Donaldson Company Inc (DCI) 2007 Q3 法說會逐字稿

Good morning.

My name is Amanda, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Donaldson Company third quarter earnings conference call.

(OPERATOR INSTRUCTIONS).

Thank you.

Mr.

Sheffer, you may begin your conference.

Thank you, Amanda, and welcome, everyone to Donaldson's 2007 third quarter conference call and webcast.

Following my brief introduction, Tom VerHage, our Vice President and CFO, will give us a brief review of our third quarter operating results.

Tom will then turn the call over to Bill Cook, our Chairman, President, and CEO, who will discuss our positive outlook for the remainder of fiscal 2007 and the business conditions shaping that view.

Following Bill's remarks, we will 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 I would like to introduce Tom VerHage.

Tom.

Thanks, Rich, and good morning, everyone.

Well as you saw in our press release late yesterday, we reported another quarter of record earnings.

Thanks to our continued strong sales growth and a lower tax rate.

Bill will comment in a few minutes on the market conditions in our major product lines, and I will provide you with some thoughts to consider as you review your models for the remainder of our fiscal year.

Our press release contains our full-year sales growth guidance of mid to high single digits for our engine segment and mid to high teens for industrial.

We previously predicted a drop-off in sales of 30 to $35 million in our second half due to the lower NAFTA heavy truck build rates.

We now project that drop-off will be $25 to 30 million, which results in a fourth quarter decline of $15 to 20 million.

Just as a reminder, we mentioned in the September webcast that our fourth quarter will include an extra week of sales in the United States.

As you know, our U.S.

sales are approximately half of our consolidated sales, so this will -- this impact will only be a few percentage points in the fourth quarter.

Our press release discussed the broad reasons for the year over year decline in our gross margin from 33.5% to 31%, and I wanted to expand on this point a bit.

Our long-term gross margin target has been 32%.

In the second half of last year, we achieved record gross margin levels that exceeded our target, as we had many factors pulling together in our favor.

The major contributors to our year-over-year margin decline are these.

First, product mix, which had an approximate impact of $6 million.

You noticed our gas turbine revenues continue to ramp up.

In fact, they were up 57% in the quarter, and we had a number of gas turbine projects close out at unusually low margins.

We also had some lower than expected margins on a few large alter filter and dust collector orders.

And in a couple of our product lines there were unfavorable sales mix shifts among individual products within these product lines.

Second, there was a $4 million impact on our margins due to the higher distribution and logistics costs.

As we mentioned in the second quarter webcast, we ramped up capital spending over the past year on new distribution capacity to better serve our customers' needs, and to meet our projected sales growth.

Our present level of distribution costs is greater than we planned, and we see opportunities to optimize this new capacity with both process and technology enhancements.

Plans are in place to make the necessary investments that will improve productivity and better control expenses.

A third item impacting margins is an increase of $1.8 million in plant startup and restructuring costs.

And just one example of a number of drivers of these costs, is the migration of our dust collector production from Belgium into a new plant in the Czech Republic, which took place at a time of unanticipated sales growth.

This required us to subcontract the assembly of many of these units for a period of time and lower than normal margins.

We also experienced inefficiencies while converting production lines at one of our plants to begin producing the new 2007 diesel emission products which are significantly different than the 2002 diesel emission products previously produced there.

While our gross margin performance was disappointing, our operating expense ratio was 20.6%, down from last year's 21.1%, and our year to date ratio remains below our long-term target of 21%.

And while our year to date operating income margin of 10.5% is below our target of 11%, we are holding to that as our target for the year.

We have said in previous webcasts that our tax rate will fluctuate on a quarter to quarter basis as discrete events occur, and that happened in the third quarter as we realized the benefit of $6.3 million for the favorable resolution of some foreign and state tax positions, as well as the expiration of the statute of limitations on certain matters that were previously reserved.

In addition, we recorded a benefit of $1.5 million for a dividend from a foreign subsidiary.

These two favorable items provided a 16.2% tax rate for the quarter, and we now expect our tax rate for the year to be in the range of 26 to 28%.

We have narrowed our capital expenditure guidance a bit from $60 to 70 million to range of $65 to 70 million.

And we expect depreciation and amortization to be 47 to $49 million in '07.

We did report negative free cash flow of $6 million for the first three-quarters.

One of the drivers of this use of cash is inventory, which is up $32 million from the beginning of the year.

As we stated in the second quarter webcast, we are increasing inventory in the new capacity added at our distribution centers to facilitate continued high levels of customer service.

Gas turbine inventory also continues to increase to ramp up due to the increased order activity.

Another driver of our increase in working capital is receivables, which increased $45 million commensurate with our sales growth.

We believe free cash flow will improve in the fourth quarter and end up the year in the range of a positive $20 to 40 million.

You likely read about our acquisition of Aerospace Filtration Systems on March 1.

AFS is a premier supplier of helicopter barrier filters and is integrated with our aerospace and defense business which we report in the off-road portion of our engine segment.

After amortization and interest expense, we expect AFS to be slightly dilutive for the first year under our ownership, and then to turn accretive in fiscal '09.

So just to sum up, thanks to our solid sales growth and a lower tax rate, we're able to produce another record quarter.

And we have narrowed our EPS guidance for the year to $1.73 to $1.80 per share, which would provide yet another year of record earnings.

So with that, I will pass it over to Bill who will provide more background on our outlook.

Bill?

Thanks, Tom, and good morning, everyone.

I would like to start first with the reviewing a few of our third quarter highlights.

We've completed three-fourths of our fiscal 2007, and we are on track for another record year, our 18th consecutive earnings record.

Year to date, our sales, earnings, and EPS have increased by 14, 12, and 16% respectively over both prior year and our previous records.

And many of our businesses are continuing to experience strong momentum they built earlier this year.

Now I would like to drill down into each of the segments, and I will start first with our engine segment.

Within engine, our European business was strong across the board with sales growth of 30% in the quarter.

Trucks, off-road equipment and aftermarket all delivered to this growth.

Local market economic conditions were good, and we picked up additional market share growth.

Our Asian engine business posted a 16% sales gain as both off-road equipment and aftermarket had good quarters.

In NAFTA, our transportation product sales dropped $10 million this quarter, less than we had anticipated as new truck build rates at our customers were higher than we had originally expected.

NAFTA construction activity also slowed, especially in the residential sector, holding our overall off-road NAFTA sales growth to a 3% increase.

And finally, our NAFTA engine aftermarket sales were up 4% this quarter as equipment utilization leveled off for both on-highway and off-road equipment.

Now I will switch to our industrial segment.

In total, our industrial segment sales were up 21% in the quarter, with strong growth coming from all three product groups.

IFS sales were up 15% in the quarter with particular strength in Europe, which was up 24%.

Asia also had a good quarter with sales up 16% with strong dust collection sales.

And as Tom mentioned, our gas turbine system sales were up 57% in the quarter.

We had strong sales for power generation projects into Asia and the Middle East and sales for the oil and gas industry remain high globally.

Finally, our special applications business was up 12% this past quarter, led again by strong growth in our membrane products.

Now I will switch gears and talk about our outlook for the balance of the year.

Looking first at the engine side of our business, the international markets for our off-road equipment segment remain good, driven by strong construction and mining equipment sales by our customers.

Nonresidential and highway construction conditions also remain good in North America.

The outlook for our customers' new ag equipment production has improved due to the recent surge in farm commodity products.

This industry is now expecting modest growth for new farm equipment for 2007.

Our replacement parts business for the existing fleets of trucks, construction, and farm equipment should remain good as utilization rates for these types of equipment are strong internationally.

And as we pointed out in the past, equipment utilization will continue to drive the need for regular maintenance and our replacement filters.

The NAFTA new truck market began its long awaited downturn this quarter following the new EPA diesel emission regulations which went into effect this past January.

As Tom mentioned, we expect our fourth quarter NAFTA transportation product sales to be down 15 to 20 million versus last year.

The good news is after the year, despite the downturn in our North American transportation business, we expect our global engine sales will grow between 6 and 9% over last year, due to the continued strength in our international engine business as well as our worldwide aftermarket.

For our industrial group in total we see full-year revenues up 15 to 18% over last year, as industrial economic conditions in our end markets are healthy across most sectors and especially internationally.

Within the industrial group, our IFS business, which includes our industrial dust collectors and compressed air filters, is experiencing strong economic conditions in both Europe and Asia, and we expect to see this continued solid growth through the balance of our fiscal year.

In our GTS business, our gas turbine business, we see considerable strength based on the orders we already have in hand for the balance of the fiscal year and foresee that our sales will be up approximately 25% over 2006.

And finally, we expect approximately 10% growth in our special applications business this year, which includes both our disk drive, filter, and membrane products.

Putting the pieces together, we project full-year sales will be up over last year by about 12%, to $1.9 billion, a new record.

Now I'm going to talk a little bit about our operating initiatives.

And as mentioned in the press release and as Tom discussed a few minutes ago we experienced a number of operating challenges in handling the combination of the downturn in our NAFTA truck business with the higher sales volumes in most of our other businesses.

We have a number of initiatives in process to address these challenges and expect to see their benefits in the upcoming quarters.

Some of the initiatives that we're working on include an investment in a new upgraded warehouse management system in our new and recently expanded U.S.

distribution center.

We're going to complete several product line transfers to improve manufacturing capacity utilization and the delivery of significant cost reductions.

We're targeting selected price increase programs in several of our industrial businesses to improve the margins there.

And finally, we have a renewed focus on more effective large project execution for both our large GTS and IFS systems.

Some of these improvement initiatives should deliver quick results so we should see some sequential margin improvement in Q4.

Other initiatives will take longer so the full impact will take several quarters to realize.

However, we remain committed to delivering on our long-term target of an 11% operating margin while we continue to invest in our business for future growth.

This year, with the anticipated improvement in Q4, we expect to be near our operating margin target.

Now I would like to talk a little bit about our diesel emissions opportunity.

We've been working on this for some time both on the products and customer relations -- relationships to capture the growth opportunities related to the on-road diesel emission regulatory changes.

While work continues, and not all the decisions regarding the 2010 round of regulations have been finalized, we continue to see some sufficient market indications that support our estimate that this could be up to $100 million incremental revenue opportunity for Donaldson by the end of 2010.

Another major program we have been working on for the last couple of years is PowerCore.

We had another big win quarter, adding 13 equipment platforms with our OEM customers to bring our total wins to 92.

Six more of these platforms went into production this quarter, so 52 of these 92 wins are currently in production with half of the remaining 40 expected to go into production some time during fiscal 2007.

PowerCore filtration sales were $11 million in the quarter, up 22% from last year, mainly from replacement parts growth.

Replacement sales exceeded first fit sales again this quarter as the number of our systems in the field has reached a critical mass for replacement filter sales growth.

And we still have approximately 70 platforms in the proposal stage with our OEM customers, and with our historical win rate of over 90%, we are very confident of the continued growth of our PowerCore technology.

So in conclusion, with one quarter left in our fiscal '07, and our year to date sales and EPS up 14 and 16% respectively, we are well positioned for our record full-year results.

The strength of our business model, which is a portfolio of well diversified filtration businesses around the world, is evident again this year, as the current weakness in the North American truck business is being offset by the strength in our other engine businesses internationally and by solid sales growth across our industrial business.

Total sales for the year should be up 12% at the high end of our long-term target of 10 to 12%.

And we expect our operating margin will continue to remain close to our long-term target of 11%.

The bottom line is, we expect to deliver another record year of sales and earnings, making this our 18th consecutive EPS record year.

That concludes our prepared remarks, Amanda.

Now we would like to open it up to questions.

(OPERATOR INSTRUCTIONS).

We'll pause for just a moment to compile the Q-and-A roster.

Your first question comes from Bill Benton with William Blair.

Good morning, gaze.

Just a few questions.

First, with regard to the working capital management, I know you walked through some of those things.

I just wanted to get a general sense.

That has grown faster than obviously your sales growth there, and I want to understand if there's something structural there or this is really just a transition period.

Good morning, Bill.

This is Tom.

Receivables, as I mentioned, will grow with sales.

So receivable agings are fine, and receivables are up, percentage-wise, very similar to sales.

I explained the reasons for the increase in inventories, representing the inventories in our distribution centers and some gas turbine in inventory buildups, and we've got some prepayments with the growth in our gas turbine business.

We make some prepayments to our subcontractors.

So you add it all up and the working capital line is really growing, along with our sales growth.

Any sort of anomaly here is really just temporary?

Yes, and, if sales growth would level off, I think you'd see a change, but if sales growth continues to increase, I think you're going to see items like receivables increase.

Okay.

Then you guys talked about an unfavorable sales mix shift within specific lines.

I didn't know if you're seeing any sort of behavior in your customer switching -- any sort of switching and products toward what might be lower margin stuff that effectively serves the same purpose for them.

I don't know if that's, in fact, the case or what may be is causing that unfavorable sales mix shift within the lines.

Bill this is Tom again.

We're going to see fluctuations in mix on a quarter to quarter basis.

So there's really nothing systemic or long-term there, in our view.

Okay.

And then market share in PowerCore aftermarket, can you give us your best guess there?

Obviously that's an area where you've focused on in terms of enabling you to grow your market share on the aftermarket.

I'm curious what you think you're getting there in terms of the total aftermarket opportunity.

Bill, Bill here, I'll take that one.

PowerCore as a percentage of our aftermarket sales is still less than 5%, but it's growing rapidly so we see sort of the transition of that over the next couple of years as more and more of these new systems, in our OEM equipment platforms get into the field.

So it's happening but it's -- the transition will take the next couple of years.

But we were very pleased with sales up 22% year-over-year in the quarter.

Right.

Do you think you're getting -- I mean, based on what would you expect the change-out rate to be, do you think you're getting the vast majority of those replacement sales when they're coming up?

Yes, we are.

Okay.

Then final question on the special apps side, I know you said the membrane business is growing well.

Are you seeing an impact from maybe flash adoption on your disk drive business at all, or is that just still seem to be growing well based on the markets you serve?

Bill, Bill here again.

I think what we're seeing in our customers' hard disk drive business, the flash is competing at the low end of their format size, so the 1-inch drives, so that's where flash is a competitive factor.

But there's a lot of -- the increasing storage capacity in the 2.5 and 3.5 f inch drives is driving the growth so that the hard drive market is actually sort of moving toward the 2.5 and 3.5 to support video applications, which require a higher storage requirement.

So there's still good growth opportunities in the disk drive market, but it's going to be in the higher disk drive sizes.

Great, guys.

Thanks a lot.

Thanks, Bill.

Your next question comes from Richard Eastman with Robert W.

Baird.

Yes, good morning.

Bill, could I just ask you, when you look out over the next few quarters, we're all looking at these ACT build rate numbers for your transportation side of the business, but will you expect that business to bottom in the fourth quarter or perhaps more like the first quarter of '08, when you look at your transportation sales?

How would you see that business, kind of making a bottom?

What would be the timing there?

Rick, it's Bill.

I will take that one.

I'd say it's most of the drop is going to happen in the fourth quarter, then it's going to drop a little bit more in the fourth quarter of our fiscal '08 so that August through October period.

Then it will start in the second quarter of our fiscal '08.

It will start a recovery.

Okay.

And, when you look at the numbers, maybe the drop in this quarter was not quite as great as you had assumed and that correlates somewhat with the build rate, but are you gaining any content along the way to help maybe with your sales number?

Is that visible?

Rick, I would say more of what we saw in the quarter was the fact that as we mentioned in our comments, related to the fact that they were -- the build rates were higher in the first part of our quarter, say in February and early March, than we had anticipated, so that's why we didn't see as big a drop as we had anticipated.

The numbers that I have for -- that we're working with for class-A production were about 70,000 in our third quarter, the quarter we just completed, going down to about 48 and then 47.

So this quarter, our fourth quarter and the first quarter of fiscal '08, back to your first question, are really where we're going to see the bottoming out before it it starts to recover.

But again, it's less about content but more around the production build rates.

I understand.

And then also, is there a business realignment number in the quarter that you could share with us that was buried, presumably in the gross margin?

Rick, this is Tom.

I think what you're referring to is start-up and restructuring costs.

And that number for the quarter is about $2.5 million compared to about $700,000 last year.

And that Delta is the $1.8 million that I mentioned in the gross margin section of my comments.

Okay.

I understand.

Year-over-year.

And then as we push forward on the gas turbine side of the business, do you have any capacity issues there?

Because I remember in the last cycle you outsourced probably half of that business at peak, but going forward would that be the same strategy, and do we have any production related capacity issues as we push into '08?

Rick, it's Bill.

I'll take that one.

We've changed our business model around the major part of the sheet metal fabrication for these large filter systems to doing that mostly externally today versus where we were doing a lot of it internally five or six years ago.

And the reason why we've done that is because of where the projects are going and being closer to where the customers want them in the eventual construction site.

So we're building systems in China today through subcontractors.

So our model has changed from a mostly internal to mostly subcontracting model.

The challenge there is just -- is developing and qualifying subcontractors.

So there's plenty of capacity out there.

It's just working with them to make sure that they understand the quality and technical requirements.

And we're working that issue very aggressively.

It's one of the -- relates to one of the points that Tom and I made around our operating initiatives in terms of better large GTS project execution.

We've got a little bit of work to do there.

Okay.

All right.

Thank you.

Sure.

Your next question comes from Charles Brady with BMO Capital Markets.

Good morning.

This is actually Kunihiko Mikuriya sitting in for Charlie.

Just had a quick question.

First, regarding your -- the challenges you're facing within that Transportation Products, would you say, I guess the operation and challenge you're facing because of the new EPA standard is in line with where you expect it, or could it be different one way or the other?

Any comments would be much appreciated.

In terms of our current business this year?

Is that the question?

Around sort of the decline that we're experiencing we saw in the third quarter and we'll see in the fourth?

I guess I'm specifically referring to the inefficiencies that you're facing because of EPA.

Well, it was -- really two fact torsion related to this that we talked about in our comments.

One is related to the fact that the new build rates are way down, as I mentioned a few minutes ago, so that down from 70,000 in our second quarter to 48,000.

So we've had a significant drop in build rates for our customers.

So that had some operating inefficiency impact.

The other is the start-up of our new emissions products related to these new emission regulations that just came in in January.

So we had been building an emission product for the 2002 EPA regulations.

It's a more complicated product, and with new complicated products there's usually some learning curve, and we're in that right now.

That contributed to our third quarter margin as well.

And as far as the ongoing initiatives that you're working on, can you comment on how much it's going to cost as it guess on and also when you expect, I guess overall initiatives to gradually go off your cost lines?

We'll focus on the operating margin line.

As Tom and I both talked about, we're going to see sequential improvement, we believe, in our fourth quarter from our operating margin performance in the third so some of the initiatives are paying off today and will help us in the fourth quarter to get back to our target.

Some of them are longer term and will take the next couple of quarters.

So it's a combination of some short term and some longer term over the next couple of quarters that will see the impact.

Okay.

And just quickly on gas turbine, I guess with 25% growth projected for the whole year, I guess that's sort of implying a decline of about 4% in the fiscal fourth quarter.

If I did the math correctly, that is, and is that -- can you comment on why that's so?

Is that just because of tougher comps, or is there anything else that might be seasonal, perhaps?

Our gas turbine business is very lumpy.

That's a technical word, but there are large shipments that don't come in on a linear fashion throughout the year.

So it's just the timing in terms of the shipments in the fourth quarter versus last year.

But all in, we're going to have a very good year in gas turbine with full-year sales up 25% over last year.

Okay.

Final question.

Can you give us what the -- what your sales growth were in the quarter excluding the acquisition of AFS?

This is Tom.

AFS only had about a $4 million impact in the quarter.

Okay.

That's all I had.

Thank you very much.

Your next question comes from Eli Lustgarten with Longbow Research.

Good morning.

A couple of quick questions.

One, can you talk about the tax issue that has occurred for, , I guess a couple times now in 2007, giving you the 26 to 28?

I'm really focused on what the tax rate for 2008 might look like, or do we get more of these kind of issues that will flow through next

Eli, this is Tom.

As we've said for a couple of quarters, discrete items will continue to pop up on a quarter to quarter basis, and we really can't predict them.

Our normal run rate for taxes on normal earned income at this point is in the 31 to 32% range.

I guess what I'm focusing on is that with a 26, 27%, whatever the tax rate turns out to be this year, you've got $0.10, $0.12, $0.15 of earnings to make up as the tax rate goes back to normal next year.

And that's a lot to overcome to maintain the growth track record that we've seen.

Just wondering whether he should expect -- I'm not sure what the timing will be, but should we expect that next year's tax rate should not be that materially different, or does it go back to normal?

Eli, we haven't provided guidance on the tax rate for next year yet.

We'll do that at our year-end webcast.

Between now and then we will be looking at that.

But all I can say at this point for Q3 and what we're seeing for Q4 is a normalized effective tax rate in that range of 31 to 32%.

Second, you talked about gas turbine.

You had a lot of very weak margin shipments in the quarter on gas turbines as part of the margin pressure.

Is that over, or is that continuing in the fourth quarter?

Does it go into next year?

Do you have some guidance on what's happening with that?

Gas turbine margins, Eli, what we experienced in the third quarter was some individually low margin orders, and pretty large orders that had low margins.

So we expect that the majority of those, if not all of those, are behind us, and that margins on gas turbine products should improve in the upcoming quarter or two.

And can you quantify to some degree what the impact of all these gross margin initiatives that you're working on?

I understand the timing will differ and it will take some now, some later, but what kind of magnitude improvement do you expect these programs to yield ultimately when you're finished?

Is that 0.5% to 1%, or is it 1% improvement in gross margin?

Can you give sort of quantification of where you think that will drive to ultimately?

Eli, I'm going to refer you back to our long-term guidance, which is gross margin of approximately 32%.

And, we were below that for Q3 of this year.

We were at 31%.

So we certainly see our improvement efforts getting us back to that 32% range, at least.

But are we using the last two quarters gross margin as sort of a reference point for the improvement, so at least 1% above that?

Is that sort of how you're viewing what's changing?

The impact as we talked about, you know, weak gas turbin margin on some big project, some start-up costs and things like that are going to occur naturally anyway.

I'm just looking for what kind of improvement over and above from the initiative as opposed to factors -- other factors.

Well, again, Eli, I think all in we're looking at 32% or 32% plus from both our initiatives and what's generally going to happen with orders from customers.

All right, thank you.

Sure.

Your next question comes from Andrew DeAngelis with KeyBanc Capital Markets.

Thanks for taking my question.

I guess first of all, in terms of these operating challenges that you face in the quarter, what really surprised you guys on the negative side?

Because, I mean, ostensibly, some of this stuff would have been built in to your expectations.

Andrew, this is Tom.

In any given quarter we're going to have ups and downs, and it turned out in this quarter that we just experienced we had the three broad reasons that I laid out for a lower than anticipated margin.

So if anything surprised us, I would say it's -- the three of those items culminating in one quarter, but again, margins are going to fluctuate quarter to quarter.

Last year we had had unusually strong margins in the second half of the year, and this year three of these general items converge to produce lower margins in the third quarter.

Can I take that $6 million impact from product mix as being one time in nature, or is some of that structural that will persist just based on, you know, the native margins of the business?

I mean, I know you talked about obviously, some GTS issues.

Right.

Andrew, again, there's really two items in that $6 million number.

It's low-margin jobs, and product mix.

We really can't predict product mix on a quarter-to-quarter basis.

But a portion of that deterioration relating to lower margin jobs we expect that to improve in the fourth quarter and beyond.

Then just on the distribution initiatives that you talked about, when do those, I guess, begin to bear fruit, and could you talk about the trajectory of improvement that we should expect on that side of things?

Andrew, it's Bill.

I will take that one.

We're going to start to see some improvement in our fourth quarter, but I think the full impact of those is going to take a couple quarters because we're investing in new systems, as I mentioned, to really handle the significant increase in both capacity and business that we're experiencing.

So I think we have to upgrade our capabilities and some of that is going to result in additional costs while we're making improvements.

So again we'll see some improvement in the fourth quarter but we'll get all of it over the next couple of quarters.

All of it being, I guess -- and I know it will fluctuate, but is the $4 million kind of viewed as one-time, or, I guess a negative variance versus your expectations, or is some of that also structural?

I would say longer term that's all a variance that we're working to eliminate.

Okay.

And then I guess my last question relates to the truck market.

You talked about your expectations for production in the NAFTA market over the next two quarters, and I was just wondering if you could provide a full-year 2007 expectation in terms of NAFTA truck builds.

Okay.

Well, I'm going to give you the quarters by our fiscal year, because that's the way I have it.

So the quarter that we just ended, okay, was about 70,000, was the build schedule, build rate.

The quarter that we're heading into, the fourth quarter, 48,000.

That will go down to 47,000 in the first quarter of our fiscal '08, and then back up to 53,000 in the second quarter.

Okay.

And the positive variance that you, I guess, guided to for the full year is fully related to -- just in terms of clarification, due to the better builds this quarter that you saw?

Early in the quarter.

Early in the quarter, you're right, we saw better builds than we originally anticipated.

That's why the drop was not as much as we thought, but some of that has now moved out into the fourth quarter.

That dropped.

Okay.

Thanks for that.

Did that answer your question?

Yes.

Thank you.

That's all I had.

Your next question comes from Phil Benton with William Boyer.

I changed names.

Just a quick follow-up in terms of the balance sheet.

Other assets picked up about $50 million sequentially.

Just curious what that might be.

That's related to the AFS acquisition that I referred to before.

So some goodwill in there?

Goodwill and other intangible assets.

Great, thanks.

Thanks, Bill.

At this time there are no further questions.

Okay.

Well, I'll wrap it up then.

To all of you participating and listening I want to thank you all for your time and interest.

To my fellow employees, I want to thank you for delivering another record quarter for both sales and earnings.

Thank you all, and good-bye.

This concludes today's conference call.

You may now disconnect.