Helios Technologies Inc (HLIO) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Sun Hydraulics first-quarter 2009 earnings conference call. Today's conference is being recorded. For opening remarks and introductions I would like to turn today's conference over to Mr. [Dennis Ticchio]. Please go ahead, sir.

Good morning. Thank you for joining us for Sun Hydraulics 2009 first-quarter earnings conference call. Allen Carlson, Sun's President and CEO, and Tricia Fulton, Sun's Chief Financial Officer, are participating in today's call.

Please be aware that any statements made in today's presentation that are not historical facts are considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. For more information on forward-looking statements please see yesterday's press release.

We will take questions once we have completed our prepared remarks. It is now my pleasure to introduce Allen Carlson.

Thank you, Dennis. Good morning. As we stated in the press release, we are pleased to earn $0.03 per share in the first quarter. Overall demand continues to be down in all areas, although we are gaining new business in many parts of the world.

We recently exhibited at the Hanover Trade Show in Germany two weeks ago. New electrically actuated products were on display as we continue to expand our offering in this area. We were able to touch base with customers from all over the world and while the number of contacts was down significantly, the quality was high. In tough economic times it is important to remain in front of the customer and not suspend important marketing efforts.

It is also important to continue improving our operations. This week we are installing a new heat treat furnace in one of our Florida facilities. This new heat treat equipment will double our capacity, improve quality, and enhance our productivity. Sun may be the only cartridge valve company in the world with its own heat treat furnace. We firmly believe having complete control of this and other critical processes gives us a formidable, competitive advantage.

I want to point out that Sun is in strong financial condition and allows us to continue investing and preparing for the future. Our balance sheet is sound; we have positive cash flow and no debt. This is not the result of luck or circumstance but directly related to how we manage the business throughout the entire cycle.

Many of you know we are focused on the long term. That is how we run our business in good times and in bad. We invest in our capacity and people to remain in a position to best satisfy our customers and the market place.

Before I turn the call over to Tricia I want to give you a few examples of some of the things we are doing. At the beginning of the year when we recognized that our workforce would have extra time on their hands more than 150 Sun employees engaged in the Florida Ready to Work program. This is an employee credentialing program that measures and develops job skills and work habits.

As a follow-up these employees are then engaging in the manufacturing essentials course through Florida Workforce Banner Center, a nationally recognized manufacturing technician certification that develops employability skills and improves training and production processes, maintenance, quality assurance, and safety. I think the high participation level at Sun in this voluntary program reflects a motivated workforce excited about learning and eager to enhance their knowledge and skills.

We also continue to hold education classes for our distributors to increase their knowledge of our products. We do this at all locations and in fact held training sessions on the fairgrounds in Hanover for many of our European distributors. It's rewarding that our distributors are investing their time and money and sending sales engineers to our classes, which are always full. The sessions result in a salesforce that is informed and prepared to provide solutions to our customers with our products.

Finally, we released a new piece of software this spring that enhances the ease by which our distribution partners can configure and specify integrated packages. This new service automates the design effort and with no human intervention designs the package and prepares all documentation. We are pleased to take orders for these new packages directly or equally pleased to have the manifolds manufactured by our channel partners in their local markets.

The vision and goal behind this effort is to sell more cartridge valves by making it easy for customers all over the world to use integrated packages. This is game-changing technology and further cements Sun's leadership position in the cartridge valve and manifold industry. I mention these examples to illustrate how Sun has continued to invest and do the things necessary to grow our business and differentiates us from our competition.

Thanks for listening, and now Tricia will provide the details on the quarter.

Thank you, Al. Depressed demand led to a first-quarter decrease in sales of 49%, which resulted in a 92% decrease in net income. Weakening of the pound, euro, and won to the US dollar accounted for $2.3 million or 10% of the sales decline. Basic and diluted earnings per share were $0.03, a decrease of 93%.

As Al mentioned, sales were down in every region across the globe in the first quarter. Sales in North America posted the smallest decline at 43%, Europe decreased 46%, and Asia was down 65%, which was primarily driven by sales within Korea. Remember that these numbers reflect sales to each region. The sales reported in the segment information of the press release represent sales from each geographic operating unit.

Gross profit decreased 67% in the first quarter to $5.6 million. As a percentage of sales gross profit was down 13 points to 22%.

During periods of steeply declining sales margins contract very quickly due to our fixed cost structure. In the past expansions with the rapid sales growth we were able to leverage these costs to produce strong margins. Conversely, it is not possible to absorb all of these costs when sales levels are dropping quickly. That is why we expect to be operating slightly below breakeven in the second quarter.

We were able to reduce SEA expenses in the areas of compensation, fringe benefits, and travel in the first quarter resulting in a 20% decrease. Included in the SEA numbers for the first quarter of both 2008 and 2009 is a mandatory 401(k) match. The match averages about 4% of US wages. No additional accrual has been made in 2009 for payment of a shared distribution into retirement accounts in 2010.

Our effective tax rate in the first quarter was 23.7% compared to 32.9% last year. As seen in the segment information the operating loss in Q1 in the US created a tax benefit which lowers the overall effective rate of the corporation.

Net cash from operations was $4.9 million, down $2.5 million from last year. The $7.1 million decrease in net income was offset by working capital changes. During the first quarter we used cash to purchase marketable securities in an effort to achieve a higher return than those offered by traditional money market rates. Total cash plus these investments increased $1.6 million in the quarter.

Inventory turns for the quarter were nine and days sales outstanding were 40. Capital expenditures in the quarter were $1.2 million. Purchases consisted primarily of machinery and equipment.

CapEx for 2009 is estimated to be $7 million and includes $1.7 million for real estate that will close in the second quarter. This parcel of land is sandwiched between one of our existing facilities and vacant land that we already own. It provides us with an excellent option if we determine that additional bricks and mortar are needed.

The share distribution announced on February 27, 2009, included a special dividend of $0.09 per share that was paid on March 31. This was in addition to our normal quarterly cash dividend of $0.09 a share that was paid in April. We are pleased to be able to continue to pay a quarterly dividend to our shareholders.

Managing cash in this environment is crucial. Inventory levels have stayed commensurate with sales, we have not experienced any collectibility issues, and we have no debt. Our strong balance sheet enables us to make ongoing investments for our future growth.

Taking a look at our outlook for 2009 we are estimating second-quarter sales to be approximately $21 million, a decrease in revenue from Q2 last year of approximately 60%. At that sales level we expect to be operating at a slight loss for the quarter.

Thank you. Lisa, we will now open the call for Q&A.

(Operator Instructions) Jon Braatz, Kansas City Capital.

Good morning, Allen, Tricia. A couple of questions. Number one, Allen, you talked about the new software product that you released as -- used the word game-changing technology. Can you explain that to me and what the opportunities and potential for this new system is?

Sure. Traditionally how manifold packages are designed is that we receive a circuit from a customer or a distributor, and this is a schematic drawing, a pictorial, of what the circuit would look like. We receive that in many locations; basically all the Sun locations around the world get this hydraulic schematic circuit. Then it's given to a design team that will design the manifold and the cavities that will house the cartridges.

Typically this is the part of the process that probably takes the longest and requires a fair amount of skill in order to do that. What we have developed over the last four years is the ability for a computer to configure this manifold package based upon the schematic that is received and generate this block design or this manifold design.

Since it's being done by a computer it doesn't have to come into a Sun location. It can actually be done in the field or perhaps even directly with the customer. So it takes a lot of time out of the design cycle and ability to get information back to the customer almost instantaneously.

Okay, okay. You know, if you would sort of look at this system -- if it would have been in place and commercially available two years ago when things were humming pretty well, any thoughts on what it could have meant to your business back then? Can you go back and look at that and say we would have done this much more or anything like that?

No, it's very -- that is a great question but the answer would be extremely hypothetical.

Okay, all right. Then, secondly, we are hearing from a lot of industrial companies that in terms of business activity levels that things are beginning to pick up a little bit in Asia and are just absolutely awful in Europe. Would you agree with those sentiments a little bit?

Absolutely.

Okay, very good. Thank you.

Joe Mondillo, Sidoti & Co.

Good morning, guys. First off you mentioned possibly hitting a bottom in the press release yet your guidance is implying a 20% about sequential decline in sales. Are you talking just about the general economy or your business as well? And can you give us a little more color on what you have seen through April and what your thought process is in determining the guidance?

We have been tracking our orders throughout the first quarter and into the second quarter and we have seen some pretty consistent order rates February, March, and April across the board. I think that is pretty much what is leading us to believe that we have reached a bottom.

That and also the sentiments that we have gotten from people that we have talked to around the world of how long this has been going on already, how long we think it's going to continue, and sort of where we are in the cycle versus where other companies are.

Tricia, did order rates decline from January to February and then sort of stabilize in February and March?

Yes, order rates declined from January to February but have been very steady and stable February, March, and April.

Okay. And then just to parlay on the last questioner's question, could you just speak on what you are seeing in Europe, if things are accelerating or decelerating on the downward direction?

Europe appears to still be decelerating at this point. I think they were a little bit behind the US in starting this and probably will be behind them in any recovery.

Okay. And then, lastly, working capital you have reduced that about $3 million this quarter. Do you expect that to continue at that magnitude or maybe larger? What point in the cycle do you begin to ramp that up or keep it flat? How do you look at that?

Working capital is primarily affected by the decreases that we saw in accounts receivable and inventory. With the continued decline in sales into the second quarter we will see continued reductions in both the inventory levels and the accounts receivable.

But at some point that will begin to level out. You can't have rapidly declining AR and inventory forever. So through the second quarter we will, but I would expect it would start to level off in the third.

Okay. Thanks a lot, guys.

Chris Weltzer, Robert W. Baird.

Good morning, everybody. I was wondering if you could talk a little bit about the impact or whether you are seeing an impact from distributor destockings. And if there is any way you could help us get a sense of what sort of magnitude that headwind is or maybe what the underlying sellthrough is like.

We have seen some destocking at our distributors. We believe that a lot of it happened in the later part of Q1 and will continue to happen into Q2. We also have had an increase in expedited orders, which are orders that have very short lead times, so we expect that that is becoming because there is not as much inventory sitting on our distributors' shelves and ready to go out to end-use customers.

Okay, fair enough. Then you had some situations in the quarter in Germany and the UK where profitability either held relatively steady or improved despite some sequential revenue declines. Can you give us a little color on what is happening in those two segments, were there significant costs taken out, does it have to do with pricing from product shipped in the US?

I don't think it's related as much to pricing. Some of it's related to the shared distribution costs that would have been in Q4 that are not in Q1, which has primarily driven probably a lot of SEA decreases that you are seeing in those areas that would flow down through the operating income.

Okay. That is helpful. You have a few decent-sized OEM customers. Do get the sense at all that some of them are starting to run their plants again or are things remaining pretty well shut down?

I think that is a mixed bag depending a lot upon what market and what industry. For example, we know that mid-late 2008 some large OEMs completely shut down. For example, Melroe, who makes skid steer loaders, actually closed their production facilities from Thanksgiving all the way through February. Those facilities are starting to open back up on a limited scale. They are open, but they are not at anywhere near full capacity. That is pretty typical around the world.

The inventory in the pipeline is being eaten away. The only areas of concern yet is there is still a fair amount of finished goods inventory, but the amount of inventory in the pipeline, the work-in-process kinds of inventory has been wound down. So when they start depleting their finished goods inventory we will begin to see an uptick in business very quickly.

Okay, that is helpful. Then just a quick clarification, normally you would expect on a seasonal basis that your orders would be picking up in the March and April timeframe, correct? And instead they have sort of held steady?

Normally that is true. I don't think this is a normal year.

Agreed. Thank you.

Kristine Kubacki, Avondale Partners.

Good morning. I guess I am just a little confused. Can you talk a little bit about -- I see that sequentially revenues are going to decline into the second quarter but yet you are saying orders have stabilized. What is the discrepancy there? What am I missing?

I think what you are missing is the first quarter was partially loaded with orders that were received in, let's say, late November, December, January timeframe. And as Tricia said earlier, we began to see the incoming orders stabilized in February, March, and April. So while things were not humming along in, let's say, late November and December, the order rate was higher than what we were currently seeing.

So that is why first quarter is up a couple of million dollars over the second quarter in terms of shipments. But the incoming order rate has been quite stable for the last, I don't know, eight weeks.

Okay, that is helpful. Just a clarification or maybe some more color on you said you talked to a broad range of customers globally and that some are at different points in the cycle and talking about when you expect things to turn around or start to see a meaningful recovery. Any guidance there or any color on your thoughts?

Well, we have a lot of discussions internally about what that might be. We are watching the PMI very closely. We have now had four months of PMI heading north. It's still below 50 but it's beginning to move in the right direction.

Historically, Sun has followed PMI about six, eight, nine months, so when it starts moving north we begin to move north. Taking a look at the amount of inventory that is in the pipeline and the destocking that has already occurred my sense is that we will begin to see improvements in the third quarter and certainly by the fourth quarter it will be significant.

That is my estimate based on all of the factors, all the macro factors, all the people I have talked to, all of that is probably worth $0.25.

I don't think so. It's worth more than that. Then my last question is I just want to hone in on a comment you made in the press release and then in your opening comments about capacity expansion, about the property and buying equipment. So does this mean we are getting ready -- going into the next cycle how are you viewing capacity expansion into the next cycle? What do you think you need to do in order to meet the next peak?

We look at capacity needs and capability needs on the theory of constraints. We know what our constraints were when we were running twice as fast as we are right now. At this time last year we were seeing $50 million quarters and we are running at a $25 million quarter. But we kind of know where our capacity constraints are and we are working to resolve those.

At some point, probably when we are well north of $50 million quarters we will need some additional bricks and mortar. That is a ways out. We are a long ways from $50 million quarters but we have to be prepared. So we are kind of teeing the ball up, ready for additional capacity when we need it. We have a good sense of where we need it. We have the land in order to do that.

The whole idea right now is anticipating when that might be and getting ready for it, but there are no plans at this time to start bricks and mortar. My sense is you are looking at somewhere beyond 2010.

Okay, that is helpful. Thank you very much.

(Operator Instructions) Holden Lewis, BB&T.

Good morning. Thank you. I missed a couple -- Tricia, a couple of your percentage changes with regards to international sales. I heard North America down 43%, Asia down 65%. What with Europe and Latin America?

Europe was down 46%. Latin America is very small for us.

Then if I am getting the tone right it sounds like Europe you are still seeing decelerating; Asia you said you are seeing some signs of improvement. I am assuming that is a function of the Chinese stimulus package and how that is moving through. But what are you seeing -- if you can just sort of confirm if that is true or if there is something else there, but what are you seeing in the US specifically in terms of trend? Is that where you are kind of seeing things flattening out?

Definitely.

Yes.

The US market might even be showing signs of coming back to life. It has been at the bottom for probably three, four months, maybe longer and there is some promising signs on the horizon. PMI is just one index that measures that, but there are some other signs as well.

Okay, and then can you comment as well about when you look at your end-market customers. I think the machine tools sector looks like it's down 50%-plus but the machinery side of it looks like they are talking about down 20%, 30% types in terms of units. And so when you are talking about down 50% or 60% it looks like that is a bit more severe than maybe what the blended -- what you might expect by blending the two end markets.

Is that a function of destocking or are you also seeing maybe some substitution towards the lower end rather than the high end? What is sort of the pieces there?

I believe it's primarily destocking and I think there is two levels of destocking that has occurred or is occurring. One is the end customer is carrying less inventory because he is building fewer machines and then the local distributors are carrying less inventory because they are having less demand, so there is two levels of destocking.

My sense from talking to people is that the end market for our products probably down somewhere around 35%, 40%, which is pretty typical and the number that you referred earlier. We are seeing an additional amount because of this destocking that is taking place.

Then if you could talk -- I guess this is perhaps a higher-level question. But when you talked about a $50 million per quarter revenue run rate a lot of companies, I think, are taking the tack that you are sort of coming out of a period where housing, construction, and automotive build and all of those were kind of in a bubble environment and that capacity had been built up to meet a bubble environment level of demand that, frankly, it might be years and years and years before you ever see 17 million or 18 million cars produced again or that level of home sales. And so they are actually reducing the capacity in anticipation of just not getting back to where we were at the beginning of 2008.

I guess you guys are kind of taking a different tack where you assume you will get back there at some point. But do you think at any point that maybe you need to sort of reign in capacity rather than continuing to build it out or what is sort of the thought process there?

We began to reign in capacity middle of '08. We cut our overtime; we began leading attrition take effect. So in terms of our productive capacity and in terms of the workforce it's significantly less than it was 2008, although we are not to the point where we are going to cripple it and not be able to respond to the upturn.

My view is that the upturn will occur rather quickly. The downturn occurred quickly. I think the upturn is likely to happen as well, especially once the destocking is done. The demand that is out there will result in direct orders and I think it will happen quickly.

We also take a look at what has happened in previous cycles to get a sense. This business cycle that we are currently in right now looks a lot like the recession of '81/'82, and we have also looked at previous cycles. We need to be ready to respond. We always grow and improve our position in the marketplace, take additional market share, service our customers around the world better as we come out of a recession than many of our competitors. It's primarily by being ready for the upturn.

I think also that with the example that you gave of housing and automotive are very narrow market spaces. But when you look at the diversity of our end markets the likelihood that all of those will remain down for an extended period of time as long as you are looking at housing and automotive I don't think is likely.

Okay. And then talk about the timing of recovery for you guys. When I think about what you guys make you tend to go into capital goods, but when you look at utilization being at like 60% give or take -- it seems like before people are going to order more machine tools they are going to need to see their utilization quite a bit higher.

And so I guess I would intuitively think that you guys would tend to lag the cycle because you are not driven as much off production as you are utilization driving the need for capital goods. But it sounds like you tend to see things come back more with the production cycle. Can you maybe sort of square up that perceptions?

Sure. We also see the downturn probably quicker than others as well. The reason for this is that our book to ship cycle is very, very short so there is not a lot of inventory in the pipeline. When things start going south we go south right with it, and when things start going north we go north with it.

It's this very, very short compressed lead time that results in order reductions or order increases. I think that is probably the biggest factor in responding to your question.

But don't you need people though to be ordering the big Caterpillar tractors and the Hardin machine tools? I understand that when they order them it's going to cycle through very quickly, but if utilization is at 60% wouldn't they probably not order those machines until utilization gets toward 75% to 80% therefore there would be a lag?

There is two answers to that question. First of all, the types of customers that you refer to the Caterpillars of the world, etc., that is not our marketplace. Our marketplace is the smaller, mid-sized specialty machine manufacturer and I don't believe the market is down 60% in that type of equipment.

We are more into mining and petroleum; the markets that are still strong. We still need energy and that market will continue to grow. Windmill, wind power generation, all of these markets that are not what you would think of as traditional markets for hydraulics is a big piece of our mix.

I think the second thing is that the statistics that you are referring to are accurate statistics for North America and maybe even for some of Europe, but we are in markets like in South Africa and China and parts of Asia that they are not seeing that kind of decline. Those markets, while they may not be as strong as they were a year ago, will come back very strong.

Okay. Lastly, does the new software, given that it does a lot of the design work and things of that sort, what does that do in terms of your overall productivity? What do you do with the design team that you have and that sort of thing? Is there a cost opportunity here or just a market share opportunity?

How should we view that and what can be the impact over, say, a three- to five-year time frame from that on the model?

It's a market opportunity. Our design teams tend to focus on much more complicated designs than what would be done by this package. So this package sort of addresses the low to medium end design requirements.

Oftentimes a customer will take a first look at a package through the use of this new software to get an idea of what it might look like. Then they will send it to us and say it's 95% there. Can you just refine it a little bit by applying some human intelligence on what is coming out of the computer? So it's opening up new business. It's not going to reduce our costs; it's going to take a bottleneck, a constraint out of the cycle.

What is it going to do for us? Very, very difficult to say. We know that already we have gotten some new business as a result of it, but to try and quantify it is almost impossible.

Okay, great. Thank you.

(Operator Instructions) Bradley Kelley, Magnum Opus.

Good morning. So several times people have mentioned different segments of the business. And so as I am looking down a list of construction, agriculture, mining, fire and rescue, utility equipment, automated machinery, and machine tools do you guys have a sense of what the percentage breakdown is between those different areas and markets that are the end markets that you guys have?

We know we are in those markets. We can prioritize perhaps the largest market, but it's very difficult to say that this market is 2%, that market is 3%.

Okay.

No one market segment is more than 10% though.

Okay, so that is really helpful. So then India, as we have had the conference call very briefly one time India was mentioned. I feel like there is a lot of positive things that are coming out of India but yet no one is still talking about them yet. Is India kind of a silent giant for you guys?

I am not sure I would use the word giant. It's s a market that we believe is growing expanding. It's a market that we are investing in. We have people on the ground in India; we are adding to our presence there. Not prepared to announce what it is and where it is, but we have had people on the ground for the last year and a half doing prospecting and identifying what the opportunities are. Painting a picture of how we need to proceed.

Our business in India has grown significantly in the last couple of years, probably five, six times. From a very low number but it's beginning to become a meaningful number.

And then PMI, you guys talked about when PMI is on the rise that you are on the rise. I got the sense that you guys were talking domestically, so maybe not -- China's PMI has been in the news this week. That was a really surprising number and it led to quite a big rally I think on Monday night in the Asia markets, which then translated into a huge day in our markets. Is China's PMI or our domestic PMI more important to you guys?

Actually look we look at domestic PMI, but we occasionally take a look at some of the PMI indexes from other countries. Germany has one, China has one, as you say, Japan has one; so it's sometimes interesting to look at those. We consider the US PMI a good proxy for an international PMI, because many of the companies that are reporting in PMI are shipping overseas as well.

For example, the Sun numbers in terms of orders and inventory are in the US PMI but 60% of our business is outside the US. US PMI is a very good proxy for what is going on around the world. And you are right, looking at PMI indexes from other countries can also be helpful. I think the China one is interesting because it shows how effective the Chinese government is at --

At real stimulus?

Yes, at real stimulus. That is well said. I didn't say it, but well said.

All right. Well, that is good then. If China's PMI then is doing that well then by the time the US PMI catches up we should be a lot better off. So you guys have talked about the strength of your business model towards the long term and you mentioned specifically really coming out of money markets where you just don't get paid to sit in cash anymore and you bought some other investments.

Being that you guys are in Florida, one of the hardest hit markets in real estate in the United States, did guys or are you guys or will you guys taken advantage of the low cost of real estate now in the state of Florida and maybe buy some of that looking out long term?

We wouldn't buy real estate purely as an investment. We have purchased two pieces of land recently -- one that will close in the second quarter and one that we bought last summer -- but those are adjacent to properties that we already own. We don't really consider those investments. Those are opportunities for expansion, but we wouldn't invest in real estate as a utilization of our cash to try to make more.

Okay. I noticed that the purchase you had said earlier was in between two already owned properties. It seemed to me that it could go either way. You buy it in case you would like to expand and if you don't it just happened to double and so you have other options that you have with it.

Exactly.

Absolutely.

That is how we looked at it.

Okay. That is terrific then. And then Latin America, you guys had mentioned that Latin America is really, really a small market for you guys compared to your other markets. Do you have plans for that market to become a bigger segment because I know you guys are in agriculture and mining and there is quite a bit of that going on, especially in Brazil?

A lot of the growth in Latin America in mining and in those markets, the equipment comes out of the US. They don't make the equipment locally; it's similar to Mexico. Most of the capital equipment that is going into Mexico is made in Germany or Italy or the United States, and so there is not a lot of opportunities for OEM sales. There are a lot of opportunities for service parts and maintaining old equipment; that is not our business model.

Additionally, in South America there is a lot of market for farming, farm equipment, petrochemical. Some of those markets we are in, but for the most part it's light-duty hydraulics, like for example, on farm equipment. We sell some into that market but it's not a strong market for us anywhere in the world.

Okay. So then might we have some more hope out of Africa than Latin America?

Our business in South Africa is doing very, very well. In fact our distributor from South Africa was in town all of last week. And by the way, is very excited with the new automatic software design tool and some of the things that we are doing. It's going to help him continue to increase his business. Our business in South Africa remains very strong.

Excellent. Then last question, the dividend, can we assume into the foreseeable future that that dividend is safe?

Well, dividends are determined by the Board but at this time we don't see any reason that we would expect a change in our dividend policy. There are other companies out there that are cash strapped that have discontinued their dividend or postponed it, suspended it for a while but we are not in that same position.

Awesome. Thank you guys so much.

Going back to the dividend question, one more comment I would make is that we consider paying the dividend as a piece of our long-term investment strategy. For the same reason that we continue to invest in our workforce and our capability and capacity we invest in our shareholders.

Okay, and that makes perfect sense. Thank you guys so much.

Holden Lewis, BB&T.

Thank you. The other line on the P&L swung from $0.5 million to a slightly $100,000 loss. Can you just sort of go through what is in there?

Last year we had an insurance claim that was included in those numbers that paid about $500,000 that obviously isn't included in this year's results.

So we should assume that that other line is kind of around zero plus or minus is the way to look at that or is there something else in there?

I think that is probably a good number. It's primarily made up of our equity earnings on the partial investments that we have either in the JV in China or in HCT in White Oak.

And then on the tax rate obviously having gone down, how do you see that dynamic playing out? If North America is kind of stabilizing and Europe is still decelerating, do you see sort of a return to profitability in the near term in North America and then may be slippage into negative territory for Europe so that the tax rate steps back up again? Or how should we view that for the balance of the year?

We don't have an estimate for the year. We really can only forecast or even estimate. It's not even a forecast; it's just an estimate of what we see right now for Q2. We are looking at a tax rate in Q2 of about 30%.

Okay. So is that assumption for Q2 does that then assume that the US business is back in profitability?

No. We are still getting a tax benefit in Q2.

And that is included in that 30%?

Yes.

Okay. So how does the tax benefit push the Q1 tax rate to 24%, but keep it at 30% in Q2? It doesn't sound like the dynamics have changed that much to cause such a difference.

It's just based off of the incomes that are earned in the different countries. I think there probably was more assumption of income in Q1 in Europe where the tax rates run about 30% than there is in Q2.

All right, thank you.

(Operator Instructions) Bob Mitchell, Conestoga.

Good morning. Just a couple of questions, wanted to get a -- I know CapEx -- any update on CapEx for the year?

It will be about $7 million.

So it remains unchanged?

Yes.

That includes the land purchase as well.

It does, okay. I think you guys talked about on the last call you were undergoing a distributor survey. Is there any update on that in terms of did you hope to have it finished by the end of the second quarter? Is that still on track to do so?

Are you referring to the inventory survey that we do quarterly?

No, I thought every so often you guys have done a more extensive distributor survey. I think to try to figure out your end-use markets a little bit better.

We have gotten a lot of the feedback from our distributors around the world but we have not received all of it at this point. We really don't see much of a change from what the original survey was eight or 10 years ago with one-third industrial markets and two-thirds mobile.

Okay. Could you talk a little bit about you mentioned the heat furnace and just for me -- I probably don't understand your processes as well as I should or could -- the significance of the purchase of the heat furnace and how you view that as a competitive differentiator?

We do heat treating in our facilities now and have done for maybe 20 years. What we have installed now is called gas quench and this allows us to quench at a much faster rate, a more consistent cooling rate, therefore eliminating distortion; improves the process throughput and the process quality. It's very, very consistent. And so we you will have a traditional quench at one furnace we have in Sarasota in one of our factories and a gas quench in the other one.

Right now if we did need gas quench on a particular part we had to send it out; very time-consuming. And there were lots of parts that we didn't use gas quench but we would have liked to if we had the capacity. So it opens up, as I said, quality and throughput. I believe the throughput, the number I have heard is twice.

Thank you very much.

(Operator Instructions) There are no further questions. I would like to turn the conference back over to Mr. Carlson for any closing remarks.

Great, thank you. Thank you all for listening in and responding to our press release with your questions.

Annual reports along with the proxy statements were mailed out last week and are posted on our website for additional information that you may have. I would like to remind shareholders that our annual meeting will be on June 8 at 10 a.m. here in Sarasota. We hope that you can attend. There is no better way to get an understanding of our business and our culture than by visiting with us.

Thank you again and have a good day.

That concludes today's conference call. You may now disconnect.