Griffon Corp (GFF) 2006 Q1 法說會逐字稿

Welcome to the Griffon Corporation first-quarter 2006 earnings conference call. With us today we have Harvey Blau, Griffon Chairman and Chief Executive Officer, and Eric Edelstein, Executive Vice President and Chief Financial Officer.

At this time, all participants have been placed in a listen-only mode. After the remarks, there will be a question-and-answer session. (Operator Instructions). This call is being recorded. Your participation implies consent to our recording of this call. If you do not agree to these terms, please drop off the line.

I would now like to turn the floor over to Mr. Blau. Sir, you may begin your conference.

Good afternoon, and welcome to a financial overview of our first quarter of fiscal 2006 which ended on December 31, 2005. I am Harvey Blau, Chairman of the Board of Griffon. With me is Griffon's Executive Vice President, Eric Edelstein. I will discuss the results of the quarter and full year, and then Eric will answer questions with respect to operations and financial results.

I would first like to point out -- to the extent that matters to be discussed in this call include forward-looking statements, they involve certain risks uncertainties that could cause the Company's actual results to differ materially from those in the forward-looking statements.

Consolidated net sales for the quarter were 359 million, up from 340 million for the first quarter of fiscal 2005. Pretax income was 10.8 million compared to 17.6 million last year, and net income of 6.8 million for the quarter compared to 9.2 million resulting in diluted earnings per share of $0.22 compared to $0.29 last year. As we will discuss more fully, the reduced profitability is attributable to our Specialty Plastic Films segment.

Telephonics, our Electronic Information and Communication Systems segment, had sales in the quarter of 53 million compared to 46 million last year. Telephonics' operating income was 3.0 million compared to 2.5 million last year. Overall, Telephonics had a very solid quarter, continuing strong operating results, high order input, and contract awards that involve the company with key new programs.

The contract with Syracuse Research Corporation, SRC, is one of those programs. SRC is an independent, not-for-profit research and development leader focused on technology programs of national significance. Telephonics successfully delivered the initial systems in support of the subcontract award from Syracuse Research for turnkey production of an SRC product. Meeting the initial discovery of this aggressive efforts is a tribute to the effective collaboration between Telephonics and SRC. As a team, we are driven by a sincere desire to support our troops in the Mideast.

Telephonics has received contracts at this time in excess of $90 million. Under the structure of the joint cooperation agreement with SRC, Telephonics' total share of all production for the program could exceed $150 million.

Production for the MH60-R helicopter program with the United States Navy is ramping up in fiscal 2006. 4 million of sales increase in the first quarter is attributable to this contract. The remainder of the increase is primarily attributable to other radar programs. Our backlog at December 31st for Telephonics is an all-time high of $312 million.

Our building products operations continued its solid performance. Operating profits for our garage door segment reflected a significant improvement over the first quarter of last year, as steel cost increases that were not recovered in fiscal 2005 were recovered in the current quarter. Sales in garage doors for the quarter were 143 million compared to 136 million last year. Operating income was 13.6 million compared to the prior year first quarter [of] 10.6 million.

Garage door sales in the quarter increased approximately 5%, primarily as the result of some price increase and product mix. We did have a sales volume decline in the quarter through our retail sales channel. This was offset by [writing] increases through our professional dealer network.

With respect to steel prices, we did experience some increases in the first quarter of fiscal 2006, but not at the level experienced last year. Looking forward, we do not anticipate our usual volatility in steel costs for the remainder of fiscal 2006.

For the overall outlook for garage doors, we continue to be optimistic. The business environment remains positive. In fiscal 2006, we expect to achieve sourcing and supply chain efficiencies that will contribute to the bottom line. Also, the continuing shift in our product mix to more premium doors should also contribute to revenue and margin improvement. All of this points to a year of further improvement in our operating results for fiscal 2006.

Our service and installation operation had sales in the quarter of 82 million, an increase of 10 million over last year -- operating [loss] 2.8 million compared to 1.3 million last year. The increase in revenue and profitability are primarily attributed to outstanding results in our Las Vegas and Phoenix markets.

In Phoenix, we have achieved market share gains among national regional home builders. We are continuing to put heavy emphasis on the sale and installation of flooring and kitchen cabinet products, which have more revenue and profit potential. As these markets have been strong for an extended period of time, we do see heightened competition in the area.

In Specialty Plastic Films, sales for the quarter were 86 million compared to 91 million last year. We had an operating loss of 1.6 million compared to operating income of 8.6 million last year. Needless to say, we're very, very disappointed with these results.

The decrease in sales in the first quarter of $5 million was principally due to lower unit volume. Although we had a number of product areas that were up or down compared to the prior-year quarter, the overriding reason for the decline was a falloff in sales volume of infant diaper film to our primary customer. The [pending] in [declining] operating income was primarily caused by unprecedented increases in resin costs and the instant diaper volume decline.

Resin costs increased 60% from August until November 2005. For much of our business, these increases are passed on with a three- to five-month delay. Therefore, we were not able to pass on these increases during the quarter. This had an unfavorable impact on operating income of almost $4 million.

Resin prices did decline somewhat in December and January. We believe there will be additional declines through the remainder of fiscal 2006. Also, we have started passing the resin cost increases to our major customer in this quarter.

We believe our sales volume decline to our primary customer was caused by the diaper redesign, high levels of competitive pricing activity in the North American market, and adjustments in inventory levels. The impact of this decline on operating income was approximately $6 million.

As we move through fiscal 2006, we are optimistic about the volume increasing in the Plastic Films business. In January 2006, volume with our primary customer in North America has returned to normal levels. Also, this was the last quarter where the quarter-to-quarter comparison was impacted by the diaper redesign.

In addition, we are excited that our ongoing sales development activities have yielded very encouraging results. Our strategy is to diversify and grow our films business to new customers and into geographic regions with higher growth.

By the end of the first quarter, we successfully qualified new products and negotiated raw material supply agreements with several very large customers that will bring substantial volume into this business in the middle of 2006 and beyond. In fact, we are beginning the first significant shipments to one of these customers in February 2006.

Also, with the startup of our new production capacity in Brazil, we're seeing increased volumes in sales of new products into this region. In the first quarter, our volume in Brazil was up 48 percent versus the prior year.

Finally, in addition to this sales development success, additional growth is on the horizon with the introduction of a significant new product. In the coming year, we'll begin commercialization of our new Elastic Materials. These products, based upon a Clopay development of the late '90s and further development over the past two years, will become an important feature to performance and consumer appeal of future baby diaper products.

Production capacity is being installed in North America to produce initial commercial volumes of these products. Capacity expansion and sales growth in North America and Europe is expected over the next several years.

Operating cash flow from operations for the quarter was 4.7 million, and capital expenditures for the quarter were also 4.7. This amount is low compared to historical levels, and we would expect that by year-end, the capital expenditure levels will approximate the average of prior years.

Our balance sheet at December 31 remains strong, with working capital of 274 million and [total debt] representing 57% of capital. We continue to fund our common stock purchase programs using 10.3 million in the quarter to acquire 415,500 shares of stock.

At this time, we would like to take questions.

(Operator Instructions) Bob Labick, CJS Securities.

First question I wanted to ask -- could you expand a little bit on the $6 million you discussed as the shortfall related from -- I guess inventory from P&G on the -- they didn't take sales this quarter, because they were working on their inventory, or -- and volumes are back to normal in January. Could you just expand upon that? Because I think you also mentioned pricing and competition in that same light. Could you break those down and tell us what you were referring to in terms of the pricing and competition?

I will expand. First, what we said was that a part of 86 million is the diaper redesign. And very roughly stated, perhaps that's a third. And then the remaining two-thirds is a combination of our major customer's inventory adjustment, and competition they were facing in their markets. And we can't split the difference or split that out -- that two-thirds.

Just so I understand, the competition you've been referring to is from your customer, not from you --

Their competition.

Yes, not a different supplier with you --

Correct, their competition.

Okay, great. That's very helpful. And then just -- I guess staying with films, could give us a sense of the expected run rate by year end for your private-label business? Now that it seems to be ramping, that you would just discuss that, so --

Actually, we can't. I mean, I think that falls a little bit too much in the context of guidance. I will say as we've now said two consecutive quarters, that we are excited about it, that we have had meaningful discussions with private-label manufacturers, both Europe and the United States, and we do expect to generate revenue from it -- meaningful revenue. And as we achieve that revenue and report on it, we will talk about what those amounts are. But at this point, we can't really speculate on where that run rate will go.

The other thing I would say is that our goal continues to be to bring our equipment to full capacity utilization -- and we have talked in the past about the capacity that we added in Europe to be at least $50 million of capacity and similarly, in Brazil, 30 million.

That's very helpful. In terms of the resin impact of the 4 million in the quarter, [how else] could you just discuss pricing in the current quarter? Is it actually down, so you should recover some of that, or is it just flattened, or what are you expecting there?

As Harvey pointed out, the resin ran up for us -- and pretty much consistent in the market -- from August to November. We have all collectively experienced some declines -- release, that is, in December and January. But where it's going -- I remarked where our crystal ball says it will continue to go down, but it remains to be seen whether that's correct or not.

In this quarter, the way our lab works, we will now and have, in fact, started to pass some of that along to our customers. And we are now enjoying the benefit on our procurement side of the declines that I just mentioned. So the situation in this quarter at the moment is definitely better than it was last quarter.

Last quarter was a scenario -- how could this possibly hurt us the most relative to timing, and that's exactly what happened.

Got it. Okay, last question, I promise, and then I'll get in queue. Could you tell us -- it sounds like there was no or minimal revenue recognized in the Syracuse Research in the current quarter. Could you give us a rough idea what the timeframe is for the initial orders of $90 million? Is that expected to be over the next three months, six months, two years? Just give us some kind of timeframe for that.

We have some difficulty there, Bob. This work is highly classified, and we are following the very, very strict guidance to the letter that we've been given. What we can report on is as things happen, and that's why we said that shipments have started. You've drawn a conclusion, appropriate, that it can't be that significant, because the revenue didn't change that much. But we are telling you that over 90 million now is in a funded capacity, and that things are moving along well, and this does have a short-term purpose to it.

Marty Pollack, NWQ Investment Management.

Just if I may -- I'd like to ask a question -- it looks like some of our own channel checks suggest Procter has seen fairly strong growth in this quarter, and I'm just wondering whether you can confirm what you're saying is really talking about the actual channel itself. This is where you're seeing the shortfall, or you are actually hearing otherwise based on your understanding for what Procter is saying? Again, it seems to be somewhat clear to us.

Well, Marty, we can't specifically speak for Procter in terms of any increases decreases and the like. What we can say is that they've told us that in their markets for diapers, they've been experiencing strong competitive pressure. And when their order rate dropped off in this last quarter, they did explain to us that it's related to managing inventory. And beyond that, I guess I would simply just refer you to what they've put out in recent times about their own results.

Just with regard to the 6 million itself, that shortfall -- does some of that reflect also just a part of the underabsorption, or is there effectively -- I think you said $5 million lower sales year over year -- is that layered on top of that as additional negative impact on profitability? Was that part of that -- in fact, part of that 6 million?

That's a good observation, Marty. That is part of it. I mean, the volume is down, so we are underabsorbed. And that's all rolled into the 6 million.

And so in effect, the 6 million does reflect an underabsorption part of that.

Sure.

With regard to the trend in recovery, obviously things are better in the quarter. Can you give us a sense in terms of the quarterly progression of how that progress might be fully realized in terms of timing sort of recovering from this problem in the quarter?

Yes, I can give you some sense of that. If you look at some of the things that we've pointed to this afternoon that impacted us negatively in the first quarter, we've already noted a number of them have changed. We've started to pass through on the billings, the redesign comparison is no longer there. Harvey noted that North American volume has returned to normal levels.

The sales development activities -- we would hope the moment would build throughout the year. So I would anticipate the progression there being a bit better in the second quarter, and better than that in the third, and then in the fourth quarter.

This business, like all our business now, does involve a fairly long sales process -- on the short end, probably at least six to eight weeks, and on the longer end, it can take months before we produce the samples, before our prospective customers test it out, we run trials. But there a lot of activity. And we are optimistic we're going to be successful for our fair share, so I would think it would build as we went through the year.

Would you still experience with some of these startups as you -- ramping up these products in the earlier quarters, more margin compression because there may be more expenses associated with the earlier quarters than the later ones, so that -- my curiosity is do we get back to a 10%-plus margin anytime in the next few quarters?

I missed what you said in the very beginning, but I think I got the gist, so let me try it, and then you'll ask me to clarify if not.

The idea that bringing on new business is initially expensive is a correct one. And in fact, we had some very good success in this past quarter bringing new business on. And to think of it on a macro level, we've lost a certain amount of business from our major customer in the quarter. We replaced a portion of it with new business.

However, to book and execute on that new business, it was more expensive than it otherwise would have been because of the samples, trial runs, things like that. And so we'll have to be putting up with that as we move forward.

Having said that, really the key question -- we still are comfortable, as we have said in the past, that on a normal operating basis that this is a 10% operating margin business. I think you all know, a couple of years back, we achieved quite a bit more than that. And we have said that that theoretically and practically is doable in the future, but not as a normal goal. But the 10% certainly is.

(Operator Instructions) Shaun Nicholson, Kennedy Capital.

I just wanted to get clarification on the lay you guys have on the resin cost. You've mentioned three- to five-month delay. Is it more specific of a 90-day pass through? Can give a little more color on that?

Not too much, other than to say that it's fairly complicated. And we've traditionally talked about it just to keep it simple. But it tends to be between three months and five months -- 90 and 150 days.

Okay. So as resin costs come down in December and January, you're going to see that impact in February and March, late March?

As resin costs come down, relative to the fact that they're coming down, we see the impact immediately, because we're buying it cheaper, but still billing at a different amount. And on average, that decline we would pass along to our customers three to five months out -- and the flip side being the increases we incur, and we have to wait until we can actually bill them.

Theoretically, if the resin prices continue to go down, we should be neutral on the first quarter hit that has cost us for the price increases as we collect the higher prices while we're buying cheaper, going forward. That is the theoretical concept, and it really helped us last year, because that's somewhat what happened. It was only the huge spike of 67% in the September and November timeframe that really hit us hard.

Okay, that helps. Another question on the private-label business. You guys mentioned -- could that be bigger than the Procter & Gamble business when it gets all the equipment in place?

Well, the market is a very large market. Unlike in the United States, where there are two dominant players, in Europe, private-label as a group is significant. So over time, anything is possible. And I would anticipate that we'll continue to do significant amounts of business with our major customer. So therefore, in some respects, we have limited capacity.

But as I say, over time, anything is possible. We could be in a plan to add more capacity a year or two from now, which would result in it eventually being as large as our current business. We also have the possibility of selling high-end films and other applications, which we currently do do in the health care area and industrial applications.

Okay. And on the Telephonics side, I think you guys have stated this on the Syracuse -- you guys can't disclose what kind of margin business that is, right?

We have a real problem talking about anything to do with the Syracuse business, other than the fact that we have been awarded $90 million out of a potential $150 million program in the last couple of months. And we expect to see additional buys over the next couple of months so that there will be $150 million worth of awards. And we can't tell you when the shipments are going to be, because it's absolutely confidential. And we can't really discuss the [absolute] product itself, or - we don't want to be mysterious, but were under very tight reins.

I understand. Okay, well, the last question, on your stock buyback program -- what do you have left under your authorizations?

1.9 million. We just increased it to 2.5 million, and we bought back 600,000 shares.

[Rob Longnecker], Barrington.

(technical difficulty) so pardon me if there's a repetition. Can you guys give color on the kind of revenue amount that you guys got in the private-label business in Europe this quarter?

You'll have to -- did you ask about the revenues related to private-label?

Yes, from the (multiple speakers)

In the quarter that we completed, we do have some revenue private-label. It's a small amount. The prepared comments spoke of significant opportunities that we're working on.

We haven't quantified them. They will pan out over 30, 60, 90 days. I don't think it would be particularly helpful to say -- and I'm just using an example, this is not -- we're working on 80 million worth of opportunities -- because more importantly, are we going to land 20 million, are we going to land 40? How quickly is this going to come?

So I think we should be standing, and we are, by our statement that we're pleased with the level of activity. It's meaningful business with meaningful customers. And as we land it and generate the revenue, we'll report on it.

I think we also said that the fact is that the significant shipments will commence in February, or have started to commence now in February of 2006, so there was not a lot of the volume in the first quarter.

How would you characterize -- I mean, this has obviously been a big driver of kind of finding new revenue for you guys, and its been talked about a lot over the last, say, two calls or so. Would you say it's been more difficult than you anticipated to get new revenue in that segment?

It's just taken a little bit longer, because it took a little bit longer to get the machinery online to give us the capacity. Until you have capacity online that you can demonstrate to a customer that he's going to be able to get product, they're not interested in giving you an award. So for awhile there, we were just giving them samples and what have you until we got the capacity onstream. We now have the capacity onstream in Europe for a substantial amount of additional business. And as soon as we showed them the capacity, and they saw it, and they did a survey, they have awarded us some major programs which are commencing in February.

Okay. So I don't even remember how many calls ago this was, but there was a discussion of sort of getting still back to a $400 million run rate business -- and this is obviously a big piece of doing that. You still feel confident that you can get back to those levels?

Yes.

Yes.

Bob Labick, CJS Securities.

Harvey, I just wanted to ask if you could expand upon the new product opportunity that you discussed with your major customer in terms of the flexible film -- I guess timing, timing of CapEx, expected ROI -- whatever you can tell us would be very helpful.

You're talking about the new products that we're working on for our customers -- the elastic films?

Exactly.

Can I tell you that it's somewhere more secret than the military?

[LAUGHTER] Okay. Should --

And since they are on the line, we can't say a word.

Should we expect CapEx this year to -- how about you just tell us -- if you don't tell us what's related to the project, what's the expected CapEx for this year? Just remind us -- and it could have something to do with the new product, or it may have nothing to do with the new product?

Well, as we had said in the prepared remarks, we're expecting CapEx to ultimately reach the level it's reached the past year. So even though we are about 4 million for the quarter, we were at 40 last year -- especially high the year before, 50 or so. We think we should be in the 40 range. And what we have said in the past, and shown, actually, is that the greatest percentage of that has been for the Specialty Plastic Film segment. That will continue to be the case, although we do have some plans this year to spend a bit more in our Building Products segment.

Could you elaborate on that -- what in Building Products would you be expanding on?

Well, it actually relates in some respects to the remarks -- which, again, we made earlier. We're looking for some efficiencies to be gained in terms of supply chain procurement and the like. And so that involves redesigning plants and new equipment and things like that.

Jack Salzman, Kingspoint Partners.

Just to the beat to death the question on the resins one more time, is there -- since P&G is the largest consumer of your resins, do you have any escalation clauses, or are you just -- there are no direct pricing contacts between you and they? Because as I understand it, you have essentially captive plants, meaning you have produced plants for them, but apparently you don't have a pricing mechanism in place to pass costs on. Is that also true -- if resins come down -- I mean, if resin prices come down, there's no contract that forces you to share it with them as well?

Let me explain this. I think we have to make it clear. We definitely have a contractual relationship with our biggest customer with respect to resin price increases and decreases. And we do pass on to them the price increases.

The way it works is that for the first months -- whether it's three months, four months -- we eat the price increase. Starting in the third or fourth month, we then pass on all those price increases to them, notwithstanding that there's been a decrease in the price of resin. Ultimately, after we've gone through that phase, if resin prices should further decrease, then we have a mechanism where we would after three or four months pass off to them the reduced prices.

So it's that the first three or four months is not predicated on price; it's predicated on time?

Well, it's predicated on price that we're paying. And then if the price increases, the price went up, once that period is over, we then start in the next three- to four-month segment pass on those price increases to them. Theoretically, if prices go up for three months, then come down for three month, we should be even and have no price effect whatsoever. And then if the prices went further down for the next three month, we would pass on those increases in the next three months.

Robert Kirkpatrick, Cardinal Capital.

Just a technicality -- is there a difference in terms of steps between a contract being awarded something -- and then, I think, there was another term you used that was funded capacity? Or do those all refer to the same thing?

In the military, we only put into our backlog things that have been funded by the military -- not a promise. So therefore, you get a contract for $10 million, but the military has options to buy 100 million, some people may call it a $100 million contract. We call it a $10 million contract because that's our funded portion of it. And as it gets further funded, we increase our sales and our backlog. So right now, we have a $90 million funded program with Syracuse Research.

And therefore, there would be an option on another 60 million roughly?

Yes.

[Roger Spitz], Merrill Lynch.

Three questions. One is which specific resins are you buying for the plastics business?

LDPE, PPD, RP [and others].

Mostly natural-gas-related.

Right. So you said LDPE and then octene LLDPE? Those are the two main resins?

Yes.

Okay. And what's your approximate resin buy?

Do you mean amount, or are you talking about price?

Volume.

All right. I don't have --

I don't actually know that off the top of my head. We tend to talk about it in terms of procuring in North America and Europe and Brazil and --

It's a large number.

Okay. During the recent hurricanes, did you have problems sourcing resin where you cut back, or given the other things that were going on, that wasn't the problem?

No, we did not have a problem on sourcing. But it's generally believed that the producers used Katrina and other weather as a reason to justify their cost increases.

Sure. And lastly, you already talked about your marketshare at your customer. But did you lose any share to, say, Tredegar or Pliant at all?

To Tredegar or Pliant? Not that we know of.

Rob Norfleet, Davenport & Company.

Most of my questions have been answered -- just a few more. I know that we have guarantees associated with capital deployment relative to new projects that we undertake. But are there also some guarantees related to unit shipments or tonnage as it relates to the films and laminates business with our customers?

I'm not sure I understand that question. Are you talking about where we're guaranteed an amount of tonnage to sell?

Yes.

No, we do it in meters. We have a guarantee in meters.

Okay. Second, Harvey, you talked about basically some new products, but as well as new customers. And I just wanted to get a little more flavor on that. What kind of size are we talking about in terms of some of these new customers that we're bringing online? Clearly, there's been some discussion at other competitors, other than P&G, if you're looking to outsource business. I'm just curious what magnitude you would see this potential relationship as being?

Well, we think that the customer in Europe that we have signed on, which is going to be a long-term relationship, is going to be a very substantial amount of business. We can't really talk about it now because it's just starting out, and we've got to make sure that we deliver on time and good quality. And as that happens, we believe we're going to see a very large increase in volume from this Company, which is a very, very large company in Europe.

In Brazil, it a [varied] companies. You're talking about Johnson & Johnson and you're talking about Kimberly-Clark. And actually, we don't do much with P&G in Brazil at this time. But we're looking to provide them with film.

We have about $25 million of capacity available in our new facility, which really is not technically opening until March. But we've gotten about 30 million or plus business in there. And we have room to do about another 30 million. So we think those customers will be filling them up.

Great. And lastly, Eric, can you just discuss quickly tax rate for the year, any -- just in terms of run rate?

I think the rate we reflected in the quarter is pretty indicative of where we should be for the year. And I believe that was 37%.

[Jan Loeb], EnTrust.

Can you tell me -- the analysts who follow your Company for the full year have an estimate -- for your fiscal year of just shy of $2, which after today's call you don't seem to be coming off that amount. So can you tell me -- the $0.16 difference between what the estimates were for this quarter and to what you actually delivered on -- how would that $0.16 be divided over the next three quarters in your opinion?

That sounds like you're asking me for a prediction. It depends on if things work out in the various divisions of the Company. If you add up the numbers and if things work out the way we think they're going to work out, both in plastic film, military business, garage door business, that we could show a substantial number that's going to get us close to where the Street is. We might be shy a little bit. But if things work out the way we think they're going to work out, we are not terribly uncomfortable with it.

But that doesn't mean that it's not going to be hard to get there. It will be. But we have to be good in the delivery of the military business and in -- and we've got to keep the garage door business going the way it is, and we've got to make some recoveries in that plastic film business.

I think the plastic film business in the second quarter will be indicative of where we're going for the balance of the year. If we're able to get the numbers out and we're more comfortable, then we should be able to accomplish what the Street is looking for.

And on the Syracuse Research contract, when you initially announced this a number of months ago, you've always said it was in your opinion a $150 million opportunity.

Yes.

How would you say -- the build to the 90 million in funding; did that happen, in your mind, faster than you might have originally thought, the same as you originally thought, or slower than you originally thought?

I think we're on target for it. I think the problem was originally making sure that the units worked, that we could get the volume up, and we could make delivery to the customer. Those things have all occurred, and that's why I think the customer has gotten comfortable and has been able to further make awards under the program.

[David Rosen], Green River Management.

A couple of questions. First, can you break out that roughly $40 million of CapEx, how much you would consider sustaining capital versus how much you would consider growth capital?

Probably about 10 million or so is maintenance and 30 is growth.

Okay. And I know that you've actually spent a good deal of money on the Specialty Films business in the last couple of years. Of that 30 million in growth, are you actually going to add additional capacity, or what are you targeting that money for?

Keep in mind that I said a good part of that 30 would go to the Specialty Plastic Films. Some would go to our other segment. But as it relates to Specialty Plastic Film, we would expect that CapEx to both add capacity and efficiency, and the ability to make things that we can't make today -- the capacity in the sense of the equipment running more quickly, and efficiency in running at a lesser cost.

One of the problems you have in the business is that it's constantly moving. It's not a static business. You're not making the same product you made 10 years ago. You keep changing; the product keeps changing constantly.

As it changes, we have to either adapt the equipment or buy new equipment in order to be able to make the new products desired. For example, to take our equipment and make the film thinner and run the machines faster requires upgrades and modifications. And modification of equipment in this business is multimillions of dollars in order to change how the film is made, whether it's made, like I said, thinner and faster.

So a lot of that money that we're talking about goes to those kind of improvements. As the customers want changes in the ultimate product, we have to make changes in the equipment to meet those demands.

That does sound a little bit more like maintenance capital (multiple speakers) growth capital.

Well, it is and it isn't. I mean, maintenance is just maintaining the equipment so that it runs as it's supposed to run. But if the client wants a film that is mils thinner than was before, then you have to make a major change to the equipment. And I [always thought] when you have to make a major change to a piece of equipment and spend multimillions of dollars, that's not maintenance.

Okay, fair enough. The other question is -- two more questions. When you mention that you're actually going to spend on capacity, you did say that you have now have 80 million of excess capacity, 50 million in Europe and 30 million in Brazil. How much more capacity do you think you're going to be adding on? Or the capital that you're actually planning for this year -- is that to get you to that $80 million of excess capacity?

The 80 million is done, subject to Brazil going fully onstream next month. And so the CapEx we're talking about would be adding to our capability.

So how much more run rate sales would you be --

It's really hard to say. And the reason I say that is it's not as discrete as the two projects we just completed, one being we added a line, and so what's that line capable of -- and then in Brazil, we put up a new [plant with lines], and what are they capable of? It's more additions to current lines, speeding up the lines, and things like that. So it's hard to say really.

Final question, and again, it relates to the $80 million of excess capacity. Is there an amount -- kind of a fixed-cost drag associated with that until you actually get ramped up? And I know that you're actually spending capital -- I mean, you have expenditures to test the product. But the actual effect that you're sitting on $80 million worth of assets that actually still require maintenance or something else or there's depreciation on that -- could you quantify how much the fixed cost associated with that and what the drag is?

Yes. We're estimating that we put on the ability to produce at least 80 more million of goods. So just to be clear, it's not 80 million of assets.

Conceptually, you're absolutely right. It does create a greater cost burden for us, which we're looking forward to absorbing through greater sales. It would be really hard to estimate the amount. I mean, you're seeing it in the form of the lower margins that we're producing for this quarter and last quarter.

But it's not million and millions of dollars. It's a number, though. And beyond that, it's really hard to estimate.

You have to understand the philosophy in Finotech in Germany. We had three lines going, which were basically dedicated to Procter & Gamble, giving us no opportunities whatsoever to bid any other business to anyone else because there was no capacity available. We didn't even have capacity to test new concepts or new products.

By adding the fourth line, which is a very modern, fast line which we dedicated to our major customer, we then freed up a couple of other lines which we are now putting money into to make them better and faster, which gives us the opportunity to go after new business with new customers. Without that, we would have had no good way of expanding whatsoever.

Thank you. At this time, we have no further questions. I'd like to turn the floor back over to the speakers for any closing comments.

I want to thank you all. This was a very difficult quarter for us. We were not happy. We are happy that people are very bullish and optimistic in the Company, and we think that there's going to be opportunities for us going forward. And we hope that the next conference call we have with you will be more upbeat on the operations, especially in Plastic Film. Thanks a lot.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day.