NN Inc (NNBR) 2004 Q2 法說會逐字稿

Good morning ladies and gentlemen and thank you for standing by. Welcome to the NNB second quarter conference call. At this time all participants lines have been placed in a listen only mode. Following today's presentation instructions will be given for the question and answer session. If anyone requires assistance on today's presentation please press the star followed by the zero and the operator will assist you. As a reminder, this conference is being recorded Thursday, July 29, 2004, at this time I'd like to turn the presentation over to Susan Garland with financial relations report. Please go ahead now.

Thank you, good morning. Welcome to NN Inc's second quarter 2004 conference call. If anyone needs a copy of this mornings press release please call my office at 212-445-8473 and we will send you a copy. Before we begin we ask that you take note of the cautionary language regarding forward-looking statements contained in the press release. The same language applies to comments made on today's conference call and live web cast available at www.fulldisclosure.com.

With us this morning is Rock Baty, Chairman and Chief Executive Officer and members of NN's management team. First management will give an update and an overview of the quarter and afterwards we'll open the line for questions. Now I would like to turn the call over to Rock, Rock please begin

Thank you Susan. Good morning everyone and thanks for joining the call. With me this morning I have Dave Dyckman, our CFO and Steve Fray, our corporate controller and Will Kelly, our Chief Administrative Officer. Today Dave will offer an analysis and commentary on our second quarter and year to date results through June 30th and I will conclude the call with comments regarding the current business challenges we face, and I would now like to turn the call over to Dave

Thanks Rock. Revenues in the second quarter of this year were up 17% or $11m versus 2003's first quarter. Approximately $6m of this increase was due to the full quarter contribution of Veenendaal and the remaining $5m increase is comprised of $2m of favorable currency, $1.5m of new business including the Asian business that ramped up later last year and finally $1.5m related to generally stronger demand.

As discussed in the first quarter conference call, in the second quarter we experienced increase industrial related demand for example machines to all electric motor areas and solid automotive related demand in both Europe and North America.

With regards to profitability, gross profit excluding the impact of depreciation which as we had stated previously is a non-GAAP measure was 21.7% in the second quarter of 2004 versus 22.5% for the second quarter of 2003. Primary dynamics in the quarter reflect the negative impact of inventory reduction, a full quarter of Veneendaal and maturing on inflation which were partially offset by volume leverage and cost productions, again including the roll off of certain 2003 expenses such as those associated with the new Asian business.

As mentioned in the release SG&A expense for the quarter was $2.3m higher than the same period of 2003 and resulted from expenses associated with Slovakian compliance work which accounted for roughly $700,000 of the increase. A full quarter of Veneendaal which added $500,000 and the balance resulting principally from currency, start up expenses in Slovakia and China and our level three initiative. As we had mentioned we currently anticipate the full year cost of Slovakian compliance work to be approximately $2m. This increase from our prior estimate of $1.2m primarily reflects increased testing and internal audit requirements associated with ongoing interpretations with a PTA of these published standards, which was accepted and approved by the SEC in June.

As mentioned in our prior release much of the work required to comply with this legislation will not repeat in 2005, however, we do anticipate roughly 50% of this expense recurring next year which is a significant incremental cost to the company.

Diluted earnings per share of 12 cents in the second quarter of 2004 compare with the prior year's second quarter EPS of 4 cents however, included in last year's second quarter was a 12 cent charge related to the closure of our NNRTA operation. Excluding this charge the current year's 12 cent per share compares with 2003's second quarter of 16 cents. Bridging this change and starting with last year's adjusted second quarter EPS of 16 cents, we had a negative impact of material inflation and inventory reductions combining for a negative 9 cents and the SG&A expense as I mentioned earlier impacting EPS negative 7 cents , which were partially offset by volume and cost improvements contributing 8 cents, accretion from Veneendaal and the Euroball buyout adding 3 cents and all other items netting favorably to a penny which builds to 2004 second quarter ETS of 12 cents.

Briefly shifting to debt the indicated inventory reductions contributed to relatively strong cash flow in the first 6 months of the year, which enabled us to reduce net debt roughly $6m since last December. As communicated in the press release with continued emphasis on inventory reductions and cash flow we have increased our targeted debt reduction for the year to approximately $13-$14m even with our start up initiative in both Slovakia and China. And with that I would like to turn it back to over to Rock

Thanks Dave, I'd like to conclude today's call if I could by commenting specifically on some issues surrounding our revised earnings guidance provided in our July 9th 2004 press release. As you may know we reduced our earnings guidance for the year from 76-78 cents a share to 60-63 cents a share based upon five major and we think significant cause factors impacting our results for the year.

In order of impact raw material inflation, inventory reduction, stock 404 compliance; start up costs in Slovakia and China and refinancing of debt. I would like to comment briefly on each cost item.

First raw material inflation impact $2.1m after tax and 12 cents a share. Transfer (p) charges and supply continue to be extremely volatile recently scrap prices have an increased after moderating somewhat in May and June. We are concerned given the tight supply and the continuing inflation we see regarding 2005 and the potential impact it could have in the coming year.

Having said that we currently do not have enough visibility to forecast for unit pricing and scraps (inaudible) charges will settle for 2005 and in a continually inflationary environment we will out of necessity again pass through the inflation in the form of higher prices.

The second issue inventory reduction 1.7m after tax debt 10 cents per share. During current year inventory reductions have all paced cost profitability improvements from our level three programs. Strategically the proper action long term but it still hurts current year earnings. We expect that the timing in 2005 with respect t our level three profit improvements will more than offset further inventory reductions in 2005 and beyond, as Dave mentioned the reductions have had and will have a favorable impact on current year cash flow and debt return.

Longer term our inventory reduction objectives associated with level three will significantly improve our returns on capital employed. The third crossed issue (inaudible) for compliance 1.3m after ax or 7 cents a share. We continue to be somewhat shocked at the cost of compliance in both our terms as well as management resources and retention associated with compliance. Its is difficult for them to comprehend that the authors of (inaudible) and congress is passing the legislation fully recognized not only the cost burden but the time burden they were placing on small US companies we should note 2004 is start up year like imitation and testing of internal controls and we are pursuing plans for ongoing compliance in 2005 that should cut this years cost by a minimum of 50%.

The third large cost item starts up cost in Slovakia and China 1.0m after tax, 0.06 cents a share. Both facilities as what we have mentioned in our long term strategy with respect to not only our geographic expansion of our manufacturing base but following our customers where they locate throughout the world. These starts up costs will insure NN'S long term viability as a (inaudible) component supplier to our global customers.

And then Number five finally, the private placement of $40m of debt $500,000 after tax 3 cents per share like the inventory reductions and start up costs in Slovakia and China the placement of that locked in extremely attractive long term interest rates on 50 % of our total debt. We believe it was the proper long term decision given the currently low position of given the currently low interest environment that exists in 2004.

I would like to summarize by tying in that this was a very challenging year at NN, the operating performance and demand from our global customers remain strong. The combination of those two factors alone in Normal circumstances would deliver solid year over year growth in earnings at NN. The (inaudible) of this year has become a very A-typical year for us with the only exception as Dave mentioned of North American Life vehicle production in the remaining 6 months of the year. We do believe that Overall demand will continue to remain at healthy levels throughout the remainder of the year in North America and Europe and Asia

Taking our operations as our entirety the company is performing from a manufacturing operation perspective as planned. Having expressed, that however we don't react favorably to not meeting our financial and operational commitments. We are taking actions to ensure we minimize the impact of these cost Items moving forward into 2005. As I mentioned the list of cost issues impacting our numbers is in most cases uniquely unfavorable all in a single year, all in 2004. Approximately 60% of these costs were unavoidable material inflation and (inaudible). The remaining 40% inventory reductions, start up cost in Slovakia and china and the private placement of debt represent long term action that will make NN a more competitive and efficient company moving forward.

In total the Big five item I outline represent a $6.6m after tax earning reduction this year for 38cents per share. We look forward to putting many of these cost issues behind us in 2005 although raw material inflation remains an un known for the coming year as we mentioned in our release if raw material and scrap prices stabilize at current levels, approximately 80% of the 6.6 Million of 5.3m (inaudible) can not carry over to 2005. (inaudible) for compliance at 50% of 2004 levels higher interest costs on the refinancing of the debt I mentioned and continuing start up cost at china, will continue into 2005. We also look forward to 2005 based up the following factor we will have a full year contributions from our Slovakian start up in Eastern Europe, second our completion of the start up of our China facility, third a four year level three contribution in all nine global manufacturing facilities, in cost, quality and cash flow improvements, based upon star up and training cost behind us 9inaudible) completed in 2004. Finally we look forward to the continuing execution of our long term revenue and earnings gross plans associated with our strategic business plan.

We would like to now open up the call for any questions.

Ladies and gentlemen t this time we would like to be begin the question and answer session. If you would like to ask a question at the end of this presentation please press star followed by the one on your telephone keypad. You will hear a three tone prompt acknowledging your selections. Your quest ions will be posed in the order they are received. We ask that you please lift your handset before pressing the numbers. One moment please for our first question.

Our first question comes from Marc Potter with Key McDonald (ph) please go ahead with your question.

Good morning guys, just a couple of questions, first of all on free cash flow, where do you expect, I may have missed it in your comments, but you talk about revising the debt reduction outlook for this year and do you have a sense of where the free cash flow generation might be for '05.

Dave Dyckman Marc, Dave,

Hey Dave

Just quickly defining free cash flow as

Cash flow after dividends, capital expenditures and working capital

We envision - Again we think that from operations can be in the 20s, maybe just south of 30, dividends, just north of five with the incremental shares, CapEx still not dramatically different from what we have previously given guidance on at around 13 and I guess some of the working capital initiatives that leaves us at close to $13m or $14m that we have talked about.

Okay, that is for this year? Okay. Would you think that that number would increase in '05, based on what you have got on your plate right now?

I don't know that we are really in a position to give you guidance in the '05. I would tell you that we have publicly stated that inventory productions ought to continue into the next two years, albeit, perhaps not quite at the pace, so we have incremental emphasis obviously on generated cash, now having said that, I think that is about the only guidance I can give you looking into '05. But we ought to be able to take more working capital out of the business as we go forward.

And just from a CapEx perspective, Marc this is Rock .

Hey Rock

You know, we do face China, pretty heavy capital requirements in China in the upcoming years and continuing capital requirements as we continue to ramp up Slovakia. I don't think the CapEx will likely change much next year versus this year, we certainly hope to have earnings improvements.

Yeah that would be nice, me too.

Wouldn't that be nice. Alright another question if I could, just a different back here, can you give us an update on the new business potential for the second half of '04 and moving into '05, where you see outsourcing opportunities, how much could that potentially contribute to the top line? : The next six quarters.

In terms of outsourcing opportunities for the next two quarters, really no opportunity in the short term. We do see outsourcing opportunities moving into '05 and in roller business as well as our ball business, and I would really hesitate to quantify what those would be because I would be giving you guidance on total year revenue right for the '05 (inaudible) which I am not, we are not prepared to it at this point, but we do have, I mean I think it is very fair to say, that we do have two outsourcing opportunities that we are presently working on in both balls and rollers.

Okay, is there anything in those opportunities that would lead you to believe that the profit opportunity is any less than previous opportunities or is it greater than anything unusual, is there more competition for it with other people going after the business?

Not really, we haven't seen a great deal of competition one of the two transactions and there hasn't been any acquisitioning, where we acquire on outsourced product line. Our discipline in terms of purchasing are multiple the returns that we expect would be consistent with what you have seen in Euroball and pipe (ph) transactions.

Okay, so that is the first thing and just one last question on the end demand environment, based on your order book, I realize that your visibility is somewhat limited, but if you are going to have to guess whether you will see an acceleration of end demand or a weakening in end demand over the next six months, which way would you think the wind is blowing?

Dave Dyckman Constant

Pardon me?

I said constant. No real reduction - I mean there will be a reduction we believe, Marc, in North American vehicle production.

I like vehicle production and I think that in terms of the total company we will be offset by the kind of improvements in industrial demands as well as continuing solid demands in automobile and industrial in Europe in particular.

I know at some point there was an expectation that European automotive production would pick up in the second quarter. Are you seeing evidence of that?

We are and that's why I say I mean, I - - if you read our major customers outlook, you know they continue to - - with the one dampening effect of North America Light Vehicle production for the next six, everything else continues to show pretty good - -

And it seems like SKX release was pretty upbeat.

It was very upbeat you know in Asia, North America and Europe.

Okay. So, I was just thinking that there might be some opportunity for acceleration of this demand. So, that's why I asked the question.

Yeah. Although I think we've experienced a good deal of that in the first 6 months of this year already and then there is - -you know, we do have a seasonality to our business that you know even in a healthy environment.

One last question. You talked about the '05 outlook for steel costs in the context of if scrap doesn't go up any more. Are you including the July surge in that scenario?

Yes.

I guess so

The July -- and I don't know of what surge you're referring to - - globally or if you're examining - - the one that impacts us the most is Europe.

Right.

And in Europe, there was a surge from June levels and we don't know what the fourth quarter looks like for Europe yet, but through the first three quarters that we now have visibility in it, it's in line with Canada's 12 cents. $2.1m after tax that we're talking about.

Okay. Terrific. Alright, well thank you. Congratulations on your working through these issues and we look forward to better (inaudible) in the next couple of quarters.

Thanks Mark.

Thank you sir. Our next question comes from Michael Greenwald with the DVT Capital Markets. Please go ahead with your question.

Good morning guys.

Dave Dyckman, Rock Baty: Good morning.

To continue on this raw material theme. I was curious of what amount pricing is going to play into recouping from the raw material cost? You mentioned that it's a $2m - - $2.1m drag now but I think you mentioned that pricing is going to offset this so, I guess - - can you just add a little color to that or what I can expect or what we can expect to see from that aspect?

Yeah, a very high percentage of our current contractual obligations with our customers call for pass through, delayed if you will til January 1st of '05 and that delay means in effect that we've taken this $2.1m after tax hit this year.

But we expect that we will recover to fully recover the impact of the inflation this year or first of next in terms of a faster provision.

What is unclear to us is if there is inflation beyond the current level, we would face contractually the same delays that exist this year - - and so, and my answer to Mark, through the first three quarters, the current inflation is about what we anticipated that - - you know in the beginning of the year.

Should it go higher than that it will be an issue for us next year.

Okay. So can I read that as it's going to be a net zero or it could even be a net benefit if prices drop.

If prices drop significantly, the same delay that existed in this year relative to an increase would be a momentary benefit in '05. That's true.

Okay and regarding inventory, at what rate are you trying to get this down to? I mean, if you look at it as a percentage of - -inventory as a percentage of sales, cost to consumer, whatever measure you want to look at it, historically, it's at about as low as it's ever been and a lot lower. In what rate are you trying to get this down to?

We've said publicly that we've got pretty aggressive goals over the next three years associated with level three. Pretty aggressive goals of -- 50% of total value added inventory. That eventually is work in process for finished goods ,which is somewhere in $13 to 15 million dollar range over a 3 year period of time.

Reduction?

Reduction and as for those dollars, we've taken that number - -we've taken the total of - - what's the number? $4m this year for the first 6 months. We don't anticipate those kind of rates annualized, ongoing, but somewhere in the $3m to $4m annually over the next three years is what we would anticipate.

I think another way Michael is to think about that on a turns basis. We're turning the 6 to 7 times currently - - give or take I mean when you actually look at the quarterly numbers.

Lastly do you have revenue by revenue and EBIT by segment handy? Or should I call you afterwards to allow you to get that?

Well actually that will come out as a part of our segment data in the Q, which -

Okay

comes out in 10 days give or take. And we, as we have been doing in the last couple of calls, defer you for 10 days to make it up then.

Okay, great. Alright well thanks a lot.

Sure.

Thank you sir, our next question comes Bryan Graft with Morgan MC Capital Management.Please go ahead with your question.

Good morning guys.

Hi Bryan

Good morning

I missed the opening of the call so if this is redundant, I express my condolences. What's your -- we track number one heavy metal steel scraps up from about $100 per ton, (inaudible) is really about $280, what are you guys seeing from year-to-date - your inflation rate on steel scraps right now?

It's down about 10%.

Okay

And Bryan - the - you'er quoting a US number?

Yeah US heavy metal - automotive is another area it's gone from (inaudible) again I'm going to back Jan '03 it's up from 130 to almost 350, some really huge (indiscernible) over the last few years.

The inflation in Europe which is where we subjected to virtually a 100% of a freight through charges has been less than that. But it's currently running around the 180 Euro per ton in Euro.

Okay that's helpful and correct me if I'm wrong you guys have kind of consistently done about 6 million or 7 million in roller business a year. Can you give us a sense what is still the captive production amongst the bearing companies in rollers specifically and what you guys kind of see opportunities maybe out 3, 5 years?

The current captive production is about a billion one to a billion two and that's in four basic product category, cylindrical, papers, spherical and needles. And we've mentioned many times that we see that billion one captivity produced by our customers as a big long term opportunity. In terms of what part of that billion one is kind of a 3 to 4 year outlook of what we believe to be a realistic opportunity, probably a third of it.

Okay, how many other competitors that might be chasing that with your abilities?

There's really very few as the numbers suggest when you look at the total of a billion three the market totally is a billion three a billion (indiscernible) one of its captive, that gives you an indication of how few competitors there are independent competitors there are out there on the roller front.

Okay when you guys were addressing the captive area in the Ball bearing or in the Balls there was some and I think you went back and looked at the Germans and some of the Europeans back to the '95, '96 era when there was a lot of demand and they were worried about critical shortages. Is that the same kind of mind set in the captive roller area or is it just a much more technical product, I'm trying to get their side from the standpoint of releasing that to an outsource?

It's the latter the technical issues tend to drive their decision a little bit more than concern regarding demand and ability to supply. Unlike the Ball business (indiscernible) a standard product because each of our customers have pretty individual requirement but (indiscernible) in terms of design are definitely standard versus rollers. For there is unique design characteristics for all those four major product categories I just mentioned by customers. And so the design of the bearing is unique and the rolling element is unique on the roller side and that frankly as been the issue of why it's still very captively dominated. And in each---it's hard to generalize in terms of what motivate these individual customer but we do see trends that suggest that customers continue to be interested in outsourcing.

So it's an issue of confidence and engineering skills and design and tolerances and that type thing?

Yes and I think just confidence in the outsourcing conflict in general.

Are you seeing any differentiation in user demand in rollers versus balls you know rollers - and again I - is a neo fight, I'm kind of looking at rollers being in very, very large low bearing bearings agricultural off-road equipment, big gigantic mining equipment, that type of thing.

That would be trucks.

Heavy trucks, things that are really, really is a tremendous load bearing. Is there any end-user difference - rollers versus balls that you see across the industrial spectrum?

There is a difference in end-users. As you - you did a very nice job of outlining the differences, between the ball-bearing market and the roller-bearing market. And, you know, heavy trucks, as an example of how - is very, very strong particularly in North America, in fact globally right now. So yeah, its not a one-for-one match up in terms of end markets, although generally speaking when the end markets you just mentioned are going well on the roller bearing side of things, is they're going well on the ball bearing side as well.

Okay, okay. Has -kind of going back, has the initiatives that you guys have been involved with, with the rampant raw materials inflation, has fighting those specific fires taken you guys away from some of your in- with best practices level three across your nine different factories as you kind of focus on some of these other issues.

Its really a good question and I would tell you absolutely not, you know, we really haven't our ball off the long-term objective of executing the strategy upwards of level there, its a really critical component in terms of creating competitive differentiation with all of our competition worldwide. On the raw material and the resulting pass through, that is very time consuming, you know customers - our customers are in a very competitive environment and when, you know, we have been responding to competitive issues over the last five or six years with improvements in productivity and passing those along, the environment's changed all of a sudden and now we've got to go an tell them that, you know, economics being what they are, prices are going up and you know, one of the trends then five or six years of the opposite - it's difficult. I - you know we do have sales marketing people in the company that are dealing with those issues daily and those people tend not to have on-going responsibilities on level three for example. I have a direct report, as well as we've got a direct in Europe - to our managing director in Europe that are - that's heading up level three and don't deal with those issues.

Okay. Any new business initiatives at IMC, or Delta Rubber?

You know, in - at IMC in particular, we put pretty aggressive new business develop base, hired and put in place a couple of our regionally and in the midwest as well as the southwest individuals to execute our business development plan - a more focused business development plan. We continue to believe that both IMC and Delta Rubbers top line growth is going to be above our corporate averages from an organic perspective long-term. We haven't seen that particularly at IMC. Delta Rubber this year is experiencing a very nice, you know 10% to 12% increase in year over year revenues versus 2003.

Okay any specific products that are doing better, any new products, anything you can talk about?

You know, rather than looking at it on product line bases, particularly at IMC, I think we shifted it a little bit and looked at our core competencies with respect to manufacturing and are looking at customers that value those core competencies as opposed to targeting individual markets. It's a subtle difference but, a difference that we think will make a difference.

Okay, and the just kind of following, what do you guys see in salary wage benefit and healthcare cost increases inflation this year as you go into '04.

We'll tell the answer to the question on medical inflation, it continues to be very, very significant. Yeah, we're just now starting to look into our programs for next year, as far as P and C type things, we're seeing moderation - V and O moderation. As far as health care, we're still seeing, you know insurance rates that mimic what the health care cost inflation is. Workers' comp., we've got a couple programs in this year, domestically, that have help saved substantial amounts of money so far.

Okay guys; hang in there, thanks again.

Thank you sir. Your next question comes from Michael Corelli, with Barry, Eagle and Associates, please go ahead with your question.

Hi, good morning

Good morning Michael.

You had talked about opportunities, out sourcing opportunities, those are serious - what is the comfort as far as debt levels and would you try to make sure that you still continue to pay the dividend and not, you know, take on any kind of debt levels that would you no longer make you comfortable paying the dividend.

Michael this Dave, we have publicly stated that the company's internal threshold could comfort with that - have always been - once we get above two times debt to EBITDA, again EBITDA not being a GAAP measure but, in terms of debt to EBITDA, we saw that a period upon which we need down the debt back into top- of two times. That enables us to maintain the dividend very much over this today. So there's no philosophical in any way to either of those two - structure philosophies that we've had for a long time.

Okay, thanks.

Thank you sir. Ladies if there are additional audio questions followed by the one. If you're using speaker equipment, lift your handset before pressing the numbers. We do have an additional audio question. Here's a follow up question from Michael Greenwald with BB&T Capital Market please go ahead with your question.

Hi guys just a quick question, why was the tax rate so high this quarter?

Good question Michael. The shift or mix of profit base, heavier in Europe and within Europe heavier Italian versus Irish and even German believe it or not, shifted us from in a traditionally 37% range up into the 39.5%- 40% range. We envisioned it being based on that, we envisioned it being in the higher range through the next two quarters.

So in the 38.5% - 39% range?

Yes.

Okay great, okay thanks.

Sure.

Thank you sir. Ladies and gentlemen if there are additional audio questions at this time please press the star followed by the one. If you're using speaker equipment we do ask that you please lift your handset before pressing the numbers. A moment for the next question. Our next audio question comes from Jerry Happerman(ph) with Lord Abbey please go ahead with your question.

Good morning gentlemen I apologize if this has been asked before, I've been jumping in and out. The SG&A expense ratio seems to have moved up and I know that we're taking on some projects plus practices productivity enhancement and honestly I really don't know where we stand this far as having outside services involved in this, or if this is just with current people doing additional work here? But could you just review that and also if you can if there are consultants in the house, if there are additional items in the SG&A line that are for the purpose of the previous projects. What is the timeline that you envisioned for them and if you could tell us how much it actually is?

Sure, Jerry this is Dave let me try and walk down, outline a response for you. We were $2.3m higher in this quarter versus the prior year same quarter, $2m is actually compliance cost for the largest portion of that $2.3m contributing $700,000 of the increase that's in the quarter. That is principally third party expense related expense. We anticipate that being $2m for the year pre-tax and believe we can get about 50% or more out of that number next year.

We also had a full quarter of Veenendaal which added about $500,000 in the quarter. And then the balance was related to principally product expenses in Slovakia and China, obviously incurring cost before getting revenue ramp and also level three expenses, training a little bit of outsource expense. We've got a third party working with us this year which will roll off next year and that in 2002 neighborhood of a million dollars for the year and we will be able to essentially train ourselves going forward.

I'm sorry if you could just give that last portion what happened to that last section?

I'm sorry in level three which is a lean fix sigma maintenance Sarbanes-Oxley combine program. We've got a third party provider that will pay in the neighborhood of a million dollars through this year pretax. That for the most part should ramp by the end of this year, I---we may have a little bit going into the first quarter but I don't think so. We ought to get the majority of that back as we pick up the ability to roll forward with this program on our own without having a third party.

So basically that one million of expense is (indiscernible) to a very small amount in '05 based on just possibility of residual pay-up in the project?

You've got it.

And then definitely zero in '06?

Right.

Okay, so then looking on at that point and assuming that since there's no major fluctuation in expenses revenue line and expenses from here on out, you really should start seeing some pretty significant SG&A leverage going out into '05 and '06? Am I correct on that or is there something else that's going to come in there?

You're absolutely correct on that and the (inaudible) of events that have made this year an aberration that I think Rock talked to, we see as an aberration, we ought to get that leverage going forward.

This may be from the personal level from your stomach level difficult to answer in a clear manner but is there anything positive that can come out of (indiscernible) issues? The expenses that you're going through and the processes you're putting in?

Jerry this is Rock I think there have been just in the broad category of the legislation associated with Sarbanes-Oxley kept saying associated with government. Although I would tell you that most of the recommendations or most of the requirements I should say are the Sarbanes-Oxley governance issues. We were moving forward independent directors the majority of your board independent directors and independent director with a financial expert, chairing audit committee, a governance committee all those things we were either had in place or were putting in place long before Sarbanes-Oxley came along. And is there value associated with documenting and testing internal control?

Yes.

Is the value that's created there however based upon worth the price? I would say absolutely not, especially from the standpoint Jerry---forget about the dollars we're spending and that's difficult to do as a shareholder I recognize and it's difficult for me to do as well. It's the time and the three individuals that are sitting in this room with me room right now on this call are spending an inordinate amount of their daily time associated with compliance issues on Sarbanes-Oxley

Okay so outside of the qualitative aspect of the sovereign structure of the company I mean honestly if I believed I was dealing with a quality group of people before hand, all we're saying is if got more quality, of the quality afterwards, if the actual operations of the company productivity of the company, the ability for the company to make business decisions faster or better do you see any improvements at that level from the Sarbanes-Oxley?

None.

Okay very good gentlemen thank you very much.

Thanks sir.

Our next question is a follow up question from Bryan Graft with Morgan MC Capital Management please go ahead with your question.

Yes I just wanted to ask relative to salary and wage inflation are you guys seeing what the kind of the overall inflation in the industrial sector across the globe any problems with hiring or retention issues with labor?

No we have none really globally as you know my answer is not only here but in Europe as well we haven't really started hiring employees in Asia yet, in China but we haven't have any issues with those areas.

Okay and then a follow on we had a I think vote and I often brought this up in the past about integrating policies it was born I think in France about extending the work week to 35 hours from 34. Are you seeing any anecdotal information that the Europeans are coming out of this kind of social welfare malaise and understanding productivity issues and work issues relative to work weeks - and is that changing at all from a cultural stand point?

It's definitely changing. I mean you cant pick out - it's changing with an our facilities level three and the drive for continuous improvement associated with that and certainly helping from a cultural perspective. But having said that the writing is on the wall in respect of what's required to compete. And you know employees that are operating under the environment of 30 to 35 hour work weeks are seeing what's happening relative to competitive issues associated with that. In the last 18 to 24 months in particular in Europe there's been a big flight of jobs in Central and Eastern Europe as a result of that. And I think that you're seeing a real commitment from employees and all Western European situations. You stem the flow in doing what's required to make the individual plans in Western Europe more competitive.

Bryan Graft Okay thanks guys.

Thank you sir. Ladies and gentlemen if there are additional audio questions at this time, please press the star followed by the one. If you're using speaker equipment you will need to lift the handset before pressing the number. One moment please for the next audio questions. You have a question from Roy Closefield with Kate Edwards; please go ahead with your questions.

Hello good morning everyone. Just a clarification January 1st price increase for your European customers to what extent can you incorporate what happens between now and the end of December as far as any further increase in the sale price -unit price surcharge and what you get January 1st sort of an average number for '04?

It's an average number - and so - Roy there is 2 components to the after provision. Any unit price that we see can be - and we won't see it until January 1st contractually is passed along 100% with no timing problem. The surcharge obviously is, - will be based on an '04 average and if you know, for the end of the year the '04 fourth quarter end of the year is higher into '05 than what the average is, we would see an impact. It's a good question, really a good question and you know it all - the question really deals with magnitude. It certainly will not accumulate into what we saw this year regardless of what happens with the (indiscernible). And you know if it reaches a magnitude that is significant we really have to hard look at the issue of the timing you know with respect to the contracts because this year it's been a really -- its' been devastating to us.

What is the days with your US auto customers next time you re-negotiate?

I'm sorry what's the date with the US customers. That's different I thought than January 1st US auto customers.

They all pretty much line up on January 1st.

So more or less all your auto customers?

Yes.

Okay thanks.

Does that answer your questions?

Yes.

Gentlemen at this time we appear to have no additional audio questions please conclude with any closing remarks.

Again thank you for your time this morning and for participating in today's call.

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