pumped up on various Kaizen events that they are working on.

And so the expectation is that our domestic earnings will continue to benefit from those activities.

If you remember in our past conference calls, a lot of the charges that we took affected just domestic income.

So the move to Tulsa, the charges that we took related to Tulsa, the write-off of the impairment of the goodwill was all a domestic charge.

So historically we had seen domestic income affecting negatively those charges behind us with the lean initiatives, the improvements in the operations domestically.

Yes, I think that is what our expectation would be with regard to earnings.

Even the interest on our bonds were all domestically burdened, so the fact that we reduced our bonds outstanding through the tender will also benefit the domestic earnings outlook.

Okay.

Great.

Do you have the growth rate by end market for the quarter as opposed to the year-to-date?

We do not have them available.

We could probably get that back to you.

[Mark Drubiano], Federated Investors.

Just one quick question.

Under your bond indentures, what is your restricted payments availability given that you are coming towards the end of the stock repurchase on the $4 million?

Under the indenture, the restricted payment is the $4 million.

Okay.

So after that you are pretty much done?

Yes.

There is a provision for that to increase as earnings go up, but because of prior year losses, it will be awhile before we're able to get into a positive to buy additional stock within the indenture without making any changes to the indenture.

Beth Lilly, Gabelli.

My question is, and I did not see it in your queue, did you break out in terms of the operating profits what you earned domestically versus internationally?

No, although it is in the Q.

There is the guarantor footnote.

Okay.

And that guarantor footnote basically is a split between domestic and international.

So you can get a sense of the international operations.

Okay.

Is there -- I do not have the whole Q with me.

Is there -- do you break out the revenues also?

In the guarantor footnote, yes.

Yes, it is a complete income statement break out, income statement and balance sheet.

Okay.

And then just so I can get a little more clarification on the share repurchase, so once you exhaust that $4 million authorization, you cannot repurchase more, or does your net income need to grow and then the indenture is not such an issue?

Can you explain that?

The indenture provides for additional share repurchases as income levels increase.

So there is basically a test that has to be done.

Right now because of the historical charges that we took, that level we have not -- we're below zero.

So at this point we cannot use any of those earnings to repurchase stock.

So once we get to the $4 million, there would be a stop at this point without going to back to the bondholders.

Okay.

Thanks very much.

Other questions?

We have no more further questions over the phone.

Okay.

Well, thank you, everyone.

Thank you for joining the call, and we are always happy to talk to you.

Thank you.

And that does conclude today's presentation.

Thank you for your participation, and have a great day.