奇異 (GE) 2005 Q1 法說會逐字稿

Good morning ladies and gentlemen, thank you for standing by. Welcome to the ZENON first quarter earnings result conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference please press star zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded on Tuesday, May 10, 2005 at 9:00 a.m. eastern time. I will now turn it over to Andrew Benedek, Chairman and Chief Executive Officer. Please go ahead, sir.

Good morning everybody, thanks for tuning in. The results of the quarter will be covered by John Barker and operating issues by Rafael Simon as usual. I -- I will simply start the discussion by telling you about things that I'm particularly proud of this quarter. We are -- we are very happy with the progress we are making globally in new markets. I guess you-all know about the Chinese sea water one, but we have many other orders in China. We have many orders, new orders in Europe and different parts of Europe, eastern Europe and the middle east, and overall the company is progressing well in virtually all regions.

As far as the Stevie Award it's nice to be considered number one in the world among middle size companies. We were very pleased to get that. And last but not least, we announced yesterday, perhaps what we consider most significant long term, is a major battle was won in the progress toward an injunction against people who are not respecting our patents. With these few words I will pass it on to John Barker who will summarize the results for the quarter.

Thank you, Andrew. As you can see from our first quarter results in the press release our results were not as strong this year as last year. I think the key area to look at is our revenues and we're below our growth rate compared to 2004, but I'd like to point out, 2004 was an exceptional year for us in the first quarter. We had an actual 41% growth rate over 2003 in our 2004 revenue. Revenues impacted by our percentage completion model for recognizing revenue, I'd just like to talk very briefly about that so people understand it.

Really the key to understanding our financial statements is the percentage of completion accounting. Revenue is based on the progress of an order which is right from the design of the order to the installation, and includes all the work that's done on the order from engineering at the beginning, to membrane manufacturing, to third party part purses purchases, to shipment to installation. And depending on the order cycle we can have fluctuations on the valuation of that revenue and the recognition of the revenue in that cycle. When we see our orders getting larger this can give us some lumpiness in the revenue and I believe that's what happened this quarter.

We just saw a lumpiness based on the mix of the orders going through the process. We do have some recognition criteria that we rely on and that restricts us from just arbitrarily taking revenue at any given time, it has to be based on specific criteria. I hope that helps explain for the shareholders the -- how revenue can sometimes be very favorable and sometimes less favorable depending on the order cycle we face in the quarter.

If we look at gross profit, gross profit was 42.5% in the quarter compared to 40.4% last year as a percent of revenue, that was a very strong quarter. We traditionally have stronger percentages in the first half of the year and specifically in the first quarter. So that is comparable to previous years, probably slightly high, and again relates a bit to the blend of the orders going through the process, whether it be membrane, manufacturing, engineering or third party components. Third party components always keep a lower percentage of gross profit and we usually see that in the third and fourth quarter.

SG&A, selling, general and administration, I'd just like to point out in that number we did have 1.1 million of legal costs relating to our two lawsuits. If you look at the selling, SG&A outside of that number, if we took the number out, we had about 20% SG&A growth over the first quarter 2004 and that's very comparable to the year-over-year we had in 2004 compared to 2003 of 19%. I think as we move forward and we look at our backlog, which is at 315 thousand, or 315 million in the year, we can see that our trend should -- will be, to fall back to our historical growth trends and if we have historical growth trends in revenue and can maintain SG&A at 19% growth, that's management's target areas.

Operating income, because of the low revenue, came in at 2 million compared to 4 million last year. Again, that impacted net income and earnings per share which were at $0.05 a share compared to $0.12. In going over to the balance sheet and the consolidated statement of cash flows, the major impact was working capital, we did utilize cash and marketable securities in the quarter to approximately -- almost $25 million. The major impact of that was in our working capital and there was approximately $17 million that we utilized from accounts payable and customer advances.

This again relates to our percentage completion accounting and to the lower revenue in the quarter compared to the fourth quarter of 2004 revenue. I do see that coming back and improving over the balance of the year as our revenue grows.

Thank you, John. Rafael?

On the operation side we are continuing to ramp up our membrane production capacity. Our recent expansion is now complete in Hungary and we're in the processes of ramping up in Canada. These expansions are following our general policy of building new membrane manufacturing equipment on a just in time basis to be able to provide the appropriate production to meet our needs and our backlog, and we believe we're still in a good position now, given our increasing backlog to have our expansion come on line just in time, so we can produce all of those required membranes that are required over the next several years.

Also like to report on our integration of the acquisition of Alpha Plan, which was our largest acquisition in our history, is going very well. The teams are all working well together between our research teams in Canada, Hungary and now Germany, and there are currently have established five major new research initiatives which will take us to the next generation both in terms of cost reduction of our existing manufacturing lines as well as expanding our product line further.

Thank you very much Rafael. We're standing by for your questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question please press the star followed by the one on your touch tone phone. You will hear a tone acknowledging your request. Your questions will be pulled in the order they are received. Please insure you lift the hand set if you're using a speaker phone, before pressing any keys. One moment for your first question. Your first question comes from Bert Powell, from BMO Nesbitt Burns. Please go ahead with your question.

Thanks. John, just a quick right off the top, the -- when I calculate the backlog kind of new, you know, opening balance plus new orders less sales, I get a fair delta is that all FX?

No, a lot of that is the acquisition in the quarter and Alpha Plan coming in, which we didn't show as an increase in backlog. So the numbers don't tie in because of that.

So that's all related to Alpha?

Yes.

Okay. And the King County contract, I think you guys put a number out there, kind of 30 million. The PO is yet to be signed on that, I think you folks said yesterday that was expected, you know, some time in the not too distant future. Is any of that at this point been recognized in revenue either from engineering work or anything from that perspective?

Not recognized in revenue and not recognized in backlog.

Okay, so that'll show up in the backlog number for the next quarter.

Once we sign the purchase order.

Okay. And the value is $30 million?

Approximately.

Okay.

Just as a comment in our backlog, the only time we recognize any value in our backlog is when we have a signed purchase order.

Okay. And the backlog that we have right now, how much of that is going to be recognized over -- over the balance of 2005? Because we have got these larger contracts coming in now, you know, if you look at King County, you know, this is a, you know 2010 type project and my assumption is that the membrane components skewed more to the back end of that timing. So as these projects get larger I -- I'm wondering how much, you know, of the backlog that we're currently sitting with, is going to be recognized this year.

The situation, this is Andrew Benedek. The situation has shifted over time, you're absolutely right, but most of that shift has occurred in the past few years. This particular order is 2- 0, by the time it's finished and delivered it's 2007.

For our scope. The plant, it's true, won't start up for -- until later than that.

Yeah, so it's an unusually long cycle. The rest of our orders are typically two years or less. And as a guide, we've been fairly consistent in the last few years in terms of annual revenue being close to our starting backlog, if you look back. That might shift a little, but not much this year.

So Andrew, if I look at the backlog as it stands today versus the year ago and kind of look at the mix, you know, between how much is industrial and we're starting to get some salt water pretreatment, if you kind of scrub the data, what do the margins look like in the backlog that you've currently got versus a year ago? Are we better, are we worse, are competitive pressures still a factor here? I'm just trying to get some sense of, you know, or is it flat?

Pressure is a factor. I don't have the exact number, and this is an important question so John, do you have the exact number?

We don't have the exact number of the margin in our total margin in our backlog, but when we look sort of over the forecast we don't see any erosion in our margins, any great erosion in our margins.

Okay, so you think things will be fairly consistent?

Yes, you know, I think we're always faced with exchange differences. Those exchange differences so far we've been able to handle it so, with gains in productivity and cost savings. Typically we -- we do run in the 35 to 40% range in our margins, and I see that continuing, probably towards the lower end rather than the higher end.

Okay. And Andrew, yesterday you guys were pretty adamant about the 26% growth for sales for 2010 and the fact that that's probably a minimum now. Can you give us a sense of what you think the bookings growth is going to be this year? You booked 310 last year. Are we going to see bookings growth faster than sales? I certainly got that impression based on the call yesterday.

We've been consistently booking roughly our revenue growth and a bit more because of the delay -- the longer term on the project. So we'll, we'll, we'll continue to do that.

Okay. Thanks, I'll let somebody get on and ask a question.

No problem, thank you, Bert.

Your next question comes from John Chu from Research Capital, please go ahead with your question.

Hi, question regarding your future sales for Q2 and Q3 I guess. You're stating that Q1 was a tough year-over-year comp because Q1 last year had strong growth, but Q2 and Q3 had pretty strong impressive growth in 04 as well. Does that make that a tough year-over-year comp going forward?

The -- John, the situation is variable quarter by quarter. Last year for example we had a very strong beginning of the year and not as strong as normal and -- at the last, in the last quarter. It was a good quarter, but you always have the best quarter in the last quarter. This year based on what you've seen already it's looking like it's going to be more traditional pattern with building up to the last quarter.

Right.

What -- what I think is clear is that we don't have the backlog. We started the year with a very significant increase in the backlog. We're still maintaining that year-over-year increase in backlog and that will eventually translate into revenue and profit.

Okay. I'm going to just going to follow up on Bert's question on the backlog as well. Now, you're suggesting that municipal orders are representing a greater proportion of your backlog and the municipal orders typically have a longer sales cycle. Can you give us a sense of what percentage of the backlog, or what percentage of municipal orders the backlog represents now, and how it's kind of progressed versus 04 and maybe 03.

John, do you have that number?

Our backlog is probably 65% on municipal. But what John wants to know, how it has progressed, has it been -- Progress from previous years, I would -- I don't have an actual number but I would say it's probably right now 5 to 10%.

So we can assume that it's been going up over the last few years. Now, is that safe to assume too, that, the majority of these municipal orders are mainly from North America?

Yes.

Okay, so the fact that you've seen a -- a rise in your bookings in North America, we can assume that municipal orders is going to be a greater percentage of that goes forward as well?

Yes, at this point. I think the -- maybe Andrew wants to --

John, we, we -- the North American municipal market is ripening and there's continuous growth in it, in a sense that the battle is over in this continent. It is growing and it's growing at a fair clip.

Right.

But what we're now seeing is that the same growth can happen elsewhere and relatively you see it this year end that off -- non North American business will increase more significantly than North American.

Okay. I guess my main point was that I understand that the backlog, or your future sales is generally 100 % or 110% of your previous year end backlog. The number just seems to be going down over the last three years, so I just see a trend going there.

As a percentage -- yes, there's a small decrease over the last few years, but not very significant.

Right.

We'll analyze it.

But we should see it decline a bit more still?

It may.

I think if you look over the last two years, too, we were faced with the quasi recession in the U.S. and on capital spending in the industrial sector.

Right, right.

That's part of it.

Right, that's a good point too, actually.

Another comment I would make is, in our foreign markets that's -- that's more focused on industrial business.

Okay. And you stated that you saw orders activity is strong or bidding activity is strong overseas?

Yes.

Okay. And finally, just on the SG&A. Now the SG&A is actually increased year-over-year despite the fact that the sales were roughly flat. Can I assume that would -- attributed more to Asia and Europe expansion? Or is there something else?

I think the SG&A is has expanded year-over-year based on the growth that we had in the last three quarters of last year and the growth that we're -- we, we know we're going to have over the next three quarters. And our -- you know, the trouble we have as a growth company is always making sure we are in balance with our SG&A and that we have capacity to meet -- meet the market demands. We're never going to see flat SG&A as long as we see 26% revenue growth.

Right. Okay, great, thanks. I'll -- I'll get back in the queue.

Your next question comes from Sara Elford with Canaccord Capital, please go ahead with your question.

Good morning guys. A couple questions from me. I'm, I'm just curious for starters whether or not, I know relative to my expectations and I would presume relative to most expectations out there, there's been some disappointments on the revenue side and we've talked a bit about that, but I -- I'm curious as to whether or not the planning process internally is -- is this, I mean, has this been a surprise in terms of some of the lumpiness we have seen or is this entirely within your range of expectations? I guess what I'm getting at is we -- have we seen some delays as far as delivery time lines are concerned?

No dramatic ones, Sara.

Okay, so this is in line with expectations then. The second question is really a philosophical one, and maybe more of a strategic one. I've looked through the revamped website and I see obviously a lot more discussion in and around the water by the gallon strategy, a little discussion on project financing options and then, I guess what I'm curious here is, I mean, obviously this is the direction the industrial business is going, with GE and others coming into the market and maybe that trend was underway, you know, before their entry, but I guess what I want to know in -- in sort of the big picture sense is, you know presumably that strategy comes with partners on your side and maybe you can talk a little bit about that?

Then secondly, I guess, how -- how much are you moving into this area, I'm just trying to get a basic understanding about, you know, how much capital you would put in that business strategy, and then secondly the types of returns we should expect on that kind of investment. It's a change for you guys I guess, and I'm trying to get my mind wrapped around, you know, what that means as far as the future.

In simple terms, Sara, we are interested in being the leader in the membrane business as we are, and we want to make sure that our customers get our membranes, in which ever is the best way to get them the membranes. And in some markets that means simply selling membranes and there are other partners that do the rest. In other markets we sell systems, and in some markets like industrial, the customer wants the membranes, but he wants it packaged and he wants us to take responsibility.

So it is really market and customer driven, the best way to succeed with a particular customer driven strategy globally. It is not a significant fraction of our business currently and we don't expect it to be near term, but we like the idea of having some recurring business, like installing systems industrially. So when the customer wishes it that way we certainly don't go against that and we -- we've been doing it gradually.

And would there be partners involved in this on your part? I guess I look at the project financing side and really where I struggle is, you know, what kind of size plants are we talking about, are we talking about $30 million facilities in which you would retain ownership and those sorts of thoughts make me believe you'd have to have a partner.

To use our cash resources in a major way for this kind of thing. It it -- they're not 30 million, they tend to be smaller industrial plants that we've been involved in. At the moment we're -- we either work with a bank or we do it ourselves depending on size, but it's a minor portion of our financial resources.

So presumably you would then sort of test the waters and build from there based on your experience?

Correct. We're going at this very gradually, strictly by customer demand.

Okay, thank you.

You're welcome Sara, nice to talk to you.

Nice talking to you to.

Your next question comes from Don Beimmer (ph) with Gorey (ph) Capital, please go ahead with your question.

All right. Over the next three to five years what percent of your business do you expect to be deriving from Asia?

We're -- we certainly see a lot of growth potential and we've invested in the Asia Pacific region this year. Still a relatively humble way, but this is where most of our investment will go in the next two to three years. Over the longer term we believe that we'll wind up with something like a third, a third, a third, being a third in the Americas, a third in Europe, middle east and Africa and a third in Asia.

At the rate of building up to this is the question, I would think it will take us at least five years to approach this and maybe longer.

Thank you.

You're welcome.

Ladies and gentlemen, if there are any additional questions at this time please press the star followed by the one. As a reminder if you're using a speaker phone please lift the hand set before pressing the keys. One moment please for your next question. Your next question comes from Scott Kaplanis (ph) from Orion Securities, please go ahead with your question.

Hey guys, how you doing?

Hi, hi Scott.

Just a quick question here, I'm looking at your February 28 press release about acquiring the two German companies and it says it was scheduled to close at year end 2005. Just a quick accounting question, because it looks like, you know, you've already incorporated some of these transactions, especially Alpha, onto your balance sheet. What's left of the $10 million payment, or what's the timing for that with respect to incorporating the transactions on the balance sheet?

John?

The way the deal was structured we -- we've taken over control as of February 28, and because of that we are required to bring it into our consolidated results. Payment terms are out at the year end. There is a potential at year end, based on various performance criteria over this year, that there could be a slight increase in the payment.

Okay, so we see that -- we'll will see that 10 million euro payment possibly higher at the end of 05?

Yes.

Okay, great, thanks very much.

Your next question comes from Bert Powell from BMO, Nesbitt, Burns. Please go ahead with your question.

Thanks. Rafael, what's the -- where are you in terms of capacity utilization in your -- in your plants?

Capacity utilization right now is very high. This is the way that we -- we like to run as I stated before, so for this month it's going to be between 90 and 100%. And, based on our -- we have our forecast for our backlog, and we know we need to expand our capacity in the future and we're on track to do that so we'll have a step change in our capacity later on in this year, which will be sufficient to meet the orders for the second half of the year.

Okay. So with the step change, will you run at 90, 100 % for the second half of the year with the new capacity that's coming on stream?

We believe with the capacity expansion that we're doing now, we're going to be running at 100 % as soon as we can and continuing that for the rest of the year.

Okay, and then so what are the plant -- what are the plans then for 06, assuming, you know, the ramp rate continues?

We've got the -- both the expansions that we have done are somewhat flexible, certain of the manufacturing processes are done at higher capacities and they are able to increase capacities at both plans with additional expenditures, and we monitor this every month.

Okay. So you -- you don't think you're going to bump into your capacity head room at this point?

No. We, we -- there's almost not a single year in the last ten years where we haven't done some capacity expansion.

Okay. So what's the cap -- wha's the -- what's your Cap Ex budget then, for expansion in 05 and 06, given the backlog you know you have got to churn through?

We don't really go into the specific numbers, but in both -- in both of these years there's going to be substantial equipment expansions going on, but there are -- is -- there is not likely to be a major expansion such as building an entirely new manufacturing plant, which would be the biggest expenditure.

Okay, so this is all incremental stuff that you are going to bring on stream, okay. And Rafael, when we've talked in the past you talked about cutting costs out of your production, I think the number was kind of 5% a year. Is that still the target?

I'm not sure we gave a number of 5% per year. We think about our cost structure more in terms of the dollar per gallon that our customers look at. And, you know, we -- we actually target a higher than that reduction every year in our-- in our cost per gallon, and of course manufacturing is a, is a significant portion of that.

So when you reduce, when you cut the costs this is really kind of a market share gain issue where the costs that you take out sort of get passed along to the customers as the competitive conditions seem to be fairly intense?

Let me try to address that, Bert. Our strategy is not complicated. It's pretty much the same as any technology leader. We were fortunate to participate in opening up of the market. We've become the leader with our technology. And now we have to defend that as a market grows, because whenever there's a market competitors come into the marketplace. So we do it by basically three mechanisms. One is to continue to make sure the product is available, hence given what's happening in the market and the wider acceptance of the product we -- we're are expanding geographically.

Second, we have to make sure that our costs are the lowest cost base in the industry. So when people want to buy market share we feel, you know, they are going to hurt much more than we ever would. And that means you have to keep reducing your costs. And if you are fortunate enough, like we are, that we have the lion's share of the global market it means your manufacturing plants are the lowest cost base. So we have that and we are going to continue doing that and we have been very successfully doing this now. It's almost built into the corporate -- corporate way, the Zenon way. And lastly, we also you have to expect your competitors to honor your patents and license them or find a way around them, if they wish to enter the market and sometimes you have to stand up for your rights in this issue and we're doing that as well.

But this is almost what every technology leader does.

Fair enough, thank you.

You're welcome.

Your next question comes Lawrence Cafe (ph) from M Partners, please go ahead with your question.

Hi, just a question about the level of unbilled revenue. I guess the nature of the municipal business requires that you perform a great deal of work in advance of invoicing, but the number, you know, continues to be fairly high and represents a fairly large component of your change in networking capital. Do you see this as constraining your growth or leading to any problems over the next couple of years or do you think you will be able to manage your cash flow given the nature of the business?

There's no doubt our unbilled revenue will increase as you said with municipal orders and the back end payment structure they tend to have.

However I think we are always very, very conscious of looking at orders when we're -- when we're bidding to always strive to be as cash flow positive as we can. As far as restricting our growth, no, I don't see that as a problem. And I don't see the number truly growing dramatically. If you look at a combination of both our receivables and unbilled revenue our pattern hasn't changed dramatically over the past five years, we've seen some improvement, but typically we're -- it, it grows with the business.

Okay.

Another comment, as those of you who analyze our balance sheet know, we're financially very strong. We raised this past year a hundred million dollars. To be sure that financial issues do not limit our growth we see continuing tremendous growth opportunities. We are very careful with this money. We have only made one acquisition of size so far. We're making some small ones to fill in geographically. In this case we did it for more technology for reasons, this the bigger one. We are trying to maximize the existing plants, but we were and we are still planning to build a new plant.

We'll delay it as long as possible to make sure we follow what Rafael said which is just in time delivery, and marginal expansion is usually cheaper than building a brand new plant, but we are ready to do that as well should the speed of delivery requirements increase. So we -- we're strong going forward financially, both for acquisitions as we see fit and for building more capacity. And as well as for revenue recognition issues.

Okay. And another question. The basic cycle time that it takes to process a municipal order from start to finish, I guess the length of time could be a year to two years, is that just fixed in the nature of the business or could that cycle time be speeded up?

It is in the nature of the business. It's not -- we are never the one that -- I shouldn't say never, but I can't remember the last time we would have been limiting any project. It is usually the client or his contractor.

Okay. And, one last question. In the quarter there was 2.8 million invested in patents and product development. Can you give me the break out of what how much was patents and how much was product development?

Well, the majority was product development and it relates to our 33-1000 product.

Thank you.

Thank you.

Your next question comes from Anoop Prihar from GMP Securities , please go ahead with your question.

Yes, good morning. Can you just tell me what the next step is in the U.S. filter lawsuit in terms of timing?

Rafael?

Well, there's, there's activity going on on a, on a continual basis with the two suits. So in that sense there's always a bunch of activities. The next -- it's a little unclear right now what the next step will be, whether there'll be some interim step or they'll go to a jury trial, which will adjudicate on the issue of injunction.

And in the event it were to go straight to a jury trial what's your best guess right now as to when that might commence?

There is no trial date set right now, but just based on the -- the experience in dealing with the U.S. courts probably some time in 2006 would be my guess.

Okay, and on the enviro [inaudible], I believe when we had the fourth quarter call a couple months ago we indicated that that suit was essentially without any merit, but I also believe we were talking about potentially receiving some cost recoveries, I wonder if there's an update there?

No, no new action there, but we still have the same opinion on the case.

So is it reasonable to assume we are be incurring a million to $2 million in legals for the variance of the year, on a quarterly basis, John?

I don't think a $2 million level, but I would look at probably a million dollars.

And we are still coming in at 25% or better on an annual basis for GA?

That's our target, yes.

Inclusive of the legals, correct?

Yes.

Okay. Thank you.

Your next question comes from Avi Delfen from First Associates, please go ahead.

Okay. Can you quantify, with regards to this U.S. Filter suit can you quantify the damages you are seeking from U.S. Filter or explain how you will calculate the amounts you feel is owing to you.

The damages are determined by the court. What I can say is that there's two aspects to this. The first one is injunction, which is the appropriate remedy for patent infringement, going forward. Then the second one is damages for violations of the patent from the time of the filing of the suit, which is a calculation based on lost profits from jobs lost or other circumstances. It's over the years it adds up to a pretty, pretty significant number.

And what about those situations where U.S. Filter has delivered a system that's now in operation by a municipality, I mean, are we talking about where there'd be an amount owing to you specifically for that and would you -- how much leeway would you have in determining, if the court rules in your favor, how much leeway would you have in determining what is owed to you for that municipal system?

Again, you know, like any court case we present our view on, on damages and they present their view and some preliminary discussions in one of the court houses have happened on this issue and you basically wait and see what you get awarded. Obviously we want as much as possible, but there's different stages that different projects are at, that will probably result in different damages.

Could -- theoretically speaking could any of these projects be stopped?

Yeah, if you win an -- if you win an injunction then likely projects will be -- will be stopped. We can't say for sure, this is of course our business is very long project cycles, but this is our expectation that, you know, if we win an injunction we will push for the maximum amount of projects to be stopped.

Okay. Also, can you quantify the value of contracts where you have been selected but haven't yet received a purchase order, like King County ?

They're saying it's about a 150 million -- quarterly in the past, we used to actually put in a press release. It's still in that range, maybe a touch higher. To answer your question, we don't quantify it now for public release, but if it were dramatically to change we would.

Okay, thank you.

Thank you very much, Avi.

Your final question comes from John Chu from Research Capital, please go ahead with your question.

I just wanted to talk about the cash you have on your balance sheet. Now, I'm just trying to get a sense of where some of that money is being ear marked for, because you do have quite a bit there. I remember earlier you were talking about maybe having 25 million of that ear marked for Home Springs, has that actually been allocated yet?

I don't remember saying that, John.

I thought you were going to have 25% of the financing towards manufacturing for Home Springs products.

Oh, I see. There was some investment for Home Springs, correct, but I don't think it was 25%.

No. Is there going to be more going towards that product and what's the status of Home Springs right now? Especially with Maytag having continued problems.

We are -- we're in negotiations with Maytag to improve the marketing of the product both in Canada and the U.S. I'm having a meeting with them in a couple of weeks. They've taken action, they've set some strong people in this field, and we'll see how that goes now.

Can we assume that sales have been below expectation thus far?

Yes, very much so.

And just on the expansion plans, can you give us a sense, is it going to be Q3 or Q4 that we'll see the capacity additions?

Rafael?

At this -- it, it -- ramp up has, has begun. And it's going to -- you're going start seeing impacts right away and it's going to probably be fully up and running by Q3.

Okay. And can you give us a percentage of how much that is going to increase current capacity?

It's going to be enough to keep up with the revenue growth of the year. So it's pretty proportionate.

It's probably like 25%?

When you add in the different de-bottlenecking activity, it's hard to -- it's hard to answer the question because it's not like we have a single expansion that's going on where we're adding a single piece of equipment and it's expanding our capacity.

Of all -- we have different manufacturing lines for all of our different products and we're constantly improving the through put of the different lines and we're doing major expansions and we're doing partial expansions.

John, is not far off the mark though, with the 25% in the sense that our revenue normally grows around that number. Depending on the year we may have more or less membranes, so that would be the variation.

Right. And just one final question, can you just remind us what the sales cycle would be for municipal orders versus industrial drinking water?

Varies very much, John, by region of the world.

Right.

For example, up until we received this order for PIO (ph), the largest drinking water plant in Singapore, that order took about a year in Singapore from start to finish. The same order in north America of that scale would be between two and three years. So the industrial orders, the smaller ones are six months, the bigger ones can be a year, year plus, but not much longer. The, the other -- we have a bunch of other segments as you know, the marine, the land development business, those segments are also six months or under.

Okay. Great, perfect, thank you very much.

It varies by region and varies by type of business.

So I guess the north American ones are typically longer sales cycle versus --

The longest ones are the north American municipal orders, which as you pointed out earlier is an increasing -- a somewhat increasing portion of our business. I don't think it's -- overall this year I don't think it will be significantly different than last year percentage. It might even be slightly down this year because of the increase in overseas orders.

Okay, great, thank you very much.

You're most welcome, John. Ladies and gentlemen, thank you for tuning in and sharing with us the unfolding Zenon story. We are delighted to have you as shareholders and analysts. We appreciate very much, the attention you give us. And some of you may be a little disappointed in the numbers this quarter, we have been consistently performing year-over-year as expected. We believe we still will do that this year. And if you really look at the quarter and you add back the legal costs we're not very different from the previous year.

It's just that quarter by quarter we have variations. Overall, we go forward as a very strong company. We do have competitive pressures, particularly in the U.S., particularly with U.S. Filter.

But overall we're still balancing our margin as John said. We are going forward with enormous strength as a company, with a lot -- by far the largest market share. We believe that we have the lowest cost base as a result of that and the best people in the business. Thank you very much for tuning in.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating and please disconnect your lines.