Enovis Corp (ENOV) 2008 Q3 法說會逐字稿

Good day and welcome, everyone, to the Colfax Corporation third quarter earnings conference call. Today's call is being recorded. With us today is John Young, President and CEO, Scott Faison, Senior Vice President and CFO, and Mitzi Reynolds, Vice President of Investor Relations. At this time I would like to turn the call over to Mitzi Reynolds. Please go ahead, ma'am.

Thanks, Tina. Good morning everyone, and thanks for joining us. I'd like to point out that our earnings release and 10-Q are available in the Investor section of our website, colfaxcorp.com. We will also be using a slide presentation to supplement today's call, which can also be found on the Investor section of the Colfax website. Both the audio of this call and the slide presentation will be archived on the website later today and will be available until the next quarterly call. In addition, a replay of this call will be available for approximately two weeks. The replay number is 888-203-1112 or 719-457-0820 for international participants. The access code is 9343586. The information is listed in the press release.

I would also like to note that in order to help you understand the Company's direction, we'll be making some forward-looking statements during the call, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties including those set forth in our SEC filings. It is possible that actual results might differ materially from any forward-looking statements that we might make today. The forward-looking statements speak only as of the date that they are made and we do not assume any obligation or intent to update any forward-looking statements except as required by law.

During the presentation we will describe certain of the more significant factors that impacted our year over year performance. Please refer to the accompanying slide presentation and the MD&A of our third quarter Form 10-Q filed this morning for details regarding additional factors that impacted year over year performance.

With respect to any non-GAAP financial measures during the call today, the accompanying information required by SEC Regulation G relating to those measures can be found in our earnings press release under the Investor section of the Colfax website.

Now I'd like to turn it over to John.

Thank you, Mitzi. Good morning, everyone. Before I get into the third quarter results, I wanted to take a few minutes to give you our thoughts on today's economic uncertainties and what it means for Colfax. These are certainly unprecedented and challenging economic conditions in the world today. However, we had a strong quarter. We expect the fourth quarter to be even better and the trends entering 2009 remain positive.

We are confident in our business, because we have a broad portfolio of products serving diverse end markets on a global basis. Our performance and critical applications is unmatched. That doesn't mean that we are immune to the global economic crisis, but it does mean we believe that we are well positioned. The fundamental global drivers in our end markets remain positive, including increasing demand for energy in the advancement of the world's developing economies.

We are also very fortunate to be in a strong financial position. At quarter end our debt to adjusted EBITDA was just under 1. As a result of our successful IPO in May, we were able to significantly reduce our overall debt level. We also entered into a new credit agreement in May, which expires in 2013. We have significant availability under our revolver, about $130 million, and approximately $50 million in cash today.

We want to maintain our conservative balance sheet and are constantly evaluating our cash flow alternatives. Our main priorities are to reinvest in our businesses and to pursue acquisitions. Acquisitions continue to be a key component of our growth strategy and our flexible balance sheet allows us to take advantage of these opportunities.

We also announced today that our Board has approved a $20 million stock repurchase program. We believe that we have sufficient cash and credit availability to fund our growth initiatives as well as a stock buyback program. This action reflects our commitment to improving the investment value of the company's stock while also growing the company.

We are closely monitoring the impact of these challenging economic conditions on our businesses and will adjust accordingly. We believe that we can react quickly as demand changes and that our Colfax business system gives us a distinct competitive advantage, especially during unsettled market conditions.

In summary, we're confident that our long-term strategy and solid financial condition has well positioned us to perform in a challenging economic environment.

Now for a more detailed look at our results. First I'll cover some of the third quarter's more significant highlights and some of the key performance measures that we achieved. I will follow that with a review of our strategic end markets and a current outlook. And finally, I'll review the financial results and then we'll open it up for a question and answer session.

As we announced in the press release issued this morning, Colfax had a strong third quarter. Adjusted net income was $12.1 million or $0.28 per share, a 34% increase over last year's third quarter. Net sales for the quarter were $153.5 million, an increase of 22% including organic growth of 14%. We had organic growth in all end markets and most notably in Commercial Marine, Global Navy and Power Generation, each of which were up 19%.

Adjusted operating income increased 22% to $20.3 million while the margin remained flat. Adjusted EBITDA increased 19% to $24 million and the margin decreased 50 basis points. These margins were negatively impacted by higher professional and other costs associated with becoming a public company and unrealized losses on raw material hedges.

Turning now to a brief look at year-to-date numbers, for the first nine months adjusted net income was $36.2 million or $0.82 per share, an increase of 41% over the first nine months of 2007. Net sales for the nine months were up 23% to $445.5 million. Organic sales grew about 12%. Adjusted operating income increased 30% to $62.2 million, while adjusted EBITDA increased 24% to $73.5 million.

We continued to see strong growth in our order rates and backlog during the quarter. Order rates have grown steadily on an organic basis over the past several years and through the first nine months of 2008. Year to date orders were up 28% with organic growth of 16%. Orders were $174 million for the quarter, an increase of 13% with organic growth of 6%. Backlog was $383.1 million at the end of the third quarter.

Colfax participates in five strategic and diverse end markets which are Commercial Marine, Power Generation, Oil & Gas, Global Navy, and General Industrial. The Commercial Marine market is our largest single end market and represented 29% of our third quarter sales and 25% of our sales year-to-date. Organic sales grew 20% for the quarter and 11% year-to-date. Organic orders declined 4% for the quarter but are up 22% for the year-to-date period.

New ship set orders generally have long lead times with some projected deliveries even out as far as 2011. This year's strong sales and order growth has been driven by a growth in international trade, changing environmental regulations and demand for oil and other commodities. We believe these factors will continue to drive demand for containerships, tankers, bulkers, supply vessels and FPSOs. We are also seeing an increase in aftermarket sales due to the increased number of vessels on the water running on Colfax pumps.

We do anticipate a decline in new orders in Commercial Marine, but we expect sales to continue to grow as existing orders in backlog are delivered. Given the current global financial crisis, some orders may be delayed or cancelled due to our customers' inability to obtain financing. During the third quarter, we received cancellations totaling about $1 million for this reason.

We monitor our backlog in this market closely. In October we saw an additional $5 million in cancellations primarily related to lack of funding. Note that reported orders are net of cancellations and are adjusted for changes in the foreign exchange rates in our backlog at quarter end. We are focusing on growing our aftermarket sales and service in our Commercial Marine market, as well as introducing new products such as the Imo ACG and ACE Optiline and the Allweiler All Trim product lines.

Moving on to Oil & Gas, sales in this end market were 13% of our total sales for the quarter and 12% of our sales year-to-date. While sales were up 3% for the quarter, they were flat on an organic basis and down 8% organically year-to-date due to an unusually large project shift in 2007. On an organic basis, orders were up 37% for the quarter and 23% year-to-date. We expect activity in the Oil & Gas market to remain favorable as capacity constraints and global demand drive development of heavy oilfields. We also believe that demand will increase for our highly efficient products as customers focus on total cost of ownership.

Our products in the Oil & Gas market are used for crude oil gathering, pipeline services, unloading and loading, rotating equipment lubrication and lube oil purification. Our backlog in this market is mainly related to heavy oil exploration. Our customers include multinational oil companies as well as national oil companies. National oil companies, which are restricted by their boundaries, continue to explore their resources as oil prices change. Booking activity remained steady at current oil prices.

In the Power Generation market, we expect activity in Asia and the Middle East to continue to remain strong as economic growth and fundamental undersupply continues to drive significant investment in energy infrastructure projects. In the developed economies we expect efficiency improvements to drive demand. For the third quarter, sales into the Power Generation market were 11% of our sales and 17% of our orders. On an organic basis, sales were up 19% for the quarter and 38% year-to-date. Similarly, organic orders were up 5% for the quarter compared to a very strong third quarter in orders in 2007. Organic orders were up 11% year-to-date.

Our Power Generation business is very OEM-centric and we haven't seen any signs of softening. Recent order activity remains solid.

Finally, sales into the Global Navy market for the quarter were 5% of our total sales and orders were 6% of our total orders. Organic sales in orders increased 19% and 12% respectively for the third quarter, primarily related to the US Navy's new ship construction program. While organic sales are down 19% year-to-date, organic orders are up 17%. The outlook for new Naval ship construction remains positive. Recently the US Navy recommended that Congress approve funding for 8 new DDG-51 class destroyers to be built in 2010 to 2015, in addition to the 3 scheduled DDG-1000s.

Fairmount Automation, which we acquired a year ago, has shown strong organic growth as well. This business develops innovative control systems for mission and safety critical processes and machinery in harsh environments and is principally sold into the Global Navy market.

We also believe that demand will increase for integrated fluid handling systems such as our Smart Valve systems that reduce operating costs and improve efficiency. In addition, we expect nations outside of the US to continue to expand their fleets to address national security concerns.

We believe continued infrastructure development throughout the world will drive capital expenditures and our sales in General Industrial market. General Industrial sales were 42% of our sales in the third quarter and were 39% of our orders. On an organic basis, sales increased 14% for the quarter and 17% year-to-date, while orders increased about 1% and 11% for the same periods.

The growth in sales in this end market for the quarter was broad-based across several submarkets with distribution and machinery support being particularly strong. This end market includes distribution, chemical processing, building products, machinery support, waste water and heat transfer, to name a few subsegments.

Turning to a geographic look at our sales for the quarter; about 50% of our sales came from Europe; 28% from the Americas; and 19% from Asia and the Middle East. The increase in sales was primarily driven by our European OEM business. We also had strong organic sales increases in China, the United States and Latin America.

Gross profit margin for the quarter was flat when compared to the prior year due to margin improvement in our European operations offset by a heavier mix of higher margin pipeline projects in the third quarter of 2007. The gross margin is up 90 basis points year-to-date, primarily due to a more favorable pricing, cost control in Europe's Commercial Marine segment. Increased aftermarket sales also improved margin.

Selling, general and administrative expense increased $6.5 million during the quarter including $1.8 million related to the impact of foreign exchange rates, $1.3 million related to higher public company costs, and $900,000 related to unrealized losses on raw material futures and foreign currency contracts for which we did not elect hedge accounting.

For the year-to-date period, SG&A expenses were up $22.2 million, primarily due to the following items; $6.9 million related to foreign exchange rates; $4.1 million related to reserve increase for a legacy legal matter; $2 million of public company operating costs; $1.8 million related to the acquisition of Fairmount and LSC. Excluding the effect of the $4.1 million reserve adjustment and $0.6 million of due diligence cost on an adjusted basis, SG&A expense as a percentage of sales was 20.8%.

Subsequent to quarter end the US dollar appreciated sharply against both the euro and the Swedish krona. This is expected to have a negative effect on our sales and order growth resulting from currency translation in the fourth quarter of 2008. The average dollar-euro exchange rate was 1.52 for the third quarter compared to 1.39 for October. The average dollar Swedish krona rate was 6.23 for the third quarter and 7.03 for October.

We made some modest improvements in our inventory position in the third quarter. Inventory is down about $2 million on a currency adjusted basis since the end of the second quarter, but it's still up about $17 million year-to-date. While the overall inventory amount is still high, we believe the current level is appropriate given the anticipated large projects scheduled to ship in the fourth quarter.

Net cash flow from operations was the use of $31 million for the first nine months. One-time cash outlays related to the IPO were $42.4 million.

Turning to our asbestos related liability, we have several very favorable developments to report. First, we received $20.6 million in reimbursement of past cost from our insurers during the third quarter. These payments reduced outstanding insurance receivables from $54.6 million at the end of the second quarter to $45.2 million at the end of the third quarter. In addition we received $11.5 million on October 15th which further reduced insurance receivables.

The majority of these funds are the direct result of a coverage in place agreement with our largest excess carrier formalizing access to approximately $450 million of coverage. We also have reached an agreement with one of our primary and excess carriers which provides us with $7 million of additional solvent coverage. The additional coverage was recorded as a gain in the quarter. The liability and related defense cost before insurance asset adjustments was $1.6 million for the quarter.

In summary, we had a very strong third quarter from a bookings, sales and profit perspective. We continue to see order growth across our end strategic markets and across each of our geographic regions. The fourth quarter is historically our strongest quarter with many customers seeking year-end deliveries. As a result, we expect to achieve our targeted low double-digit organic sales growth for the year.

With that, I'll open up the floor for question and answers.

(OPERATOR INSTRUCTIONS) John Inch with Merrill Lynch.

First question, the collapse of AIG and this whole financial institutions meltdown, what do you believe are the risks, if any, to future receipts for asbestos? How should we think about that?

If you look at the collapse of AIG, clearly it was at the holding company level, not at the insurance company level. And in fact, AIG is one of our carriers and is certainly paying on its responsibilities related to our asbestos liability. So, our view is that there is certainly risk out there, but we feel pretty confident in our ability to collect on those, not only on the current receivables but also on future claims.

But do you have a sense, John, that the timing of the receipt based on perhaps one or two insurance companies struggling a little bit, does that get pushed out versus expectations or you're just not really that concerned?

We're not concerned at this point. I don't think our view on collecting asbestos as a result of the financial crisis has changed at all right now. We've diligenced that with our insurance brokers, with outside legal counsel and some specialists in the area as well, so we're comfortable.

Okay. And just for a follow-up then, you mentioned in the press release that you're closely monitoring the impact of the economy. All companies are sort of saying that and I guess based on your experience with prior global slowings, how much should we really anticipate that your backlogs and book of business is perspectively at risk? I heard your commentary, but I mean, as we look out, how would you put this downturn into the context of prior downturns and how should we be thinking about your operations and perhaps really I think risk of cancellation of backlog, is what most people are concerned about?

I understand. Historically, when we've gone through downturns our order book has remained solid. We are very specialized supplier and therefore, our orders tend to be project driven, very specific applications, sometimes with deposits with them. So our history of order cancellations is very minor. We did have a couple of cancellations on Commercial Marine that we identified. I think that was more kind of a cleaning of the books, so to speak, from some of the ultimate customers of their new ship construction outlook. That trend seems to certainly have slowed down as we've gone into our month of November. But we literally monitor it everyday. So I think if you look at our non-Commercial Marine business, we've had no cancellations so far and if you look at past downturns, that's been a very minor issue for us historically.

So the prospect of some sort of restructuring action probably is off the table. Is that a fair statement?

You know, we'll continue to monitor it. We do have a very strong backlog and if that for whatever reason changes, we can be nimble. I think we certainly have a history of restructuring at the appropriate time and if the appropriate time begins to show itself, we're prepared to take actions.

Shannon O'Callaghan with Barclays Capital.

You gave some of the flavor around Commercial Marine in October. I wonder if you could comment on kind of the rest of the business, following up on this monitoring conditions point, how do things flow through the quarter and how do things trend in October? You said there's no cancellations, but what have you been hearing from your customers in terms of their behavior most recently?

Sure. I think many customers are certainly taking a wait and see approach on things. I think our activity level remains very strong. We built backlog in the third quarter. October was a solid month from both a sales and an order perspective. So I think obviously folks are looking at the economic maelstrom going on around them and making some decisions, but I don't think our customer base is panicking. I think there's some wait and see approach, maybe a delay here or there in terms of making final decisions, but the activity level remains strong.

And as you look a little further out, you said you expected things to remain positive in 2009. What do you mean by that? What are your expectations at this point?

Well, as we get closer to the end of the year, we'll start communicating our official guidance for 2009, but right now based on our backlog and our view on potential cancellations being a fairly minor event, we certainly anticipate that 2009, while it may not continue at the very strong organic growth rates that we've seen over the last several years, it's still going to be a positive year for Colfax.

Okay. You mentioned around some of the raw materials hedges, but just broadly around pricing and raw material costs, where do you stand on that? Are you seeing any pressure to pull back your prices and when do you expect to get some benefit from the lower raws?

I think on pricing, it remains stable. It certainly hadn't seen any pullback as of yet from our side, nor frankly do we anticipate it. I think on a commodity basis, we did get hit with some hedge difference, particularly on copper and nickel, where we did some forward hedging and there was a very strong drop in prices in both of those commodities. So we should see some moderate pick up from commodity price reductions in the fourth quarter and into the first quarter of 2009.

Jeff Hammond with KeyBanc Capital Markets.

Just wanted to dig in a little bit more on general industrial, the order growth was exceptional in the second quarter and slow in the next. I just wanted to understand what you see as changing, maybe a little more granularity on order trends within maybe some of the sub-verticals within General Industrial?

Sure. I think the overall activity level in the third quarter in General Industrial was pretty solid. We did have a couple of larger project orders last year that skewed the numbers a little bit, made it a tougher comp, particularly on chemical jobs where we do larger project business. That particular vertical continues to remain pretty active for us, so we see continued strength in that market going forward.

I think overall, General Industrial is going to be a solid market for us. I don't think you're going to see any major swings upward or downward in General Industrial, because we do cover so many different markets within that segment, some of which are, again, trending pretty positively, others are moderately slowing as the economy slows. So, I think it will continue to be a fairly stable market for us going forward.

So the order deceleration was more a function of the tough compare than any kind of material slowing latter part of the quarter?

No, in fact, if you look within that vertical there are a couple of subsegments that are what I would call more leading indicator business, our building products, our elevator pump business and our diesel engine business, both of those held pretty strong in the third quarter. They tend to be what I'd call more leading indicators for us and we haven't seen any dramatic change in either of those markets as of today.

Okay, great. And then moving over to Oil & Gas, certainly that business has been lumpy and you had this kind of slowdown in the sales rate and now a reacceleration on the order side. Just as we've seen a dramatic drop off in Oil & Gas prices more recently, taking out some of the lumpiness, have you seen any change? What are the customers telling you there on a near-term basis?

Our order activity level has been very strong in the Oil & Gas segment. We did have a very large project that shipped last year that would skew the numbers a little bit from a revenue perspective. I think you'll see that turn around a little bit in the fourth quarter, based on our anticipated Oil & Gas shipments in the fourth quarter.

I think, again, as I said earlier, there's some wait and see aspect in some of our customers. We've had discussions where projects that we thought may book in the fourth quarter will probably book in the first quarter now, but that's been a fairly minimal type of movement. We continue to view opportunities around the world in this market. It's very strong. We're investing in a new sales office in the Middle East to continue to grow our business presence there.

So again, the price of oil is kind of back where it was a year ago. We had a major price spike upwards. I think our customers certainly weren't using $140 a barrel to justify their projects. I think they were probably using a price closer to where we are today. So the activity level that we saw throughout the first half of the year has certainly not changed significantly in the back half of the year.

Jason Feldman with UBS.

If you could give us a little bit of color perhaps on what's going on in the acquisition department. I saw there was that due diligence expense, so you're obviously looking at some things, but whether the environment has gotten more attractive, and also how you're thinking about that relative to repurchases?

Well, I think the acquisition environment still is out there. We're continuing looking at transactions. We've got a number of things in the hopper, so to speak. I would say nothing that's of any tremendous magnitude at this point. I think like many customers out there, there is a little bit of wait and see from an acquisition perspective as well. We did have one transaction that we did do some substantial work on in the third quarter that didn't come to a successful completion and we had to write those costs off. But I think that's again in line with our approach to acquisitions. I think it needs to be the right fit at the right price and when those two don't come together, we will walk away from a deal.

Okay. Because I guess I was just a little bit surprised to see the repurchase announcement. In this environment, you certainly have a pretty good liquidity situation. You have the revolving credit line there to complete an acquisition, but if the economy continues to deteriorate, it seems like there would be good deals out there, what's the reason for going in to repurchase shares?

Well, I think you can just look at the overall level of the stock and we decided that if you look at our return on invested capital basis, at the levels we've seen here recently, it's a pretty good investment in Colfax stock at that level. I think if you look at the cash we have on hand plus the credit availability that we have without having to go out and raise any additional capital, with the existing facilities we can do some pretty significant acquisitions while at the same time continuing to move forward on the buyback program. I don't think it's an either/or situation. I think we'll certainly be able to accommodate both through our internal cash generation, the cash we have on hand and sort of anticipated receivable collection going forward.

Okay. And then last thing, has there been any updates on -- not the ongoing asbestos litigation in terms of resolving claims, but you had some litigations with some of the insurers dating back several years. Has that been resolved or was it settled?

It's still in process, Jason. We're still in pretrial hearings right now. We anticipate that that will actually go to the jury trial sometime during the fourth quarter. The pretrial hearings have certainly dragged on for a while at this point, but we're hopeful that the jury will sit here in the not too distant future.

Michael Schneider with Robert Baird & Company.

I'm wondering if you could just go back to the Oil & Gas market. There's been numerous reports now of project delays, for example in the tar sands area and then presumably with crude coming down there could be delays down in some of these South American finds. Can you give us a description just of -- I know you've not had order cancellations, but have you had project and quoting delays that have emerged on those related projects?

On that particular part of our business we haven't, Mike, on the pipeline piece. The one move out on an order that we had was actually a downstream application, not a midstream or upstream pipeline project. Our business in both Canada and Latin America is pretty robust right now and as of today, I can't say that we've had any project dates move out on us. Certainly we're talking to our customers on a daily basis in both of those markets and they're both very good markets for us. But we certainly haven't seen any movement at this point.

Okay. And then focusing on margins for a minute, because I guess when I looked at my model the disappointment was not really in revenue, because currency obviously swung significantly, but it's the margin flow through in the quarter. Can you focus for a minute on adjusted EBITDA margins? A year ago you reported 16.2 and I'm looking at your reconciliation table here and then this year you're at 15.7. And I guess on the base of 14% organic growth, can you walk through what have the puts and takes been year-over-year to explain why on 14% growth, margins are down 50 basis points?

Sure. The decline is all at the SG&A line, which primarily is related to the additional cost we've taken on as a public company. And I think that was fairly well detailed in the Q and also in the discussion we had earlier today. From a GP perspective, really in the quarter the biggest factor, quite frankly, is we had a very strong third quarter last year, based on the mix particularly of pipeline projects were very heavy in the third quarter last year. We didn't have that same mix this quarter, so we lost some margin points based on that.

I think if you look, our margin progress year-to-date it's been basically dead on where we had anticipated in terms of reading through some of the pricing increases and also the productivity increases, particularly in our European facilities as well as the sales growth that we've had in our aftermarket business has kept up with the pace of sales growth in the for-market business. So I think from a margin perspective we're pretty much where we thought we'd be for the quarter and certainly for the year as a whole.

Okay. And then on the aftermarket business, you've made it clear your strategy is to increase the mix of that business and focus your sales efforts there. What was the aftermarket mix in Q3 and then just can you give us your analysis of your success in driving aftermarket business at this point and maybe what's in store for 2009 based on your current momentum?

Sure. The mix was about the same as it's been historically. We certainly have been having some very strong for-market growth as well. Our aftermarket growth kept up with our for-market growth this year, so the mix really is fairly stable. I think that that, as we go into 2009, it certainly depends on what rate the for-market growth continues in, because I think the trajectory on the aftermarket is very favorable and we certainly hope that that will continue next year, based on the programs that we have in place, plus some of the new product introductions that we had that are specifically geared towards aftermarket replacement.

(OPERATOR INSTRUCTIONS) Follow-up question from Jeff Hammond with KeyBanc Capital Markets.

Just wanted to come back to Commercial Marine. I think you said you had some cancellations this quarter and then a good bit into October and you thought that there was some cleanup. Maybe just give us a little more color on what your customers are saying there and what gives you the confidence that we don't see a lot more of that on a go-forward basis?

There's a couple of factors. One, if you look at our customer base in Commercial Marine, we tend to serve primarily European ship owners. That's our largest ultimate customer base. Our sales go through the shipyards in China, Korea, India, Viet Nam, but the ultimate customers are for the most part, European ship owners and so our customers tend to be well capitalized, well run business. So I think from that perspective that gives certainly a little bit of confidence in that market.

But also based on activity level. There certainly was a flurry of activity right as the financial crisis hit and a lot of concerns out there, but as we've gone into November, the mood has come down a little bit and we've seen some pretty substantial new order activity start to turn. And while I don't think many of us are anticipating a huge boom in orders by any stretch of the imagination, and certainly we commented on that earlier, but we feel like it's certainly stabilized. But we're in the marketplace every day talking to our customers, talking to the yards and as I said, we're monitoring it very closely for any changes in those trends.

Okay. And where are you seeing the cancellations, what sub-verticals? Is it mostly dry bulk or?

It's been a mix. It's been more heavily weighted on the container side than anything else. But it was a mix. There was some bulkers, but it was primarily containers.

Okay. And then can you just remind us of what percentage your Commercial Marine is aftermarket? And if we have decent activity levels over the next couple of years as you work through the backlog, what might the aftermarket look like two or three years out as a percentage of that total mix?

Well, in total, aftermarket is about 25%. That percentage in the Commercial Marine vertical is lower, because we've had such strong for-market growth in that particular market over the last four years. So we're starting to move into the gestation period where we should see just by the passage of time, a larger growth rate in the aftermarket in Commercial Marine.

I think over time if you look at our business, the mix of the aftermarket 25% is actually on the lower end of the range, because we've had such strong for-market growth. If you look, it ranges anywhere from 25% to 32 to 35% at the very high end. So I think as we go into the next couple of years you'll see that percentage start moving up and hopefully have a 3 on the front of it, going out into the future.

That concludes our question and answer session. At this time I would like to turn the conference back over to John Young for any closing or additional comments.

Thanks, Tina. Again, thank you for your participation today and all the questions. I think in closing, third quarter certainly was a good quarter for us and our outlook for the fourth quarter still remains pretty strong. I think we're on target to hit our sales growth target that we have out there and hopefully come to a positive conclusion for 2008. So with that, I think we'll complete the call this morning. Thank you very much for your participation.

This concludes today's conference. We thank you for your participation and have a nice day.