Simpson Manufacturing Co Inc (SSD) 2005 Q1 法說會逐字稿

Good day and welcome to the Simpson Manufacturing Corporation First Quarter 2005 Earnings Conference Call. I would like to turn the meeting over to you Chairman, Mr. Barclay Simpson. Please go ahead, sir.

Thank you, and thanks to you all for joining Mike Herbert, our CFO and myself. We are not going to tell you anything that we don't believe, but it's based on current information, which could prove to be inaccurate, surprising, aye? So, as you know from the press release, our first quarter was a mix. On the minus side, it was only the second quarter since we went public in 1994, where our earnings were down in relation to the prior year. Greater but it was less than 10% and the first quarter, last year was exceptional. Still our people aren't happy with such results as their cash profit sharing is down. In fact, our Simpson Dura-Vent people didn't get any cash profit sharing at all.

Dura-Vent has made some substantial investments in the future including new tooling and capital equipment to improve manufacturing efficiencies and breadth of the product line. Such items as the new laser welding system has started to be expensed long before they'll start to payoff. The laser system, however, will get us into new markets for residential boilers, and tankless water heaters as well as the next generation of Direct-Vent pipe, but not until next year.

Obviously, we're confident that our SDV investments are going to payoff. When we get the numbers in for the first quarter, when we got them in it was apparent that we overestimated our ability to handle fluctuations in the prices of materials, primarily steel, but other items as well. Also, there were substantial costs related to the Quik Drive acquisition and the move to our new Texas plant. Some of these costs, but not all, were one-time costs.

Will our gross margin go back up later this year? Maybe, but there are too many tough-to-predict variables right now to make any reliable projections. However, a bunch of positive things are going on. Europe sales increased 23% over last year. Last year, Europe showed a loss in the first quarter. This year it is profitable. Our long-range plan to develop a brand name is succeeding. We have markets in Eastern Europe targeted for an increased sales effort. That's one of our new manager's goals to build those markets. Our new manager in Canada is making progress also. Sales were up 22% over last year.

Anchor Systems, and as you'll remember that is the Epoxy and mechanical anchors and other products, designed for use in masonry and concrete. Anchor Systems group made considerable progress in the first quarter. Sales were up 32%, largely due to new customers and new markets, such as Hawaii. Also, our long-range efforts, to deserve being specified, by architects and engineers are starting to payoff. And you will notice I said 'to deserve being specified'; we work on that all the time. And it is starting to pay off with Anchor Systems products, just as they have with the Simpson Strong-Tie's structural connectors for use with wood over an awful lot of years. Progress was made on the deficit also. It was reduced over 40% from last year.

One negative that we didn't predict was the weather in California, especially, but to some extent in the Midwest and Northeast. Southern California had the second wildest winter in recorded history, and rainfall in Northern California was excessive also, causing sales in California to go down for the first time since we went public. It has been a long-range goal of ours to reduce the percentage of our total sales in California, but not that way. However, our California branch managers are positive for the rest of the year as our other managers. And while we're not happy with our first quarter's profits, being down in relation to last year's sale, we made an after-tax profit of 8.9% on sales, which isn't too shabby. Questions?

[OPERATOR INSTRUCTIONS]. Arnold Ursaner, CJS Securities.

Can you comment a little bit more on your inventories, both raw materials and finished goods, and perhaps describe kind of the trend underway there and how it may have impacted your gross margins in the first quarter?

Yes, we certainly could. Mike, you want to take that?

Certainly. As we noted in the press release, the finished goods inventory increased by 11% and the raw materials decreased by 15% on a dollar basis. On a pound basis, raw materials actually went down by 25%, when I look at North America. So, we continue to manage our inventory as we mentioned on the last conference call and it's a focus area for us. But with steel markets being uncertain, we'll continue -- either it may go up in the future, it may go down, we will not be quite sure and not have enough steel. As far as impacting our financials, it had minimal impact on our financials this quarter, the level of inventory.

Okay. Again, I'm trying to dwell on the question, and I think many of your investors are focused on, which is -- obviously your gross margin in Q1 was unusually low. You mentioned some one-time items related to Quik Drive, you mentioned the move to the Texas, but you've been no where near this kind of gross margin level, and trying to assess on a go-forward basis, how we should be thinking about margin? Again, you had great revenues in the first quarter, so I don't believe it's facility utilization.

It has been a while but when we went public, we were at around 35%. But the question of course is now how do we get back up to 40, and as I said, we just have too many variables to make a really qualified guess. Right now, I can assure you we're going to work on it, but where we'll be 6 months from now I'm not sure.

Do you intend to try to raise prices efficiently to recover your margin?

We're about there in raising prices. If we have -- if steel does go up again, then of course, we can raise prices. But otherwise, we're about there.

Barry Vogel, Barry Vogel & Associates.

The first thing I want to ask you about is, going back to this gross margin thing, when you earned the tremendous amount of profitability in the first quarter of '04, and we found out -- but we knew that you are on FIFO. We never got the information as to what might have been on an accounting basis. The inventory gain in the first quarter of '04, and we know there had to be an inventory gain, because you earned 63% increase in net income. So, Mike, can you give us to get us a bit of better understanding, could you tell us in terms of making a comparison since you just told us there was little impact on your financials in the first quarter, can you tell us what the impact was in the first quarter of '04?

Barry, that's the kind of information that would give aid and comfort to the enemy, we are not going to give you that.

Okay. That would really help us understand the tremendous margin in the first quarter of '04.

I'm sorry.

Okay, because that would help us. Okay. Now going away from that can you give us an idea of what the increase or the dollars were for your Home center business and what the increase would have been for your largest customer in that category?

Right. Well, it was Home Depot, the largest customer and that is public information. So, we have to disclose it, 9% and Home centers overall went up 12.7%.

So the 9% is a percentage of your total corporate consolidated sales?

That's Home Depot.

Yes, as a percentage of all your sales is 9%?

Home Depot's, yes.

Now, could you give us the sales comparison, changes in connectors like you always do with the 5 different categories, California, other western states, South and East, Midwest and Northeast?

Yes. You just want connectors? You don't want the whole Company?

No. I just want the core business, which I call core domestic business.

Well, you are talking about Strong-Tie.

Yes.

Okay. Well, Strong-Tie, California was down 7.6%.

Okay.

The West was up 32.9.

South and the East combined?

The South, Southeast was up 30.5.

Midwest?

The Midwest 9.

And Northeast?

16.7.

Now as far as California being down, I understand the weather. It was the second wettest weather in the history.

Oh yeah. We got clobbered.

I mean that really does have an impact.

Oh yes. It had a -- for instance it had a very large impact on our sales of our Strong-Wall because they are 90% or so in California. And they disappeared in southern Cal and northern Cal had pretty heavy rain also, not as bad but pretty heavy.

Fine. So, if the weather really was significantly responsible for that 7.6% decline--

Oh absolutely.

--one would think with the weather over -- we are now in April -- that California sales should improve.

Yes.

Are you seeing that in April?

Yes.

All right. So, that is good. Now, as far as your breakdown -- you gave a few numbers on some of your connector sales, where you said Europe was up 23% and it was profitable. Anchoring Systems is up 32% and you had a 40% lower loss? What was Strong-Wall?

Strong-Wall was down around 36%.

And you think it is weather related as well?

Oh, I think absolutely, because the sales were in California, 90% or so.

Okay. Now, as far as--

That's why we are working on a new wall to get the rest of the country.

Right, right. Now, as far as Mike, as far as your capital expenditure projections for this year and D&A?

D&A will be 26 million, capital will be in the $60 to $65 million range.

Okay. Barc, as far as Quik Drive, was that accretive or dilutive?

That was accretive.

Alright. That was accretive. Okay, I'll give other people a chance and I'll come back in line.

Okay Barry.

Thank you.

Justin Lord, Abbott & Company.

Mike or Barc, as it relates to the inventory again. On the -- the discussions over the last 6 months, call it last year, as you guys were trying to take advantage of relationships and buying bear. Where do you feel -- I mean in hindsight, not the Monday morning quarter bracket -- but certainly as Arnie alluded, your top line is still very strong. So the mist doesn't appear to be there relative to your expectations on buying the inventory. Did you guys just want to take advantage of it not knowing availability, if it was going to be the case going into the year? Give us a little visibility there, if you would?

One basic principle of this business is never to run out. And we therefore have higher inventories than you would expect. But it's paid off over time because you can't have shortages and you can't have surprises on certain items. So, our inventories are higher than often people like them to be. But not higher than we want them to be.

So you are comfortable today still? Like you said it is a focus area, but generally you are still comfortable with your levels of inventory?

Well, Justin we are never comfortable about anything but yes, we think it is okay.

Okay. And then just relative to the potential impact of steel, you know, let's assume -- apparently steel has started to flatten out here in the last month or so and if it doesn't get any worse to your point, are we going to start eating into layers of higher cost inventory because of FIFO, therefore there is some potential margin implications for the balance of the year on that?

Well, it's a -- if -- it all depends on how big the change is. If you get a big change either up or down, then we change pricing. If it's very minor or a small change, I should say, then you don't. Some times it cost a little. Right now, it's probably costing us a little.

So, to Arnold's question, if the gross margin has not felt the impacts of steel yet all that much and those types of other costs it seems like there were more SG&A related possibly, and I think you alluded to that in the press release. And what was the delta, I mean, clearly you can't look at last year's margin because that was so huge relative to prior years, but what do you attribute then, call it then on couple hundred basis points to, if steel has yet to really be an impact area?

Yes, I think steel has impacted us some. Take it easily.

Tony Campbell, Knott Partners.

I'd like to ask a question a little differently. All these one time sort of impact, have you quantified that on a first share basis?

No.

Okay, you probably should.

Well, of course we -- when you say have you quantified it, I think in terms, in exact terms, no. Yes, we think that all may be it's a couple of points.

Well, then you're almost flat and I think if I recall correctly you'd been saying all along that the first quarter was going to be extremely difficult.

That's right. Unfortunately, we were proved to be right.

And I know what you talk about it with regard to weather in California, because we have a big home building position, so I actually think the earnings are pretty decent considering all the one time sort of events if you will?

Well, I think it's a mix, and yes. There were some one-time things that bashed us good now. But as I said earlier, we really don't have. There are so many variables involved right now, and we don't have enough information yet for me to give you and I'd like to give you a really estimate on how much our earnings can go back, between 35 and 40%. And we just don't know yet.

Let me ask you one final question. The business that has been temporarily lost in California, is there anything or reason that you can think of that, that business cannot be completed this year?

No.

(Egary , Simpson

Couple of questions. One is, in terms of your ability to pass the pricing down to the customer level, what do you see in that, has it been more difficult, less difficult, has that impacted the margins at all? And my second question is on your SG&A in terms of, kind of what do you see from here obviously on number one time charges, but there is also some material increase in terms of the sales force and that type of thing, I mean, what do you see that going on the forward going basis?

I think that -- Yes, I think it is more difficult these days to pass on price increases than it was say five years ago, and that's because builders have more power, they're bigger, much bigger. They are consolidating and they are little tougher to negotiate with. Now, it hasn't changed though that -- we think that our manufacturing costs have to be less than somebody who is 20% of our size simply because we can automate products where they can't. They don't sell enough of them to million-dollar press line. So, yes, I think it is tougher to raise prices and that's why I said when we have relatively small fluctuations in the cost of basic materials, it isn't worth it to do all the negotiating out in the market to make a small change. If it says substantial change, definitely we can and we will do it.

But isn't it -- the steel prices have gone up so much, wouldn't that be an example of material increase in prices that would warrant going back and asking for better pricing?

Say that again. What I'm telling you now is, steel is a little soft.

Right, but that's fine, but may be going into the quarter even last year, were you able to pass through the cost to the customers on your side?

Pretty much. Not entirely, it hit us a little bit. We underestimated just a bit. That's balanced by the money we made in the first quarter.

Okay, and my second question was on SG&A in terms of kind of the trends going forward from here, what do you see that number being - are you planning to add more people on the sales and marketing side or do you see that the first quarter numbers is kind of status quo?

We did, yes, we have added people and of course, when you make an acquisition like Quik Drive, you take on people and the ratio until you get things really organized, and it takes about a year usually, until you get it really organized you are going to have excess people. May be or may be you find out that you get them all organized and integrated and your sales have gone up enough, so you don't have to shorten it at all, but usually the integration - you reach some efficiencies because you have both of you now doing it. So, there are changes and we are in process.

Alright, thanks.

[OPERATOR INSTRUCTIONS] Steven O'Brien, Wellington Management.

Good morning, Steven.

Couple of questions, in your press release you mentioned that most of the sales gain was from Quik Drive and price increases and probably a little bit of foreign currency. And, I was wondering if you could break out how much was from price, how much was from Quik Drive?

There was no foreign currency. There wasn't any from foreign currency.

Nothing from foreign currency?

No, it stays there, but the other - those are numbers that we don't give out. The amount of increase in prices and that kind of thing, we don't give that out. We don't think it is positive to do so, and it can be negative.

How about Quik Drive? What did that contribute?

Let's see, $300,000.

Okay, not a big number?

No, not a big number yet. Now, we expect though that as the year goes on we will get them working together, and 2 plus 2 should equal 5.

And then, California, how much does that normally account for your first quarter sales, I'm sure, you know, given the Midwest, the Northeast there is not a lot of building activity going on in the winter lots of times?

So far this year, California has accounted for 24% of our total sales. Now, that is in relation - last year, it was almost 30%. And, that's a healthy thing except that, we don't like that change to occur because their sales went down. We just want them to go up less than the rest, and gradually we have lowered the percentage with California, of course, we started out here.

That's my point; I mean California is down in the first quarter hurts total corporate sales a lot more than down in the second or third quarter where it is the Midwest and the Northeast.

Correct. And, what is interesting also, I think, is that the South-Southeast section was 21%. So, that's becoming -- right up there close to California.

Okay, very good. Thanks a lot, Barclay.

You are welcome.

Timothy Jones, Wasserman.

Hello, sir.

The most important question I think was Tony's, and I want to make sure when you said that 2% of the gross margin was affected by sort of extra ordinary items, is that correct?

No, I said a couple of points and that wasn't the right way to put it. I think it was a couple of cents a share.

A couple of cents, not a couple of points?

Yes, and that's just a crazy guess, you know.

I know it's a crazy guess, Barclay. But now, what are you counting as extra ordinary in that couple of cents?

Let's see, we had quite a few expenses in relation to integrating Quik Drive.

Okay, so the Texas move and integrating.

And, the Texas move, yes.

And the integrating costs, with Quik Drive?

That's correct.

Secondly, one of your questionnaires implied that Quik Drive was affecting SG&A. Quik Drive margins are lower than the corporate average, aren't they?

That's correct. Our thinking though in acquiring Quik Drive was that they would

We would be able to raise them. There is a chance of the positive factors of the two working together.

I looked at the Quik Drive products. It's like a drill with a machinegun with screws in it and it's a great product anyway.

Actually it is.

Now, why are you only in California with Strong Wall?

That's because as it turned out -- well actually we knew that, the wall was designed largely for seismic factors. And, it sells a little bit for just other reasons. So, an architect or an engineer wants to know what that wall will hold in the home and so he specifies us but the competition has a wall which is selling better in high wind areas than our wall is. In fact, ours isn't selling well at all and that's why we have this new wall that is -- now is trickling onto the market. But it will take us about may be as much as another 6 months.

Is that the same name or different name?

Beg your pardon?

Is the same name or different name?

No, its -- what are we going call that -- I guess without a name--?

You don't have a name, I guess you might--

We are working on it. It will have a different designation. It is non-steel. A non-steel wall and we think that it's going to be really important in a lot of areas of the country where we have no sales at all hardly.

All right. It certainly makes all the sense distribution for that. Now, you give a number, there is one question here about the Quik Drive 200,000. What we are talking about there?

200,000?

The question I want to ask you -- the contribution of--

It was 300,000. Contribution to profits.

The profits. The question I asked is sale.

Okay, I am sorry.

What are you talking about?

Talking about money.

Yes, I know but I would like to ask this question again, what was Quick Drive's contribution to sale?

What was it? About 6.4 million.

Okay. And the 300,000, is that operating profits, what are you talking about?

No, that's bottom line.

After tax?

No, before tax.

Pre-tax 300,000, 6.4 million. Very helpful.

Wait a minute. That was after tax.

Okay. So, that's about a 5% margin, okay. And lastly, as you raise prices enough, you are not going to raise prices enough -- the gross margin is up. You are happy as far as the prices goal right now. These other factors we are talking about right after affecting gross margin?

Never happy. But no, we are not planning on any raises right now.

[OPERATOR INSTRUCTIONS] Arnold Ursaner, CJS Securities.

Couple of questions. You have had an authorized share repurchase in place of $50 million, could you kind of comment on your view towards at the current point?

Yes. Our cash position is going down substantially because of investments in the future. Things like new plant in Texas and also what we are going to do in Ohio and other things, the new 18 new press line. So, we don't have the cash that we had last year, the year before. And I do not think -- right now I see the odds are 2 to 1 against us buying any stock because we are looking at acquisitions all the time, of course. And, it's always possible that we have a substantial one, we are looking at a couple. And, it wouldn't make sense to spend the money buying stock.

Okay. Could you then remind us of what the options increase is likely to be this year?

Yes, how many --

I believe and I will have to check this number, we've granted approximately 240,000 options across last year, closing debts over 4 years.

Okay. Few more questions for Mike, if I could. Mike, you indicated I believe 60 to 65 million of capital spending this year. Can you give us some of the kind of -- the breakdown of some of the key uses with that capital expending?

That's going up in the last few weeks.

Well, we announced that we are going to acquire new home offices in , California. And we are currently in due diligence with 2 existing buildings there. That is estimated to be approximately $12 million. We are buying the Columbus property that we currently rent, on May 1st, approximately for $5 million. And approximately $13 million on increasing the size of that plant and retrofitting the existing plant. We'll be spending approximately $5 million on Dura-Vent's Laser welding system this year, and the balance is spread among many of the branches on equipment.

Okay. Again, I am sorry if I am beating a dead horse, but on the gross margin question, since we have to attempt to put out a model on you guys. I went back in over the last 6 years, your gross margin even in periods like 911 drifted down to only 38%. And there are only in my view two possible explanations for why your margin is as low as it is, either some structural change in your business like Quik Drive or you had an inventory loss in this field or some other factor. I want to go back on the Quik Drive part of it, if I could. If it had 6.4 million of revenues and was 300,000 increment the profitability, unless there are some unusual items in between the lines that had to be diluted not accretive to your results?

You mean to the percentage. Yes.

So again, when I think of structural changes, the only identifiable material structural change I can come up with is Quik Drive's margins are so far below your core that that was a factor in, almost 500 basis point decline of margin.

They are below, yes. But our thinking is that given a year or two that we should be able to raise them.

Right. I think we all grappling -- you had roughly again a 500 basis point decline in gross margin. You mentioned one-time integration expenses in Quik Drive although we have not quantified those. You mentioned the move to Texas, which we have not quantified. So we are just trying to do the math. Mike maybe you have some better numbers you can share with us?

We'll talk about a theoretical conversation if we -- if you had -- speaking of math, if you had revenue of a 100 and your cost was 30, and so your margin was 70. So you are 70%, if you raise -- price of steel went up by 2, so 30 became 32, and you raise prices by 2 so, a 102 versus 32, you still make 70, but your margin does change.

Right. But it wouldn't change by 500 basis points?

No. But there is a math effect that will as you raise prices to recover our price of steel does impact the margin percent.

Well, again maybe -- again focusing specifically, your gross margin in the past has been 38%. Is there any structural change in your business that prevents you from returning to that level or above in the balance of this year?

Well, it's just conjectured at this point. But personally, I think that it will be very hard to get back. I think that as I mentioned earlier, we have got some factors there that the customers or the users are getting bigger and more powerful. And getting price increases through is getting tougher. Now that doesn't mean that we don't have a lot of power because we got by far the broader group of products, we get by far the most specifications, and a lot of structural engineers won't change them because they have faith in our numbers. However, you get a really big builder and he'll do something about it if he can figure out how to get enough difference in price. So I am just saying it's tougher.

Okay. Over the next several quarters you should obviously see a pretty big swing in the international and we know you have had pretty substantial losses for years in Anchor Systems, and that appears to be getting closer to a breakeven?

Yes, it is.

If you were to look at the impact that is likely to have on margins over the next 3, 4, 6 quarters. Can you give us some help there?

Well, lets see. International business is about -- well the total international is about 16%. Right now the -- Europe is 10, 11 -- 11.5%. Now, you can figure the math out there on that one if -- like last year we made a $1.5 million on our sales in Europe and this year we think that we'll increase that. Just how much? I don't want to put out a number yet because it wouldn't be based on enough factor, too many changes going on there. But we think it's going to be better, so far it has been. Now, lets see, Anchors Systems, we have, you know, lost millions and now it's getting down to where it pretty close to break-even and it may be very close to that this year. And, next year the way it's going we expect that we should be in the black. But, the exact amount -- well the sales of Anchor System, we should go up another 15% or 20% and so maybe it's $70 million or something like that, $65 million, $70 million in the next couple of years, and that should reach a point where we are profitable.

So, again, Mike, just again a very straight forward question. Did you actually lose money on inventory in steel in Q1 under your accounting method?

Steel and mineral impacting Q1.

Barry Vogel, Barry Vogel & Associates.

Gentlemen, I missed the first few minutes of the call, and I know you usually give out the breakdowns of connector products and venting products in terms of profitability, operating income percentages?

Right.

So, can you give me that?

Yes, the connector sales were $167 million.

Right, and profitability?

Profitability was 26.9.

And, venting products?

17.2.

Profitability?

Profitability, 65,000.

65,000, and did you comment about the drop in profitability there?

No, I did not.

That's a fairly sharp drop, can you explain that?

Yes, well, I did comment that this expense -- we did a lot of things there that cost a lot of money like we had a new manager at the start of the year and the plant in for the future, it was okay for the present, but it wasn't okay for the future, and we had labor problems there, we had not spent enough money on equipment, and so we had to -- we are having way too much turn over. So, we changed quite a few, we changed benefits, we changed basic wages, we put in some new equipment which were starting to of course write off. There is a whole lot of cost there and they are still going on. I think that probably by the last half of the year, we should be passing that and Dura-Vent should be making its usual contribution. Dura-Vent's contribution per dollar of sales generally is about 0.5.

So, in the last year venting products had a profit of $10.672 million, do you think realistically that they can equal that or it is no way they are going to equal that?

No, I don't think so.

So, their profits would be down.

Yes.

Okay, and Mike, going back to this inventory thing, could you give us a breakdown at the end of March of your raw material dollars, your working process dollars, and your finished goods inventory in dollars?

I have those numbers for North America, and--

They say for North America, I am looking at consolidated figures that you give out, and that's what I wrote down here to make comparisons?

Right, I don't know. In the past, I have not given you up, and I do not have resembles with me.

Okay, that will be good to compare -- even though you did make a comment and be able to quantify that. You said raw materials in dollars were down 15%. Was that versus 12.31 in '04?

That's correct.

Okay, and finished goods were up 11%?

That's correct.

And, then you said raw materials in towns went down 25%?

That's correct.

So, what does that mean exactly? In other words, exactly it went down 25% in pounds versus 15% in dollars.

So, there is a change in price there.

That means the price goes down or up?

If the dollars are down only 15% and the pounds are down 25%, the dollar turn up.

So, the dollars went up.

Yes.

Now, as far as your purchasing of steel, when is the last time you had a steel cost increase?

I do not have those numbers available. We buy steel every day.

Because all signs are the steel prices have peaked and they are probably heading downwards.

Well, Barry, that's like trying to guess what the market is going to do. The steel companies are trying to create the impression that steel is scarce and they are not succeeding right now. So prices are a little soft. That could change tomorrow, they give us estimates on what China is producing and using? All those things change overnight.

Okay, Mike, one last question. What is the average shares fully diluted that we should use this year for the per share calculation?

I am going to give an approximate number, approximately 49 million.

What were your shares outstanding at the end of March, outstanding?

I do not have that number in front of me. I am sorry. Well, basic or diluted, we have put it in our press release.

I don't want basic, I want outstanding.

Well, on a diluted basis it is 48.9 that's million, that's the number have.

So, fully diluted right now is 48.9?

Correct.

And so we should -- do you think we should use that for the year, at 49 for the year?

Yes.

One other question on the issuance of options, Barc. A year before you had had a very good year, that was on '03 and you issued about 500 and some odd thousand shares.

Right, 577 I think.

Right and this year you had another outstanding year. In fact, you had more outstanding year in '04 than '03 and yet you are only issuing based on that performance 240,000. Has there been any change in policy on the issuance of options?

No, not essentially.

So, why the lower figure, given the fact you made a lot of money last year?

We look at it every year and look at where -- what are the options people have and our goals and it's a decision we just review on a yearly basis.

Justin , Lord Abbott.

Just a quick one. I think this is the longest conference call I had ever been on, Barc. CapEx 60 to 65, when should we start to see that pulled? I mean in '06, we expect more in line with D&A. Or what do you think there?

I think we will see our capital leveled at a lower level next year.

Lower than 60?

We've expanded our stock -- we built a stocking plant, we extended that. We just finished the McKinney Plant, the Columbus Plant, we will finish most likely by the end of this year. So, a majority of our plant expansions in the United States will be complete, as well as, we will move into the new home -- as well as, purchasing a new home office.

So may not be down to the 25ish million, but certainly will be lower than 60. Barc, just relative to acquisitions, what's your comfort level from not so much size, but balance sheet debt standpoint, I mean now that cash is down 40, 45 million. Is that kind of the amount you would target or could you see yourself doing a $100 million deal therefore needing to put some debt on the balance sheet or what do you think?

We don't have an absolute number that stops us. We will look at anything. And it depends, of course, you make your estimates on how the two fit together and if it fits well enough we will go a 100, 200. We haven't seen one yet, but we are looking at some.

Egary , Symphony Asset Management.

Just a follow-up question. I think I am -- just a follow-up question on the -- your views on the stock buyback, I mean the stock is off roughly 30% in the last quarter. It's probably, I mean hopefully I am wrong, but I think it's going to be down quite a bit after this quarter. I mean wouldn't you think -- you have a very clean balance sheet and if you -- do you think at some point you would get back to your historic margin levels, wouldn't that be a good idea to go back to the market and send a message to investors that after the 30% drop you want to go ahead and buy a material amount of your stock?

Well, we don't work on pleasing investors that way. We work on pleasing investors by constantly raising our sales and our profits. And don't look on it that way at all, like I am told by most of you that we should -- if we have the cash we should buy our own stock back, and I tell everybody that I only push to buy just enough to balance the dilution caused by internal options and if you buy any more than that, you are cheating because your profit is going to go down, but your earnings per share go up. And we are not going to do that.

Do you do any acquisitions in stock or has it generally been cash only?

Well, with Quik Drive, it was around 30 million and -- 35, I guess it was and we -- 5 million of that was stock. The owner wanted some stock. And we thought that was a plus because he is staying and he is a very good man. So, yes, we will use stock.

But you don't think that, you know, driving or at least trying to get the stock price up at this point would do more good for your company rather than just go out and pay the cash?

We never try to drive the stock price up. I invested in our Company pension plan for over 40 years and if there is one thing I became sure of -- you apparently know something I don't, because after 40 years I decided there was -- I didn't know what the stock was going to do and there is only one thing that drives it, earnings, earnings per share. So, that's what we work on this Company, and that's why it's been such a great investment. How many companies do you know who since they went public over 10 years ago, every single year sales and profits are up? That's because we concentrate on making money, not on fussing around with the stock.

Steven O'Brien, Wellington Management.

One more question on the California thing. With sales down that much in an important market and I guess, if sales were down 7% and volumes were down a lot more than that, how disruptive was that to overhead absorption?

Yes, that's a very good question. And it's really disruptive, because this being a long-range Company people come to work for us, because they figure that they are going to have a job indefinitely, and that applies to people who are running the presses also. And that kind of thing is really tough; you have got that tough decision to make. Do you lay people off, do you keep them on, what do you do? And yes, that's a very good question and it's disruptive, and it's costly.

Is there any way of trying to figure out what that could have done to your gross margin?

Pretty tough. I'm sorry. I'd like to give you good answer on that, and I can't.

No, I know we're all kind of searching for answers. But okay.

Of course. It's a legitimate question.

Timothy Jones, Wasserman.

I think Barry asked you the breakdowns of taxes at ventilator, and you gave the sales and profit this year. Could you give me the comparable numbers last year?

Yes. Last year net sales, first quarter we're talking about, connective products was 142.5, the contribution to income was 28.5, remaining products were 17.4, and the contributions to profit was 1.6, substantial difference.

Yes, obviously, I mean you got over 1.5 million swing there, you went through all these problems with the Vicksburg plant that other than raising the benefits of that, how many of those were sort of one-time? There had to be a lot of disruptions, how many of that were sort of a one-time problems on changing over the manager and sort of disruptions and so?

There was some, but a lot of it was not one-time, and what has to result from them is increased efficiency. So that the cost is there and it stays there, but it's absorbed because you're producing that much more, your output per person goes up.

How many plants do you have that produce these products in ventilating ?

Just two. One in Vicksburg, Mississippi, and the other in Vacaville, California.

So, they both about 50, 50 of your production, or they about equal in size?

It's roughly that. Yes.

Okay. Good. It's an important thing that changed over this.

Yes, it is.

Did you lay anybody off because of the decline there in California because of the weather, or you knew it was going to come back?

No. We knew it was going to come back.

I knew you would answer that that way.

Well, we're a long-range Company as I've said many, many times.

That's what the great companies do?

That's what builds the Company, as people come here for a job, a long-term job, not at bus stop.

I wouldn't expect to see you lay off any body. Okay. Thank you.

And it appears we have no further questions. I'd like to turn it back over to you Mr. Simpson.

Okay. Thank you all. That's it.

That concludes today's conference. You may now disconnect.