Carlisle Companies Inc (CSL) 2007 Q4 法說會逐字稿

Good day and welcome to today's Hawk Corporation fourth-quarter earnings conference call.

Just a reminder today's call is being recorded.

At this time I would like to turn the call over to your host, Ronald Weinberg.

Please go ahead, Sir.

Thank you.

Good morning, everybody and thank you for joining us today.

This call is to discuss our fourth-quarter and year-end '07 results.

Conducting the call is myself, Ron Weinberg, I'm the chairman.

Joe Levanduski and Vice President and CFO, and Tom Gilbride, Vice President of Finance.

As you know, we released earnings this morning.

During the call we will review financials, give you an operating report on the business, including some discussion of guidance and then we will open the call to questions.

I would like to remind you the 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 materially affect financial performance related to forward-looking statements, please refer to our quarterly earnings releases in our periodic filings with the SEC.

I will begin by covering some of the broad points and issues that I would like to emphasize and then turn this over to Joe and Tom and then after that, we will be glad to take questions.

We are very pleased with the year.

We had sales that were up 7.8% over the previous year at $288.7 million.

And that for our friction business and for our continuing operations represents a record.

Our income from continuing operations was up 87.9%, which we are very, very pleased with.

And that is $18.6 million.

Now to drill down in that just a little bit, in the prior year, there was an impairment charge that made that year look a little bit worse.

But if you continue to analyze it and look at just our friction business alone, our income from continuing operations, without regard to that impairment charge was 23% and our total was 29%.

So that gives a little bit more of a pro forma apples-to apples comparison, which is an interesting analysis.

And our earnings per share was $0.75.

We completed the year with cash and marketable securities of $81 million, which gives us nice financial strength at a particularly unusual time in the economics of the world and give us untapped potential for looking at acquisitions.

We continue to look at acquisitions and friction-related businesses, and we will continue to stay focused in that area because we are staying within a tighter industry frame.

It makes it a little bit slower for us to be able to achieve an acquisition because we are going after a defined population of companies.

We continue to look and feel encouraged.

The markets that we serve were strong, and that was an important contributor to our sales gains for last year.

One of the interesting things that we are certainly not unaware of, the fiscal crises going on in the world and some of the softness in certain markets.

Within the industries we serve, there are specific dynamics that are driving them.

As one of our customers said, if their holding a recession, they forgot to invite me.

So we are aware and we are the beneficiary of that.

We certainly do keep our eyes on the economy as a whole, and I think, and I am proud to say, it is one of the reasons we were forward thinking in making sure that we have a lot of cash at this time.

Our markets continue to look good at this time.

We have gotten the discussions of Tulsa behind us, which were an issue for us in past years.

And I think it is important to note that the management changes that we made in the business going back two years ago, when the management at Wellman was changed.

And then the operational leadership changed one year ago.

And those things have led to further implementation of our lean manufacturing and operational inputs - improvements.

And that has had the effect of driving our margins up in '07.

Some of the projects that we worked on include leaning out our operations and also rationalizing our routing of any part we make, so we eliminate freight and just put things more local to where they're needed.

It is going to continue to make a difference.

We have expanded our capital budget for '08 as a result to give us increased capacity and increased ability to do these lean things that I am talking about.

Another factor that I would point out for '07 is, we did benefit from a number of the issues that are cited in the release and in our 10-K.

Those include strengthen the economy.

They include the strength of the your euro in relation to the dollar in our currency translations.

In addition, I think there's a factor that we havent seen as much as, and I think that we will in the future and that is getting our, what I call, our selling-cycle reactivated.

During '05 and '06 when our shipments were poor because of the move to Tulsa, it was more difficult to get new business awards than it will be when we are rolling along nicely.

Because of the selling cycle, we weren't able to get those activated as quickly as some of the other lean activities.

As we go forward, our goal will be to restore sales momentum.

That's something we look forward to kicking in in the future.

At this point, we won't to work on our three-key imperatives that we talk about regularly in the business, both internally and externally.

They are operations, getting ourselves lean, flawless delivery, flawless quality at the six sigma level.

Enhancing our technology, so we are bringing fresh ideas to our customers in the marketplace in what we call "customer intimacy".

Understanding what our customers want, anticipating it and knowing how to supply that.

It is just a constant theme of what we talk about internally that we keep focusing on those three items.

In addition, we are building our aftermarket business.

We have applied more management focus on it.

We think it is very attractive area for us and because we make parts that are wear parts that wear out, the aftermarket business is good.

Both the direct aftermarket and the aftermarket we serve through our OE customers.

In addition, we are working on some longer-range projects that we think have good potential.

One is the manufacturer of fuel-cell components, and the second is manufacture of carbon-composite materials that would have friction and other uses.

We have been are refunding research on those two activities.

We are gearing up with equipment for the fuel-cell production and we think in the future there will be more talk about those and more to show.

At this point, we have nothing new to announce on the SEC investigation, it continues.

We continue to cooperate and when there is something to announce, of course, we will.

At this point, I will turn this over to Joe Levanduski and also Tom Gilbride, who will give further details and guidance.

Thank you, Ron.

Hawk Corporation set a new record for revenues for the 2007 year finishing at $228.7 million up 7.9%.

We do expect this record to be short lived but I will refrain from discussing that until I get to the guidance section of this presentation relating to the 2008 year.

Friction segment was up $16 million to $215 million, versus just under $200 million in 2006.

All our markets or majority of the markets were reporting strong numbers except for our truck market, which we had anticipated.

Pricing actions, new business awards that Ron alluded to and the strength that euro contributed to the success of the friction segment numbers.

Our racing segment was up 5.8% to 12.8 million versus 12.1 million driven by the success of the initial introduction of the car-of-tomorrow concept in Nascar.

Currency exchange rate accounted for approximately 3.2% of net sales increase.

The diversity of our market pie chart is obviously a strength of our organization and is led by construction of mining, which is our largest segment of reported was up 15.1% for the year.

Our aerospace and defense was up about 5.6%, agriculture was up 18.2%, and specially friction was up 5.3%.

As we mentioned, the truck market which was coming off of a soft year in 2006 -- I'm sorry, 2007 was extremely strong in 2006's volume for new truck sales in advance of the '07 emissions standards change positively affected the 2007 sales in this market.

Truck was down 18% in 2007 which was better than we had originally anticipated.

Gross margins improved to 23.2%, versus 22% in 2006.

Operating margins also improved to 8.1% from a reported 4.7%.

Ron mentioned the good will impartment charge in 2006, taking that into account, operating margins in 2006 adjusted were 6.8%.

So, apples-to apples comparison, 8.1% versus 6.8%.

Pricing actions and continued improvements from our lean thinking initiatives have been responsible for driving the improved results and offsetting these improvements were the legal costs from the SEC investigation and increase incentive compensation expense that was variable and based upon the operating performance of our organization.

Interest expense lowered to $9.4 million versus $11.2 million in the prior year, that resulted from our successful tender of our bonds in August of this year, and the overall lowering of our borrowings level.

throughout the course of the year.

Interest income driven largely by the cash position that Ron mentioned, driven by the sale of the our precision components group and cash from operations was $3.8 million in 2007.

The resulting net income from continuing operations was 7.2 million versus a loss of $2 million in 2006 or roughly $0.75 per share versus a loss of $0.22 per share on a fully diluted basis.

Our discontinued operation reported an income of 10.8 million versus 4.9 million in the prior year reflecting the gain on sale of the precision components group.

The $10.1 million equates to a roughly $1.08 per share.

All in our net income was $17.3 million versus $3 million in 2006 or $1.83 per share versus $0.30 per share on roughly 9 .4 million shares outstanding as of December 31st, '07 versus 9.5 million shares outstanding in 2006.

Our balance sheet remains very strong at December 31st, '07 with cash and marketable securities of 81 million versus 6.2 million in the prior year.

The net cash is what is remaining postbond tender from the sale of the precision components group.

Our inventory and accounts receivable have increased year-over-year reflecting higher sales volumes, our working capital overall reduced to $113.3 million versus 115.8 million in the prior year and our current ratio now stands at 3.1 to 1 Long term debt is approximately $87 million versus 110 million in 2006.

Again, reflecting the successful bond tender in August of 2007.

We have a $17.9 million available under our current credit facility.

The credit facility is in total $30 million based upon the collateral calculation, we have 17.9 million available with the collateral we have today.

Total shareholders equity the 67.3 million versus 46.7 million in the prior year.

One other point I want to mention, we have substantially completed our share repurchase program as of December 31st, consuming approximately 3.7 million of the $4 million program that we announced earlier this year.

Turning to guidance, we are coming off of a good 2007 and we anticipate even better 2008 numbers.

Although there are risks and uncertainties in today's economic climate, the global position of our major customers and diversities of the markets that we serve lend itself to Hawk expecting to experience another solid year.

We are guiding to 2008 revenues of $245 to $250 million, which would represent a 7.1% to 9.3% increase over our 2007 published numbers.

We continue to extend our reach into markets in Russia, China and India and our operating income, we continue to watch the inflationary pressures on many of our raw material components that we consume in our manufacturing process.

And we do attempt to shield ourselves as best as possible against these cost increase, but we are subject to certain expenses increasing as we go through this year.

We also anticipate investing in human capital as we strengthen our commitment to many of the interim growth initiatives and Ron mentioned a few of those.

The resulting guidance from the income from operation is between $20 to $22 million, which represents roughly a 7.5% to 18.3% increase over the 2007 year.

Our effective tax rate, we anticipate being similar to the 2007 actual rate that we, as reflected in our income statement, which is approximately 43.4%.

Ron mentioned that we are going to aggressively continue to fund our internal projects, such as fuel cell and carbon composites.

We have a very aggressive capital spending plan being budgeted for 2008 and expect to spend $15 million versus $7.9 million that was spent in 2007.

Depreciation and amortization is also expected to fall similar to the 2007 rate and we anticipate at the end approximately $8 million for the 2008 year.

With that, I will turn it back to Ron Weinberg.

Thanks Joe.

At this time, we are prepared to take questions.

So anyone that has them operator, would you place them in.

Thank you, Sir.

(OPERATOR INSTRUCTIONS) Our first question comes from Joe Giamichael from Rodman & Renshaw.

Good afternoon, gentlemen.

Hi, Joe, how are you doing.

Not too bad.

Congratulations on the quarter.

Just a couple of quick questions for you.

The friction products gross margins were down sort of several hundred basis points from Q1 which had similar revenues.

Other than the inflationary pressures in steel that you talked about, what are some of the reasons that we are seeing this pressure?

I think part of it is just relating to the, to the segment and the calendar.

We do have a, during the fourth quarter, we do experience the holiday shut down cycle and working capital of management from many of our customers in the marketplace.

Hey, Joe, also, I think in the fourth quarter there are some product mix issues in which we had some deliveries in the first quarter not repeating in the fourth quarter at the same product level or at the same mix level.

Got it.

Okay.

So do you think you will return, would you expect to see sort of more normalized gross margins in that segment, not where you are in Q1 but somewhere between the difference in Q1 and Q4?

Going toward.

Let me answer it a different way and Joe can and Tom can answer.

Q4 is always kind of a micro challenge for us, if you will, because of the seasonality, there's holidays and the end of the year and that kind of thing that begins to affect us.

And Q1 generally while there aren't official seasons in our business, it just seems to be, customers manage inventory at the end of year and Q1 is always a nice perk.

Okay.

That's fine.

Just you gave pretty aggressive capital expenditure anticipations for '08.

What are the locations and for what are the related products that you are plan to go add all of this capacity?

Well, typically, the locations are a little bit all over.

In Italy we have, we are just constrained we are running flat out.

So we are working on increased capacity.

In our U.S.

plants, and we have actually down loaded or whatever phrase you want to use, some of our Italian demand and European demand to our plant in China.

So we are expanding there.

And then in addition, in the U.S., we are looking at expanding capacity in where we have constrained areas, where there is bottlenecks and we are also working hard on the lean process that I talked about.

Specifically, the phase of lean we are working on right now is, it is very simple and logical frankly.

It is cutting back the travel time for a given part.

In other words, we want to localize production.

So if we are making a given part in Tulsa, we don't want that part to have to travel very far around the country, if at all and we are working on being able to do.

In some cases, we have had stamping capacity in certain places and not in others, as an example.

So those are the areas that we are working on and it defines more in terms of process than it does particular product lines because any of these pieces of equipment because we have so focused - we are a friction supplier .These affect all of our product lines, particularly when it comes to the steel, which is the backing plates for all of them.

Got it.

Thank you.

Performance racing.

I know it is a very small piece of the total business, but what needs to be done here for this to start making a positive contribution on the operating line?

Well, it's, it is a frustrating process for us because we have gotten half of it where it is doing okay.

That's the quarter part and the tax part of it has been the culprit.

The answer to it is - we have made a transition from the call it the old-styled Nascar, where teams want greater technology and greater support.

Product development, we have been doing that.

I think that we have got to, yow know, restore our "customer intimacy" to use a phrase we use with the customers there and we are working on doing that.

Those are the things that have to happen.

People have asked us about that.

We have defined it not as a core business, so we don't see expanding it like some of the others but that's a pathway to fixing it.

The other thing from the racing side, 2007, you know, from a revenue standpoint we did see improvement in the top line.

It was offset by a lot of the engineering cost going at new product development areas.

In 2007 was the first year that Nascar introduced on a limited schedule the new-car-of- tomorrow initiative that they uncorked.

We did extremely well in terms of the performance of our product and we expect to see continued strength from that program as it becomes fully implemented in 2008.

They will be racing that new car platform and on every race in 2008.

So hopefully we will see continued success from that platform.

When we talk about racing, there is something that I always want to point out.

Our racing segment includes only our clutches and transmissions.

It does not include the brake materials, the friction materials we make for racing, both professional and amateur enthusiast.

That's within our Wellman division.

One last question and I will get out of the way here.

Can you just give us what the legal expense was for the quarter?

Do we have that?

For full year it was 1.1 million.

We didn't disclose it for the quarter itself.

I think it was pretty much a wash because I think that third quarter year-to-date something similar to the $1.1 million.

So you can squeeze the number out then.

Okay.

That's fine.

Is that an expense that in terms of on going, what do you expect to see there?

We are not giving guidance as to the number.

As long as we are working on the project, it is not going to go away but we haven't quantified it.

But you can - by taking what we have reported, you can squeeze out the number of what it was for the quarter.

So it gives you some idea of current rate run - run rate for Q4.

That's fine.

Thank you, congratulations on the quarter.

Thanks.

Our next question comes from Ivan Marcuse from KeyBanc Capital.

How much year-to-date are you seeing steel up?

Has it risen 30%?

40% since December?

It is - yes, it is really kind of coming down the pipe we are sensing that there's price increases coming through but we really haven't seen a significant impact as of the current time.

You have to remember we use a lot of specialty graded steel.

It is not just tied to commodity steel prices and so we are getting a sense that price increases are coming.

We haven't really seen a significant amount of price increases today.

How much of your cost is steel?

It is one of our largest, you know, because obviously friction material gets on a steel backing plate.

It is something that's consumed on every piece we ship out the door.

It is a pretty significant number.

I don't have the percentage in term of what steel is to our cost.

Got you.

And then you mentioned in your release - I didn't really understand.

You are not able to pass any of through to your customers because you have year long contracts.

No, I didn't say that.

We didn't say that.

In 2004, which was a cycle where steel, we got hit with steel surcharges during the course of the year.

Got you.

There's always a time line between when the steel vendors hit you with price increases and when we are able to negotiate with customers.

It did hit us with an expense in that era.

So the trick is to be able to be quick in negotiating those charge pass throughs and we would anticipate doing that.

What we mentioned in our guidance is that there's no guarantee as to how quickly we can pass those along and if we will be successful from a timing standpoint.

So there's always that risk of negative impact but our intent would be to try to negotiate those through the channel as best as possible.

Historically, what's the time line from passing through, the prices and the costs.

It varies.

I mean I am trying to think back in that era.

It was some number of months.

We spent a lot of time working on this from a management perspective, as we describe in there, we do some forward buying in some of the other commodities.

Right.

Copper, tin, and we try to match it so we don't get caught in currency swings either way.

Steel is a little different but Joe described it well.

We stay right on top of it.

We are not bashful, if you will, about seeking to cover those costs when they come and some times we get a lag and that's - that's probably as best we can in terms of quantify it for you.

Okay.

Got you.

Then how much did FX account for your fourth quarter revenue growth, the 8% revenue growth, how much of it was FX?

We indicated about 3.2% was from foreign exchange translation.

Wasn't that for the full year or just for the fourth quarter?

Oh I'm sorry.

That was the fourth quarter - or full year.

The fourth quarter wasn't all that different.

Okay.

So that's pretty much 3% is about the FX for fourth quarter?

Yes.

Yes.

And then last question you talked about your new business awards.

Can you give an idea of where these are and what business lines and a little more detail about them.

Yes, we haven't given public discussion of that.

The point I was just making is the sales cycle had hampered us up until now.

People would ask when were having slow deliveries, did we burn any relationships.

We continue to have relationships with the companies.

Particularly our OE customers would say to us, we are not giving you new business until you catch up in shipping the old.

We are past that now.

We think it is fair to say that we are key queued up and competitive to get new business and are - lets call it, fully energized to go after it.

Don't have exact numbers for you other than you can see the thinking we are doing within our guidance for '08.

Okay.

Actually, one more question.

Was that you said that truck was only down 18%.

In the beginning of the year you were expecting it to down 30.

What's your anticipation for 2008?

Has it started off slow?

Has it started off stronger than expected or can you give a little color on that?

We don't provide guidance from in terms of percentage change in our forward-looking statements.

However, you know, the information that we get from our customers and from the industry analysts that follow the truck market, the new truck builds, we anticipate to see a rebounding.

The number this has softened in the last six months or so in terms of what the expectation is for '08 and '09.

There is a 2010 emission standard change looming out there.

So there's a lot of discussion as to what that will mean, as we go will you the 2008, 2009 era.

I think, you know, it is just overall we anticipate it to be, you know, a rebound from the 2007 year, but we don't guide to market performance.

Great.

Thanks a lot.

Great year.

Thank you.

Thanks.

(OPERATOR INSTRUCTIONS) Next we will go to Beth Lilly.

Good morning.

Hi, Beth, how are you.

Good.

How are you doing?

Good.

I wanted to just spend a minute and talk about your '08 guidance in term of your operating margin.

You have been implementing leans now for a while.

You have the Tulsa issues behind you.

I just wanted to better understand why your operating margins are not going to expand much?

I mean you know, from the 8%.

I mean you have give a range of 8 to 9%.

But can you just talk about that for a minute?

And then going forward, do you think those margins can get to double digit level?

Well, in terms of the first part of your question, a lot of the thing that we think are going to improve the margins result from the CapEx initiatives, localizing our production, and it is hard for us to anticipate the timing of these things.

When we don't have a firm fix on it, we opt for conservatism.

Equipment coming in, when does it get run in, when do we see the benefits of it.

So that's probably a large part of the answer to the timing, why you don't see more.

We are always going to work for more but we don't have any assuredness or guidance that we will have a bigger expansion of the margin.

In terms of where we could see it going, again, I am not going to guide to it, but we certainly have goals and ambitions of raising our operating margins.

You know, we think it is possible in the business and you know, I don't know how much I can add to it than that.

The process of lean is, you know, the phrase, continuing improvement, and we plan to do that.

Uh-huh.

And weren't there some issues geographically; right?

Your very profitable overseas; correct?

Yes.

Yes.

So, and I am trying to remember, is it the U.S.

business that needs to get the margins up?

It is the U.S.

business where we have had that discussion in the past when it comes to federal income taxes and why our higher tax rate because we - and a little bit of that, we sort of have to be careful of how we describe it because it can be misleading.

In other words, financially you are exactly right.

We would be showing what is in effect, a minor profit or loss domestically and being very profitable overseas.

We have all of our overhead costs here and it can lead to a little bit of a, - it can be some what misleading, I think.

The other part of that is we have the Tulsa start up and that did make it a reality.

We weren't showing the profits that we wanted to and expect to in the future.

But it would be a misnomer to define our domestic business as a loser and our foreign as profitable.

Okay.

But the improvement that you are going to get going forward or continue to get going forward, that should drive the margins higher is clearly going to come from the U.S.

business.

A lot of it will, but we have been so busy in Italy, we have been frankly, you can get topped out up to a certain point you absorb more overhead when you fill a plant and then you can get to where you are scrambling and incurring different inefficiencies there.

We have almost reached that in Italy.

So I think it is fair to say that we have some opportunity in both places.

So how much of rising raw material costs are going - is an issue of your margins not going up very much next year?

I guess it is fair to say, on the one hand, we manage very aggressively against that and on the other hand, we are, you know, we are cautious.

We are aware of it.

It is a very, very important part of the way we manage the business.

I can't over-emphasize that too much, because if you (Inaudible) at this commodity market that we are in, if you are asleep at the switch a week, you know, you can get caught with it.

But having said that, we don't call up customers and talk about a surcharge or in increase and have them greet with open arms.

There's always some negotiation and some time lag that they fight for.

So that's something embedded in.

I can't quantify it for you but it is a factor.

Okay.

But it is, all right.

To the extent that you are able to - there is, that you are able to recover your raw material costs though - from your customers?

I mean typically we have been able to.

You know, as Joe said for the record, there's never an assuredness but we are not bashful about it and the other thing is - we have a - an important part of our business, one of the fundamental things here is that our products are an important part of the operation of - of the piece of equipment that they're on.

The way a clutch performs.

The way a brake performs.

It is very fundamental to our business.

We are engineered in.

So our customers need us and within reason, you know, we can get an understanding of what it takes to offset any commodity price increase.

Okay.

Great.

Very helpful.

Thank you.

I'm sorry.

No, go ahead.

I was just going.

I was going to say - as we have spoken before - in some cases, we try to match our expected demand with - with - you know, purchases, so we don't get hit with constant fluctuation in commodity prices.

In some of the raw materials we buy it is not really possible to do that.

So there are some fluctuation that is we will have to take on a, on a continuous basis or on going basis.

Others we have fixed.

So depending on what commodity, we will need to negotiate with customers, at the time when those prices go up.

Yes.

Okay.

Very helpful.

Thank you very much.

Thank you.

Our next question comes from Richard Marshall from Longbow Research.

Good morning.

This is are Richard Marshall.

Hi, Richard.

I'm sitting in for Eli this morning.

This has been asked a little but I want to try to maybe ask the price cost question a little bit differently.

Looking at profitability in the friction product section.

I guess looking at the full year '07, do you guys see a cost price squeeze and do you expect cost price pressure in '08?

You have addressed it a little but I just wanted to address that directly.

You mean do we see a cost squeeze in 2008?

Yes.

Well I think, to the extent of what we just described, we see, we don't see commodities going down.

We have tried to anticipate and do forward buying for certain of the commodities, and we think, we are sort of, let's say, on guard for steel pricing going up.

And so I think that the answer is yes.

We see pressures and we have talked about how we seek to manage them.

I think we will do pretty good.

We never get away completely unscathed - never perfect, but we think we can manage them pretty well.

Okay.

What about you mentioned your outlook for the truck market.

Can you talk about your outlook for the farm and construction both domestically and foreign markets?

Well, in other markets, we see firmness and strength, you know, our assessment - I was at an industry trade show last week called Con Expo, construction industry show.

It has some people to deal with ag and construction and deal with mining and you know, heavy equipment and the like, and the markets there look strong.

I mean there's nobody looking down.

They're seeing infrastructure building around the world.

Their seeing energy prices staying up.

They're seeing infrastructure building in foreign countrys and so that is what we see.

We temper our thinking and is that going to continue just because when we talk to the financial community.

There is so much obvious caution in the air right now.

Don't see anything different when we look at our end markets.

I don't know if we have a better crystal ball than anybody else but things are going strong and steady.

There's also some discussion in relations to the new tax relief act that that was passed recently and the impact that some of the accelerated depreciation aspects of that measure will have on equipment buying decisions down the pipe is a positive thing as well.

So, in terms of construction and agriculture, they believe that in North America, that could have a positive impact, as well.

The only other market that we have mentioned in our guidance is aircraft, which we anticipate showing a modest growth in 2008.

Great.

A couple of other things, do you guys have any forward guidance profitability or sales on the performance auto?

Performance auto or performance racing?

Performance racing, excuse me.

I just wanted to see if you had any sales guidance or profitability.

We haven't dissected any specific sales guidance for it.

We haven't dissected any specific sales guidance for it.

We see it as a good sector for us but we havent modified any - It is about approximately 5% of our overall sales in the market segment and we just have been guiding and having discussions on our major markets.

All right.

A couple of housekeeping things and that will be it.

I look for interest charges and interest income in '08.

Interest expense, assuming status quo, it would be pretty easy to compute because the only debt we have on our books as of December 31st of any significant is our bonds which are roughly $87 million and it carries a fixed rate of 8.

75%.

So you can do the math on that.

It should be lower than what we had in 2007 given that we had 110 million during the beginning of August of 2007.

Interest income, you know, I think, you know, Beth probably has a little influence on that.

The rates in terms of what we have been able to re-invest in has been lowering since we - cash from early part of '07 to where we are at today.

So it is not going to be a significant number, just in terms of the interest rate percentage we are able to achieve on high grade investment vehicles.

All right.

And then just the last thing, what, you mentioned tax rates going to be about the same as for '08.

Is that staying at 43.4 I think you said?

Yes, based upon what we see today.

There are a lot of things affecting that and the, the performance of both domestic and foreign operations that we have discussed are are still there.

There are certain thing that is are, that are positive as well, some things that are the other way, tax law changes in Italy that should affect us positively.

And you know, as we, as we go forward, domestically, it would be a shift hopefully with more profitability affecting our affective tax rate.

But for the time being we are keeping it similar to where we are in '07.

What about '09 tax rate?

We haven't guided to anything in 2009 at this point.

Okay.

All right.

Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from Bob Labick from CJS Securities.

Good morning, gentlemen.

If you look out, can you give us a sense of how you see international operations contributing to your top line in '08, '09,'10?

We see them continuing to grow.

When you talk about international, it comes to us in two different directions.

One is our international plants, obviously, Italy and China, and then a lot of our international business is a little bit hidden to us, in the sense that when we ship to our aircraft customers, our large OE, construction minning customers.

We don't know where it goes except that Caterpillar half of their business is overseas.

So we estimate that roughly 50% of our sales and that is kind of a swag number - overall, it's driven by the international markets.

We have the same view of those that you would that there's a lot of growth potential internationally.

We are responding by giving a special attention.

We have talked in the past about how we have opened up Russia.

We have a sales representative office there.

And we are giving it greater attention and we are going to do similar things with the other brick countries.

Okay.

Great.

Just from a footprint standpoint.

I want to point out that at the end of last year, we were able to - through the sale of the precision components group, there was equipment that was adjacent to our facility, that has been vacated and we are taking full ownership of that space going forward.

So in '08 we will be consuming that - that square footage and that should benefit us there in China.

Ron also mentioned that some of the overflow from Italy will move over to the China facility.

In 2007 we did discuss the fact we did purchase some land adjacent to our Italian facility and we continue to look at plans on how to best utilize that land in terms of bricks and mortar.

So we will continue to focus on expanding those two areas.

Okay.

Great.

Thank you.

Also, you said you haven't seen steel price increases so far, but industry does show steel is up 25% this quarter.

Can you help my understand how you guys have avoided those price increases given the rising steel?

Again, we use a specialty grade of steel and do buying in the steel market.

That's why currently we are not seeing it but as we go back into the marketplace we do anticipate it will be there.

Okay.

How far forward do you generally look when doing that buying?

Only a few months at that time.

Okay.

And turning to the domestic side, can you remind us of your exposure to residential construction?

Well, residential construction is very low, I mean it would be our primary largest customers.

We have indicated is really to the larger construction, larger mining equipment.

So, there's probably some, but it is relatively small.

Okay.

All right.

And it tends to get lost in the overall buy.

There are are small construction for home building is soft but it is so eclipsed by everything else going on there, we don't get a clear picture of it.

I understand.

And my last question, can you the audit assessment charge.

The audit assessment charge, you took this quarter and what you expect the outcome of that to be?

You are talking about Mexico?

Yes.

It was - it is a tax that related to a prior year audit.

We are contesting it and vigorously going after, all of our avenues to try to make sure that is not something that will end up having to see cash outlay on - to the best that is possible.

Obviously, we are dealing with a foreign Government in this area and we have legal advisors on the ground there that are helping us through that process.

So at this point, it is not something we can determine probability of when or how much, but from the counting standpoint we took a very conservative position and hope to pull them out of the liability.

Okay.

And just so I am clear, that charge is the 839,000 loss for discontinued operations; correct.

That's, yeah, that's the bulk of it.

Okay.

Okay.

Great.

That's all I have.

Thank you.

All right.

Thanks.

Our next question comes from Tony [Ventorino] from (Inaudible) Investors.

Hello, thanks for taking my call this morning.

Hi, Tony.

I just had a quick question about your cash balance and your plans for that.

You said you used about 3.7 of your 4 million repurchase plan.

Are you anticipating going back to the board to increase that amount or ask for another 4 million?

Also, can you comment on maybe the market for acquisitions.

I know you probably can't talk about anything specific but - are you looking - three months, six months on this?

How is the market for that looking?

Here is the thing, on the, on the first part, the amount of stock repurchase we do is governed by a feature of you are indenture for the outstanding bond.

So if we were to do that and try to do more, we would have to get a waiver of the limitation on the bond.

It is more than just a board issue.

Nothing doing right there now on that.

As far as the market for acquisitions, two things govern the pace of what's going on here.

Because we have targeted friction-related things, we know where most of the focus needs to be.

So it is much slower.

If we were just saying we are going to go buy an industrial manufacturer or performance automotive manufacturer, we would have seen 20 things right now probably negotiating for three of them.

But we stay very focused.

As we go forward, the current economic climate - I know from other things I hear in the financial marketplace has made it easier to see acquisitions.

It is probably a plus for us.

I am not going to put a time frame on how long it will be before we make an acquisition or if we do because these are sort of out of our control.

We are careful about how much money we spend and are staying some what focus.

We are proactive.

So the odds are with us but it could be four months.

It could be a year.

We are not trying to pin ourselves down because we want a deal that works for us.

So if you weren't able to find anything, what you would do with that money, would you, you know, buy back more debt?

We will do something useful with it.

We haven't crossed that bridge because it is unlikely we won't find something but we would explore all alternatives.

I mean if the world were to say there are no more acquisitions to be done because very hypothetical and silly but we would look for ways to return it to our stake holders.

Would you be looking overseas for these acquisitions.

Would these be U.S.

acquisitions.

We could look overseas.

Those are important markets.

We have talked about eastern Europe, India being of interest to us.

In the past we have been shown things in Brazil.

I don't know that we have any right now in front of us but it is a good market.

That's it for me.

Thank you very much.

Thank you.

And we have a follow up question from Joe Giamichael.

Thanks.

Just want to touch on the fuel cell and carbon composite.

I want to get a sense of what the development costs have been so far on these projects and if you have are any sense for when you anticipate starting to see a revenue stream from this?

On the fuel cell - I don't have a good number on each of those we have quantified publicly but on fuel cell, it is something that we are starting to buy equipment for and establish the manufacturing cell.

So I think it is fair so say we expect to seeing in this year.

We haven't quantified how much because so it will be with a start up in the beginning.

It is an attractive area and we think it has good potential.

As far as the carbon goes it is a similar thing.

It is fair so say we have spent a good amount of money every year.

Not capitalized and there we should begin to see some sales triple beginning this year.

Joe, historically, we have always invested significant amount on R&D.

We don't break it out for competitive reasons for specific projects, but we currently in 2007 spent just over $5 million in research and development costs, which equates to about 2.3%.

That was up from about - about $4.5 million in the prior year.

So we continue to see continued investment in these types of both R&D project initiatives within our organization to insure continued growth in the long term.

Could you briefly explain again how the friction business relates itself to both of those new potential business segments?

Yes.

When we talk about let's start with carbon composites.

As you may recall, a lot of the world of friction is carbon.

In fact, even one of our materials we sell Caterpillar is a carbon based paper.

So it is very much of the friction world.

We decided to make a - let's say a stronger statement - with some new ways of coming and making carbon.

That's what that is all about.

We refer to it has carbon composites, because as luck would have it, the products that we are coming up with seem to have other applications beyond friction.

So where that can happen, of course, we can make the material, we are going to take advantage of it.

It has a friction orientation to it.

That's what it is all about.

As far as fuel cells, the process for making component for fuel cells is very closely related to making a friction material.

It is the ability to press powders, the idea that when you press powders and fuse them or center them, you end up with a continued porosity and that's important in a fuel cell because fuel cells, you are migrating some of the mediums.

In some cases, you are placing barriers in others and this is a quality to have.

So we actually were approached by our largest customers being interested in having us manufacture for them.

That is how this happened.

We are not a designer for fuel cells.

We make the components for suppliers.

Okay.

Thank you.

Uh-huh.

(OPERATOR INSTRUCTIONS) At this time we have no further questions and I will turn the call back over to you Mr Weinberg for closing or additional remarks.

Thank you for joining us.

We are happy to talk and give additional information where we can.

Thank you very much.

That conclude's today's presentation.

Thank you for attending and have a great day.