H.B. Fuller Company (FUL) 2003 Q4 法說會逐字稿

Good morning, welcome to the fourth quarter year 2003 earnings release. At the request of the company this conference is being recorded for instant replay purposes.

Following today's presentation, there will be a formal question-and-answer session. Instructions will be given at that time should you wish to ask a question.

Management in attend on today's call includes Mr. Al Stroucken, Chairman of the Board, President and CEO. Mr. John Feenan, CFO and Mr. Scott Dvorak, Director of Investor Relation.

And at this time I would like to turn the meeting over to Mr. Scott Dvorak. Sir, you may begin.

Good morning, everyone. This morning's conference call will be available for replay approximately one hour after we are finished with questions.

Before beginning I would like to inform everyone that the discussion today will cover certain financial information that has been adjusted to reflect our restructuring initiatives and considered to be non-GAAP under applicable SEC regulations.

Our earnings press release issued yesterday provides a reconciliation of these non-GAAP items with our GAAP results. This press release is posted on our Web site at www.hbfuller.com under shareholder relations and press releases.

In addition, 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, as results may differ. For more information please refer to our press release, quarterly report on Form 10-Q and annual report on Form 10-K filed with the SEC.

Now John Feenan.

Thanks, Scott.

Good morning, and happy New Year to everyone. Quarterly results were impacted by volume improvements that started later than expected. This and the relative high cost of crude oil and natural gas along with a continued high level of competition per volume resulted in an operating environment that proved to be very challenging.

Before I review the fourth quarter results, I want to remind everyone that current and prior year results discussed will be before any special charges or gains incurred due to the restructuring initiatives, which have been reflected in the pro forma statements provided in the news release. In addition, per share amounts are reported on a diluted basis.

Net earnings for the quarter decreased from $16.6 million in the prior year to $13.1 million. Earnings per share were 46 cents compared to 58 cents the last year's fourth quarter.

As we have mentioned previously, this quarter's earnings per share included an increased expense associated with our U.S. pension and post retirement benefit plans as compared to that of last year's fourth quarter of $2.5 million or approximately 6 cents per share.

Net revenue for the quarter was $346.2 million , 5% higher than quarter four 2002 revenue of 329.6.

Looking at the components of the 5% sales increase for the quarter, we see the following. First, pricing was down 1%, volume increased 2.2%, and currency affects primarily due to the Euro and to a lesser degree the yen, Australian and Canadian dollars accounted for a 3.8% increase.

The increased volume this quarter reverses the trend that we had realized in the previous two quarters.

Gross margin of 26.9% was 180 basis points lower than last year's gross margin of 28.7%.

Decline was primarily due to year-over-year lower pricing and higher raw material costs. The lower pricing reflects the continued competitive environment that we experienced for the quarter.

Operating expenses were $72.4 million or $6.4 million higher than last year. As a percentage of sales, operating expenses were 20.9%, 9/10 of a percentage point higher than last year's 20%. Excluding the effect of the higher pension expense, operating expenses as a percentage of sales were 2/10 higher than last year.

Relating to our increased focus on strengthening the balance sheet and due to the continued economic downturn we increased our allowance for bad debts during the fourth quarter. Besides the U.S. pension expense, foreign currency translation increased the reported U.S. dollar amount of operating expenses by approximately $2.1 million.

We also realized an increased year-over-year spend of approximately $1.2 million for company-specific growth initiatives that Al will speak to you later.

Operating income decreased $7.8 million to $20.8 million compared to $28.7 million for the fourth quarter of last year.

Operating income in Global Adhesives in the fourth quarter was $11.1 million, a decrease of $8.4 million from the fourth quarter of 2002.

Full-Valu / Specialties operating income of $9.8 million increased $500,000 from the previous year's fourth quarter.

Consistent with the other financial information we have reported, operating income from the business segments excludes special charges and gains related to the restructuring initiative. Interest expense of $3.4 million was 9% lower than the fourth quarter of 2002, driven by a lower average outstanding debt level.

Miscellaneous other expense of $400,000 in Q4 compared to $500,000 of expense in Q4 of 2002. Pre-tax earnings of $17 million was 30% lower than the previous year's fourth quarter pre-tax earnings of $24.4 million.

The effective tax rate for the quarter of 30.4% was the same as the effective annual rate for the full year.

As you recall, we adjusted to this rate in the previous quarter. As a reminder, this decrease was due to a change in the mix of earnings and assessment of global exposure. It's for these same reasons that the planned effective tax rate for 2004 will increase to 32%.

I would like to remind everyone that the following balance sheet figures maybe subject to minor changes prior to filing the full year's 10K.

Cash at the end of the quarter totaled $4.1 million. Operating working capital amounted to $258 million compared to $265 million in the previous quarter, a decrease of approximately $7 million. As a percentage of sales, operating working capital was 18.6% versus 20.6% last quarter.

Capital spending for the quarter was $12 million compared to last year's fourth quarter spend of $11 million.

For the full year, capital expenditures were $40 million in 2003 and $36 million in 2002. For 2004, capital expenditures are planned to be in the similar range of $35 to $40 million.

Depreciation and amortization were $13.7 million for the quarter. Debt decreased from the previous quarter end by $26.5 million to $174.6 million, the lowest debt level in a decade. For 2004, debt repayment is expected to be minimal based on our current debt structure.

The company's capitalization ratio was 25.5% at the end of the fourth quarter compared to 29% at the end of '02. This reflects the company's strongest equity position in the last decade.

Free cash flow for the quarter was approximately $25 million compared to $5.4 million in the fourth quarter of 2002. For the full year, free cash flow was again positive, representing the fifth consecutive year for the company.

At this point, I would like to provide you information as it pertains to our U.S. pension and post retirement benefit plans.

As you will recall, the year-over-year impact of these plans has reduced our pretax earnings by $12 million and $10 million respectively for 2002 and 2003. This has equated to a 27 cent and 22 cent earnings impact per share for the previous two years.

In 2004, the impact will be slightly favorable with a reduced pre-tax cost of $2.5 million or approximately 6 cents per share for the full year and is realized evenly throughout the year.

In summary, as I mentioned in the previous call, we are confident that the foundation at H.B Fuller will provide the opportunity for future growth and improved profitability.

Our focus will be to accelerate our growth initiatives and increase our M and A activity. In addition, we will continue to strengthen our balance sheet, improve our networking capital position, and ensure a consistent level of cash generation.

I would now like to turn the call over to Al Stroucken.

Thank you, John and good morning. I hope each of you had a restful and happy holiday. As you know from our conference calls and the many other sources of information and news that you followed in the course of the year, 2003 was marked by increased raw material costs, mainly driven by prices of oil and natural gas, an elusive economic recovery and fierce competition for volume resulting in pricing and margin erosion.

But mainly there's also been some early signs that would indicate that the manufacturing sector might be at the turning point.

We have, therefore, started to put more emphasis on activities and initiatives that we believe will improve our growth and will provide for increased profitability in the future. I will share with you some details of these initiatives shortly. First let me review the fourth quarter results.

Though sales in the fourth quarter did not represent an overwhelming departure from the overall poor business conditions experienced throughout the year, the quarter did reflect an overall tonnage improvement of 3.7%.

During the quarter we saw our sales evolving from a slow start in September to a more robust performance in the last two months.

Volume improvements continued to be realized in all regions except Europe. Asia-Pacific and Latin America led the way, but also North America showed volume growth, reversing the trend of the last couple of years.

On an absolute U.S. dollar basis, sales reflect a 5% improvement over those of last year as the weak U.S. dollar continues to provide for favorable currency effects slightly offset by reduced pricing.

In North America, our adhesives business was able to realize a 5.9% tonnage improvement over last year's fourth quarter.

The automotive division had significantly improved volume levels based on the acceptance of some of its new products like direct glazing and liquid applied sound dampening systems in the industry.

We are also recovering some of the erosion of our market position in several of our businesses that I have mentioned in earlier calls.

In Europe, tonnage was down over 6% as the strong Euro continues to hamper many of the European countries, and therefore our customer's ability to export.

Germany's officially reported exports for October alone fell by a seasonally adjusted 6.6%, the largest drop in ten years for that country.

The slow recovery is expected to emerge in the latter half of this year, realizing a GDP growth of less than 2% for all of Europe in 2004, supported mainly by a revival in domestic demand as projections for the Euro continue for it to remain strong.

The impact on the economies from the tax, pension and social security reforms for several of the European countries remains to be seen. Latin America and Asia-Pacific continue to demonstrate considerable volume growth.

In Latin America, we have seen a positive influence from Brazil's new economic policies managing to lower inflation and the stabilization of their currency. We experienced over 6% volume improvement in Latin America

In Asia-Pacific, volumes continue to achieve nearly 20% increases. In the packaging and assembly markets we were able to gain back some market share by regaining previously lost business and converting new customers.

Our Flexible Packaging business grew significantly above the industry average for the quarter through the solvent-free product lines alternatives that we offer through the industry.

In our corrugated business, we are also winning back some of the customers previously lost, albeit at lower prices. Pricing and the non-woven and graphic arts sectors has become very difficult as the large volumes of the global customers offer an attractive incentive to competitors for some incremental volume.

In Full-Valu/Specialty, our paints, windows, Adalis as well as consumer business show solid growth rates. Specialty construction brands sales were essentially at previous years' levels.

Pricing for the quarter decreased 1% on a year-over-year comparison similar to that of the second and the third quarter.

In previous quarterly conference calls I have discussed the competitive environment and the struggle for volume in some greater detail.

The delayed economic recovery caused many of these manufacturers despite the increasing raw material cost to bid for volume at significantly lower prices, which has reduced the overall pricing in the market. This has created a situation in which our new or regained business is generally obtained at lower prices than historical levels resulting in continued pressure on margin restoration as we look towards 2004.

As has been the case all year, our top line continues to benefit from the currency translation of our operations abroad. Favorable translation impact of 3.8% this quarter is mainly due to the Euro, Yen as well as the Australian and Canadian dollars.

The gross margin run rate compared to that of the previous quarter was impacted by two main factors. First, our sales growth continued to be strongest in the regional areas, for the gross margins tend to be lower than our largest region, North America.

In addition, some of the business that we regained in the quarter in North America had been impacted by earlier competitive pricing action.

Also, price pressure in the automotive industry does not allow for recovery of raw material swings as we have experienced them in the feed stock-driven product lines.

And second, with increased emphasis on the balance sheet, we reduced our inventories from the previous quarter by approximately $7 million. This impacted our absorption of fixed manufacturing costs by approximately $800,000.

Operating expenses as a percent of a sales equaled that of the third quarter. In dollars, operating expenses were higher than those of the previous year's fourth quarter due in part to the increased U.S. pension and post-retirement benefits that we have reported on extensively in the past.

As John has mentioned earlier, currency effects and increased receivable reserves added approximately $3 million of cost.

The additional expenses incurred to some extent to support our growth and earnings improvements objectives and the amount that we incurred for this expenditure was $1.2 million in the quarter.

Let me describe some of those initiatives for you. We have started an active dialogue with our managers throughout the world in a series of face-to-face meetings and workshops to better understand and appropriately react to the changing competitive environment and customer requirements in the various regions.

I believe that some of the improved sales development that we are seeing may be an outflow of those discussions.

We also began to prepare and train for the rollout of our Lean Six Sigma deployment. Lean Six Sigma will be the tool we use to execute our strategy. It will determine how work is done and how optimal business value can be realized.

Lean Six Sigma will shift the (inaudible) culture to embrace discipline, data-based decision making and problem-solving processes with emphasis on those processes that are focused on the customer and that will be driving our top-line sales growth.

We believe that we have to use this tool throughout our company to stay ahead of the competition and to be able to provide our customers with the level of performance and costs that they in turn will need to thrive in their respective markets. It is our expectation that we will benefit considerably from this initiative in the future.

In the coming year, we would expect that the economies we can achieve through operational efficiency and growth opportunities made possible by applying Lean Six Sigma will allow us later in the year to offset the cost of implementing the concept in the first half of 2004.

We were able to expand the Glidden license for our paint business into Guatemala, Nicaragua, Honduras and Belize.

We opened six new stores in Guatemala that boosted our operating expenses in the quarter with sales adding little for the period to defray the costs, but clearly preparing the ground for our sales next year.

We also entered into a strategic development marketing agreement for the Sash Slide technology that could revolutionize the way vital (ph) windows are made. We started our marketing activities for this technology that represents a very powerful addition to our window product line and expect our first sales by the second quarter of next year.

In addition to these initiatives, the increase in sales of our new products exceeded 30% year-over-year this quarter and accounted for 16% of our total company sales.

We are also pursuing our growth opportunities outside of North America, particularly China and the rest of Asia-Pacific and parts of Latin America.

As I have discussed in previous conference calls, certain industries are moving manufacturing to areas outside of the U.S., and we are taking advantage of our global footprint in these high-growth regions.

But we will certainly not neglect the growth opportunities that we have in the U.S. and Europe with our customers and markets that we do not currently serve or where we are under-represented. This is critical for us in order to support our operating margin levels as our infrastructure particularly in the U.S. provides us with the greatest opportunities for realization of higher contribution margin.

John already mentioned that our positive cash flow has allowed us to drive our debt to the lowest level in a decade. This has continued to strengthen our position for growth through M and A. The activity in this area has increased over the past couple of months and I look forward to announcing several transactions in the course of this year.

The large transactions that I have talked about in the past remain elusive and will, therefore, likely see several transactions of a smaller size below $100 million as our vehicles for future growth in both our adhesives and Full-Valu/Specialty businesses.

Now let me take a quick look forward to 2004. John discussed the expected impact from the U.S. pension and post retirement benefit plans.

After two consecutive years of a cumulative net earnings reduction of 49 cents per share, we will receive a slight year-over-year benefit to earnings of approximately 6 cents per share.

I already talked to you about some of the positive economic trends that we expect to help us moving forward, yet the recent increase in crude oil and natural gas will again create raw material pressures for the first and possibly the second quarter of 2004.

We have tried to anticipate this development and do not expect a significant impact for the first quarter. As the year goes on, we will continue to update you on the developments.

The U.S. dollar is expected to remain relatively weak compared to the other main foreign currencies, primarily the Euro, Australian dollar and Yen.

As we manufacture locally in most regions, currency will impact our top line more than our bottom line. As I mentioned before, deployment of our Lean Six Sigma is expected to be cost-neutral for the full first year 2004.

However, the training and development of this program will cause the costs to be proportionately heavier in the first half of the year with the earnings benefits occurring mainly in the second half of 2004.

In December of 2003, we decided to close our Adalis facility in Saint-André-Est in Canada and moved up production to Vancouver, Washington.

At the same time, we had a census reduction in our powder coatings business in the U.S. with a combined negative impact of 2 to 3 cents per share in the first quarter, before turning slightly accretive for the full year.

All of these actions will result in a quarterly earnings development not following historical trends and having a more pronounce weighting than usual of our earnings in the second half of this coming year.

In light of our own internal initiatives and economic improvement we have targeted our annual earnings for 2004 to improve over those of 2003 in the range of 8 to 12%. Thank you for your attention and I will now open it up to your questions.

Thank you

[OPERATOR INSTRUCTIONS]

Your first question comes from Rosemarie Morbelli. Please state your company name.

Ingalls and Snyder. Good morning all.

Good morning, Rosemarie.

And Happy New Year to you all, of course--.

Same to you.

If you look at the results in the fourth quarter and you eliminate the impact from the higher row material costs, do you have a feel for how you would have done in comparison to what you did, what was the cost of that particular item?

As John had indicated that we saw about a 6.5 or 6.7 million dollar higher cost in the area of -or in the reduction of the gross margin and that was about half due to pricing and half due to raw materials. That was about the proportionality of it. So it's 3.2 and 3.4 I believe. 3.2 in pricing and 3.4 in raw materials if I recall correctly.

And as you are expecting raw materials to continue going up is there anything that you can do over the short-term? I understand that you have your Lean Six Sigma, but is that how you are planning to cover the amount, the economic and competitive environment or is there more that you can do at the same time? Like eliminating capacity given that there is a heck of a lot of adhesives out there?

Well, as we already said in earlier conference calls, first of all, with regard to the raw material end, I think that the strategic sourcing teams that we implemented a couple of years have been extremely successful and have played a major role in the last year in keeping the raw material impact significantly down from what I believe the rest of the market and our competitors have seen.

So that is something that we can drive ourselves, that we can drive directly. The other part, and it's indicated in my comments looking forward to 2004, we continue to look at opportunities to take out additional capacity and the closing of the facility in Saint-André-Est is for instance an indication that we do that.

But as, or contrary to what we've done in the past where we have set up specific restructuring efforts, I think the opportunities that we have at this point in time are smaller in nature and do not warrant the setup of special restructuring efforts, so we have it running out of the current operations.

And you mentioned as part of -- well, could you give us a little more detail on what you are going to do as part of Six Sigma actually?

I didn't get the last part phonetically?

If you could give as you little more detail on what you are planning to do what is included in the Lean Six Sigma project and what would be the cost in the first half? I understand that you will make it up in the second half. But if we could get a feel for what the costs will be and if this translates into lower earnings in the first and second quarter versus 2003?

Rosemarie, this is John. Happy New Year.

Thanks.

As far as the impact of the Lean Six Sigma, I'll answer your question two-fold. One, we're looking at all areas throughout the organization as far as what Al alluded to in his script as far as processes and procedures to make sure that not only are we lean in those processes, but efficient from a cost standpoint.

As far as the second part of your question, the dollar impact for the full year, the total costs are going to be ranging somewhere in the range of $4 to $5 million. We expect the bulk of that money to be spent in the first quarter with a little bit in the second quarter. But as Al alluded to on a full year basis, we expect that to be earnings neutral.

And does that translate into a lower comparison in terms of earnings in the first half?

We believe that the issues that we're going to see in the first half and that includes the closure of the facilities, that includes the layoff of some people in our coatings business as well as the initiatives that I talked to, will most probably have an impact of about 6 to 7 cents or so in the first quarter compared to last year.

So just making sure I understand the first quarter could be 6 cents lower? Or are you going to make up some of that negative impact in some other area?

Rosemarie, the impact in the first quarter would be, as Al said, about 6 to 7 cents a share and that does not include the growth that Al alluded to as our full year outlook.

OK. Thanks.

You're welcome.

Your next question comes from David Begleiter. Please state your company name.

Thank you. Deutsche Bank. Good morning, Al.

Good morning Dave.

Thank you. Can you discuss your efforts to enhance your position in Asia as customers migrate over there? That's my first question. Thank you.

All right. Well, we are actively engaged in first of all, in improving our infrastructure in Asia-Pacific and we will most probably in the middle of this year move our Asian headquarters into the People's Republic of China to be closer to the largest single growth opportunity that we have.

We have in the last couple of years put a lot of emphasis in driving our market knowledge to a point where we can strategically approach the market because the opportunities for acquisition in China seem to be fairly limited.

We did quite an extensive study to look at what we can acquire and we found that most companies are either very small or have some significant issues that we would not necessarily want to take over. And therefore, we will most probably have to go it alone.

But we are working with other companies to have them tool manufacture for us in those areas where we feel it's not yet opportune to invest capital but yet participate at the growth rate that we clearly see.

And we are also of the conviction that we have opportunities for further growth in the Japanese market where we have been stagnant for quite a number of years.

And yet in this past year, we've seen some significant growth because we have changed our approach and we've changed also our management in the region and that's helping us significantly to expand our position and our foothold.

Al, on the pricing pressure, I'm not sure if you've seen volumes continuing to improve in December and January, but has there been any lessening of pricing pressure competition as volumes have picked up in your end markets?

Well, I would contextualize it the following way. I think the trend that we saw in the last two months of last year as far as strengthening of sales continued also through December.

And the early indications for the first week of January tend to corroborate that that is going to continue.

Concurrent with that, we have seen a lessening in some areas of aggressive pricing because I believe most probably people are realizing what it's doing to their income statement.

But, on the other hand, we see also in some other areas where perhaps the overall margins tend to be a bit stronger still and where there are some large-volume opportunities and I alluded to it in my comments with regard to the non-woven and the graphic arts market which typical tend to be up hot melt areas, there we now suddenly see a increased pricing activity.

So we are not yet fully clear how it's going to balance out. So I would say as a gut feel, we'll see a slightly lessening of the pricing pressure in the last couple of weeks.

And lastly, in powder coatings, given the layoffs you're announcing there, how core is that business to you going forward?

Well, I've stated in the past it really is not a core business for our company, and that we have always kept an open mind towards this business.

And I believe I mentioned at the last quarterly conference call that however this is not the time to do anything, we have to clean up the situation first and we've made some changes in management in the middle of the year and we've seen some improved trends already in the last couple of months.

And then I think we have to tie it into our overall strategy and look how we can best utilize this position in the marketplace and that may not always mean a continuation of that business under the pattern of H.B. Fuller.

Thank you very much.

Your next question comes from a Allan Cohen. Please state your company name.

Hi, actually Ray Kramer here from First Analysis.

Hi, Ray.

How are you doing? What did you guys see in terms of pricing volume sequentially in the November quarter?

You mean within the individual months within the quarter?

Or even just quarter-to-quarter or individual months?

Quarter-to-quarter, it's basically fairly stable. I think we had a 1% decrease in the previous quarter and I think also about a 1% decrease compared to last year this quarter, so that shows some stability.

OK. And in terms of pricing, I know at least before you had stated it was your strategy that in some areas where pricing was just getting too crazy, you were just going to walk away and go after the low price stuff, it seems now that you may be doing that more. Has your strategy changed or is it just the --

No the strategy has not changed, but what we're seeing is that some of the businesses that were gained by our competitors are coming back to us, not only because of the price opportunity that they may get with us.

I think the tendency that we're seeing is more related to the fact that some of the competitors had gained the business under the assumption that they could make modifications in their products and in the formula, and in the raw materials, and thereby eventually get some economies to justify the price that they had offered in the first place.

But what some customers are finding is that these modified products do not work as well in their operations and that is basically forcing them to come back to us.

Yet, when they come back and even if they want then the old product back, they still are going back to the results of the bidding and of the reverse auction and that is impacting our price still somewhat. But it does not mean that we're going to the price levels that we have seen in the marketplace because that would be ruinous.

So when you win back these deals, you're getting pricing at higher prices than your competitors who are bidding at?

That's correct, but at a lower price than we had in place in the first place. You may recall that I mentioned in the past as in some cases we saw price reductions of 25% and 30%.

And you continue to see that some areas in the industry?

Yes, we see some of that trend continuing to occur.

OK and then finally in North America, you've outlined a good strategy, I think for growth in Asia-Pacific, Latin America, through acquisitions.

What efforts are you doing specifically in the North America to fuel some volume growth?

In North America, our focus is on retention of customers because in the industry it's typical to have a significant churn of customers. I would say overall, you would see about 5% of your customer base fluctuating in the course of the year.

And a lot of the efforts and I hope Six Sigma will help us in this area, is going to make sure that we will not lose those customers because very often they leave because of an error or because we're not shipping on time.

So I think that would give us an opportunity to plug the hole and that of course means an additional sales at the top line if you don't lose it through the back door.

We also have gone to some extensive market segmentation efforts in the last year, which show us much clearer opportunities for growth and opportunity for profitable growth and we're pursuing those and that is particularly occurring in our packaging as well as in our assembly markets where we still have plenty of opportunities.

We should not forget that even in the United States where market share may be perhaps a bit higher than in the global market, but our global market share is only 5% or so, so there's plenty of opportunity in the existing market to grow with our existing structure with our existing tools it just means going after it, more focused and with more emphasis on gaining new customers and converting customers to our products.

All right. Thank you very much.

[OPERATOR INSTRUCTIONS]

Your next question comes from Frank Dunno (ph), your line is open and please state your company name.

Hello.

Hi, Frank.

Oh. There it is. OK.

You have to remove the mute.

I had nothing do with the mute.

Their system, you hit star, 1, and then they cut you off because they want your name.

I've got a couple of questions. The first one is a technical one. Are those 8 to 12% earnings growth off of what earning base for 2003 are we using? Is that the operating side?

Yes, it's the 152.

Yes. 152. I know when you were going to make an acquisition, I think you preferred making a large one and I think that was going to be like putting together two companies and rationalizing any cost savings if I remember correctly.

That's correct.

If you're going to buy a number of smaller businesses, what type of business - are these more like bolt-ons or this or how what type of strategy are we looking there?

Well, it's differs between adhesives and Full-Valu/Specialty. And the adhesives area as I had said before it's basically consolidation game with one odd exception that maybe where we have a regional weakness and we may be able to buy the player who has a regional position where we have not been well represented.

That would basically give us some additional market access. Generally in the adhesive market there is a consolidation play. In the Full-Valu and Specialty area it's clearly opening up new markets, new avenues getting product lines to add to existing product lines to use similar channels to market that we already have in place.

So were would it be fair to say that most of these acquisitions, the smaller ones, are going to be in the Full-Valu area?

I would certainly hope so. That would be my intend at this point in time given the situation in the adhesive industry, of course there may be more companies in the adhesive industry of that size willing to sell because conditions have not been very favorable overall for them.

Yes. But would you be willing to buy any of those?

Well only if it makes sense within the categories that I just mentioned.

OK. Thanks.

Your next comes from Godfrey Birkhead. Please state your company name.

SBK Brooks. Most of my stuff has been answered. Thank you. I had a couple of bookkeeping questions. What was the net worth, please, as of the end of the period?

If you could give us the next question and we'll look that up and give you the answer to that.

And the other one, Al, is depreciation estimate for 2004.

Godfrey, this is John Feenan.

Yes, John.

I'll answer in reverse order. Depreciation should be right in the range of what you've experienced and what we experienced in '03. And our net worth -

What was -

Approximately 450.

How much?

450 million.

450. For the equity?

Correct.

And what was depreciation in '03?

I believe it was between right around 55.

Around 55 million. OK. Thank you very much, guys.

You're welcome.

Your next question comes from a Rosemarie Morbelli. Please state your company.

Ingalls and Snyder. Could you give us a little more detail on the windows program and what you expect from it.

All right. I would say over all from the two combined businesses that I mentioned, one was the Glidden paint business as well as the windows business, we expect to get $7 to $7.5 million of new business next year.

The windows business is, because it's such a new concept, is a little bit more difficult to predict how it's going to start off, but we are very hopeful that it really is going to find wide acceptance in the marketplace.

What it means especially in the sector for the insulating glass customers that we call on is it reduces the manufacturing steps in their processing and in the manufacturing of the glass as well as the window units. And on top of that it improves the insulating qualities of the glass construction significantly.

And so there is a dual benefit to companies to switch to this product line and we at this point in time have, I believe already seven accounts signed up to move to this product line and we see a lot of interest.

And we are hopeful that in our updates in the coming months, we'll be able to give you some more specific and detailed information as to how this process and this product line is moving in its market introduction.

Would this translate into higher growth or higher margins or both?

It would certainly give both. Because it is not a replacement of our existing product line, it's an extension into new products that we have not had before.

OK. So you will have, obviously, some growth. And what about the margin?

The margin will be higher than the existing business as well.

And are you doing anything, obviously it seems as though the growth as you mentioned conference call is coming from lower margins overall for the company from lower margin product lines. Do you see a switch to the higher level some time soon?

Well, I believe that the proportionality of our Full-Valu/Specialty is hopefully going to increase. As you know from the past, Full-Valu/Specialty tends to have some fairly good gross margin numbers and that would help us.

I believe, though, Rosemarie, we have to look at the balance between what is additional volume going to bring us and what is the margin going to do to see what ultimately ends up as being the highest dollar in results that we can achieve for the company.

OK. Thanks.

Godfrey, I just wanted to give you a quick clarification. I gave you incorrect answer. Not an incorrect answer, I gave you the wrong timing. Our equity position at the end of '02 was circa 450 million at the end of '03, it's 510.

At this time, I'm showing no further questions.

All right. So we would like to thank all of those who took the time to listen and participate in today's conference call.

Since there are no more questions, we will now conclude this call.

Thank you.