NN Inc (NNBR) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the NN, Inc. fourth quarter results conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for a question-and-answer session. If you should require assistance at any time during this conference, please press the star followed by the zero on your touch-tone phone. As a reminder, this conference is being recorded today, Tuesday, February 28, 2006. I'd now like to turn the conference over to to Susan Garland with the Financial Relations Board. Please go ahead, ma'am.

Thank you. Good morning. Welcome to NN, Inc.'s 2005 fourth quarter and full year results conference call. If anyone needs a copy of this morning's press release, please call my office at 212-827-3777 and we'll 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 webcast available on www.earnings.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 up for questions. Now I would like to turn the call over to Rock. Rock, please begin.

Susan, thank you. Good morning, everybody, and thanks for joining the call. I have with me this morning Jim Dorton, our Chief Financial Officer and VP of Business Development, Will Kelly, our Chief Administrative Officer, and Tom Burwell, our Corporate Controller. Today, Jim is going to offer an analysis and commentary on the fourth quarter and full year results through December 31st, 2005, and then I want to conclude the call with comments regarding an outlook for 2006 and just some brief comments on the past year. With that, I'll turn the call over to Jim.

Thanks, Rock, and good morning everyone. The fourth quarter was a positive rebound from the third quarter for NN. Demand was strong for balls and rollers from our U.S. facilities and our IMC unit continued its recovery and performed at record levels. Demand in NN Europe also recovered somewhat from weaker mid-year levels, although it remained slightly below our original business plan for the year. We earned $5.1 million in net income in the quarter, or $0.30 per share. This was about 20% ahead of our plan, and an excellent comparison to last year when we had a loss of $0.01 per share, due partly to a 2.5 million after tax charge or $0.15 per share for global rationalization of manufacturing facilities.

I would like to note that we had a $0.02 per share gain from the sale of land in the quarter, and another $0.02 to $0.03 in various year-end reserve adjustments. So from operations, you should think of this as a $0.25 or $0.26 quarter.

Compared to the fourth quarter of last year, actual sales were up about 3%. But due to the decline in the euro versus the dollar, reported sales were down 2.4 million, or about 3%. In the fourth quarter of last year, the euro exchange rate was $1.30, compared with $1.19 in the fourth quarter of this year, which reduced our reported revenue and earnings from Europe.

As I mentioned in the press release, cost of products sold decreased as a percentage of revenue in the fourth quarter compared with the prior year to 75.1% from 81.8% due to cost improvements related to our Level 3 program, and our ability to successfully pass through raw material cost increases. SG&A was down slightly in the quarter compared to last year, due to lower SOGS costs and consulting.

Looking at the full year, we had net income of 15 million, or $0.87 per share, more than double last year, on a 6% increase in reported sales. This was a record year for sales, net income, and EPS, and it was in line with our original guidance adjusting for currency. On average for the year, the euro exchange rate was $1.25, versus our business plan rate of $1.33. This reduced reported revenue from Europe by $12.3 million, and reduced reported net income by 900,000, or $0.05 per share. For the full year, SG&A expenses were down 1.1 million to 8.9% of sales, versus 9.5% of sales in 2004. The main factors were lower SOGS costs, currency, and decreased consulting and legal fees.

Looking at the balance sheet and cash flow, we ended the year very close to our expectations. We generated cash flow from operations of approximately $30 million during the year, and we used this cash for capital spending of approximately 15 million, much of which was for the construction of our new plant in China, and investment in Slovakia, the partial payment of the SNR acquisition of about $2 million, to pay dividends of 5.5 million, and to reduce debt by $12 million. That's including the currency translation impact.

With a funded debt to EBITDA ratio of 1.4 times at year-end, we have sufficient capacity to add debt if needed for acquisitions, and to fund our stock repurchase program.

So if you step back and look through all the pluses and minuses for the year, I think the story is similar to what I described in the fourth quarter, and here are some of the key points. Number one, we successfully passed through raw material price increases for steel and resin during the year. Two, the Company was more efficient in operations and improved gross margins due to our Level 3 program.

Three, each of our business units improved performance versus 2004. That's every business unit. U.S. Ball and Roller, IMC and Veenendaal had particularly strong performances. U.S. Ball and Roller grew sales 13% and net income by 40% on the strength of its core ball business and strong growth in rollers. IMC had a dramatic business turnaround in the second half of the year. The core manufacturing operations improved significantly, and the unit went from a loss last year to a good profitability level in 2005. Veenendaal had a 12% increase in sales and nearly tripled net income from 1.4 million euros to 3.8 million euros, with strong growth in both rollers and cages, and the European ball plant sales were slightly lower than 2004 due to weaker demand in the second half of the year for balls. However, net income improved by 32% on stronger margins due to raw material price pass throughs. NN Europe was basically on plan in euro terms, but its reported results were below plan due to exchange rates.

Number four, we had some non-operating items throughout the year, like the sale of land, most of which were offset by a number of small non-operating losses like the write-off of Delphi receivable and the negative tax variance in the third quarter.

Number five, we invested a lot of cash in building up our capacity in China and Slovakia which was in line with our strategic initiatives and finally, our cash flow performance and our balance sheet management are in good shape, and we have the funds and borrowing capacity to execute on all of our strategic goals.

Those are the financial highlights, and now I'll turn the call back to Rock.

Thank you, Jim. I would like to just close today's call with comments regarding -- a small comment on 2005, and then provide an outlook for 2006. Jim covered 2005 well. I have only one real additional comment. Our management team and employees met every financial and operational goal we committed to the board and our shareholders in the guidance we provided for 2005, exactly one year ago in the February 28th, 2005 year-end earnings release and earnings conference call. In that call, we provided a bridge from the disappointing $0.41 a share in 2004 to $0.92 a share, which was the mid-point of our guidance, $0.90 to $0.94 a share for 2005. Our actual performance of $0.87, as Jim mentioned, met our guidance commitment, currency adjusted.

I am extremely proud of the accomplishments of our 1,700 worldwide employees who continue to focus on improving the competitiveness of our businesses on a daily basis. Continuous improvement is so vital in today's marketplace. At NN, we continue to be committed to enhancing the value of the products we provide to our global customers, who by the way continue to serve and operate in markets that are extremely competitive.

With respect to the 2006 outlook, from a revenue perspective, as the release mentioned, we expect revenue from 325 million in 2005 to a slight increase to 325 million in '06. From an economic perspective, there's no real change up or down from 2005, slightly down North America and European automotive markets, are offset by good levels of industrial end market demand. As we mentioned in the release, global capacity at these economic levels continue to be very good. As Jim also mentioned in his comments, the strength of the dollar versus the euro is negatively impacting at least our forecasted year over year revenue comparisons for 2006 by around $8 million, or 2.5%.

From a market share perspective, we expect a slight improvement with, of around $12 million, offset by the disappointing decision of the US [inaudible] around 12 million back to their German ball facility. That is the impact for 2006 based upon a midyear contract expiration. We have negotiated an extension with SKF through the end of 2006 under essentially the same turns of the existing contract. We are currently in negotiations with both INA and SKF for multi-year extensions of the Uniball contract, INA for the remaining business and SKF on the existing business moving forward. We would expect to have a resolution on both contracts sometime in the second quarter.

From an operating outlook for 2006, the volatility of global steel markets has eased somewhat from a supply concern, but again this year, in in 2006, the dynamics in the U.S. are quite different than in Europe. In the U.S., prices by mid year, we hope, will have stabilized albeit at significantly higher prices from historical levels, and the availability of supply from our Japanese and European suppliers has improved and is considerably more stable than 2005. In Europe, a basic six-year supply agreement with our major European supplier expired, resulting in an 18% unit price increase effective January of 2006. Our 2006 plan does reflect this in terms of full pass through to our customers, as well as 2005 delayed timing inflation associated with that surcharges. Like the U.S., availability in Europe has also stabilized. For 2005, in terms of actual performance on Level 3, as Jim mentioned, has delivered excellent results with estimated savings of approximately 5.5 million pretax, or 1.7 million pretax margin improvement for the year.

We have had over 95 key managers globally that have now been trained and certified in Lean, Six Sigma and Total Productive Maintenance. We are clearly seeing the results of of the institutionalization of those skill sets necessary to drive this continuous improvement process with respect to quality and cost improvements at NN.

Currently we track four Company wide improvement measures and specific improvement goals are established at the beginning of this year relative to productivity, inventory turns, utilization, cost of goods sold, and internal parts per million. We're really very pleased with Level 3 and the results we've seen thus far and are looking forward to continuing to witness the transformation in our businesses that has existed as a result of the establishment of the program.

Finally, I'd like to comment just specifically on the earnings outlook for 2006. Our guidance of $0.86 to $0.92 a share includes the following key earnings drivers. On the positive front, revenue is up, as I mentioned, slightly from 321 million to 325. Full recovery of material inflation from prior years and current year material inflation is also included in our guidance. Level 3 improvements similar to 2005 levels are also forecasted, as is an interest expense reduction on the basis of lower debt levels, as Jim mentioned. That's all set by substantially higher energy costs that we're seeing globally, I might add, for 2006 as well as a forecasted currency translation impact on the strengthening dollar in translating NN Europe's euro -- European -- euros back to U.S. dollars. The forecasting expension of potential stock option awards is also a negative, as is higher depreciation associated with China and Slovakia. As we mentioned in the release, we have not forecasted the potential impact of any acquisitions or the recently board approved stock repurchase program for the repurchase of up to $10 million of our common stock. As Jim mentioned earlier in our comments, with a funded debt to EBITDA multiple of 1.4 times at year end, we have good debt capacity at NN to continue to grow our core business with internal acquisitive growth, fully fund our dividend, and also fully fund the stock repurchase program. The three are not mutually exclusive at all and we feel very confident in our ability to fund all three. Coming off excellent 2005 results, we are looking forward to 2006 and the continued execution of our long term strategic goal plan. With that, I'd like to answer any questions that you may have. I'll turn the call over to Q and A.

Thank you. At this time, ladies and gentlemen, we will begin our question-and-answer session. [OPERATOR INSTRUCTIONS] One moment, please, for our first question. And it comes from the line of Michael Greenwald with BB&T Capital Markets. Please go ahead, sir.

Thank you. Just wanted to see if you could quantify what you're modeling for stock option impact in 2006.

Yes, Michael. It's about $0.03 a share.

Okay. And is that -- okay. And in regards to the contract with INA, how is that occurring when everything we've been hearing is capacity has been constrained in the region, particularly in this area? So is this a trend? I mean, do they add additional plants, or is this -- are they just opening up a new plant that they've had shuttered down, or what's going on there, and is there a bigger trend here?

Okay. As you know, we -- the original transaction of euro ball was done with both SKF and FAG, and about midway through the supply contract, and after we had acquired the -- well, actually, it was just prior to acquiring the 46% of euro ball we did not own. INA acquired FAG in a transaction. INA is a public, or a private company, excuse me. FAG is public. That acquisition was significant in that INA still has a ball plant in western Germany -- or, excuse me, in Germany, and continues to have a -- I guess a different attitude toward insourcing and vertical integration in their business than FAG did historically, and so our new customer, INA, after the acquisition of FAG, had a ball plant, and they like at least maintaining some level of vertical integration with respect to components in their business. So it is a change with respect to the trend and the -- what we saw in terms of FAG based upon the acquisition, but they've had this ball plant in Germany. They are not building new brick and mortar, but they did add to the capacity of this plant to affect this insourcing decision.

Okay. So what -- now, you mentioned that this particular contract was ending, I think, mid-year?

Yes.

So it sounds like this -- this is probably gone for good, but what about -- what about this particular plant? I mean, what are you -- are you at risk of losing additional volume to this particular plant? And I mean, you mentioned some other contracts are up for rebid. Could those possibly go to this plant as well, and do they --?

No, yes. I think it's important for you to understand that SKF, for example, our largest global customer, does not have ball capacity anywhere in the world. I mean, a little -- a tiny bit of capacity in non-North American, non-European locations. But SKF in particular does not have any additional capacity, and has expressed no desire to create capacity. So it's not a trend with respect to SKF. I cannot -- you know, as I mentioned to you, we're trying to negotiate with INA and SKF multi-year and maybe two year, three year extensions of the existing contracts, and in INA's case, the existing contracts left what they've already indicated they're going to insource.

Okay. I mean I'm sure you can see where I'm going with this. But with INA, I mean, do they have the ability to say, you know, we're not going to renegotiate with you, we have the capacity to do it ourselves, or is it a play where you're just talking details now?

Well, I mean ultimately, to answer your question, they have the ability to do anything they want with respect to the remaining business. It would -- it would take a pretty significant investment on their part for the remaining business from a capacity perspective to do that, but that is always their prerogative. We are trying to negotiate with them on a multi-year agreement on the remaining business, but I can't -- I can't give you any guidance on how that will ultimately play out. I can't tell you I'm optimistic about it, or I'm pessimistic, either one. We're negotiating.

Gotcha. Okay. Thank you very much.

You're welcome.

Our next question is from the line of Mark Parr with Keybanc Capital Markets. Please go ahead, sir.

Hey, Rock. How you doing? Congratulations.

Thank you.

Good quarter.

Thank you.

I'm just wondering if you could talk a little bit about -- about pricing momentum. I know -- you know, the -- if you could talk about it in Europe versus the U.S., and what you're seeing as far as base price, and also one other thing. Some of the market share gains you talked about on the release, I don't know if you went into detail. If you did, I missed that. Could you give us a little more color on where you're gaining share?

Yes. The share gains, Mark, are in both Europe, kind of split equally between Europe and North America. So it's about a fifty-fifty split --

Okay.

-- in North America and Europe on the share gains themselves. And I'm not sure I understand the first part of your question associated with -- can you repeat that part of it?

Well, yes, if you just give us an update on what you're seeing as far as base pricing, excluding raw material pass through and all the other things.

As I mentioned in my comments, our customers are in sort of extremely competitive end markets. And so there's -- the continuous improvement side from Level 3 and everything we're doing there is directly associated with an acknowledgement on our part that we have to continue to take costs out of our business and share in those costs savings to some degree moving forward.

Okay.

And so we -- while we have raised prices dramatically over the last two years to pass through all this material, we have not raised prices beyond that. And --

So it is fair to say that base prices, kind of excluding the non-controllable elements, are negative?

Slightly down, I would say. You know, not in a big way, but slightly down. It's also fair to say, Mark, that in term terms of looking at it historically, Euro Ball offered year over year reductions to our two largest customers are pretty substantial reductions over those six years that we've been in the contract, and both those reductions, while they were substantial, we actually improved the margins of both of our operations in Europe while we were doing it. So it's always a balancing act, and we want and need to meet the needs of our customers associated with their competitive end markets, and at the same time try to maintain a level of profitability in the business that's, you know, that's healthy.

Okay. One other question, if I could. Part of the growth story for you guys, historically, admittedly there are up and downs that come along, and I guess this INA thing for '06 is going to be kind of a down. It's not the first time that that kind of thing has happened to you guys, but what I'm curious about, if you look at new outsourcing opportunities emerging in '06 and '07, what's your best sense of the geographic source of those opportunities and how is your capacity situation set right now to potentially deal with those opportunities if they were to arise?

Okay. That's a good question. We've said many, many times that -- over the last two years -- that we see our -- the roller business in terms of outsourcing trends and the ability to capture previously vertically integrated components on our customer side as the single biggest product opportunity in our current bearing components core business. And we still believe that, over the next two to three years. We have some pretty sizable objectives associated with growth on the -- either Greenfield growth of rollers, or acquisitive growth of rollers.

Just if you had an opportunity for 10 to 20 million of increased roller business, and the customer location was not going to be appropriate, you were going to have to use your own capacity. Where would it be easiest for you to add production capacity? Would it be in the U.S. or in Europe?

It actually -- we think of it globally now, including China. We -- we would contemplate capacity additions in all three, and we have constructed a facility, and have the ability in China to expand production capability there as well, Mark, and so I guess the answer is we think of it in all three markets.

Okay, if I could just ask one more question. Could you give a little more color on the profit turnaround at the seals business, at the rubber seals business?

I think that Jim actually spoke about IMC, but it's also true at Delta. Both Delta and IMC in the U.S. had very good turnarounds versus '04, and it's a focus on the operating improvements associated with Level 3, and the whole lean manufacturing and Six Sigma and TPM, and getting those skill sets institutionalized down to the plant floor is really the success factor that drove the earnings improvements in both of those operations. We have new leadership at IMC, and from beginning in the very first part of 2005, in terms of management leadership that's done a terrific job, but Level 3 has really driven the improvement.

Okay. Are you having as much success passing through rubber and resin cost increases as you are with steel?

Yes.

Okay. Terrific. Thanks again, congratulations.

Thank you, Mark.

[OPERATOR INSTRUCTIONS] We have a question from the line of Gary Hefferman with Lord Abbett. Please go ahead.

Good morning, Gary.

Good morning, gentlemen. In regards to stock option expense, I was interested to know if management and/or board has changed their view of the use of stock options, or just if you could tell us what your thoughts are of using stock options going forward, and how that may be or may not be different going forward?

Good question, and the answer to that is yes. As I mentioned, we have a forecasted earnings hit of $0.03 a share, and -- and I say forecasted because it presumes that the compensation committee of the board would award options and restricted stock under our current long term incentive plan. As we look at it, at $0.03 a share, after tax, it's not as big an impact as the cumulative impact of when they start vesting in three to four or five-year increments, and that happens in years two, three, and four, and so the simple answer to your question is that we are concerned about it. We are looking at it. And frankly don't have anything to say concretely relative to what we might do in the future, but it is -- for a company our size, and as a percent of our reported earnings, it will become a much bigger issue in '07, '08, and beyond, and so we are concerned and trying to look potentially at some alternatives.

Okay. And could you -- this is probably on the lines of a review question, if you would. Review the status of China and what your thoughts were at the implementation of this venture for the growth in volumes to that plant on a timeline, and if that timeline has changed at all, and where you are now with that, how you see the China effort going forward?

Okay. We -- we're slightly behind from a timeline schedule, based upon the construction and completion of the building. We did hold our grand opening ceremony and have begun production just in the first quarter here, and looking at it for 2006, the plant is going to -- is going to lose money, but we have a pretty good plan in place to get enough capacity installed through 2006 that by the end of 2006, moving into early 2007, we really -- we believe that there will be good levels of earnings coming out of that facility. Some of the initial revenue that is -- will be put into that plant is a change in mix, and that is that some of the product and revenue will come from our European operations that we're exporting out of Europe into Asia, and likewise in North America, where we're exporting out of North America into Asia. Our global customers expect us to produce regionally, and so that's the first move in terms of getting the plant business, but we're also actively pursuing new business, and I would say we're pretty much on track with that, and as I mentioned, believe that we'll get the plant above break even and profitable going into the fourth quarter and on into the first quarter of 2007.

Gary, this is Jim. I would also say to reiterate what Rock said, it's really an issue of volume at that plant. In terms of the plant itself, it's productivity, it's quality, quality of products, the cost that we expected there, we're seeing all that. It's just an issue of getting enough business in there, and that depends somewhat as to when our customers are ready to take it from there.

Okay. But certainly as we look at the evolution of earnings for '06 into '07, first quarter of '06 certainly has a meaningful drag from the efforts in China, and that meaningful drag decreases through to the third quarter, and hopefully per plan is a contribution to the fourth quarter, and we should be cognizant of that as we review how the EPS rolls out through the year.

That's a very good summary.

Okay. And if I'm looking at '07 earnings, trying to weed through all the macro economic turbulence that is out there, that I have no idea what will happen.

Right.

Just know China being four quarters profitable in '07, as per plan, should provide a meaningful step up for earnings versus '06. Is that a correct statement?

It is. There's a -- there is an offset to it, relative to what we transfer out of North America and Europe, and that offset needs to be considered, but you are correct, in that there's a meaningful drag on '06's numbers.

And presumably the offset would be a better margin. Same offset, but better margin.

Yes.

Okay. And certainly with your building of that plan, and as you said, your customers are looking for you to be able to work for them on a worldwide basis, serving all of the regions. Your thoughts on the capability in Asia with the China plant, to being able to woo new customers?

From a footprint perspective, we've spent a great deal of time as a management team, and the footprint that's been created in China from a quality, from a best practice on quality and process, layout, lean, Six Sigma, TPM, is culturally as good as anything we've got in the world in terms of ball production coming right out of the chute. Our North American management team, as well as our European management team, was intimately involved in tremendous amounts of training in 2005 to get the plant up and running. All of our employees in China spent up to six to eight weeks in our European operations on a training schedule, as well as we've integrated a lot of U.S. managers, as well as European managers, rotated them into China on the training front and getting the plan up and going so we feel good about it in terms of being able to sell in markets products that are as good as anything we produce in the world.

Okay. I was thinking more along the lines of are there any potential customers out there that are not customers because heretofore China availability was not there?

Oh, sure, in the domestic China market, as well as Asia in general, there's potential.

Okay. So as per senior management's views and the goals and achievements that you're expecting from your marketing sales effort, what's the time line you're putting on them for saying, hey, look, we expect to see some new customers coming on to the list?

That's this year.

Okay. So you expect to see some new -- new customers on the list of customers this year through this effort?

Right. And Gary, that's definitely one of our strategic initiatives for this year. It is not included in the business plan that we gave you, because we want to achieve that before we give it, but it's definitely one of our strategic efforts.

Very good. And one last question if I may, and this is a little bit more narrow in range, is the railcar industry is going gangbusters, for lack of a more educated term to use, and I was wondering to what extent that you are able to participate in that?

Honestly, very little.

Okay. Very good. That's all I have for this morning. Thank you very much.

You bet.

And once again, ladies and gentlemen, if there are any additional questions, please press star 1 on your touch-tone phone at this time. We now have a question from the line of Michael Corelli with Barry Vogel and Associates. Please go ahead.

Hi, good morning.

Good morning, Michael.

A question about the share repurchase announcement. Is that something that the Company wants to buy stock at the current stock price, or is that something you want to have available, since your stock has been quite volatile over the last few years for when there might be declines in the stock price?

I can't answer that specifically, but I would say that in the -- looking back at the last 12 months and kind of where we've been trading, that we think a stock buyback makes sense in those ranges, without getting specific in terms of when or where we might buy back, at what price.

Okay. And then just a couple of numbers questions. Could you tell us what you think capital expenditures, depreciation, amortization, and maybe debt repayment, excluding acquisitions, might look like this year?

Okay. Michael, this is Jim. I'll give you some numbers. On the CapEx side, we will probably spend something like -- I don't know if we gave accurate numbers last year, but I'm going to give you some off the cuff numbers here, and then we may have to tighten these up later. But we would spend around $12 million or so on existing operations, and -- well, let me take that back, about 10 million on existing operations, and another 4 million on SNR acquisition to complete that, and then about 7 or 8 million in China and Slovakia.

So does that come out to 21 or $22 million?

Yes, counting completing the payment for the acquisition of SNR, yes.

All right. So your spending is going up a lot this year, I guess, including the acquisition?

Yes, including the acquisition. And depreciation should be up slightly from the previous year, something like 17 to 17.5 million.

Okay. And then any thoughts on debt repayment?

Well, we will generate, at this level, we'll generate probably 20 to 25 million in free cash flow, even after the CapEx, so all of that would go to repay debt, except for what we spend on the stock repurchase program. So if we spend 10 million on the stock repurchase program, that would leave us in the 10 million range for debt repayment.

Okay. And then just one other number. Could you tell me what the actual shares outstanding were at the end of 2005, not for EPS purposes, but actual outstanding shares?

I thinking about it was about 17.2, Michael.

Okay. That's all I have, thank you.

Thank you.

We have a follow-up question now from the line of Mark Parr with Keybanc Capital Markets. Please go ahead, Mr. Parr.

Thanks. Hey, Rock. Did you give any guidance related to the first quarter, or are you willing to go there at this point?

No. We aren't willing to go there, Mark, and our intention is to provide annual guidance, and annual guidance only, honestly.

All right. Is there any color that you could give us at this point that you're seeing regarding the first quarter? This is kind of better than, this is worse than, I mean, is there anything going on that you could kind of give us an update? You're about 2/3 of the way through the quarter at this point, without getting too specific? I'm just trying to help you out here. This is really not -- I'm not trying to grill you with a light.

Yes, you are.

No, I'm not.

That's okay. I -- we've talked about this a great deal, and short of commenting on the quarter, which I would not like to do, we would end up getting into the -- back in the issue of kind of where are we quarterly, and we've decided that providing annual guidance, and then -- I mean, if there's any major change to that annual guidance, we'll let you know.

Okay.

But in terms of commenting on a specific quarter, I would prefer not to, and I'm sorry, Mark.

Hey, it's okay. I'm just trying to help, that's all.

Yes.

Thank you.

You're welcome.

I would like to go back to the CapEx question now that I've had a chance to look at my notes and make sure. I think I was off by a million or so. You should thing of the CapEx plan for 2006 to be around 8.5 million from existing operations, about 8 million or so for China and Slovakia, and in addition to that, we'll complete the SNR acquisition at 4 million, so I think that would come closer to 20 million than the 21 that I babbled about earlier.

And once again, ladies and gentlemen, if there are any additional questions, please press star 1 on your touch-tone phone at this time. We have a follow-up question from the line of Michael Greenwald with BB&T Capital Markets. Please go ahead, sir.

Hi, thanks again. As far as the Level 3 initiatives are going, I think you noted that you're expecting 2006, the benefits to be sort of flat, but it seems like in Q4, at least, it picked up quite a bit, and that's one of the areas that you're seeing some good signs. Could you comment on that a little bit further?

Sure. Michael, you're right, and there's -- there is -- there's a benefit associated with Level 3 that is a little bit difficult to identify, but as we go back and these 90 managers take the skill sets back into the operation and work on what we would call certification projects in their businesses associated with Level 3, you get a lot of activity in the manufacturing plant that while it's not originally associated with Level 3 is incremental adjacent cost savings associated with the plan. And many -- many of -- many companies talk about the fact that that can sometimes be double what -- or at least a single, 100% of what you're getting out of the program. And in the fourth quarter we did have god efficiencies, and good productivity associated with Level 3, and -- but we -- while we might be slightly conservative relative to forecasting what the outlook for Level 3 is, it's not too far off the mark versus what we experienced kind of in the last 6 months of '05.

Okay. So you're seeing incremental --?

Yes, to your point, if we carried forward the level that we achieved in the fourth quarter all the way through '05, or '06, yes, we would have been a little bit stronger, but we're perhaps being a little conservative on that.

Okay, so if nothing more, it will at least help offset some of the costs in -- the losses that you're going to experience in China, and then it will probably equal out towards the end of the year your incremental benefit will be a a little bit less towards the latter half of the year?

Yes, but I would also like to remind you that we have inflation in energy that didn't occur in '05. Big inflation.

Okay. Great. Thank you.

And energy costs that are around $0.07 a share.

That's what you're modeling for 2006?

In energy?

Yes.

Inflation? Yes.

Okay. Okay. Great. All right, thank you.

You're welcome.

We have another follow-up question, this time from the line of Michael Corelli with Barry Vogel and Associates. Go ahead, sir.

Hi. Just had a question about your cash generation comments at 20 to 25 million. Obviously you've given a range of $0.86 to $0.92 a share for the year. $0.03 I know is non-cash stock comp. So that comes out somewhere, I think, around $16 million of net, if we added back the non-cash stock comp, and you have 17 or 17.5 million of DNA, which is somewhere around 33 million, 33.5 million. You're going to spend 20 million on CapEx. That only gets me to $13 million of cash generation. Are there going to be significant working capital changes to account for the rest of that?

Yes. We've got working capital goals to decrease inventory and accounts receivable and also accounts payable management goals that make up a big part of that difference. We might get -- I don't know if we'll get any this year from the exercise of stock options. Oh, actually, we have a sale of land that is under contemplation that would be in there as well.

Okay. Thank you.

And at this time, I would like to turn the conference back over to management for any closing comments that they may have.

Thank you again for listening in on today's call.

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