Donaldson Company Inc (DCI) 2006 Q2 法說會逐字稿

Good morning. I would like to welcome everyone to the Donaldson second quarter earnings conference call.

[OPERATOR INSTRUCTIONS].

Thank you. Mr. Sheffer, you may begin your conference.

Thank you, Rashida. Welcome, everyone, to Donaldson's 2006 second quarter conference call and webcast. Following this brief introduction, Tom VerHage, our Vice President and CFO, will give us a brief review of our second-quarter results. Tom will then turn the call over to Bill Cook, our Chairman, President and CEO, who will discuss our outlook and the business conditions shaping that view. Following Bill's remarks, we'll open up the call to questions.

Before I turn the call over to Tom, I need to review our safe harbor statement with you. Any statements in this call regarding our business that are not historical facts are forward-looking statements, and our future results could differ materially from the forward-looking statements made today. Our actual results may be affected by many important factors, including risks and uncertainties identified in our press release and in our SEC filings.

Now, ladies and gentlemen, here's Tom VerHage.

Thanks, Rich, and good morning, everyone.

As you saw in our press release late yesterday, we are on track to deliver full year EPS in the range of $1.47 to $1.57, which would give us our 17th consecutive record year of earnings per share. Our confidence was reinforced this quarter by the continued strong gross and operating margin performance, especially considering the $2.2 million charge for stock options that was not in our results last year.

We reported a small increase in sales in the second quarter, however, our backlog is at an all-time record, $459 million, which is 10% higher than last year. This indicates a good second half to fiscal 2006. A key single factor in vacuum sales is the stronger dollar relative to foreign currencies. This factor alone shaved more than 4 percentage points from our reported sales. North America our engine growth was slower than expected due to longer holiday shutdowns at a number of our customers compared to last year. We're also coming up against tough comps in the truck business as billed rates are flattening at the current record levels.

In our industrial businesses, our North America IFS business had a good quarter. Though it's mostly offset by lower North America gas turbine sales. However, as we mentioned in our press release, we expect gas turbine sales on a global basis, to increase for the year. Internationally, currency translation had a big impact, reducing an 8% sales gain in local currency by $16 million, resulting in less than a 1% international sales gain when translated to U.S. dollars. In Europe alone, the negative impact was approximately 10%. Assuming exchange rates do not change from today's levels, we expect translation to have an impact again in the third quarter, when the dollar was fairly weak a year ago.

Gross and operating margins remained healthy during the quarter. Gross margin was 31.8%, which is 70 basis points higher than last year, in spite of the rapidly increasing petrochemical prices. We had continued success with our cost reduction efforts, which center around our lean manufacturing strategy. We also had 1.7 million of plant rationalization and startup expenses in the quarter, which compares to 1.4 million in last year's second quarter.

I mentioned last quarter we planned to spend between 5 to $6 million on plant rationalization and startup expenses this year versus only $3.6 million last year. Given our new plant and distribution center startups scheduled for later in the year, we are now broadening that range to 5 million to $7 million.

Our operating expenses were 22.1% of sales in the quarter, which does include the $2.2 million of stock option expense. Adjusting for this impact, operating expenses were down slightly, as a percent of sales from last year. We have already incurred over 80% of the stock option expense that is planned for this year, and continue to expect a full year charge of between 2 to $0.03 per share.

Our second quarter tax rate was 28.4%. That brings the year to date rate to 27.5%. For the balance of the year, we expect our tax rate to be approximately 28%. This is an increase of about 1 percentage point over our normal tax rate from the last couple of years, and this increase is due to the mix of where we earn our profits around the globe. In last year's fourth quarter, we took a $4 million tax charge, related to our $80 million foreign cash repatriation plan. To date, we have repatriated $72 million of the 80 million. But we are nearing completion of this plan.

We have slightly reduced our CapEx spending from the range of 85 to $95 million down to the range of 80 to $90 million, as it appears that some of the projects will come in a little under budget.

As we previously stated, we have several major projects under way this year, including new plants in China, a new plant in the Czech Republic, a new distribution center and warehouse in South Africa, and a significant expansion of our distribution center in Indiana. We have also approved a new distribution center to be built in Mexico, which will support the growth of our Mexico, South America sales.

We continue to expect depreciation and amortization expense of 45 to $50 million this year. We have maintained our 2006 EPS estimate range of $1.47 to $1.57 per share. We expect operating margin for the year to be in the range of 10.5 to 11%, which includes our projected plant rationalization and startup expenses and the impact of expensive stock options, and we still plan for interest expense to be approximately 3 to $4 million higher than last year.

But just to sum up, our business is running well, and we expect fiscal 2006 to be our 17th consecutive year of record earnings.

And now I'd like to introduce Bill Cook, who will discuss our outlook. Bill.

Thanks, Tom, and good morning.

As Tom mentioned, the current strength of the dollar has turned into a headwind, translating our foreign currency sales and earnings into fewer dollars. Now we obviously can't control exchange rates. Our job is to manage our business to mitigate any impact of exchange rates on our margins. And on that front, as Tom pointed out, we've been very successful, as evidenced by the continued improvements in both our gross and operating margins. Our gross margin has improved 100 basis points in the first half from 31.2 to 32.2, and our operating margin has improved 60 basis points from 9.6 to 10.2. That includes, as Tom mentioned, this year's absorption of stock option expenses. We are very happy with the progress we've made and we continue to focus on further improvements.

Now, holding aside the exchange rate issue for a few minutes, I'd like to talk about the underlying economic and market factors driving the major portion of our business and also give you an update on a few of our major growth initiatives.

We'll start with our engine business. As you may recall, there are three major components, our first-fit on-road or truck business, our first-fist off-road or construction ag business, and our replacements parts business. I'll start with the truck segment. We see continued strong conditions in our on-road or truck business led by the continued strength in the North American truck market. We foresee new NAFTA heavy truck builds to be about 345,000 this year, this calendar year, '06, which would be a new build record and up slightly from the previous record set in calendar '05. Incoming Class A truck orders at our customers were very strong in January and almost 44,000, up 35% over January of last year. So, in sum, a truck market looks to be every bit as good in calendar '06 as it was in '05.

In our off-road segment, the construction piece we see continued strong equipment builds for our customers, as they foresee their calendar '06 sales increasing by about 10%. The ag or farm equipment portion of our off-road business is quieter, with sales estimates by our global customers flat year-over-year. Finally our replacements parts businesses for existing fleets of trucks, construction, and farm equipment should remain strong as utilization rates for all types of equipment are good. For example, Class A ton miles are forecasted to increase 4.8% this year per act. So this solid equipment utilization will continue to drive the need for regular maintenance and our replacement filters.

Now I'd like to switch and talk about our, the outlook for our industrial businesses, starting with our IFS, which includes both industrial dust collectors and our compressed air filters. This business represents a mixture of new filtration equipments and replacement filter sales. The current ratio is about 55/45. In our new equipment business, that's driven by increased industrial economic activity. And one indicator we look at for guidance is U.S. machine tool consumption, which was up 8.4% in 2005 and remains healthy.

In our industrial replacement filter business, like our engine replacement filter business, it's driven by the utilization of existing filtration equipment in the field. And this also remains strong as evidenced by a weekly series of very strong replacement filter orders in the U.S. since the holiday break. Though in total our IFS second half will be stronger based on our order backlogs and the condition that we see.

In our GTS business, we have orders in hand that provide the basis for our forecast of a stronger second half and for full-year GTS sales of about $120 million, up 6% from last year. The North American gas turbine market is pretty quiet, we see gas turbine conditions strong in the Middle East, Asia, and parts of Africa.

And finally in our special applications business, we see continued strength in our disk drive filters business. The latest industry projections estimate a 19% increase in our customers' disk drive production in calendar '06 of 445 million drives. This growth is being driven by both drive usage in computers, as well as for many quickly growing consumer applications, such as some of the iPods. All of these disk drives use between one and three filters, so this will further grow our disk drive filter business.

I'd like to switch gears for a minute and talk about some of our other growth initiatives, and I'll start with PowerCore. During the quarter, we went another six equipment platforms with our OEM customers, bringing our total wins to 53. 29 of these 53 wins are already in production with another 12 to go during 2006. In the quarter, our PowerCore sales were up 54% due to a combination of growth and now first-fit platforms as well as replacement parts. Furthermore, we still have another 60 platforms in the proposal stage with our OEM customers, and with the current win rate of over 90%, we are very confident of the continued growth of PowerCore.

We're also continuing to make progress with our PowerCore technology on the industrial side of our business, and gas turbine was shipped nine of our PowerCore systems to date and have orders to ship six more over the coming quarter. PowerCore offers our gas turbine customers the same advantages it offers our engine customers, significant reduction in the size of the air cleaning system, less space, less waste, lower installation costs, while delivering the same filtration performance and protecting our customers' replacement filter business.

Finally, I'd like to point out that it's not just us at Donaldson that think PowerCore is a breakthrough in filtration technology. Last month our PowerCore product received the Frost & Sullivan award for product innovation.

Now I'd like to talk about our emissions opportunity. We've talked a lot about this the last couple of years, and we're very optimistic about this long-term growth opportunity. This opportunity is related to the regulations that require a reduction in the emissions of diesel particulate and knocks from on-road diesel-powered vehicles, that is trucks and busses. Essentially the mufflers on these vehicles today will be replaced by a very sophisticated emission control device. And Donaldson has technology and experience to do this.

There are three components of this on-road emission opportunity for Donaldson. The first is related to the North American EPA regulations of 2007 and 2010. To our knowledge, all of the sourcing decisions for the '07 regulations have now been made by the engine manufacturers. Some of the new news is that one of the major engine manufacturers, Caterpillar, who produces engines for both medium and heavy-duty trucks, and who we thought would be a possible customer for us, has recently announced their decision to internally produce their emission control devices. As it stands for Donaldson, we have won two programs in North America for '07. We've also established credibility with all the engine manufacturers by having a complete active system that has over a year's worth of road testing in the harsh Minnesota climate and has proven than it works.

We also have [Spiracle], the best closed crank case ventilation product in the industry. So we feel that we're well positioned for 2010 regulations and remain confident that we'll capture more business.

The second component of this emissions opportunity is expanding retrofit opportunity in the U.S. Entered primarily on school bus fleets. We have now received California air resources board verification for our passive system that meet all three emission reduction levels and have an EPA verified product as well, giving Donaldson the broadest verified retrofit platform to meet the needs of school bus fleets. We expect our retrofit sales to be up 33% this year to $16 million, and we foresee continued strong growth in the coming years. In the final emissions opportunity we see is around the European regulations in 2009. And here again, we're establishing credibility with the engine manufacturers with our product and technology.

So to summarize, we're making good progress in all three emission fronts. We've won two North American '07 platforms, we have over 11,000 retrofit systems already in the field, and we're making good endroads in Europe for the '09 regs and in North America for the 2010. Our long-term expectation for this diesel emissions opportunity or trucks is that by 2010 it should be a $150 million business for Donaldson, $100 million increase from today's levels.

Another news item for the second quarter is that we completed one small acquisition in the U.S., Air Sell. Air Sell manufactures a full line of refrigerant and regenerative dryers for compressed air and other gases. Air Sell gives us a cost-effective product range designed for the specific needs of the U.S. marketplace and is a great fit in our IFS business model. Air Sell is an example of the types of acquisitions we continue to look for to supplement our organic growth plans.

Time to talk about some of the great infrastructure projects we have underway to support our future growth. As he mentioned, we have three more plants under way, two new distribution centers and a major expansion to our main distribution center in the U.S. Though we're continuing to invest for two reasons, first to serve our OEM customers as they continue to expand their international presences into newly developing countries and secondly, to support our after-market parts growth, both in the U.S. and in the rest of the world.

So to conclude with my remarks, just want to recap. We see most of our market conditions as good or improving. So these good general business conditions coupled with our growth initiatives, help provide the basis for our fiscal '06 outlook. In addition, as we've discussed in the last couple of webcasts, we have been and remain focused on improving both our gross margin and operating margin percentages. We've made good progress again this quarter, and we see additional opportunities for improvement in the second half. The bottom line, as Tom mentioned, is we expect fiscal '06 to be another record year of sales and earnings, making this our 17th consecutive EPS record. That concludes our prepared remarks.

Rashida, now we'd like to open it up to the questions.

[OPERATOR INSTRUCTIONS].

The first question comes from Andrew [Spiegel] from KeyBanc Capital Markets.

Good morning, gentlemen.

Hi, Andrew.

You talked about and market conditions. I was just wondering if you could also break it out by geography, speak a little bit to Asia and Europe. I know you did mention that you saw some good strength in North America.

Andrew, I think maybe where you're heading with the question is, where do we see any weakness? I say probably that the one area of weakness that we see that could change is the agricultural or farm equipment market in Europe is weaker. Holding that to one side, generally we see that conditions in the rest of our markets, the markets that we serve, are about the same. And either good or improving.

Okay. And then, just looking at your comments and some of the data that you guys put out, it looks like the general trend of the quarter is that it picked up towards the back half of the quarter after the holiday season ended. Were there any orders that kind of slipped through the quarter and maybe caused you to book it in the second half rather than in this quarter?

I think the second quarter historically, as we've mentioned over the years, and as Tom mentioned in the last webcast, is always our weakest one because of the holidays and customer shutdowns. So we knew it was going to be weak. I think probably the impact of the foreign exchange was more than we thought.

Uh-huh.

But in terms of orders slipping, no. It's probably the biggest, if there was one surprise, it was more around how much the foreign exchange shaved off of our dollar growth.

Okay. And then just lastly, looking at your segment profitability, looks very good in industrial. I guess I was a little bit surprised by the profitability with engine even after stripping out some of the allocated expenses from corporate and some of the options items. Could you maybe comment on profitability in engine and ability to kind of leverage on growth that you're seeing in that segment?

Andrew, this is Tom. Engine did have a few items this quarter that were not in previous quarters. One, you need to remember that stock option expense is an expense that the unit needed to absorb this year. Then there were perhaps just a couple of other relatively small nonrecurring-type items. So we look for the engine profit margin to increase a bit from here in the second half of the year.

Okay. Thank you, guys.

Thank you.

Your next question comes from Ed Littmann from William Blair.

Good morning, gentlemen.

Hi, Ed.

Hi. Just a clarification on one of the questions that the last caller asked. Obviously you had to bring down, you reduced your full-year sales outlook. And not to get cute with the wording, but you said mainly due to currency and translation. So the only other thing that you're concerned with out there is the weakness in the agriculture European sales?

That's probably the biggest one, Ed. I'd say generally there's maybe more weakness in Europe. But it's most specifically centered in the farm market. But we are seeing some other economic weakness in our end markets in Europe, but the biggest one is the ag market, the farm market.

Okay, great. Can you offer any color on how the currency impacted you by particular segment this quarter? And then also comment on how it impacted the operating expense line?

Ed, this is Rich. I'll go through the list of translation impact on the sales. I've also, if you don't want to write them down, I also have posted a schedule on the website on the lead page of our IR section of our website so that you can print that out if you'd like. But just going through in the quarter, the impact and the engine segment was 8.5 million, ranking down 2.2 million in transportation, 4.7 million in off-road, and 1.5 million in after market. The industrial side, it was 7.6 million, the breakdown there, 5.4 million for IFS, 1.6 million for gas turbine, and 600,000 for special applications.

Now, if we look further down, the translation impact on gross margin, gross margin in dollar terms was up 3.2%. Stripping out translation, it would have been up 8.3%. For operating expenses, in dollar terms, they were up 3.6% in the quarter. Stripping out the impact of currency, was up about 9%, operating expenses were up about 9%. So when you get down to the bottom line for the company, the impact on net income was about 600,000.

In the quarter.

In this quarter, correct.

Okay, great. And just lastly, you guys have been able to offset rising commodity and petroleum prices through cost reductions, can you comment a little bit about your ability to go out and maybe get a little bit of price to offset those as well?

Well, we get some price recovery, but I would say that the major contributor to our ability to offset the commodity cost increases is through our relentless cost reduction efforts. And we've got a host of initiatives across the company that have delivered great results in the first half. And we see tremendous opportunities in the second half. So it's mostly cost reduction efforts that have protected and actually improved the gross margin.

Okay. Thanks a lot, guys.

Your next question comes from Andrew Obin from Merrill lynch.

Good afternoon, guys.

Hi, Andrew.

Just a question, you left the outlook for the year unchanged. And as I'm thinking about the headwind, we have a bit more currency headwind, and we have a bit more restructuring costs. First, am I thinking about this right? And the second question, what were the positive offsets to sort of give you the confidence that he will still meet your previous outlook?

Andrew, this is Tom. Well, our outlook is a range from a $1.47 to $1.57. So just as we were last quarter, we are this quarter, comfortable with that range. And then the second quarter, as Bill mentioned before, is definitely seasonally our weakest. So we do expect some improvement in the second half of the year. Particularly when you look at the operating margin line. So we're comfortable with that range.

So, should I be thinking that there was a lot more cushion build up? I'm just, the way I'm calculating it, I should be subtracting at least a couple of pennies from the top end of the range. Yet you haven't done it. So was the outlook conservative to begin with? Is that how I should be interpreting, or do you think there will be some positive offsets in the second half? That's another way of asking this question.

I wouldn't say it was conservative. I think again, it's our best guess at the range, and we do expect the third and the fourth quarters, as they have been in the last couple of years, and seasonally just stronger than the first two quarters.

What do you think is the biggest threat as you look at the landscape right now, to your outlook right now, is it currency?

Currency is one. There's no question that the dollar was very weak in the third quarter of last year. It strengthened a bit in the fourth quarter. And then, the petroleum prices that I mentioned before is definitely a concern. But, as Bill mentioned, we're dealing with them through our lean manufacturing initiatives.

Gotcha. Let me just follow up on what you've said about the truck business. I apologize, I'm in a car right, but what was your outlook for 2010 in terms of emissions business before and after you guys found out that Cat is going to go it alone?

In terms of, Andrew, Bill here, in terms of the amount of incremental business that we see, we still see the $100 million and building it to $150 million business segment first. So unchanged.

Okay. And it's just sort of outside opportunities?

Right.

Okay. Thank you very much.

Thank you.

Your next question comes from Richard Eastman from Robert Baird.

Bill, I wanted to touch on that as well, and maybe just as a follow-up to the earlier question. When you look at your emission opportunity in the incremental opportunity there being 100 million, is it safe to assume at this point that more of that is going to be driven by the '10 reg and the retrofit market than it will be by the '07 content game?

Rick, Bill here. Yeah, I'd say that's probably fair to say that it will be the combination of retrofit, the '10, and then the opportunities now we're seeing emerge in Europe.

And that's, we haven't really played there in the past. Are those European opportunities driven, I guess their reg kicks in in '09. But we haven't really played there from a capacity standpoint and a technology standpoint. Have we done more there?

Over the last year, we've done a lot more there. And we think that we're, we have the technology, obviously is transferable, so we already of the technology. It's establishing the relationship and building the credibility, and we're doing that. We have done that.

When do those, presuming they're going to be letting platforms as we've talked about in the past, but when do those start to get awarded?

We would expect to see those, Rick, probably over the next year or 18 months.

Okay. Okay. And then just a question on the after-market business internationally, that looked a little bit weak and maybe not currency. Can you just give me some color there? I know it was a tough compare, but anything else there that we should look into?

A big impact on the currency, Rick. I think just in our European after-market business, it saved 10 points of growth in the quarter.

Okay.

So in local currency in Europe, we take a look at that, maybe taking a look at all of our international entities and constant currencies was about 7% increase.

Okay.

And then the, especially in Europe, with the dollar Euro, it turned that around. Local currency, the businesses are running, the conditions are good in our after-market. My comments more about the ag market in Europe are more around the first [inaudible] side.

Okay. Just lastly, can you just give us an order of magnitude as to what the annual run-rate of PowerCore revenue is right now?

Rick, Rich is looking it up as we look, so I won't have to guess.

Yeah. The run-rate right now, Rick, year-to-date, is about 15 million. And again, with the new platforms coming online in the ramp-up of aftermarket, I think we're still real solid with the outlook of 40% growth this year.

Okay. Very good. All right, thank you.

Thanks, Rick.

In your next question comes from Charles Brady from Harris Nesbitt.

Good morning, this is actually [Kuni Hiko] sitting in for Charlie. Can you guys hear me okay?

Yes.

Hi, just touching back on our gross margin for a second, how much of the higher raw material and freight costs would you say are not being offset with cost reduction efforts? And I have one more question after that.

This is Tom. Actually, the vast majority of those commodity cost increases are being offset by our lean manufacturing efforts.

Oh, okay. And I know you mentioned that you haven't had any tangible or price increases, but do you plan on possibly introducing one in possibly in the second quarter of the year?

We look at that very selectively. We're in very competitive markets and our OEM customers, we have to work with them. So it's very selective where we can do price increases, mostly in our after-market or parts business, not in the OEM side. That's why we focused generally, as Tom mentioned, on the cost reduction initiative.

Thank you very much.

Your next question comes from Lincoln Werden from H.G. Wellington.

Okay. Thinking of the geographic location of sales again, in the latest quarter, how much, what percentage came from Europe, what percentage came from Asia and North America? And what do you see 12 months from now, if currencies somehow remain stable?

Link, Bill Cook here. I'll let Rich look at the details while I sort of give you a general answer. The last couple of years over 50% of our revenues have come from outside of North America. And that breakdown has been roughly about 30% from Europe, about 19% from Asia Pacific, and 1 or 2% from everywhere else, South Africa, and we see over long-term, that that trend is going to continue, over 50% of our sales will be coming from outside of NAFTA. Just in relation to that we see probably proportionally more growth opportunities outside of the U.S., where because our market shares are generally lower. So, over time, over the long term, we're going to see percentage be higher on the international side. I don't know what it's going to go to.

Somewhat higher growth rates implied for the overseas sales?

Right, exactly. The currency worked against us here in the second quarter and for the first half. But I'm just giving you the long-term view of what I see, think is going to happen. Rich, I think, has the numbers for the quarter or the half.

Link, looking at international sales in total, our foreign subs generated 53% of our sales year-to-date.

That's for all of 2005?

Yes, that's a year-to-date number.

For 2006.

Oh, latest 12 months.

The latest six months. This is the end of our second quarter. So year-to-date through six months, 53% of our sales have been generated internationally, 28% is Europe, 20% is Asia Pacific, and 5% is all other. And that includes the impact of FX. In constant dollars, it would have been even more.

Okay. Thanks.

Your next question comes from Rick [inaudible-bad connection].

Good morning. You recently introduced your Ultraweb cell culture product, and I was wondering where you are in the ramp-up of that and what kind of financial impact you think it might have.

Rick, Bill Cook here. It's very early innings with that product. We remain very excited, but we're trying not to overplay it a lot more that we have to learn. But we're very encouraged that fine fiber or nano web technology appears to be a breakthrough in the cell culture arena. So I would probably stay tuned over the next couple of months. We'll be making some more announcements as we make further investigations into the market and meet with more people. There's probably no new news right now other than it remains that it looks pretty good.

Have you signed up distributors yet?

We're in the process of talking to partners. It's probably all I can say about that. In terms of the financial impact right now, Rick, it's a cost center, we're not really selling anything. So we're investing in it with the hope that down the road, it turns into a nice segment for us.

Thanks.

In your next question comes from James Gentile from Sidoti and Company.

I was wondering if you can comment on the coming 2007 regulations and the potential pre-buy associated with heavy truck builds. Seems like we're obviously turning at 350,000, but there's been some language from some of the suppliers of steel into the heavy duty truck market that we can see a pretty big haircut in '07. And I guess the follow-up to that would be, how do you anticipate the financial effect on that cycle, turning downward on your engine segment overall?

James, Bill Cook here. I think the, well, first a comment on the pre-buy part of your question. You know, as I mentioned in my comments, we're foreseeing, and this is other people's numbers that we use as guidance that heavy Class A builds in NAFTA will be about 345,000 this year, which is another record, up slightly from the last record, which was last year, but our sense is that many of our customers of the truck manufacturers are trying to manage that so that they don't, it isn't a huge fall-off next year. And they're not adding capacity. They don't want to be caught with it next year or in future years. So there is some of that's a pre-buy, some of that's related to general economic conditions. In terms of what I look at for numbers for next year, I've seen numbers that range from probably 230,000 to 265,000 or thereabouts for calendar '07

Right.

Builds. Which is down a bunch from this year. But that would still be in a normal market, a pretty good year.

Sure.

And again, that's driven by I think a sense that they're not going to overbuild any more than they have to this year. And that there's good economic fundamentals driving the requirements for new trucks. So somewhere in that range. It's still would be a good year for us. As I mentioned in the past we're, the impact of that downturn on us is mitigated by a couple of things. One is, is that this isn't as large a percentage of Donaldson's business as it was 20 years ago. Versus North American Truck. And the second is that we will have additional content on the '07 trucks with these emission control devices.

So is it going to be, putting all that together, does that mean that our business next year is not going to grow? I'm not saying that. I'm saying that any downfall or shortfall or downturn, due to the production rates will be offset for us because of the additional content. Not a big deal.

Gotcha. And I just guess in terms of the longer term, I know how you guys very appropriately look at your financials in sort of matrix style in terms of leverage you can pull. Seeking, assuming of course that you do have a defensibility against a, call it a 20% to 30% decline in truck builds next year, would you be planning on, perhaps, acquiring to fill that revenue hole, assuming it would be something more material to come away from that? Or would share repurchases be on the horizon? Which levers could we look to as the cycle time moves forward?

Well, you're right, I mean that the downturn in the heavy truck is a question that we have to answer internally in terms of if it's going to have some impact on our business. I'm not, we're what I said a minute ago is that we're hoping that the additional content will help offset that. Production rates are going to go down. So we are looking for other growth opportunities. And we start with looking at our portfolio with all the different businesses, and history has said that some of those grow differently than heavy truck business or cycle differently.

Of course.

So that's, but we can't count on that. We are looking, we have a number of new projects, growth projects, Tom talked about some of our investments and some of these developing economies. So those will all be coming onstream, we're hoping that that's going to help with further international growth for further parts growth as the distribution centers come online. Specifically, the other part of your question around acquisitions, we're always looking. Our target, as I mentioned before is to try and get about 3 to 4% of our revenue growth target. So our total revenue growth target is 10 to 12% per year to try and get 3 to 4% of that through acquisitions. So we're always looking to try and do that. But we haven't been able to do it the last couple of years, the last two years, because of, say, the pricing of acquisitions or the availability of targets.

So we continue to look, and hopefully we can do more. But obviously we can't promise anything. And share repurchase, we have our long-term plan of trying to acquire 3% of our shares on average per year. We did more than that last year. We've done some this year. We're committed to the long-term plan. But again we don't comment specifically in any one year.

Gotcha. Thanks.

Sure.

Your next question comes from Charles Brady from Harris Nesbitt.

Should we expect to see a decline in operating expense as a percentage of sales in the second half?

This is Tom responding. In the second half, we won't have as much stock option expense as we did in the first half. We expect that quarterly expense to be in the 2 to $300,000 range. And, so in total, and because again, in the second quarter we had a lot of plants shut downs and holidays, we would expect for our operating expenses, as a percent of sales, to come down in the second half of the year.

And for the full year, would the percentage be comparable to that of 2005?

We're looking for the full year for operating expenses in about the 21.5% range.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS].

You have no further questions at this time.

Okay. I'll just take a minute then to conclude, Rashida. I'd like to thank all of you who have participated or listened for your time and interest. And finally to my 11,000 fellow employees, I want to thank you for delivering yet another record quarter in terms of both sales and earnings. So thank you all and good-bye.

This concludes today's conference call. You may now disconnect.