H.B. Fuller Company (FUL) 2005 Q1 法說會逐字稿

Good morning, and welcome to the first quarter, year 2005, earnings release. At the request of the company, this conference is being recorded for instant replay purposes. This conference is scheduled for one hour. 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 attendance on today's call includes Mr. Al Stroucken, Chairman of the Board, President and CEO, Mr. John Feenan, CFO, and Mr. Steven Brazones, Director of Investor Relations. At this time, I would like to turn the meeting over to Mr. Steven Brazones. Sir, you may begin.

Thank you, Wendy, and welcome, everyone. Today's conference call will be available for replay approximately one hour after we are finished with the question and answer portion of our call. Before beginning, I would like to inform everyone 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. In addition, during today's conference call, we will be discussing certain non-GAAP financial measures, including free cash flow and networking capital.

Management believes that the discussion of these measures is useful to investors because it provides insight into the ability of the Company to fund such thing as debt reduction and acquisitions. For more information, please refer to our recent press release and our annual report on Form 10-K filed with the Securities and Exchange Commission, each of which are available on our website at www.hbfuller.com. under the shareholder relations section. Now, John Feenan.

Thank you, Steven. Good morning to everyone. Before I begin, I want to remind everyone that per share amounts discussed are on a diluted basis. Net revenue for the quarter was $353 million, 10.8 percent higher than the $318.6 million of revenue in the first quarter of 2004. The components of the 10.8 percent net revenue increase were as follows: Pricing increased 4.4 percent, volume increased 1.4 percent, currency effects, primarily due to the Euro and at a lesser degree the Yen, Australian and Canadian dollars, accounted for a 2.3 percent increase; and acquisitions had a positive impact of 2.7 percent. Gross margins for the first quarter was 25.7 percent compared to last year's first quarter margin of 26.9 percent. The 120 basis point decline in gross margin was predominantly driven by increased raw material costs; and to a lesser degree, escalating delivery expenditures.

Although a sequential improvement in pricing accelerated in the first quarter, which helped partially offset these rising costs, the increases in prices were not enough to entirely mitigate the year over year raw material cost impact. Included in this year's first quarter gross profit is $1 million gain on an insurance settlement. Operating expenses were $80.3 million or 22.8 percent of net revenue. This percentage is 90 basis points lower than last year's first quarter of 23.7 percent. Included in this year's first quarter operating expenses is approximately $1 million of expenses related to the investigation of our Chilean operations, as well as approximately $1.1 million of severance and other related expenses associated with the departure of certain executives during the quarter. Operating income for the first quarter was flat with the first quarter of last year at $10.4 million. On a segment basis, operating income in Global Adhesives in the first quarter was $5.7 million compared to $7.1 million in the first quarter of 2004.

Full-Valu /Specialty's operating income was $4.7 million, an increase of $1.4 million or 42.7 percent over the previous year's first quarter. Last year's first quarter Full-Valu/Specialty operating income included expenses related to the closure of the St. Andreas [PHONETIC] facility in Canada, which when taken into account makes for a relatively easy comparison. Interest expense of $3.3 million was 6.6 percent lower than the $3.6 million for the first quarter of 2004. The repayment in this year's first quarter of $22 million relating to our 1994 private placement reduced interest expense by approximately $150,000. Net gains on sales of fixed assets were $1.8 million in the first quarter of 2005, as compared to gains of $34,000 in the last year's first quarter. This year's first quarter includes a 1.7 million gain related to the sale of our [INAUDIBLE] United Kingdom facility. This facility was shut down as part of our 2002 restructuring program.

Other expense in the first quarter was $352,000 compared to $1 million for the first quarter of 2004. The decline was primarily driven by lower currency exchange losses and higher interest income. Pretax earnings of $8.5 million for the first quarter of 2004 reflect a 44.8 percent increase from last year's first quarter pretax earnings of $5.9 million. The effective tax rate for the first quarter was 32 percent, equal to last year's first quarter tax rate. As a result, for the first quarter of 2005, net earnings increased $4.6 million in the prior year to $6.5 million. Earnings per share were $0.22 compared to $0.16 for last year's first quarter. As we turn to the balance sheet, I would like to remind everyone the following figures are subject to minor changes prior to filing the 10-Q.

Cash at the end of the quarter totaled $36 million. Networking capital, which is defined as net trade accounts receivable, plus inventory, minus trade accounts payable, amounted to $261 million. The components were as follows: Net trade accounts receivable were $246 million, inventory was $175 million, and trade accounts payable were $160 million. As a percentage of net revenue, networking capital was 18.5 percent for the first quarter. This represents a decline of 380 basis points from the previous year's first quarter. Improvements in revenue and all working capital components, and reflect the global effort of our businesses on a continued balance sheet improvement. Capital spending for the first quarter was $6.9 million, compared to last year's first quarter spend of $6.3 million. Depreciation and amortization were $13.9 million for the quarter.

Total debt decreased $24.1 million from $174.4 million at the end of the fourth quarter of 2004 to $150.3 million at the end of the first quarter of 2005. As discussed earlier, this is primarily due to the $22 million repayment related to our 1994 private placement. The company's capitalization ratio was 21.2 percent at the end of the quarter, compared to 26.3 percent at the end of the first quarter of last year, and 24 percent at fiscal year end. Free cash flow for the quarter, defined as cash flow provided by operations, less dividends paid and purchased property plant equipment, was a negative $18 million compared to a negative $14 million in the first quarter of 2004. This year's first quarter free cash flow was impacted by a $9.5 million funding of our Austrian defined contribution plan.

The components for the first quarter of 2005 were as follows: Cash flow provided by operating activities was a negative $8 million. Dividend paid was $3 million and purchased property plant and equipment was $7 million. The first quarter proved to be quite challenging, due to the conditions in the raw material marketplace and the impact of higher energy prices on transportation costs. This inflationary environment has persisted for several quarters now, and has been the primary basis of our decline in gross margin year over year. With that said, we are optimistic. The progress we made during the first quarter in recovering raw material cost increases represents a significant step-up versus prior periods. We will build on this progress and continue to work with our customers in mitigating the impact of rising raw material costs in the quarters ahead.

Before I turn it over to Al, I would like to provide you an update on the situation regarding our Chilean operations. The investigation into the accounting irregularities is complete, and we are taking the necessary actions to correct the identified material weakness and internal control over financial reporting. First, the company no longer employs those individuals of the local accounting organization that were directly involved in the misappropriation activities,s and we intend to pursue all legal remedies against those who were involved. In addition, we have implemented procedures to provide additional oversight to the local accounting functions.

We've tightened our internal controls and we are in the process of expanding internal audit resources in the region. Additional information regarding the material weakness and the steps we are taking to resolve this matter will be provided in our quarterly filing on Form 10-Q With that, I'd now like to turn it over to Al.

Thank you, John, and good morning to all of you on the conference call. As our last call was not too long ago, I will focus on the issues that may have changed since then and on topics that may have an influence on our business going forward. With raw materials being such an important part of our cost structure, and many of our prime raw materials going through some rapid changes in their pricing and availability, it's only natural that I devote some time to the developments in this area. Based on what we are seeing in gearing and our discussions with our suppliers, there is no reason to suspect that the trends that we have been observing in the last 12 months or so are likely to change this year. You all are familiar with the basic information on oil and natural gas.

Inventories are pretty solid, yet prices continue to climb. It does not seem to be a concrete logic for such a development, as the underlying fundamentals would point us in a different direction; but you and I have heard that a significant portion of the price level is supported by speculation that falls outside the normal supply and demand equation. Trying to guess when a correction will take place is useless, as the driving factor are beyond our [INAUDIBLE]. But we also believe that the prices of these basic raw materials are at this point secondary to the forces that drive the prices and availability for our key raw materials. And in this arena, I believe we have a pretty good handle on the supply/demand picture, and that let's us conclude that raw materials are like to the remain tight and under continued upward price pressure for the remainder of this year.

Our sourcing teams will have their hands full, and we will continue to need the support of our customers and being flexible enough to modify our formulas to accommodate all the raw material sources and compositions. So far, we have been very successful in our efforts and we hope that our global sourcing footprint will help us also moving forward. Now all of this of course also having a significant influence on how we need to market our products and dialogue with our customers. As you heard from John, we've made significant progress in increasing our selling prices, and you can imagine that the average numbers for the quarter are not reflective of the actual price level at the end of the period.

The trajectory has been rather steep, and we will continue to see prices move fairly briskly and rapidly, because our overall raw material prices in the first quarter now project to a full year over year double-digit increase on top of last year's increases of around 3 to 4 percent Our selling price development varies, of course, by product line and region depending on the cost drivers. You may have recalled that in the past I have talked about the diverging cost developments here in the U.S. versus, for instance, Europe. It is now evident that Europe will have a similar development as we have seen in the U.S., with a time lag of six to nine months. With very slight variations for individual raw materials, virtually all regions and countries are now seeing similar cost pressures.

As I mentioned earlier, we are dialoging with our customers and find a greater level of acceptance to share in our cost increases than we have seen in more than almost two decades. That does not mean, however,r that from time to time we are not still losing some volume to competitors that either have a different opinion on the cost and availability projections that I talked about earlier, or may be marching to a different drummer all together. Some of this may be reflected in the reduced volume growth rate that we saw in the first quarter of this year. In particular, the commoditized large volume standard technology products see quite a bit of supplier shopping. Yet, we feel that the frequency of customers eventually coming back to us after a couple of weeks or months is indicative of broad-based price or cost movements in the industry.

We have concluded that to remain a viable and reliable supplier of products that very often have little cost impact yet great potential influence on the performance of the customers' finished product, we have to do our best to ensure dependable performance. In this environment, that also means that we have to be able to recover the cost that market conditions force upon us, and make solid judgments about whether or not we have sufficient supply to service the needs of existing and potential new customers. With the cost pressures that we are facing -- cost controls and operating expenses and manufacturing overheads -- our focus area is in all business units and regions. And our plans -- and as you can tell from the operating expense levels also in our nonmanufacturing areas, we are getting benefits from our effort to improve our productivity.

Being Six Sigma is helping us immensely in this difficult environment to find new and improved ways to create value for our customers and for ourselves. In the quarter, we benefited from some significant one-time events that John discussed with you and that helped us cushion the costs that were incurred as a result of the investigation in Chile, and more than $1 million in severance and other related costs for a number of executives and managers that left the Company. Within the regions, we saw strong growth in Europe, driven by the impact of currency, our last year's acquisition of Provos [PHONETIC], and improved demands. Let me remind thank you in future quarterly comparisons, Provos will be included in both periods.

Within Adhesives in North American, price increases accounted for more than two-thirds of the increase in sales; and especially in the earlier stages of our price increase efforts, we saw quite a bit of competitive activity leading to what we believe to be temporary losses of customers who understandably took advantage of offers that purported to keep prices unchanged or even at reduced levels. Despite the situation, we grew our volume close to 2 percent. Within Adhesives in Latin America as well, price increases represented more than two-thirds of the increase in sales, and volume increases accounted for the remainder of the double-digit increase in the region. Adhesives in Asia Pacific slowed from the pace we have seen in previous years, with currency and price increases accounting for more than 80 percent of the growth we saw there.

A little over one months ago, we announced the signing of a definitive agreement with Sekisui Chemical Company to enter into joint venture agreements for the Adhesives business in Japan and China. In Japan, H.B. Fuller will initially take a minority position with an option to increase its participation to 50 percent in two years. We felt that a consolidation in this important market would benefit the Company and our customers. The combination of Sekisui's intimate knowledge of the market and its strong position in hot melts, with H.B. Fuller's global position and product line creates a formidable market position that will hopefully lead to additional consolidation opportunities there.

With the start of the joint venture expected for April 1st of this year, the sales of H.B. Fuller in Japan will be consolidated by Sekisui. In China, where Sekisui initially will take a 20 percent share in our joint venture, we expect to gain momentum in penetrating the significant number of Japanese companies active in that country, and to benefit from the proximity of a considerable manufacturing and technology base just across the East China Sea. Let me summarize. Market conditions are pretty solid and indicative of a continued economic expansion on a broad scale and also for our customer base. Raw materials are likely to remain tight and become more expensive, with very little lead time. That will require us to find alternatives by leveraging our technological resources and global position to deal effectively with these circumstances. In addition, we are working with our customers to find ways to deal in a timely fashion with these market conditions.

The shift in pricing power to our raw material suppliers is radiating into our market space as well, and creating conditions that are not unlike a seller's market. With our focus on margin recovery, we may find ourselves in situations where our growth pattern of the last four or five quarters may be muted somewhat; but given the limited supply of raw materials on a broad basis, we feel that may be a temporary impact. Thank you for your attention, and I will now open it up for the question and answer period.

[Caller Instructions]. Ray Kramer, you may ask your question, and please state your company name.

Hi, from First Analysis. First, congratulations on a really strong quarter, guys.

Thank you, Ray, thanks.

First question -- and I apologize, I just missed a couple of numbers on the call. Could you tell me what Cap Ex was?

Cap Ex was 6.9 million for the quarter.

Okay. And then, did you guys break out tonnage numbers? And if you didn't, could you repeat that for me?

No, we did not. We just talked about the overall volume, which of course includes mix as well.

Okay, do you have those tonnage numbers?

I don't have those at the fingertips.

Okay, and then sort of getting on the price point now, I know had you commented, at least qualitatively, that the price increases were increasing sequentially through the quarter. Can you sort of give a sense of what the sequential increase was at the end of the February quarter, maybe? Or -- and then sort of looking into the May quarter, if all the price increases you've got stick and all the ones that you're planning stick, what sort of year over year number are you looking at?

Well, I already mentioned in the comments that, and John gave the specific numbers that were at about 4.4 percent for the entire company. I did mention in the conference call that of course we still have varied development by individual region. You may recall that in the last conference call, as indicator of what was happening, I used the example of the United States adhesive price situation without the automotive part, and I had indicated at the last meeting that we were running at about a 5 percent rate in the first two months of the quarter. That rate strengthened to about around 6 percent for the first quarter in that small segment of the entire business.

And I think that is indicative of the direction that we will continue to see, at least in the next couple of months, based on what we already have in place in the marketplace or what we are rolling out at this point in time. You will very well imagine that this is a situation that continues to be in flux, because of it depends to a very large extent also on what we're seeing in the raw material end, and their prices continue to move forward at a pretty good clip. So I do not see any reason at this point in time to expect that our efforts to raise prices are going to fail because of the supply situation. Now if supply becomes long, then of course the situation may change drastically. But I do not see that happening at this point in time.

Okay. And then finally, sort of your best guess with the price increases you've got visibility on, and then what ever sense you have of raw materials. At some point this year, are you going to be able to catch up, or is it still going to sort of be chasing and moving target for the next couple of quarters in closing the price raw material gap?

No, I think we will be able to get close to that number; and if you look back over the last couple of years, you will realize that we still have quite a bit to make up for; because if I look back -- '99, for instance -- our gross margin was basically 400 basis points higher than we have in the first quarter of this year. So there still is quite a bit that we have to make up for. I'm not just looking back one quarter or two quarters. I think we've to get back to the profitability levels that we've had established for quite a bit of time in this industry.

And any sense of when you think that's a reasonable goal?

Well, I think that at the end of the second quarter we will, of course, have a much better perspective on this than at this point in time. It's -- I'm reluctant, Ray, to project from one quarter to a full year, basically to the next couple of years. I think it's too early -- let's first see what's going to happen in the marketplace, and what we are seeing also with regard to our competitors.

All right. Thanks a lot.

Thank you. Jeff Zekauskas, you may ask your question, and please state your company name.

JP Morgan. Good morning.

Morning, Jeff.

Can you tell me what the after tax effect was of the equipment sale and the insurance settlement, or what the amount of taxes were that you paid on those two items?

Yes, Jeff, our tax rate for the quarter was at 32 percent -- for both of those items, that would be applicable.

32 percent.

Right.

Secondly, can you talk about sort of business conditions in Europe in that? My own impression is that, at least through most of the calendar quarter, sort of business conditions have weakened in terms of all kinds of polymer demands. Is that something you're seeing, or are your markets a little bit different from some of the general trends?

Well, we are not yet seeing it in our business. I assume you derived your information from polymer companies that have reported. We have not seen that. In fact, what we are seeing in Europe is the tightening of the raw materials situation, with companies that up until December had no issues in supplying us volume are now installing allocations; and in fact, in some cases, are not able to supply to the level that we had expected. Fortunately, we're able to use our global sourcing a bit to make up for some of the shortfall; but that would indicate to me that demand in Europe, at least in the segments that we are serving, is still pretty strong.

Okay. Thank you very much.

You're welcome.

Thank you. Lawrence Alexander, you may ask your question, and please state your company name.

Good morning. Deutsche BanK, how are you doing?

Fine, Lawrence, thank you.

Just wanted to start off by digging into what you think, now that pricing is getting to improve, whether or not consolidation activity in the sector might accelerate? Are you seeing any signs that you might either be [INAUDIBLE] there?

Well, I think for anybody that's watching the industry, certainly M&A activity has picked up a bit over the last couple of months. I think it is typical in such environments when there are some fundamental changes happening, as I believe there have been happening in this business, and people are going to take a step back and look at their business. I mentioned on the last conference call that we are actively pursuing a variety of opportunities at this point in time. And following the conference call, we announced a joint venture with Sekisui, which, if you will, is also some kind of consolidation. So I would expect that we will continue to see a more lively activity in this area. But I also have to tell you we have seen multiples going up in the last couple of months as well, and so it's always for us going to be a decision not to only look at the strategic value, but also to look at the economic value of what is available.

And you mentioned on the call that delivery costs were a specific issue this quarter. Do you have a sense for how much of a hit on margins delivery costs alone were, and what the -- how we can forecast that over the next few quarters?

Well, if you look at delivery expenses, which of course is also a part of the volume that we are moving, but our delivery expenses were up by about half a million dollars previous versus with last year, so that's an increase of about 20 basis points.

And finally, can you discuss the slow down in Asia, any particular end markets that -- you know, or regions in Asia that were of particular concern?

I think what we are seeing is that China -- and I mentioned that at the last conference call already that China is softening somewhat. How much of that is really part of an effort by the government to slow down some of the economic activity and how much of this at this point in time due to our pricing activity in the marketplace, is something that we are going to have going to have to take a deeper dive in and get a closer look at, and we are going to have some people go into the region in the next couple of weeks to give us some conclusive information about that.

Thank you.

Thank you. [Caller Instructions]. Our next question comes from Andrew O'Connor. You may ask your question, and please state your company name.

Andy O'Connor, Wells Capital. Good morning, Al, John, Steve. Congratulations on your quarter.

Thank you, Andy.

Wanted to know, is the first quarter volume growth indicative of what you expect for the full year '05, or what would you anticipate Fuller's volume growth to be in light of or commensurate with a more aggressive pricing policy? Thanks.

Andy, based on what was happening in the first quarter it's difficult to really predict. We had an extremely strong December, which in retrospect may have had a variety of factors. Number one, the holidays in December fell on the weekends, so we had more shipping days than we typically would have in a December. But also, there was a time when we really made a significant effort to raise prices, particularly here in the U.S. That had a huge impact on the volume that was being shipped.

Okay.

We then saw a week January, which may have been a combination of some customers going to alternate suppliers that had not yet raised prices, or people working off their inventory. February came in a little bit stronger again. So I would be very hard pressed at this point in time to make a reliable prediction. If I can look at total sales as sales increase, including pricing and other factors, what I'm seeing in the first couple of weeks of March is indicative of a continuing trend of what we saw in the first quarter.

Okay. That's helpful. And then, wanted to know if you could further characterize the availability of your key raw material inputs -- ethylene, propylene and benzene. Would you say that benzene is still the tightest at this point in time?

I think styrene at this point in time is the tightest raw material. I think benzene, of course, also has picked up again lately in stock prices and pricing in general. I believe that at this point in time, demand factors coming from China, India -- and also the general pick up in economic activity in Europe and in North America -- are contributing to that factor. And we had expected, if you would have asked me two quarters ago, that benzene would go softer somewhat but then we saw a reversal on that trends.

So it's become extremely difficult to predict and all indicators at this point in time are for a continued tight market in quite a variety of raw materials. We have, in the past can couple of months, been able to work intensely with our customers in such areas where raw material did become a problem, that the customers were willing to speed up their approval process for modifications in the formulas of ultimate raw materials. I think that is going to continue a significant part of our work moving forward to assure supply of these products to our customer base.

Thanks very much. That's all have. Again, congratulations on your quarter.

Thanks.

Thank you, and that's all the questions I'm showing at this time.

Okay, thank you very much. I'd 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 this call.

I do have one further question.

All right, we'll take one more question.

Thank you, Rosemarie Morbelli, you may ask your question, and please state your company name.

Hi, Ingalls and Schneider. I am driving and I went through an area without signal. So I haven't heard any questions. I am a little frustrated. It took ten minutes to get back. And I apologize if you already answered the question. But is there any sign of a change in attitude within the industry? You have been losing business as you are raising prices. What are your competitors doing?

All right. Well, Rosemarie I hope you have a hands-free telephone.

I do.

Okay. What we are seeing is, on a broad-base, there is quite a bit of pricing activity ongoing. So I believe that logically, intellectually, companies and top management of companies understand the basic underlying factors; and therefore are clearly driving the need for increases throughout the organizations. As we have seen ourselves in our own company, sometimes it's very difficult to have the implementation then of those increases actually happen in a coordinated fashion at the front end in the marketplace.

And so we still run from time to time into situations where even large companies are doing things where we scratch our head and say, well, that doesn't make any sense, but with what we are seeing and with what the overall supply situation is, but I don't think that that is indicative of a strategic -- strategic direction. One of the things that we find still very often is that the smaller customers -- smaller competitors -- tend to not have the visibility perhaps that we have on what's happening in raw materials, and they tend to be surprised and get surprised, and therefore sometimes their pricing actions are a little bit out of sink with what's happening overall in the marketplace. But if I look back over the last couple of months, this is the most solid pricing environment that I've seen in this business since I've been with the company.

And this applies even to the commodities side of your product?

Well, and that's of course where you have -- on the commodity side -- where you have a lot of competition from also small companies, and that's where we have seen some supplier shopping over the last couple of months. But ultimately, the availability of the basic raw materials is going to dictate whether they can continue to do that or not.

And have you seen any -- any of those small competitors kind of going away? So this is one question. And then secondly in light of what is going on in the commodities side of your products, are you thinking of eliminating some of them all together since you are losing business anyway? Does that translate into shutting down a facility or manufacturing line or any other major change which would save cost?

I believe at this point in time with the basic availability of raw material being as I described, this is a unique opportunity to segment your market more carefully and then shift raw materials to segments that generally are at a higher level or a more secure level of income. And so there is naturally in the process of segmentation and price increases a tendency to look at those businesses that have the lowest contribution margin, and either raise prices significantly there or move the volume of raw material to one of the customers or product lines that give us a greater level of income. So that is, I think, a natural occurrence and that is, I believe, a logical way of managing your business. I would say with regard to the small competitors, Rosemarie, it is very difficult to predict what they are going to do. Sometimes the reason for staying in business are quite personal and vary from individual company to individual company. So I cannot really make a categorical statement as to what's going to happen there.

Okay. And then you have a new management within your automotive business. Any change in terms of the way they are operating? Any input as to whether you intend to stay there? Can you bring us up to date on your latest thoughts?

Well, you know from my past comments that the automotive industry is not necessarily a segment where I believe our company can get the highest return on its investments, and I've been trying to find alternatives for that business in the past and we will continued to so. But that does not relieve us from the obligation to maximize the business as it is toda,y and I think our present management is doing the steps that need to be done. You know from other companies that you are following that this is a very contentious area contentions area. It's very much in your face, and very difficult to deal with. But I think given the underlying factors, it's quite evident that there has a shift occurred in this segment as well.

[INAUDIBLE]?

Sorry, you broke up. I didn't hear you. All right, you're breaking up entirely. I assume your question had to deal with the European partners; and, of course, we are in constant discussion with them about what the potential for this business is. And you have to keep in mine that of course we also have an ownership in the European and Asian part,s and those businesses have been doing reasonably well.

Thank you. Our next question comes from Lawrence Alexander. You may ask your question and please state your company name.

Deutsche Bank. I just had one follow up. Can you please give us an update on the outlook for pension contributions over the balance of the year?

Yes, I had mentioned at the last conference call that we were going to mostly see a $0.14 per share shit in this course of this year, or $6 million; and I think this is already included in the run rate of the first quarter. And so we continue to expect that we will be able to make up for that are additional cost, as Al mentioned earlier, through productivity improvements and through the ability of lean Six Sigma to generate benefits that would compensate for that.

But Lawrence, let me answer the question a little bit different, because what Al was talking about is the expense that we have incorporated in our P&L for the year.

Right.

The contribution is a scoop over $5 million that we planed to do in 2005.

Okay, so that's in addition to what has already been done, another 5 million?

That's correct.

And in terms of where you think working capital to sales can go, do you feel -- how much more do you expect to achieve over the next 12 to 18 months?

I think if you recall from the prior calls we have a corporate goal to get somewhere in the range of 14 to 15 percent.

Right.

We felt it would take about two years to get there. And I think as Al has alluded to, one of the things that we are really leveraging now is the lean Six Sigma initiatives and really getting down to a more granular approach and looking at all three components -- not just the payables side, but more importantly our focus going forward is how we can minimize our inventory and be aggressive on our -- and prudently aggressive -- on our receivables. That's an initiative that we have on a global basis, but we're also leveraging the techniques within lean Six Sigma to make sure we can accomplish that goal.

Okay, so that goal is still intact, no change?

That's correct.

Perfect. Okay, thank you very much.

You're welcome.

Thank you, and at this time, I am showing no further questions.

If there are no more questions, we will now conclude this conference call. Thank you.

This concludes today's conference. Thank you for your participation. You may disconnect at this time.