Carlisle Companies Inc (CSL) 2008 Q1 法說會逐字稿

Good day and welcome to the Hawk Corporation first quarter 2008 earnings conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference call over to the Chairman and CEO, Mr.

Ronald Weinberg.

Please go ahead, sir.

Thank you.

Hello everyone, and thanks for joining us today.

The purpose of this call is to discuss our 2008 first quarter financial results.

On the call and conducting it with me today is myself, also Chris DiSantis who is the President and COO of the company, Joe Levanduski, the Vice President and CFO and Tom Gilbride, who is Vice President of Finance.

As you know, we released earnings today, actually late Friday after the market closed for the first quarter end March31, 2008.

During our call, we will review the financials and give you an operating report on the business.

After that, we will be glad to open up the call to questions.

I would like to remind everyone on the call that statements made during the 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 Hawk's quarterly earnings releases and periodic filings with the SEC.

I am going to begin our comments today by taking a little bit of a step back, because occasionally during these calls, we get questions related to our overall blueprint for how we are running the business and where we are going with it, and so I'm going to comment on that and then turn this over to Chris DiSantis who will cover sales during the quarter and then Joe Levanduski will talk about the operational details -- the financial details in the release.

What governs most all of our decisions here in managing Hawk Corporation is shareholder value.

That's really the thing that we keep our eye on very clearly.

Many of those of you who watch us know why the the insiders own a fairly substantial amount of the company, and it is very important to us, as I'm sure it is to every shareholder.

The way we look at getting there with that is to be great at what we do.

Shareholder value doesn't just come from having a good quarter, it comes from very carefully building over a period of time and being really good and focused in what we seek to achieve.

The word focus is important to us.

If we want to be great, we want to be world class, to borrow a phrase.

It is hard enough to do it in one thing, never mind doing it in a lot of things.

So we have made a decision to focus on our friction business and things related to friction.

Over the last couple of years, you have seen us deploy our resources in that direction.

And in the financial sense, we have sold our Powder Metal business which we did our precision components business, we refer to it as -- we did that in early ' 07 and as we have recently announced, we intend and will be selling our racing business.

Nothing new to announce there yet, but we will be selling it.

In addition, we have realigned management around our focused strategy on friction, and so going back about two years ago, we selected the elements of the management in the company that would be most appropriate for leading our friction business, which was the business that we of course intended to stay with and emphasize, and then in keeping with that, as the management teams have unfolded the strategies and executed very well, then Chris DiSantis was appointed COO just a couple months ago of Hawk Corporation as a whole.

Now, the other aspect of this is very important is, what are the opportunities that we are afforded in the friction business or scalability, as people call it?

Even though this is a niche business, we operate globally and we are very well known.

We are a leader globally, and we do not find that we are blocked of opportunities -- lots of opportunities, and so as we look at what we are working on at any given time, what we see is opportunities and not closed doors or empty pathways, -- blind pathways.

We are in a situation right now where our customers are doing well.

If you look at the large customers such as Caterpillar, Case New Holland, we are fortunate that the economies and the industries they serve are good.

We also serve a variety of industries, so we are fortunate in being able to benefit from ones that are doing well at any given time.

In addition, the aftermarket business that we have offers a lot of opportunities and the various markets that we serve are large in relation to our size.

There are five of them that we described, the fleet business, supplying friction materials to fleets, military, what we call street performance that is our materials that are sold through retail channels for street use, but it is also a performance orientation.

And then closely related to that is racing and then finally industrial.

And so, each of these are markets that offer very, very attractive opportunities to us and it is up to our own strategies and efforts to succeed in them.

The other issue is geography.

We are diversified, we operate all over the world, we have manufacturing in many parts of the world, and so as we move along, there is always places for us to go where our products are wanted, respected and that is fueling and we think will continue to fuel our growth beyond the fact that the rest of the world happens to be going through very good economies right now.

Now, what we are doing is we have the benefit of being able to use the resources, some of which we achieved -- the liquidity we achieved when we sold the Powder Metal business a year ago so we can grow our company larger by doing it.

It has given us the ability to expand our CapEx and I think we make reference to the fact that we might be doing that in order to satisfy the demand as we now see it.

In addition, we have our acquisition program.

We have been working on it,.

I think it is going slower than some might be accustomed to seeing, simply because we are focused on friction.

We haven't thrown the doors open to opportunities of any sort and this by definition has made it move a little slower than it might have otherwise.

Now, another thing I will touch on is how we compete.

We keep three very simple imperatives in front of us where we want to be excellent.

One is operations, and we are fully utilizing the tools of the trade, if you will, in operations, lien manufacturing, six sigma, theory of constraints and these really are everyday bread and butter things right now that manufacturing companies use, and actually, our OE customers expect us to be good in these areas.

It is what creates quality, what creates service and what lets us to do it with leaner uses of resources.

The other one is technology.

While someone who is not familiar with what we do might tend to under estimate the amount of technology that is involved in friction materials, there is a lot of it there, and it is mission critical to our customers and their particular piece of equipment or vehicles that we be good at it.

So, our goal there is to be able to give a competitive advantage to our OE customers and to be able to give performance to our aftermarket customers, and we think that we do this very well.

The third of the key imperatives we want to be excellent at is customer intimacy, and that is not unique, every company talks about how they serve their customers.

It is our goal to be better at it and to really integrate the other two things.

Our operations so that we really form a seamless integration with our customers and with technology so we understand what their needs are and can give them that competitive advantage.

In addition to our basic portfolio of activities, we have two break out ideas we are working on and we have talked about.

One is, we are going to be manufacturing components for fuel cells.

Now, someone might ask, how is this related to friction?

There really is a very close similarity between some of the manufacturing processes that are used to make friction materials and that that is needed in fuel cells.

The kind of fuel cells we supply components for are going to be stationary fuel cells that are large and they supply standby power for buildings, remote locations, military uses, et cetera.

All the benefits of clean energy, it is an alternative energy form and we think it has got tremendous potential.

We haven't want quantified that potential, but we do think it has an opportunity to be material to our company.

The other thing is carbon composites.

The friction world uses carbon extensively.

We have one particular piece of -- one particular product that we have developed that uses carbon that we sell into the mining truck market and we are working on additional ways to make carbon composites primary for friction but we are coming to understand that the carbon we are making may have other uses, and if that's the case, we will market it that way as well.

This is an overview of how we are thinking.

I wanted to give a little bit of global insight to what our thinking is all about.

At this point, now to focus it down on the first quarter, I am going to turn this over to Chris DiSantis.

Thank you, Ron.

We continue to show our great momentum with all time record sales in the first quarter of $65.8 million.

That represented an increase of $11.6 million or 21.4% versus the first quarter of ' 07.

A variety of factors drove these results; strong end markets, new business awards and favorable exchange rates.

Our international growth was particularly strong, and sales from our foreign facilities now represent 45% of our global revenue compared to 38.7% in the first quarter of 2007.

Of the 21.4% in total growth, 6.6% of that is accounted for by the effects of foreign currency exchange rates.

One area that we are particularly proud of, that's a great success, is that our China facility was up 60.6% on a local currency basis versus the prior year.

All of our major market segments had good results in the first quarter compared to prior year.

Our largest, construction and mining was up 25.1% agricultural was up 46.3%.

Both of those segments are supported by very favorable strong global economic factors.

Our aircraft and defense segment was up 20.4% and heavy truck was down 6.5% as we anticipated.

Our aftermarket brands, Velvetouch and Hawk Performance also reached record sales within the quarter.

So in conclusion, overall we are very pleased with these outcomes and it is a very good way to start the year, and now I am going to turn it over to our CFO, Joe Levanduski to go through the rest of our financials.

Thank you, Chris.

Hawk benefited globally from the record volume as Chris just alluded to, and our continued operational improvements, combined with pricing actions that helped balance the impact of material and overhead inflation, these factors led to Hawk's gross margin increasing by $3.4 million to $17.4 million for the first quarter of 2008.

Gross margin as a percentage of net sales improved to 26.4%, up from 25.8% in the first quarter of last year.

Our selling, technical and administrative costs increased by $1.1 million to $9.7 million, however, dropping as a percentage of net sales to 14.6% from 15.9% of net sales for the first quarter of 2007.

This increase in spending was driven by higher employee related expenses including wages and benefits and our variable incentive compensation expense.

Another factor driving this increase was our research and development cost, which increased to $1.3 million from $1.1 million last year as we continued to stress the importance of our technology solutions.

This 1.3 million represents roughly 2% of our net sales.

The resulting income from operations -- from continuing operations was $6.5 million in first quarter of 2008 compared to $3.5 million in first quarter of 2007, an 85.7% increase.

Foreign currency exchange rates accounted for 17.1% of this increase.

Our interest expense dropped by $600,000 to $2 million for the quarter, compared to last year first quarter.

The results -- that resulted from lower debt levels that we experienced as a result of our third quarter bond tender where we reduced our total amount of bonds outstanding.

Interest income was relatively flat to last year's first quarter at approximately $700,000 for the quarter.

Our effective tax rate for the quarter was 41%, benefiting from improved domestic earnings and a recently enacted Italian tax law change that took affect in January this year.

As a result of all of this, our fully diluted earnings per share from continuing operations settled in at $0.40 per share versus $0.20 per share last year first quarter.

The shares are virtually unchanged at 9.4 million shares.

Our discontinued operation reported a loss of $700,000 in the first quarter of 2008 which included evaluation reserve of $750,000 pretax or roughly $488,000 net of tax related to the announced sale of our racing segment.

In the first quarter of 2007, the discontinued operations included the gain on sale of the precision components group.

As a result ,our fully diluted earnings per share from discontinued operation was a loss of $0.07 per share versus in the first quarter of 2008 versus $1.16 of income in the first quarter of 2007, and the resulting net earnings per diluted share added to $0.33 per share as of March 31, 2008 versus $1.36 in the first quarter of 2007.

Turning to the balance sheet, our working capital decreased by $14.9 million compared to net working capital as of March 31 of 2007, driven primarily by the $22.9 million redemption of our senior notes that occurred in the third quarter of 2007.

Accounts receivable increased $11.2 million compared to the December 31 levels driven by the increase in the sales volume as Chris depicted earlier.

Our inventory decreased by $900,000 as compared to the December 31 levels.

This was driven largely by the continued improvements in our lien initiatives as we continue to improve our operational and supply chain management.

Our cash and marketable securities declined by $10.1 million from December 31 of 2007 at $70.9 million of cash as of March 31, 2008.

Our first quarter cash flow was impacted by our semi-annual interest payment on our senior notes which is made in January and the payment of our annual variable incentive compensation and 401K contributions to our employees.

Our capital spending was also influenced in the first quarter of 2008.

We finished at $3.4 million, which is up compared to $2.5 million in our first quarter of 2007.

The 2008 spending is in line with our anticipated CapEx spending guidance which I will discuss a little bit further in a moment.

Our total debt remained virtually the same as of December 31, 2007, finishing at $87.1 million as of March 31, 2008.

Turning to our guidance, we had issued guidance in March which included our racing segment.

The guidance I will be talking to here today has been adjusted to reflect this segment being recorded as a discontinued operation.

Our new guidance for continuing operations represents an improved outlook for our friction segment.

Our revenue guidance range is now $245 million to $250 million, up roughly 13.5% to 15.8% from 2007 sales from continuing operations up $215.9 million.

This is based on strong performance of our global industrial markets.

Our income from continuing operations increased -- will increase to between $21 million and $23 million or up 7.7% to 18%, compared to 2007 income from continuing operations of $19.5 million.

This guidance reflects the favorable volume leverage offset by expected inflationary pressures and higher levels of invariable incentive compensation expenses that are expected.

Our current expected capital spending levels we expect to increase to $15 million for the 2008 year to support the lien initiatives, increased capacity and to support our key strategic initiatives.

This includes the fuel cell and carbon composites that Rob mentioned earlier.

Our depreciation and amortization should be approximately $8 million and our effective tax rate should be approximately 41% for the 2008 year.

With that, I will turn the conversation back to Ron Weinberg.

Alright, thanks Joe.

At this point, we are ready to take questions.

So operator, if you could key in everyone as to what they should do.

(OPERATOR INSTRUCTIONS) From Rodman and Renshaw, we will hear from Joe Giamichael.

Good afternoon, gentlemen, congratulations on the quarter.

Thank you.

You are much stronger than I had anticipated.

I just have a couple quick questions and I will get out of the way.

I know there are a lot of small numbers involved here, given the limited share account.

But you really came in well ahead of our expectations across the board.

I was particularly surprised by the gross margin.

Can you remind us how much of your cost of goods steel tends to be and then give us a bit more color on what you are seeing in pricing for that material and how you have avoided a margin squeeze there?

Let me kind of answer it in a different way.

In the course of a year, we use something like $40 million some odd worth of steel,and we do see price increases ahead.

We haven't seen them fully in the first quarter.

As we talked about before, it is very much a part of our philosophy to stay on top of this and we watch it -- we watch it very carefully, and we try to minimize and stay as commodity neutral in all of our buying and selling activities as we possibly can.

Obviously, you are doing a very good job there, because you sort of heard the order of magnitude of a much more significant impact across the board with the other companies.

Yes, it has and we have been fortunate.

We haven't seen -- we think more of it is ahead of us than is behind us, but we do watch it carefully, and I think it's fair to say, we expect to do better than average in that regard.

It is every company's goal to be able to pass it on, so you don't get left getting squeezed, and we feel our products are important enough to our customers where we should and have been able to do that.

Good, good.

From a cash flow perspective, it looks like a lot of capital is tied up in Q1.

Receivables grew significantly while you were reducing the payables.

I know Joe mentioned that briefly in his portion, and you've always been very focused on the lien initiatives, can you give us a little more color as to why the receivables grew as much as they did, outside of just higher levels of sales?

There is a couple of things.

Besides the higher level of sales, Chris mentioned that all our international facilities are doing extremely well.

Our European facility, as they continue to do extremely well from a volume standpoint, extend terms that are much more consistent with what the European community expects, and it is significantly higher than our North American terms.

So as we watch our receivables, our -- the credit quality is quite high, as you can well imagine, with the customer portfolio we have.

But the terms coming out of Italy has driven those receivables and the DSO up from the first quarter of 2007.

But we continue to manage that quite effectively.

Got it.

So it is just more an issue where the DSOs will probably reflect that the international customer base, more than what we have seen, okay.

The other thing you see, comparing it to the December 31 balance sheet, Joe, is that our fourth quarter tends to be a much slower quarter, so we do see that drop off in receivables, and then it zooms back up in the first quarter of the year.

So, that effect is in there also.

Got it, and just one last question, and Ron, I know you touched upon this and you sort of gave the overview.

But regarding the decision to sell the performance racing division, other than the under performance, can you walk us through some of the thought process, and how the company should benefit going forward as a pure play in the friction space?

Two things as far as far as the first part, why we sold it.

One, of course, is the under performance, and then secondly, it was under performance in a division that we really couldn't see putting large amounts of management resources into it from the rest of our team, because then we are pulling them away from the friction business and other things where the numbers are a lot larger.

The other thing about it too, and we would get many questions about this from portfolio managers and investors, would be how does it really relate to your business?

What is the importance?

And while theoretically, there is a benefit of the rub off between being well known in high profile racing and that it might help pull through some of our other products, we think that actual effect was small enough, and we think we have got enough closeness to the racing world with our brake materials to begin with, we really weren't getting a worthwhile benefit from that.

You put the things together, and it really wasn't that hard a decision to make, and then when you look at -- the second part was, how do we see focusing on friction?

It takes away even small amounts of diversion from that.

The big benefit in focusing resources was when we sold Powder Metal business because it was larger, it freed up more financial resources and management.

But the two -- it is all part of the plan, and that's why we are doing it.

I would also add that the return on invested capital, we believe the profile, in terms of risk and returns, is much better in friction than it is racing.

So when you are trading off where to invest your dollars, we believe that the friction business is the better choice.

Sounds good.

Thank you again.

Congratulations on the quarter.

I will jump out of the queue and allow some of the other callers to ask questions.

Thanks, Joe.

We will go next to Bob Labick with CJS Securities.

Hi, good afternoon.

This is Torin Eastburn filling in for Bob Labick.

Thanks for taking my call.

Thanks.

Can you talk about the overall demand you are seeing?

Obviously, overseas and most of your large customers' end markets are showing strong growth, but is there anything that was maybe weaker than you might have expected or that surprised you, anything accelerating or slowing down?

We have talked about a couple of areas that have been comparatively soft.

Truck has been -- heavy -- large truck on highway has been softer than the other areas that we serve, going back to the emissions standards change a year ago, There is some softness in small construction equipment, for example, that companies like Caterpillar sell, but we don't see it because it is so overshadowed by their larger -- by the products that are doing well.

But that is an area of softness, as you would expect, due to domestic residential construction.

One other comment on the truck side, this probably would be, from a comparative standpoint, the first quarter of 2007 was basically the last quarter from our perspective in 2007 that wasn't as effected by the emission standards change.

There was (inaudible) as of January 1, it was gradual.

We still saw some strength coming from the advanced bill cycle that led up to the emission standards change.

So while the numbers, if you look at it from a trending standpoint, was better than the fourth quarter, which was better than the third quarter, it still shows a negative comparative first quarter to first quarter.

We expect to see that start turning around in the second quarter.

Okay, great, thank you.

Also, in the press release you alluded to new business opportunities that you were seeing that wouldn't impact revenues until after 2008, but might affect CapEx.

Could you give any more detail on those?

It sounds like you might have alluded to them in the preamble as well.

Yes, well in the preamble, I was talking about the markets in general, and that is really what we were referring to.

We think that we have been successful in achieving a really -- it is almost a cliche for companies to say they are a leading manufacturer of X, but we really do mean it.

We are in a niche industry, we are very focused, and we regarded as one of the world leaders in what we do.

So, given a time right now where our technology is being very well accepted, business is good and we are seeing a lot of opportunities, no one specific thing, and obviously, we are not going to comment on details of every customer we are after, but it looks pretty good out there, there are opportunities for us.

That's all I have.

Thank you.

(OPERATOR INSTRUCTIONS) We will go next to Ivan Marcuse with Keybanc Capital Markets.

Hey guys, how are you doing?

Hi Ivan, how are you?

I just have a couple of quick hitters for you.

Joe, how much was pricing -- did pricing contribute to the revenue growth?

We don't really get into specifics of the individual components of the growth.

We don't really have that quantified.

We do that for obviously sensitive reasons in respect to our customer base and our competition.

Great, okay.

Well then, in China, you had a pretty strong quarter, it appeared, and what do you think drove that growth?

Was it just a matter of a favorable comparison or what is actually driving China?

China is favorable for a variety of reasons.

There are different segments of the China business.

There is an aftermarket segment, there is a domestic OE segment and there is -- also, it acts as a support unit for supplying other parts to our other facilities around the world.

So, there is an inner company portion, and in every respect, the China facility continues to do well.

There is a general dynamic in the market that the customers we serve are going to China, and part of our overall strategy is, wherever our customers go, that's where we are going to go from a service standpoint.

So the concept of setting up China eight or nine years ago was, in hindsight, a very smart decision because that's where the customers are going.

Do you expect to have the same sort of year-over-year comparisons throughout 2008 similar to what you had in the first quarter?

For the China facility specifically?

Yes.

We can't guide on the specifics of the performance --

Let me go back to the beginning of your question, though, just to make sure it is clear.

China is benefiting from all of the aspects.

The domestic Chinese market that we serve, the American transplants, and we have actually moved work from Italy as well into China.

We are getting it all the way around.

Whether we will continue to grow at 60%, we are not guiding on the specifics like that.

Right.

And then, one last question is in your release, you mention that you will be able to pass pricing through on steel to customers according -- depending on market conditions.

What type of market conditions would you not be able to pass pricing through or what kind of conditions are you counting on that you will be able --

I think you are reading more precision into my remarks.

What I'm really trying to say is that, first of all, we are attuned.

Whatever the market conditions are, and we have got no better crystal ball than anyone else except to see that steel -- people talk 17%, 20% steel price increase.

What I was giving you was the background of conditions that I think make it likely we will.

One background is that everybody understands that this is happening, it is not just a problem with us.

So when there is a general inflationary mode in a particular commodity or a shortage, customers tend to be understanding, because they have the same issues themselves, and they have the same capability themselves to pass it onto their customers.

So, the climate is right for us to gain understanding.

The other one is, I like to think that our customers understand we really do manage our processes very well.

It is not inefficiency or sloppiness on our part, but just world conditions that are affecting us all.

And then the third thing is that, we make a part that is very mission critical to a customer.

We are engineered in, and we provide them characteristics, technology that are important to them, and they want to continue using that.

It helps their product.

When someone runs a piece of equipment that has our friction materials in it, whether it is a clutch or brake, it could be a multi-million dollar piece of equipment and the performance of that several thousand dollar part really affects how that operator looks at that piece of equipment, what it feels like in his hands.

So we like to think we are pretty important to them, and it gives us a good chance to be able to keep ourselves commodity neutral.

Alright, thanks Ron.

One last question, when do you think you will be able to have a quantitative outlook on the fuel cell or the current -- the new technologies that you have?

I think maybe in fuel cell -- this is really a guess -- that we will begin to have a better feel of how numbers unfold as we get through the end of this year.

It doesn't mean we will have a perfect crystal ball, but we hope we will have something more to say about it.

The other product, I think, is still in a little earlier phase in its development.

Fuel cells, we are a supplier to a division of subsidiary of United Technologies, and they drive the technology and pace the marketplace, and we will see how it goes, and when it happens, we will know it.

The other is in a little earlier stage in its development.

Okay, great.

Great quarter, guys.

Thank you.

Next to Eli Lustgarten with Longbow Securities.

Good afternoon.

Hi Eli.

Couple of quick questions, one on tax rate 41% has gone down a bit.

Does it stay down particularly for 2009, or do we begin creeping back up?

Well obviously, haven't guided to 2009, obviously, as our foreign entities do well and the effects of the new tax law change is felt in Italy and our domestic earnings continue to improve, the trend hopefully is positive for us as we go forward.

Obviously, there is an election out there, and who knows what can happen.

So I don't have a crystal ball on 2009.

But at this point, we are probably located around the same area as opposed to going back to 47% or 48% or anything like that, as we used to have?

I hope so.

Secondly, your FIFO accounting, I believe, which means that this quarter really benefited from the use of that accounting.

Do you have any measure on what it would have -- what benefits you got?

I would have guessed if you made the extra dime (inaudible) using FIFO instead of LIFO in this quarter.

Is that why the guidance is so cautious, because you did not really increase the guidance of EBID given the fact that I think we all -- most of us had a loss in performance racing from 2008 anyway, so it is basically the same number.

I think -- to make sure I understand your question correctly you are asking for the inventory accounting, how we account for steel had any material impact on the gross margin in the first quarter --

And the profitability.

My suspicion is that the fact you were on FIFO helped you report the profit numbers --

The reason that we appeared where we are insulated in the first quarter, has to do with how we buy and how we ultimately sell steel (inaudible) of the product, not because of any accounting treatment with respect to steel.

With the hedges if you had a lower cost that -- I mean, you have given us very cautious guidance for the rest of the year based on the high material cost.

Say, you had hedges in place in the first quarter, the question becomes, what would those numbers look like under more normal kinds of environment that we are going to see for the rest of the year?

Are we going to see a much dampened profitability which is why you gave us such cautious guidance?

No let me answer it in a different way.

It is uncertainty of managing the process.

It is not that we expect to get slammed.

In other words, there is not a built in accounting mechanism that is going to grab us in the next three quarters.

There is the world of commodities out there that you see, just like everybody else, and we have got to manage our way through it.

Given that, you are calling our guidance cautious.

I don't know, we think it is realistic, and we try to account for what we see out there.

Ultimately, any negotiation is on a case by case basis with each customer.

When you have a thousand customers, it --

I think that's where it kind of lies in.

There is a level of clarity in terms of the expected price increases, although that could change overnight from where the expectations lie today in terms of steel increases, and steel is not the only thing that is increasing.

There are other components that are also increasing, inflationary impacts are felt throughout our, not just raw materials, but spending overhead.

Like spending.

the lack of clarity comes with, as Chris alluded to, the negotiations with our customers, the timing of those pass throughs and the ability to manage as effectively and efficiently that process that we can to mitigate that.

So there -- that is all kind of factored into the guidance.

When you talk about end market demand being so strong,with the construction equipment was up 25%, I guess, in the quarter, was that primarily driven by overseas market or was some of that benefited from the absence of inventory liquidation in the domestic market?

Do you have any sense for how much was end market demand and how much was just not cutting production as much as in the first quarter?

We don't have the ability to quantify ultimately the destination of the equipment.

For instance, for some of our major customers, we sell to all of their sites all over the world, but you may sell 50% of your revenue in the U.S.

It doesn't mean that those end products, those wheel loaders, those excavators, those haulers, that they are destined for the United States.

But if you follow sort of what kind of information has been released to the market by our major customers, you would say that the international growth, particularly in places like China, Asia Pacific and in the mining industries is carrying a lot of the weight of the growth.

One final question, you had a big surge in ag, up 46%.

Is that -- does that give you-- I know it will be sustainable for most of the year at the level, but did you see some of that step up last year or did we get comparative measure all year?

At what point of the anniversary some of the gains that we, I think started in the second half of last year?

The increase in ag did start for us in the second half of the year, so we are seeing a continuation of that.

The comparison of this quarter is pretty good because the markets are still strong.

A lot of that strength is coming out of Europe.

The second quarter is fine and then we begin to catch up with those gains of last year.

Probably continue to catch, up, but it is still pretty strong.

Oh, yes, it is going to be very strong all year, thank you.

Thanks Eli.

(OPERATOR INSTRUCTIONS) We will go next to Tyson Bauer with Wealth Monitors, Inc.

Good afternoon, gentlemen, and a great quarter.

Thanks, how are you?

A couple of quick questions.

You mentioned in your comments and on the press release your continued pursuit of acquisitions of organic growth in the friction segment.

In calls past, you seem to carry a good deal of optimism on the acquisition front.

Has that dampened at all if you are focused on the international scene, given the currency rates, and has that worked against your efforts if indeed you are primarily focused overseas?

No, there is nothing that has dampened our enthusiasm or confidence that we can do something.

I think maybe it is fair to say that we have been sort of busy working on the racing sale right now, and maybe that slowed down the pace, but there is nothing that has happened that has made us less optimistic.

Are you finding difficulties in the courting process?

Are evaluations coming more towards where you would like to see them?

What are you seeing as far as opportunities?

The courting process works fine, as you know, it is getting married that counts.

What we are seeing is that the fact that our universe is limited.

If we were just looking for an industrial area or looking for a second leg, which we are not, we would be seeing all kinds of things and chances are we would be getting something done in six months.

So, it is a little bit of a different discipline for us here, but we have not lost faith in what it represents, and there are targets of opportunity for us.

On the fuel cell side and I guess, does the racing performance and jettising that division when you are able to have anything to do with the prospects that you see in fuel cell a year out and which that may have a much better outlook for it and may, in fact, replace your racing division today, just with much better upside?

Well, I'm not sure I'm understanding your question.

Are you asking about whether fuel cell has got acquisition opportunities that we are looking at?

No, basically was it part of your decision to get rid of the racing division in fact because you see a better outlook in fuel cell, even though that may be a year or two down the road.

Basically, being that replacement of that ability to have a division that has higher growth than the rest of your business?

Well, I think the facts you both state are true, but it is not like one led to the other.

We were not happy with the performance of racing and feel like it is not the best bet for us, and fuel cell happens to be around and better.

but it was not like we were just comparing the two.

Everything you are saying is accurate, we just weren't balancing the two on each other.

We just made the decisions independently.

If racing had been doing alright, we would have kept it.

And then last question, on the the fuel cell side is, are there any federal government programs or provisions that are coming up in some of these bills that would aide in that development of that segment within the alternative energy marketplace?

Well, I think we can answer your question generically in that I think it is fair to say there is going to be more interest in alternative energy in this country and clean energy going forward.

As a data point in that, there was $1 million grant we got from the state of Ohio which helped pay for CapEx because this is alternative energy.

So we don't know of any particular bills that are going to drive it, but I think you will see strong interest in alternative energy and people are going to be willing to bet on it just for the good it does for the climate, and my guess is there probably will be something coming along, but we don't know that.

Okay, thank you gentlemen.

Thank you.

There appear to be no further questions at this time.

I will turn the conference back over to our speakers for any additional or closing comments.

Okay, well thank you very much everyone.

We enjoyed having you on the call and feel free to contact us at any time.

Thanks.

And that does conclude today's conference call, we thank you all for your participation and you may now disconnect.