Koninklijke Philips NV (PHG) 2003 Q2 法說會逐字稿

Good morning and welcome to the Genlyte Group Inc. and Thomas Industries 2003 second-quarter earnings conference call. At this time all participants are in a listen-only mode. There will be two question-and-answer sessions during the conference. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Phillip Stuecker of Thomas Industries. Thank you, Mr. Stuecker. You may begin.

Thank you. Good morning, everyone, and also a welcome to those of you listening on our Webcast. Today we will begin our conference with the Genlyte Group Inc. Larry Powers, Chairman, President, and CEO of Genlyte, and Bill Ferko, Vice President and CFO, will be providing an overview of their second-quarter results, followed by a question-and-answer session. Immediately following, you will hear from Tim Brown, Chairman, President, and CEO of Thomas Industries, and myself, Phil Stuecker, Vice President and CFO of Thomas. Following our comments, there will be another specific session for questions-and-answers to Thomas Industries' second-quarter earnings.

Before we begin, let me remind you that this morning's discussion may include forward-looking statements. These statements are based on our view of the world today, and therefore are subject to risk and uncertainties which are discussed in more detail on both companies' most recent form 10-K. Obviously actual future results may vary.

I will now turn it over to Larry Powers of the Genlyte Group.

Thank you, Phil, and good morning everyone. As I stated in the release, the earnings release that went out this morning, although I am somewhat pleased that we had a slight increase in sales, it was very disappointing to have to report our first down quarter after 33 consecutive record quarters. I will probably remember this quarter for quite some time, because I like much better reporting an improvement in earnings than I do when we have a decline.

Unfortunately for us during the quarter, we had some challenges that we just weren't able to overcome, which I will talk to you about in a minute. But first just give you a little overview of the market in total. The market remains, and when I say the market I am referring primarily to the commercial construction market, and then I will talk a little bit about the industrial and a little bit about the residential market.

But the overall commercial construction market, which is the primary market that we serve, continues to be very weak, particularly in office construction. We have not seen any turnaround at all. In fact if anything it may have even weakened further.

Retail construction continues to be very soft. We don't know of any of the major retailers, that we work with at least, that have increased the numbers of new facilities and construction projects this year versus last year. As all of you will remember, last year was a very weak year for retail construction.

Hospitality is very similar. The major hotel chains, the Marriotts, the Hiltons, all of these, their business overall remains relatively soft and weak; and as a result are not building the new, particularly the large downtown hotels that we like to participate in. We are seeing a fair amount of activity in the lower-budget type hotels; but that is not the markets that we really go after or are really good for our upscale lighting products. So overall the market conditions remain pretty weak.

As we told you about earlier, we had announced the price increase back in January, and we were hoping to gain more benefit than we have been able to gain so far. The market conditions are the primary driver of pricing pressures. The basic problem is that there is just too little business for too much capacity in our industry right now. Even though we have gotten some benefit, and I think will continue to get some benefit, out of the price increase, it is minimal and probably will remain minimal as long as the market conditions are as weak as they are. Every commercial job that comes up for bid, you have got four or five major companies bidding, and everybody is scrambling for this business. So it just puts a lot of pricing pressure on these jobs.

Some other negative things happened to us during the quarter. Vari-Lite, which is a company that we acquired back late last year in December, has not come on stream nearly as fast as we had hoped. This division actually lost money in the first half and again in the second quarter. It lost much less in the second quarter than it did in the first quarter, but it is still losing money. I was down at this facility last week, and we had a complete review; and I feel much better about where they are today.

At the time that we acquired this facility, we decided to move them in with our controls division. The building was not large enough, so we had to acquire a new building; and we have now relocated both of these companies into this new facility, and they are still fighting through some of the transitional problems and issues that you have when you consolidate two companies and move into a new building.

But I think the majority of these issues are behind us and that we should see significant improvement in this operation going forward. At least they have assured me of that, and I really feel more comfortable after visiting the facility that they will see a nice improvement in the second half.

Shakespeare, the company that we acquired the first of June, had a relatively good month in the first month we were with them. We feel very good about this acquisition and believe that they will be a positive contributor to earnings throughout the remainder of the year.

The big challenge we have for the remainder of the year is just the continuing soft market conditions. The residential market has remained relatively strong; and it appears, at least for the foreseeable future, that it is going to remain reasonably good. I mean it is weakening some from where it was, but it still remains fairly healthy and I believe is a major contributor to our overall business being better than it otherwise would be. If we see residential drop off, I think the small commercial projects could drop-off as a result of that, and commercial business could get even softer.

There are a few positive things going on that could really help our business the second half if it should happen. I am on the NEMA, which is the National Electrical Manufacturers Association, Board of Governors. I was at a meeting in Washington D.C. last week. We have helped the Bush administration develop this new energy policy that they're trying to get through Congress.

In the event that that should pass, that would be a real shot to our business. Because part of this new energy bill that the Bush administration is trying to pass is to give some positive benefits to people, some tax incentives and that to get people to install new energy efficient lighting. It is lots of other energy-efficient products too.

But the one I am addressing specifically relate to lighting, where any of the old magnetic T-12 ballasted fixtures, they would give so many dollars per square foot to upgrade to new more energy efficient type products. We met, when we were over there, with five congressmen. Some of them are somewhat optimistic that this bill may pass in some form.

They're not sure what is going to be left and what is going to be out. There are a lot of controversial issues with this bill. So it probably is not going to pass in its entirety. But the thing we are primarily concerned about is the lighting portion of this bill, which would be a real shot to our business. It would really, really drive, we think, retrofit business in this country.

One of the things that was discussed at this meeting was that many people in our industry now believe that retrofit business constitutes roughly 50% of the entire business that is available to us today, which is a number that is considerably larger than I had been using, but it does make some sense when you start looking around at the amount of new construction, which is very soft. Then you look at our business in total; it is certainly not as soft as the new construction business overall. We will continue to work very hard to refocus. We have done a pretty good job of that I think so far; to refocus our selling efforts on those markets that are more our active. Such as schools remain relatively strong; healthcare; all types of government work. There is still some business out there. And again as I mentioned earlier, the retrofit type business, we don't look for much of an increase or much of an improvement in the next quarter over what we saw this quarter.

I do hope we can get a little better handle on our cost. We have continued to see cost increases particularly in areas of freight. We have had some significant cost in our legal expenses. And health insurance has continued to be a challenge for us. But hopefully, we won't see these costs continue to go up.

The other major contributor to our earnings shortfall this past quarter was the strength of the Canadian dollar versus the U.S. dollar. We have these two major divisions in Canada that sell the majority of their production in the U.S. and we got hurt pretty significantly. You will notice that we mentioned that it cost us $1.7m in the translation between the Canadian and the U.S. dollars. Hopefully that won't continue. It certainly shouldn't continue at the current level. We cannot see that Canadian dollar is going to continue to strengthen as it has over this past six months.

So all in all we are going to continue to be challenged I think through the remainder of this year. We do not see much improvement in the overall market conditions, but we are going to do everything we can do continue to aggressively introduce new products. We had our Lightfair back in May, and we introduced many new products. And a lot of them have been very well received. We have some new energy-efficient Highbay type products, fluorescent-type products that are replacing some HID fixtures.

They are getting excellent acceptance in the marketplace. And people continue to be excited about the exciting new products that we introduced. So we will keep our new product introductions moving forward and do everything we can to control our cost and continue to function the very best we can in very difficult market conditions.

I think with that I will turn the time over to Bill, and he can go into the financials in a little more detail; and then we will be happy to answer any questions that you might have.

Thank you, Larry, and good morning everybody. As you saw from our release, second-quarter sales of $254.1m are 2.6% over last year. Excluding the Vari-Lite and Shakespeare acquisitions, sales were down approximately 1.6%. However, the month of June was a delightful surprise compared to April and May. We saw pretty soft markets out there or pretty soft business in the April and May and thus our prerelease that we did in June. However as June unfolded, the month of June was much stronger than the previous two months of the quarter were. So hopefully that will continue a trend; although one month definitely doesn't make a trend.

Year-to-date sales are $492m or 2.5% over last year. If you exclude the two recent acquisitions, sales would be basically flat with last year. Our backlog going into the third quarter is $11.3m or 9% lower than it was last year. The backlog from Shakespeare and Vari-Lite added about $9.5m to the backlog.

Operating profit for the second quarter is $23.1m or 8% lower than last year. And year-to-date operating profit of $43.8m is 3.7% lower than last year. Some of the elements that contributed to lower profitability are the gross margin, which declined to 34.9% from 35.3% last year. Most of this decline, or a good part of this decline is attributable to these Canadian divisions that Larry talked about earlier that sell into the United States markets, where their margins have declined accordingly.

In addition, our health costs have continued to climb as they did at the end of last year and the first part of this year. However our workers compensation costs decreased significantly from last year, when we had an escalation in costs that were attributed to some plant shutdowns.

Year-to-date gross margin is 34.7%, compared to 35% last year. Another big part of our operating profitability reduction is attributable to our selling, general, and administration expenses increasing. They are about $3.1m higher than last year at 25.8% of sales, compared to 25.2% in the comparable period last year. The strengthening Canadian dollar resulted in a $1.7m translation loss on Accounts Receivable and cash that were held during the quarter.

And legal and due diligence costs from a potential acquisition that we decided not to pursue resulted in cost increases a $1.2m. Year-to-date SG&A expense was 25.7% of sales or $4.4m higher than last year, which was at 25.4% of sales. The Canadian dollar impact for the half was $2.7m; and $1.9m is attributable to legal and due diligence costs that are higher than last year.

Our second-quarter EBIT margin is exactly 1%age point lower than last year at 9.1%. And again the cause for that is the higher legal and currency costs, and slightly lower gross margins. Net income for the second quarter then is $9.8m, which is 7.9% below our $10.7m from last year. As Larry indicated, this ends our run of 33 consecutive quarters of net income and earnings per share growth over comparable prior year quarters.

Year-to-date net income is $18.6m or 3.9% lower than the 19.4m reported for the half last year. Earnings per share for the quarter at 72 cents are 6 cents lower than last year's 78 cents. Year-to-date earnings per share of $1.37 are 5 cents under last year's $1.42, which is 3.5% decrease.

Cash generation from operations less capital expenditure was $10.5m, compared to $1.9m last year, which is a nice increase given our touch operating conditions. Working capital less cash and cash equivalents increased 15% to $192m from $166.8m last year. Most of this increase is attributable to the two recent acquisitions. Approximately $16.5m is from Vari-Lite and Shakespeare. In the Accounts Receivable segment of working capital we close with $171.5m of Accounts Receivable, which is $6.2m higher than last year.

However as a percentage of annualized sales it is at 16.6%, which is 10 basis points lower than last year, despite picking up about $10m from Vari-Lite and Shakespeare. Inventory increased $12.1m to $145.3m or 14% of sales compared to $133m last year. Most of this increase or $11.6m is attributable to the acquisitions. Capital expenditures $4.2m or $600,000 lower than last year. So we are trying to reduce capital at a time when the business is relatively soft.

Debt at the end of the quarter, we closed with a net cash position of $62.4m. During the quarter we paid down $15.7m worth of debt outstanding; and the Shakespeare acquisition consumed $19m of cash. So net debt at the end of the quarter was $62.4m compared to $37m last year after the two transactions I just told you about.

Gross debt was $24.8m less than last year, or $16.1m compared to about $41m last year. So cash flow fortunately and debt reductions were kind of nice for the quarter. The month of June was a very solid month for us, and hopefully that will continue as we unfold into the summer. Although looking at the big picture that Larry just talked about, the outlook for the next few months is going to be guarded.

With that, I will open the line up for questions and answers.

Ned Armstrong with Friedman Billings Ramsey.

Good morning. Could you provide a breakdown on the sales per market? Commercial, residential, and industrial? And how they compared to last year?

We don't have that right now. No, don't have it at this time.

There is not much difference. It is not going to change much, though. 80% to 85% of our business is in the commercial business; another 10% or a little over -- what is it, 10% to 12%, Bill?

About 12%, yes.

12% in residential; and a little bit in industrial. We don't see much shift in that. In other words, our residential businesses, what some people might think might be up more and our commercial business down more. But that is really not the case. It stayed pretty consistent. If you look at division by division, we have a few of our larger commodity-oriented commercial companies that are done a little more. But a lot of our outdoor and commercial companies that are in the high end spec business, this business is up a little bit. So it is going to be pretty similar to what it has been.

So 80/12/8 is a fair percentage breakdown?

That is probably even a little -- probably 80%, 15%, 5% is probably more. We don't do a lot of what we call pure industrial business. We are pretty small in that market segment.

And the Shakespeare acquisition will be included in the commercial section?

That is correct. Commercial, some of it may fall into the industrial section simply because there is some industrial. But most of it will go into the commercial division.

Okay, thank you.

Craig Kinneson (ph) with Robert W. Baird.

My first question has to do with July. Just given the strong June, have we seen any follow through?

It is actually reasonably strong from what we are hearing right now. July historically is always a pretty weak month because there is lots of vacations and lots of factory shutdowns and that kind of thing. But just in what little I know about it, and I don't have a rule good barometer on it right now, we will have a better later this week. We are bringing all of our managers in here for a meeting day after tomorrow. We will have a little better feel for it from them.

But in talking with guys, they feel that July is kind of a continuation of June, which I hope is the case for all of our divisions. Because if that is the case, I know for Lightolier, which is our largest division, I was talking to Zia Eftekhar this morning, the president of that division, and he said that July looks reasonably strong. And about the same relationship to what it was in June.

So that is very good for us in comparison to April to May. Our April to May were both pretty bad. And as Bill indicated earlier, June came back quite a bit stronger. And we don't know if that is an anomaly. We don't see anything overall that says the business is going to get that much better, but June certainly was a much better month than April or May.

Do you have a sense for what is driving that?

No, not really. There was a lot of schoolwork. I know in Lightolier's case this time of year in June, the schools are shut down; there is quite a lot of work going on for people trying to get schoolwork, the schools back in condition to start back up this fall. We had a few nice projects. The winter for some of our outdoor businesses was kind of long and we thought there were a lot of projects in that that got delayed. I know landscape lighting, which is a nice product category for us, was significantly delayed; and they came back in June and had a much better month. So I think it is a combination of weather and the type of business we're doing today.

Secondly, could you comment on the margin profile of any business you might win relating to the Bush energy bill? Is that product line a lower margin or higher margin product line?

It is somewhat of a lower margin business. Although it depends on the type of fixtures that they replace them with. If the energy bill comes into existence, and a lot of offices and a lot of companies follow through on the retrofit program, our whole position would be to sell them on higher quality, higher-end lighting. How successful we are doing that? We will probably be about the same ratio as we are now. We think we will pick up a significant amount of pretty profitable business. Some of the lower end lens louver parabolic business, which is lower profitable business, we will have to be competitive with everybody else. That is certainly not our most profitable business.

The good thing about that for us is because we spent a lot of money last year retrofitting that factory down in Sparta, Tennessee, we're in a much better position today to compete at higher margins than we were a year ago, as an example. The problem we have with that new factory right now is that it is so underutilized; and we haven't wanted to go out and be real aggressive in pricing and drive the margins down. So we have been very selective in how we have utilized that facility to date.

On the acquisition you elected not to pursue, could you provide some insight into the nature of that acquisition? Maybe the size, the industry, or product lines you were interested in, and what caused you not to pursue it, given that you did commit $0.5m to looking at it?

I have to be a little careful, because both they and us, we signed confidentiality agreements. They didn't want to know that the company is up for sale. It was a sizable acquisition. In the neighborhood of $150m to $200m; that was their sales, not the cost of the acquisition. We were very excited about it. It had some ramifications outside this country also that could have been very positive to us.

But the conditions of the sale just got to be such that it did not make economic sense for us going forward to pursue this. We could not get them to come off their position. We spent a lot of money, a lot of effort, and thought we were pretty close to this acquisition; but it fell apart at the end. And we do not see it going forward at this time.

Could you comment on the acquisition pipeline? You have done well in recent quarters having smaller acquisitions to offset some of the industry decline. Could you just comment on the pipeline?

We don't have anything right now that is imminent. We continue to look and pursue all kinds of acquisitions. There is a lot of little companies, not very profitable; not a lot of very good companies out there. And so we continue to look for opportunities. But right at the present time I can tell you we don't have a lot going on. But they can come up pretty quickly.

The Shakespeare acquisition was a company that I was interested in buying years ago, and they did not want to sell it; and they got a new president of the company. The reason they decided to sell that company was because they wanted to focus on -- they're primarily a sporting goods companies. So they decided to sell it. It didn't have anything to do with the profitability of the company or whatever. We're looking for good solid companies. We don't want a lot of bad companies. You can buy those every day.

Yes, right. Thank you; that is helpful.

Justin Morrow (ph), Lord Abbott.

First, on the pricing you talked about; it has been a little bit more difficult than you thought. Has that been offset somewhat, though, by steel being a little bit more favorable? Because wasn't the primary driver for that to try to offset some of that cost?

Is certainly wasn't just steel. Steel hasn't been that bad. The real problem that we have had from a cost standpoint has been in health insurance; pension; freight has come back. If you've seen the recent thing that just happened with Yellow, I don't think that thing has been finalized yet. But Yellow making an offer to buy Consolidated, believe me, is not going to be good for our industry. Because it is similar to what a lot of other industries would like to do, is have fewer players and not so many competitors. So that is a real challenge. And then our legal costs have been significant for us, has been the primary cost issues.

The pricing for the products that are going into stock, which unfortunately is smaller and smaller today, because distributors just are not stocking that much because their business is softer; we are getting some price increase. The problem with the price increase is on the large negotiated jobs and that. Because there is so much pricing, so much competitive pressure we're just not able to pass this price increase through on a lot of these jobs.

What is the split generally, just rough, between in stock versus bid jobs?

It is probably about 70-30, 75-25; it varies. It is becoming more and more job oriented all the time.

Dovetailing on that, maybe talk about China a little bit? Or maybe not just China but any other country competitors. Is the rise of that in anyway placing additional price pressure on pricing? And is that a longer-term issue?

It is, it is both a short and a long-term issue. China is definitely going to be a factor. Obviously, we are over there buying parts. And we buy some finished goods, particularly in our decorative business. And we keep an eye on it. And we are very much involved in that market. I don't know; we will import this year many, many hundreds of containers. That has been another area where we have gotten hurt, is on ocean freight. They are definitely a factor and they will be a factor for years to come. I think China is going to be a formidable force in the lighting fixture business.

Some of the large commercial business in the fluorescent business and in the large outdoor, a lot of that business it doesn't make sense, because their costs can not be that much cheaper than ours here. It is in more the high-volume commodity type products, the low wattage HID now, they are becoming a real factor. They have been a real big factor in the residential business for several years now.

I might my point out also, our business model, as Larry indicated earlier, is heavily job focused. And it is difficult to service, from a customer service perspective, last-minute changes that architects and specifiers come up with from China. Our business model to a certain extent insulates us from the stock and flow of commodity, large containers, and just try to put it all on a shelf and ship it out. So clearly that part of the business, the stock and flow, as well as residential is going to be more impacted than the commercial architectural job business would be for China

Do you see yourselves or any of the industry players making investments, direct investments? Or is it just mostly going to be component purchasing, do you think?

There's more and more direct investments all the time. There are certainly people that are making direct -- and we look at it all the time. It is just kind of a decision. We have some very good vendors that we work with; and so far we have made the decision to continue to work with some key vendors and that. But we have not concluded that we would never go in there and make a major capital investment ourselves.

Okay. Finally, on the somber outlook, which of course has been the case for a while; and you guys have done a great job of trying to maintain the business. The stuff that you are selling today, is the majority of that for projects that were, two years ago, in the works, and now buildings are being completed; and you guys are coming in at the end with the installation of your product?

Or maybe talk about the quoting activity, versus the more recent business you have been doing. Is it totally dropping off a cliff now that some of the projects that have been worked on for a couple years are being finished off? Or is it not that dire of a circumstance, do you think?

We haven't seen that a dire circumstance yet. Sometimes I become a little nervous that it could get a little worse. But so far, there has been enough. I have used the local market here that I am most familiar with, right here in Louisville. You got Churchill Downs out here, the big racetrack. Everybody knows it because of the Kentucky Derby. They had an ongoing project to renovate, and they are doing it little by little by little. We are doing a nice project there. The Louisville Airport here, it is old and tired, so they are renovating it.

That is where I think the majority of the business is coming from. It's projects like that, and less and less from new construction. But You could see some of that business go I would I think could be fairly significant. So far we have been, I think, fairly fortunate that there has been a fair amount of significant renovation. They are going to build a new museum here. It is the history of firearms and that, throughout the world; here in Louisville.

Some people would call that -- you can argue whether it is renovation or new construction. There is a building; it is already there; but they are taking this whole building and completely renovating it. To me, that is like new construction. They are going to do that.

There's a fair amount of projects around the country. And, you know, retail is not totally dead. And there's certain markets even where office space is a shortage. But the big markets, San Francisco, New York, Washington D.C., Chicago, these big markets have got a lot of excess in office space. But when somebody moves out of an office, or even where they have these old buildings, they have to do something with them. So they are spending a fair amount of money trying to renovate them and that. I think that is where a fair amount of our business is coming from today.

The overall quotations and activity, we haven't seen it -- I watch that pretty carefully, and it is staying pretty constant. We have not seen a big change up or a big change down. It is just staying pretty constant.

Okay. So you feel like the last couple quarters, other than seasonality, of sales and/or profit, kind of run rate, you don't see a pending cliff? Or even a small cliff, maybe, to fall off a little bit once some jobs are done? That there is enough in the replacement business? And if it shifts from new to remodel you don't care, as long as you are doing the business?

Right. The only thing that I think I caution even ourselves and our people to watch for a little bit is residential construction. When residential construction booms, and you go out into the suburbs of the areas where all this residential construction is going on, that relates to a lot of new branch banks; they build a new McDonald's; they build a new little shopping center. That has really driven, I think, a lot of the new strip malls and a lot of the small commercial construction that we would not have if residential was not strong.

I think if residential really fell off, you could see some of that business go away. Which I think could be fairly significant. So far it looks pretty good. The NEMA statistics we were just looking at, they are looking for residential to stay pretty strong. As long as these interest rates stay down and that, it still looks pretty healthy for the foreseeable future.

Thanks a lot.

Andrew Meister (ph), Stifel Nicolaus.

Good morning everybody, Larry and Bill. Just a quick couple of questions here and I don't want to beat the energy proposal and bill to death. But my understanding was that some of like the T-12s that are out there, I mean are already, I don't know what the term is, but illegal or not fit for use. I am wondering what the change in incentive is to spur this retrofit business? And number two, what is the time-cost incentive mechanics that make this all work and pull it together, so that it could be something that we would see in the next one to two years?

If it would go through in its current form, is the way I understand it; and I'm not an expert on the bill, but I have a pretty good feel, is that in that -- and I don't remember the exact dollars; but in essence, the government, first of all, would go out and make a commitment to over a period of time, and I don't know the exact timetable. They have a time schedule to retrofit a lot of the government buildings. As you probably know, the U.S. government is the largest owner of buildings in this country. That in and of itself would stimulate, we think, a lot of activity.

The T-12 lamp, in essence, we're not supposed to be able to even produce them anymore. But in fact, in the year 2002 which just ended, that is still the number one selling lamp in our country by far; and that is before the retrofit business. Nobody is producing the fixture now that uses a magnetic ballast and a T-12 lamp. But there is still a huge market out there. And they are allowing people to sell into that market, because of the demands, through the Home Depot's, through the grocery chains, through wherever they can buy them. It is still there.

And if this energy bill went through, the idea is to encourage people and give incentives, tax incentives. What it is, is so many dollars per square foot for lighting and HVAC; they would give you an incentive to go retrofit and get rid of all your old inefficient fixtures, and retrofit with the new either T-8 or T-5 electronic ballasted fixtures. It should stimulate a lot of activity because it would make it a relatively short payback.

The big challenge we have today, there is still a pretty good payback in areas where energy costs are very high; but in areas where we live here in Louisville, Kentucky, where you got 5, 6 cents an hour kilowatt-hour, the payback is not that good. So people don't pay much attention to the energy cost. Hopefully, if this bill went through, we think over the next five years it would stimulate a lot of retrofit and get people a lot more energy conscious. And if nothing else put a lot of emphasis on just to be a good citizen of the United States you ought to be a lot more energy efficient, and you ought to be doing some things to upgrade your lighting and your HVAC.

Certainly. Just moving along, and still on that same line of thought; as far as retrofit activity is concerned, is there any difference in that business relative to new construction, as far as lead times are concerned? I know one gentleman talked about profitability. I'm just wondering if there is anything else that we can touch on there to help me understand it better.

The lead times if anything would probably be less in renovation. Because people order lighting, it is a matter of getting contractors in and deciding what they need and retrofitting. Particularly if they are replacing fixture for fixture, it goes fairly quickly. The pricing and that on the fixtures, there's some of the ESCOs, these energy conservation companies, ESCOs as we call them in our industry; that want to just replace the lamp and ballast.

Obviously, we fight that. We think you ought to replace the fixtures. They are old and tired, and there is new, better, more efficient fixtures. So we try to sell new and better fixtures. Depending on how successful you are will depend on the quality of the orders and that you get.

But I don't think the orders would be much different from a profitability standpoint than new construction today. If there are big projects and that, you will still have to bid the orders. And if you have got the best product at the best price, and you can convince people to use your product, you will get the order.

Does your stock and flow mix and your spec percentages say the same then with this?

It would not change much. Some of this could be purchased out of stock. But most of this is going to be job retrofit type business.

We talked about June being a little bit stronger and July sort of maintaining. Do you have a feel for the percentage change year-over-year for June? I don't want to get too granular and make you divulge something you don't want to say. But at the same point in time, ex-acquisition, was June up 2% or flat or up 5%?

I hesitate to even give you those numbers. Because it is so hard to sort out all of these different variables, in terms of weather, or how many days were this June versus last June, in terms of the way the weekends and holidays fell. You have to take it at its face value that it was stronger and it exceeded our expectations. But I think you need to be really careful about drawing conclusions from it, and trying to extrapolate that out.

It is possible, because indications for July are pretty good too. But it is very premature to take that and say, okay, this is dip we saw in April and May are over. Because we just don't know. Your guess is as good as ours right now. I think if we get a few more weeks of what we have seen in June and July under our belt, then we could say, well, things have really turned the corner. But it is premature to draw that conclusion right now.

Okay, that's fair enough. Thanks, guys.

Tom Spiro (ph) with Spiro Capital.

I got on the call a moment late, so I am sorry if this was already addressed. Larry, with the recent tax changes out of Washington, is the company's posture towards the stock repurchase versus the dividends going to change? Or not?

We have a Board meeting this week. We constantly talk about it. There is nothing has changed yet. Will we ever change? I don't know. We will constantly look at it and review it and see if there is anything that makes sense and that. But at this point I don't really have anything to report on. We haven't done anything at this time.

Okay, thanks a lot.

Gentleman, there are no further questions at this time. Would either of you care to make any closing comments?

No, that is fine. We just appreciate everybody's input and participation.

Ladies and gentlemen, we would like to thank you for participating in today's teleconference. This concludes the program.

Wait, wait, wait. Thomas Industries.

Gentlemen?

We need to go through the Thomas Industries conference call.

Please do so.

Okay. This is Tim Brown, President of Thomas. Good morning. We were pleased to report that earnings for the second quarter were the best in our company's history; and the earnings per share did equal last year's earnings per share of 54 cents. For the first half, we posted both record net income and earnings per share.

Obviously we benefited from the inclusion of Rietschle for the first 6 months of this year. And as you know we acquired Rietschle in August 2002, and have consolidated their results from that point going forward. We think the acquisition was 2 to 3 cents accretive year-to-date. During the quarter, we did benefit overall from the currency exchange by about, pretax, about $0.5m. We continue to believe that the synergies envisioned in the Rietschle transaction are on target and will be achieved by the end of the first quarter of 2004 as we talked in the past.

You obviously just heard from Larry Powers on the results and outlook for GTG. While results were impacted by some expense items, overall results were not too bad in a pretty tough environment, as Larry talked about. And certainly a little better than earlier forecasted, in early June.

As we noted on the pump and compressor business, we continue to find pricing pressures in our major markets; and where necessary we have moved some product to the Far East. To combat margin pressures, we are also spending considerable time and money in developing new and if possible proprietary technology. We will continue to do so, as well as to continue with our other cost reduction efforts.

As we indicated in our release, medical and automotive were quite strong in the quarter as well as year-to-date. We know based on history they probably won't be quite as strong in the second half. Compressors to fill Hummer 2 demand have now been adjusted to fill a more level production rate. And the oxygen concentrator market was really strong in the first half; but demand can fluctuate quite a bit, as we have seen in past years.

Our weakest area again this quarter was in Asia-Pacific, where sales into two of our larger markets, oxygen and Freon recovery, were really weak. And we see this probably continuing for the rest of the year. Some of this has been driven by legislation, especially in Japan. Excluding these two markets, however, overall sales elsewhere grew in Asia-Pacific.

We continue to move through with the integration of Rietschle Thomas structurally and operationally. This past month we converted our ERP system in Schopfheim, which in time will give us the tools necessary to improve upon our overall service to our customers. As we said in our release we have closed our Fleurier, Switzerland, manufacturing facility; and we have completed a number of other sales office consolidations throughout the first half. This has clearly helped us achieve the synergies that we promised.

So overall it was a reasonably good half. I'm looking forward to the second half. It is a little hazy right now. Certainly this'll be the first year that we have worked through the vacation season with the Rietschle acquisition. As you know, in July and August in Europe, there are a lot of vacations. We are not sure what the impact of that will be. But we have a lot of new projects that we are working on.

With that, I will turn it over to fill and comment on some of the figures. Phil?

Thank you, Tim, and good morning again everyone. Our balance sheet still remains very strong. Cash flow was generated from operating activities for June year-to-date are $5.5m compared to $3m for the six-month period ending June 2002. We closed the second quarter of 2003 with a cash balance of $17.7m, down from the $18.8m at year-end. This decline in cash balance is principally due to an increase in our capital expenditures for the quarter, which totaled $4.6m. Our working capital was $94m; and our current ratio is 2.7 to 1.

Our accounts receivable are $55.8m; and our number of days outstanding is 55. This is up slightly over March, but still a very nice improvement from year-end, where our days sales outstanding were running at 62 days. Our inventory balance is $62m and has an annualized turn rate of 4.1. We have built inventory since the beginning of the year as a result of the planned shutdown of our Fleurier, Switzerland facility and also to improve service and on-time deliveries.

The strengthening euro and British pound since the end of the year has also contributed to this increase. Since year-end the exchange rate conversion accounts for approximately $5m of our June 30, inventory balance. Obviously, the exchange rate conversion will also affect other balance sheet accounts.

Other key balance sheet figures for the end of the second quarter are as follows. Current assets $150m; investment in GTG $203m; goodwill $53m; net property plant and equipment $96m; and total assets of $527m. We had notes payable of $3m; current portion of long-term debt $9.5m; and our long-term debt was $104m. And total shareholders equity was $342m.

Our debt to capital ratio at the end of June is under 24%. Capital expenditures for the quarter and year-to-date were $4.6m and $6.5m, respectively. Depreciation expense for the quarter and year-to-date was $3.7m and $7.6m, respectively. Estimated capital expenditures and depreciation expense for the year is $17m and $16m, respectively.

I would now like to open up the conference call for any questions that you may have, with either Tim or myself.

Ned Armstrong with Friedman Billings Ramsey.

Can you review the sources of your sales growth, as far as acquisitions, foreign currency, and core growth on both the quarterly and first half of the year basis?

Okay, looking at the quarter, the currency impact in sales was about $2.8m over last year's. Obviously, we did not have any sales from Rietschle in those numbers last year; so Rietschle is not included. So we are just looking at the incremental increase because of foreign currency because of the Thomas existing business. On a year-to-date basis, that is about $5.7m. It is getting a little harder and harder to monitor the sales and the overall, I should say, accretion to earnings, because as we combine these operations. But I would say that if you were to look at Rietschle's existing businesses, and try to make some estimates as far as the consolidations that we did, that they probably added close to $50m in sales for the quarter.

And how about for the half?

I would say the first quarter was probably a little bit less than that. Again, we had a little bit better feel for it. I think that was probably around $47m; in that range.

Okay, thank you.

Michael Schneider (ph) with Robert W. Baird.

Wondering if you can first spend a minute on Rietschle? Talk about on-time deliveries, backlog at Rietschle; just how you have addressed some of the service issues that you alluded to last quarter? And maybe where you stand today?

I would say our service issues continue to be a bit of a problem. At the time of the acquisition were looking at putting in a new ERP system; and we were unfortunately delayed in doing that. We did go through the implementation at the end of June. We have now converted to the new system.

But it is going to take a while to build in the tools to give us some of the information and planning that we need to really improve our service. So it continues to be an issue with us. We are addressing it with overtime and trying to get out of that situation as quickly as possible. But we really need a little bit better planning tool, which we have now started the implementation of at Schopfheim.

And your experience in July now at the facilities with the new ERP system; are you getting product out the door? Are the inventory controls working? Billing working?

We made the conversion; it is working as well as it did before; but probably will some impact on us as we move through the third quarter. But I think as you go through these ERP implementations, your nightmare situation is that you can't operate. But we are up and operating and processing orders and shipping goods. So for the most part I think we are pleased with the implementation.

Okay. The consolidations now. You announced the Switzerland facility. This is the same facility we talked about last quarter, though, right? This is not an (multiple speakers)

Yes, it is. Yes.

Okay. Looking into the second half, then, you have obviously got a lot of German operations. The German economy is probably the worst on continental Europe. Can you give us some insights as to what the next major steps could be?

Nothing right now. We have got some further consolidations of some sales offices, really, that we need to get completed around, really around the world. We have done probably three or four of them. We still have probably three or four more to do.

Okay.

We talked about the last conference call the Fleurier shutdown. We basically announced it to the employees within the company and so forth. but we had activities all the way through June, through the end of June at Fleurier. So hopefully, we will start seeing some of that benefit in the second half of the year.

What do you think the period costs were this quarter related to Rietschle and the consolidations, the ERP, etc., just to give us a sense of how much margins or operating earnings were depressed by those activities?

I don't think there was a whole lot, to be honest with you. We will see some shutdown cost as it relates to the Fleurier shutdown second half of the year; tied into the relocation of our Memmingen facility, because you know we are shipping some of that product to be manufactured in Memmingen, and we have a new facility there. So there is going to be some cost hitting us in the second half of the year. But we are looking at seeing some pretty nice synergies later in the year, and then the full-blown amount of that in 2004 from the Fleurier shutdown.

Okay. Maybe you can spend a minute by market. Last quarter the medical market was strong; sounds like it was again this quarter. Can you give us a sense of what revenue increased there? If you had further benefit from this new systems approach with one of your major customers?

It is hard to say what the total systems approach has added to us. If you look on some of our key projects, especially those projects coming out of Europe, probably, I don't know, 40% or 50% are project or system related. The medical market was up somewhere between 12% and 15% for the second quarter, as well as the first half. Automotive was a big increase. As I indicated before, that primarily came about as a result of the compressors sold for the Hummer 2. As I said before that has kind of leveled out now to a more stable production. We did a lot of filling of the pipeline in the last six months.

What was automotive up?

Actually our automotive sales were up almost 50% for the half. You understand, we didn't have much of the Hummer production -- didn't have any of the Hummer production first half of last year.

Industrial was actually up, in all the industrial markets that we serve, between 8% and 10% for the quarter and they half. Our big fall off was in business equipment. Laboratory markets were especially weak. Those were two of the big downturns. And then the Freon recovery especially, as I indicated, in Japan was quite weak.

Okay. I guess this pipeline fill now, with this medical program that you're now doing the entire system, rather than just the concentrator.

We're not doing that today. We are only supplying compressors for concentrators.

Okay; but you talked about a program that you had taken on a larger slice of the system last quarter benefiting (multiple speakers) .

You are talking about a nebulizer that we were manufacturing and transferring that manufacturing into China. And we are on target to do that late in the third quarter of this year.

So it is on target and will be (multiple speakers) and the impact on margins, then, Phil? Presumably you start to capture some of the margins you have been targeting?

We really won't start to see that until the fourth quarter.

Okay. Finally just the preannouncement versus the earnings today. We had a number at 54; you preannounced 47 to 50; and you come in at 54. Where were the variances? Genlyte did a little better; but it doesn't seem to explain all of the upside from where you warned us in early June.

I would say some of it did come from the Genlyte side. I mean that was up quite a bit from what we had thought could be the situation. I would say automotive remained much stronger than we thought it was going to. We thought we would see more fall off quicker. I got to tell you, the medical markets were stronger than what we thought; it just continued to fill.

Right; in fact Invicare (ph) reported a very good quarter with strong oxygen concentrator sales. Is there a market share shift going on there? Or was the market indeed just stronger this quarter?

I probably wouldn't comment on the market share; but I would say the market in total was quite strong.

Okay, I appreciate it. Thanks.

Josh Wafenten (ph), Gibelli Asset Management.

Just a couple of catch ups. Can you go through the balance sheet items again? Short-term debt, long-term debt, cash? I just missed it.

You have the cash? I'll just go. Cash is $17.7m; receivables $55.8m; inventory $62m; current assets $150m; investment in GTG $203m; goodwill $53m; net PP&E $96m.

You can just jump to long-term debt.

Long-term debt $104m; and shareholders equity 342.

Any short-term debt?

The current portion of long-term debt is $9.5m. And we did have 3m of notes payable.

Okay. Secondly, someone asked about how much Rietschle contributed, the first question. You said 1-5m not 5-0m? You said 50m or 15?

For the quarter, second quarter we had $95m in sales. And again we are consolidating sales offices and so forth. I think a reasonable estimate would be about $50m.

So I heard that right; just making sure. Lastly, it is a point we bring up a lot. At our conference in the fall, we asked you about monetizing the GTG stake. You said business was not good. You didn't want to sell at the bottom. Business continues to get worse. Is there any reconsideration there about monetizing that asset?

We certainly talk about that at our Board meetings. But right now, I mean again while business may not be great at GTG, I think they have done a really good job of maintaining sales and operating margins. I think they will clearly benefit from a rebound in the overall economy. The energy policy perhaps, as Larry talked about. And also I think from some of the acquisitions that they have made in the past. So it is still a good business.

I appreciate your comments. Thanks.

Justin Morrow, Lord Abbott.

Couple things. You mentioned the Rietschle business was 50m in total, incremental. I just want to make sure that implies that the base business then would be down about 10%; which given what you said about the strength in auto and medical, I would be surprised if that was the case.

I would say our base business is not down 10% at all. But again we went through this consolidation of several of our facilities. And I would say our base business is probably close to last year's level or slightly up; particularly after you adjust for the currency translation adjustments. So it could be $48m to $50m, in that range. Obviously the biggest part of the increase of our business in sales was the result of the Rietschle acquisition.

Within that, what about the year-over-year? Not to get too specific if you don't want to, but the Rietschle business year-over-year with the currency being strong, has that impacted their business negatively? I know they sell a majority of their stuff in Europe, so I would presume it has not had that much of an impact?

A great deal of their stuff is sold in Europe. But they do sell all over the world. And I would say I think we're able to compete wherever we want. It does put pricing pressures, especially like in North America. Our North American operations that sell the Schopfheim product clearly have seen lower margins as a result of that; because they have simply not been able to pass on all the currency exchange. It put pressure in the Asia-Pacific as well.

Lastly, I think you guys have talked in past quarters about competitive pressures and opening price point product. I don't know if that was specifically within concentrators, or medical in general?

I think I have commented particularly in medical in general as well as automotive.

Has that continued?

Yes, and I would say that that will probably continue. Our job is to find ways to offset those pressures.

Thank you.

Michael Schneider.

I apologize for digging into details again on Rietschle, but I think everybody is calculating the numbers here and something seems somewhat askew. First quarter Rietschle, I think last quarter you said contributed $39.9m.

I didn't have that quarterly breakout with me here; I apologize. If that is the number we gave, that is the right number. I know that on the quarter basis we did not have from our existing business a 10% drop in that. But I think we commented for the quarter we had about $2.8m increase in the Thomas business last year, as it relates to the conversion to the stronger euro and pound. I just don't have that.

The reason I ask is last quarter, again, the number given, I think, if my notes are correct, was $39.9m from Rietschle. And then it seems like the step to $50m this quarter, and I know it is a rough figure, but it seems quite large for Rietschle even given the seasonal strength.

It is. Let me give you this number that I have got here; and I think this is a little -- we are showing total June year-to-date sales of the former Thomas companies of $103m versus $89m last year. So it is up about 15%.

Of that $5.7m would be the currency effect?

Yes.

So if I just crunch the number here; 103, 5, 7, 89. So you are up $8.3m year-to-date in the core Thomas businesses.

Yes.

Okay. All right. I appreciate it. Thank you.

Gentlemen, there are no further questions at this time.

Thank you very much.

We would like to thank you for participating in today's conference. This includes the program. You may now disconnect your lines. Have a nice day.