Quaker Chemical Corp (KWR) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Quaker Chemical Corporation fourth quarter and year end earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ronald J. Naples, Chairman and CEO for Quaker Chemical Corporation. Thank you, Mr. Naples, you may begin.

Thanks very much for the introduction. Welcome, everybody. Glad to have you here today. You won't be surprised to know we'll use the same process we've used in the past. I would like to take some time to cover a few points to give 2006 some context, but I will try to be brief. I am sure you're glad to hear that. And then Neal will follow-up -- Neal Murphy, our CFO, will follow-up with some detail on the fourth quarter especially. I am pleased to say that, and I hope you agree based on our press release last night, that 2006 was a fine year for us. And for me it had several aspects to it. One, of course, is the financial piece. But also, it did a lot, I think, in terms of positioning us for the future.

Taking a look at the financial piece first, our sales for the year -- and I am going to focus on the year, and Neal will talk a bit more about the quarter. But sales for the year, as you noticed, were up about 8.6%, which is, as you know, is way ahead of the market growth in the markets in which we participate. So we're pleased about that. It follows several years of the same kind of result that our sales growth has been ahead of the market growth, so that indicates the kind of strength that we're able to exercise in the marketplace. That growth comes from share of market gains, from penetration among our customers, and I think that's indicative of the ways we have found to serve the needs of our customers. And one of the strategies we've used to build on that, CMS, is also continuing to be successful for us. But penetration has been an important part of our sales growth over the last few years. Also, market expansion into markets that are related to what we do now, or that you may consider adjacencies into which we put current products into new markets, have also been an important contributor for us. So on the sales side, we've made good progress, I think. '06 was another year of good progress, sales up almost 9% in markets that are growing only a fraction of that.

Earnings followed, thank goodness. We reported for the year, as you noted in our official reporting, earnings -- growth in earnings per share from $0.17 in '05 to $1.18 in '06. Of course, that's over six times. But that's really not the full story, because as you know, we had some things happening in '05, both in the plus and the negative side, that conspired to make that result in '05 not a like to like result as the '06 result. But if I walk back the -- that comparison a little bit and provide a more like to like comparison that rids itself of the one-time pluses and minuses in '05, you still get a result where our earnings are up over 70%. So we feel like we had a really good year in '06 that resulted in fine earnings, driven by a top line that continues to move ahead. And an important part of that is the GM, gross margin improvement throughout the year. It was a very modest change if you look at it on a full year basis, as it was only 31% in '06 versus the 30.6% in '05. But we did see from quarter to quarter, improvement in that gross margin going from 29.6% in last year's first quarter to 32.2% in the fourth quarter of this year.

The important point about this is not just what is the number, but we were able to achieve this in the face of significant raw material cost increases through the year, as we did see again in '06 the same kind of cost -- upward raw material cost pressure that we have seen in the previous two years. Improving our absolute gross margin percent in the face of these increases, these raw material increases, I think is indicative of the effort we have made over the last couple years to work with our customers, to get our prices up, at the same time we find ways to work with them and improve the value we provide to them. Now this increase in our gross margin percentage is not a forever process, but it is a great result for us in '06 and it helped us a lot.

Another important aspect of '06 is we were able to use the '05 restructuring to allow higher spending in '06 in higher growth areas and in our strategic initiatives without unduly raising our costs. That was an important point in doing the restructuring in '05. That means we invested more in China. We invested more in the new business and adjacent markets, I mentioned earlier. We invested more in new product efforts. The important point about the '05 restructuring, I just want to remind you of, we talked about this a bit at the time. But I want to remind you that it wasn't primarily a cost reduction effort. Rather it was an effort to redeploy the costs we had to make strategic investments in the things we had -- that we felt we had to do to create a better future, and to do that without unduly increasing our costs, as I said earlier.

In terms of cost reduction, we are very -- as a general subject, we are very sensitive to the reality that the competitive cornerstones of our business are, one, high service to our customers so that we find ways to deliver value to them, value they recognize. And, two, is the global reach of our infrastructure. That's both internal, as we use our assets around the world, such as knowledge in a global way, and that's external, as we learn and expand our service to global key accounts with a global approach to our business. So these two aspects, high service to deliver value and global reach of our infrastructure, are very important parts of how we compete. And we're always committed to these business priorities, and we always keep those kind of priorities in mind as we think about where are the prospects of cost reduction. So we feel like in making a change we made in '05, we reestablished our base, redeployed where we were spending money, and we think we are pretty well set for how we go ahead for the next few years.

Another important aspect of '06 was our progress in CMS. This has been an important strategic effort for us, as you know. We've been working on this business particularly hard in the last few years, as a particular way to deliver value to our customers. That's been, as I said earlier, a cornerstone of our competitive strategy. And through CMS we find an opportunity to become part of the customer's management process, which allows us to establish a strong position with the customer. As '05 rolled into '06, you recall we began to work with our customers to try to revamp some of the arrangements that we thought could work better for them and work better for us. Through '06 we made considerable progress in these areas. Not only was there for us a much improved financial result in '06 from CMS, and that is both in the service aspect of the business and in our product penetration in our customers. But as importantly, for our customers we made real progress, because as indicative of the fact that they saw enough value in what we do for them, so that in '06 and actually into early '07, we've had a 100% success rate in renewing the contracts -- the CMS contracts that have come up for renewal. And that was really most of the contracts we were working on. So we feel good about that, and we feel that CMS is a model that will continue to work for us to build that customer loyalty and build the value -- build the customer's awareness of the kind of value that we can bring to them.

Another important part of '06 as you think about it in the long-term context, is our efforts in China. We built our platform in China in 2006 from the acquisition of 100% of our joint venture partner of his interest to revamping our operations. We consolidated our approach to the market in China in both steel and metal working into a single operation. We built a new plant and new R&D facilities in China. We think these will allow us to be more responsive to local markets, will put our costs more in line with local market costs, allow us to source raw materials in China, which should help us. We'll even be transferring some European manufacturing into China as we increasingly employ the new plant assets we have there. In China, we staffed up in a major way to build our presence in our markets, focused on, one, maintaining our leading share in steel in the face of increasing competition. And, two, in building our metal working business, particularly with the automotive manufacturers in China, and in actually Asia Pacific generally. So we feel these are all -- if you add these kinds of things to the financial progress that we made in '06, we feel that we made big steps during the year.

As we look ahead we think these steps that I've just mentioned, along with our ongoing new product and new market efforts in areas such as tube and pipe and mining and coatings, will all build our foundation to grow the business, and will each individually contribute to our future success. Looking into '07 we think that these will help, the kinds of things I just covered, will help in our progress in '07 to achieve solid earnings improvement. Our markets look steady, not ebullient, but solid in both steel and metal working manufacturers. The opportunity for share gains in certain market segments, such as mining and certain geographies where we've improved our efforts through redeploying our assets, we think are promising. We think that we will have some more raw material stability in '07 than we've had looking back. And with some luck, that will come along with a more moderated cost -- absolute cost level than we've seen looking back.

So I will just summarize by saying we're pleased with the progress we made in '06 with the financial results we had, but not only for the financial success that we had in '06. But because we feel we positioned ourselves well for future success. And after all, that's what we're in the long run shooting to do. So with those general comments I will stop, and I will turn to Neal, as I said I would, for him to cover the -- provide a little more detail, particularly about the fourth quarter. And then when Neal is finished, we'll have some time for questions -- any questions that you may have. So I will turn to you, Neal.

Very good. Thank you, Ron, and good afternoon, everyone. Yesterday we announced record fourth quarter sales of $115.5 million and diluted earnings per share of $0.30. This compares to sales of $107.1 million and earnings per share of a negative $0.56 for the fourth quarter of 2005. The 2005 fourth quarter included restructuring and related charges of $9.1 million, as well as a $1 million tax charge associated with foreign earnings repatriation. We're very pleased that for the fourth consecutive quarter we've been able to achieve significant core earnings improvement over the prior quarter -- prior year quarter. On a year-to-date basis, operating income is up more than 60% in 2006, after excluding the restructuring charges in the prior year period. Ron mentioned 70%, referring to bottom line earnings improvement. My reference is to operating income improvement of 60% after we carve out restructuring.

I am going to spend the next couple of minutes focusing primarily on the fourth quarter P&L, with some selective comments on full year results. And while we do not provide specific earnings guidance on a forward basis, I will intersperse a few comments regarding the outlook for 2007. Again, revenues for the fourth quarter compared with the same period last year were up 8% to $115.5 million. Revenue growth was driven primarily by pricing improvement. We also saw some benefit from foreign exchange rates, and some volume growth. Pricing improvement occurred broadly across all markets and market segments and regions. Volume growth occurred primarily in China, with some softness in other markets.

Foreign exchange contributed to the revenue growth, mostly on the strength of stronger currencies in Europe in Brazil versus the dollar. The Euro and the Brazilian real appreciated approximately 8.5% and 4.5% respectively from the fourth quarter of last year. As Ron mentioned, the higher sales prices reflect our continuing efforts to work with our customers to recover higher raw material costs and to provide increased value. Declines in crude oil prices over the last few months have contributed to fourth quarter stabilization in mineral oil prices, after two years of fairly persistent and significant escalation in the cost of this raw material. We have not yet seen a downward movement in mineral oil costs, although we've certainly seen it in crude oil. But as you know, we acquire mineral oils, not crude oil. If we were to experience a sustained period of crude oil prices below $60, it could put some downward pressure on our mineral oil costs. As we've talked in the past, these markets do not move in lock step, but they do tend to move directionally in the same direction. Forward improvements in gross margin percentage of any real magnitude in 2007 will likely have to come from raw material cost reductions.

Volume growth with double-digit increases in our volumes in China was offset by softness in other areas. One of our strengths is our diversification into the various regions of the world, and we feel we're very well positioned as manufacturing shifts from some of the developed countries to the less developed countries. As compared to the prior quarter of 2006 in which we reported record third quarter revenues, we did experience a bit of slowing in steel volume in the fourth quarter, particularly in North America and parts of Europe as our customers work down inventory. We also saw some pockets of sluggishness with a few of our automotive customers.

I would like now to give some revenue data on a segment basis. As you may recall, we have segmented our business into three areas; Metal Working Process Chemicals, Coatings and Other Chemical Products. In our Metal Working Process Chemical segment, which makes up 92% of our sales, revenues in the fourth quarter compared with 2005 were up 7% to $107.5 million, and operating income improved 44% to $16.5 million. Sales in our Coating segment, which makes up approximately 7% of our sales, increased $1.3 million or 20%, due to both higher coatings and chemical milling maskant sales to the aerospace industry. Operating income was flat at $1.5 million. And in our smallest business segment representing approximately 1% of total sales called Other Chemical Products, sales were down $300,000.

Let's now turn to gross margin. Gross margin as a percentage of sales of 32.3% this quarter, was an improvement over the first, second and third quarter percentages of 29.6%, 30.4% and 31.6% respectively, and well above the 30.2% fourth quarter gross margin in 2005. Our persistence on the pricing front has enabled margin restoration despite continuing escalation in raw material costs over the past year, which ebbed a bit in the fourth quarter. Gross margin in dollar terms was up more than 15% or almost $5 million for the quarter, primarily due to price recovery actions, as well as volume growth and stronger performance from our CMS channel. Our gross margin for the full year 2006 was 31%, and a $12.8 million improvement in absolute dollar terms over the prior year, driven by the same factors as in the quarter, price, volume, and CMS.

We've made great strides in CMS in 2006 by generating internal process efficiencies, improving the terms of key contracts which were not meeting profitability requirements, and gaining higher Quaker product sales through this channel. Further, we're very pleased to report that we were recently successful -- 100% successful in retaining 23 CMS sites which we currently serve. We obtained new three-year contracts for these sites in a competitive bidding process at the end of the fourth quarter. In addition, we were also awarded three new CMS sites in recent successful bids, and are currently building on a few additional sites. While we expect production reductions and some plant closures at some of our big three CMS sites in North America in 2007, we believe that product sales opportunities at the new CMS sites and increased CMS service profitability will substantially offset any profit loss from volume reductions at our existing sites.

Moving down the P&L, I will now discuss SG&A and other expenses. SG&A of $32.3 million this quarter is $3.3 million higher than the fourth quarter of 2005. Cost savings from restructuring efforts completed in 2005 helped to fund increased spending in higher growth areas, such as China, CMS, tube and pipe and other strategic initiatives, as Ron mentioned. We also incurred higher variable compensation resulting from substantial earnings improvement year-over-year, as well as higher professional fees. SG&A as a percentage of sales was 28% for the quarter. For the full year 2006, SG&A as a percentage of sales was 26.3% compared with 27.4% in 2005. While sales levels, foreign exchange rates, variable comp levels and many other factors can impact actual results, we're currently targeting 2007 SG&A in the 27% range.

The increase in net interest expense over the fourth quarter of 2005 is reflective of higher average debt balances outstanding during the fourth quarter of '06, as well as higher interest rates. And the effective tax rate for the second -- for the fourth quarter is 28.2% versus 14% for the same quarter last year. The prior year rate was a bit unusual due to the impact of restructuring charges on pretax income, as well as a $1 million tax charge related to the repatriation of foreign earnings. The current year fourth quarter rate benefited from shifting income levels towards lower tax jurisdictions. As we look forward, our current view is that the tax rate for 2007 will be in the 34% to 36% range. Minority interest was higher for the fourth quarter of 2006 compared with the same period last year primarily due to improved profitability in the Company's minority affiliates, offset in part by the purchase of the remaining interest in the Company's Chinese joint venture.

Like to turn to the balance sheet and cash flows briefly. The Company's net debt has increased from December 2005 primarily to fund working capital needs, construction of a new manufacturing and research facility in China, and the fourth quarter 2006 acquisition of the remaining interest in the Company's China affiliate. In addition, fourth quarter 2005 restructuring actions were funded during the course of 2006. The Company's net debt to capital ratio was 40% at December 31st, 2006, compared to a 35% level reported at the end of 2005. In connection with the adoption of FAS 158, employers accounting for defined pension and other post retirement plans, we recorded a noncash charge to shareholders equity of $9.3 million, which negatively impacted the Company's net debt to capital ratio by approximately 2 percentage points. And that concludes my prepared remarks.

Okay, Neal, thanks very much. At this stage, let's turn to any questions people may have.

[OPERATOR INSTRUCTIONS] Patrick Flavin, Flavin, Blake & Co.

Ron, it is nice to see the turn in margins and the pickup in revenues. It is appreciated, the work that was done in the past year.

Thank you.

But one question remains that I would love for you to give some time to, which is the ability of the Company to self finance itself. The increase in debt is notable during the year, and do you see the Company being able to, at higher margin levels and higher earning levels be able to develop a free cash mentality?

Yes, sir, I do. We obviously look at that pretty carefully. [inaudible] I am sorry, did everybody hear that static? Are you still with me?

Yes.

That static had nothing to do with the answer. But we obviously look at that very carefully. And obviously we're also very mindful of the fact that our debt has increased. Please keep in mind, however, that the increase in debt has been related to specific undertakings that we've had to improve our business, which are identifiable and planned. It is not the kind of thing where cash needs for unexplained reasons have just gotten ahead of our ability to fund them. We do expect a much better year in that regard. In '07 plans show that. It probably won't be as positive as we'd like it to be. But we do expect a much better year than we saw in '06 in that regard. We don't expect the level of capital commitments that we've had in terms of the recent building activity and that kind of thing we've seen. We focus hard on -- expansion activity, is what I mean, particularly in China. We focus hard on working capital control. And that's real, working capital is the largest cash demand that we have in the Company. But of course, that's been driven by improved sales, thank goodness. But we nevertheless always are focused on the need to manage that better. So I guess the net of all of that is, we think the -- our demands and cash will still be there, but we think we are going to be in a much better position to fund it. We worry about it, we plan for it, and we expect -- I will just summarize by saying we expect the '07 year to be much better in that regard than '06. Neal, would you like to add anything to that?

Yes, just maybe a little bit of additional color. Depending on where you look on the cash flow statement, there are really four key drivers of cash flow for us. Earnings, working capital, CapEx, and dividends. And we're working on the first three very heavily. And as you've seen some earnings growth, that has certainly been helpful, and we see continued earnings growth. Working capital is a topic every week and every month and every quarter, and we do have -- some of the investments we've made in Asia specifically should help us reduce our supply chain. And we do continue to grow the revenue line and as such, continue to invest in working capital. And then lastly CapEx. And as I mentioned in my comments, we made some substantial investments in Asia. But as I've alluded to in prior quarters, I think a more normalized CapEx level for us is more in the $7 million, $8 million range. And that is certainly our view going forward into 2007. So we're confident that we will improve our cash.

Just to try to drill a bottom line on that, Patrick, we're very mindful of it, and we feel like as we look forward, we feel like we have a very good handle on it.

Okay. And is the CapEx budget for '07 the $7 million to $8 million or -- ?

That's correct.

Yes.

And specifically, Neal, can you address DSOs with the respect to the $13 million increase in receivables?

Yes, Patrick, it is a little deceiving. In the sense that as we've spoken about our CMS business in the past, and we act not only as a purchaser and reseller of product, and as a seller of our own product into the CMS channel, we also have an agency relationship whereby we purchase and resell product. But because of the agency nature, it does not get reported in our revenue line. And that business outside of the revenue line does carry working capital with it, and that business has increased quite a bit over the course of the year. There has been close to a $25 million to $30 million increase in that agency business which carries working capital with it. And so the nature of that is driving our working -- our receivables as a percentage of sales up. But if you include those sales in our overall DSOs, our DSOs are remaining constant to slightly down around the world. Again, Asia is a bit of an exception. We're growing in Asia, and the DSOs tend to be longer in that region of the world.

Okay. Well, on the CMS business, it is understandable if you're acting as a purchasing agent for you to be the warehouser or the logistics person for your customer. But I would assume, or hope it's in the contracts, that until they take delivery, it is their cost to carry, not your cost to carry.

Yes, I don't want to get into the specifics of each contract. But what I would say to you is every contract we look at, we evaluate from, I'll call it an EVA or economic value-added perspective, so that we're not interested in contracts that don't allow us to cover our cost of capital. But we have many, many contracts throughout the U.S., and they're not cookie cutter contracts. So it is hard for me to be specific, other than to say we're very cognizant of the need to recover any capital that we invest in these contracts.

Okay. Gentlemen, thank you. Keep up the good work.

Thanks for your interest, Patrick.

[OPERATOR INSTRUCTIONS] Bob Rezaee, AXIA Asset Management.

I just wanted to ask you regarding '07, what are the key business issues, challenges and opportunities? I think it is probably fair to say in '06 you had to contend with a lot of raw material cost increases, and that was well advertised. Just wondering if you can sort of share with us some of the highlights for the upcoming year?

Well, obviously raw materials are always an issue that we keep our eyes on because it has such a dramatic impact on our income statement. It is an important cost for us to manage well. We don't expect that raw materials will dial down dramatically. So we need to stay sensitive to that. I think growth in our European operation is going to be one of the key factors for us in building our success. Maintaining the improvement in U.S. profitability is an important factor for us in building '07. Continuing the CMS profitability levels we've had is an important business factor for us in '07. Taking advantage of the kind of economic opportunity we think we have to improve our Chinese business, because of the kinds of things we've done. Not immediately necessarily this year, but positioning ourselves better for the future in China is an important strategic issue for us. Also making progress in some of the adjacent markets that I have referenced in the past, particularly where coatings is concerned, and mining for that matter, are important things to keep our eye on in '07. Neal, do you want to add anything to that?

No. I think that pretty well covers it, other than I guess Patrick Flavin's question. I think that we've been focusing on earnings growth and cash flow growth simultaneously, and we see cash flow improvement as an important area for us in '07.

I wonder if I can engage to you expand a bit on '07 from sort of a -- I got on the conference call a bit late. So you might have touched on this. If you have, I apologize. I wonder if there is any sort of a range of growth in earnings in top line that you can sort of guide to for '07 and beyond?

Bob, we've not made a practice of doing forecasts for the year, because the level of visibility forward in some of our geography and in some of the businesses we're in, since all of our demand is derived demand, based on the demand of our customers, we don't always have direct visibility to that until we're on the receiving end. So we felt the better part of wisdom here is not projecting. We've not projected in the past, and we're not projecting this year, other than to say that as I said in the press release, that we feel that we're well positioned to continue our solid earnings improvement in '07.

Very good. Specific to the gross margins that you realized in Q4, I know you had a lot of headwinds that you dealt with in the last few quarters, and you seem to have overcome that. Would it be reasonable to expect that this becomes a bit of a trend line, or would that be too much optimism?

If you mean by a trend line that the gross margin -- the gross margin percent would continue to climb as it has in the -- as it did in '06, as I said, I don't think that, as I said in my introductory remarks, I don't think that is a forever thing for us, just because of the nature of the gross margin calculation in terms of what happens to the numerator and denominator. So I expect that our gross margin would stay solid, but I wouldn't expect that there would be significant improvements in that number itself. What do you think, Neal?

I would agree, Ron, with the only caveat being, we will -- I think to see an upward move in that gross margin line in any major way, we will need to see declines in our input costs, our raw material costs, the combination of mineral oils, vegetable oils and animal fats. There is potential if they trended downward to gain some additional margin improvement. But other than that, I think we're looking at a more stable environment going forward.

Having said that, though, I need to say that it is not that we've kind of put that out there and said, okay, that's going to be the satisfactory part of our plan. We're always looking for ways to improve those margins, particularly if we can improve them through the introduction of a better technology in our customers. So we're always striving to find ways to do that. But as a practical matter, particularly given the uncertainties around raw materials and how important that is to us, for us to lead you down the path of suggesting that this will -- the nature of this -- the magnitude of this improvement will continue going forward, I think is too iffy to suggest in a really strong way.

So the good news is that you have relatively higher confidence about the stability of margins remaining at the levels that you realized as you closed '06?

I think that's a reasonable statement. Again, the reasonable confidence level is tapered by the fact that for the last few months there has been a little less volatility in raw materials. But certainly we've demonstrated the ability to recover raw material costs, but with a lag. And an uptick -- a significant uptick in raw material costs, or downtick, could create some additional volatility in that margin.

Particularly where timing is concerned, since, as Neal said, we're not always -- we're rarely in a position to be able to be ahead of that curve.

And admittedly, you have sort of got -- arrived at a point that you're probably a little more ahead of the curve, in that your customer awareness of these escalating costs are relatively high, you've probably been able to adjust your prices accordingly. So hence, unless we get a major spike in the raw material, some stability in the margins at these levels are relatively reasonably assured?

We believe that we're in a pretty good position in terms of our customer awareness, and the way we've been working with our customer to try to adjust to this environment. So while I am always a little concerned about the word assured, since I only wish it were that way in life, I think that's a fair statement.

Very good. Thank you for your time.

Thanks for your interest.

Steve DeNichilo, Thomson Horstmann & Bryant.

Just want to say congratulations on 2006. You had a nice sequential improvement in gross margins and certainly says a lot of the value add that you guys bring to the table.

Thank you.

Just quick question on the SG&A line. Wondering if the fourth quarter if you could just kind of break out how much of -- was due to higher compensation expense?

We had a significant -- why don't I let Neal handle that, in the sense that I am not sure we break out those numbers specifically, Neal.

We don't have the specific details for you, Steve. But suffice it to say that 2005 was a very disappointing year from an incentive compensation perspective, as it was from an earnings perspective. And 2006 was quite a reversal. And so there is a very substantial component of our SG&A which is incentive compensation-based, and as earnings trickled up or moved up during the year, so did incentive compensation. And the incentive compensation amount in the fourth quarter was the highest of all of our quarters last year. And I should also mention that our approach to incentive compensation is what have you done for me lately. And so the incentive compensation base adjusts every year based on expected growth going forward. And that will be the case as we move into 2008.

So then in that 27% sales that you mentioned for SG&A, embedded in that, what are your expectations for incentive comp for '07?

Again, it will depend upon -- we don't reveal forward-looking earnings guidance, so it is hard to reveal -- .

Right, but I guess -- .

-- Forward-looking incentive comp. But I would say that we do not expect it to be as high at our targeted budgeted levels as it was in '06.

Does that mean you're going to make less money, or -- ?

That means I hope we exceed budget so I can make as much money.

The difference is, Steve, that we ratchet up the base for earning incentive compensation every year based on our plans for the year.

Got it.

So as we could make -- we expect to make a lot more money this year. I shouldn't put it that way, but as I said, we expect to improve our earnings next year. Let me be careful about that. Because I really don't wish to lead you astray. We expect to improve our earnings next year, but we could improve our earnings and still pay much lower bonus expense than we had this year, because it is based on the plans for the year.

Okay. That makes sense. Just real quickly, just very generally speaking and you might have gone over this in the beginning of the call. But can you just talk a little bit more about the demand you're seeing in the steel markets and auto in particular? I know you guys have heavy exposure to the auto. And then there has been a lot of scary talk out there. But in the end, if you guys really are a value-add and you can save your customers money, I would have to think that the demand for your services will always be there, and I think that shows in your improvement in gross margins. But maybe you can just speak a little bit to that?

Well we certainly believe that demand for our services will always be there, and our issue of course, is how do we build the share to the greatest extent we can. We are subject to the end, as I said earlier, to the end use demands of our customers, which doesn't allow us to drive the demand for our product outside the demand of the markets. Now, within the demand of those markets, obviously, we can establish -- we can build our share, which we have done. We have the leading share around the world in the steel industry, and we have a competitive share in the metal working industry. Where the steel industry is concerned, I think it is fair to say that over the last couple of months we've seen probably more wiggles in the demands than we saw in the earlier part of last year. But that is of course, sensitive a bit to the geography that's concerned. That was probably more true in the U.S. than it was in Europe. I know there have been some -- there has been some discussion out there about the steel makers pushing price increases in the second quarter. So I guess depending on how you read that signal from them, they expect the markets to be okay in '07. We still think there is some wiggles to come, but we think that will get better as the year goes on.

Car demand is -- and of course, for us it is not just general car demand, but it is the car demand of the customers with whom we're dealing, which for us is largely in the U.S. Of course, the big 3 here. And in Europe and other markets it is the local makers there. And the car demand here in the U.S. I think is only expected to be moderate demand for these guys this year. And we think we're well positioned with that to make sure we maintain our share and indeed grow share, particularly as we've talked about CMS. And the car demand in Europe, I think our expectation is now that last year was not a really strong year. We expect this year to be a bit better, but still not to be a red banner kind of year in terms of the demand for units in Europe. I hope -- it is hard to be kind of encyclopedic around the world about this. But I hope that gives you at least some sense for how the markets are doing today, and what near term prospects are.

Okay. And just one last question. As far as any typical seasonality in your business, have you seen any in the past?

No. I think the seasonality is very slight. Wouldn't you agree with that, Neal?

Yes, it is. You have months that are sometimes can be slow. But they -- but given our global presence, there is not a lot of seasonality. So this month will be slow in Brazil with Carnivale. August is slow in Europe with holidays. December can be a bit slow. But really, if you look over our history, there is not a lot of seasonality quarter to quarter on a consolidated basis.

Thanks for taking my questions, guys. Congratulations.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

We'll just give a minute or a few seconds if somebody else has a question. I hate to cut it off too quickly if there is some question out there. But I don't want it keep people unnecessarily either. So I will give them a couple more seconds.

[OPERATOR INSTRUCTIONS] Bob Rezaee, AXIA Asset Management.

I wonder if you can just expand on the following -- on your cash flow, as it improveS, will the Company's propensity, would it be more to increment on the current dividend payment, or possibly entertain doing a stock buyback, or maybe neither? I wonder if you can just sort of -- I don't have a long history with the Company, so I don't exactly know what you've done in the past.

Well we've done both things in the past. We have bought back shares, although we've never had a really big program for that. And of course, we've increased our dividend regularly over the last 30 years or so, although we have not done it within the last year-and-a-half, I guess. Where share buybacks are concerned, I think that's a bit problematic for us. Although we don't -- it is not a matter of religion, we will do it when we think the opportunity is there. But one of the things we're always concerned about in terms of our trading activities, having enough shares out there to make a good market in our stock and to be sure our investors can get in and out and trade orderly. And we think that that is probably at the low end of the level to be able to do that. Now, we'd hate to take shares out of circulation, unless that were -- was a clear slam dunk that was something we ought to charge into.

Where the dividend is concerned, we're very committed to the dividend, obviously, given our past history with this dividend, with our dividend practice. Of course this is something the Board considers every quarter. They keep their eyes on this pretty carefully. So I guess it is -- if you're asking us to choose between the two, I am not sure we look at choosing between the two. It is a matter of doing what we think is the right thing at the time. And frankly, when we think that there are growth opportunities that we should seize, that's where we're really most inclined to spend our money, although it is obvious, again, I just want to reiterate, it is obvious that we have a great deal of commitment to our dividend also. I guess the answer, if I were to summarize all that with your question, I would say the preference is neither.

Perfect. And if I may squeeze just one more question. Once again being new to analyzing your Company, the competitive landscape that you're confronting, has the competition intensified, diminished, maybe if you can just give us some color?

We have great competitors who are always active, and who are always tough. So I wouldn't say that -- there is nothing that I have seen to suggest that our competition has diminished. I believe we've gotten much more competitive over the years.

I see.

Neal, if you have a different perspective on that, I would certainly like for the folks to hear it.

No, I think that capsulizes it very well.

We're in competitive businesses. But we think we stack up very well against our competitors, particularly if you take the cornerstones of what I mentioned earlier, that is our global reach and our focus on service for our customers and delivering value.

Excellent. Thank you.

You're welcome. Okay, I know that question came as we were running -- as time was pulling out. So I will assume that there is -- if there is another question, we would be glad to take it. I don't want to cut it off unnecessarily, but again, I don't want to keep people unnecessarily.

I am sorry, no further questions in queue.

Okay. Well, thanks, everybody, for your interest. Thanks for your support as we've gone along. I hope we can continue to deliver the kind of result which will give you confidence in our future, because that's the way we feel about it. So I will look forward to talking with you again after the first quarter has ended. Thanks a lot.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.