派克漢尼汾 (PH) 2004 Q3 法說會逐字稿

Good morning, my name is Latangy and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Parker Hannifin third quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Ms. Huggins, you may begin your conference.

Thanks, Latangy. Good morning, everyone. I'd like to welcome you to Parker Hannifin's third quarter fiscal year 2004 earnings release teleconference. In line with tradition, however, I have a couple of comments to make prior to commencing with the actual earnings release. The slides that we will be using today will remain on Parker's website at www.phstock.com until the next earnings release, along with the Webcast of the teleconference itself. Upon commencement of Q&A that will be held at the end of my formal presentation, once again I ask, please limit yourself to one question at a time in order to give everyone a chance to participate.

At this time, I would like to call your attention to our disclosure on forward-looking statements and non-GAAP financial measures. The forward-looking statement is essentially unchanged from the previous quarter, however, I trust that you'll read this statement in its entirety if you haven't already done so. The numbers that will be presented today in connection with the slides are on a GAAP basis, with one exception. The sales numbers have been reconciled from a GAAP basis to that without acquisitions, divestitures, if applicable, and currency to allow for a valid comparison from period to period.

We at Parker do listen to your input and we do value it and based on that format that I will be using today, different from the past, the slides have been revised and while they are different, they do provide essentially the same information. The income statement and the balance sheet have been included in an appendix that you can refer to at your convenience. I will not be reviewing each slide in detail with you today, but, rather, I will be providing a summary of the quarter only, focusing on the highlights.

First, I will begin with earnings per share and sales growth. I will then have a few comments on the significant influences on sales, including order trends. I will then comment on the influences to earnings and take a few minutes to discuss Parker's Win Strategy. While I will mention the segment results, I won't be covering them in detail. I will conclude with a brief summary of the balance sheet and cash flow position, and then closing with the outlook for the remaining portion of fiscal year 2004.

At this point in time, I will move to the earnings for the quarter. In line with the press release this morning, and well above our guidance, third-quarter earnings came in very strong at 90 cents. This is 114% higher than earnings per share for the same quarter a year ago. On a year-to-date basis, earnings per share are up 47%. While I didn't provide specific guidance at the last teleconference for the third quarter, we did provide guidance for the year as a whole. As you can see, our run rate is higher than that guidance and in line with the press release, I'll be providing increased guidance at the end of this presentation.

This was clearly a good quarter for Parker, the earnings were quality earnings. With a 260 basis point improvement in income from operations versus the same quarter a year ago. Sales for the quarter increased 16% over a year ago. Without acquisitions and currency, sales were up 9%. As you will recall last quarter, sales were only up 1.5% and on a year-to-date basis they were actually negative by a percent. So as you can see, this is the first quarter of significant sales growth year-over-year. We experienced positive sales growth across all segments of our business. Placing us in a positive position on a year-to-date basis for all segments other than Climate & Industrial Controls. And Climate & Industrial Controls is down mainly due to automotive.

The 16% significant sales increase is the result, of course, of end-market strength and heavy-duty truck and the mobile market. Construction and agriculture are very strong. Sales are up across most end-markets, making us fairly sanguine about a broad-based recovery. Semiconductor and oil and gas, while not as large as some of our other markets, are also very strong. Markets not as strong, however, are automotive and aerospace.

Aerospace, sales were up 6% for the quarter, mainly due to military. The commercial business continues to be down for Parker. We did see a slight uptick in the commercial aftermarket; however, we're not confident that that will continue. North America's sales growth for the Company is being driven by the hydraulics and connectors markets in terms of dollars, but what is really encouraging here is that other markets are actually experiencing higher percentage increases. This gives us confidence in the recovery and that we really are seeing broad-based improvement. Asia-Pacific and Latin America continue to remain strong.

As an indicator of future revenues, the order rates remain strong in North America. We've had eight months of consecutive increases in order rates. While the momentum is encouraging, if you look back in history, I can't seem to find a time when we had eight consecutive increases. But that's a little bit deceiving, in my opinion, because it indicates that what we're seeing is a real smooth transition in economic recovery, and I tend to believe that what we're seeing more is in spurts rather than the smooth transition.

In the rest of the world we've had seven months of improved orders. For the quarter, orders were up 15%, driven by increased orders in all regions. Although percentage-wise Asia-Pacific and Latin America are doing better than Europe. Climate & Industrial Control orders in the last quarter have shown improvement. However, that is due mainly to seasonality. This rate of order entry is not expected to continue into the fourth quarter.

Moving to aerospace. Aerospace orders are up against easy comparisons post 9/11, and, as you all of you know we have a long way to get back to those peak levels. Most significant in this particular sector is the decline in the commercial side of the business for us. Any recovery in this business would be good.

Moving to earnings and their influences, segment operating income for the third quarter is up 59% versus the same quarter last year. North America was 121% higher, international was up 80%. Again, aerospace and Climate & Industrial Controls didn't see these types of increases year-over-year, but the margins in both of these segments are high. Aerospace had margins of 12.5% and Climate & Industrial Control had margins of 11.8%.

The increased earnings in the different segments are due to increased volume, the restructuring efforts, and obviously, the Win Strategy. We're now running higher volumes through less facilities, which is creating good leverage for Parker, and this type of results can be seen on the growth margin line pushing up over 200 basis points.

Incrementals were clearly higher for North America, Climate & Industrial Controls and the other segments. Again, aerospace isn't seeing the same type of incrementals year-over-year due to what we call PIM, Pension, Insurance and Medical. And, obviously, as a result of the mix in business. Commercial aftermarket business being down over a year ago, obviously, we've been keeping the military at the same pace, a good pace.

We completed the acquisition of Denison this quarter, closing February 12th. The numbers that you're seeing include the acquisition for a month and a half. Denison did make a contribution to the bottom line and was accretive to the quarter. On a year-over-year basis, operating margins increased in every segment this quarter other than aerospace. You will recall that last quarter, when I talked to you on a year-over-year basis, operating margins were up in every segment, other than aerospace as well. This is clearly the result of the Win Strategy, as at that time, if you remember, sales year-over-year had actually declined.

Speaking of the Win Strategy, let me just take a minute to talk about that. The Win Strategy is really Parker's initiative with respect to procurement, pricing and lean. These initiatives we feel are clearly showing results. We said, if you recall over the last year, that we would achieve 2% from each of these initiatives, and that we would achieve 1% on the margin line in '03, 2% in '04, 2% in '05 and 1% in '06. We have seen the 1% improvement in '03, and we will see the 2% this year. Procurement has been more successful than we anticipated. It's been a wonderful program for Parker.

The way that we measure our success, however, in lean is a little more difficult. We measure it through inventory reductions, productivity improvements and reductions in capital expenses. Inventories, without Denison, declined $90 million year-over-year. DSI, which includes Denison, declined 10 days. Sales per employee, which is our productivity measure, increased 13%. Capital expenses declined to 2% of sales. Plant and equipment is below that of a year ago by $70 million, of course, excluding Denison. Gross margins have improved to 19%, up from 16.9% a year ago. In addition, our balance sheet is strong, with $170 million in cash, and our debt to total cap is 28%, lower than it has been since 1999.

Just a few brief comments on the segment information, as I said earlier I'm not going to go over that in detail with you. However, I want to just point out a couple of items. Operating leverage for North America is at 47%. Increasing margins from 5.8% to 11.1%. While the leverage wasn't quite as good for the rest of the world, their margins increased 220 basis points from 5.7 to 7.9%. Aerospace margins declined from 13.6 to 12.6, just as we said they would.

I just want to refresh your memory on the aerospace margins. We've been saying all along that aerospace margins in fiscal year 2003, that they would decline every quarter throughout fiscal year 2003 and that in the last quarter, it would level off. We said that we would maintain those margins in that fourth quarter throughout fiscal year 2004. And we said that margins would be around 12%. We're still projecting that same level of margin for the year.

The decline in margins, however, for aerospace, going from fiscal year 2003 to 2004 are the result of two items, one being PIM, Pension, Insurance and Medical, and I want to point out that this particular group is hit harder as a result of the PIM than the other groups. And the second reason for the decline is, obviously, the change in the business mix from commercial aftermarket to military.

CIC Commercial, Climate & Industrial Controls, has clearly benefited from moving to low-cost regions and the implementation of the Win Strategy. Again, we see increased margins in this particular segment. Going to "other", the other segment, not material in terms of our total numbers, but very significant in terms of their improvement. The teams here have done a very nice job in reducing their cost structure, moving margins from 1.2% to 5.1%.

Just to summarize the strength of our balance sheet, we have $170 million in cash as of the end of the quarter. Without Denison, a little over $100 million. We actually have some cash from Denison that we will be consolidating in the next quarter and will use that cash to pay down commercial paper. Debt has been reduced by $375 million for large maturing debentures. However, the net-debt reduction is $278 million, and this is on a year-over-year basis.

Denison was financed with CP, which is good. And currently we have only $134 million commercial paper outstanding. Debt to total cap on a net basis is 25% and we think it'll be as low as 23% by the end of the year. Again, as I said earlier, just to reiterate, DSI decreased 10 days from the same quarter a year ago and this does include Denison. Property plant and equipment is $70 million below last year, excluding Denison. And shareholders' equity, while this is only up $67 million from March 2003, remember that we did take a $297 million hit as a result of booking the minimum pension liability.

So our financial leverage is very good at 28.9% on a gross basis. Again, the lowest certainly before 1999. We have exceptionally strong cash flow for the quarter. We set a record in fiscal year 2002. We would have set a record in fiscal year 2003 if it had not been for the pension contribution that we made. Just to remind you, we made pension contributions of about $120 million worldwide. And this year we made a pension contribution as well, however, to the tune of about $80 million. We're on track to set another cash-flow record, we hope.

And, with that, I would like to move to the outlook, which is probably what you're most interested in anyway. And go over that with you. In North America, we feel that sales will be up 7.6% to 8.1% year to date, third quarter we were at 4.7%. Industrial, rest of the world, we feel that sales will be up 23.6% to 24.1%. Aerospace, only a 1% and 1.5% increase in sales is projected. Climate & Industrial Controls will actually be down 1% to 1.6%. And in our other segments, sales are forecasted to be up 9.4% to 9.9%.

And in the next section, these increases that you see here are really operating income dollar increases. What I will give to you, however, here today verbally are the margins, which might be a little helpful to you. North American industrial margins are forecasted to be between 9.2% and 9.5%. Industrial rest of world, the range is 7.4% to 7.7%. Aerospace, 11.9% to 12.1%, which is within the range that we had talked about before and right at the guidance that we have been talking about throughout the last year. Climate & Industrial Controls, 9.9% to 10.1%. And in the other category, 6.7% to 6.9%.

Looking at the assumptions below operating margin, starting with the corporate administration. That has been inching its way up every quarter. Currently, forecasted to be 27% to 29% higher than last year. This is basically the result of incentive compensation, which is obviously good. It means that we're doing better. And also included in that caption are some costs related to our tax initiatives.

Interest expense as a result of our stronger debt position is scheduled to be down 9% to 10%, and other income and expense forecasted to be up 30% to 45%. Our tax rate, you did get the press release with respect to our tax rate, helping us by 10 cents on the EPS line this quarter. It is, however, scheduled to continue at 32% going forward. This was a discrete one-time tax benefit, not to be repeated. So the effective tax rate for the year will be around 30%.

Hopefully helpful to you, we have included the earnings outlook for the entire fiscal year 2004. What we're looking at right now is $2.55 to $2.65. This is approximately 50 cents higher than the previous guidance, although we didn't give you the exact numbers before, but if you take it from basically the midpoint of what we were at, it's approximately 50 cents higher. So I think last time we were thinking that the guidance going forward for the fourth quarter was probably around 60 cents. You can see that on top of that 60 cents we did get 10 cents from the tax benefits and we did get 20 cents from operations. And we feel that we can duplicate that same 20 cents in operations in the fourth quarter.

The downside risks to this forecast, which I'm sure doesn't surprise you, is the raw-material price increases that we may incur. We are also looking at automotive in our Climate & Industrial Controls group to be down. The momentum in that particular market is shifting. However, on the upside, we do think that if there's any aerospace recovery, and particularly in the commercial aftermarket, that would be very good for us.

So all in all, we had a very good quarter. We think this is only the beginning of what's to come. We're pretty excited about it, we hope that you are, too. And with that, we'll go to Q & A.

At this time, I would like to remind everyone, in order to ask a question, please press star one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Stephen Volkmann with Morgan Stanley.

Hi, Pam.

Hi, Steve.

A couple of quick things. I guess just a little bit of clarification. You talked a little bit about some of the specific things for the full-year interest expense and so forth. It looks like the other expense is going to be a big hockey stick in the fourth quarter, just to kind of get you to where your goal is for the year, unless my numbers are wrong. Is there something in there that we should be aware of in the fourth quarter that's going to be kind of a big number?

Right. Steve, that's a good question. I don't think that that number's a real driver, number one. It's a pretty small number for us. But, yeah, what you're seeing in there is LIFO. As a result of the raw-material price increases, we had a fairly significant LIFO adjustment. So that's why you're seeing the increase in the percentage year-over-year.

Is that as much as $10 million?

Well, there's also -- there's a little bit of foreign currency in there, but the biggest adjustment is LIFO and there is some foreign currency, but like I said, I don't think that's going to be a real big driver for us and it's a relatively small number in comparison to the ones that I think could really make a difference. So I don't really see that as something to really be concerned about.

Okay. Fair enough. And then just, obviously very strong balance sheet here and good cash flow and then the question always becomes, what are we going to do with the cash? I was actually out, as you know, in California talking to the aerospace guys there and they seem to be saying that they had kind of corporate permission to maybe up the ante a little bit on what they're willing to pay for acquisitions in aerospace. Is that right and can you give us some detail on that?

Sure, sure. Cash flow -- we've been pretty consistent, I think, in our message that, we want to generate 10% cash flow. As you know, we do pay dividends that amount to about 1% of that. And we're going to continue at that pace. There is very few companies, in fact, that can match our dividend record. Of the S&P 500, I think there's about five companies that match consecutive increases in dividends the way that we do. So we will continue to do that.

Capital expenditures, although they are very low right now, we really don't expect that to be sustainable. We do think that that will bump up a little bit. So, really, after you deduct the dividends and the capital expenditures, we really look at having 5.5% to 6%, which will be devoted to share repurchase and, obviously, acquisitions.

We have had a fairly lengthy review process on strategic planning within our company, where they really did come in and they did a detailed review. And one of the things that came out of that review, obviously, is that we need to be very, very focused going forward with respect to acquisitions. We want to make sure that we're spending our money in the right places and that we're getting companies that have big growth potential, that have high margins. And, quite honestly, in our other businesses, there really just isn't a lot of room to grow. Hydraulics, we've pretty much tapped that out. Foot connectors we're number one in the world.

So when we look at our businesses, it leaves filtration, we think that that's a great secular story. Also Climate & Industrial Controls we think is a wonderful story. Again, we love that razor, razor blade type stuff. And so aerospace, same thing. Aerospace companies, they run at much higher multiples and to be able to get an aerospace company you have to pay a lot more money. And quite frankly, we don't mind doing that.

If we can find a good acquisition in the aerospace business that's going to give us good margins, yeah, we would very much like to step up to the plate to that. So, yeah, I think what they told you is right on. We really would very much like to do an aerospace acquisition. But then again, there are other opportunities as well in lots of our other groups.

Very well. Thanks.

Thank you.

Your next question comes from the line of Andrew Casey with Prudential Equity.

Hi, Andrew.

Good morning, Pam. A question on the outlook. First on revenue growth of 10% for the fourth quarter. Could you help me understand the presumed moderation from 3Q revenue growth of close to 16%, if we step through the revenue guidance, you generated close to 16% in 3Q, orders remain strong. You should get a full quarter benefit of Denison and combined with expected raw-material-related price increases that we think we're finding in the channel. Why is 4Q outlook for 10% versus something closer to what you did in the third quarter?

Well, there is a couple reasons for that. When you just look at the sales. First of all, Climate & Industrial Controls, they're actually forecasting a decrease in sales. And the reason for that is because third quarter is a very strong quarter for CIC. It's very seasonal. And what is happening is in the third quarter, they're really building for the new season going forward. So that business is expected to be down year-over-year. The other thing is, aerospace. If you look at aerospace also, we really don't know what's going to happen in aerospace. We've had a little bit of an uptick in the commercial aftermarket, but the feeling is that that's probably not going to continue.

So I think going forward, we have about 17% projected for the fourth quarter in North America, we have about 30% projected for rest of world, and then, obviously, we have a couple problem areas, CIC and aerospace, not that it's going to be off significantly, I don't want to give that impression at all, but it will be down a little bit. So, orders remain strong, price increases, we're not exactly sure about and I'm sure I'll get into that a little bit more here on the call. And we're not sure if order rates are sustainable. March was a very good quarter for us, and in fact one of the reasons that we didn't go out earlier with the numbers is March came in very strong. And we're not quite sure if maybe some of the strength that we're seeing in March is a result of this whole raw-material price increase frenzy.

Okay. Thanks. If we can follow up on one of Steve's questions on the acquisitions, can you qualitatively comment on the backlog, are you seeing more properties coming on the market? And then, secondly, is pricing stable or is that going up? Thank you.

Your next question comes from the line of --

Wait, I didn't get to answer his question.

I'm sorry.

Okay. I would very much like to answer his question. He asked, what are we seeing in the market and what are we seeing with respect to prices? And, Andy, what I would like to say is we're seeing a lot of activity. It is very busy right now. You didn't see any of the bankers for a long time. Well, I've seen a lot of bankers within the last couple of months. It's very busy out there. There's a lot of activity. I would say in terms of the prices, that for the most part the multiples are holding. So I hope that answers your question.

Yes, it does. Thank you, Pam.

Thank you.

Your next question comes from the line of Ann Duignan with Bear Stearns.

Hi. Ann Duignan here. Hi, Pam.

Hi, Ann, how are you?

Been good. Maybe you could tell us a little bit about what specifically you've done on the balance sheet, particularly on the inventory levels? That's a significant reduction in inventories year-over-year.

Right, right. Yeah, we're real happy with what we've done with inventory. You probably remember, Ann, better than anybody, but back during the last recession, our inventories at Parker were as high as 28%. During that recession, we were able to get them down to about 18%. And then most recently, we've been around 15% as a percentage of sales. Our goal is, obviously, to get it down to 12%. We think that by the end of this year, we'll be down around 14% of sales.

So we're making good progress on the inventory. Like I say, DSI, we were able to reduce it by 10 days, and that includes the inventory that we picked up as a result of Denison. So, yeah, we're going to continue working on that program in connection with our lean initiatives very heavily.

Should we assume, then, that this is as a result of lean initiatives that it's a lot of work in progress that's been taken out of the businesses?

Absolutely. I think it's coming out from all areas. We're getting much better on the front end in terms of ordering. We're looking at the inventory, the stock levels, those types of indicators. So we're getting good on the front end, as well as we're taking the opportunity to, yeah, have very little width in the supply chain and, obviously, we're even doing it on the finished-goods side.

So even as sales increase and raw-material prices increase, you expect to be able to, A, keep this level of inventory, and, B, keep the gross margins where they're at?

We're going to give it a try. We're going to try real hard to do that. That's our internal goal, so --

Okay. And then finally, any color on fiscal '05? I know you've only got one quarter left in '04, but what are some of the drivers going into '05 that you think may give you some momentum that may help either in aerospace or semiconductor, some of the in-markets that you may be seeing just some momentum beginning now that you expect to see continue.

Ann, we haven't really gone through our planning process yet. We're just in the process of doing that. So it's pretty hard for me right now to be able to give you any color on that. I guess the only thing that I can say, as far as the aerospace on the OEM side, I don't think we're really forecasting that to come back until either late 2005 or 2006, but I really don't know because we haven't had our planning meeting yet.

But the EMBRAER orders should start to pick up?

Yeah, the EMBRAER 170, as you know, I'm sure you know it's been certified and it's fine. So we're excited about that. We have probably one of our biggest bill of materials on the EMBRAER 170, which is fairly consistent with the regional jets, the billing materials seems to be higher than what it is on the transport. So we're looking forward to -- yeah, the 190 coming on, too.

And those should start shipping in fiscal '05 at some point?

Yeah. It's scheduled to.

Okay. So that will be incremental sales for aerospace in '05 that you would not have seen previously.

Correct.

Okay. Okay. Thank you.

Thank you.

Your next question comes from the line of Mark Koznarek with Midwest Research.

Hi, Pam.

Hi, Mark.

Just a couple odds and ends for you. Just o make sure we're all on the same page, your guidance for the year includes the extra 10 cents of tax benefit you got here in the quarter, is that right?

Right.

Okay, good.

Yes.

Your receivables are up substantially.

Right.

$265 million sequentially, and looking at the Denison balance sheet, they only added 35 or 40. So what's going on there? That's a really surprising increase.

Right. This is kind of complicated to explain, but actually DSO is up two days. However, on a trade basis, it really is not up. Internally, we calculate DSO a little bit differently than the way it's calculated on an external basis. We actually layer the sales back, starting with the most recent month. So if you look at it on an internal basis, it's really down. However, because we had those high sales in March and it's average for the quarter, the sales are averaged in the quarter, it makes it look as though that it's going up, when in reality really on a trade-net basis it isn't.

So effectively you had really strong sales at the end of the quarter?

Right.

Sort of in layman's language.

Exactly. And the way it's calculated on a quarter with three months, then it tends to average it and it causes the actual calculation to show an increase. So we're not concerned about that at all.

Okay. And then just a couple other minor things, maybe not so minor. Europe, it sounded like from just the discussion in the press release that Europe really didn't post much growth. Can you comment on Europe in particular?

Well, I think Europe is showing improvements as well. We're seeing -- if you look at the order rates, you can see that we had a high of 23% the one month and then it fell, I think to about 12% and then came back at 16%. At the beginning of the year, we really felt that we weren't going to even see those types of increases in Europe because of the economy in Germany and France. As you recall, a big portion of our business is in Germany, France, and the UK. So we're doing much better than we anticipated at the beginning, but I will say that Asia-Pacific is very strong. We are showing extremely strong growth in Asia-Pacific and Latin America. And, yeah, while the rest of world isn't equivalent to North America, I think the momentum is just beginning. I think it's just starting to gain traction. And if you look historically, I think you'll see that Europe tends to lag North America a little bit for us.

Okay. And then finally, should we be thinking about any restructuring at Denison coming up in the fourth quarter?

No.

Okay. Thank you.

Thank you.

Your next question comes from the line of Joanna Shatney with Goldman Sachs.

Hi, Joanna.

Morning, Pam. One of your competitors likes to talk about how they outpaced the market and what's interesting this quarter is, it looks like you guys have really outpaced the market. Can you just talk about what's driving your outperformance maybe relative to just the NFPA order data.

Right. We do look at the NFPA data as well. And I think we could say -- if we were measuring our market growth with respect to that, I think, yeah, we would say that, yeah, we're outpacing the market, too. The real strength in our business really came from -- like I said earlier, the hydraulics and the connectors markets. Heavy-duty truck is up a lot for us right now. And the mobile market, which was the first market to really come back. I mean, we started seeing large mobile OEM orders quite some time ago and so those are really strong. Also, semiconductor, oil and gas are really strong. In fact, when you look across our markets, Joanna, I mean one of the beauties of our business is that we're in so many end markets, and when you really look back across all those markets, it's kind of difficult to find one that's really down right now.

So the strength, the broadness of the recovery now is helping you outperform some of your peers, I guess, just because your product portfolio is larger.

Right. And that's exactly right. Because the mobile large OEM came back, the industrial business is coming back, and then, of course, distribution.

Okay. That was my second question. Because it still looks like there's a big discrepancy both in North American industrial and rest of world order rates and what you're actually shipping and if you look at the NFPA data, there's that big gap for the industry as well. Can you just talk about how that gap might start to pick up now that distributions participating in this recovery as well as OE.

Right. Well, one of the things that I think is a little bit misleading about our orders in North America. And when I talked about there being eight consecutive monthly increases in orders, it almost looks like there's a very smooth pattern to this recovery, but really that's not what's happening. Manufacturing businesses right now I think are very volatile. And I think we're growing in spurts as opposed to a smooth pattern. When you look at the order rates, you don't see that, but when we look at the sequential orders, you really can see that. We had an increase in September followed by an increase in November, and subsequently one in January. So in all of those interim months, orders were relatively flat.

So I think the lag in shipments -- I think that should just be viewed as a temporary pause, basically in the context of what we would think of as a solid industrial expansion. I think that we really do have a great recovery here. It's just not as smooth as I think we would like it to be. And like I said, large mobile OEM orders were the first to come back. We only have two months of backlog, which I know you're aware of, and so all of that backlog isn't going to ship within the next six weeks. The lag that we're seeing I think is fairly consistent with the NFPA. They seem to be showing that same type of lag. But those orders will eventually turn into shipments, it's just a timing issue.

Okay. Thanks, Pam.

Thank you.

Your next question comes from the line of Joel Tiss with Lehman Brothers.

Hi, Joel.

Hi, Pam, how are you?

Good.

Can you give us a little help on the tax rate for 2005?

I think the tax rate's going to remain around 32%. One of the things, our tax department, they are always trying to reduce the tax rate and, obviously, that's how they're measured to some degree, so they do have programs, Joel, that they're constantly working on. They're really working to reduce that tax rate all the time, but they're basically discrete type of items. And they're not something that we can really factor into the yearly rate before we see it. So the only guidance that we can really give is that, yeah, it'll probably be around the same as 32%.

Okay. And, also, your industrial revenue growth rate expected for the fourth quarter looks so much higher than your order growth rate, is that all Denison, or is there anything else in there?

No. That's -- no. That's it.

Okay. And last question. You mentioned before I think to Andy Casey that your commercial industrial was going to be down in the fourth quarter year-over-year because of seasonal, but it seems that you would have the same seasonal influences that you had a year ago, can you just give us a little bit of help, if there's anything else in there beside that?

No. You're speaking of Climate & Industrial Control, right? The Climate & Industrial Control?

Yeah.

No, there isn't anything else in there, Joel.

All right. It just doesn't seem to make sense, but thank you.

Your next question comes from the line of Wendy Caplan with Wachovia Securities.

Hi, Pam. Could you say a little more about pricing? Are we seeing price increases in effect across the board, are we anticipating some more in Q4? And, secondly, what gives you a lack of comfort that aerospace aftermarket is not sustainable at these levels?

Okay. Sure. First of all, I will address the raw-material increases. Currently, we think that raw-materials represent about 12% to 20% of our cost of goods sold. Within that, we basically participate in all raw materials, steel, stainless steel, rubber, plastics, copper, brass. I mean, we're really in all those. And in terms of dollars, obviously the big purchases are the metals. However, in terms of pounds, the big purchases are rubber and plastics, and we really haven't seen increases on those. So there is a percentage of that 12% to 20% that we won't see increases on.

And, yeah, we've been seeing price increases just like everyone else. However, there's some things in Parker that help us or protect us a little bit. The first one being indexing. We have some divisions that are just heavily dependent on raw-material commodities, and it's really pretty much a way of life for them. As soon as they start seeing the increase in the raw-material prices, they start passing them forward. They have contracts where it's indexed in it and as soon as the price increase comes through, they pass it along. Now, obviously when the price goes down, then we get it on the other side. That is one thing.

The second thing is, because of our procurement, our long-term contracts, I think that the price increases that we've seen have actually come later than some of the others. I think we're seeing that we'd have some protection in that. I mean, obviously if raw materials become an issue in getting them, our procurement contract isn't going to help us that much, but really the price increases have come later for us. We do have some protection as a result of the long-term contracts, and we are putting price increases through to our customers.

We've put price increases through to our distribution and those will stick. We don't have a problem with that whatsoever. However, OEMs, when you look at our forecast going forward, one of the things that we did say that was potential downside for us was the raw-material increases. We are a little nervous about that. And we don't really know what's going to happen. I think that overall, people are a little more comfortable with it because we've gotten our arms around it in terms of passing surcharges along to the OEMs and price increases to the distribution.

So we do have our arms around it, we feel more comfortable than we did maybe a month or so, but we're not totally comfortable with it yet. And that's one of the areas that, if you look at the downside to our forecast, that's one of the areas that we feel could be a slight problem, but, we feel comfortable that we've handled it and we're doing everything we can to not take any more hit to our bottom line than we have to. Wendy, did I answer your question there, Wendy?

Yes. I guess I was just wondering whether there were any specific price increases that you were assuming would come through in Q4?

Yeah, I think price increases will continue to come through. I think that for the most part, though, that there will be offsets to that. We don't feel, like sitting today, if you talk to any of our group presidents, I don't think any of them would tell you that they'll be sitting before me in the fourth quarter and had lower margins as a result of raw-material price increases. But, it is something that we have at the forefront of our thoughts.

And the question about the aerospace aftermarket sustainability?

Yeah, on the aerospace, moving to that, on the aerospace aftermarket, in our orders, for two months in a row you'll recall that we did say that there was slight uptick in the aerospace aftermarket. Well, what has happened is that seems to be just exactly what it was, it's just a slight uptick, very slight. And we don't really see that sustaining itself. We're not exactly sure, we have some doubt as to the sustainability of the orders within aerospace, the flights. The aircrafts, they are flying ten and a half hours a day and they're down to nine and a half hours per day, so a lot of aircraft can come back on the market before we really see a change there, about 1,200 airlines, I think, can come back into the market.

So, we just -- we don't really know what's going to happen in aerospace, but the mix, obviously, has hurt us fiscal year 2003 to fiscal year 2004. And, we're pretty much where we've always been, Wendy. We said that we thought we would see about 12% margins in this business, we said that at the beginning of the year and we're really not changing our tune. We really feel that we can still sustain 12%, but in terms of orders we're not sure that we're going to see any recovery in the aftermarket, in the near term.

Thanks, Pam.

Your next question comes from the line of John McGinty with CSFB.

Good morning, Pam.

Hi, John.

On the industrial rest of the world, clearly the reported incremental margins were very lackluster in relation to what we saw in industrial North America. I guess the question is, if you make the adjustment for currency, in other words, the currency has an affect on sales, it has an affect on earnings. If you take currency out and if you take the acquisitions out, what is the impact on the operating margin? In other words, is there a core improvement in the industrial rest of the world that we can't see because of the impact of currency and acquisitions, or, in fact, is it just continuing to be disappointing?

No. I think there clearly is improvement. The margins are improving in Europe. There clearly is improvement.

But eventually, if you just look at them in absolute terms.

Right. No, there's improvement. The leverage isn't what you're seeing in North America and, clearly, what you're seeing in North America is the result of the Win Strategy, too, to a large degree. I mean, there's volume in there obviously and there's some restructuring, but big improvement on the Win Strategy side. And in the rest of world, we're just starting to gain traction with the Win Strategy in the rest of world. That program, as you know we used consultants on it and we implemented it in North America first, there's only so many resources that we have available to use and we started in North America, we're really gaining momentum on the Win Strategy and I think as we move forward we're going to gain even more momentum, because, obviously, if you purchase more you get more savings on the procurement side. Lean, we're working that program every day. So that's getting better. But on the rest of world, we just haven't been able to get the momentum yet because of the timing of when we started. We just haven't -- we started much later there.

But, and then the other thing, John, that you have to remember, is in rest of world, we've had a lot of initiatives. We're moving to low-cost country, we just doubled the size of our Czech Republic facility, we doubled the size of our Poland facility. We're going to double the size of our woofy in China.

Right.

So there are a lot of investments and we're moving product there. So there's hidden costs to some degree with respect to moving things around and adding on and -- but, no, I think clearly we're seeing improvement in the rest of the world.

It just doesn't show up. I mean in the same kind of incrementals.

No, not at the same level of incremental, you're exactly right.

Does it in '05, or do these things that -- I mean, do these things continue to take longer and longer?

No, I think we're gaining some traction. It came at a later time, the programs, they were initiated later, so I think they'll bring some more traction next year. Plus, I think some of the investment costs will be reduced. Because, like I say, we just announced the opening -- the doubling of our Czech Republic plant, we just had the celebration. And we've combined our sales force so we're moving sales around, we're pulling sales out of some countries, putting them in a single country for order-entry purposes. So there is a lot happening there. But I think we will see improvement in fiscal year 2005 as well.

And then just as a clarification on the talking about pricing and the impact of prices. As you said, there are surcharges, you can put through stuff on the distributors. I guess the question is, in the third quarter, the quarter that was just ended.

Right.

Was there any -- year-over-year was there a higher price realization for Parker as we look in the fourth quarter with the guidance for the year? In other words, we can imply what the fourth quarter is. Is there a percent or 2% or any price assumed in -- was there in the third quarter, or is there in the fourth quarter? I'm just trying to get an idea of the order of magnitude of what you've been able to get so far, what you've been able to put through.

In terms of our price increases to the customers?

Yes, exactly.

Okay. We really just started the price increases in April. And that was limited to -- the groups actually are doing it at different times. As you well know, we have different groups and the different groups deal with our distributors directly and so there can be some staggering of the price increases according to group. But the distribution doesn't have any -- they're not having a hard time picking up those price increases. What we did, though, however, is to be able to have one face to the customer, for Parker Hannifin as a whole for the OEMs, we consolidated and are going out to them with one price increase effective in May.

And how big is that, on average?

3.5%.

Okay. Thank you very much.

So the price -- to summarize, John, just to summarize for you, the price increases for the current quarter, January, February and March.

Was zero.

You've got it. Thanks.

But on the 3.5, what's the -- is there any kind of price protection, or how long does that last? Does that come in immediately?

Yes. It comes in immediately and it stays until we stop issuing it.

So is it a surcharge, not an increase?

For the most part to the OEMs, it's a surcharge and to the distribution it's a price increase.

Great. Thank you very much.

And we'll do another price increase potentially in July. We'll look at it and see where we're at and make a decision at that time.

Great. Thank you.

Thank you.

Your next question comes from Robert McCarthy with Robert W. Baird.

Morning, Pam.

Good morning.

I don't mean to beat a dead horse, but I'm having a little trouble understanding the fourth-quarter forecast. You just did 80 cents in the third quarter on an operating basis. You're looking at top-line growth in the fourth quarter being similar to that in the third. Yet you're looking for a quarter-to-quarter decline in earnings. I mean the traditional pattern for Parker, as you know, once a recovery is in place is for the fourth-quarter's earnings to be above that of the third, just seasonally. And that would seem intuitively to make sense, given that that's where you'll see strong seasonal increases in some of the markets that are hottest for you right now, like off-highway equipment and truck.

Right.

So, if you can help me understand what I'm --

Missing.

Yeah. What am I missing here?

The first item is -- we're not substantially lower. I mean, we're -- we came in at 80 cents without the tax, right?

Right.

Tax was about 10 cents so we're at 80 cents and our guidance going forward is pretty much in the range of --

70 to 80.

Yeah, exactly. So, what I would say is the first item is price increases. We don't really know what's going to happen with price increases.

So it's fair to say --

Raw material, we don't know what's going to happen on our side in terms of raw-material increases coming to us, and going out, we're not sure what's going to happen on the OEM side. We know that distribution is going to take on the price increases, there's not an issue, but we don't know how much is really going to stick with the OEMs. So that's the first issue.

Okay.

Okay? And then the order rates. Again, I go back to what I said. Even though it looks as though there's this smooth process, it's really not. What we're seeing is in spurts. And I'm not sure that we can keep that momentum up. The order rates have been very strong and we're not sure --

Do you have any real evidence that business was pulled ahead into March because of fear of price increases, or is that just anecdotal talk around the water-cooler.

We do feel that that has happened. We don't feel that that is significant enough, that it really makes a big difference, but we do feel that that's happened.

Okay. Okay.

Now, let me just finish, too, okay. I talked about raw material price increases coming to us and what we -- we're a little bit concerned about the OEMs and how much of the price increase that we'll put forward will stick.

Right.

The other thing is, CIC -- you have to remember, Climate & Industrial Controls for the fourth quarter is weaker, okay? Their business is down. The backlog's down, the sales are down. So you have to factor in that. And then, we have some uncertainty with respect to aerospace. There is uncertainty with respect to aerospace, and they have some new programs that they're working on where there could potentially be some nonrecurring engineering expenses.

Okay.

Okay? And then we're not certain that we're going to have aftermarket -- commercial aftermarket business. So, those are the main areas, when you really look at the forecast and --

Okay. Let me follow up with, just a follow-on to the dialogue you had before on the later launch of Win in Europe. What kind of a time lag are we talking about, Pam? A couple quarters or?

That's difficult to say, because the way that it's implemented throughout our company. If you remember, we have 120 divisions, and it's implemented at every single division at a different time. It depends on the division and who they're working with and so it's really staggered. I would say, though, that there's a good -- there's probably a year time lag between the time we started it in North America and when it really started in the rest of world.

Okay. Thank you, Pam.

Thank you.

Your next question comes from the line of Barry Bannister with Legg Mason.

Hi, Barry.

Didn't your receivables pop up because the Pentagon is historically a slow payer?

That's funny. Not to my knowledge. Not to my knowledge. Really, the explanation that I gave you is really the explanation of fact. I'm treasurer of the company, so when I saw the external number, obviously I was on that immediately. So you have to trust me. I'll go into that calculation with you in detail, but, trust me, it really is a result of the calculation. I mean, DSO is up two days and from your particular standpoint, you should look at it like that because that's how it's reported. But really trade receivables, the DSO is really down period over period and I'll be happy to walk through that calculation with you.

Okay. And then Eton has been talking a lot about their 5,000 PSI product and how that's going to take share on large aircraft and you talk an awful lot about small aircraft, are you seeing a share shift in large aircraft in terms of specifications?

No. No. We're very successful on the regional jet and that's why we talk about it. The nice thing about the regional jets for us is that we have all three systems on it. And and we're very proud of that. And not only because we have all three systems on it, but we get the aftermarket business as well, because the regionals don't tend to do their own aftermarket, they don't service that the way that some of the larger aircraft do. So, no, I would say for the most part, no, we don't see a big shift.

Okay. Thanks.

Your next question comes from the line of David Bleustein with UBS Warburg.

Good morning.

Good morning.

Pam, has the whole raw-material phenomenon, net of your ability to pass them through, helped you, hurt you, or really had no impact.

I'm sorry, could you repeat that question again?

Sure. If you just take the aggregate amount of your raw-material price increases, those that get charged to you.

Yes.

And net from that your ability to pass those cost increases through to the customer, is it fair to characterize that whole issue as having no impact, has it hurt you up to now but will help you going forward? How would you just characterize it from 30,000 feet?

Well, it's real difficult to say. I would say that because we have received the increases much later, that there probably has been minimum impact on this quarter. And I think we're well positioned to handle that increase going forward to the fourth quarter. So I don't see a big increase, but I just want to say that we're probably fairly cautious about that. It's something that we do think about, but we have our arms around it, I think. But I don't think there's a big impact in third quarter.

Okay. Good. And, Pam, I know it's only been few weeks, but how has April looked and what are you hearing from your customers about build rates or activity levels over the summer?

Well, you'll see orders when they come out, when we announce them, but right now there's no reason to believe that we'll see anything differently than what we have seen. Right now things are moving along at a pretty good pace. We really don't have any reason to believe that things will be different, but we're only halfway through the month and, like I said, this hasn't been a smooth process, it's come in spurts, so I'm not sure what we'll see going forward the rest of the month.

In terms of customers, I think most of them seem fairly optimistic. Microelectronics I did hear could potentially level off. We've had particularly strong demand for microelectronics in Asia and I think that demand in Asia has peaked. And this is all anecdotal for sure, but I think that it's peaked in that there could be a leveling off moving into the late summer.

And then here's the tough one. Following up on John McGinty's question on international, is it a question of time, or is it a question of volumes? Or maybe the better way to ask is at what point in time or at what revenue level would you expect to see double-digit margins in your international business?

Well, I think it's a combination of both. I think timing's part of it. I think volume is part of it. I think it's both. We haven't been as successful in Europe as we have been other places and we would like to very much get better at that. The Denison acquisition, as you know, is very successful in Europe. And one of the reasons that we're moving a little more slowly in terms of integration from a sales and marketing perspective is because we're really trying to learn something from them. If there's something there to be learned, we want to make sure that we learn. So we're taking opportunity to look very carefully at what they do to see if that might be helpful.

But, secondly, like I said, we made a lot of changes in Europe and I think it's just a matter of getting traction and getting some of the momentum on some of the changes that we've made. We've moved from Germany, some operations in Germany to the Czech Republic, which is obviously going to help. We're moving more products into the incubator in a couple of those places which is going to help. We're still reducing warehouses. As we said, we were going to go from 57 to two. So that is being done.

But clearly, it takes a long time to do some of those things. I think sometimes we can underestimate the work that's required that goes into that. And we're pulling sales out of countries to be able to have single-order entry points. And it takes a long time to work your way through that, but clearly, we're going to see the results from that. But timing's an issue from the perspective that the Win Strategy was implemented later there, and timing is also an issue as to when exactly we'll see the results of all these initiatives that we've put in place in Europe.

Okay, Pam, thank you very much.

Thank you.

Your next question comes from the line of Gary McManus with J.P. Morgan.

Hi, Gary.

Just on Denison, I can't imagine it was that much, but how much was the accretion in the third quarter, how much are you expecting in the fourth quarter, and how much do you really expect for the first year of ownership, I mean to what degree?

I think we saw about 2 to 3 cents, maybe in the quarter. And it will probably run at that rate for the -- yeah, I think it was 2 to 3 cents. I'm not exactly, but I think it was 2 to 3 cents in the quarter and I don't know. I don't know where we're going to end up, to be honest.

But if we seen you owned it for half the quarter roughly, will we expect a higher run rate in the fourth quarter and beyond, or do you think it's going to be running around the 2 to 3 cent per quarter level.

No, I think it'll be higher. I think it'll be higher. Because we only had a month and a half, we only had a month and a half in this particular quarter.

Okay. And that's in your fourth-quarter guidance of higher accretion from Denison.

Yes, it is in there. It's included in there.

Okay. And just getting back to capital spending. I looked a couple years ago, fiscal '01, you did $335 million of CAPEX, it's now maybe half that, that's where you're going to end up in fiscal '04. To what extent can that go higher in '05 and beyond?

Yeah, capital expenditures have actually been less than I think -- we had always said that we thought a sustainable rate is around 3% to 3.5%, and the rate that we're at is significantly lower than that. And most of the investments that we have been putting in have been in Europe and Asia-Pacific. I think that actually we'll never see those high rates again in terms of capital expenditures, but obviously it's not going to stay at the same rate. I think 3% is probably a good estimate.

But if I took 3% of roughly $7 billion in sales, you're talking over $200 million in '05. I mean is that a good number for '05?

It's the best I have. I think, yeah, it's probably a fairly good number. It might be a little lower, but I think that's a fairly good number.

Okay. Thanks a lot.

Your next question comes from the line of David Raso with Smith Barney.

I know it's getting late, I'll be quick. Just one quick clarification. The full-year sales guidance is 10%, or as the fourth quarter implied is nearly 16%; is that correct?

Yes.

Which is similar to the third-quarter growth, correct?

Right.

Okay. On the corporate expense, there's a lot of ways to measure it. Just sometimes look at it as corporate expense as a percent of the segment operating profits. It came in kind of low this quarter, about 12.9%, it has been averaging nearly 16% to 17% over the last, say, five, six quarters. If you looked at your new full-year corporate guidance, it implies the fourth-quarter corporate expenses are nearly $30 million.

Mm-hmm.

Last year's fourth quarter was only 18. Can you remind me why such a large corporate expense jumped fourth quarter over fourth quarter?

Well, there's incentive compensation in there.

Can you quantify that?

No. I really can't quantify it, but it's basically as a result of the corporation doing better and the accruals for incentive compensation. There's also, David, some costs with respect to tax initiatives. You saw the 10 cents in this quarter, those were the benefits as a result of it, but we also had some additional costs that were related to tax planning.

Can you help me quantify this? I mean it's a big number. Basically, people are trying to wonder why third quarter to fourth quarter you're implying flat to down on a core business. I mean, the hope is that's conservatism.

Right.

But the corporate expense alone accounts for it. I mean, you're going from $18 million a year ago to $30 million sequentially probably also up $4 to $5 million. Not a big number, I'm just trying to understand why -- it's a million year-over-year.

It's about four-tenths of a percent of sales is what it really comes out to. It's about four-tenths of a percent.

Corporate expense I believe runs a little higher than that, right? It's about 1.3 --?

The change is about four-tenths of a percent. So while it seems significant in terms of total percent, it's about four-tenths.

I'm just trying to understand why it seems a little low this quarter, then we're giving it back next quarter. I'm just trying to understand that. And last one on Denison, just trying to understand, can you remind me again the sales annual run rate of Denison?

About $180 million.

So on $180 million, to be accretive by, let's say half a quarter was 2 to 3 cents, so a full quarter would be 5 cents, 20 cents for a full year is net income of $23 million, just accretive. It just sounds like a big number. Just so I understand for my modeling purposes, is Denison supposed to be accretive on an annual run rate of 20 cents?

Yeah. That number seems a little high to me.

It would be nice if it was that accretive. That would be a huge home run.

Yeah. That number, though, seems just a little bit high based on what I remember, but, I really have to get back to you on that. I don't remember exactly the number that we factored in for the year.

Okay. We'll talk off line. I appreciate it. Thank you.

Okay. Thank you.

Bye bye.

Your next question comes from the line of Jeff Hammond with Key Bank Capital.

Hi. My questions have been answered. Thanks.

Your next question comes from the line of Mark Koznarek with Midwest Research.

That's all right, my follow-up's been answered. Thanks.

Your next question comes from the line of Robert McCarthy with Robert W. Baird.

Sorry, Pam, real quick. You identified September, November and January as months that showed sequential improvement in order rates. You did not include March, does that mean March was roughly flat with February?

Well, we really don't like to talk about sequential numbers. I think we've really been trying to get away from that. But for the most part, we didn't see an uptick in March.

Okay. Thank you.

Okay. Thank you.

Your next question comes from the line of Alex Blanton with Ingalls & Snyder.

Hi, Pam.

Hi Alex.

I know everybody's been harping on this with you, but it really is unusual. It would be unusual for you to have a sequential decline in EPS third quarter to fourth quarter of 10 cents, which is implied by the bottom end of your range, particularly when the economy's booming, capital spending is starting to rise, virtually all the markets that you're in are in a recovery.

Right.

The incentive compensation is a possible factor. But I'm been following your company 30 years and I've never seen that happen, a sequential decline, unless there's a recession going on. It has happened in that case. But there is that matter of incentive compensation. Can you compare the incentive compensation in the fourth quarter that you're anticipating with third? Was there any in the third at all? I mean, what kind of a sequential increase are we looking at here in that particular item?

Alex, let me put it this way. Last year the incentive compensation was nil.

No, no, no. Third quarter, Pam. I'm talking third quarter. We're talking sequential now. We're talking about your forecasted earnings could go from 80 cents in the third quarter to 70 cents in the fourth.

Right.

That's the bottom end of the range you gave.

Alex, I hope you're right. I really do.

No, no. I asked the question, what's the incentive compensation anticipated for the fourth quarter versus whatever you accrued in the third? What's the incremental increase?

Alex, I don't have that level of detail in front of me.

Was there any in the third quarter? Because I don't think you usually have it in the third quarter, but I could be wrong.

No, no. We accrue incentive compensation throughout every quarter of the year based on where we are at that particular point in time.

And is there any reason to think the fourth quarter would be out of line with what you paid in the third?

The earnings -- the results are much better for the third quarter and what's anticipated for the fourth quarter is much better. So, yes, we would anticipate a higher compensation.

Well, if you anticipate a higher incentive compensation in the fourth quarter, why wouldn't you anticipate higher earnings sequentially.

We do anticipate higher earnings in the third quarter.

Sequentially, you don't.

And we expect those to carry forward to the fourth quarter.

Well, wait, no, no. My question is this: If you expect higher incentive compensation in the fourth than in the third and if it's related to the earnings of the quarter, why wouldn't the earnings for the fourth quarter be higher than the third? You're not anticipating -- your guidance rules that out. Your top end of your guidance is 80 cents.

We're really not -- Alex, we're not expecting higher compensation in the fourth quarter.

Than the third?

Right.

So that's not the reason for the increase in corporate expense item from the third quarter to the fourth quarter, then?

Corporate expense has a lot of items running through it besides the incentive compensation. The reason that it's up year-over-year is because of incentive compensation.

I'm not talking year-over-year.

Right, I am.

I'm talking -- but I'm asking the questions. I'm talking sequentially here. I'm trying to get a sense of why you would anticipate earnings down 10 cents, possibly. I know you've gone through a lot of the reasons, but that would be highly unusual.

Alex, we have aligned our compensation with the results.

Okay. Fine. Thank you. Now, one more thing. Who do you have providing economic input for these forecasts? The reason for my question is that all year long you really haven't been hitting the numbers, you've been way too low and very, very cautious about order rates continuing and so on in the middle of a big recovery. So I'm wondering if you're getting economic input for the purposes of making the forecast?

Alex, the way that we've prepared our forecast is a rollup from the divisions. The divisions prepare their forecasts, it's rolled up to the groups, and then the groups rollup to corporate. We don't have a staff of economists sitting around.

So this is bottom up. What's the incentive for the people doing the rollup to underestimate their results? And do they get additional compensation if they beat their numbers?

No, absolutely not. There is no incentive for them to be cautious.

Okay. All right. Thanks. We'll talk off line.

Okay. Thank you, Alex.

At this time, there are no further questions. Ms. Huggins, do you have any closing remarks?

No, I don't, other than to say thank you to everyone who participated. And I will be around with Nick Librator [ph], we'll both be around this afternoon to answer further questions as they come up. And we thank you very much for your participation.

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

Thank you.

You're welcome. You have a great day today.

Thank you very much.

You're welcome.