Simpson Manufacturing Co Inc (SSD) 2006 Q3 法說會逐字稿

Good day and welcome to the Simpson Manufacturing corporation third quarter 2006 earnings conference call. I would like to turn the call over to your Chairman, Mr. Barclay Simpson. Go ahead, sir.

Thank you. And hello, everybody. And thanks for joining Mike Herbert, our CFO, and myself, for --

We're not going to tell you anything that we don't believe. But it may not surprise you that we can make mistakes. Our people are not happy with third quarter results. We did not beat last year's strong numbers because we let ourselves get too dependent on housing starts in the United States. They were down substantially and our biggest market, California, as well as down in pretty much all of the U.S. From estimates by supposedly knowledgeable people, they may go lower. Our current revenues indicate such. And it may be a while before they start back up. Regardless, we do not plan to continue to be so dependent on something over which we have absolutely no control. And we're working on reducing it in several ways.

We think that foreign markets, while they usually are costly getting established, are a major part of our future. Geographical expansion. And Asia, especially China, should become more and more important. We're doing some business in Japan and China now. In China, it's largely epoxies. For example, our epoxies were used to build a bridge and a road outside of Beijing. Shortly, we will have an experienced manager living in Hong Kong. He has been making sales calls in Asia for some time and has a well thought out plan on how to become a significant presence in China and elsewhere. He and his wife and three children are committed to living in China, starting in Hong Kong for a minimum of five years. At some time, we have to manufacture in China in order to efficiently serve that market. Like Europe, quite a few of the products may be new to us.

Our European operations are coming on strong. Sales in the third quarter were up 25% to $28 million, and $74 million for the three quarters. Third quarter net income jumped to over 6% of sales. And our new European manager, as of last year, has ambitious goals in both western and eastern Europe.

Another major way to reduce our dependency on U.S. housing is through acquisitions. We're looking both here and in Europe, and for the first time, we're getting help from firms such as J.P. Morgan, and Euro-Consult. As I'm sure you all know, we have kept a very strong balance sheet so that we will not have to bet the store to acquire any but a large company. We plan to use our cash to build the Simpson Company's future, rather than to buy our own stock. Speaking of acquisitions, our latest, Quik Drive, is working out quite well. Sales are up 12% for the quarter and 20% for the year and we're just getting started in Europe.

The quarter, amongst other things, had two real disappointments to us. Anchor Systems lost some momentum and was up only 1% for the quarter. Although it still is up 12% for this year. Our sheer walls including the new steel one go into housing and sales are down 11% for the year. This year, and possibly next year, may prove to be bumps in the road of continuously better sales and profits in every year since we went public. However, we still expect to show very good returns on profits to revenues and investments.

We remain a long-range Company and we're not for sale. Personally, I feel that we have the culture, the people, and the resources to resume an outstanding growth record. How soon depends on how well we're able to diversify and how quickly.

Questions?

Thank you. [OPERATOR INSTRUCTIONS]

We will take our first question from Arnold Ursaner with CJS Securities. Go ahead, please.

Good morning, Arnie.

How, Barc, how are you?

Good.

My first question relates to inventory. Given the slow down, obviously your inventory of both raw material and finished goods seem quite high, you know, at various points over the last year or two you maintained high inventories from a discretionary point of view because of fears of availability pricing or availability of steel. That doesn't seem to be an issue out there in the markets, so could you perhaps comment on your goals of -- for inventory over the next few quarters?

Yes. Well, as you know, we're a people Company, and we don't like to lay people off until we really have to. So when you go through that kind of a process, why, you're going to increase your inventory of finished goods. And that's a major reason for that increase. And steel, we're concerned about trying to figure out whether the price is going to go up or not, and it has recently. And we're not going to be caught short. I think the steel companies do a great job of controlling the market, you know. They close an operation to keep steel scarce. So as you know also our major objective with our customers is never to be out of goods. We got to have them when they need them. So they don't keep carpenters on the job and have to pay them and they don't have the product.

I'm sure all this will drill down by regional things on the home builder side. I would just as soon not go there. I have a financial question if I could. You obviously accrue bonuses based on expectations relative to, you know, targeted numbers. I know you do this on a quarterly basis. But given, you know, the closest thing I've ever heard you give to guidance regarding the back half of the year, is -- have you reversed any of your accruals for bonuses or in the SG&A line, or are you likely to do so if your Q4 trends continue as you expect?

Well, we don't -- we don't quite do it that way. I will leave the answer to Mike.

Our quarterly bonuses are based on the performance clause in the past quarter. So the way the tax profit sharing plan works, is if the Company does well, the employees do well and if the Company doesn't do well, we don't do well. So as we look at Q3, we saw a significant reduction in our bonuses because the Company did not meet -- because we did meet our projections.

Mike, where I guess I was going is I assume these are based on full-year projections. So you would have accrued in Q1 and two, based on quarterly performance but relative to annual budgets?

No, no, the cash profit sharing is based on the profit in that quarter. It is not accrued ahead of time. Because you don't know what it is going to be.

Even on the corporate level?

Correct. Even on the corporate level.

Okay.

That's right.

I will jump back in queue. Thank you.

Okay. Just one other comment there, though, what is based on estimates of profits in each of the branches and the home office is the stock options. They're granted or not granted depending on whether that branch makes its goals. Maybe that's where you got that idea.

Thank you very much.

Thank you. We will take our next question from Barry Vogel with Barry Vogel and Associates. Go ahead, please.

Good morning, Barry.

Good morning, gentlemen.

Oh, thank you.

A terrific quarter, Barclay, just terrific. Even though you were disappointed. In terms of sales by region, could you give us the percentage change on the five regions that you usually give us?

Yes. They're all down. Well, wait a minute. Wait a minute. We had one that wasn't.

They were all down.

Was Texas down? Yes, they're all down. California, 15%. The west, 7%. The midwest, 9%. The south-southeast, a little less than 1%. And the northeast, 14%.

Okay. And as far as the home centers, can you give us approximately the change in sales in the third quarter for -- first of all, Home Depot stores alone --

Home depot, down substantially.

Right but can you you give us the change for the stores and then give us the change for all of your Home Depot sales? And the other home center stores?

Well, it is stores with Home Depot.

Right.

There is nothing else.

Didn't Home Depot make some acquisitions? I know they're minor.

But we have them separated, right.

Right. So if you can give us that change, I would appreciate that as well.

Yes, I'm not going to split the -- split it between their acquisitions and the Home Depot stores, except just to tell you that the Home Depot stores were down very substantially.

Okay. So what was Home Depot down in the quarter totally?

I don't want to give that out right now.

Okay. And as far as, you know, looking at the connector business, Mike, could you give us the operating profits between connectors and venting for the quarter?

Yes. We have that. What happened to that sheet, Mike? Ah, yes. Here we are. The split in income from connector products was $39.4 million, and the venting products was $2.5.

Okay And as far as looking at the connector business, you've been giving us the either percentage change in sales --

Very similar to what it was last year.

So you could give us -- let's see, you gave us on your initial comments anchoring systems change in the quarter, we can extrapolate the strong wall sales in the quarter, and I guess, what did you say, Europe was up 25% in the quarter in terms of revenues?

Is that what I said? Then it was.

Okay. Now, what I think is quite amazing and maybe you can explain it, the G&A expense for the quarter was down 17.6%, and I'm assuming that the bonuses are in that area. Am I correct?

The bar introductions were greater than that.

Reduction greater. So really, it is the bonus -- does it show that you are just doing absolutely very good control of your G&A expenses? Or is bonus the key reason for that? The bonus drop.

Well, it is a combination of things. The bonus did play into that a significant amount. But we are also managing our head count.

Because you're doing an outstanding job in that, I must say. Now, Mike, could you give us a new read on capital expenditures for the year and D&A for the year and tax rate for the year?

Capital, $59 million. D&A, $25 million. And I'm sorry the last question?

Tax rate for the year.

38%.

All right. I will get back in queue. Terrific job.

Thank you. We will take our next question from Steve Chercover with D. A. Davidson. Go ahead, please.

Hey, Steve.

Good morning. How are you?

Good.

Great. My question is on Anchor Systems, I guess I always assumed that it was a bit less residential because it is not strictly wood to wood. Can you give us some color on maybe why that was flat in the quarter?

I really don't have an answer to that right now. I've got to talk to the key people there. It was -- it surprised me. And I'm sorry, Steve, I just don't have the answer to it yet.

I know you will get to the bottom and address it. Next question, you've said that you are trying to grow in Asia and Europe and what not. Is that a function of kind of spending money to create demand and awareness? Or you know, what's the strategy to grow that, if you can share it with us?

Well, the strategy in Asia is that as I mentioned, we are sending somebody permanently. And the idea is to get from within a real feeling for that market, particularly China, but the rest of Asia also, and then to establish more and more of a presence there. I think we will do it first with just sales and then we will get to manufacturing. But with somebody there who is highly qualified, we will learn about those markets and just how we can get them, but it is a must, we have to. China is the wave of the future. We got to be there.

Now, Europe also, our manager there, as I mentioned, has made tremendous progress. And we still have all eastern Europe, we're a little bit in there, we are selling a Home Depot type business in Moscow, for instance, but we've got a long ways to go and he is really -- he is focused on getting into eastern Europe as well as getting -- making Spain much more important. So we think that in the future my -- we have about --outside of the U.S., the sales were around 17%, a little over 17% in the quarter. I would expect in the future that is going to go up.

Maybe I can ask one more and then I will also get back in the queue. You have got $105 million in cash, that is clearly dedicated towards acquisitions. Can you give us a sense of just how big a quarry you can go after? Because you're willing to take on a bit of debt as well, I assume.

We would be, yes, if it is the right kind of acquisition. But we're also aware that all of you people, if we take on a big acquisition, and it hits our earnings for more than a year, it is not going to be very good for the stock, so just personally, I have about a one-year limit on how heavily any company can hit our -- any acquisition can hit our earnings. Now it is possible if it is something that is so apparent that it is a great fit, maybe some of you would stick around for two years. But I think one year is kind of the general limit.

So --

Size, you mean?

A quarter billion?

Well, it depends on how well it fits. We would go several hundred million if it is the right kind of company.

Several hundred million and accretive within a year. Okay. Thanks, Barc. I will stick around.

Okay, Steve. Good. Thank you.

Thank you. We will take our next question from Keith Johnson with Morgan Keegan, go ahead, please.

Hello, Keith.

Good morning, guys. You think we're all that short-term oriented down here? Couple questions. I think you covered most of it. I guess the first one, can you talk a little bit about the pace of the change in your markets as you came through the September quarter and kind of how, as it quickened as you've gotten into the October quarter as well as declining residential construction and those type of things?

Yes. The fourth quarter doesn't look good. I think that residential construction is down. Maybe quite a little more. It is going to be down in this quarter. And it just is so apparent that we've got to get rid of such a high dependency on housing in the U.S. We have to do that. We don't talk about things over which we have no control. We talk about what we need to do. But the board and management is most pushing to get rid of such a large dependency on housing. I don't think the fourth quarter is going to be a good one.

Okay. And a little bit -- when you look at kind of the supply channel out there, I know, I guess from your standpoint, inventories are up, raw materials, finished goods, as you look at kind of what your distributors are saying, is there an inventory build beginning, it is going to take a while to work out over the next several quarters?

Well, it is hard to estimate beyond one quarter, we've learned, as far as inventory goes, but I think there is, amongst probably practically all of our customers, they're looking harder at their inventory and projecting that they're not going to need as large of one. So I think maybe that will continue through the fourth quarter.

Okay. And I guess from -- you talked a little bit about steel prices being I guess up in the September quarter. Current conditions, you said I guess in the press release had stabilized, have you seen any indications of steel prices starting to drop off as we go into the fourth quarter?

You know, I think the price of steel is, to me, is about like trying to figure out what is going to happen to the stock market. Can't do it.

I understand.

And I've seen that at one time, all the word we get is that steel is going to go up. The next time, it is going to be flat. And 50% of the time, the information is correct.

I see.

Like the stock market.

Right.

So I'm sorry I can't give you any wise projection there. All I can say is that we continue to have that policy that we're not going to run out.

Right. I guess given the -- in light of the slowdowns on the demand side, I know you don't talk about price increases implemented in the past, but, you know, looking at the tighter steel environment and the slowing demand, where does that put you on the potential to adjust prices to try to help out margins and those type of things as we go forward?

Well, just generally, I know there is a great deal of concern out there about the price of steel and what it does to us. It really is not a major problem, because when the price of steel goes up for us, it goes up for all our competitors. So we are -- we're able to raise the price. And if it goes down, we are going to lower the price. And it is really that simple. You've got a lag, a time lag usually, not always, but a time lag between the time that the price of the steel goes up, and we can get a price rise in, because we're not going to just bang do it, we're going out and we talk to all of our customers and tell them what the problem is.

Right. Okay. Alright. Well, thanks. And good luck.

Thank you, Keith.

Thank you. We will take our next question from Stephen East with SIG. Go ahead, please.

Good morning, sir.

Good morning, Barc, how are you doing?

I'm doing fine.

A couple of quick questions. Your southeast performance was actually much better than I was expecting given the big slow down we're seeing in the Florida housing market. Are those trends holding in there or are you just now starting to see a significant decline in the Florida market?

We saw it -- excuse me -- we saw it in the quarter. How much was it down, Mike?

Florida was down 11%.

Florida, 11%. Of course, California was the worst. It was down --

15%.

15.

Okay. Alright. And then on the Home Depot sales that you were talking about, down substantially, what do you think is going on there, what is driving it? Is there a lot of price discussion or is this -- what's driving the issue with the decline?

I think that their obvious purpose to do more and more business with contractors, I think maybe they're succeeding. And that that may be a major part of the reduction in sales. Also, of course, as we have said before, when they decided to do their own merchandising, we think it cost them quite a bit of sales. They can't do it as well as the manufacturer, us, can do it.

Okay. And then just one last question. Are you seeing from the builders, the builders are talking a lot about really pushing suppliers for cost concession, et cetera. Are you seeing that? And is it flowing through?

Oh, yes. We're seeing that. But you know, that is just -- that is just business. That is nothing new, that being pushed by whoever uses your product, to lower your prices. That's okay. We do that, too.

Okay.

And it is not -- you either have a strong brand name, and real reasons for contractors and others to use your products, or you don't. And we have built a very strong brand name over time. And it pays off.

Okay. Thank you.

Thank you. We will take our next question from Justin Maurer with Lord Abbett. Go ahead, please.

Good morning, Justin.

Hi, Barclay. Just a follow-up on the Depot question. You know, Barry asked earlier about the store sales versus non, meaning Hughes and White Cap. Is it safe to say based on your comments it was the actual, the retail stores that were down greater than the contractor supply, if you will?

Oh, yes. Absolutely.

Okay. And there has been obviously a lot of discussion, you know, the last couple of quarterly calls about the relationship there, and I think the last we left it, you felt like the relationship was much improved in terms of line of communication, and I suspect that is still the case. They're just destocking inventory?

That's still the case.

Is your sell-through from what your guys can tell there, is your sell-through at the stores greater than the sell-in, that they're just choosing to work their inventories down?

I think so.

Okay. Mike, what is Cap Ex's thoughts for next year? Any idea yet?

Approximately $44 million.

$44. Okay. And then the finished goods, the inventory comment you made in the press release, you said since December, raw 57 and finished up 9.5%, if you looked at it up year-over-year would it be roughly the same split in terms of it being predominantly steel related?

I don't have the exact breakup there but steel is up substantially.

Alright, guys. That's all I had. Thanks.

Finished goods are up, also.

Thank you. We will take our next question from Timothy Jones with Wasserman Associates. Go ahead, please.

Yes, sir?

Hi, Barc. A couple. On the finished good, isn't that bothering you being 9.5%? Forget the steel, with that such a thing, looking at down sales the last quarter and probably for the next quarter?

Well, yes, it is not a plus. However, it is part of our culture, that we are not going to let people go until we have to. And our people -- we have, they're with us 5, 10, 15, 20, 30 years and done a great job and is part of our culture that we appreciate that, so we're not going to anticipate reductions in sales. In fact, we're going to go the other way.

You said that consistently since I've known you. You have never waivered from that.

No, sir, we haven't.

Okay. Second question. You gave California and Florida. You could give me what Texas was up or down in sales?

Oh, Texas was surprising. Texas actually wasn't down, was it?

Texas was up 14%.

How about that? That was the only area -- well, no, there were some small areas that weren't down, but the major ones across the country, except for Texas.

Now, do you put New Orleans with Texas or not?

What?

New Orleans, you know, in other words the building from Katrina from a year ago, is that allocated to the Texas area or not?

Well, yes, it is.

Okay. And that's what's happening there, I guess. Another question is, you've got Florida down, 11%, and the southeast down 1%. Obviously then your non-Florida operations in the southeast were fairly strong, too. And what was the reason for that?

That's a very good question. And I don't really have a very good answer. What do you think, Mike?

If I can clarify, when we talk about south, southeast, that is run out of our Texas branch in Mckinney and Texas through Florida, the -- the Texas number we gave was just for the state of Texas. If you look at the state of Louisiana, we saw a 33% increase there.

I'm sorry, did you put -- do you put Florida, Texas, and Louisiana in the south-southeast, not in the west?

Yes, we do. That's correct.

Okay. That's why I was getting confused. Geography a little bit problem. Okay. And let's see if I had anything else. That's alright. I will get in the queue if I have anything else. Thank you.

Okay. Good to talk to you.

Thank you. We will take our next question from [Stan Westhof] with Paradigm Capital. Go ahead, please.

Good morning, Stan.

Good morning, Barc. I just have one question. Most of them have been answered. But can you split out the venting product segment? What percentage is the gas venting products of that revenue?

Yes, just one moment. It was very close to what it was last year, about 11%. And let's see. We've got -- it is close to that.

Okay. That was my only question. Everything else has been answered.

Oh, good.

Thank you. We will take our next question from Kim Kiro with Value Holdings. Go ahead, please.

Good morning, sir.

Good morning. You reduced your 2006 Cap Ex plans by $4 million from your plans back in August. Where did you decide to pull back?

It is really a project that we did not complete this year that will roll into next year.

This is not unusual. In fact, the difference between the estimate and what actually occurs invariably is off, and it is usually off more than that.

Well, even though you're rolling it into next year, you have next year down 25% versus this year. Why is that?

Well, because we have built new plants in Texas and in Ohio, and elsewhere to the extent that we're in good shape probably for several years. So the money has been spent. And we don't need any more plant right now. There will be exceptions to that. We just bought a warehouse in Tennessee. But -- and there will be exceptions. But generally, we're in good shape for quite a while.

Okay. And regarding your share repurchases, should we infer from your earlier remarks regarding your desire to make acquisitions that you're not planning to spend the remaining $33 million of the $50 million repurchase plan that you announced last December?

Oh, that purchase plan, we just have the authority to do it. I have the authority to do it. But the only shares that we will repurchase, and this is not a commitment yet, is to prevent any dilution, because of internal options.

Okay.

Not buying any more than that. And the major reason is we -- we want to use the money to build the company.

Sure. One last thing, Barc. I didn't quite understand your logic as to why Home Depot sales would be weak because of Home Depot's desire to do more business with contractors. Is that because they're not emphasizing merchandising to the -- in the stores?

No. Because they have been in acquisition, all kinds of ways, they have been putting a real push on increasing their business that has to do with new housing. So new housing, being down substantially, it was surprising how much they were down, but I suspect that quite a bit of that had to do with new housing in the U.S.

Okay. Thank you very much.

Thank you. We will take our next question from Cliff Walsh with Sidoti and Company. Go ahead, please.

How are you, Cliff?

Good. How are you, Barc?

Alright.

I was a little late to the call so apologize if this was redundant but maybe you can comment a little bit on -- you were talking about reducing exposure to home building. Can you talk about where things stand on the acquisition front, the pipeline and such?

Well, just generally, as I mentioned, we're using now firms who are -- we have found very good at finding acquisitions for other companies that we know well. And so instead of just doing it ourselves, making calls on companies, and finding out who is for sale and who isn't, we're using these two and three, actually, major companies that they have divisions that do that, and I think that it is going to pay off. We will see. But I think it will pay off.

Okay. And with respect to succession planning, anything new on that front?

Well, nothing new except that because of our Company culture, I don't see a problem there. The branch managers, they have the authority to go with the responsibility, and so you build strong people. Like the branch in Texas, he's got his own sales force, his own engineering staff, his own manufacturing plants, and he makes his own decisions. At the home office, the job was to help the branches to make their goals. And so you build strong people, because they actually do run a business. It is not top-down in this Company. It is bottom-up. So we have right now, I guess, roughly three strong candidates for Tom's job. And that will probably change in the next couple of years. He is going to stick around probably for at least two years, and we will have probably somebody else who will come up and maybe one of the candidates will go down, I don't know. But because of our culture, succession planning is necessary but it is not a problem.

Okay. Well, it sounds like you may have narrowed it down a little bit. I think in previous conversations were you talking about maybe five or six candidates, so --

Well, it may go back to that.

Okay, okay. Very good. Thank you very much, Barc.

Okay.

Thank you. We will take our next question from Tony Campbell with Knott Partners. Go ahead, please.

Good morning, Tony.

Good morning. I am wondering just if were you to go back and if you could give us kind of a sense of sort of peak to trough, what happened in the last sort of cycles, you know, sort of going back say 15, 20 years or whatever, if you could just give us some sense. I guess what I'm trying to get is some sense of what the down side could be, if any.

Well, the Company is totally different.

I understand. But --

12 years ago when we went public.

I understand. But before were you public -- I mean just to give us some variance, peak to trough in revenues, I understand that.

Well, the difference was that we were building a market which had a lot of room to get built in all of those early years, the first 30 or 40 years. So what happened then or in a dip in housing, probably, I don't even remember. I'm guessing that probably we would overcome them every time, with maybe one exception. My recollection is that in 1991, that there was a pretty substantial dip in the economy, and I think we were not able to overcome it then. That our sales went down, not a lot, but they went down a little bit. Now, here, on this one, this looks like a big one, and we obviously are not able to overcome it, and we got to do something about that. But it is going to take some time to get it done. All of these things, acquisitions and Asia and Eastern Europe and Spain and all of those things, they take time. So I -- that's why I mentioned that I think that this year, I would -- this last quarter is not going to be a good one. We may end up below last year, in both sales and profits, not a lot, but we may well end up below, and next year, I don't know. I think these things we're doing won't come to fruition. The definition being adding to sales and adding to profits. Maybe for two or three years.

Since you've hired these investment bankers, have you -- how would you classify the quality of deal flow that you've seen.

I think they've widened the market immensely and they made available companies that we had called on who said they weren't for sale. But these companies obviously have made a contract with these major divisions of Morgan and a couple of others, and they have the contract and so anybody coming in from the outside, they're not going to talk to them. But we have had -- they've done a great job so far giving us all kinds of possibilities and we're sorting through them.

Terrific. Good luck.

Thank you.

Thank you.

But we're not going to count on luck.

Thank you. We will take our next question from Barry Vogel with Barry Vogel and Associates. Go ahead, please.

Hello, Barry.

Yes, Barc, you said that the European business had a 6% net income figure on sales. Was that operating profit?

That was net income.

So that was not operating profit?

No. That was down at the bottom line.

So what was the operating margin?

Oh. Let's see. The operating margin was 11.3%.

Now, generally speaking, I would assume due to the seasonality to the business, but based on what you achieved in that quarter, I which think is the most earnings you've had since you've been in Europe --

Oh, yes. By far.

So you would expect to be decently profitable in the fourth quarter as well?

Yes.

Okay. I have a few questions for Mike. I know you gave an estimate of capital expenditures for next year. Can you give us a preliminary estimate for D&A and the tax rate for next year?

I do not have those numbers yet. We have not completed our plan for next year.

Okay. And as far as Quik Drive, can you give us some numbers on accretion that you expect for the year?

Yes. Just one moment here. Well, let's see. I'm looking at the paper I got from the manager there of Quik Drive, and you're thinking about sales?

No, accretion of profits, in terms of, you know, earnings per share.

We don't -- in Quik Drive, we don't have that.

You don't have that. All right. Okay. So as far as --

But Quik Drive, when we bought them, they were profitable, and they still are, and probably, you know, at least as much.

When you give us some idea, because it looks like it was a super acquisition, what your operating margins are at Quik Drive?

I haven't got those.

Okay. Thank you very much.

Right, Barry. Sorry I couldn't answer all of your questions.

That's okay.

Thank you. We will take our next question from [Scott Salsburg] with SIG. Go ahead, please.

Hello, Scott.

Good morning, Barc. Just a couple of questions, you mentioned at the top about your foreign expansion, and how that can be pretty expensive. I wanted to get a little more color on where you see the income statement effects. Have you already seen some of those expenses flow through in the quarter just past? Do you expect some more impact in the fourth quarter? Just trying to get a feel if this is on the horizon or if this is already flowing through.

No, in Europe, for instance, for several years, we had substantial losses there and we expected to have those. What we were doing was building a market. And we weren't after the managers there, to make money, but to get more sales. And now, it is done, and we have a good profit there. And I expect that it is going to stay that way. And in China, so far, we've made money off our sales there, but if we get to manufacturing in China, I would suspect that for a while, we will have a lot of trouble making any money. That's just the way it works. It takes you a while to get to really -- to build a brand name in a market. And that's what enables you to make some money. You build that brand name. But that takes time. Europe, we've done it.

So on that manufacturing side, it sounds like that is something that may or may not come online in the fourth quarter. It is something you're working on, it might be more of an '07 story?

Oh, I don't know when. Because our man isn't going there until the first of the year, and I would just make a guess that it will take them a year.

Okay. That's helpful. Okay. And then last question is on the research and development side, your expenses are actually down sequentially, and I know you had talked in the past about increasing R&D spend, I just wanted to see if the latest quarter was a run rate for going forward.

What do you think, Mike?

We continue to invest in R&D, and we meet with the managers all the time and making sure they get what they need, so there are expenses for different things that come and go, like different tests, so all I can say is we will continue to invest in that area.

Alright. Thank you.

Thank you. We will take our next question from [Matt Herford] with Atlantic Capital. Go ahead, please.

Good morning Matt.

Good morning, Barc. How are you?

Good.

Help me just if we could just kind of frame what you guys are looking for with your acquisitions. Are you looking for connector companies? Are you looking for businesses you think are kind of are tangential to what you are trying to do, help me understand the criteria you're looking for.

Alright. That is a good question, Matt. And what we're looking for is to relieve the dependence upon U.S. housing. That's what we're looking for, number one. But also, if -- with housing down so much in the U.S., I think there are going to be companies come available that largely depend on housing for their profit sales and profits, and if it is really a good buy, we will take it. Even though it is housing. But we are looking hard for companies that do not have a heavy dependence on housing. We want to get out of that.

And sort of certain financial criteria that you got, be it accretion, returns on invested capital by a certain year, multiples, anything along those lines?

No. No. You just -- you almost -- you have to adjust your thinking to what that particular acquisition is, and in all kinds of ways. And to set absolute numbers before you're even well into it, it hasn't made sense for us. So I guess I just ask you people out there to take a look at our record, and you will see that we haven't made any major mistakes. Now, that doesn't mean that we're -- we're going to look very carefully before we acquire anybody, and I think, though, that we need to look much harder outside of the housing industry.

Okay. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] We will take our next question from Timothy Jones with Wasserman and Associates. Go ahead, please.

Yes, Tim.

Hi, again. You implied, and I just want to make sure that you might have down sales and down earnings this year. To do that you would have to have a 20% decline in sales, and a 30% decline in earnings in the fourth quarter. I don't know about the earnings, because we can guess from margins but since over half of your business is probably not housing, you know, and that should be flattish to up, and of course, Europe and so forth, I mean it implies like the housing related will be down 40%. Do you think that is excessive, really?

Might be. Might be, Tim, might be excessive, but I guess as I think you know and most people who have been following the Company for a long time, the last thing I want to do is put out information that causes analysts to buy us in expectations that don't come about. I would much rather go the other way.

I feel that you're doing that. Okay. Thank you.

It appears we have no further questions at this time, sir.

Okay. Thank you very much.

This concludes today's teleconference. Thank you for your participation. And have a wonderful day. You may disconnect at any time.