Koninklijke Philips NV (PHG) 2004 Q1 法說會逐字稿

Good morning and welcome to the Thomas Industries and Genlyte Group first quarter 2004 earnings conference call. At this time, all participants are in a listen only mode. There will be two question and answer sessions during this conference. At that time, if you wish to ask a question, please press *1 on your telephone keypad. If anyone should require operator assistance during the conference please press *0 on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to turn the call over to your host Miss Laurie Lyons of Thomas Industries.

Thank you and good morning everyone and also welcome to those of you listening on our web cast. Today we’ll begin our conference with the Genlyte Group Incorporated. Larry Powers, Chairman, President and CEO of Genlyte and Bill Ferko, Vice President and CFO will be providing an overview of their 2004 first quarter result followed by a question and answer session.

Immediately following we’ll hear from Tim Brown, Chairman, President and CEO of Thomas Industries and Phil Stuecker, Thomas’s Vice President of Finance and CFO, following their comments there will be another Q&A specific to Thomas Industry first 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 risks and uncertainties which were discussed in more detail on both company’s most recent Form 10-K. Obviously, actual future results may vary.

I’ll now turn it over to Mr. Larry Powers of the Genlyte Group.

Good morning everyone. It’s always a pleasure to have these calls when you have an earnings increase of 20% so needless to say we were pleased with the overall results of the first quarter. We did feel that it was important to somewhat break-out particularly our sales for the first quarter to point out that our basic commercial business is still relatively flat any of those you who follow the commercial and industrial construction numbers you’ll note in the first quarter those numbers have remained very soft and we haven’t seen much of an up tick although the general overall activity just seems to feel better for both ourselves and our sales representatives and our distributors, everybody is feeling a little bit better about the business and we saw that in the overall results in the first quarter.

We had a significant contribution in the first quarter from Shakespeare which is the fiberglass pole company that we acquired last June, they had a very good first quarter and we look for their business to stay relatively strong. I think particularly with the increase in steel prices these fiber glass poles are going to all of a sudden become a lot more competitive and I think more attractive to the marketplace so we look for them to continue to have strength there going forward, we also had a significant input of business and shipments from Vari-Lite which is a company we acquired a year ago this past December although we’re not totally satisfied with the financial results of Vari-Lite to date we still got ways to go to get this company to where we’d like them to be from an earnings standpoint but they made a nice contribution to our sales in the first quarter, part of it is a result of the Olympics that are upcoming in Athens, Greece we received a very nice business as a result of those Olympics which they historically have done a nice job of furnishing products for the Olympics in the past. And as I said this year will continue to be somewhat of a challenging year for them from a profitability standpoint but we believe going forward particularly starting in 2005 we’ll see a substantial improvement in their profitability and they’re continuing to improve all the time but just not at the pace that I would like to see them.

We are experiencing some significant cost increases as we pointed out, steel has been a major issue for all of us. I was just reading an article this morning about the fact that steel is probably going to continue to be a challenge from a pricing standpoint for the next two or three years with China now being the largest user of steel and they are buying up all the steel they can and forcing the pricing upwards we don’t see that softening any time in the near future so we’re going to have a continuing problem with steel prices going forward. Healthcare, health insurance of all types is continuing to be a problem with insurance up significantly; we’re also seeing price increases in aluminum, in corrugated so I think that’s just a fact of life.

One of the things that concerns me a little bit that’s a little bit in the industry is that I’ve been talking to a lot of our major distributors about is that many of the newer contractors are not used to these kinds of price increases and many of these contractors had quoted prices out some of them were out a year/18 months where they quoted these jobs and didn’t have any escalation costs in it and are finding it very difficult to be able to get price increases and it’s putting a real financial burden on some of these contractors and that’s somewhat concerning but we’re getting a lot of pushback from some of these large contractors and subsequently some of our distributors although for the most part we find that our distributors and most everyone in the marketplace is receptive to the price increases that we’ve announced of 5 to 8% depending on the product line because everybody recognizes that all the other commodities have gone up, you know conduit, steel, aluminum, copper, so everybody has somewhat relegated themselves I think to cost increases these days and so we’re hopeful and I think it’s extremely important that we’re able to obtain this 5-8% price increase going forward or we’re going to find it very challenging to achieve the numbers that we have budgeted for this year if for some reason we don’t get this price increase. However I am optimistic and I know that we’re going to take a very strong stand and push very hard to get these price increases because we need them based on the cost increases that we’re receiving.

The other thing that we talked about and continue to talk about is that we continue to be very diligent in our cost avoidances, doing everything we can to minimize our cost. We’ve pretty much completed our factory consolidation at this time and we’re starting to see a lot of benefits from that. Our Sparta plant that went on stream just about a year ago now had a lot of challenges in startup as we find in many of our operations our service hadn’t been that good our productivity hadn’t been that good but we’re now starting to see significant improvement in both in productivity and in the service levels out of Sparta, and we think that will do nothing but continue for the rest of the year and continue to get better.

The other major thing that’s happening this year is Lightolier celebrating their 100th anniversary. They’ve now been in business for 100 years which in it of itself is a great feat from my standpoint. To last 100 years in business today is a significant achievement and Lightolier has not only lasted but they’ve thrived and they have many many major events this year. They’re having their first national sales meeting at their new renovated tech centre up in Fall River in May , they also plan to have a national sales meeting in that where they’ll bring a lot of distributors and customers to Fall river to show them their new tech centre and the many many new products that they’re planning. They have probably the largest product introduction in Lightolier’s history and for those of you who know about Lightolier and their past they’ve been a company that’s always been very aggressive in introducing new products but this is going to be their best year ever. So we look for really good things to come from Lightolier this year with all these new products they’re introducing.

Many of our companies, Guardco, just had a sales meeting where they invited in their sales force and introduced several new products that were met with overwhelming acceptance and we think that’ll help that company to move forward and most all of our companies have very aggressive new product introductions both here in the spring and also later in the year so you know, assuming that the economy and that interest rates don’t get too carried away and the economy stays at or near the current level, you know, I expect the year to continue to do, you know, reasonably well. We are always somewhat cautious because of the commercial construction is still relatively soft and nobody sees much improvement in commercial construction until later this year and most likely early into 2005, which it will be, you know, mid next year or late next year before we’ll see much benefit from that but all in all, I feel very good about the first quarter and what we’ve been able to accomplish and feel optimistic - - at least cautiously optimistic that we’ll be able to continue to move forward through the rest of the year and have another record year for Genlyte. So, with that I’ll turn it over to Bill Ferko who is up in New York and he can talk to you specifically about the financials and then we’ll be happy to answer any questions that any of you might have. Bill.

Okay. Thank you Larry and good morning everybody. As you saw from our release we are very pleased to announce that our sales of $277.4m are 16.6% over last year. We broke out in the release, the three major contributing factors to the sales increase with 5.9% of it attributable to the Shakespeare acquisition from May of last year which was not in the first quarter numbers and a Vera-Lite acquisition which was in - - as Larry pointed out, it was late November early December last - - in 2002. And during the first quarter of 2003, there was a lot of - - I guess consolidation where we’re shutting down factories and ramping up the business and so it was - - you know, they are going through product introductions and it was a very difficult first quarter for them last year and they had a very good first quarter of 2004.

So, that combination of those two deals, attributed to a 5.9% increase. And then 6.6% of the increase is attributable to us having four more working days this year in this - - this first quarter of this year than prior years and 2.3% is attributable to the Canadian dollar which strengthened throughout the year last year and if you’ll recall last year we - - because we had a lot of US dollars that were held by our Canadian divisions, we actually had exchange losses due to the translation of cash deposits.

This year, we are getting the benefit of the Canadian dollar being stronger as the sales and earnings translate to more US dollar. During the first quarter, we actually did also - - and I’ll talk about this in a little bit - - the Canadian dollar actually weakened through out the first quarter and we actually received some translation benefit from that as well so, it’s just kind of , both things moving in the right direction for us at the same time.

Excluding all of these items, the sales then increased 1.8% over 2003, which is as Larry pointed out during a period where there still is significant vacancies in commercial construction, commercial office buildings - - you know, we are doing surprisingly well. Although we are still very disappointed that - - with the cost increases that we are getting that we are not able to substantially offset those cost increases with price increases until now and the price increase was announced last month and a lot of it is not effective until basically early May. So, we will not be experiencing the benefits of price increases for some time.

In the operating profit area, first quarter operating profit of $25m is - - 20.3% higher than 2003. As I mentioned earlier, the first quarter currency gain due to translating Canadian working capital transactions resulted in about a $400,000 benefit and then the operating profit is translating to more US dollars resulted in about a $576,000 benefit.

We had significantly higher costs in many areas. Legal costs were higher, group medical, we broke out for you the pension expense due to curtailment of a pension plan for a recent plant closure. That was about $800,000. Steel prices – from what we saw where they - - wrote us an article just last week that they had experienced a 68% increase for cold-rolled steel from December of 2003 in - - until a point in early April.

It is significant concern. We have not experienced all of that in our business due to supply agreements, purchasing agreements that we have in place and some of that will roll out. As those agreements roll off we are going to be experiencing even more cost increases related to steel, I am sure.

Freight cost continues to be a concern with consolidation in transportation, trucking industry and we expect that to be something we are going to have to manage very carefully for the rest of this year.

Other cost areas that are a concern for us. Our selling expenses and commission expenses increased slightly from last year. Advertising is up slightly from last year and our R&D expenses are up from last year. So we have had cost increases in many areas that cause concern and we are working on those as - - very diligently trying to keep that in check.

In the net income area, net income increased of $10.9m increased 23.3% compared to the 8.8m we had last year. And interest income during the first quarter was $285,000 compared to a small interest expense of $28,000 last year. Earnings per share then are 20% higher at 78 cents compared to 65 cents last year. Cash generation is the one black eye that we really got for the quarter. This quarter and the first quarter we had a $24.3m use compared to $3.7m use last year. First quarter is traditionally a challenging quarter for us where we usually have a fairly significant increase in working capital and this first quarter was no different.

As a percentage of sales, working capital increased from 17.9% to 18.2% this year. Accounts receivable was the primary area that we experienced increase and a lot of that is attributable to a relatively strong March sales month where we had an increase in receivables. Off setting that somewhat was a reduction in inventory. Accounts receivables were $184.5m or $28m just over $28m higher than March of 2003. As a percentage of sales, it did not increase that much it’s 16.6% compared to 16.4% last year. DSO actually increase more, increase from 56 days to 60 days.

However inventory was a fairly good news, it only increased to $147m verses $142m last year and as a percentage of sales decreased fairly significantly from 14.9% of sales in 2003 to 13.3% of sales this year so you can see the significance. With a fairly strong March there’s a big shift of dollars from inventory into receivables and we’re just now will be collecting those over the next month or two.

Capital expenditures during the quarter was slightly higher at $6.3m verses $5.2 last year and the other big factor for working capital for us in the first quarter as accrued expenses they’re $63.8m or $11.5m lower than December 2003. This is very typical during the first quarter. We have some fairly large payments for bonuses, 401K, commissions, rebates, benefit plans ect. So there’s some fairly large cash outlays in the first quarter of the year and we bring that up throughout the year after that.

Debt at the end of March this last March we close with cash and short term investments less debt possession of $117.7m compared to $71m last March and a $141m in December, total debt that at this point is $11.4m verses $34.4m that we had last year. With that, that’s all of my formal comments and I will open the line up for our questions.

Thank you. At this time I would like to remind every one in order to ask a question please press star one on your telephone keypad. A conformation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipments, it maybe necessary to pick up your handset before pressing the star keys. Our first question will be coming from Ned Armstrong of FBR.

Good morning.

Good morning Ned.

It appears that you’ve done a pretty nice job in the commercial sector in absence of strong office construction by penetrating other markets as you allude to in your release such as retail schools and healthcare. Can you give us just a little bit of color as to what portion of your total commercial sales that is now? How that compares to what it’s been in the past and whether you see it being able to maintain that proportion of commercial sales going forward?

Well I don’t have any exact percentages or numbers that I can give you specifically but I can tell you that historically company like Lightolier was never really ---they never really went after the school business as an example which is---you know, its been a market that kind of adds some specific fixtures and certain types of lightning that they use and occasionally we would quote a school job here and there. But what Lightolier did is specifically go out and create some literatures and brochures and we also had a couple of reps in a couple of territories throughout United States that really put a focus on schools. And we’re able to, you know, they grew that business by several million dollars and without that Lightolier would be very difficult for Lightolier to continue to have the strength that they’ve had as an example.

Historically Lightolier has been very, very strong in retail construction and we’re still doing a nice job there. But over the past three years, you know, virtually every major account that we have dealt with their new construction has been less than it was the prior year. We’ve seen a decline every year and this year is kind of the first year that we are hoping a little bit optimistic that we might see some pickup in that. But that being as it may what happened last year and is continuing to happen this year. We have picked up some new business, you know, some retrofit business from some of the big retail people in that, that we haven’t had in the past and that’s been able to sustain us to a time when the new constructions just wasn’t there because our overall retail sales have remained quite strong even in the fact that the new construction for many of these companies has been way down.

Okay. With regard to commercial office construction couple industrial components makers of---makers of pumps and painting equipment specifically have indicated that there commercial office markets have begun to strengthen, and I was wondering if you could give any color so to speak, as to what type of lag there might be for the lighting companies relative to these companies that provide painting equipment and the pumps?

Well, I’m not sure where they’re seeing it, there’s certainly some nice renovation business in some of the big cities such as New York, San Francisco and these type of people where office space is now, you know, peoples offices rent is expiring and the new leasers they are requiring that companies either reduce the rent to them in some cases and or do tenant improvements, and we’ve gotten some nice business there, but we haven’t seen anything as far as any improvement in new construction.

As you may know we have a marketing agreement with Steel Case, and they’re probably the best indicators to us as to what’s going on in the new office construction, and I will tell you that its pretty weak, their continues to be very weak. Now fortunately for us and Steel Case, all of the businesses the new business that Steel Case has gotten where we’ve been involved with lighting has all been plus business for us because they got out of the lighting and we’re now supplying most all of the lighting that they would have supplied themselves in the past, so there’s been some plus business there for us. But I - - I will tell you from our perspective, we don’t see much improvement in the new office construction business till mid to late 2005, and I’m getting those numbers primarily from Steel Case who is much more directly involved in that market than we are and have much better market intelligence.

Okay, thank you, I’ll get back in line.

Thank you. Our next question is coming from Andrew Meister of Stifel, Nicolaus

Hey gentlemen, good quarter. Just a couple of quick questions, I was wondering, of the organic growth, was there any price increase in that?

There was not any at this point to speak - - other than what we got last year, and (inaudible) we’ve had little but nothing that we got, you know, since the first of this year, anything that was, you know, not a carry over from last year.

The one in - -

Some slight increase - - we don’t - -its hard for us to measure it that way, we announced some price increasing at the beginning of last year, early in the year but it was nothing - - there was no new increase, you know, that we got this year.

Okay, okay, that makes sense. Then another question, Larry, this is you know, kind of in a bigger picture topic and that is, I notice that there is some activity in the LED space, I believe there’s a company raises capital, I know that you guys have LED fixtures for quite a while and a number of different, you know, the brand. I was wondering where you see that business going. Someone - -there’s some industry groups even talking about how, you know, as their technology comes down that could displace, you know, some of the traditional, you know, incandescent florescent lighting, just an update from, you know, from your thirty thousand foot perspective.

Well I view the LED business a little different than some people, I view it as just another - - as like another light bulb, another - - you know, another lamp to us. And its certainly going to be a factor going forward in the industry, so far they haven’t been able to get the efficiencies up and lamp life on those fixtures and have more efficiencies - - its been relatively short, so there is still not a huge advantage in using LED or any type of general lighting, its very good for some under cabinet lightings, step lightings, some very specific applications.

Now I was at a meeting about a month ago with Osram Silvania(ph), who is one of the major manufacturers of light bulbs - - the second largest manufacturer of light bulbs in the country, and I can’t remember right now whether its 2006 or 2008, they said that LEDs will be - -start being used in head lamps in automobiles. Well when that comes about, that’s very much the same what happened in the halogen lamps.

When they star - - when LEDs start being used as a light source for - - they perfect it to that point where its used in headlights, I can promise you that it will become a major source of lighting in flood lighting and even potentially down lighting and many other applications, and we’re - - we’re following all the time, we’re in constant contact with the lamp manufacturers, we’re following - - we’ve been to a lot of seminars, we’re very much aware of LEDs, we’ve implemented into many of our products where it makes sense today and we will going forward.

But I don’t think it’s like some people think, that all of a sudden LEDs are just going to revolutionize or change all the lighting that typically doesn’t happen. Like I said, it will be an additional light source and we will be there and we certainly have fixtures readily and available and in the marketplace as soon as those lamps are there and available.

Okay, okay. And then - - there’s another question, you know, you had I believe not too long ago a sort of a favorable announcement handed down from the teleport, and it seems like we get closer to favorable resolution, you know, to the Keene litigations. I’m wondering if there’s any development with yourselves and people that Thomas, regarding sort of the future of GTG and the plans going forward.

Well we have, you know constant dialogue between Thomas, Tim Brown and Myself about, you know, our position on the joint venture and those are continuing Michael, you know we’ve had discussions and I’m sure that we will continue to have discussions and that - - you know, we’ve had some kind of interesting developments. I’d like Bill Ferko to actually to talk about some things that we found out recently because I think its important that everyone kind of understands what the ramifications, if and when we ever decide to do something with Thomas. So Bill, why don’t you talk a little bit about the purchase accounting specifically and what that would mean if and when we do a transaction.

Alright, okay. Well Andrew, what Larry is talking about is, recently or during recent discussions with our public accountants Earnst & Young, we determined and in looking at what the potential impact would be of acquiring or purchasing Thomas Industries minority interest or the 32% of GenlyteThomas. Now purchase accounting would apply to that type of a transaction and, I think that - - I don’t remember if you’ve made any analysis but some our analysts have performed calculations which may or may not include the impact of purchase accounting, I guess we haven’t been able to determine if you included that or not. But there are two key accounting issues that need to considered as a part of purchase accounting, first of all the fixed assets will need to be - - the fixed assets and the intangibles, such as the patents and intellectual property etcetera would need to be appraised by appraisers and then stepped up for both accounting and tax purposes. Purchase accounting will require us to step up only 32% of the gain or the increase in value of the assets especially for the 32% that Thomas has. But the result will be an increase in ongoing depreciation or intangibles amortization expense.

It’s difficult to figure out what the impact of this would be, from our most recent balance sheet the we just put out today you can see that our total PP&E is about $111m including about $281m of accumulated depreciation. A 30% step up on that would result in a gross increase, let’s just say it’s inflation or whatever 30% - - I’m just pulling that out of the air. But a 30% increase in that with results of 33% increase in the value if you would then we would just we would only increase the Thomas 32% if we were to do this, which would result in a $10m to $11m increase in the average life - - in the value. And then the average life I don’t have any idea how much that would be. Just for round number purposes lets assume it’s 10 years, that would result in a increase in depreciation (indiscernible) expense of about $1.1m a year. And that would be beneficial from a tax perspective we’d also have to recognize it from an accounting perspective. Similarly lets say there’s a 60% step up in the $111m it would be a similar impact. Take $111m times 60% and if it is a $66m increase factor down that Thomas 32% is a $21m increase and then the depreciation impact over 10 years would be about $2m a year.

Those are just hypothetical numbers I don’t have a clue if that’s how it’s going to turn out, unfortunately we would need to hire appraisers that would have to take a look at we have about 28 factories, half a dozen warehouses, 30 sales offices over 500 patents they would need to be looked at by appraisers and go through the whole purchase accounting exercise for the whole business.

Secondly, purchase accounting that we would requires that we would back off, we do not recognize the profit that’s in our backlog or finished goods, that existed on the date of any deal to the extent of Thomas’s 32%. In the recent balance sheet we just published we have about $84m of finished goods, backlog at any point in time typically runs between $90m and a $110m of course we – the Thomas participation of that would be rolled off and during the first two or three months after the transaction.

In other words to the extent there’s any profit that otherwise would have gone to Thomas Industries from their 32% interest in the backlog or in the finished goods that would have to be backed off and would not receive any benefit or any profit from the finished goods or backlog until that --- 32% of it --- until that backlog and inventory is burned off. So for the first two or three months after our deal we would have interest expense or whatever for the transaction but we would not receive any profit before that first two or three months. So that’s really just a start up thing as it relates to it’s really just a first year impact as it relates to the backlog and finished goods inventory, however depreciation impact would be on going for roughly 10 years or so.

So hopefully that clarifies things a little bit and again we have not done any of this obviously so were going to have to hire appraisers so its full of non value and effort from our perspective because it’s the same business. The business does not change at all. We’re just have to go through we would have to go through all of this appraisal process and purchase accounting process for business that’s the same business and they--- from an operating perspective before or after such a transaction. So I thought that would be helpful that you all understood that. You have questions Andrew? Hello?

Sir he’s no longer in the queue, we do have another question coming from Glen Daley. And once again if anyone would like to reenter the queue they may press star one, Mr. Bailey your line is live.

Hello Larry?

Yes.

I just have a comment before I have a question. You know the new phase of downturn in the market, you face increases of the same kind with raw materials, benefits, insurance and transportation and so on. That’s a real test, the strength of management control and its process. And I’ve got to tell I was very impressed when I read in your annual report that you started off -- despite a difficult environment, I am pleased to report that Genlyte’s 2003 performance set new records in total sales, earnings and cash generation. That is very refreshing because most of the annual reports I’m reading uses the excuse of difficult environments to justify low sales (indiscernible). I think that’s terrific.

Now, my question comes back to a trend that I’ve seen over the past 10 years so I believe this is true. And I wondered if your marketing teams would agree with that and I’m talking over a 10 year period. First off I think there’s a strong trend towards more and more lightning and lightning controls and each residential unit, each commercial building and each manufacturing plant. I think that is due in part to the needs for convenience, energy savings and the fact that these buildings and houses are costing more than they have in the past primarily because architectural design are becoming more flamboyant as people are making statements. I think that - -what I’ve seen, makes it a trend towards more and more lightening to reach in those units.

Now I also think there might be another thing at play here and that is Genlyte’s ability to increase its market share because of this new product development program which we talked about so well, durability of our product and the excellence that you have in those products or your service where you are delivering on time a quality products with the value and designs that acceptable for most of the market. I just is your marketing team in their three and five year business plans reflect that thinking at all?

Glen we really do we’ve certainly see an increase and put a lot of money and a lot of R&D work into our controls business and will continue to do that, we see a tremendous market opportunity. And we need to expand I think both in the commercial and the residential area. We’ve really focused our controls in the last probably in the last three to five years very heavily on the commercial side of the business and we may have been somewhat negligent in doing as much as we could have done on the residential side. Although we do have a new wireless system really that’s very, very easy to install and it’s really growing in leaps and bounds, so we’re doing excellent in controls and I’m sure that we can do even better and have plans to accelerate and grow that division. And there’s no question in all these upscale homes – I was just out in Utah recently to a resort area and I’m just absolutely amazed at the money that’s just going into these new homes and the controls going along with that.

And we’re certainly emphasizing in our product development -- Lightolier is doing a tremendous job and a lot of their new products and emphasizing the control aspect of that making it easier for people to use the controls and the individual users to be---have access to their computers or whatever to be able to control the lighting in their environment. So that’s a very important part of our marketing and sales efforts going forward.

Thanks Larry I appreciate that. Keep up the good work.

Thanks.

Thank you our next question is a follow-up question from Ned Armstrong of FBR.

With regard to cost and the price increase that your putting through of between 5% and 8%, what proportion of the increase cost do you think that price increase will offset? Would it entirely offset it or just 50%, 70% what’s your sense of that?

Well if we’re able to get we announced a 5% to 8% price increase and if we’re able to get all of that price increase we would more than offset just particularly just the material of cost increase then the insurance and the freight, so we should get some improvement. Now am I overly optimistic at this point that we’ll get all that price increase probably not but our goal is certainly to get all of the cost increases and plus be able to increase our margins slightly as a result of this price increase.

Okay and with respect to the pension expense due to the plant closure. Is there more of that to come in that kind of magnitude or is this really the last big chunk for the time being?

Well – because we don’t have any other plans to close any plants this is the one and only one this one kind of caught us by surprise. This is one of those goofy things that ends up catching you the day you close the plant you have this responsibility and it so happened that the market had a real down turn. This was kind of a goofy thing that we got hit with. It was a surprise to all of us at this magnitude that should not have happen actually but unfortunately the timing was just not right when we close that.

But right now we don’t have any others that we’re aware of or we have no other exposure at this moment at all that we’re aware of.

Okay thank you.

Our next question is a follow up question from Andrew Meister of Stifel Nicholas.

Hi thanks guys for that explanation I did have a couple of question. I am trying to get my arms around what a buy-in to GTG would be and – I sense as I don’t have the depreciation in my numbers or the step up. But my sense is because you’ve had (technical difficulty) you know at some point in time you know the plan is to go forward and acquire that 32%. I’m wondering if we could have an up date on the law suit because that is a hinge factor.

Well Dan Fuller is here and I’ll let him give you. There’s not a lot of update but I’ll let Dan – why don’t you come over here by the phone and let him just up date you on where the law suit stands at this time.

As every one probably know the second circuit in the court appeal for the firm to lower the (indiscernible) so within 2.5 weeks after all argument which is kind of extraordinary in my experience. It was a pretty hammering of the plantiff’s case. Now the creditors trust the plaintiff have until Friday of this week to ask the second circuit to reconsider that ruling. They need to ask the same panel or the entire court on bach to reconsider the ruling. And that’s a procedural step they can take. And that opportunity expires on Friday. If they don’t take that they have 90 day from the date of the ruling to ask the Supreme Court by way of petition for (indiscernible) to hear the case. And if they – that 90 day period will be stayed if they ask the second circuit to reconsider.

So our looking at the timing on it, it could be over this week knowing they probably will take procedural steps because they have nothing to loose to take procedural steps. But I think there is an indication here to them and to every body else how weak their case really is. I don’t know what they’ll do. At the outside we could be looking at my guess is 5 months.

That’s very helpful thanks guys.

Our next question will be coming from Tom Spiro of Spiro Capital.

Tom Spiro of Spiro Capital good morning.

Good morning Tom.

Larry I was curious whether you thought the sales line was affected much by the price the announcement of the upcoming price increase. whether you pull forward any sales Q2 into Q1.

No we – because of the way the price increases we wouldn’t have pull forward any business. I mean we have started to get some orders in now but none of this shipment in that first quarter would have any impact – it wouldn’t have been impacted by that price increase at all. Cause the price increase if you look at most of it, Bill said May but actually the majority of the shipments or the price increase will be with shipments in June. So we wont see any benefit for that for another you know early 45 days and not even for now.

I was just thinking of when you announce it people might accelerate their purchases to get ahead of the price increase.

Well then the – most of this business is project business and they wont. Now when we get down believe me at the end of May or what ever we could get a surge of business you know we told people we’ll hold orders for a certain period of time. You could get a surge but I don’t think any body has moved any thing ahead at this point because they know that they’ve got 30 to 60 days depending on what company and what the situation is before they actually have to take delivery.

So I don’t think we got any shipment at all in the first quarter that had anything to do with the price increase.

Thanks a lot and good luck.

Thanks.

Sir that was our final question.

Okay operator we can now turn that over to Mr.Tim Brown of Thomas Industries. Go ahead Tim.

Good morning everyone. Like Larry we were please to announce that our first quarter results were a record for any quarter in the company’s history. And certainly our sales at $109,500,000 were record sales for our pump and compressor business.

Our equity earning from GTG that Larry just talked about were extremely good plus 21% as he indicated over the prior year. And looking at our sales for our pump and compressor business at the $109 million discussed they were up 19% from last years $92,300,000. And of this increase of $17m, about half is attributable to exchange rate impact as we saw especially the Euro impact from where it was last year.

Exchange rates, although on a had a neutral impact on an operating or pretax income. As Larry Powers discussed previously with GTG, Thomas operated with roughly three days more manufacturing versus first quarter last year. Although especially with our German facilities, I’m really not sure what the impact on OEM sales would be. Still all in all, I think we had a reasonably good start for 2004. We’ve discussed in the past our production difficulties in Shopheim, however our people are getting more and more used to the new operating system.

We were successful in eliminating a substantial portion of the past two backlog that has plagued us over the past three quarters and obviously working down this backlog had some positive impact on sales in this quarter as well. When you look at the key major markets and the activity compared to last year, medical was up over 15% compared to the first quarter of last year. Major applications again being obstant concentrators, nebulizers, and dialysis equipment. Printing and paper handling was up over 20% and in May, the Drupo show, which is the large printing show that’s held every four years will take place and we certainly expect that the activity in this segment will pick up in the second half after that show.

Environmental was very strong, up almost 30%, again with applications in the sewage aration vapor recovery gas analyzers and soil remediation, Industrial markets were up over 20%. Neumatic (inaudible) power station application that were strong. Food and beverage was up over 30%, beer dispensing, meat pack processing, vending machines. Packaging was only up slightly for vacuum packaging, our laboratory markets were up over 20% primarily through distribution and as we do have a large foundry operation in Shopheim, our sales of components to the automotive market was up about 15% so some pretty strong market activity in some of our key markets now they were offset by a couple of weak markets our automotive activity was down about 13% that’s primarily aero suspension and in business equipment that was down almost 19% where we have specific applications for air bearings and printers.

Gross margins on higher sales volume actually declined a .9% due to the ongoing competitive pricing issues a lot of the expenses that Larry talked about in terms of healthcare, pension and insurance as well as what we are experiencing in commodity cost increases plus energy cost. We continue to aggressively fight off these cost increases that were necessary where we can but it is becoming a little more difficult.

Our SG&A expenses as a percent of sales did decline 0.2% although in addition to the expense issues that I just mentioned we’re also incurring additional SG&A cost for legal corporate governance and compliance survey as well as increased the audit fees. As well as we’ve been gone incurring cost for our China facility expansion and will probably have China cost of about $350,000 or $400,000 in the last three quarters of this year with zero sales until 2005. Also included in the first quarter SG&A expenses were $818,000 of shut down expenses related to our Whooper Call facility. The shutdown will occur on time and was in budget but we will re-incur remaining expenses for the shutdown that we will book in accordance with GAAP about $900,000 in the second quarter, about $650,000 in the third quarter and another $375,000 in the fourth quarter those are all Euros.

Annual savings from the shutdown will be about Euro $1.1m once we get that move completed and finalized. Net income per share was 60 cents versus the 50 cents in 2003, a increase of 20%. I think there is no question that the first quarter was very hot and we certainly don’t expect to see quite as robust activity in the second, third and fourth quarters as we saw in the first. We mentioned in the last meeting that we will be loosing some business to a large medical OEM and we still anticipate that to occur but not quite as quickly as we had originally thought.

All three geographic regions showed increases in sales, Europe up 28% of course that is somewhat impacted of course as I said before (technical difficulty) by the exchange rate, North America up 6% and Asia Pacific up over 30%. I think the key to our success will continue to be in our ability to generate new business with new projects, to find ways to offset cost increases and to better manage our working capital. I think as we look into 2004 we have a number of priorities that we’ve talked about to first grow our sales as we’ve done in the first quarter although we don’t expect it to be quite that strong the rest of the year. Constructing our China facility and again that should be complete by the end of the year and start production in the first half of ’05 but we need to continue to rationalize our production opportunities especially where we can products for Europe and the US for lower cost manufacturing. We need to improve our on time deliveries and lower our cost of quality which hampered us in 2003 and I think we’re making good improvements there. We also have other consolidation activities in the UK and Germany again as I mentioned before moving our Whupercol plant to Minigan and finally we need to find and make good acquisitions for growth and expansion of our overall product offering.

The Euro has weakened somewhat from the end of the year which is a help but is still much higher than the rate we experienced in the first half of ’03 and this continues to impact our group companies, especially those outside of the European community. So I think we’re off to a good start with economies around the world being quite a bit, a little bit stronger but still see tough conditions ahead as it relates to costs, be it in compensation and benefits or just commodity cost increases. I still think overall we’ll be ahead of 2003 results even after taken into account the Whupercol shutdown cost, it will be about $2.6 euros for the year. So with that I think I’ll turn it over to Phil to make some comments on our overall financial numbers.

Thank you Phil and good morning everyone. Before commenting on our balance sheet, I’d like to point out that for the first quarter our effective tax rate was 35% up from the effective tax rate of 2003 which was 32.9%. As we previously disclosed, in December there was a change in the German tax law and our best estimate now is that the effective rate for 2004 will remain in the range of 35%. As Tim commented, we’re pleased with record performance of our earnings for the first quarter, but we’re also pleased with this overall strength of our balance sheet. The balance sheet remains very strong.

We closed the first quarter with cash balance of approximately $31m, an increase of $7m since December 31st. Our accounts receivable balance is $60m and our days sales outstanding at the end of the first quarter is approximately $50m. Total receivables are up over our balance in December by $5.6m and this is primarily the result of higher sales volume that we had in the first quarter compared to the fourth quarter of 2003. Our inventory balance is $67.2m and we have an annualized turn rate of 4.2 which is a slight improvement from 2003. From an asset management perspective improvement in inventory management is the areas of greatest opportunity for the company and we will be working diligently on this throughout the balance of the year.

Other key balance sheet figures for end of the first quarter are as follows, current assets of $171m, investment in GPG $221m goodwill $68m, net property, plant and equipment $106m total assets of $591m, notes payable of $3.1m current portion of our long term debt of $9.8m, long term debt of $108m and shareholders equity of $386m. Our working capital is $95.6 and our current ratio was 2.5 to 1. Our debt to capital ratio was less that 22%. Our cash flow was generated from the operating activities for the first quarter was approximately $5m a strong improvement compared to prior year’s first quarter of $721,000. Capital expenditures for the quarter were $3.7m compared to $2 for the first quarter of 2003 and depreciation expense for the first quarter was $4m compared to $3.9 in the first quarter of 2003. Estimated capital expenditures and depreciation expense for 2004 is $19m and $17m respectively. Now I’d like to open up the conference call for any questions that you may have of us.

Thank you. Once again ladies and gentlemen, we would like to remind everyone that in order to ask a question, please * 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Please hold while we hold for questions. Our first question will be coming from Michael Schneider of Robert W. Baird.

Wondering if you could first just address the medical top line this quarter. Did you see any of the loss of the OEM business this quarter?

No we did not Mike.

Okay and does that begin in the second quarter?

A little unclear. It may not start really until the third quarter.

Okay and is that a case where we should expect the 4 to five million then concentrated in just the second half or - -?

That’s what I would say Mike, yes.

Okay and then in terms of currency Phil, could you give us some specifics as to what dollar amount the top line benefited from the - - from currency this quarter?

Okay. Primarily the biggest driver of the currency was the euro and if you just look at the quarter-to-quarter change we had about a 12.3% drop. So, I’d say you’re looking at about half of that would - - of our sales increase would be a result of the currency fluctuation.

Okay. Do you have a dollar number by chance?

It’d be in the $8m range.

Okay and then as well the backlog draw-down in Germany. Do you have a sense of what the dollar reduction was in backlog?

Mike, it was about $2.5m.

Okay, and you now consider the backlogs in that facility to be normal, Jim?

Yes. We’re back to a more normal working but I think we’re going to continue to make improvements on that but I think it’s in an area that we can operate more efficiently from.

Okay and then just taking a step back and looking at all these markets. Tim you’d ticked off 5,6,7 markets that are all up 20% plus, is that a function of just three more days in the quarter which would add probably 5 – 6 points to growth?

It’s hard to say how much, you know, in the OEM market Mike it’s - - we have about three more production days but I’m not sure what - - what the impact that had on sales really.

Okay, but what - - you know, what is - - caused markets like medical to be up 15 this quarter and food and beverage to be up 30? I doubt it’s the economic recovery binning.

Well I think we had clearly, I mean the - - I think the demand was extremely hot for concentrators and nebulizers in the first quarter and we continued as we said over the years that that is an ongoing growing market what we’ve traditionally seen Mike when we’ve had really - - spikes like this, we’ve traditionally seen some push-out and fall off in subsequent quarters

Right

because this is awfully strong. So, my guess is we could anticipate some of that occurring in the future depending on the inventory levels that our customers have - - so, that’s not outside of the question. In food and beverage, quite honestly, we’ve got some new applications especially in beer dispensing that have come on board that have been a big help to us.

Okay and in printing and packaging - - well, first let me follow up on the inventory situation. What is your sense of inventories at your key medical customers and how much visibility do you really have?

That’s - - I couldn’t tell you that Mike. Quite honestly.

Okay. Printing and packaging up 20% that to me is probably the best barometer of the European market through Rishley [ph] is that right?

Yes, but we also - - I mean, we also sell a lot of spare parts and replacement pumps really all around the world through our worldwide service. So, you know, replacement pumps as well as the OEM shipments to printing and paper handling customers was up nicely. But I think there has been some kind of demand. If you noticed that I somewhat depressed market the last two years.

But again that’s principally Rishley, right?

Oh yes. Absolutely.

Okay and I guess - - what do you read into - - what do you read into their strengths, cause as you said their market has been depressed for quite some time . Is it just a reflection of the industrial economy?

I think so. I think it’s always a reflection of, I think, the industrial economy and I think also people perhaps loosening up, doing more advertising, printed material and creating more demand for printers.

Okay and then just pricing generally. Phil, can you just give us a sense of what raw materials were up this quarter, year-over-year? That you can attribute to the spike in different raw material costs?

Really, it’s hard to put our arms around what the actual cost was and looking at, primarily right now the North American side, we didn’t have that great of an increase in costs in the first quarter.

We’re uncertain as far as the balance of the year as Tim commented as far as fuel, aluminum prices, more prices and anything that’s going to be impacted by higher energy cost. Its just hard for us to get our arms around it. We are going through working very closely and diligently with our vendors. It wouldn’t surprise us that we would be going after in certain key markets for price increase for the second half of the year depending on what does actually occur and what we do start to realize as far as cost increase so it’s just hard for us to give you a number at this time.

So to date you haven’t gone out with a price increase?

Not specifically, we went out with a price increase in January as we do every year but this would be a separate price increase that we would be considering.

ok and maybe just an update on the consolidation efforts. Sounds like Germany is going better, could you address and then also address the UK consolidation?

yes, in the UK we have 2 facilities there now and we’re actually going to combine those 2 existing facilities into a new facility. We actually hope to free up a couple million British pounds in cash from those transactions once we sell that facility. And in Germany the move form Whoopertall to Memming is going along, all our planning is in place and I think we’ll successfully complete that in June.

Ok and the UK consolidations will be done when

That’ll be the end of the year.

end of the year and both are on, both Germany and the UK are on schedule with you

Yes

and in light of the Shopheim ERP difficulties, what steps are you taking in the UK and in the Memming facility to avoid them?

The IT issues are , there are no IT issues there at either one of those facilities

are you putting in the same system you put in the Shopheim?

No they’re using the existing system that’s been up and running for quite a while so there’s no change in systems

ok ok ill get back in line thanks.

thank you,our next question is coming from Ned Armstrong of FBR

good morning. I’m looking at a comment in your release that says you don’t expect to see quite as robust an activity for the remainder of the year. I was just trying to get little bit more clarity on that. Are you meaning that sequentially the performance won’t be as well or the magnitude of change year over year wont be as strong. Does that apply to both revenue and earnings in equal portions?

yes Ned that’s exactly what I would say. Sequentially it won’t be quite as strong. Traditionally our first half has always been stronger than our first half anyway.

Ok so sequentially it won’t be as strong and that will be equally split between earnings and revenues roughly?

yes that’s what I would say

Good thank you.

thank you our next question will be coming from Tom Spiro of Spiro Capital

good morning. What’s the tax basis of your investment in a GTG?

it’s reasonably close to what our book basis is but then maybe $15M. Although the book basis may be a little bit less than our book. So you can look at our book basis and it would be approximately $15M less than our book.

I noticed that Mr.Richly resigned from the board a number of months ago , I was as curious to why?

He simply decided for personal reasons to not be a board member and I think it put a lot of toll and stress coming back and forth to the US all the time. But you know for personal reasons he’s just simply decided not to be. He’s very active in the business and doing a very good job.

He’s still the general manager

He’s one of the (inaudible) yes at the Shopheim facility. Spends a lot of his time on the engineering side and has done a very good job.

thanks much good luck

once again if anyone else does have a question or comment at this time press star 1 on your telephone keypad. Our next question will be coming from Josh Fenton of Gabelli Asset Management.

Good afternoon, its time to ask a typical normal question. The strength of GTG, have you reevaluated how you’re going to deal with that investment?

We always discuss it and I’m sure we will again at our board meeting tomorrow but at this point in time there’s nothing to report

On the GTG call they went into some detail about the accounting effects of buying out the 32% stake. Was that prompted by something specific doing that research? Or is the research always sort of been out there.

Well I think you know as the accounting rules and regulations change I think GTG is always evaluating you know what ifs scenario and what would occur if they decide to – or we decide either one, to exit our investment.

Okay appreciate the update thanks.

Once again ladies and gentlemen if you do have a question please press star one. Our next question will be coming from Michael Schneider of Robert W. Baird.

So on the expenses of closing Miming, the $818,000 that pre-tax is that correct?

That’s pre-tax that and that’s US dollars.

Okay and where does that run through the P&L is that in cost of goods sold or is that in SG&A?

It’s going to be in SG&A.

Okay and the forth coming expense for the closure those will as well be run through SG&A?

The majority of those will yes.

Okay I guess I’ve chosen to exclude those from the model what tax rate should I apply to those expenses in backing them out?

You know I think that the safe way was just to file over effective tax rate that we’re looking at for the year 35%. You know there was a change in the German tax law, we’re still trying to get our arms around how all this is going to affect us on this. But right now I say that would be a safe number.

Okay and just a final topic on China I guess what activities are going on over there given that you know presumably you’re moving production over there and setting up equipments. Why aren’t you able to ship product out of there until year end or even in ’05.

Well Mike what we’re doing is I mean first of all we source a lot of product out of China today with the contract manufacturer and we will continue to work with especially in areas where he has expertise. What has occurred to date is that we have purchases land in China and our activities to date are hiring, manufacturing and supervisory personnel as well as you know getting the plant get constructed. So the plant won’t actually be physically constructed until probably end of November.

Okay and what else do I want to ask you about China. I guess the ultimate business to this business is how much capacity will you have over there? And what does this imply then for further consolidations either in Europe or in the US?

I hope Mike that number one we grow our business and we are able to maintain the level of activity that we have in our existing plants. But we’re seeing more and more of our customers move to China. If you look at even in Taiwan or the UK or France we have customers that continue to move production to China and in many cases you know we have to be there to support our OEM customers.

So we see more and more of that type of activity that will impact some of our plants. But I think there will be a on-going growing market for the far east. And a lot of the production that we target for customers in China and the rest of the Asian Pacific region.

Okay so then I guess I apologize one more question. On the new product and the new applications you have had obviously some big successes with some of the automotive applications (indiscernible) can you give us what you’re most excited about, the one or two applications for 2004?

Oh I think you know we have new developments in terms of oxygen enrichments in terms of blood pressure monitoring equipment. As I said before we have a number of applications relative to beverage dispensing that look good. The whole environmental market continues to be a growing market for us that we look forward to. And then I think there – a big opportunity for product out of (indiscernible) would be the packaging market down the road.

Okay thanks again.

At this time we would like to thank every one for their participation in today’s teleconference. This does conclude today’s program, you may now disconnect your lines and have a wonderful day.