H.B. Fuller Company (FUL) 2007 Q2 法說會逐字稿

Good morning and welcome to the H.B. Fuller second-quarter 2007 investor conference call. At the request of the Company, this conference is being recorded for instant replay purposes. This conference has been 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. Michele Volpi, President and Chief Executive Officer; Mr. Jim McCreary, interim Chief Financial Officer and Corporate Controller, 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, Candace, and welcome, everyone. Today's conference call is being webcast and will, therefore, be archived on our website for future listening.

In addition, this call will be available for replay approximately one hour after we're finished with a 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. As 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, specifically free cash flow and operating income. Free cash flow is defined as cash provided by operations less dividends paid less capital expenditures. Operating income is defined as income before taxes, minority interest and income from equity investments, plus interest expense less other income expense, less gains on sales of assets. These measures should not be construed as an alternative to the reported results determined in accordance with GAAP. Management believes that a discussion of these measures is useful to investors because it assists in understanding the operating performance of the Company and its operating segments, as well as provides insight into the ability of the Company to fund such things as debt reduction and acquisitions.

Non-GAAP information discussed today may not be consistent with the methodologies used by other companies. All non-GAAP information is reconciled with reported GAAP results on the last page of this presentation as well as in the earnings release.

Lastly, I want to remind everyone that the results discussed today for all periods are from continuing operations and not include the divested powder coatings business. For more information, please refer to our recent press release, quarterly report on Form 10-Q and annual report on Form 10-K filed with the Securities and Exchange Commission, all of which are available on our website at www.hbfuller.com under the Investor Relations section.

I will now turn it over to Michele.

Thank you, Steven. Good morning, everyone, and thank you for joining us today. As you have seen from the release yesterday, in the second quarter we continued to accelerate on the turnaround that started nearly three years ago.

I would summarize this by saying that we're running the rates faster than ever before. Earnings per share from continuing operations of $0.44 exceeded the First Call consensus estimate of $0.40. Net income from continuing operations increased over 45% year-over-year. Gross profit margin expansion continued with a profitable topline, a clear result of our continued effort to shift the mix to a more profitable topline.

Cost controls and (inaudible) efficiencies drove SG&A expense to 19% from 20.5%. Operating margin advanced nicely year-over-year to 10%. Networking capital improved to 13.1% from 15.5%. Return on assets and return on equity continued to improve both sequentially and year-over-year. And free cash flow increased over 40% to nearly $50 million in the second quarter.

In an environment where several industry participants have reported declining profit and reduced earnings expectations, H.B. Fuller has instead continued to deliver impressive results focusing on the controllable items.

Now let me review the topline trends. Our geographic diversity and strength abroad continues to help mitigate the challenge in North American environment, which as expected did not abate in the second quarter.

I am very pleased with the commitment and accountability of all of our associates. They have been able to execute extraordinarily well during our transition to a completely new leadership team. Significant progress has been made in the hit ratio and cycle time of the new business pipeline, resulting in an improved new product index of 22%. We are comforted as well by the fact that such pipeline is shifting our needs to more profitable and sizable accounts, in line with our strategy.

While we continue to increase our average selling price, volume declines eased. With that said, the trend change in organic sales year-over-year as previously forecasted has not materialized yet. However, the momentum we are creating, together with our commitment to profitable growth, gives us confidence and leads us to expect a topline trend reversal in the fourth quarter and positive organic growth in 2008.

You remember that at the beginning of the second quarter we implemented an organizational realignment, whereby the operations of the former Full-Valu/Specialty and Global Adhesives segments were folded into a combined regional structure. As a result of these structural changes, we now have four operating segments corresponding to the four regions of operation.

Certain financial historical segments operating results have been provided in our second-quarter earnings release. Although we are only one quarter into the realignment, we are ready realizing benefits, and we're happy to notice that speed of execution, full operation, knowledge sharing and best practice translation are developing nicely. This is positioning the Company to more closely link accountability with responsibility and is bringing a new level of organizational clarity.

On Monday we announced that Fabrizio Corradini will be joining H.B. Fuller as our new Chief Strategy Officer. Fabrizio brings a wealth of experience including strategy development and implementation, business development and mergers and acquisitions together with a very broad global perspective. With his addition to the executive committee, you can expect the H.B. Fuller team to take the business to a new more strategic level than ever before.

Our search for a permanent Chief Financial Officer continues. We have set the bar high, and we're taking the time necessary to make sure we select the right candidates. We will update you on that as developments warrant.

Next, let me highlight the contributions of Lean Six Sigma to our business success. Lean Six Sigma continues to be the common denominator of our operational improvement and turnaround in financial performance. It covers all of what we do on a day to day basis, including pricing, mix shift, salesforce effectiveness, procurement, product development and marketing. It has become the mindset of the organization, part of who we are, our DNA. The tools and disciplines of Lean Six Sigma will continue to be deployed in all of the many facets of our business, and we expect it to further benefit the Company in a significant way in the years ahead.

The raw material landscape in the second quarter was largely unchanged from the last quarter and the end of 2006. For Fuller specifically we still saw upward pressures in certain raw materials and some easing in others, but in aggregate our costs were relatively flat.

Until recently, excluding any significant hurricane activity, we were expecting more or less the same for the second half of 2007.

However in mid-May, Celanese, the largest producer of vinyl acetate monomer in North America and globally, announced force majeure due to an outage of their acidic acid facility in Clear Lake, Texas. What was considered initially to be a minor disruption with limited duration has evolved into a major supply issue for the (inaudible) sector.

The disruption has had a cascading effect through multiple materials used by the industry. It directly impacts North America and Latin America, but its spillover effects are global.

Celanese's recent press release project at the start of their facility in mid-July. Even with a timely restart of this facility, the impact of the outage will continue for some time. Clearly this is a major supply disruption for several industry players.

We are at H.B. Fuller diligently working to secure our needed supplies of vinyl acetate and meet the demand of our customers. Our global footprint allows us to source from all over the world and provides a competitive advantage in times of regional supply/demand imbalances such as the one that exists right now.

As a result, we are confident that we will be able to fulfill all of our contractual obligations in the second half of the year, and due to the actions we're taking, we do not expect a negative impact to earnings.

In combination with our efforts to accelerate organic growth, M&A continues to be a significant focus for the Company. We are presently evaluating a number of interesting portfolio moves throughout the world and continue to expand the pipeline. We have ample flexibility given our strong balance sheet position, and we are confident in our ability to deploy it strategically to position the Company for continued long-term success.

Regarding our capital structure, we are now in a net cash position. The strong free cash flow generation of the business, coupled with the proceeds from the divestiture of the powder coatings business, have driven us from a net debt position of almost $200 million at the end of the second quarter of last year to a net cash position of nearly $30 million this quarter. This provides us with significant financing flexibility with which to pursue our external growth opportunities while maintaining a balanced approach to our capital structure and the utilization of our free cash flow. We are aware of the opportunities that the (inaudible) situation entails and are actively investigating several options to make sure that shareholder value is created.

Now I would like to provide you with a region by region review. In North America the slowdown in construction in automotive end markets continued to pressure our revenue lines. Housing permits remain at the lowest level in nearly 10 years, along with the confidence of homebuilders which is at a 15-year low.

Same-store sales comps at the major home improvement retailers worsened yet again in the last quarter, and as treasury yields begin to rise, it is not yet apparent to us that construction will improve in 2007.

On the North American automotive front, the former big three continued to lose share to their Asian counterparts. And current data shows that light vehicle production continued to fall during the second quarter.

Recently the former big three announced extended holiday shutdowns, thus increasing the likelihood of a further deterioration in the second half of the year.

Clearly our exposure to the construction in automotive end markets, which constitute almost 50% of our North American sales, had a negative impact on the region's revenue evolution in the second quarter. With that said, we are happy to underline that our business group started showing the first signs of volume trend reversal this quarter.

Adding to the top market environment in the second quarter was the performance of the Roanoke acquisition which continues to underperform. During the second quarter, it became part of the base business and had a negative impact on our consolidated topline development. While this transaction has been a disappointment, we have already taken actions to turn this business into a contributor and are actively pursuing gap closing measures to remedy the situation.

Not withstanding the Roanoke situation, our North American team was unable to force an operating income improvement year-over-year of more than 15% focusing on the controllable items.

Europe continued to deliver very strong financial results during the second quarter, continuing a transformation that has repositioned the region to a very attractive position within the H.B. Fuller portfolio. Organic sales were up 1% year-over-year, and margins continued to expand. Currency was an added benefit as the Euro continued to strengthen versus the dollar.

In the region, the growth profiles of the economies continued to be vastly different between the East and the West. In Eastern Europe industrial production remained at a double-digit rate for most currencies, while in the West, it was more subdued but steady at around 3%.

The story for us was similar. We too experienced higher growth in the East than in the West, albeit at lower rates than the general expansion in industrial production would suggest. This is the result of the specific actions we took to deemphasize lower margin product lines and not to follow opportunistic and irrational pricing behavior by certain of our competitors in the region.

In Latin America we remained diligent in our approach to the marketplace and continuously monitor credit profiles as the tenuous geopolitical environment continues. This, coupled with a profitable approach to sales, impacted the topline development.

During the second quarter, the region implemented a Kaizen to improve operational efficiency and streamline operations. This Kaizen heavily impacted segment operating income, reducing it by approximately $1.1 million. These were needed actions to improve the long-term profitability of the region. Absent the Kaizen related expenses, operating income margin improved 20 basis points year-over-year.

Lastly, in Asia-Pacific the revenue line started to shows signs of improvement versus the first quarter, clearly supported by macroeconomic growth in a region that is now facing more closely developed work.

Our tight credit controls and profitable sales focus make our sales growth more selective and typically require a longer selling cycle. Here too we're convinced that the new regional structure with heightened regional oversight and support will lead to improved performance as the best practices of the other regions are more rigorously translated and implemented here. We're investing heavily in the region, upgrading positions and adding new positions where it makes business sense. These investments in talent are coming at the short-term costs, and we are confident that we will generate long-term improvement in both growth and profitability.

We have already begun to see progress in the second quarter as a result of these actions. With clear signs of volume trend reversal on the business front, profitable new business closures are gaining momentum. This gives us confidence for the remainder of the year.

Now analyzing the operating income data of Asia-Pacific, it is worth noting that the second quarter of 2004 and 2005 include the results of our Japanese business prior to the formation of the joint venture with Sekisui. In the second quarter of 2004, our Japanese operation contributed net revenue of $11.1 million and operating income of $1.2 million. In the second quarter of 2005, it contributed $4.1 million in net revenue and $220,000 of operating income. The Japanese joint venture was entered into April 1, 2005, which was one month into the second quarter.

With that overview, I will now turn it over to Jim for a more detailed review of the consolidated financials.

Thanks, Michele, and good morning. The second-quarter consolidated net revenue was $373.5 million, up 0.5% over the second quarter of last year. The impact of acquisitions and divestitures, as well as foreign currency translation, favorably contributed 4.5 and 2.4 percentage points respectively to net revenue growth. Higher average selling prices contributed 2.5 percentage points, and volume declines reduced growth by 8.9 percentage points year-over-year. Gross profit was $108.1 million for the quarter compared to $107.5 million in the second quarter of 2006. Gross margin percentage for the second quarter was 29%, up 10 basis points over last year's second-quarter gross margin percentage of 28.9%. Favorable mix shift, coupled with our profitable pricing processes, lead to the improved results.

SG&A expense was $70.9 million versus last year's second quarter of $76.3 million. As a percentage of net revenue, SG&A expense was down 150 basis points from 20.5% in last year's second quarter to 19% this year. Productivity gains from Lean Six Sigma and thorough cost controls resulted in significantly reduced expense year-over-year.

Operating income for the second quarter was $37.2 million versus $31.2 million in last year's second quarter. Correspondingly operating margin improved by 160 basis points from 8.4% in last year's second quarter to 10% in this year's second quarter. The effective tax rate for the quarter was 29% compared to 29.6% in last year's second quarter and 29% in the first quarter of 2007. We continued to expect an effective tax rate of 29% for the year. Earnings from equity investments increased to $2.3 million from $1 million in the second quarter of last year. The Adhesives joint venture in Japan and the international automotive joint venture improved over prior year.

For the second quarter of 2007, net income from continuing operations increased from $18.7 million in the prior year to $27.3 million. This resulted in diluted earnings from continuing operations of $0.44 per share compared to last year's second quarter of $0.31 per share.

Before discussing the balance sheet, I would like to remind everyone that the following figures are subject to minor changes prior to filing the 10-Q.

Cash at the end of the quarter totaled $201 million, up $79.4 million year-over-year and $29.6 million versus last quarter. The strong free cash flow generation of the business drove a sequential improvement and together with last year's divestiture of the powder coatings business drove the improvement year-over-year.

Total debt at the end of the second quarter was $171.7 million compared to $318.2 million at the end of the second quarter of 2006 and $197.2 million at the end of last quarter. During the quarter we repaid $20 million of private placement debt that bore interest at a 6.6% fixed rate.

Networking capital defined as the net amount of trade accounts receivable, inventory and trade accounts payable amounted to $195.5 million. As a percentage of annualized net revenue, networking capital was 13.1% for the quarter. This represents a decline of 240 basis points from last year's second quarter. The improvement was the result of business ownership and commitment across all four regions.

Capital expenditures for the second quarter were $4.3 million, up $400,000 versus last year's second quarter spend of $3.9 million. For 2007 we are reducing the expected range to 20 to $30 million based on year-to-date spend.

Depreciation expense in the second quarter was $9.3 million, down $600,000 from the prior year's level. Amortization expense was $3.1 million in this year's second quarter, up $800,000 year-over-year. For 2007 we continued to expect depreciation expense to be between 35 and $40 million, but now anticipate amortization expense of between 14 and $15 million. The increased expectation for amortization expense is due solely to the $1.7 million accelerated amortization that we incurred last quarter for the discontinued Roanoke productline.

Lastly, free cash flow for the quarter increased $14.3 million to $49.1 million from $34.8 million in last year's second quarter. The components for the second quarter were as follows. Cash provided by operating activities was $57.3 million. Dividends paid were $3.9 million, and capital expenditures were $4.3 million.

I will now turn it back to Michele for some brief closing comments.

Thank you, Jim. As we look ahead, we continue to be optimistic despite the continued challenging environment in North America and recent supply chain constraints. We are confident that we will be able to deliver earnings per share for 2007 at the high-end of the previously announced range of $1.65 to $1.75.

Additionally we expect the topline reversal in organic sales to happen in the fourth quarter and to return to positive organic sales growth in fiscal year 2008.

Regarding our long-term goals, as we discussed on the last conference call, we are in the process of renewing each metric to determine what modifications are necessary. Our objective is to be much more deliberate, much more specific and to provide timelines for each.

Additionally we are evaluating adding certain metrics to the mix that are missing from the list today. The objective is not to have more goals necessarily, but to have a set of goals that are more accurately aligned with the returns to shareholders. We will be unveiling our new long-term goals and how they align with our strategy at an Analyst Day event this fall here in St. Paul.

Before I close, allow me to recap some of the accomplishments of the quarter. We continued the acceleration in performance. Earnings per share exceeded the consensus estimate. Net income grew more than 45% year-over-year. We reduced SG&A expense as a percentage of sales by 150 basis points. We expanded operating margin to 10%. We further improved our working capital position, and we grew free cash flow. We are very happy with another great quarter, and this gives us confidence as we enter the second half of the year to continue the journey we embarked on nearly three years ago.

Thank you for your confidence and long-term support, and I would like now to open up the call for your questions.

(OPERATOR INSTRUCTIONS). Steve Schwartz, First Analysis.

I guess the first question I have regards price increases. It looks like they are starting to taper off. What is your outlook for the second half of '07?

And then secondly, I would like to get an idea of where those price increases over the past couple of quarters have been coming from. Have they been coming more from your specialty products or the commodity items?

Thank you. Well, I would say that we continue to increase selling prices year-over-year in a very tough environment. Clearly the challenges that we have in North America in construction automotive is not easy. Still we were able to continue to increase because it is part of our process.

Also, as far as raw materials as you heard me saying before, yes, on aggregate we are flat, but there is a lot of variance around that. Also, part of our process following Lean Six Sigma discipline, we are everyday reviewing our pricing with the cost to serve. So that is not necessarily assigned to commodity versus specialty, but is really decided at the account level.

Okay. So, in other words, you expect price increase contributions to continue in the second half and that it is coming across both what you would call commodity and specialty?

Well, that (multiple speakers) is by design part of our strategy. Only certain components of our price moves are related to raw materials. Clearly you have always to keep into consideration what is the competitive environment and what the market can bear.

Okay. And then my second question relates to equity investments. It looks like you gained maybe $0.02 a share off the improvement year-over-year. I know some of that investment is in automotive. Can you tell us more about that?

Because obviously your North American venture is hurting right now. So what is behind that automotive?

And then if you could tie that in, you said in your comments that the North American automakers are losing share to the internationals that have moved in. How come you're not able to capture that even though you have this joint venture with some of the international automotive manufacturers?

This is Jim McCreary. I will start with the first part of your question. So the equity investments, they really come from two joint ventures. They come from both the automotive joint venture that you mentioned, which includes the activities in Europe and in Asia, and they also -- the results also come from our joint venture in Japan. So if you look at those numbers, we roughly have of the $2.3 million, roughly 1.8 is coming from the automotive group and roughly $400,000 from the Japan joint venture.

So the majority of that improvement is also coming out of the automotive area in Europe, but we're also seeing nice improvements in Japan as well in terms of the year-over-year performance. Let me turn it back to Michele to talk a little bit about the automotive group in Europe versus North America.

Yes and clearly in that automotive joint venture, we lead as H.B. Fuller on the North American front, while our colleagues of [ANT] lead on the Asia-Pacific and North American -- and the European front.

With that said, I think that [ANT's] team has been doing a fantastic job over the years. We are very grateful for their contributions. Clearly, as far as the Japanese manufacturers are concerned, we're doing a very good business here in North America. Still that is not able to offset some of the hurdles that the big three North American manufacturers have here in the territory that we manage.

Please bear in mind as well that the joint venture we have with Sekisui in Japan is not including automotive components. So all of that is done through the [ANT's] joint venture.

So to recap, we're doing a good job. We're happy about it in North America with the Japanese manufacturers, and it is helping us. Clearly the situation in the North American markets this year with the big three's does not help in that environment.

James Sheehan, Deutsche Bank.

My question is about your expectation for the volumes to start accelerating in Q4 and in 2008. Could you give us a little more color about what regions or what end markets you expect to drive this improvement?

Well, I have to say that so far already in the second quarter we saw some beginning of trend reversal in the busy spot in North America and in Asia-Pacific. Clearly we expect those to continue to accelerate, but overall as a mix take into account that Roanoke in North America became in the second quarter part of the base business and is down year-over-year. So that is really not yet in contributing to that trend reversal.

But, as we stated, we're very happy that volume declines eased in the second quarter, despite the challenges in North America. We did not have on aggregate yet our trend reversal, but we are confident that it will happen in the fourth quarter because we already see signs of that already happening, and we see signs of the signs of new business pipeline, longer cycle, clearly more profitable starting to come in.

So the trend is starting to happen, but as we said and we reiterated, we expect that reversal to be an overall H.B. Fuller reversal in the fourth quarter and becoming positive organic growth in 2008.

Thank you. And also on the M&A front, you have been talking about ramping up the M&A. You're investigating a lot of opportunities there, and you have hired this new Chief Strategy Officer to assist you with that I take it.

Given that the Roanoke synergies have fallen short of expectations, do you foresee integrating Roanoke before you embark on acquisitions? Also, could you in the area of -- also could you tell us what types of businesses do you have adjacent strategies in mind? Or what areas of H.B. Fuller do you want to bulk up?

Well, first of all, Roanoke is not delivering on the synergies for now. But, as I said already in the previous quarters, we're committed to deliver on those synergies, and that is I think a very clear statement. We inherited some problems, but we're committed to fix them and turn around like we have turned around the other issues we had in the past.

The acquisitions activity does not depend on Roanoke. It is not a franchise. We have enough manpower, brainpower, cash power and process discipline to do things not sequentially.

So we have a team that is very focused and is doing the right things to turn around Roanoke. At the same time, we have another team which includes me as well that is engaged in mergers, acquisitions and divestitures and other additives relooking at the portfolio continuously from a strategic perspective. And yes, you are totally right that the new Chief Strategy Officer over time we need to allow him to get onboard will be a key contributor to this more strategic M&A approach. And part of that strategic M&A approach will be also your third leg of the question, which is on what adjacencies.

We do not want to become a drugstore. We do not want to get into the risks of conglomerates without common threads around their portfolio, but we're actively investigating and analyzing, and that will accelerate with CSO what is the common thread where we can build adjacencies around. That does not at all exclude continuing to optimize the core and continuing to expand the core.

Jeff Zekauskas, JPMorgan.

A few questions. The first is that for the first half, your gross profits are about flat year-over-year. And all of the gains are coming from the SG&A line, which you have reduced dramatically. In this quarter, on a pro forma basis, it's down about $5 million. And that does not even account for the inflation that you would normally have because of your employee costs.

So if you could talk about in a little bit more depth how you are achieving these very, very sharp decreases in SG&A, that would be helpful. But what are you going to do for 2008 when you run out of reducing SG&A? Because you have not really been able to get your gross profit line moving yet. That is the first question.

Well, let me start answering the first question, Jeff. Thank you very much. Well, SG&A is clearly a result of Lean Six Sigma. I don't want to be generic or repeat it over and over again, but it is truly the fact.

You remember when we were discussing for Europe in previous years that it was not performing. Well, we used the Kaizen approach. We turned it around. Really looking strategically at the organization strategy of what do we need, how do we eliminate waste from the organization? How can we become more nimble. The same we did with the automotive business. Fine, it is not strategic, but meanwhile we fixed it, and we used exactly the same processes.

At the same time, we did that also with Latin America and it delivered. Now the key question that I always gets asked is, what else is left? How much more upside? And I think that if we go back to the basis of Lean Six Sigma and the Kaizen methodology, it speaks of continuous improvement.

Everyday if you have a good team, which is what we have, and you have the right process discipline, you identify new things that you can do. And a lot of this is not just tactical or operational. It is also strategic in nature when you address your product lines. When you address your customers and you start looking at how high is the cost to serve, the strategic component kicks in.

So going on 2008, clearly we will have the favorable component that we don't have yet today of organic sales growth. With not only very, very good cost controls to make sure that the SG&A does not get out of control, that there is the right amount of money to invest in the strategic actions that we are, by the way, already taking. But actually we continued to look for opportunities, strategic ways to further reduce SG&A. And I believe that the new organizational structure -- if you remember, Jeff, we said that when we announced the organization and we were already grasping some of the benefits, is allowing us by breaking down the silence between probabilities and Full-Valu not only to be much more aggressive and coordinated on the topline developments, but also making sure that we optimize efficiencies. That is putting the things together.

At the same time, remember that by putting the things together, we also have the opportunity to display some of the best practices that Global Adhesives developed, and not only pricing but also on cost control to the Full-Valu/Specialty and to the corporate world, which is what we are doing.

Thank you. That is helpful. And the second question I guess has two parts. It relates more to some of the cost issues you have got. Interest expense was $3.2 million, which I think comes out to about an effective rate of 9% on the debt you have got. So I don't understand why interest expense is as high as it is.

And second, can you just give us an idea of how bad Roanoke is? I think the pro forma sales originally were $80 million. If you sort of look at the business now, what is the size of it, and what has happened to some of your big box relationships, and how do you expect to repair it?

Jeff, let me start. On the interest expense, you have to keep in mind when we paid off that $25 million on the private placement. That was done at the very end of the quarter, so that was done on June 2. That is skewing your interest expense calculation.

So, in other words, your effective debt for the quarter was something like 192?

If you look at the average, it is in that range. I don't have that specific average in front of me. But, as we said, the private placement debt is in the 6.6% range, and we have a term -- and we have a $12 million piece of that that is in the 8.7% range, and the term loan is LIBOR plus 62.5 bips.

Okay. That is helpful. And Roanoke?

Let me turn it back to Michele to comment on Roanoke.

Well, from a Roanoke perspective, clearly year-over-year sales are down on the double digits. And, as we said already in the previous quarter, Jeff, part of it is the contractual market. Part of it were our own issues. That is why we had to depreciate some product lines.

But moving forward and the reason why we're committed and we're saying we're going to fix this, it is not that we're trying to fix it. We are going to fix it. It is we are engaging in very good dialogue with the big box retailers and making sure that if they have issues of their own, we actually position ourselves as innovators, problem solvers, bringing in solutions, and I am optimistic that the team based on what I see and the new approach is going to be able not only to turn around the topline of that business but also to develop the relationships with these guys, the big box retailers at a different level, which is more on innovation and in helping them sell more and sell more effectively and sell more profitable products.

Okay. That is helpful. Are you going to stop the share creep that you have got?

You are referring to Roanoke?

Forgive me. It is a different subject. Your average shares outstanding keeps inching up. Are you going to stop that, or are you just going to let it rise up your funds devoted to acquisitions?

As I said before Jeff, there are several options on the table right now from a capital structure standpoint. We are aware of the these opportunities. We are actively investigating all of them. We know all of them. There are five or six, and it is clear that a decision needs to be taken because we understand that behind every opportunity there is a threat.

At the end, we're going to make a decision that is basically focused on creating shareholder value. We have that very, very clear in mind, and we all know which are they options, and I can tell you I am analyzing each one of them. There is nothing that is off the table. I think we have not really addressed that enough in the past. We were just banking only on acquisitions, and I think that is just one of the options.

So when will we find out about the results of your deliberations?

Stay tuned.

Christopher Butler, Sidoti & Co.

The first question is related to the acquisition market. Can you give us an idea of what you're looking at in valuations? What is out there maybe specific geographies that are more appealing understanding that private equity seems to be driving a lot of valuations up nowadays?

Well, in terms of creating future shareholder value, let me start from the end of your question. We're looking at acquisitions where are we are really very, very comfortable that we can generate synergies. And from that perspective, clearly we have an advantage compared to several of our competitors based on what we have been able to prove as far as execution capability and process discipline, and we have an advantage versus private equity in terms of really generating that value and being able to commit to it and deliver on it.

So clearly, at the same time, we want to avoid overpaying because at the end it has to be accretive to our shareholders and it has to be highly accretive to our shareholders to generate the value.

So, from a geography perspective, really the best opportunity is if we're looking at the best of the best is things that are more global in scope because by definition the synergies would be global. So from that perspective, we are engaged in several opportunities. The market I think in the recent past was really a bit out of control from a priced and multiple standpoint. But I think that that is going to go slow down a bit. I think that everyone is accountable to his own shareholders and needs to deliver long-term value.

So we have seen lots of acquisitions bought very, very high, and I'm really curious to see what are the returns when some of these things are sold back into the market. From our perspective, we want to make sure that we buy at the right price, that we have a total strategy we delivered to that and we get all of the synergies.

And my next question is going back to some of your comments on the operating environment in demand. You had said that you are not necessarily looking for a rebound from the residential construction market here in fiscal '07. But, at the same time, you were talking about organic sales growth for 2008. I'm just wondering what your assumptions are as far as the housing market and whether or not you're looking for any softness to leak into fiscal '08 from that standpoint?

Well, clearly construction market -- if you remember, Chris -- we started already in the fourth quarter saying that it was bad and that we saw it even possibly getting worse at a time when people were saying that it was bottoming down. And actually today I have to tell you that not only is it not getting better, but it has the potential of getting even worse. Several factors are putting together, so that is why our team is focused on the controllables because we have got to deliver on the guidance no matter what the market does, staying focused on the controllables.

At the same time, when we're speaking of trend reversal in Q4, because clearly we have more controllables there but not in Q3, there is no summer vacation. There are hopefully no supply chain distractions out there happening right now. We believe in doing -- in closing some of the business that we had started a long time ago, which is very difficult but a long cycle. Some of this is share but is shared in an innovative way, new products, new applications, different approach. And some of it is really creating a new market where we are really developing new applications.

You know that is not a quick share shift where you get something from your competitor at a low price per pound and you run the risk of losing it again immediately after. So yes, there is some share, but it is share not based on price, and there's a lot of development on new products and new applications.

Rosemarie Morbelli, Ingalls & Snyder.

Just as a follow-up on this last question regarding the organic growth in the fourth quarter considering that you're not expecting any improvement and worth yet some decline in the environment you are operating in, could -- is it also in addition to what you talked about, new applications for example and closing some accounts? Could it also be because last year in the fourth quarter volume was down 14.3% and, therefore, helping you in this fourth quarter is the fact that the comparison will be easier, or do you actually have real growth coming?

Well, I think the combination of the two. For sure we have easier erosion comparables, and that is helping that. But the thing that I really looked the most at is the true growth, is how the pipeline day after day is developing. How are we closing? Are we closing in the timeframe that we said, and are we closing at the margins that we said? And are we getting the long-term commitments of the customers that we said? And it is based on that that I'm banking my confidence on.

Okay. Still on the subject, you also mentioned developing new markets, which obviously take a longer time. Could you give us a better feel of what those new markets you're entering are?

Well, in terms of new markets, we are speaking both geographies and we are speaking applications. And geographies I think we have not yet done what we should have done in areas of Middle East, Eastern Europe, India, China. Those are clearly areas where we are already producing efforts that are starting to deliver outcomes.

From an application perspective, we are more and more trying to go into our solutions and a total cost of ownership approach with customers, trying to bring them to technology shift. When you move, for instance, from water-based to reactive (inaudible), those are clearly areas where there's a longer sales cycle but it is much more profitable. And clearly it requires a different approach with customers. There is much more intimacy there, and you're trying to make them become the winners of the future in their our markets.

So that is our effort, and that is where some of the results are coming specifically when we're speaking before as far as some areas of the world showing already volume declines easing or starting to reverse.

Okay. On the automotive side, you talked about selling products to the Japanese automakers in Japan. How much business are you doing with the transplants in North America?

Well, I would say that --

Or were you including that in there?

Well, there is already since awhile a relationship with the Japanese players that you know that they are very long-term oriented, very focused on quality and very focused on relationships, and we're really happy at how that is developing. That is not new news. It has been there for a while. I would not get into the specifics of how much we're doing also for competitive reasons. I hope you understand that.

No, I understand, but the bottom line is that you're selling to the Japanese both in Japan and at the transplant locations in North America? (multiple speakers)

Yes, our colleagues in Japan are selling in Asia to the Japanese, and we are selling to the Japanese manufacturers in North America.

Okay. Thanks. That is helpful. If we could talk a little bit on the force majeure from Celanese. You are, if I understood, probably going to be able to have enough for materials for you to serve all of your customers and so on. Is that going to be at an additional cost? Would that hit the gross margin in the next two quarters?

We are still evaluating that. What I can tell you is things are in motion. I'm comfortable with the way of securing volume that we have gone at. I have already seen commitments. I think we have made sure that our customer relationships remain solid, and we did not get anybody nervous. And we have leveraged what we believe is a structural competitive advantage, which is our global footprint. And that is clearly helping us I think much more than several of the local and regional players throughout the world.

Well, that still does not address whether it is going to cost you more -- I mean it is great that you will be able to supply all of your customers. (multiple speakers) -- but is your cost going up because of that? And if it is, will you be able to get that passed through to the customers?

Well, as I said in my script, we do not expect a negative impact neither from a volume nor from a price and gross margin standpoint out of this. So that makes me confident, and that is why we have actually given a clear indication of the guidance for the rest of the year, which includes both the volume and the price developments related to the Celanese supply chain constraints.

Okay. And then lastly, if I may, you have lowered your expectations in terms of CapEx since your previous estimate. Are you eliminating some projects? If yes, which ones? Or is it a question of timing?

It is more of a question of timing. We are not saying that over the long-term we're going to reduce the CapEx. What is clear is we have clearly a very strong process that is very, very selective and is continuously reviewing this CapEx, and some make it, and some don't make it unless there is a very strong payback, and there is a strategic rationale behind.

So I think part of Lean Six Sigma we have become much more disciplined in that sense, and that is why so far for this year we're reducing the CapEx. We have not discussed yet about 2008.

Anyhow CapEx there is a part which is maintenance CapEx and that has to follow some of the logic of the (inaudible) business, some is strategic, and clearly we're reviewing that in line with the strategy.

What is the level of maintenance CapEx?

I don't have right now that number. Why don't we follow-up with that.

Yes, we can follow-up with you on that.

At this time we have reached the allotted time for questions. Mr. Brazones, are there any closing remarks?

Thank you. We would like to thank everybody for joining us today. Have a good day.

Thank you. This concludes today's conference call. You may now disconnect.