Carlisle Companies Inc (CSL) 2008 Q2 法說會逐字稿

Welcome to the Hawk Corporation teleconference call. Today's conference is being recorded. Later there will be an opportunity to ask questions during our Q&A session. At this time I would like to turn the conference over to Mr. Ron Weinberg. Please go ahead, sir.

Thank you. Good morning everyone and thank you for joining us today. The purpose of this call is to discuss our 2008 second quarter and six month year-to-date financials. Conducting the call today is myself, Ron Weinberg, the Chairman and Chris Disantis, President and CEO; Joe Levanduski, Vice President and CFO and Tom Gilbride, Vice President of Finance.

As I am sure you know we released earnings today for the second quarter ended June 30, 2008. 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 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 materially affect financial performance related to forward-looking statements, please refer to Hawks' quarterly earnings releases and periodic filings with the Securities and Exchange Commission.

As we begin I'm going to make a few comments. As you would expect I am very pleased with the results; our sales are up almost 30%, income from continuing operations up 100% over last year and we are raising our guidance. What I would like to do is comment on a few of the drivers at work in the business, some of them internal and some of them external.

The most visible factor of course that our markets are strong and our large customers are doing well and of course that always bodes well for a sales opportunity for a company. Let me talk about some insights behind this. We work from a strategy and our mission is to build a great company focused on friction and to be a worldwide dominant force in our markets. And we employ and in addition to that -- we have had several organic outgrowths which those of you that have been following us will understand, and one of those is our entry into alternative energy, fuel cell components that we manufacture. And the second is carbon composites. Both of those give us an avenue to some future growth.

And the origin of them is there are production similarities to the processes we employ to make friction; so we had the benefit of really being able to germinate organic growth in a field with a process that is very close to what we already do. And as you know and you will hear more about it, we are beginning to display sales in the alternative energy area, in our pie charts and releases.

Now if you look at the markets we have benefited from global markets which have been very strong. An important fact that I want to point out to everyone as we are able to enjoy this benefit because we positioned ourselves intentionally going back a number of years ago. For a small company it is something we are very pleased with we have been able to do that. We are also getting current help in the United States markets from the lower currency valuations, but I also note that our foreign plants, Italy and China, are doing extremely well also.

Our competitive methodology is based on three things. I talk about them a lot because they are very much a part of the fabric of the company. One is operational excellence, being able to be flawless in our operational execution. The second is technology, being a great problem solver for our customers. And thirdly is customer dedication. And as we utilize these tools of our competitive craft they really serve to give us a very strong position in the market and we look to achieve new business awards based beyond just the markets strength that is going on out there in the world right now. And I comment on these things because this is what we look at as a longer-term horizon that we want to achieve.

We also have been very fortunate in working our brands. We have two we have talked about for a long time, VelveTouch and Hawk Brake. In addition we have entered the market with Black Hawk which is a brand name we have attached to our carbon composites and there will be more about that as time goes on.

Commenting on our acquisitions our strategy continues although we have focused in the short run also on a divestiture of our racing division and there are two components to that; one which has been announced has been sold and the other we continue to work on. Our acquisition focus will be friction related or friction, and we have nothing specific to announce right now although we are very pleased to note that our organic growth opportunities internally have been certainly sufficient to drive a very strong measure of growth. So we are doing that right now; you will hear more about our CapEx increased guidance and we will continue to talk about acquisitions as we have something to say.

At this point I'm going to turn this over to Chris Disantis who will comment on the markets and after that Joe Levanduski, our CFO, will talk about the financial results.

We had excellent sales for the second quarter, record output for many of our facilities, many of our product lines. We finished at $71.8 million in sales up $16.5 million or 29.8% versus the second quarter 2007. There were several economic drivers behind these results, first off we had very strong end market performance; we were successful in establishing new customers, introducing new parts. We implemented pricing actions specifically to offset raw material cost increases and we had the favorable foreign currency exchange impact to sales.

Our foreign facilities continue to amount to a significant amount of our total business, 45.4% of our total sales in the second quarter compared to 47.9% in the second quarter of 2007. On an end market specific basis if you compare the second quarter of 2008 to the second quarter of 2007 construction and mining which is our largest segment, was up 39.7%, agriculture was up 32.7%. Each of these segments were supported by strong global demand particularly in the fast developing BRIC countries.

In aircraft and defense we did well, up 13.7% and in heavy truck we were up 36.4%, the large part of that favorability was due to the emission standard change that negatively impacted the second quarter of 2007.

On an international facility specific basis, we are looking in terms of local currencies our business in Italy was up 32.5% in euros, and our China facility was up 82.1% in yuan. Our aftermarket business continues to prosper; Ron mentioned that our products are sold in those segments under the VelveTouch in HAWK Performance brands. That segment of the business did $8.9 million in sales in the second quarter of 2008 compared to $6.7 million of sales in the second quarter of 2007 up 32.8%. In that business we have been very successful in establishing new distribution partners, introducing new products, leveraging the power of those brands and using our technology to take market share.

With that I am going to turn it over to our CFO, Joe Levanduski, to review the financials.

Thank you, Chris. I would like to first start off by congratulating all of our employees worldwide on their passion and skills that they are putting into their day in, day out effort to achieve these types of results; it is an excellent job and they deserve all the recognition. Chris has touched upon the items that have affected our revenue that we reported for the second quarter, so I will start my discussion with the gross profit line of the income statement. Chris mentioned the volume and pricing actions and the currency translation and continued laser focus that we have on lean thinking Six Sigma initiatives that are driving the favorable operating performance of our business.

The gross profit percentage increased to 29.4% in the second quarter of 2008 versus 24.4% in the second quarter of 2007. Offsetting some of those favorable items are obviously the inflationary cost increases on a variety of manufacturing inputs that we are working very hard to pass through.

From a selling, technical and administrative standpoint we have been holding steady in terms of the percentage of our net revenues. We have seen increases in these areas; the increases are really driven by incremental R&D and marketing activities and our variable incentive compensation expense which is driven largely by the operating result that we are experiencing during the quarter and the year. Our operating income as a result of this is recorded at $10.6 million for the second quarter, up 100% from the second quarter of 2007.

Our operating margins improved to 14.8% versus 9.6% in the comparable quarter in 2007. The currency translation accounted for approximately 16.1% of this increase. From an interest expense perspective there has been virtually no change in our debt position since the end of 2007 and consistent with the interest expense levels in the first quarter, we reported second-quarter interest expense of approximately $2 million. Interest income was approximately $500,000 for the second quarter.

The effective tax rate that we are reporting in the second quarter was approximately 32.3% versus 49.9% in the second quarter of 2007 and on a year-to-date basis the rate is 36% versus 47.2%. The second quarter and year-to-date effective tax rate was favorably impacted by a one-time tax law change in Italy. This one-time change favorably impacted the second quarter earnings by approximately $391,000 or approximately $0.04 per share. And adjusting for this one-time item the effective tax rate for the quarter would have been 36.6% and on a year-to-date basis 38.5%. The 38.5% is our new revised guidance for effective tax rate for the company for the balance of 2008 which is down from our previous guidance of 41%.

All these factors considered our earnings per share on a fully diluted basis from continuing operations after taxes for the second quarter is reported at $0.66 per share versus $0.20 per share in the second quarter of 2007, and on a year-to-date basis $1.06 per share versus $0.40 per share in the same period of 2007.

Turning to the balance sheet are cash has decreased by $3.6 million since the end of 2007, but from the end of the first quarter we have seen an increase of approximately $6.5 million in cash and marketable securities. The volume that we have been experiencing on the topline has resulted in our accounts receivable increasing to $55 million versus $37.5 million at December 31, 2007; and inventory due to the production volume that we are experiencing has increased to $38.7 million versus $36.7 million at the end of the year 2007.

From a capital spending perspective we have finished the six-month period with approximately $6 million spent year-to-date versus $4.3 million in the same period of time in 2007; and we will talk about guidance and capital spending in a moment. The last thing I want to point out on the balance sheet is in terms of our credit facility, as you will recall we have a $30 million credit facility; due to the increase in the growth in our accounts receivable and inventory levels our credit facility and availability to borrow under that facility has increased to $22.6 million. As of June 30 we have zero borrowings under that credit facility.

Turning to the guidance section, based upon the results of the second-quarter and our expectations for our markets for the balance of the year we are pleased to increase our revenue range to between $255 million to $260 million which is an increase from our previous range which was stated at $245 million to $250 million. This new ranges is up 18.1% to 20.4% from the 2007 sales that we reported of $215.9 million.

The factors that we have considered in this guidance includes some softness that we expect in the aircraft market towards the tail end of this year, in response to many announcements that have come about in the past several weeks from major airlines. Also impacting the second half of the year and taking into a factor is the normal events that we see year in, year out, which is European August holiday season which impacts our Italian operation, and the fourth-quarter holiday schedule reducing the number of shipping days available to the company and our customers who normally adjust their working capital toward the tail end of the year.

As a result of this new range and our continued focus on lean thinking initiatives, we have also increased our operating income range to $28 million to %$30 million from our previous range of $21 million to $23 million. This represents a 43.6% to 53.9% increase from our 2007 operating income of $19.5 million. As a result of our improved revenue range and our operating guidance we are also increasing our capital spending expectations for the 2008 year to $20 million from our previous guidance of $15 million. This growth in capital spending expectation is obviously driven by continued capacity requirements to support our growth initiatives and our customer demand.

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

Thank you, Joe. At this point we are happy to take questions from anyone.

(OPERATOR INSTRUCTIONS) Robert Labick, CJS Securities.

This is (inaudible) for Bob. First of all congratulations on a very strong six-month business. My first question relates to the gross margin in the quarter which was obviously very high; how much of that improvement was due to higher prices on low-cost steel inventory?

I don't know that we have a breakout on how much of it was that. I think it is fair to say we are not suggesting that is a sustainable level of gross margin as Joe touched on for the second half of the year. We haven't broken out pricing on it.

And then in this quarter where specifically did you see the strong demand coming from and maybe you can they've even talk a little bit about how much was volume and how much was pricing?

When you say where, you mean what segments or what geographies?

Yes, and how sustainable is it going forward?

Okay. Let me comment on it and then Joe or Chris can wade in. Basically it is one of the things where we are fortunate the stars have lined up very nicely for us so we really didn't have down segments. Our normal discussion centers around the diversity of markets that we serve, both in terms of product focus and in terms of geography and everything was looking good.

There is one area that is obvious softness to people in the US here and that is things related to housing and I am sure somewhere in Caterpillars' portfolio there may be some softness but so much of their business is strong as they have been doing very well and we have been benefiting from that business. The demand was coming from a lot of places if that answers your questions.

When you ask about sustainability we commented on it a little bit, it is embedded in the remarks that I was making because nobody can count on just always getting perfect markets in all of your product lines. And so as we work internally our goal is to make sure that we are developing competitive strengths that will transcend ups and downs. So we enjoy being in a lot of markets around the world, we enjoy being in a lot of different product lines and embedded within this growth was just plain old, what we call NBAs, new business awards from new things. So all of this was not just strong unit volume increases from our existing customers.

I think when you look at the horizon and we touched upon there is always pluses and minuses out there in terms of sustainability, I think our diversification model is going to hold us in good stead. We touched upon the aircraft market expectations of some softness going for the tail end of the year until 2009. At the same time Ron mentioned Caterpillar, they recently put out an announcement that they are going to increase capacity in their US operations by investing $1 billion in capacity for mining trucks and heavy-duty infrastructure equipment which is right in our sweet spot.

So I think it kind of goes toward the strength of our diversification model that there is always segments of market opportunities within those segments that we have.

That is all I have. Thank you.

Eli Lustgarten, Longbow Research.

Good morning, everyone. Nice quarter. A couple of quick questions, want some clarification, your press release says the tax rate for the year will be 35%; then you said 38.5%. And you said 38.5% in the second half and there is a huge difference between that. For the third and fourth quarter 38.5 or the year ending 38.5 which (inaudible) third and fourth quarters at 42.5.

No, the 38.5% effective tax rate is our year-to-date through June 30 effective tax rate, once you adjust for that one-time impact from the accounting tax law changes. And that is our guidance for the full year.

The third and the fourth quarter should be 38.5 each.

That would be correct.

The big question for 2009 is that number hold or something near that number or do we go back to the 40s because it is a huge difference obviously, it is a dime a share effectively (inaudible).

We haven't put out guidance for 2009 so I don't really want to guide toward the effective tax rate. But it is really sensitive to the domestic earning versus the international earnings. That is what we have suffered from historically when our effective tax rate was higher, things have been balancing out the strength of our US operations has been continually improving and that has helped to balance the effective tax rate. So we don't see a reversal of that trend.

Now your guidance for the second half of the year, on a top line growth comprise roughly $60 million a quarter and that puts you at the upper end of your guidance -- I'm not seeing how $120 million -- you did a [259.6] I think it is, [137] are you looking at that much of a slowdown versus what we saw in the first half, volume wise?

Again there is the normal course of the second half being slightly less than the first half in terms of volume due to the factors that I mentioned that are consistent from your end and year out and as the European holiday season in the third quarter and then the fourth quarter were impacted by just the normal holiday short shipping season. And customer working capital. And then we also mentioned in terms of factors that we considered the softness of the aircraft industry. So these things are factored into our forecast and it is a normal trend that the second half is normally slightly off pace to the first half.

Actually we are materially different that's why I was looking. Besides the aerospace market are you seeing any slowdowns in any of the other markets for example, Caterpillar has this wonderful long-term outlook for you but they are cutting production in the second half of the year. Heavy truck production is lower in the second half of the year than it is in the first half of the year; is that where you are seeing any softness in any of those two businesses at all?

We expect to be fine with respect to those segments. You really have to understand a lot of different things to be able to understand what the outlook is for each segment. There is volume components to it, there is price, there is taking market share, there is new product initiatives. And fortunately we have got enough new business award momentum that we think the guidance that we put out there we are going to be able to achieve and we don't expect any segment to be significantly down versus prior year except for what we've guided you to expect.

Do you have any measure of how much new business you have in the first half of the year, or how much of your sales came from new business?

No, we don't disclose that. The other thing I want to carry-on with Chris' comment is the fact that our product in the marketplace is a wearable component and the aftermarket flavor of even our OE business is pretty substantial. So when you talk about truck all the acceleration prior to the emission standard change is all after market business to us today. That has helped not only in terms of diversification of the products and markets that we serve but the products that we have as well.

Are you seeing any change in your business in Europe particularly in Italy, with the -- we look to be a pretty good slowdown is hitting most of the European markets in the last two months, have there been any change in the outlook (inaudible) at all.

In order to understand the geographic impact of what you see in terms of changes in economies you really think to think of Hawk as a global business because even though we are selling a large amount of our product into the European market into components assemblies and modules, they wind up ending up in end products that are shipped globally around the world. So countries like Brazil, Russia, India, China -- even though the production is coming out of Italy the destination for much of that product is not in Europe. So and we don't really have that level of visibility to be able to see how much of a particular assembly winds up in a unit in Europe versus a unit in --

I guess what I'm referring to is for example is the big Caterpillar production cut is coming in Europe in second half of the year because of the slowdown in markets over there. I'm just wondering whether you said your business -- I know the product will go over the globe but whether you are seeing the people you supply in Europe (inaudible) have any change in their buying patterns.

No. Eli, we know what you're talking about, we watch it, too, because everybody is wondering if the recession that we feel here is spreading and what is it going to mean. We haven't seen it. It doesn't mean there is not going to be a turn down somewhere in the world somehow but we haven't seen it.

That is why I was asking whether you have seen any change; I wasn't implying you should have or not but you hear --

What Chris is trying to say though is if you blend the factors could there somewhere be something, maybe; but between the business of new business awards that we get that could be just a new application for us or the fact that we are making product that may come out of Italy but be shipped to an emerging economy, we just haven't seen it yet.

One final question 7.8% topline impact to foreign currency; do you have any measure of how much the foreign currency added to profits?

We indicated that foreign currency was 16.1% of the change, that 100% change in operating income, so there is that impact although it is not --.

16% of the change in operating?

16% of the 100% increase.

Thank you very much.

(OPERATOR INSTRUCTIONS) Joe Giamichael, Rodman and Renshaw.

Good morning, gentlemen. Congratulations on the quarter. You talked about some of the new customers and new product introductions, and I may have missed this earlier in the call but could you just give us an example of some of the new directions you are headed in from a product standpoint or new customers that are potentially taking you in a different direction?

Let me talk about the large products, if you are referring to fuel cell or alternative energy and carbon. Starting with those fuel cell is a way for those of you that aren't familiar with it making electricity with hydrogen as a source and it is a direct conversion to electricity and the only byproduct is pure water. The fuel cells we make or the components we make, are components for United Technologies. These are stationary fuel cells that will be large power providers for a remote location, a standby for a hospital. In fact we understand they have sold an application into the new World Trade Center, I think it is called Freedom Tower and it is going in there.

And so and the reason for this someone will ask, how do we talk about friction and end up in alternative energy but the manufacturing process for making friction materials which involves pressing powders, largely metal powders, is very close to what they need for making the separator plates and anodes and cathodes for a fuel cell. So we have just begun for the first time to break out sales. You all remember we have talked about it; we have not quantified anything and it is now in our pie chart. It is still small with respect to our totals but I have a feeling it is going to be growing very nicely, and you don't have to look hard to pick up any newspaper or watch any media and you see talk about alternative energy. And there is government support for these things aside from the political talk there is real action. We in Ohio here got a $1 million grant, a grant, not a loan, to help with our CapEx for fuel cell production. And so this is an important growth element for us and stay tuned we think we will have good news coming from it.

The other one which we call carbon composites stemmed from a search effort that we undertook starting several years ago to make a carbon-based friction material. And we assembled a team of our best engineers and they have come up some very, very interesting ideas and just as oftentimes happens when you go into a development like this you end up with other markets that get well served. So when the engineering team would go to trade shows and talk to people related to carbon and graphite and so forth, what emerged was interest in people saying this would be good for product X. And so some of the sales that we are just beginning to make in that segment aren't necessarily to friction and they are almost self generated from the marketplace which is taken an interest in this new material, which we can make rapidly and at less cost. Those are two of the product areas.

Going into the other areas we really don't give guidance or information on specific customer applications except to say that we are getting them beyond simply increased unit volume from the good economy that we are all enjoying. Does that answer your question or do you have a follow on?

It does Ron. Just in regards to that is it fair to assume that the two new areas that you were just talking about, fuel cell and related, is it fair to say that those are potentially higher gross margin opportunities than the traditional business?

We don't know yet, they are new, so really don't have a comment to say about that assumption. I will say that we certainly don't go into things at a loss. But when you are doing something as new with the growth potential of those in fuel cells there will be constant volume increases and we will be looking at a market that wants to expand and be able to bring the capital cost per kilowatt hour down. So there will be those challenges as we go forward; everybody in the energy business will be looking at that.

On the other products many of them are products that we are not making yet. In other words we are getting kind of call it raw interest in a new material that we have developed in effect, that can go into all kind of markets, so we really don't know about the margins.

Fair enough. In a different direction in regards to the capital structure you have done a tremendous job delevering the company over the past several years, using both your cash from operations and through the sales and the assets in an effort to streamline. From here or do you have any interest in trying to repurchase more of the senior notes? Either in the open market or through another tender? If not then how do you foresee redeploying the cash since you have got four or five years until the senior notes mature?

To begin with on the senior notes the market seems to value them pretty high despite strange credit markets, they seem to -- there is not a lot of market and people do not seem to want to sell them so we haven't spent a lot of energy working on that. We watch it but there is nothing particular to report. In terms of how to deploy the cash we have our acquisition program, we see it as really a loaded spring that we would love to find the right thing and we look. We have been very disciplined; we focused on friction and friction related things. When you keep your targets as tight as we have everybody that you want to buy doesn't always want to sell at a given time. We have got some prospects and we are looking and it is fair to say that we are not complacent about that until we have got a real asset on the books that we could turn into value by making the right acquisition. But we are going to work on getting the right one so nothing new to report yet.

And in the meantime, Joe, we continue to invest as we had stipulated right from the very beginning when we sold the powdered metal division that we were going to support internal projects. And we continue to do that as is highlighted in the fact that we have probably one of the more aggressive CapEx spending programs for 2008 that we have ever had.

Got it. Could you just give a sense, obviously you haven't been afraid in the past to go up or down the curve in terms of the size of transaction that you would look at, the things that you're looking at now or taking into consideration would these be considered bolt-ons or would these be of the magnitude that they would be a game changing acquisition?

It could be, I don't know what a game changing acquisition means. We are going to stay in friction or friction related. We will look at things of all size and I'm just kind of thinking of things that have crossed our sight line. Some of them could be things that you would call bolt-on, some of them would be a little bit larger. But whether they are game changers looking at something really big I just don't know, we haven't seen anything like that.

Okay, great. Congratulations on the quarter. Thanks for taking my questions.

Beth Lilly, Gabelli.

I wanted to ask about margins and just -- I think Ron, you mention either you or Joe talked about the gross margin that you generated in this quarter of 29.4% is not sustainable longer-term. But as you look at your margin structure what do you think is a sustainable gross margin. And the follow on with your lean activities and everything the guidance you have given for the rest of 2008 then for your operating generates an 11% operating margin if I take the midpoint of the range of the revenue and operating income. Is that a sustainable level going forward?

Generally we haven't guided to questions like that. It is a great question but I commend you for asking it that way. What we typically have done is give some of the qualitative factors that we work with and the challenges and goals that we have, and sometimes we surprise ourselves when we have a really good margin for a given quarter. As you know from hearing us talk when the gross margins were down below 25% we would be working, we would have these same kind of discussions. And we are employing all the tools of the trade to try and keep our margins as best we can.

The first one is continued lean work and a lot of the lean work we do now revolves around what we call localization. And we were talking about this before it became as dramatic -- everybody starting to talk about it now because freight costs are getting so high. People they don't want to ship a crate of tomatoes very far anymore because of fuel costs. We look at it as something even beyond that; it is not just the trucking cost but it is really being very lean in how we handle parts and we really are in midstream of doing that. We were doing it not just because of freight costs but we found ourselves moving a given part from Tulsa to Ohio or back to Tulsa or sourcing steel for China from somewhere else, things like that and we are working on that.

And I think it is fair to say that there is still margin pickup from that activity. One of the other things about margins is of course we are very much in a price volatile world and managing the spread between our costs and our selling price occupies a lot of the time of our operating people right now. And as you well know every customer wants to buy cheaper and every supplier wants to get more money and so we consider it important core competency of ourselves to be able to try to manage that process so we don't get hurt. And that is going to impact on what it is.

And then the other part is going to be volume and overhead absorption. And we work with that. I realize these qualitative things do not give you your exact answer but I just want you to know how aware we are of those things and how hard we work on maintaining it.

So just, I can drill down on one point you made which is the issues with Tulsa you think are still there in terms of operating improvements?

Yes.

What are the issues there, is the plant not operating as efficiently or as lean as -- we've talked about as a continuous improvement -- are there still tremendous lean opportunities, what is the issue with Tulsa?

First of all when you use the word issue and there is no harm in using it except it always has a pejorative connotation and so there is nothing wrong with Tulsa, it is humming along nicely, but we do go under the continuous improvement banner, kaizen as they call it in the lean world and we are always working on things. The biggest of which is of course the localization. Chris, anything you want to add to those comments?

Yes. There are benefits beyond what Ron was just talking about with respect to costs. We are eliminating all the back and forth in freight and logistics cost by doing the kinds of things that we are doing with localizing supply chains and building a better foundation which we make parts to deliver to customers, we want to reduce lead times. And when you reduce lead times you make yourselves more responsive and you're in a better position to take business when there is opportunities arise. So it is really as much a tool for growth on a topline basis for us as much as it is on margin enhancement. As far as margins go again we cannot guide a specific number but there is, it is always a journey as far as continuous improvements and there is always room for improvement. There is always waste in any system that we can take out and we just see it as a continuous process that we are going to relentlessly pursue improvement in all of our businesses.

Okay, great. That is very insightful. Thank you very much.

Eli Lustgarten, Longbow Securities.

Can you hear me? Two quick follow-ups, one in the pie chart you show alternative energy as 1% of sales which means the fuel cell stuff is running in the half a million to million dollar range. Is there any insight you can give us as to whether that sector can become any more material in 2009 or is it still an investment that may be a couple of years away before we see any materiality?

We have been saying and we believe it is going to grow; I don't know what material means when they say that means 10% of sales or something, we haven't tried to guide to that sort of thing.

You are set up for three right now.

You said sell for three?

The fact that we broke it out separately on the pie chart is kind of a strong statement as to how excited we are on the prospects in the fuel cell arena and alternative energy in general. I think we have high hopes for it. We don't have any guidance on any one of our specific markets including alternative energy but it may be a very small slice of the pie today but we are expecting that to grow as we go forward.

We don't worry about 2008 anymore, we worry about 2009. So I am just trying to --

I worry about 2007.

So do we.

Particularly the kind of environment when foreign currency not helping you anymore next year (inaudible) point. The other question I have is working capital needs and you had a huge step up in receivables, I guess that is Italy for the most part. Can you talk about whether you're going to solve that $15 million step up in receivables in the quarter whether that solves itself over time? (inaudible) I know the terms are much longer in Italy but can we get some idea of whether working capital will be brought back under control from there?

It wasn't all Italy; I mean Italy we talk about Italy only because their selling terms are different than US-based selling terms and that is normal over there. But I think with the sales growth was really what triggered the increase in receivables; clearly there is not a quality issue and we do expect that those levels will come down. As we look at the guidance for sales and your comment that it is a $60 million quarter we do expect there will be some -- with a leveling off of sales growth the balance of the year -- we will see that receivable numbers going down and collection in the cash.

The problem is the way that the growth happened; you consistently said month to month, sales records, you are growing faster than.

One final follow-on if I could. The $20 million capital spending this year is that going to be sustained for the next year or two? Is this the beginning of a multiyear $20 million level that we are seeing, given the expanded patterns of your customers, did you see like Caterpillar and Deere at this point?

We ourselves haven't gone beyond 2008 in terms of what we forecast so I wouldn't say that it is just, we just don't have guidance beyond 2008 yet.

All right, thank you very much.

It appears that we have no further questions at this time. I will now turn the program back over to Mr. Ronald Weinberg. Go ahead, sir.

Thank you everyone; we are always happy to talk with you and take questions as they occur. Have a good day.

This ends today's teleconference. Thank you for calling in. Please feel free to disconnect and have a nice day.