ESCO Technologies Inc (ESE) 2004 Q4 法說會逐字稿

Good day and welcome to the ESCO fourth-quarter and year-end conference call. Today's call is being recorded. With us today are Vic Richey, Chairman and CEO; Chuck Kretschmer, President and COO; and Gary Muenster, Vice President and CFO. Now to present the forward-looking statements and for introductions, I would like to turn the call over to Ms. Pat Moore, Director of Investor Relations. Please go ahead.

Good morning, everyone. If you have not received the press release you can obtain it in on our website or by calling 314-213-7216.

Statements made during this call regarding the results and timing of real estate sales, the level of contribution from each segment, future investments, potential acquisitions, potential customer contracts, share repurchases, future fiscal 2005 revenues, EBIT, EPS, SG&A, and tax rates, the longer-term revenues and earnings of the Company, and other statements which are not strictly historical are forward-looking statements within the meaning of the Safe Harbor provisions of the federal securities laws.

Investors are cautioned that such statement are only predictions and speak only as of the date of this call. The Company's actual results in the future may differ materially from those projected in the forward-looking statements due to the risks and uncertainties that exist in the Company's operations and business environment including, but not limited to, the risk factors referenced in the Company's press release issued today, which is an exhibit to the Company's Form 8-K filed today.

The Company disclaims any intent or obligation to update these forward-looking statements. In addition, during this call, the Company may discuss some non-GAAP financial measures in describing the Company's operating results. A reconciliation of these measures to their most comparable GAAP measures can be found on the above-mentioned Form 8-K and accompanying press release on the Company's website at escotechnologies.com, under the links investor relations, financial reports, and SEC filings. I will turn the call over now to Vic.

Thanks, Pat. Good morning and welcome to our quarterly earnings conference call. I will first turn this over to Gary Muenster, our CFO, to provide a brief description of our financials.

Good morning. As detailed in the release, our fourth-quarter operating results were very strong. Total sales in the quarter increased 9.5 percent over prior year, with all 3 segments contributing to the growth. Test increased 13 percent; filtration was up 10 percent; and communications improved 7 percent.

Communications sales increased over the prior year fourth quarter in spite of significantly lower sales to PPL in the current period as we near the end of this program. Also during the fourth quarter, in communications we were able to resume deliveries of our SecurVision products, which contributed 3.8 million of sales.

GAAP earnings increased substantially in the current period over prior year, as the prior-year results included the charges from the MicroSep write-downs and the repositioning activities begun in 2003. The GAAP results in the 2004 fourth quarter included a 2-cent in discontinued operations resulting from the finalizing of the closing balance sheet related to the European MicroSep businesses sold near the end of Q3.

I will focus my remaining discussion on the operational results. Operational EPS of 93 cents per share increased 39 percent during the fourth quarter, as compared to the prior year's 67 cents. While all 3 segments increased their EBIT dollars year-over-year, the most significant contributions to the operational EPS growth were the continued strength of the communications segment.

In addition to the increased SecurVision sales, other contributions included a favorable sales mix and significant cost reductions realized on AMR component parts. For the full year, sales increased 6.5 percent and operational EPS of 2.91 increased almost 16 percent from the 2.51 reported on the same basis in 2003.

Our September 30 balance sheet remains very strong, with a net cash position of about $72 million. From continuing operations, we generated $21.8 million of free cash flow during the fourth quarter, and $44.6 million for the year.

During the fourth quarter, we utilized a portion of our strong cash flow and spent $10 million to repurchase 156,000 shares of our stock. We're planning to continue this program and expect to spend another 25 million in 2005.

Our strong cash position and available credit capacity, coupled with our strong cash flow plan for 2005, will allow us to continue to fully fund our internal development program and will provide adequate financial resources to achieve our acquisition objectives.

CapEx for 2005 is expected to be consistent with or slightly below the level of CapEx from continuing operations recognized in 2004. Entered orders in the fourth quarter were 116.5 million, which resulted in a backlog of 249 million at September 30. The largest contribution to the fourth-quarter orders was in the test business relating to a large chamber project in Korea.

Although consolidated backlog was essentially unchanged from June 30, we did see a decline in both filtration and communications backlog during the quarter. Based on the current corner profile, we expect to add to the filtration backlog and maintain the communications backlog at its current level in the first half of 2005.

On the governance front, we continue working diligently on the implementation of 404 certification requirements, and we feel that we are in excellent shape to be in full compliance well before the September 30, 2005, deadline. I will be happy to address any specific financial questions during the Q&A, and now I will turn it back over to Vic.

Thanks, Gary. We are very pleased with our financial results for the quarter and the year. It was a record year, with all segments contributing positively to our performance improvement.

The actions that we initiated in '03 to reposition the business are now complete, and we're seeing the results we anticipated. Our focus now is clearly shifted to growing our core business. As we developed our '05 plan and longer-term goals, I was encouraged by the number and the quality of our opportunities available to us.

Having said that, our baseline '05 guidance is for modest growth in revenues and earnings per share. There are a few points I want to emphasize regarding the '05 outlook.

In communications, as has been the case in the past, we have excluded any contribution from new investor-owned programs. Our thinking here is not a reflection of the opportunities, but rather our belief that we're all better served by adding the contributions for major IOUs when they happen, rather than including them in a baseline and creating a potential for disappointment.

Also in communications, we are taking what we hope will turn out to be conservative stance with regard to the sustainability of SecurVision's current contribution. Given our history in this market we believe that it is appropriate to get a bit more traction before we put the full potential into our outlook.

In filtration, we had a significant contribution in fiscal '04 from defense spares at VACCO. For the development of our '05 outlook we're taking a position that the level of defense spares in '04 was partially a war dividend. Specifically, our '05 outlook reflects a reduction in our defense spare sales of $8 million or over 50 percent of the level they reached in '04.

Despite the positions we have taken in these areas, we are projecting year-over-year EPS growth as a result of stronger performance in the balance of the business. While to some degree the current baseline is driven by visibility limitations, I believe our current guidance is responsible.

Longer-term, as I stated in the release, we think 5-year sales and EPS growth goals of greater than 10 and 15 percent, respectively, are appropriate. We set these goals based on our competitive positions and our view of the overall market potential. These reflect both organic and acquisition contributions.

Top-line growth will have to play a more significant role going forward than it did in our attainment of our prior 5-year goals, which we essentially met from an EPS standpoint 1 year early. Our new 5-year goals, driving off of our '04 results, imply 2009 revenues and EPS of approximately $700 million and $6.00 a share, respectively.

We are also targeting an EBIT margin expansion of 3.5 points from the current 14.5 percent to 18 percent over 5 years.

In terms of helping us meet our goals, the most significant opportunity is for the expanded adoption of our TWACS technology by investor-owned utilities. The market is extremely active. I am not only referring to the well-publicized initiatives in California and in Ontario, Canada, but also other activity by domestic electric utilities. In fact, we booked 1 new investor-owned utility pilot in November; and we expect at least 1 more in quarter 1.

With respect to the AMR market, we are also actively reviewing acquisition opportunities, which would give us direct access to water and gas markets.

In test, we have some momentum and we're going to continue to cultivate the positions we have established in Asia and the acoustics market.

In infiltration, the outlook is a bit more modest, but we are working a number of niche opportunities which could be meaningful over the long term. We do have the market positions and the financial flexibility to capitalize on these opportunities.

In summary, I think we have staked out a responsible starting position for '05, and we have good reason to be encouraged about the future. We would now be glad to answer any questions you may have.

(OPERATOR INSTRUCTIONS) Richard Eastman with Robert W. Baird.

Vic, could you just for remind us once again, on this Blackhawk VACCO business, how much was actually billed in '04? Are you looking for that to be zero then in '05?

It was about 8 million last year. Our hope, our view today is we are going to have the same this next year.

So it doesn't go to zero, but it is flat.

Right.

Is there a life on that project or that contract? Is it run off then at the end of '05?

No, that contract should go at some level for another probably 3 years beyond that.

All right. Also, just a question on the test business. Just a little color on how sizable was this 1 large chamber in Korea; and does that ship this year or trail into next year?

The overall project was $20 million, and we actually had about $2.5 million of sales in '04. The bigger year will be in '06 and '07. Because what we have done so far is really the design and development phase of that. We're doing some work this year, but then the major actual installation of that is out in '06 and '07.

That is the Boeing contract, right?

That is correct. Our contract is actually with Boeing, but it is to be built in Korea.

Okay. 1 last question, maybe for Gary. The operational earnings that you show for Q4, if I do the quick math it is like $19.5 million. When I go to the EBIT reconciliation it is like 19.2. What is your thought there? What am I missing there?

The EBIT 19.2, are you looking at the exhibit 1?

Yes, you break that down in the back there.

Hang on 1 second; exhibit and exhibit 5, it reconciles to the 19.2.

Yes, but on the full P&L, where you get to the operational earnings of 93 cents, if I just look at the sales less the cost of sales less G&A, I'm actually at more like 19.5 to 19.6. Why doesn't that reconcile?

I'm not sure exactly what you are trying to do. When you look at exhibit 1, you can see that on the operational side, to reconcile from GAAP to operational, the only thing we're removing is this GAAP's impact of the 333. So there were no charges in the fourth quarter.

So when you look at the GAAP column and the operational column, they both reflect 93 cents a share. The only impact that affects that is the 2 cents related to the disc-ops; that brings it down to 91 cents on the GAAP side.

I understand. Okay. Let me circle back to you on that. Thank you.

Let me back up on there, the first question you had, just because I don't want there to be confusion out there about these spares. Because we specifically reference the spares both in my comments and in the press release.

Those Blackhawk spares are actually with the Army. When we talk about the defense spares fall off, those are primarily Navy spares. So I just want to make sure there wasn't some confusion there.

I see. Okay. Different piece of business. Thank you.

James Gentile with Sidoti & Co.

I just have a question, first infiltration. How is the specs for the Boeing 77 going? And how is VACCO or any of the other filtration -- not VACCO. How is Filtertek or PTI going to get involved in that?

I will let Chuck answer that. He is closer to that today.

We are involved in the hydraulic systems, James. There was 3 people that would be the first-tier subcontractors to Boeing participating -- Eaton, Triumph, and Parker. There was some dispute between Triumph and Eaton, and it looks now as if that work has gone to Parker.

We have not yet -- it is not yet clear to us what participation we will have as a subcontractor to Parker, but we are still in the game. I don't think the final selection has been made for the content that we might contribute. But I would say it is at least protracted by the dispute that took place with respect to the hydraulic systems.

Great. You mentioned that you signed 1 IOU pilot in November in your prepared statements, Vic. I was wondering if you could perhaps give us any sort of information regarding that pilot? Is is similar to Idaho regarding the regulatory requirements? What are the characteristics of that pilot versus the Idaho one?

A really cannot give a lot of detail. I really questioned whether I should bring that up or not as you can imagine. Let me just give you a little more explanation than that though.

The reality is I have been saying for sometime the market is active. That is all I have been saying. So I feel it is important that people understand that not only is it active, but we are participating in it.

So it is kind of a double-edged sword, though, because then we start talking about these pilots again. We kind of got in that trick bag once before, and that is all anybody specifically wanted to talk (multiple speakers).

Let me just say, the bigger issue though is we have confidentiality agreements with these customers, and we went to respect those. So there is not a lot of information we can provide. Other than these are competitive arrangements, and we feel good about the fact that we're making some progress in that larger market.

Maybe the function of the question was how the process goes in terms of you identifying these available pilots; and whether it is regulatory driven or it is just a basic capital budgeting decision on the utilities.

What we're seeing out there today is a wide range of things. Some of those things, for instance, everybody I'm sure has read what has gone on in California. I mentioned before, and that is more regulatory driven. But some of the other areas are really more utilities going in, like PPL did, and say we think we can develop a good business case for this.

So I'm encouraged by the fact that there's both of those approaches that are taking place today. The involvement of the regulatory environment in some cases can accelerate things, but we think that there is just a good standard business case as well that is going to push some as well.

1 last question. The sustainability of your SecurVision business, what kind of annual run rate are looking at, in terms of revenue for fiscal 2005? In your plan, included in the plan.

What we have in the plan is a bit over $10 million.

Great, thanks.

Steve Sanders with Stevens Incorporated.

I had a couple of questions on the communication side. On the small utility AMR, it looks to me like bookings there over the past couple years have sort of ranged from 19 to 30 million. This quarter was on the low end of that; previous 2 quarters were on the high end.

I understand there's some large orders that on the small utility side play a role there. But I wanted to see if you could just talk about that market -- saturation, competitive outlook, order activity? Just give us some information there.

If you look at it on a year-over-year basis, we have made significant improvement over the past 3 years. We think that that is going to continue to be the case. That overall piece of the market has accelerated.

As far as the saturation point, though, they're about 30 percent penetration. So there is a lot of headroom there, a lot of opportunities to continue to deliver additional product, and hopefully even grow that at a faster rate.

The competitive environment has not changed significantly. Our biggest competitor remains Hunt. They have a powerline based system that has been successful as well. They are the people that we see the most in the co-op market. There are some smaller unique technologies that play from time to time, but they have been the major competitor.

The acquisition activity, to get into the water and gas side, I know that is something you guys have been talking about for a while. Can you characterize where that stands today versus 6 or 12 months ago?

It has been a while. I guess the easiest way to answer that is twofold. We do have multiple candidates in that primary target area. We are back I'd say kind of in the early to mid stages with those.

We had gotten pretty far down the road on something in the last quarter, and that came apart for a number of reasons. So we are back in the heavy evaluation mode. But it's something we are committed to pursue.

Okay. Back to the SecurVision, the operating margins there, would you say those are comparable to the low end of AMR? Maybe the large IOU? Just help me a little bit with what that increasing mix should do to the margins, under the assumption that the large utilities are probably sort of low 20s and the small utilities are high 20s.

I think you have characterized that pretty well. What really drives that obviously is the volume. 1 thing we really do like about the business, it has much the same business model that our AMR business does, in that we do outsource the manufacturing there. So the prime primary cost is in the project development and sales function.

Just to put that in relative terms, the gross margin is about 6 to 8 points below what the AMR business is running at. So obviously the volume thing is really there to cover the G&A and the other fixed costs. So as the volume goes up, that is where you will get the leverage.

But just so you can model it out, from a gross margin perspective, if you used a 6 to 8 percent differential I think you will be okay.

Gary, it was obviously a strong finish to the year on the free cash flow side. Looking into '05, is 35 to 40 million in terms of free cash sort of a reasonable range to start with?

Yes, I think the higher end of that range would be appropriate. I think 40 would be a good point estimate.

All right. Thank you.

(OPERATOR INSTRUCTIONS) Patrick Forkin, Rockhouse Research.

You indicated in the press release that you were going to be spending more on the communication segment this year and it equates to about 15 cents a share, which if you add that to the high end of your guidance puts you pretty much in line with Street estimates.

I think it is interesting you guys talk about that, because in the past you haven't spent that kind of money unless you are fairly certain that you're going to get a decent return on it. Vic, if you could address sort of your level of confidence on the IOU side during 2005?

Well, the things that we're seeing out there today are really exciting. The things we're seeing out there -- I'm sorry, I kind of drift off. The things we are seeing out there today are really exciting, between what is going on, the things that are well publicized, and a lot of things that are not getting a lot of press today. There is just a lot of activity.

Our view is that this is a prudent investment. We need to continue to have a strong product to offer and continue to prove that. Because the requirements, as you look at some of these specific requirements, are getting tougher and tougher.

Fortunately, we have a good core system that is able to support that. So if I want to look at our position versus other people's positions, I like the position that we have. As these things go forward, I think we're going to be able to play a big role in those opportunities.

You mentioned in your prepared remarks this morning, right after you talked about the pilot in Q4, you mentioned something that you anticipated in Q1. I didn't quite catch that. Could you repeat that?

I said I would think that we anticipate probably getting another pilot in the first quarter.

Unrelated to the Q4 pilot that you referred to?

Correct.

I understand your guidance does not include major IOU contracts. But I want to make sure I have got a proper understanding of the potential impact of those contracts. You talked about the California situation and how that is really being pushed by the regulators.

If you take the top 3 IOU players out there, you're probably looking at something in excess of 20 million end points. It looks like to us that PG&E is probably the frontrunner as far as timing of getting something done, and they probably have 8 to 9 million end points there. All of these IOUs that are bubbling around out there look to be a multiple of maybe 2, 3, 4 times PP&L.

But on an annual basis -- sort of the scale we have been using, and I just to make sure we're right here -- on an annual basis if you pull in $100 million in AMR or AMI-type revenue, you're basically looking at something $1.00 to $1.35 a share on an annual basis. A lot of those contracts I think would probably be spread out over 3 or 4 years. Is that a fair assessment of the potential there?

There are a lot of things to adjust there. The overall numbers that you see, that you talked about, I think are probably in line as far as the overall opportunity. The thing that I would say is it is unclear the timing of those, as well as how they are really going to be done, if it is going to be 1 technology or several technologies that are going to participate in those things.

But it is a big opportunity. I think the timing of those are the real question. As well as you mentioned 3 years, I think 3 years for some of these very large utilities may be a little aggressive in the deployment phase. Just because if you're talking about deploying those many meters in that time frame, I think it's going to be difficult to do.

You remember that PPL deployed over 3 years with 1.3 million meters, and that was a pretty quick pace. Not to say that the other folks can't put resources on it to make it happen quicker. But if I were going to model that out, I probably would not be quite as aggressive about the deployment cycle.

Okay. Overall, with respect to your guidance, last year you guys guided to operational EPS guidance of $2.40 to $2.55 and you came in at $2.91. Did you guys use the same basic approach as you outlined your guidance for 2005 here?

There were a lot of things that happened in the past year that we did not anticipate or I think we would have had different guidance going into the year. Part of the problem is visibility.

You sit here today, or as we sat 12 months ago and looked on to the year, there are some things that happened, most notably in the communication segment; a little more traction in the test side; and then some of the defense spares which we talked about at VACCO that we just didn't have clear insight into as we sat here 12 months ago.

As we sit here today, we are a little bit in the same position. That is why I tried to spend so much time explaining what the base of our forecast was. I would love to say that all of those things are going to go right again this year; but we don't have that visibility today, and so I don't think it would be prudent to say that.

We're talking about the things, the business as we understand it. As always we're going to work to improve the performance of the business throughout the year.

Last question. In a recent investor conference, Vic, you mentioned that you were seeing a resurgence in load control versus AMR. In PG&E's response to the PUC on the initiatives out there, they sort of indicated that they may be going in a dual approach of load control and AMR.

Could you talk about what you meant on resurgence of load control? And then specifically with respect to the latter, is your technology something that is scalable, that you can do the load control and the AMR together in an efficient manner?

When I made those comments it was really about a couple of things. Certainly we have even seen some activity in some of the co-ops wanting to do load control. So that is 1 piece of it. But then some of these larger utilities, they have also expressed an interest in that as well. Most notably, as you mentioned, in PG&E's public filings they have said that that is something they are interested in.

As far as the scalability, the requirements that they currently are talking about are much smaller than what we have already done in Florida. We have had a large load control contracted with Florida Power & Light for a number of years. We have over 600,000 units deployed there.

So it's a very scalable system. It uses essentially the same substation equipment as we have currently deployed. So it is something where you could use the same substation equipment, same infrastructure if you will, to do both. It is really what you do at the home that has to change.

Okay, very good. Congratulations on a great year.

Jason Simon with JMP Securities.

Just 2 very quick questions. Just trying to get a better perspective on the AMR landscape. First, are you seeing an increased interest in wireline versus wireless products? Do you think the restructuring initiatives at I guess one of the largest competitors is causing a greater awareness of your product offering? I will come back with a follow-up.

We really look at it as what the requirements are. If you look at the requirements that are being put out, really do require the ability to frequently collect the information.

So again I like our position in that, because we have a powerline base system of fixed network we are able to real-time collect the data that is necessary. We think that is supportive of all of the initiatives that are being publicized today.

Just for modeling purposes, would you expect any seasonality to your comm business over the next 4 quarters?

I don't that I would say seasonality. That is not really lends itself to that. But there is certainly some changes from quarter-to-quarter. But it is really more what is in the cycle at any given time. So you cannot predict those as well as we would like to. But as far as straight seasonality, it is not really reflected in the business.

It's a little more customer driven these days than it has been historically, so that is really -- if you see some movement up or down quarter-to-quarter, it is really driven by the customer's requirements on their installation profile and that sort of thing.

I guess just on that, when you listen to a couple of the major larger players, they would suggest that on the IOU side they're still seeing long leadtimes and delayed orders. Would you say that is depictive of what you are seeing? How does that compare to what you guys are seeing in the co-op market?

They're really different businesses. There are long leadtimes with these investor-owned utilities. There is no doubt about that. I have said that from day 1.

So that is the reason it is encouraging to have a number of things in the hopper at any given time. Because they are long leadtime and they are different phases, which is very different than what you see in the co-op market. For the most part, those are turned much more quickly; usually with 6 months to a year versus a multiyear type of procurement.

But again you have to understand, these are big, big investments for these large investor-owned utilities. Usually it's the second or third largest investment they ever make. So they're going to take their time to not only evaluate the technologies but also to insure that they have a robust business case.

All right. Thank you.

Tiran Kana (ph) with Wellington.

So I was just looking at the communications business, Vic; I guess a question for anyone. You talked about 27 to 29 percent operating margins; and then you talked about the incremental spending of 3.2 million. Does the 3.2 million, is that incorporated into the new margin guidance?

Yes.

I guess if you adjust it then you get something like a 30 percent type operating margin, maybe a little higher, which is still kind of lower sequentially than what we saw in Q3 and Q4. I am wondering how that plays out.

In Q4, the communications EBIT margin was 31.2 percent. So what you're looking is 2 things. 1, as the contributions from SecurVision add to that, obviously, as I mentioned to one of the other individuals who had called in, you're looking at a 6 or 8 point differential on the gross margin.

So obviously as that mix changes a little bit, that is going to pull down the aggregate communications margin. But if you just focused on the AMR business, what we should see there year-over-year is a slight increase in its contribution margin, because the absence of the PPL contract, obviously that was below the average. So as we go into '05, we're going to have nominal revenues for the growth meters at PPL.

So you are going to be running in our model almost entirely a co-op driven business, which inherently has higher margins. So on the AMR side of the business, you'll see a higher contribution, and that's a mix thing. And in the aggregate communications, you'll see it muted a little bit as SecurVision ramps up; it is going to pull the aggregate margin down a little bit. But it is still substantially positive at these revenue levels.

Vic, is the SecurVision business kind of a long-term core business for you all? It seems like there is a tremendous appetite for anything related to fire and security and monitoring these days.

It has been a business that has taken a while to get up and running. But we're looking forward to having a couple of strong years now. Because we think the opportunities certainly are there. Again we like the business model because it is a profitable business.

Okay, great. Thank you.

James Gentile with Sidoti & Co.

I just wanted to ask you all how the relationship with Badger is developing, and how that is going to equate to your penetration in the water and gas business?

So far so good. They're a good company. We have worked with them in the past. Again what we're doing there is we are going to be working with them in the development of an interface between their water meter and our electric meter.

Some of these large investor-owned utilities in particular have a requirement to read gas and water, so they can help us there. As well as in the municipal markets, where most of the time they read both electric meters and the water meters. So I think this is going to help us. 2 strong companies I think working together here will help us to penetrate some of those opportunities.

Thanks.

Richard Eastman with Robert W. Baird.

A couple questions again. On the AMR side of the business, could you just give us a real brief update on where do we stand with WPS, Bangor, and PREPA? Are those just in terms of completion, or ongoing business there?

PREPA is ongoing. We probably have another 2, 2.5 years of deliveries to make there.

There is about 12 million in backlog left there, Rich.

Bangor, we are about fully deployed up there. Then in the third one was?

WPS.

WPS, we're ramping up there as well. We still have some work ongoing with them, but we're pretty much wrapped up there.

Also, 2 other questions. Gary you'd mentioned the free cash flow number. The CapEx that you are including, a CapEx estimate for '05, is there any number in there that suggests you are putting excess capital in anything?

I think I said in my prepared remarks it should be consistent with the levels that we are showing in '04. So from a continuing operations basis, it was 10.8 in '04. So I would say give or take a half million around that is the way it is modeling out now.

The last question is, Vic, when I look at the 5-year plan and the CAGR on sales is about 10 percent, the assumption is filtration and probably test would fall below that. I am assuming that is an organic growth number.

The communications, how were you modeling that out for 5 years? Are we talking 15 to 18 percent? I'm just trying to get a sense of the order of magnitude that you look at that business on a 5-year horizon.

If you look at what that business has grown, I not talking just about ours, but the overall AMR business, our AMI business over the past 3 years has grown about 15 percent. The projections that we see from the industry experts reflect the same thing.

Having said that I just want to make sure to clarify; you mentioned about the acquisitions. When we talk about our top-line growth, there are going to be acquisitions included in that. We're looking at total growth of about 10 percent CAGR, but that is inclusive of acquisitions.

You're modeling your AMR business then against an industry growth rate; and hopefully if we're positioned as well as we think it could be better than that.

That is correct.

Very good; thank you.

Patrick Forkin, Rockhouse Research.

I have a quick follow-up on the share repurchase program. It looks like you have got, in sort of the open to buy, there is still like 75 million. And the release it said that you were looking to spend an additional 25 million in the near term. Then on the call, I think there was more of a reference to 2005. The 25 million, is that something that you guys look to get done in Q1 here?

Yes, what we do is each quarter we look at it. Obviously at the beginning of the fourth quarter we sit down and make a determination of obviously what we have in the way of the investments in the business. We look at what we have in the acquisition opportunities. We look at all 3 of those with the same level of diligence.

We did 10 million in Q4 at the start of the first quarter, 25 is what we're looking at, and we will readdress it as we enter the second quarter. So we're committed to 25 here in the very near term. As soon as our window opens we will be active in the marketplace.

When does that window open, Gary?

The way we have done it is 2 days after the press release. We allow obviously digestion; and it ends the first week of the third month of the quarter. So we will be active for around 3 weeks; and hopefully we can get that taken care of as expediently as possible.

Okay, thank you.

That concludes today's questions. Now I would like to turn the call back over to Mr. Vic Richey.

Thanks, everybody, for your interest in ESCO and our results. I did appreciate the continued support of our shareholders, the guidance we get from our Board, and in particular the extraordinary dedication of all our employees. Thank you very much.

That concludes today's conference. Thank you for attending.