Quaker Chemical Corp (KWR) 2007 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Quaker Chemical Corporation's fourth quarter 2007 earnings conference call. At this time all participants are in a listen-only mode. A 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. Thank you, Mr. Naples, you may begin.

Thanks very much. Welcome, everybody. Glad to have you. Thanks for joining us. As usual, I'm here with Mark Featherstone, our CFO. Not as usual, though, I'm traveling, so I'm on a remote phone. So forgive any delays that you may hear or any backing and forthing with the questions. We'll try to make it as seamless as possible. And as usual, I'll make some overall comments and Mark will provide some detail and of course, we'll take any questions you may have when those are finished.

We're very pleased to have you all note, I hope that 2007 was a heck of a year, and I'm pleased to say it was a heck of a year because it always makes reporting a little easier. As much as we're pleased by our financial results in 2007, and I'll talk about those in a minute, one of the most important and satisfying aspects of 2007 are really a couple of things. Number one, that it follows a very strong earnings growth year in 2006. So, it's part of a succession to the kind of progress we made in '06. And second is that it represents a remarkable recovery, I think, from the admittedly tough years of '04 and '05. And we've done a great number of things to make that happen, from shifting our organization to realigning our costs, to refocusing our operating priorities, resetting our future oriented strategic steps that we're taking.

And it's important to note that this recovery in '06 and '07 has been accomplished without the external environment changes and any change in external environment that largely caused the difficulties of '04 and '08. These really haven't gotten any better in the last couple of years and they haven't provided any relief on their own. I'm talking about raw material prices. They're certainly today as much as if not more of a challenge than they were then. Indeed we all know crude oil is flirting with $100 and we've seen other markets like animal fats and vegetable oil start to climb, particularly as they get competition from biodiesel usage and that kind of thing.

Our markets and our competitors are as challenging as they ever were, certainly as challenging, if not more so than they were a few years ago. Also, we've seen customer consolidation over the last few years, with its own set of possible implications for the competitive environment. So, essentially nothing has really changed from the hard days of '04 and '05, except what has changed is what we've done to respond to those and I'm proud to say the organization has come a long way in doing that. So, the bottom line for me is the progress of '06 and '07 is the story of a very resilient company, determined to deal with realities as it finds them, but still devoted to the fundamental principles it has developed over the years as the heart of how it wants to operate and how it feels it can carve out its unique competitive position. That is the value the customers are trying to create.

Global scope and reach and integration of our business, and our use of global knowledge, because in our company, knowledge isn't owned anywhere. It's our most important asset. It's what we sell, and knowledge we gain everywhere in the world is used everywhere in the world. It's not owned anywhere. So, those are very important aspects of what '06 and '07 represent, not just the financial piece. For me, as important as are the financials, of course, the kind of turnaround the Company has made and the kind of principles on which it's built are the best and most promising part of '06 and '07, especially '07, because importantly I think it speaks to the strength of our company character, if I can call it that, if you will, and its long-term promise for our future. Whatever that future throws at us.

Well, let's return to some of the specifics of '07, which I would like to highlight with you, just to point out what a fine year it was. We reached the very meaningful market for us. It's the first time that we're a [half billion - corrected by company after call] dollar company, and we expect to go from there. Our sales this year were up, an excellent 19%, and a real contributor to this was real volume growth. I think that's an important aspect of how we're building in our markets, and our growth this year of 19% of course is far ahead of industry or market growth rates. It's been that way for the last few years and certainly '07 was a sterling example of that. It's interesting to note for what it's worth that the year also saw our largest-ever sales month and our largest ever sales quarter. That's nice for our organization to realize.

Our net income grew over 32%. I don't have to say the kind of growth that that represents in markets that are as difficult and mature as the ones we're in, but it's indicative of the kind of position we're able to carve out. Our operating income improved to over 5%, if one strips out the environmental settlement charge that we took earlier in the year, which shows the progress that we're making towards the goal, toward our goal to push this operating margin up. That's an important aspect of what we're trying to get done.

Our EBITDA this year was our highest ever in the company's history, and the EBITDA leverage ratio that we're operating with fell to well under two times. Our operation has generated over $27 million in cash, which is the best that the company's ever done as far back as we bothered to try to look. In fact, I would want to point out that even working capital generated a bit of positive cash and this was done in the face of an $85 million sales increase, so despite all that kind of increase in -- those dollars increase in sales, we were actually able to take money out of working capital. And I note this because we've been talking all year about our focus on working capital, and I'm really pleased to say that what we've accomplished is the reflection of our words and we made good on the kinds of things we said we wanted to try to get done here.

I also should point out that our balance sheet got stronger, more cash, less net debt and a very, very solid net debt to capital level. So, we feel good about that aspect. Not only the earnings aspect, but the cash generation and what it means to our balance sheet.

In nonfinancials, I should remind you that earlier in the year we settled the California environmental problem we had, which for us removes a large level of uncertainty and exposure and puts that behind us. And we did that I think on a very favorable basis. That gives you a sense, I think, of the highlights of the year, and I think it represents excellent performance on the part of our organization.

Now, I'm going to stop with the stats because Mark will give you more detail, but I did want to be sure to try to get at these highlights so that the essence of the year's performance didn't get lost in the detail that you'll be hearing about in a few minutes. I do want to look ahead for a moment. As you know, we haven't in the past forecast the upcoming year and I certainly don't want to start doing that now. But I would like to give you a sense of how we see 2008. We're optimistic and we go into the year with the same kind of performance expectations and demands that have energized us in the past few years. We're determined to continue the level of accomplishment we've had. We expect that the rate of sales growth is likely to be less than we've seen in the past couple of years. It was about 9% in '06 and 19% in '07. But it will still be well ahead of the market and industry growth rates where our focus, as I said earlier, on continuing our profit improvement and we expect that the rate of profit growth will significantly outstrip the rate of sales growth.

There are, of course, some wild cards out there in a world that seems only to get more and more unsettled and you all are as close to this as anybody as investors, so you know the litany of this very well. In our world, it comes down to continued economic health of the countries in which we operate and the welfare of the consumers that we have to rely on to buy the consumer durables that our products look to support. Economic weakness usually hurts in that regard, but I think one of the advantages we have is the fact that we are a business that's spread around the world and we have a good portfolio of business around the world, which allows us to get our portfolio effect under the economic circumstances in the country in which we operate. But certainly the economic environment is a concern to us and we'll keep our eyes focused on that.

Of course another concern is the value of the dollar. But because it does have implications for the economies out there, it has implications for the trade flows, has implications for the value for the price of oil, so it's something that's important to us to be sure. And of course, I've already mentioned raw material, but it continues to be a wild card. There's a tremendous continued volatility in crude oil. I mentioned already that we're seeing increases in vegetable oil and animal fats because of the competition from biodiesel and other competing uses. So we're focused on these wild cards. We are focused on making sure we stay responsive for what it requires of us. While I point these out as wild cards, I want to say we have not ignored these challenges in our plans for the year. We'll deal with - we'll define it as we've always done and despite these wild cards, we remain optimistic about the year, and as I said earlier, about our ability to deliver another good year. So I hope that gives you some sense of our perspective on the upcoming year.

Now I'll turn to Mark so that he can give you a little more detail on some of these aspects and then as I said, we'll be happy to take any questions, so off to you, Mark.

Thank you, Ron. Good afternoon, everyone. As Ron indicated, we had a strong fourth quarter, which represents a continuation of the progress we've seen all year in 2007 and also in 2006. I will spend the next few minutes focusing on the fourth quarter P&L and then we will go on to questions.

Revenues for the fourth quarter compared to the last year are up 23.3% to $142 million. The growth was driven by volume growth, pricing improvement, as well as higher revenue related to the CMS channel. Volume for the quarter was up about 13% from last year's quarter, including the higher CMS revenue from both new programs and the renewals and restructuring of several CMS contracts. Foreign exchange also increased revenues by approximately 8%, as the U.S. dollar weakened against most currencies. Volume growth occurred across all regions compared to the prior year quarter. As we've discussed in previous quarters, demand in the North America fuel markets continued to be somewhat mixed. While volumes were improved over the prior year, they were below third quarter level and this was despite low inventory levels at fuel service centers. And while we're off to a good start in 2008 compared to a weak start in 2007 in the U.S. steel market, the demand outlook for 2008 is cautious, given the uncertain economic environment.

We also continue to see pockets of slowness in some of our automotive customers. However, our sales, particularly through the CMS channel, have increased due to continued conversion of systems from competitor to Quaker products, as well as other factors. The higher sales prices reflect our continuing efforts to work with our customers to deliver value, while also recognizing the impact of higher raw material costs. Overall raw material costs continue to remain significantly higher than prior year levels, up about $10 million in 2007 full year versus prior year levels. Our current estimates are that raw material price increases in 2008 will exceed those of 2007. Although a slowdown in the global economy or change in biodiesel subsidy levels could impact us. As we have discussed before, we have been able to work with our customers to recover at least most of the raw material increase costs through higher selling prices and keep our margins stable, relatively stable throughout 2007.

However, as we've discussed in the past, there usually is a lag effect between when our raw materials costs increase and when our price increases go into effect. During the fourth quarter, we experienced the catchup effect on pricing compared to raw material costs and recovered some margins. This was the reverse of the third quarter, when prices for tallow and vegetable oil products increased faster than our price and recovery. Now, with crude oil prices now hovering around the $100 range, mineral oil prices have been increasing some, but our mineral oil prices are tied to ICISLOR which tends to be a little more stable index than the West Texas Intermediate, which is a widely traded commodity.

Turning to segments, I would like to now give you some data on the segment basis. As you recall, we segment the business into three areas. Metalworking process chemicals, coatings and other chemical products. In our metalworking process chemical segment, which makes up 93% of our sales, revenues in the fourth quarter compared to '06 were up 18.8% to $132.9 million, and operating income improved 10.8% to $18.3 million. Sales in our coatings segment, which makes up about 6% of our sales, increased about $700,000, or 9% due to higher temporary and permanent coatings sales. Operating income increased 27% to $1.9 million. In our smallest segment, called other chemical products, which represents 1% of sales, sales were up $700,000, due to the acquisition of Frontier Chemicals earlier in the year.

Turning now to gross margin, gross margin as a percentage of sales was 30.6% this quarter, which represents a decrease from the 32.3% of the fourth quarter of 2006, but was in line with the first three quarters of 2007. And this is despite the escalation in animal fat and vegetable oil prices. Although there was continued escalation in raw material costs over the last year, gross margin in dollar terms was up about 17%, or $6.3 million for the quarter, due to a combination of volume growth, price recovery actions, as well as stronger performance from our CMS channel.

Moving on to SG&A expenses, as a percentage of sales, SG&A was 24.9% of sales for this quarter, versus 28% in the fourth quarter of 2006. And this compares to a full year 2006 SG&A percent of sales of 26.2%. In absolute terms, SG&A for the quarter was up approximately 10%, or $3.2 million, with higher foreign exchange rates accounting for about two-thirds of that increase. We have also continued to invest in future growth opportunities, including China, and have higher commissions on the 20% growth in sales and with inflationary increases accounted for most of the rest of the increase.

Touching briefly on operating income, reported operating income as a percentage of sales for the quarter was 5.7% versus 4.3% in the prior year quarter, benefiting in part by the settlement of the AC Products environmental litigation earlier this year. Other income is higher than '06 primarily as a result of foreign exchange gains this year versus foreign exchange losses in the prior year quarter. And a decrease in net interest expense compared to the fourth quarter of 2006 is reflective of somewhat lower average debt balances outstanding to the fourth quarter of 2007 as well as higher levels of interest income.

The effective tax rate was much higher in the fourth quarter, at 43.6% compared to a 28.2% rate in the fourth quarter of 2006. There were three major drivers affecting this rate. First, due to a tax rate change in Italy, we had to revalue our deferred tax assets, which cost us about $400,000. We also experienced a change in mix of income out of lower rate jurisdictions such as China and into higher rate areas, including the U.S. In addition, the adoption of FIN 48 also contributed to the increased rate as well. For 2008, we will continue to benefit from the tax holiday in China, but currently expect a tax rate higher than the full year 2007 tax rate of 29.3%. However, we also expect to continue to experience volatility on a quarterly basis due to FIN 48 and potential changes in the income mix.

Looking at the balance sheet, our net debt has decreased from December 2006, primarily due to the higher earnings and the significant working capital improvement in the second half of 2007. Our net debt to total capital ratio was 32% at December 2007 compared with 40% at December 2006.

There have been a few questions on working capital and cash flows during our previous calls, so I'll spend another minute on this area. First, during the quarter, we again experienced an improvement in working capital, despite strongly higher sales and had operating cash flows totaling $11 million during the quarter, which builds on the progress we have shown during the second and third quarters. Now, this improvement in working capital was especially noteworthy given the double-digit sales growth we had. Finally, as we indicated during our earlier conference calls, the first quarter historically is our weakest cash flow quarter and cash flow tends to improve as the year progresses. And we expect this trend to continue into 2008. And that concludes my prepared remarks.

Thank you, Mark. At this stage, we'll turn to any questions people may have and do our best to clarify things, any issue that you may have. I'll turn to you all for questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question is coming from Daniel Rizzo with Sidoti and Company.

Hi, guys.

Hi, Dan.

Can you give me what the coatings segment sales were for the quarter?

Sure. Coating sales were 18 -- were $8.4 million for the quarter.

Okay, and in terms of the sales growth you guys posted, if you did it on a percentage basis, how much was price versus volume, I mean like 60/40?

It was much more volume than price. There was a factor -- volume was 13%, including the CMS change that we talked about. FX was 8% and that left about 3% on the pricing mix side.

Okay, and I see you guys were able to drop your SG&A expense as a percent of sales significantly year-over-year. Is this the level we should expect it to be at going forward around here?

Well, we do expect to be able to improve our SG&A going forward. It's going to be a little bit of a wild card because of the various expense levels related, that are directly related to sales in various areas, so some of it depends on where we get the sales growth, but we do expect to try to bring down over time the level of the percentage of our sales represented in SG&A, yes.

And I know you settled one of your environmental concerns. Are there any left?

I guess you never say never, but we're not aware of any. And we certainly work hard to make sure that we don't get caught short in any way.

Okay. All right, thanks, guys.

You're welcome.

Thank you.

Our next question is coming from Robert Felice with Gabelli & Company.

Hey, guys. Congrats on a great finish to what's really been a strong year for Quaker.

Thanks, Bob.

Thank you.

A couple of quick questions. You mentioned a couple times that raw materials continue to tick up. We see tallow still at pretty high levels. Base oil prices continue to tick up over the last couple of months, probably at a magnitude of 10% to 15%. I'm just wondering where you stand in terms of your price cost gap and do you have enough pricing in place today to offset some of the more, the more recent cost pressures?

Well, it's -- as Mark indicated, this is one of those areas where you're always a day late and a dollar short, but I think that we think that we probably have been able to over time achieve recovery of, in the 80%, 85% area. And we have a continuous effort with our customers to try to review these questions and stay current on them, so we don't fall behind the eight-ball. So, yes, I do believe that we have a process in place that allows us to stay current with what's happening in these markets. Of course, there's always matters of negotiation. We're never going stay current 100% as much as we would like to and as much as we try to explore that with our customers. But do I think we have good process. It's regular. We have good conversations with our customers. They understand where it's coming from. They understand the value that we deliver for them, these are usually constructive conversations, so I think we're in good shape in terms of getting the best out of the relationship we have with our customers to cover the increases in raw material costs.

Okay. So, is it fair to say, then, that as you look out at the environment as it stands today, relative to the pricing that's in place, you should be at a minimum able to maintain your gross margin level in '08 versus '07?

Do you mean gross margin percent?

Percent.

Yes, probably, again, I don't want to be in the business of forecasting here, but I would expect that our gross margin levels in '08 will probably be in the same ballpark, a little bit down or a little bit up, but generally in the same level. Mark, do you want to illuminate that, expand on that at all?

Sure. With the start of the year, we did enter into discussions with our customers around the world, about increasing prices in early '08 based on the raw material prices that we were experiencing in late '07. That has been a further uptick in the raw material prices in '08, so, you know, inevitably, as Ron mentioned, we'll need to go back to our customers and have further discussions to recover those prices as well. We also have to see whether those new price increases hold because sometimes prices do not hold. But we are committed to continue discussions with our customers to recover increased raw material prices.

I was talking specifically, Mark, about Bob's question related to the percentage gross margin levels. (multiple speakers)

Yes, I expect that just like we kept our gross margin in the same ballpark throughout '07, that's certainly what our goal was for 2008 as well.

And I think we'll be able to do that, Bob. Although obviously these are not precise projections, so there's a little bit of up and down in that, but I think we should be in the position --I think we have the position with our customers that we have a process in place that should be able to, enable us to maintain the kind of gross margin percent levels we're seeing.

So if I'm reading into some of your earlier comments and taking your answer to the previous question into account correctly, you--

Don't try to stick me with consistency here.

You mentioned before you expect revenue to be down probably in the mid to high single-digit range. You said it will be less than '06/'07 levels, yet you said you expect operating income growth to be well in excess of that. You expect gross margins to be relatively flat. Does that mean you expect SG&A to come down by a pretty decent amount in '08?

We do think the year-to-year comparison in SG&A will be favorable, yes.

If I look back over the last five, six years, you've been able to whittle SG&A as a percent of sales down by probably about 100 basis points a year. Is that kind of a fair run rate going forward, that it will decline by about 100 basis points?

You're asking for a level of precision there, Bob, that I'm uncomfortable laying out for you because there are so many variables in moving that one way or another but -

Well, give or take a little bit.

Yes, no, I expect we'll be able to dial back the percentage. I expect that we're going to grow sales faster than we'll be growing expenses, yes.

Okay. And also on working capital, you really did a great job turning that around throughout the year. I guess could you discuss what you're doing differently specifically or what's changed as the year progresses? As we look out to next year, do you expect working capital to be a use or a source of cash?

No, I would expect working capital next year to be a source -- I mean to be use of cash. I'm sorry. One of the things that we did this year is got a lot of our CMS business in line, in terms of its working capital, particularly in terms of receivables, and we -- the result we had this year was really the result of setting some goals and staying tremendously focused on those goals. It's amazing the power that has. Which is not to say in the past we were lazy about working capital, but it's much more of a let's keep the process rolling. And this past year, 2007, we really set the goal to bring it down dramatically. However, as I'm sure you're aware, you can't do that forever. There's a certain level of working capital you need in a business just to keep it going.

You do have wild cards in that regard also. For instance in China, there's a whole different cultural feel about how people pay their bills and when they pay them. And indeed over the past year, we've been seeing China pay us in bank notes and we've been able to negotiate and cash those bank notes because their interest rates were very reasonable for that. But now we find that that's changing dramatically and we're not sure we want to continue to cash these bank notes the way we've been doing in the past, so that may have an implication on the kind of money we've got invested in working capital, but that won't be because we're not paying attention to it or it's climbing unexpectedly. It will be because we made a financial decision about how to finance the business out there.

So, I don't expect that working capital will be a source of funds in '08. I do expect that kind of effort -- I do think that the kind of effort we've made in '07 going into '08 has our working capital levels at about the kind of range where they should be. I think there is some opportunity to get those down, maybe a little bit in Asia-Pacific, if some of those dynamics change a bit. But where we are in Europe maybe could improve a little bit. Where we are in the United States and where we are in Asia, in South America are probably what you kind of have to expect those to be. So, that's a long way, that's a long answer and I'll summarize quickly by saying, Bob, we don't expect working capital to be a source capital and a source of cash in '08 and our activities in '07 probably brought our working capital levels as a percentage of sales down to where they probably will be, in the ballpark of where they will be over the long-term.

So, you've right sized it now and it will grow with the business?

Yes. I expect that's closer than to the fact that we'll be generating cash out of working capital.

I would just like to add one more comment on the working capital front. In 2007 and Ron kind of alluded to this, we were able to solve a couple major customer issues in terms of getting prompt payments, so we have somewhat of a one-time favorable benefit in '07, which by nature wouldn't be able to happen in 2008 as well, and that was probably $5 million to $7 million of the working capital reduction we achieved in '07.

Okay. That's helpful. Thanks for taking my questions.

You're welcome, Bob. Thanks for your interest.

(OPERATOR INSTRUCTIONS) Our next question is coming from Patrick Flavin with Flavin, Blake and Company.

Good afternoon, gents.

Hi, Patrick.

Nice quarter. As the guy was banging on you last quarter about working capital usage and cash flow, I tip my hat to you.

Thank you very much. I made a note of that, Patrick, from the last meeting.

Yes, but I just want to make sure that I'm not hearing any back sliding in here about one-time events and everything, this $27.5 million of cash flow looks awfully good.

Well, there's no back sliding. I think the reality, is and Mark tried to alluded to this, I think, where working capital is concerned, the first quarter is always our worst quarter in that regard, so you won't see the kind of -- you won't see the first quarter doing what the fourth quarter did.

Okay.

But we do expect -- as I've spent a fair amount of time answering Bob's question, we think we're in good shape in working capital.

Sure. I'm not interested in the first quarter. I'm interested in the year.

Okay.

And you see the beneficial effect it has on your interest costs everything else.

Absolutely.

It's obvious. Anyway, I tip my hat to you guys. You've done a really nice job this year.

Thank you.

Question on this, I guess this is related to the, it was the first question related to the quarter and that was the composition, the mix of volume, pricing and FX. And what I heard was 13% on volume, 8% on FX, and 3% on pricing. This raises two questions, one of which is I'm surprised at how little the pricing increase is given the order of magnitude of the increase in your raw material costs. So, although, I hear that you're doing a better job of getting pricing in line with your cost increases, it strikes me that 3% is awfully low.

Mark, can you put a little more color to that?

Sure. In terms of the raw material increase that we experienced in '07, that was about $10 million, so if you look at our revenue for the quarter, a 3% price increase would translate to somewhere in that $3 million to $4 million range, so it would indicate some, at least being even or actually as I mentioned, we actually kind of overrecovered having that catchup effect from prior periods. So--

Well as I look, Mark, your cost of goods sold is $377 million for the year, and you're telling me that your raw materials costs, and I don't know the composition of raw materials in there, but I suspect it's high in your case, but you can help me with that. If that's 10%, how much of the $377 million is raw materials?

I don't think the number was 10%, Patrick.

I'm sorry. $10 million.

$10 million, right. Yes, we typically don't break out our costs of goods sold into pieces.

Okay, but a 3% increase would cover that for the quarter is what you're telling me?

In sales prices, right.

Okay, and then, Ron, as a second question to that mix, a 13% increase in volume is stupendous frankly in this day and age when things aren't moving very well. You have to be gaining prodigious market share. Can you take us around your product markets, like steel, auto, et cetera, and tell us what kind of market share gains you think you're picking up here?

Yes, sure. I'll try to give you a top line to that without boring you with it too much. If you look at steel around the world, as you all know, I think that we are clearly the leaders in market share in steel, for all the chemicals that go into a coal drilling mill, particularly in the rolling oils, which is probably the highest value-added products they use in the cold mills. In the United States, we have -- if you look at it by region, we have easily the highest market share. Probably three times our closest competitor, and I'm reluctant to refer to specific numbers because the market share numbers are hard to come by in really reliable numbers. So, we have to work in orders of magnitude, I mean for us to [seize] planning, we work with numbers, but of course that's something we want to keep private. But the -- Mark mentioned that the growth in steel in the United States, the growth in the steel business in the United States was a little soft in '07, but our -- we've been able to gain market share.

We certainly maintain the share we had in most customers and we've been able to gain market share in certain mills, particularly as new mills are brought online through ventures, cross-border ventures, because with some of these cross-border ventures, say CSN or Mittal, we have excellent relationships around the world with these customers and sometimes we're able to leverage that into improved share in another market. In Europe, we've, again, always had the highest share in that, for a long time have had the highest share in that market. We're the key supplier to the biggest players from Mittal to Arcelor to other large makers in the, on the continent.

Asia-Pacific, our steel share is the highest in the market and we've maintained that. We've picked up -- in fact, grew it a little bit I think in '08, or '07. It's probably -- we're probably at the limit of how high we can go with that in terms of share development, so we'll be growing with steel in Asia, we're probably -- steel in China, I'm sorry, specifically, we'll probably be growing a little more with the market than we have been. And we've been outgrowing the market there. Our position is very strong, though. I think I've pointed out in past conference calls that as new mills come online in China, we get virtually everyone to start. Where have I missed?

In South America, again, we are the leading player there. There's really nobody even close to us there, and we've -- we maintained the, our business with the key customers there in '07, although I have to say that business has gotten a lot more competitive because more of the field customers down there are focused on trying to develop a two-supplier strategy, but we are, even in the face of that, we're maintaining the share that we have down there and we expect that we can get a little bit of growth there. But our share is already so significant there, that it's probably not realistic to plan on a lot of share growth there.

So it's a mix of strong position in China. We think we'll grow with the market there. Strong position in Asia-Pacific, but we're probably not going to be getting significant new share. In the United States, we have done very well in terms of building our share. We think there's probably some more share opportunity there, I think it's fair to say. In Europe, we think there's a little bit more share opportunity there, as strong as our share is there because customers do come and go there.

In metalworking, our, as you know, metal working is a less centralized market, less aggregated market than steel, so you have many more customers and more competitors with different shares. We are probably, on a par with the, other than the fact that there are two companies that have, one company that has a significantly larger share than us and that's Castrol. Another company that probably has a slightly larger share and that's -- folks who are probably on a par with the major competitors below them, with shares in the range of, the low -- middle single-digits. And we're building that business in Asia-Pacific, we had a lot of growth in metalworking in Asia-Pacific this year, although it was off a small base and we are growing that business in China. In Europe, we're making in roads -- we've maintained a position that we've had particularly in the French automotive market. We're making some inroads in the German market. In the United States, we're making significant in roads in automotive through the CMS business that we've developed there and our product sales are moving along smartly with the development in CMS business. And in South America, again, we've had strong positions there and we're using CMS as a leading edge there to try to build our business, build our share in metalworking in South America.

So, as I said, without trying to bore you too much with more detail than you want to know, I hope that gives you some sense of where we stand in our major markets around the world.

Yes, well, the volume growth is very impressive, Ron. In terms of capacity, does that present you with capacity challenges, or no?

No, that's not really a problem for us at all.

Okay. Keep up the good work.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question is coming from Gerry Heffernan with Lord, Abbett and Company.

Hi, Ron. How are you doing?

Hi, Gerry. Nice to have you on the call.

Nice to be had. Thank you. Can you guys comment on your current net debt to capital ratio, where you're at on that?

Yes, I think the current number, Mark, check me on this, we ended '07 at 30%, or 32%. Is that right, Mark?

32%, correct.

32%, it was down from, I think it was 40% last year at the end of the year.

Yes, that's right.

Right. Okay. That's good. That's what I obviously easily had worked out too, also. Seeing a number that low is not something I'm used to with you guys and you certainly should be congratulated on that. It does beg the question as to what do you guys see as far as the, you know, a competitive effort in using your balance sheet? How -- having it down to this level, what do you do with it here?

Well, we would like to -- we've always tried to reserve our debt capacity to make acquisitions. We haven't made a major acquisition in a few years, or a sizable acquisition, put aside a major one, in a few years and we would like to bring something home in that regard. It's not that we stopped working on it it's just the productivity of what we've been working on hasn't brought anything home to us. So, we do want to try to do that. And we try, as I said, to reserve our debt capacity for that. You are a little unkind to say you don't see us in these levels usually. I think for a long time we were in these kind of levels until the last few years where we had the kind of profit difficulties we had in '04 and '05. I don't think we're in strange territory for us, but we are in new territory based on where we've been for the last for you years. I do agree with that, Gerry. We've always taken the approach that we've tried to reserve the debt capacity for growth and particularly if we could use it for acquisitions.

Understood, and I was thinking of the last five years and certainly no intent to be unkind.

No, I know, Gerry. I just couldn't resist (inaudible).

Just for that, I'm going to bring up a quote you made to me earlier just to put you on the spot. Where you made the, you made the statement to me that you are still seeing raw prices going up, SG&A prices are, you're working hard to contain them, but you don't expect the operating margin percentage to be above 5%.

No, I don't think I ever said that. Certainly it's our goal to get -- as I mentioned earlier, we are over 5% this year if you take out -

I know that you are.

The charge, and it's our goal to move that number considerably north of that, Gerry.

Okay.

Maybe if I said we don't expect it to be 5%, maybe I was referring to a specific time period. Certainly in terms of our goals, we certainly expect it to be moving smartly north of 5%.

Right. That was on this year basis, not on a long-term basis.

Okay.

Trying to bring this all together, you have a strong balance sheet. You went through with the previous questioner about your marketshare positions, some very strong gains that you guys have been making. With the market being difficult the way that it is, in regards to raw materials, where steel and where metals are being worked or produced throughout the world changing, is acquisition the right move towards continual blocking, tackling and winning market share is a better move? Give me a compare and contrast on that, if you would.

Yes, I think that acquisition only makes sense if we're adding -- I shouldn't say only makes sense. When I talk about acquisition, we are much more likely to look for acquisitions that are either geographically strengthening for us or, for instance, in metalworking, if we could find some right players in metalworking, we could build our share in metalworking to certain markets where we aren't as strong as we would like to be. Or it's where we can bring on complementary products. I don't expect acquisitions to take the place of, as you call it blocking and tackling in our core business. We're not likely to do acquisitions right in the heart of our core business unless there's really a strong opportunity to bulk up and really improve the strength of our market position somewhere. So, we don't want to grow the business in our core business simply by acquisition, but we do want to take advantage of opportunities for an important bulk-up somewhere, particularly if it's got geographical implications and what would be more preferable for us is to expand our product range and our segment strength in certain areas of our steel market or metalworking market.

That's great. Thank you very much for your time and congratulations on some real good work this year.

Thanks, Gerry. Thanks for your interest.

Gentlemen, we have no further questions at this time. I would like to turn the floor back over to management for any closing comments.

I don't have any closing comments, except to say that I appreciate the interest of others who hang in there with us through the tough times, even through this relatively longest call. As I said, we're optimistic about '08 and we've got plans in place to try to be prepared for the things that we think can happen to us and with some luck and good fortune, we'll be able to manage our way through any difficulties that come in the year. So, we are optimistic about having another good year in '08. With that, I'll look forward to talking with all of you again in a few months as we report on the first quarter. Thanks for your interest. Take care. Bye.

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