Carlisle Companies Inc (CSL) 2010 Q4 法說會逐字稿

Good morning, my name is Tequila and I will be your conference operator today.

At this time I would like to welcome everyone to the Carlisle Company Inc.

fourth-quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions).

Thank you.

I would now like to turn the call over to Mr.

David Roberts, Chairman, President and CEO of Carlisle Companies.

Mr.

Roberts, you may begin.

Thank you.

Good morning and welcome to the Carlisle 2010 year-end conference call.

On the phone with me are Steve Ford, our CFO; Kevin Zdimal, our CAO; and Julia Chandler, our VP and Treasurer.

We provided slides for your convenience and they can be found on our website under the Investor Relations tab titled Presentations.

The slides will provide you with the data that we are presenting on today's call.

Before we go any further, please take a look at slide 2 titled Forward-Looking Statements.

We strongly encourage you to review this slide before making any investment decisions.

In 2008 I announced our strategic direction.

Simply put it said we were moving to fewer, larger businesses that provided growth opportunities in excess of GDP and possess a margin profile allowing us to generate 15% operating margins.

At the same time I announced the major restructuring of our Tire & Wheel business.

The restructuring of Tire & Wheel began immediately and throughout 2008, 2009 and 2010 we closed distribution centers and consolidated tire and wheel plants.

That restructuring is now substantially complete.

There will be about $2 million of restructuring charges that flow through the Transportation Product income statement in the first quarter, but 2011 is the year that Tire & Wheel delivers both revenue growth and margin growth.

In 2010 we sold the last of our two non-core businesses -- Johnson Truck Bodies and Trail King.

This moved us into the business segmentation we were aiming for back in 2008 when our strategy was developed.

As one of our analysts so aptly said in a recent report, we're done playing defense, we're now on the offense.

One of those offensive moves was the acquisition of Hawk in December for 413 -- I'm sorry, $414 million.

This was the largest acquisition Carlisle had completed in nearly 100 years of our history.

With the purchase of Hawk we bought a well run, a high-margin wet friction business that gives us a worldwide market-leading position in both dry and wet friction applications for off road.

We think this is just the beginning of what appears to be a very active acquisition pipeline and we have the balance sheet to support future acquisitions.

Our strategy has led us to five business segments -- Transportation Products, which includes the Tire & Wheel and drive belt business; Brake & Friction, which is a combination of our industrial brake and friction business and the Hawk acquisition; Construction Materials; Interconnect Technologies and FoodService, which did not change from last year.

To make it easier for you to track year-over-year performance we'll be restating the previous year's results in this new segment alignment.

Let's now move to the slides for a review of the fourth quarter.

I know this is an earnings season and I don't plan to take you through each slide in detail; rather I'll give you the Reader's Digest version, providing highlights from each slide.

That way we'll leave more time at the end of the meeting for questions and answers.

Let's turn to slide 4, which is a summary of the fourth quarter.

As you can see, our sales were up 15.5% organically and the acquisition of Hawk added 4.1% for a total of 20% growth in the quarter.

Our EBIT margins were 4.3%, but our earnings included $14.2 million of Hawk transition costs.

Also in the quarter, and this will be the theme throughout the call, we continue to have raw material cost pressures impacting our margins.

But we have to offset some of these costs with price increases and COS savings.

For continued operations, EPS was $0.35 including the Hawk acquisitions cost, but $0.51 with the Hawk acquisitions cost out of the base.

Slide 5 depicts our sales bridge.

The encouraging element shown in this slide is that the vast majority of our growth came through volume, followed by acquisitions and a small amount of price.

With the exception of FoodService all of our markets have turned favorable.

In FoodService the core business has grown but the healthcare business continues to be a laggard.

Slide 6 details the fourth-quarter margin bridge.

The major negative elements were raw material, acquisition costs and other costs which included spending on new product development.

These were offset by volume, price, COS savings and net restructuring costs.

Slide 7 takes a look at our performance for the full year 2010.

You will see that our sales were up 12%.

Sales in each of our businesses except FoodService grew in 2010.

Our EBIT margins were 7.8% which included $14.2 million in Hawk acquisition costs; $14.2 million of restructuring costs, primarily in the old ETF segment; and an effective tax rate of 30.5% compared to 23.5% in 2009.

As a reminder, we had a very favorable tax rate in the fourth quarter of 2009 due to the sale of Icopal, the European Construction Materials joint venture in 2007.

Slide 8 shows our full-year sales bridge.

You will notice that price was actually negative in the year, driven primarily by our Construction Materials business.

There have been some structural changes in the Construction Materials competitive landscape that should have a positive impact on pricing in 2011.

You'll also notice the double-digit organic growth in Braking growing at 36% and Interconnect Technologies growing at 17%.

As a reminder, these are the segments we have focused our growth on through product development and acquisitions.

Slide 9 shows our margin bridge for the year with the major negative impacts being the fire gain we had in 2009, raw material, acquisition costs and price.

On the positive side of the ledger were volume, COS savings and net restructuring costs.

Let's turn to slide 10 where we begin to provide you with some color on our segments.

In the fourth quarter we continued to see revenue growth in Construction Materials growing at 16%.

Our split between re-roofing and new construction was 75% re-roofing and 25% new construction.

I don't see this mix changing significantly in 2011.

Margins were down from 14.7% to 11.2% due to raw material increases and negative pricing.

On the next slide we see the Transportation Products, now comprised of the Tire & Wheel and the power transmission business, grew organically 14% with 7% of that growth being price.

Natural rubber was up 70% and synthetic rubber was up 39% in the period.

The good news in this segment is that our restructuring is substantially complete.

Jackson is manufacturing tires at the volumes we need to supply our customers' requirements.

Our margins went from a loss in 2009 to effectively a break even in 2010.

In our new segment, Brake & Friction, shown on slide 12, organic sales were up 158% in the quarter with the Hawk acquisition adding 109% to our growth.

Organically the business grew 50% in the quarter.

Margin performance was negatively impacted by $14 million of acquisition costs that flowed through the income statement in the month of December.

There will be an additional $2.5 million flowing through in the first quarter as well.

Interconnect Technologies was our star performer during the year.

In the fourth quarter our sales were up 20% and our margins improved from 4.8% to 13.6%.

For the year the business performed very well with sales being up 39% and earnings being up 116%.

The business grew nicely despite waiting for Boeing to ramp up the 787.

Slide 14 shows a 2% negative sales growth in FoodService and a decline in margin from 10.8% to 9.3%, almost all of which was the effect of raw material in the latter half of the year.

I'm now going to turn the presentation over to Steve Ford who will take us through the balance sheet, cash flow and working capital slides.

Steve?

Thanks, Dave.

Good morning.

Please turn to slide 15 of the presentation.

In the quarter we borrowed $250 million of public debt at an attractive 5-1/8% with a 10-year maturity to permanently finance a portion of the Hawk purchase price.

Both Moody's and S&P have maintained their credit rating on Carlisle.

Our balance sheet remains strong with a debt to capital ratio of 26% and we have over $400 million of availability under our revolver, leaving us well positioned to continue to focus on our growth objectives.

Turning to slide 16, for the year we generated $43 million of free cash flow, well below last year's record performance.

The decline was attributable to working capital which increased by $110 million, in line with our fourth-quarter organic revenue growth of 16%, as well as approximately $25 million in net working capital outflows due to the Hawk acquisition.

Last year reductions in working capital contributed $189 million as sales declined 21% in 2009.

Turning to slide 17, we continue to make progress reducing our working capital as a percentage of sales.

For the year average working capital was 22% of sales as compared to 25% for the full year 2009 as we have improved our DSOs, our [DPOs], as well as our inventory turns.

And with those remarks I'll turn the call back to Dave.

Thanks, Steve.

If we could open the call for questions, please.

(Operator Instructions).

Peter Lisnic.

Good morning, everyone.

Steve, I guess first question -- you talked about Construction Materials, the third-quarter to fourth-quarter pricing stability and that being indicative of the environment I guess to some degree.

Can you give us a sense as to what your go-forward expectations are on the pricing side and then on the commodity cost side and how we should think about construction margins for 2011?

Yes, I think that in 2011 we should see margins improve a bit.

We've seen some structural change, that I mentioned earlier in the call, in our competitive landscape that really we think will have a positive impact.

We've had one competitor take out an EPDM and a TPO plant; we had another competitor exit TPO completely.

And we've actually seen some -- wouldn't call them aggressive -- but basically pricing increases that have flowed through the market that are very similar to what our price increases have been, and timely with our price increases.

So I think these changes, Pete, should have a positive impact on what the margin will be in 2011.

Okay.

And is there a way of gauging the TPO rationalization in terms of percentage of industry capacity?

I don't have that offhand.

But I just -- I couldn't answer that, Pete, honestly.

But one major plant did come out.

But -- okay, so classify that as material I guess?

Right.

Okay.

And then the top-line plus 16% suggests very strong re-roofing growth.

We could look at the dodge or read numbers for new, but my guess is that there's also share gain.

And so how do we think about sort of share gain into 2011 and whether there is any pent-up demand that helped that number in the fourth quarter in 2010 and how that sort of rolls off potentially in 2011?

Yes, I don't think there's any share gain.

I think that we've all pretty much held our own share -- our market [wise].

You may pick up a couple of percentage points and over a period of time you'll give that back.

But I [don't] think there's a major shift in share.

I think what's happened is that as we go forward more and more people are replacing their roofs.

I think they're staying in buildings longer, they've got situations with roofs leaking and they have to replace those roofs.

Looking forward into 2011, the best thing that's happened to us from a re-roofing standpoint is the weather.

We have gone through two or three months that have been very wet across the country and this will bode well for us in re-roofing in 2011.

I think new construction will be relatively flat with last year.

I don't think we'll see any growth in that area, but I think we will see some growth in the re-roofing business.

Okay.

And then last question if I could, just on Jackson.

It sounds as though that's up and running full speed.

So we shouldn't expect to see any sort of one time inefficiency sorts of costs in the first quarter or first half of the year, is that the right way to think about it?

Well, there's about $2 million in restructuring -- we're calling it restructuring.

It's really in efficiency in a facility.

We think scrap will be a little bit higher; the productivity will be a little lower than what it will eventually be.

But that's included in the $2 million.

It's running -- the only thing that we've seen so far is scrap rates are a little higher than we had predicted, but also our spending is down in the plant, so we think that's offset some of the scrap.

We really expect that Jackson will be up and running, certainly by the second quarter, at productivity levels equal to the factories that we closed when we moved them down to Jackson, and actually be a little more productive than what we're realizing in the other facilities.

And presumably better cost structure is the way to think about that?

Yes, no question.

When you think about basically three factories into one, there's going to be significantly more -- the cost structure will definitely be lower.

And can you just remind me of what the savings were going from three to one?

I'm looking at Steve here, Pete, real quick.

Yes, Pete, I would say between $10 million and $15 million.

Okay.

All right, that is perfect.

I'll jump back in queue.

Thanks for your help.

All right, thanks, Pete.

Deane Dray.

Thank you.

Good morning, everyone.

Hey, good morning, Deane.

Hey, if we go back to roofing, just -- there's a couple -- some further color would be helpful.

You know, any fourth quarter we usually ask about roofing days.

And I know there was some pretty tough weather in the Northeast, so how did that affect the sell-through on roofing days?

Yes, I think that we did have, as you say, less roofing days in the fourth quarter, particularly as we got to December.

But still I look at the strength, it wasn't that significant.

But there were days that we couldn't get on roofs.

I think you'll see a little bit of that in the first quarter just because of what we're seeing weather wise.

But honestly, January was a pretty darn good month for us in the Construction Materials business.

So, I think there will be some lack of roofing days, but I think still overall we'll see some nice growth this year.

Sounds good.

And then can you quantify the price increases that you put through and how much of those actually you think will stick and the timing of those?

Yes, in TPO it was a 5% increase, EPDM was a 6% increase -- those go into effect late first quarter.

It's too early to predict what we're going to see, but I think some of the structural changes I talked about earlier will have a positive impact on being able to get most of that price.

Was there some pull in from expected pricing, is that a phenomenon that happens here?

I think there might be a little bit of that, but I don't think there's a lot.

You just can't carry a lot of TPO inventory and EPDM inventory.

As you know, those are a lot of -- or large rolls of material and there's not a lot of places to put them.

So a little bit of buy ahead but not a lot.

Dave, I was impressed that -- it isn't often that you get the stars line up where competition takes out capacity and then there's always a little bit of a game of chicken on price, and it sounds like matching price is the best scenario.

And so from that standpoint you could kind of check the box and say, all right, that seems to be preceding best case.

How about looking forward on quote activity?

Is there -- you said more re-roofing, but is there anything insightful there?

Well, other than we think 2011 is going to be a good year for Carlisle in total.

And I certainly don't see any indication that we'll see a pull back in re-roofing in 2011.

I think it will continue to be another strong year.

Anything on the mix that was interesting in the quarter for roofing?

No, not really.

No, not really.

Good, that's real helpful.

And then over on the FoodService side, is there anything -- is this just a pent-up demand issue, delays by the FoodService customers -- they've been getting squeezed in all different ways on budget constraints.

Is that what we should read into the softness, anything competitive?

And just, if you'd flesh that out.

Yes, there's no competitive gain or loss by our major competitors or ourselves.

So I think it's market softness.

If you look at the core FoodService business, it actually grew a bit last year; it was healthcare that was down.

And I think there, there were just budget constraints and budget concerns more than anything that prevented people from buying new equipment.

The core business, Deane, I think was up around 5% and it was the healthcare business that was actually down a bit.

So going into this year we're a little more optimistic than we were last year.

It appears as though population or volume is going back into the restaurants and we should start to see some equipment being bought now.

Great.

And then just last one for me on the Brake & Friction side.

First of all the whole split between the new casting of the segments is very intuitive, so I appreciate that.

I just want to -- how do you get 50%, 50% organic revenue growth?

Just kind of take us through what are the end markets and how that plays out?

It's simply ag and construction equipment.

Ag and construction equipment has been ramping up all year.

I'm sure you've seen what Caterpillar is doing, they're a major customer of ours.

It's across the globe.

Some of the equipment that's being built in the US is being exported.

It's just a very strong market dynamic today in that entire area.

Contribution margin on that kind of business, what range should we be expecting?

Yes, I think we still say about 30% contribution margins.

That's a business that has a little bit higher operating margins; it could be slightly higher, but the 30% range is good to use.

Great, thank you.

Ivan Marcuse.

Hey, guys, how are you doing?

Okay, Ivan.

How are you?

All right.

A couple quick questions.

On synthetic rubber going into third quarter or fourth quarter it looked like it was flat.

So is it starting to trend higher this quarter?

And with that, the price increases that you have, will that offset the increases you're seeing now plus some or should it just be more of a matching of the cost and the pricing?

Well, we think what we're going to see is more of a matching of the cost than being able to pull ahead of the cost.

The -- I'm stalling here while I look for a chart.

But there were synthetic raw material cost increases in the period, not as much as what natural rubber was, but we did have synthetic rubber going up.

Now what we're working is to try to end up qualifying more tires with a higher percent of synthetic than natural just because synthetic has gone up less than natural rubber so that could help as well.

Okay.

And then for the Construction Materials, you had a $9 million headwind in raw materials.

What are you sort of looking for in the first half of the year or first quarter, second quarter, however you want to break it out?

Yes, I think that with the price increases going in I would think there will be a little bit of headwind early in the quarter.

I think we should start to see that catch up toward the latter part of the quarter.

But we're planning on a little bit of headwind in raw material for the first quarter of 2011.

Okay.

And then how about for the Tire & Wheel?

Will that be -- with natural rubber going up would you expect that to accelerate through the year a little bit or do you think it should be (multiple speakers)?

Yes, what we were able to do is we actually hedged some of our material at the end of the third quarter and into the fourth quarter, which puts us in a reasonable position not to absorb all of these cost increases that we're seeing in rubber.

We put through price increases late last year.

We're still going to have to put through additional price increases, particularly in the aftermarket.

And we will be going after the OEs as well, just to keep up with what's happening with the raw materials.

But we did hedge a bit and I think we'll have less of an impact on the margin line in transportation this year than perhaps we've had in previous years.

Okay.

And then you said you're going to get -- in 2011 expect about $14 million in savings.

Does that include benefits from COS or is that just simply restructuring savings?

No, that was the restructuring in the Jackson facility.

I think the number is -- I think Steve said $10 million to $15 million.

I think we're probably going to be closer to maybe that $10 million mark than the $15 million.

But we'll be in -- somewhere between the $10 million and $15 million.

For COS?

No, no, for --

For Jackson restructuring.

Jackson.

Jackson, I got you.

Right.

And Ivan, that $10 million to $15 million that I mentioned for Jackson, that's really over two years.

We expect to get about half of it in 2011 and the other half in 2012.

So again, between like $5 million and $8 million of savings this year and a similar number next year.

Okay.

And then if you look -- then going over to COS, do you expect then more benefit going in 2011 or is it sort of (inaudible)?

No, I think we'll probably see substantially the same number that we saw this year, this year being 2010.

In 2011 we would expect to generate the same level of savings for ourselves.

On top of the savings you had this year?

Yes.

Okay.

Another quick question.

You said that you expect margins to improve throughout the year.

Is that including the impact of the Hawk costs in this quarter or excluding it?

So is the margin that you should look at that you should be improving off of is including the Hawk or excluding Hawk (multiple speakers) full year?

No, it's -- inclusive of all of the Hawk expense we expect margins to be improving.

Okay and to what degree or can you quantify 100 basis points, 200 basis points or unknown?

It's going to get better.

Yes, we expect really some meaningful improvement over the current year levels and beyond that, Ivan, we're not really giving guidance on that.

Right.

But it will definitely be better this year than it was last.

Meaningfully.

Right.

Okay.

And then depreciation and amortization, there's a significant bump.

Is that all due to Hawk?

About $25 million of it is due to Hawk, yes.

We go from like $70 million to $95 million.

$20 million of it's due to Hawk.

Okay, great.

Thanks for taking my questions.

You're welcome.

Glenn Wortman.

Yes, good morning, everyone.

Good morning, Glenn.

Can you just -- how large were those price increases that you put through for the Tire & Wheel in late December and can you --?

You know, Glenn, it really varied by OE.

I'm going to give you an average here -- maybe 6% to 7% on average.

But again, it varied by customer location and by aftermarket.

Are you guys having some success with those prices?

We have, yes.

Now it takes longer -- when you're at the OEs it just takes you longer to get them implemented.

But, yes, we've had some success.

Okay.

And then you said you didn't pick up any share in the Construction Materials, but then you talked about some of your competitors closing down plants.

Yes, I think there's probably -- I mean, there's no major share that you can talk about.

My guess is we did pick up some share, but I don't think it's meaningful.

It could be 2 or 3 percentage points of market, but nothing that would suggest that we picked up 10 or 15 percentage points.

Okay, okay.

Do you know when those plants shut down?

They were announced in the fourth quarter, I'm not quite sure if they're closed now.

I would think they are closed now.

Or if they'll be closed in the first quarter.

But they're certainly -- we're moving aggressively to close them.

Okay.

And then you mentioned in your release this morning about a mid-teens growth rate for 2011 for all your businesses combined.

Can you perhaps give us your thoughts on your revenue by segment, where you think -- if you can ballpark that for us?

Do you have segment growth?

I'll let Steve just walk you through that real quick.

Well, that number reflects Hawk, so we're seeing most of our growth will be in the Construction, Brake & Friction segments.

We are expecting significant growth in CIT, double-digit.

And then our other businesses growth in the 5% to 7% range with FoodService being closer to 5%.

And then finally, just talking about rising raw material costs maybe for some of your other businesses, in FoodServices and perhaps even Interconnect Technologies.

Can you talk about any impact there from high raw material costs and any price increases that you've put through in (multiple speakers)?

Yes, we put through a price increase in FoodService that was 6% effective January 1, so that will have a major impact.

There have been various price increases put through in the Interconnect Technologies business that's primarily on a project-by-project basis.

If I look at the three businesses that we should have minimal cost increases -- or cost increase impact compared to price increase would be in the Braking business, in CIT and also in FoodService.

The ones where we generally have the most difficulty, and our bigger businesses, are Construction Materials and Tire & Wheel.

But we think that the market frankly is improving where we'll have a better chance or better opportunity to increase prices there to cover raw material.

All right, thanks for taking my questions.

You're welcome.

Wendy Caplan.

Hi, good morning, it's Wendy Caplan.

You know, Dave, I've got to say that, kind of remembering how we kind of -- how you sounded a year ago, things sound significantly better, lots of good things happening at the Company.

Can you -- it sounds like aside from the structural changes in construction, the pricing that you've put in, Jackson on the Tire & Wheel side, and your comments that the markets are improving -- what are the things that at this point you look ahead to 2011 and think are the most worrisome to you?

Yes, it's raw material, Wendy.

I mean, we're not quite sure what's happening there.

We've been fighting it for basically a year and a half.

That's our biggest challenge is raw material.

I would say second behind that would be being able to get the efficiencies out of Jackson.

Other than that I think the cost structures that we have changed over the last two years, the improvements that we've implemented, COS, frankly, we're bullish on 2011 certainly on an earnings side and honestly on the sales side.

I think that we're frankly feeling pretty darn good about 2011.

It sounds that way.

Can you -- on Interconnect, can you kind of walk-through -- obviously it was volume leverage here that drove the margin up.

Can you talk some about the demand?

You mentioned military projects and kind still waiting for Boeing.

What are we expecting as we stand here today?

Yes, I think that the -- ex the 787, which --

Who knows.

-- somebody can tell me what's going to happen there someday.

But the 787, we planned on shipping probably 50 to 52 plane sets this year, I think that will be down a bit.

But on the good side of the ledger is the fact that the 747 is actually ramping up a bit, Airbus appears to be ramping fairly well, the 737 is still -- they're still building a lot of airplanes in Seattle in the 737 class.

Other than the 787 it appears to be going very well.

We still have military programs that we're quoting and bidding on, these appear to be certainly very near to being let.

Other than the 787 I think that we're -- again we're very bullish -- I hate to keep using that -- but bullish on what CIT looks like this year.

And are there any of -- any military or defense programs, I guess, that are at risk that we would -- if they didn't happen that we would say uh oh?

Are we (multiple speakers) are there any worries?

No, the great thing about them is these aren't huge projects that something got canceled that would cause us concern.

Usually when we're quoting projects at this point they're pretty much a go.

It would be a dramatic change to a program if they canceled at this time.

Okay.

And can you kind of give us a sense on the roofing side of capacity utilization at this point versus where it was a year ago?

You know, Wendy, I really can't -- the good thing is that volumes are up.

I'm going to guess that we're probably 65% utilized in the industry.

If a plant comes up my guess is we're going to go to about 70% utilized.

Now keep in mind, we're in the slow season --

Right.

-- but we'll start to ramp up.

What happens in this industry is that as you get into the building season everybody is running at near capacity, but then you get toward the end of the year or the start of the year and you're down in the 45% to 50% utilization range.

So I'm guessing we're at 65% to 70% or so.

Okay.

And just to confirm, you don't have plans to add capacity in that segment?

Well, the only thing we're adding capacity in Construction Materials is a poly-iso-plant.

We announced it I think it was three weeks ago.

We're going to build an iso-plant up in the Northwest, so in the state of Washington somewhere, to not only cover the Northwest but also Canada.

And that plant will be -- we're looking for sites now, that plant should be up and running during the season of 2012.

So we will be adding capacity.

I think the cost for the facility is $26 million or $27 million that we're going to invest.

But that's the only thing that we're adding at this time.

Okay.

And finally, you cited new product development a couple times in your prepared remarks.

Can you help us kind of understand where you're focused and are there any metrics that you're using in terms of what you expect to spend in R&D or how should we think about that?

Yes, I don't think you're going to see a dramatic pickup in the total cost.

But what we have done is challenged every one of the businesses that what we want are new products generating at least 20%, and in some cases 30% of our revenue.

So, in other words, a new product introduced from now through the next three years should comprise 30% of our revenue.

And that is going to obviously be a number of new products.

If I look at the tire and wheel business, they're actually moving very close to that number today.

The other businesses are ramping up to get there.

We will continue to see new products added over the next number of years.

Thank you very much.

You're welcome.

[Rob Crystal].

Yes, I have two questions.

One was, is there an amount of inventory you are carrying, Steve, still for Tire & Wheel consolidation?

And then can you help us with the breaking margins sort of longer-term or what a normal quarter would look like if Hawk was in for the whole quarter?

Thanks.

This is Dave.

I will talk a bit about the inventory in Tire & Wheel.

We added about $30 million worth of inventory in the second, third quarter of last year, with the idea that that would help us through the transition of Jackson as we closed Carlisle primarily.

It will be working that inventory off through this year.

But at the volumes we look at, we don't think it's going to have an impact on certainly overhead absorption.

In fact, as you look at what we have done to the cost structure, we've actually taken overhead out.

So it's about $30 million that we will be working off as we go through the year.

The other question was on Hawk, I believe?

Yes, I'm breaking sort of what the margins are maybe shorter-term and then longer-term?

You know, I think I'll answer that as well.

I think the margins in that business should be in the mid-teens moving upwards toward perhaps 20% over the next year and a half or so.

Thanks a lot.

[Ben Loper].

Hello?

Good morning.

This is Ajay Kerjriwal.

Just a couple quick questions.

So first on free cash flow, a little light than what we had been expecting.

And I know there are a couple of moving parts here with the Hawk acquisition.

So maybe talk about the inventories ex-Hawk and then thoughts on how you think about free cash flow this year.

Well, excluding Hawk receivables are up about 20%, inventory is up about 15% and payables are up 22%.

That nets to about a 17% increase which is in line with our fourth-quarter revenue -- organic revenue increase of about 16%.

As we mentioned in the opening remarks, we were negatively impacted by the Hawk transaction.

We took on a number of accrued expenses that were cashed out in December and that had a negative impact of about $25 million on cash flow performance.

We are -- again, we are very focused on this, Ajay.

We are seeing improvement in terms of our management of working capital as a percentage of sales.

We are disappointed with 2010 performance.

Our goal for 2011 is to convert cash at or above 100% and we'd be very disappointed if we didn't meet that goal.

And Ajay, more than disappointed, we'd be very surprised if we didn't meet that goal.

Yes, I like hearing that.

Good.

And a couple other detailed questions.

On restructuring it sounds like you came in a little higher than what you had guided to, $7.5 million, did you accelerate something into the quarter or did restructuring in ETF come in higher?

Yes, we're looking at -- for some information here.

I don't think we were up any over from what we had forecasted.

No, restructuring came in well below where it was last year.

And restructuring for the quarter I think was consistent with the advice that we were giving throughout the year.

(multiple speakers)

The total one-timers -- you had kind of mentioned $6 million, I thought it was $7.5 million.

But maybe my --.

Well, we had $14 million of Hawk-related expenses.

Now the $6 million -- we had previously talked about in connection with Hawk there would be about $6 million of public company costs that we would eliminate.

And that's different from these one-time $14 million in costs that we incurred in the fourth quarter.

The $14 million, that was pure professional fees in connection with the acquisition, change in control payments, some accrued bonuses that were earned by the Hawk management team.

We did not give a whole lot of guidance on that number previously and it ended up being north of $14 million in the quarter.

Yes, the $14 million is a different compare and I thought on the third-quarter call you had kind of guided to $9 million to $12 million in acquisition-related costs.

But I know how deal expenses work.

(multiple speakers) the $14 million also includes about $2.5 million that related to an increase in the inventory that we acquired.

That might not have been in the $12 million number that we gave and maybe that reconciles the $12 million to the $14 million.

Good.

But my original question was on the plant closure, $2.5 million and that $5 million start-up cost for Jackson, I thought that corresponded to a $6 million number, but maybe not.

I'm sorry, Ajay, repeat that Jackson question?

So, last quarter you had said you expect about $6 million one-time costs in ETS.

In the fourth quarter?

If your restructuring in the quarter was about $2.5 million, we also had about $4 million of inefficiencies because we continued to run the Pennsylvania plant.

That's not technically recorded as restructuring, but in our remarks we may have lumped the two together.

We did have about a $6.5 million negative P&L impact within ETS, that is sort of Jackson related.

But maybe only $2.5 million of it qualifies as restructuring under GAAP.

Good.

And maybe any color on what expectations are for this year?

As far as restructuring?

Restructuring, any one timers and ETS?

Yes, well, we've got about another $2.5 million that will probably end up flowing through on Hawk that will occur first quarter.

And then we have another couple million dollars we think will be restructuring/inefficiency associated with the start-up of Jackson.

But after that there's really nothing else planned.

This should be a much cleaner year for us.

Good.

Thank you very much.

You're welcome.

I'm showing no further questions.

Okay.

Well first of all, thank everybody for attending the conference call.

But I just want to leave you with the idea that we are very bullish on 2011 and we generally don't give guidance, but I will tell you that January was a very good month sales wise.

We haven't seen the income statement yet as we're still closing the books, but if January is any indication of what the remainder of 2011 is going to look like, it should be a very good year for us.

As I said earlier when Wendy asked the question, our biggest concern, our challenge is going to be raw material.

We think we're on the front end of that, we're doing things from a price increase standpoint, doing other things related to hedging.

So anything related to natural rubber, synthetic rubber, oil-based products and steel we're seeing cost increases flowing through.

But I think we're in a little better condition this year than we were certainly in 2009 and 2010 when it -- or 2010 when it came to raw material costs.

Despite the raw material, frankly, as I said earlier, we are bullish on 2011.

We think that with some good, solid execution, a little luck on passing along price increases, 2011 will be a very good year for us.

So, again, think everyone for calling and, operator, we can go ahead and end the call now.

This does conclude today's conference call.

You may now disconnect.