H.B. Fuller Company (FUL) 2003 Q1 法說會逐字稿

Hello, and welcome to the H.B. Fuller Company's first quarter conference call. Following today's presentation there will be a formal question and answer session. At that time, instructions will be given should you have a question. Until that time, all lines will remain in listen-only mode. At the request of H.B. Fuller Company this conference is being recorded for replay purposes. Should you object, you may disconnect at this time. I would now like to turn the meeting over to today's host, director of H.B. Fuller Company, Mr. Scott Dvorak. Sir, you may begin.

Thank you. Good morning everyone. This morning's conference call is being recorded and will be available for replay when after we are finished with questions. Present for this conference call are Al Stroucken, Chief Executive Officer, Ray Tucker, Chief Financial Officer and several other key executives. Before beginning, I would like to remind all listeners that certain matters discussed during this call will include forward-looking statements as that term is defined under the Private Securities Litigation Reform Act of 1995. Since such statements reflect our current expectations, actual results may differ.

I also wanted to note that some of the financial information discussed today reflects adjustments from our reported results in order to assist investors in understanding the impact of special items related to our restructuring initiative. For more information on either of these topics please refer to our press release and annual report on form 10-K filed with the SEC. Now Ray Tucker.

Thank you, Scott. Good morning, everyone. Before I begin I would like to remind you that current and prior year results discussed will be prior to any special charges incurred due to the restructuring initiatives and that per share amounts are reported on a diluted basis.

You have already seen from our press release the first quarter results reflect a 10% improvement in earning per share over the previous year. Our reduced cost structure realized from our restructuring initiatives significantly benefited our results, offsetting lower sales volume and higher raw material costs.

Net earnings increase from $5.6 million in the prior year to $6.3 million. Earnings per share were 22 cents, 2 cents higher than last year's 20 cents.

As will be the case for the next three quarters of this year, current quarters' earnings per share include an increased expense associated with our pension and post retirement benefit plans of approximately 6 cents. Net revenue for the quarter was $294.6 million, half of a percentage -- half of a percent higher than Q1 2002 revenue of $293.2 million.

Looking at the components of the sales change for the quarter, we see the following. Pricing was down .5%, volume decreased 2.4%. Currency effects, primarily due to the Euro and to a lesser degree the Yen and the Australian dollar, accounted for a 3.4% increase.

Gross margins of 28.5% was 70 basis points better than last year's gross margin of 27.8%. The improvement was due to lower manufacturing labor and overhead costs, more than offsetting higher raw material and container cost.

Operating expenses were $68.3 million or $900,000 higher than last year. As a percentage of sales, operating expenses were 23.2% compared to 23% a year ago.

The increase is attributable to higher expenses for our pension and other post retirement benefit plans of $2.5 million. Excluding this effect, operating expenses as a percent of sales would have been 22.3%, a decrease of 90 basis points.

Operating income increased 11.7% to $15.7 million compared to $14 million for the first quarter of last year. Interest expense of $3.8 million was $1 million or over 20% below the first quarter of 2002.

Miscellaneous other expense of $2.7 million compared to $1.1 million last year. Included in this year's amount is $2.4 million of foreign currency losses compared to $1 million last year.

Unlike last year's foreign currency loss that related to the devaluation of the Peso in Argentina, the major part of this year's loss was the result of our pound sterling exposure and its conversion to the Euro.

Having trended with the Euro since the Euro's introduction, the significant weakening of the British pound at the beginning of the calendar year created the situation that we had not experienced previously.

Once we became aware of the situation, the appropriate action was taken to counter the effects of the weakening pound and we have implemented the required procedures to minimize any exposure we may have in the future.

Pretax earnings of $9.2 million were nearly 13% higher than the previous year's first quarter earnings of $8.2 million. The effective tax rate for the quarter was 33%, which should continue to be the effective rate for the entire year.

I would like to remind everyone the following balance sheet items may be subject to minor changes prior to filing the 10-Q.

Operating working capital amounted to $249 million compared to $223 million last year. An increase of $26 million.

As a percentage of sales, operating working capital was 21.1% versus 19% last year. The increase in this quarter's operating working capital resulted from the pay-out of restructuring liabilities, a buildup of inventories ahead of price increases, and a reduction in trade payables at the end of the quarter.

We expect operating working capital to trend down throughout the year based on our historical patterns. Total debt decreased 7.8% from a year ago to $208 million.

Debt increased from the 2002 year-end amount of $183 million mainly due to the increase in operating working capital. The company's capitalization ratio was 31.7% compared to 29% at the end of 2002 and 34.4% a year ago.

Capital spending for the quarter approximated $8 million compared to last year's first quarter spend of $4.2 million. Depreciation and amortization were $12.4 million for the quarter.

Before I turn it over to Al Stroucken, I would like to provide an update on the restructuring initiative. The program continues on plan.

During the first quarter of this year, we incurred net pretax charges of $4.5 million. This consisted of $2.4 million for severance and $2.1 million of facility closing, disposal and other related costs.

The cumulative pretax restructuring charges we have incurred are $35.8 million. All remaining charges will be incurred in the second quarter of 2003, and we still anticipate the total net charges to be approximately $35 million once all costs have been recognized and all related assets have been sold.

We have not yet completed a detailed analysis of the actual cost savings in the first quarter, but we are confident that the expected annualized savings will be at least $12 million.

Now, here is Al Stroucken.

Thank you, Ray, and good morning. Last quarter continued to be marked by uncertainty, lackluster demand and the highly speculative raw material cost development.

Whereas December and January showed some strengthening in demand, February, with its triple whammy of weather, worry about war and weakening of industrial output wiped out the progress we were making in the first two months. I'm sure that you, with the broader view of the market are even more intuned than we to the almost daily streams of reduced expectations of both the top and bottom line in many companies and industries.

Our results for the first quarter that Ray just explained to you are, therefore, a source of some pride in our company and a reaffirmation that we are taking the right steps in an extremely difficult and shifting environment. These are truly remarkably challenging times in an unusual economic political environment.

Our total company sales reflect an increase on a year-over-year U.S. dollar comparison with actual volume improvements continuing in the Asia-Pacific and Latin America regions.

In North America our volumes were down over 4%. Significantly impacted by lower demand in the automotive and durable goods sector, a direct reflection of the lower consumer confidence and continued unemployment rate.

This decline was most prominent in our [EFTEC], assembly and powder coatings businesses. In addition our converting and packaging markets also saw some softening demands due to the general economic environment, as well as some shift of production to other regions.

The graphic arts market, as well as certain divisions of our Full-Valu/Specialty business, namely window, tack and [INAUDIBLE] demonstrated some positive year-over-year improvement.

In Europe, the overall economic picture continued to worsen with the recently revised GDP for the last quarter of 2002 reflecting only 2/10ths of a percent of growth for the overall European area with Germany, the largest economy of that region, having posted no growth at all.

Extreme weakness in the manufacturing sector and its resulting unemployment, as well as low consumer demand provided for a very difficult operating environment. Our volumes fell by 4.5%.

In Latin America we realized an increase in volume of over 4% seeing improvements in the assembly and converting markets as we continue to benefit from the shifting of production to Argentina and realizing the advantages of exporting based on the lower cost base of that country.

In the Asia Pacific region, we continued to realize strong growth with an increase in volume of 8.5%. I noted last quarter that the pricing deterioration we had been experiencing in 2002 had begun to subside.

Compared to the 1.2% decline in pricing we incurred in the fourth quarter of 2002 year-over-year, this quarter's reduction of one-half of a percent reflects a sequential strengthening of our pricing. In the first three months of this year, we have received more than 250 notifications of price increases across a wide range of raw materials.

At the same time, we saw competitors offering significantly reduced prices with two to three-year full price commitments to large volume users of adhesives. Quite a few of those commitments were then retracted in late February and early March. Nevertheless, such actions can have quite an impact on the flow of business with our customers for a while.

I believe what we are seeing are the symptoms of a distributed pricing authority in our markets where many individuals within the various companies, including individual salespeople, had the power to establish prices and, as a consequence, many decisions are made on the spot with emotion surpassing knowledge by a far margin.

You will recall that we put a stop to this type of marketing several years ago in our own company. Nevertheless, we are still seeing many instances of these type of actions all around us.

Despite this environment, we saw the need for a pass through of the raw material development and on February 21 we announced an increase of 4.5% for hot melt and 6.5% for water-based adhesives effective March 15th or as contracts allow.

In our Full-Valu/Specialty businesses, specific individual increases for the various product lines are being implemented as well. It is too early at this point in time, to determine how successful we will be. An encouraging sign is that quite a few other companies have made similar announcements since then.

The currency impact on our top line was even more favorable this quarter than in the fourth quarter of 2002 due to the weakening dollar. Realizing a positive impact of well over 3% over the previous year, this more than offset the effect of volume and pricing.

Now, let me give you some further information about the cost development of some of the feed stocks that are important drivers for our business. Following that, I will talk about the trend of the market prices for some of our specific raw materials.

You are already familiar with the run-up in crude oil and natural gas prices since January of last year. Even though in the last few days we saw a significant correction of the war premium in oil, prices today are still more than 30% higher than in January of last year. And how stable the most recent correction is going to be will have to be seen.

Natural gas, following a spike of $9 per million BTUs in the middle of this last month have leveled off to around $6.60 per million BTU. But that is still more than 200% above the level of a year ago. As you may expect, this upward price pressure has been reflected in the market for some of our raw materials as well.

North American market prices of our direct raw materials like vinyl acetate monomer predominantly used in our water-based products saw an increase so far of approximately 35% compared to the first quarter of last year. EVA a key product for our hot melt line of products, at this point has jumped approximately 16%.

Many other raw materials saw similar developments as the 250 price increase notices that I talked about earlier demonstrate very vividly. I believe these numbers show how difficult our market conditions have become, and how important it is for our business people to stay on top of this development.

We will make every effort to insure that our raw material cost increases will be reflected in our future selling prices.

Despite the increased pressure of the higher pension and post retirement benefit costs that we are facing again this year, our operating expenses remain comparable to those of the previous year. The improvements we have made in our cost structure, and continued tight control that we have on our spend levels have played a key role in being able to maintain these comparable levels.

Aside from cost management, we are also spending quite some time in insuring future opportunities for growth. One of those opportunities is the introduction of new products into the market place.

In this last quarter, we made some good progress with our new products growing more than 30%. Let me just highlight a few of them.

For Global Adhesives saw [INAUDIBLE] packaging adhesive one again showed significant gains of over 30%. This product line continues to offer the market extraordinary value and benefits including reduced down time and maintenance cost, improved mileage, lower strap rates, and many others.

HydroLock, a unique and exciting stay applied, super absorbent hot-melt technology used in the hygiene area is unlike anything else available in the industry. Capable of absorbing up to 100% of its own weight in liquids, this technology will allow manufacturers of disposable diapers to design more comfortable and better performing products. But its application possibilities go far beyond the hygiene industry.

In our converting business we have had great success with our new water soluble hot melt laminating adhesive for multi-plied tissue products. As a hot melt adhesive in this historically water based application, this product will significantly increase line speeds and productivity over conventional products. This quarter alone sales doubled from that of the previous year.

In our Full-Valu businesses, sales of InsulCure a patented sealant technology for the insulating glass and window industry more than doubled compared to last year's first quarter. InsulCure combines the cure performance of a polyurethane with the ease of a hot melt.

In our Adalis business revenues from consulting apart from any product sales are validating our concept of solution selling. In our Branded Specialty business, sales of tecs, care and maintenance line introduced in the first quarter of 2002 also more than doubled. Tecs complete line of premium care and maintenance products employs an innovative fluent polymer, technology that repels oil and water and protects one investment in high quality stone or tile floor.

Tec sales of premium latex fortified mortars continues to grow. First class performance of super flex is underscored by sales growth of 50% this quarter.

Tecs' newest product is the industry's most advanced mortar system. Its one-step process cuts insulation time in half and doubles the crack insulation protection of any mortar on the market. Introduced this quarter, sales are off to a very promising start.

In our Automotive division continued market advances are being achieved with our liquid applied sound dampening technology. Sales of which increased well over 60%. Used primarily in vehicle interior structures to reduce noise, vibration and harshness, vehicle manufacturers generally realize the saving in process and direct materials of 15 to 18% compared to the use of conventional melt pads.

At the same time, we continue with our adhesive product rationalization effort supporting our planned consolidations and the operational excellence model. And we have realized an estimated 6% further reduction again this quarter from that of year-end.

Our restructuring of the manufacturing area is largely completed. And it is giving us the cost advantages that we had anticipated.

Presently we are focusing on the support function alignment that had to wait until the manufacturing base was established. This effort is mainly confined to Europe and Latin America, and we expect to stay within the time line that we had projected earlier.

As I have reviewed the conditions we operated in during our first quarter, let me now take a few moments to set the stage of the environment we are currently facing.

The highly speculative movement of the stock market, as well as in raw material futures has made it clear to everyone that it is futile to try to predict what our market environment might be tomorrow or ten weeks down the line.

The uncertainty of the past couple of months and now the daily seesaw of the reporting on the events in Iraq are not creating a reliable base from which to project. Despite the fact that our growth expectations failed to materialize in the first quarter, and even in light of the significant run-up in raw materials, we have been able to cope with these additional challenges.

I do not see a clear direction at this point in time that would give me sufficient reason to question the prediction that we had made in January for the year 2003. Here in North America unemployment, industrial production, and consumer confidence remain as points of concern for the short-term situation.

Recently the preliminary Report of Consumer Confidence Index fell to 75. The lowest rating since late 1992. In addition, the business sentiment has also been undermined.

The most recently manufacturing survey index revealed an estimated decline of 8 points in March signaling the likelihood that the manufacturing level will fall back below the 50 point level. In Europe, the most recent data relates for the broader Euro's own economic growth was reduced from 1.8 to 1%.

At the time we did our planning for this year, the expected growth rate was still at 2.8%. The European commission indicated that the latest expectation may reflect actual contraction in the first quarter.

In addition, consumer confidence has fallen to its lowest rating since September of 1996 and Germany is close to slipping into deflation.

In Latin America the Venezuelan political situation and the Carribean dependence on the North American economy will continue to put pressures on the growth numbers for the region. Even though the revaluation of the Argentian Peso and the stabilization of the situation in Brazil provide some upside potential for renewed growth.

For the Asia Pacific region, despite the fact that the reduced demand in the world impacted some of the exporting countries, continued growth should be realized driven mainly by by China. Japan's outlook seems to be slightly improving based on improve corporate profits and increased business spending offsetting concerns of unemployment and export levels.

In the event of an early end to the war in Iraq, we have to keep in mind that underlying weak economic indicators will still be present. The most likely benefit we will see will be a stabilization of the framework under which we can make assumptions for the future and start to deploy our marketing and growth plans.

In summary, I believe a cautious outlook will continue to serve us best as we continue to rely on our own savvy and tools to guide us through the upcoming year. Our rate of success in implementing our price increases in this quarter will have a considerable impact on the outlook not only for this quarter, but for the year as well.

Thank you for your patience, and I will now open it up for your questions.

Thank you. At this time, we will begin our question and answer session. If you have a question, please press star one on your touch tone phone. If you are using speaker equipment, you may need to lift your hand set prior to pressing star one. Should you wish to cancel your question or your question has already been answered, simply press star two. Once again, if you have a question please press star one, and star two to cancel your question. One moment while the questions register. Once again that is star one if you have a question and star two to cancel. Our first question comes from Rosemarie Morbelli of Ingalls and Snyder.

I hope I suppose you guessed who I was.

Yes.

You talked about what you had based your expectations on, and the sound was a little garbled so I didn't catch that number. Did you, when you made all of your plans, did you expect 8% growth?

No, for Europe we had expected 2.8% growth which was the published number by the OECD at that point in time.

So, in any case, this being the number, if we look at the world you are operating in, obviously when you made your plans you were expecting for better -- a better environment, you know, globally. Did you make contingency plans, in other words a plan B to fall back on to should these not materialize, or are you now struggling to change the way you were planning and operating? Could you give us some feel for what you are doing?

Well, Rosemarie, when we are planning for the upcoming year, we, of course, do not have a single plan. We always have some contingencies that we keep in mind as we move forward. Should we have really seen the development that we had expected with regard to overall economic growth, we would have most probably spent a little bit more money on new initiatives, and new activities into the market place.

But, overall, I believe that what we have in place, at this point in time, and I think it is visible from what we did in the first quarter, assures us that we have sufficient steps and alternatives in place to deal with even some significant swings between reality and the expectation. And we expect this to continue also in the coming quarters.

Do you feel that well, if things stay more or less the way they are, you can still be above last year's based on what you have done and what is remaining to be done regardless of what goes on out there?

Yes. As I said then, in my comments, that we do not see any reason, at this point in time, that would really be a compelling reason to change the prediction that we had made in January, which foresaw a slight improvement of our profitability over the level of last year.

And then lastly, in the global adhesives, prices were down but your margins were up. So I am assuming that it is the steps you have taken as part of the restructuring which have helped. On the Full-Valu side, on the other hand you had a price increase but flat margin. Are you working -- is it that -- well, can you bring us up to date as to what you are doing on the Full-Valu to bring up those particular results?

Well as I had already indicated at our last meeting, we continued to see disappointing results in our Global Coatings division which is the powder coatings area which is mainly directed towards the area of durable goods. And we have taken some steps there in the last three months where we will see some of the benefits coming through. And, in fact, already in the first quarter our Global Coatings division showed improved results over the first quarter of last year.

The areas where we are, at this point in time, investing, and specialty Full-Valu are the areas where we see also some of our highest growth rates. For instance, in the area of Tec or Foster, or also in the area of our window business, because we feel that the investments that we're making at this point in time, even though they may have a temporary effect on the income streams of those businesses, are very worthwhile investments on future income streams, and I think we're seeing that because the growth that we are realizing because of those investments bodes very well for increased profitability rates down the road.

Okay. Thanks. I'll get back on queue.

You're quite welcome.

Thank you. Our next question comes from David Begleiter from Deutsche Bank.

Thank you. Good morning fellas.

Hi, Dave.

Al, the price increases, what percent do they represent of a current price of adhesives? And it has been about 10 days since they went into effect. Who has followed? What's been the initial feedback from customers, even if you can't tell us exactly, a little more color on that issue.

All right. We did, in fact, already start with some of our price increases in November, that's why the consecutive price development already, even though it's still negative looks bit more positive than what we were reporting in the fourth quarter. Initially, David, we started out with small and medium sized customers where we felt that, perhaps, the value of our adhesives were not fully recognized and we were successful in that. But, it became very obvious that we were seeing a much more dramatic increase in raw materials in the first quarter, and so we started to go to our large volume customers as well.

When we, without the announcement, were out in the marketplace already in January and in early February, we were running into the situations that I just talked to you about where we were seeing, even some of our very large competitors making the long-term price commitments for significantly reduced prices. And I was a little bit flabbergasted by what I was seeing. So we did take a few hits at a few customers where the customer, because of the offer that was on the table, elected to go with an alternate supplier, but we still felt that given the development that we saw in raw materials, we had to go out, announce the increase and drive the increase through.

Now, what I'm seeing in the first two weeks of March, and as you know the effective date was only March 15th, I saw a real broad based active approach by our marketing organization and our sales organization on keeping track of it on a bi-weekly basis. And what I'm seeing also with regards to the overall environment in which we operate, it's very encouraging because it's not only the adhesive suppliers that are out there with increase, if you take the packaging industry, for instance, a lot of our packaging customers use plastics, and plastic containers, as well as plastic wraps and those have been going up significantly as well.

So I think the environment, the receptivity of the increase is at a level that I certainly didn't see three years ago. It's much higher.

Al, if you get these published price increases, how much will you still be lagging the increase in raw materials?

The way we are projecting at this point in time, our success rate, would lead me to believe that we can absorb the increases that we are seeing in the raw material end in the second quarter.

And lastly, on the FX, what did that add from an operating profit standpoint? What did it add from an operating standpoint?

If you look at the results, the two areas where we had the FX impact most severe was Japan and Europe with Europe clearly the dominant part. And if you look at that on the operating income, I would say it's a percentage of operating income. So it might have had a 5% or 8 percentage points impact on the operating result if you go all the way down because, if the top line moves 8 or 9% because of currency, all the other cost factors, because all of it is manufactured in Europe and is based on an European cost base moves up as well. So it basically is just reflected in a similar percentage in the operating income level.

Okay. Thanks a lot.

You're welcome.

Thank you. Our next question comes from John Roberts of Buckingham Research.

Good morning and congratulations on the quarter.

Thank you, John.

Have you had a chance to study ICI's announcement regarding National Starch yesterday? And can I connect the dots here and think about your comments about competitors offering lower prices just as raw materials were going up as maybe a source of the problems there?

Well, I have seen the announcement, and I think from what I saw, it was not just a singular issue with regard to adhesives. But, I would also not want to comment about individual competitors because I think we slug it out on a daily basis with everybody in the market place. I don't think there are any good guys or any bad guys in the market.

Okay.

But, clearly from what I saw, it looks like they are seeing the same raw material cost pressures that we're seeing.

Secondly, the fact that Latin America and Asia are up and U.S. and Europe are down is that a favorable mix shift for you in terms of regional profitability?

Well, we've certainly seen some significant improvements in our profitability in the regions. But, also in Europe, and perhaps I should say this on a broader basis because I was looking at that earlier this morning. In fact what we have seen is that aside from the two regions, Asia Pacific and Latin America where we had sales growth and they contributed to the profitability and the improved profitability, what we also saw that in those product lines, that have been struggling to show growth and, in fact, had a decrease in sales, we have seen the most significant profitability improvement.

Which basically indicates to me that we may have been serving some customers there, we may have had some business that really has not been contributing tremendously to the bottom line. Now, you will realize there is of course, a fine line when you have to call that and say okay now we've got to move forward and get some additional volume. But I really do not see, at this point in time, that the steps that we're taking, also with regards to, perhaps walking away from the one other competitive situation, is really hampering us or it's giving us a negative effect in our profitability.

And then just lastly, I think there are some pretty big increases for VAM and EVA scheduled for April one. What kind of additional increase? You mentioned VAM for you is up 35% from a year ago and EVA up 16%. What are you going to look like relative to today when we get to the end of April?

As I already said our quarter runs a bit differently from other people's quarters. So, we already were looking at the second quarter with the price projection for the second quarter in vinyl acetate monomer included.

Okay. Thank you.

You're welcome.

Thank you our next question comes from Jeffrey Zekauskas form J.P. Morgan.

Good morning. This is [INAUDIBLE] for Jeff. Good morning, how are you?

Fine, thank you, and you?

Good. Most of my questions have been answered. A few housekeeping questions. On the pension side you mention that the expense quarter was $2.5 million which is roughly 6 cents and that's going to repeat for the other quarters. So in effect it would be like for the whole year like a $10 million charge which totals like 24 cents a share. Is that correct?

Yes. That's correct. And, in fact, it's a continuation of what we saw in the previous year where we had a 27 cents a share impact, and as in the previous year, we expect that by our cost management steps and by really taking care of some of the issues that we are addressing through our restructuring, we will be able to absorb those increases also in this year.

Mmmm-hmmm. Okay. Are there any funding requirements? For the next three years?

At this point in time, we do not see any funding requirements. The last that I have seen indicates that perhaps, over a span of the next two years there may be some required investments of 15 or $20 million.

Lastly, what are your CAPEX and D&A expectations for '03?

Our CAPEX expectations are between 35 and $45 million and at this point in time we are tracking with that number.

Okay. Thanks very much.

You're quite welcome.

Thank you. Our next question comes from Godfrey Birkhead of SBK Brooks.

Hi, Al.

Hi, Godfrey.

Al, given the fact that you have been cutting back on capacity, what was the operating rate in this most recent quarter versus last year?

I don't have that off the top of my head, but anecdotally I can tell you that we would expect about a 10 percentage point increase in capacity utilization in the first quarter, but I don't have the specific number yet available.

Okay. Are we talking about an operating rate now that's in the 70s or the 80s?

No, it's significantly below that.

60s?

Godfrey, if you look at the -- you have to separate a bit between hot melt and water-based.

Right.

I'd say in most cases where we have semi-continuous manufacturing processes, we would expect a 70% rate under our calculation of seven days a week, 24 hours up-time for the operations.

Okay.

To be at -- when we reach 70%, I would expect to be at a full capacity utilization.

So that's maxing out --

At this point in time we are running at around, I would say, close to 50%.

50%. Okay. But that's 10 points above where it was a year ago.

Yes, that's correct.

Okay. Now, the second question I have is you mentioned the number of new products and I wondered what contribution collectively those new products had in the first quarter of 2003, if you have that?

Well, right now, these new products that I was talking about and some others that I did not mention because the list would have been too long, account for approximately 12 to 13% of our total sales.

Okay. And what is your long-term goal as to new term products? New products as a percent of sales?

Well, it really depends on the definition of new products. The way we have the products established at this point in time, I would expect that we get that number up to 25%.

Okay. Okay. Thank you very much.

You're quite welcome.

Thank you. We have a follow-up question from Rosemarie Morbelli.

On the new product side, you talked about additional applications for super absorbents. Can you give us some idea?

Yes, perhaps one that is the most obvious is, for instance, you see the popularity of some of these wipe cloths that are used in the household, and sometimes now even are used on a mop. That type of product would lend itself very well to the application of this particular product.

What, realistically what kind of a potential do you see in dollar terms?

I think, at this point in time, Rosemarie, that's too early. If you give us about a year or so until we see how this product is being accepted in the market place, we might have a better reading -- read on that.

So it would take one year for this to make any dent?

Because we will also pick up new opportunities -- application opportunities along the way which will then broaden, of course, the size of the market that we could address.

And what is the size of the diaper market currently that you are -- I mean for you, your business, into that particular market? And do you have those super absorbent into all of the diapers nowadays, or is there some still some inroads to make in that particular market place?

Oh, no it's just barely starting because it basically also requires some design changes in the diapers on the part of the diaper manufacturers. And, as you know in the industry, in the hygiene industry, diaper manufacturers come out with new changes and new modifications to keep the product interesting and at the forefront of the consumer's mind on a regular basis.

And we will gradually see then the adaptation of the of the performance characteristics of HydroLock to move into the construction of the diapers. Are you saying that this is going to replace this kind of a gel they now have in diapers? Or is it the gel?

Well, they use a super absorbent powder. One of the issues in the powder is that it tends to shift and bundle up in the diapers and this product may help a little bit in the distribution. But it certainly will not entirely replace absorbents that are presently being used just because of the amount of HydroLock that you would have to use to get the same absorbence.

I hate to disappoint you but I have recently become an expert in diapers.

Congratulations.

Thank you. And they seem to be working quite well. So what is your level of confidence that what you have could replace this powder?

I think it really is driven by the enthusiasm that we see on the part of our customers, and that is at a very high rate.

Okay. And then lastly, long-term debt was up sequentially. Is this mostly the working capital, or do you also have some seasonal needs?

No, it's mainly the working capital, as I talked about in my speech. We should see that probably reducing in the quarters going forward.

Okay. Thanks.

Thank you. Our next question comes from Jeff Balin of Silvercrest Asset Management.

Hi. Can you please tell me a couple of balance sheet numbers?

Yes, certainly. Ray will answer those questions.

Okay. I was looking for current assets, current liability, short-term debt and cash.

Okay. Current assets is about $422 million.

Okay.

Current liabilities is around $202 million.

What was the other ones you wanted? Short-term debt including current liabilities. I'm sorry current portion.

$30 million.

30. And cash?

Cash $1.6 million.

Okay. Thank you.

You're welcome.

I have a question coming from David Begleiter.

Thank you. Al, on the new products, what is their gross margin? Or at least directionally obviously it's higher than what you have right now, but how much higher? And can you talk about the sales force? I know we had some changes going on there, and how they are reacting with this new price increase. Are you happy with their performance?

Okay. Let me first talk about the margins. As we introduce new products, we, of course, look at the value that these new products might potentially represent for our customers, and we find that certainly in the introduction phase, the margins tend to be very high. And some cases over 50%.

As with any specialty as we find a greater level of acceptance in the market place, and these products get widely known, then, of course, we will eventually see some competition which will force those margins down. But, at this point in time, these products generally come in at a significantly higher margin than what we see in our traditionally well-established product lines. Some of it is also justified because it does require higher marketing expense and marketing cost for the introduction and [INAUDIBLE] service but I think overall it's a very positive contribution that we get from those products to our profits.

With regards to the price increase, as you know in the past six months, or nine months, we have reported about some significant changes that we have made in our sales organization and the sales structure that has also extended to the management and marketing management of most of the SDUs, and I see a much more professional approach to the increase. I see a much more deliberate and preplanned activity in the market place, and I think what we are really benefitting from is a much greater level of professionalism of dealing with pressures from the raw material end and a recognition also that there is value in these products for the customer that goes beyond just the value of the raw materials that are included. And I think that is helping us in this process.

Thank you very much.

Thank you. We have a follow-up from Godfrey Birkhead.

Yeah, Ray, depreciation and amortization this year, please?

This year? I believe it was 58 to $60 million.

55 to 60?

No, sorry it's $50 million depreciation amortization.

Okay.

That's for the entire year, Godfrey.

Thank you, Ray.

12.5 for the quarter.

Al, when you first came on board, you talked about a possibility of a 6% net margin for the company. Is that still possible? And is that a goal you still have for yourselves there?

Godfrey, when I talked about that, I was talking of course, from the cost base that we had at that point in time. And, as you know, our benefits and pension situation was quite different as I just indicated.

Right.

We are, at this point in time, still working on absorb about 50 cents or 49 cents a share of impact from those factors. So that has certainly made our task to get to the targets that I had mentioned at that point in time a bit more difficult. But I am still convinced that the business of the nature as we have it today --

Right.

-- should be able to generate a net return on sales of 5%.

5%, okay.

And I also believe that we may get beyond that, but there is a natural limit as to what we can expect, at least as the way the business is constructed today, and as we operate it today.

A fairly modest amount --

---of 6% because I believe then it becomes too attractive for many of the 400 competitors that we have in the marketplace to take little bites out of our operations or out of our activities in the marketplace.

Okay. The next question has to do with the acquisition area and the shelf registration which you have. Can you comment on what the acquisition market looks now, and what the current circumstances with Iraq and so forth and so on tend to make you step back from that, or what?

Well, overall, as I believe I said the last time, this is the best time and this is the worst of times as well.

Right.

It's a very good time because valuations have come down considerably.

Yep.

But there is reluctance on the part of companies to part with their businesses, or parts of their business because they're all hoping for a pick-up in overall economic activity, and therefore there is a general pervasive feeling that well, let's wait another quarter or let's wait another two quarters until we see a pick up and then perhaps we get a higher value for the property we are trying to sell.

Okay.

On the other hand, we also are seeing more businesses coming under pressure because of the overall market conditions. And so I'd say in the smaller business areas, smaller unit, smaller competitors we see a increased desire to possibly sell their businesses whereas on the part of the large deals and those are the deals that we're really looking for, we still see reluctance on the part of the companies because they still are hoping for better times. Okay. When you say smaller or small, what's that, $50 million in sales or so? Smaller is $10 million of sales.

Okay.

To max $20 million of sales.

Okay.

But you know this is a very distributed business --

Right.

-- most of our competitors are extremely small.

So it would be okay for me to think if you announced an acquisition of 10 or $20 million in sales in the next six months that is a possibility?

Yes. In fact, we recently concluded a very small one of about $7 million or so in sales, but we didn't take any -- any equipment, any facilities, nothing. We basically are absorbing the volume into our existing operation.

Okay. And is that going to be in your 10-Q?

I don't think it's material enough.

Okay.

It may eventually show up in the 10-Q, yes.

Okay.

But it is a fairly small cash outlay for the company.

Will this be earnings additive? Or neutral?

No. I would expect that to be additive. But again you are talking about a fairly small --

Yes. It's a very small company. Okay. And can you share with us the line of products that this company was in?

It's basically hot melts.

Okay. Thank you very much.

You're quite welcome.

Thank you. Our final question comes from Rosemarie Morbelli.

Yes. Could you give us a feel for the minority interest and the equity in the European joint venture? I'm assuming that it only looks flat with, I'm talking about the JV now that results only look flat with last year because whatever they lost, they made up in the currency translation.

I think what we're seeing Rosemarie in the automotive industry is Europe is very weak comparable to basically what we saw in the United States about a year and a half ago. But where they are benefitting considerably, and we are benefitting, is that Asia Pacific is improving significantly. And that's part of our joint venture partners' majority position. So we are seeing some of that benefit from Asia Pacific reflected in the overall results and that's why it's balanced. I don't think it is much -- much currency related.

And are you -- you said Europe is weak. Are you expecting it to fall off whatever the part of the cliff they have come down to now?

No, I believe that we're going to continue to see whatever effect we're going to have in Europe to be counteracted by the positive effect in China which is really the Asian activity. Where growth rates, if you follow publications of large automotive manufacturers in China, growth rates of 30 and 40% are not unusual. And that, of course, has a tremendous impact.

Okay. Thanks. That will be it. Congratulations on a good quarter.

Thank you very much.

Thank you. I would like now to turn the meeting back over to Mr. Dvorak.

Thank you. We would like to thank all those who took the time to listen and participate in today's conference call. Since there are no more questions, we will conclude the call.

Thank you for participating in today's teleconference and please have a good day.