Tennant Co (TNC) 2002 Q1 法說會逐字稿

Thank you for participating in Tennant Company's first quarter earnings teleconference. All participants will be able to listen-only until the question and answer session. This call will be recorded. If there are any objections you may disconnect at this time. Beginning today's meeting is Ms. Janet M. Dolan, President and Chief Executive Officer for Tennant Company. Ms. Dolan you may begin.

Thank you [Brenda]. Good morning everyone. As she said this is Janet M. Dolan and I would like to welcome you to our first quarter results conference call. Here in sunny Minneapolis I have to tell you that snow is melting and we are cautiously optimistic that spring has finally arrived. I want to thank all of you for joining us this morning, and I want to welcome also all of you who are participating in this webcast of our call. With me today for this call is Anthony T. Brausen, our Chief Financial Officer, and before we begin I am going to ask Tony to provide you our Safe Harbor statement.

Good morning everyone. Our remarks this morning and our answers to your questions may contain forward-looking statements regarding the company's expectation of future performance. Such statements are subject to risks and uncertainties and our actual results may differ materially from those contained in such statements. The risks and uncertainties include the factors that affect our companies operating and global markets as well as matter specific to our company and are described in today's new release and the documents we filed with the Securities and Exchange Commission. We encourage you to review those documents particularly our Safe Harbor statement for description of risks and uncertainties.

Tony, will review our financial performance for the quarter in just a moment. To begin however, I have some general comments about the quarter. Overall, our performance in the 2002 first quarter was inline with our expectations and the guidance that we provided when we talked to you at early February. We told you that that we expected the continuing weakness in the industrial economy to have a more severe impact on the 2002 first quarter than it did in the comparable 2001 period. We missed downturn, which is just beginning. In addition, the first quarter is typically or seasonally slowest period. As we noted in our earnings announcement, which was issued this morning, the Industrial Production Index has reasonably began to signal an increase in activity in the North American industrial sector, although the index is still at levels well below a year ago after trending sharply downwards throughout 2001. Activity in our largest and most profitable product line, North American industrial equipment tends to correlate closely with a multiple of movements in that IPI. So we are encouraged by the positive turn in this indicator. In addition, our first quarter North American industrial equipment revenues were about flat with those we reported for the weak 2001 first quarter. We had expected to see both an upturn in the IPI and the stabilization in our North American industrial equipment revenues in this 2002 first quarter versus the fourth quarter. The fact that both of these events indeed occurred may be signaling that the worst of the industrial sector downturns in North America is behind us. As economic recovery in the North American industrial sector emerges we believe we are well positioned to benefit from it, both because of the way we responded to the downturn as well as the work we continue to do to widen the gap between Tennant and our competitors. I will have more to say on these topics after Tony provides you a recapitulation of our first quarter performance. Tony.

Thank you Janet. Our first quarter results announcement was issued early this morning over the wires and is now available on our website www.Tennantco.com. For the 2002 first quarter we have reported net earnings before unusual charges of $2 million or $0.22 per diluted share. During the first quarter, we recorded unusual charges totalling $4.5 million pretax on an aftertax basis the charges totalled $3.3 million or $0.37 per share. The charges incurred in the quarter are comprised primarily of severance costs including cost related to our previously announced decision to close several North American distribution centers and transfer our distribution operations to a third-party provider of logistics services. This action will result in the elimination of 80 positions. In addition, we also took other actions to streamline our customer service operations in Europe and to reposition our research and development organization. In Europe, we are consolidating customer service operations for all of Europe in one centralized location consistent with our pan-European approach to managing our operations there. This action will result in the elimination of 50 positions in the local countries and the addition of about 30 positions all of them at the new customer service center in Antwerp, Belgium. Janet will elaborate on these actions in just a few moments. In North America, we are changing the mix of the expertise and skills in our research and development organizations to increase our focus on new products that reduce our customers cleaning costs. To do this we offered early retirement packages to some individuals in the research and development group. This will allow us to reassign existing personal and add new engineers without increasing annual R&D expenses. In total, approximately a 140 positions are to be eliminated, with the net reduction in position will be closer to 100 as we add customer service personal in the Antwerp and engineers for our research and development team. The related severance costs, a least buyout, and fixed asset writedowns account for $ 4 million of the $4.5 million in unusual pretax charges for the 2002 first quarter. Inventory writedowns related to the consolidation of our distribution operations account for the remaining 5000 of charges and appear on the cost to sales line in the schedule we provided with our first quarter announcement. When you include these unusual charges, we reported a net loss of $1.3 million or $0.15 per diluted share in the quarter. From this point on I will discuss results and comparisons excluding the unusual charges and I will refer you to the columns in the news release labeled before unusual charges. Our financial results for the first quarter was once again adversely affected by negative foreign currency exchange effects, primarily on the strength of the US dollar against the Euro, the Japanese yen, and the Australian and Canadian dollars. Exchanged effects reduced net sales for the quarter by approximately $1.3 million reduced earnings per share by approximately $0.05. In January 1, 2002 as previously announced we adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, under which we are ceasing the amortization of goodwill. This increased first quarter earnings per share by $.01. I will now provide an overview in review of our income statement. Starting with consolidated net sales for the first quarter they total a $96 million that is down 6.8% from the 2001 first quarter. The decline resulted primarily from the continued difficult economic worldwide compared with a year-ago when the current downturn was just beginning. Price increases benefitted net sales in this year's first quarter by about 1.5%. In North America, first quarter net sales declined 4.8% to $70.7 million. Sales of industrial equipment, commercial equipment, and floor coatings all declined compared with a year ago period reflecting the economic downturn. Service revenues, however, increased 5% compared with 2001 first quarter. In Europe, sales for the 2002 first quarter declined 3.3% to $17.6 million. The European fiscal year has now been adjusted to the calendar year and as a result the 2001 that is the year ago first quarter includes the months of December 2000 through February 2001. The inclusion of the low volume month of December affects the period-to-period comparison. Adjusted for the fiscal calendar alignment and to exclude foreign currency exchange effects, sales for the 2002 first quarter decreased 9% compared with the 2001 first quarter. The 9% decrease results primarily from the weak economic conditions throughout Europe. In our other international markets, sales for the first quarter of 2002 totaled $8.3 million that is down about 26% from the 2001 first quarter. The decline reflects particular weakness in Latin American markets as well as negative foreign currency exchange effects resulting from the weakness of local currencies as compared with the US dollar. In several of our international markets, we did see somewhat stronger order activity late-in-the-quarter, and these orders are reflected in the quarter-end backlog and will be shipped in the 2002 second quarter. Accordingly, the 26% sales decline is over stated relative to orders in the quarter, which were down about 10% versus the year ago quarter. Our consolidated order backlog grew to $10 million at the end of the 2002 first quarter compared with $5 million at the end of 2001 fourth quarter. Order backlog was $11 million at the end of March 2001. Our gross profit on the consolidated basis our gross profit margin for the first quarter of this year was 36.7% compared with 38.3% in the 2001 first quarter. The decline in gross margin results primarily from volume declines and related sales mix effects, foreign exchange effects, and unfavorable manufacturing overhead absorption. These were partially offset by the benefits of the transfer of manufacturing operations in Germany to a contract manufacturer in the Czech Republic. The unfavorable manufacturing overhead absorption reflects the comparison with a strong 2001 first quarter compared against the 2001 first quarter production volumes were about 20% lower. At 2001 first quarter being the last period during which we operated the relatively high volumes. Selling and administrative expenses totalled $32.4 million in the 2002 first quarter at down nearly 7% from $34.8 million in the last years first quarter. The decline primarily reflects the impact of cost reduction measures we took in 2001 as we adjusted to the downturn in demand. A portion of these cost reductions are temporary such as salary reductions and reduced discretionary spending. As a percentage of net sales first quarter S&A expenses were 33.5% in the 2001 first quarter flat with last years first quarter. Our operating profit for the 2002 first quarter totalled $3.1 million and that is down from $4.9 million in the 2001 first quarter. The factors primarily responsible for the decline were the lower sales volume, along with factors I indicated that affected our gross margin. Operating margins for this year's first quarter is 3.2% compared with the 4.7% in last years first quarter. Negative foreign currency exchange effects account for about 30 of the 150 basis point decline. The remainder of the decline resulted from the same factors that I just mentioned that affected gross margin. Our tax rate before unusual charges for the 2002 first quarter was 38% compared with 35.5% in the 2001 first quarter. The increase results from the mix of earnings by country and is inline with the expectation we noted in February regarding our 2002 tax rate. Turning now to our balance sheet. Our cash and equivalence balance at quarter end was $16.1 million that is down slightly from $16.7 million in March 2001. However, in the past 12 months we paid down about $7 million in debt. We continue to expect 2002 capital expenditures to be in the range of $15 to $20 million. Our inventories and net receivables at the end of the 2002 first quarter were down nearly $19 million from the end of the last years first quarter, but up slightly from the end of 2001 fiscal year. Our debt to total capital ratio was 10% at quarter end that compares the 13% in the year ago quarter, netting cash against debt our net debt to total capitalization was nearly zero. That concludes my over view I will turn it back to Janet.

Thank you very much Tony. To conclude our remarks this morning, I want to elaborate on a comment that I made in my opening remarks, which is that we are very well positioned to benefit from the recovery in the industrial economy. Those of you who have been following us know that we have been focussing on several critical initiatives intended to enhance our competitive position, improving our operating effectiveness, and ultimately generate sustainable increases in economic profits what will benefit our shareholders. We have maintained our commitment to these initiatives throughout the downturn in the industrial economy, with the objective of widening the gap between Tennant and its competitors. These strategic initiatives include first, reducing our total costs to serve our customers. Second, developing products that enable our customers to reduce their own costs to clean. Third, being the suppliers customers find it easiest to do business with. Today, I am going to focus on the first of these, which is our efforts to reduce our total cost to serve our customers. We have a number of initiatives underway and we are making substantial progress to deliver permanent sustainable cost reduction. Today, I want to highlight several of these initiatives. The benefits of our work will become increasingly apparent this year and next. Particularly, if we see a meaningful resumption of growth and demand, in fact by late this year we expect to begin realizing annualized cost reductions of approximately $3 million pretax as a result of the restructuring actions we have announced today. These benefits are in addition to the improvement in operating efficiencies. We are already beginning to see from our earlier decision to transfer production from a leased plant in Germany to a contract manufacture in the Czech republic. That action which was completed last year began enhancing our operating profit in the fourth quarter of last year and is now yielding benefits of about $1.5 million annually on a pretax basis. In the aggregate done these restructuring actions should ultimately yield annualized pretax benefits of $4.5 million. As Tony noted, the actions announced today include the consolidation and centralization of our European customer service operation. In Europe, we have been migrating for sometime now for a pan-European approach to the management of our operations there. This migration has included getting our European operations up on our common global platform enterprise resource plan existence. Putting in place a common pricing system across Europe and implementing other policy and procedure changes to make the way we do business in Europe more reflective of the unified market place that Europe has become. The last major step in this effort is the centralization of our European customer service operations into a single location in Antwerp, Belgium. Through this action we expect to both enhance the level of service we provide to our European customers while reducing the cost of providing that service. This transition will occur in the fall of this year. In North America, we expect to achieve a similar double benefit, an improvement in service, and a reduction in the cost of providing that service. By consolidating our network of distribution centers into two facilities located in Louisville, Kentucky, and Fontana, California. These facilities will be owned and operated by third-party logistics services providers. We expect this initiative to reduce our operating transportation and inventory cleaning cost, while improving on a level of service that is already industry leading by enabling us to deliver parts of machine even more quickly and at a lower cost. The transition to the third party logistics provider began this month and will proceed in phases through September. We have other projects underway to achieve further improvements in our operating effectiveness. In light of their importance, we strengthened our leadership team this month by adding Chris Killingstad, to Service Vice President, North America. In this position Chris will focus on the growth on our business in North America overseeing our industrial, commercial, and outdoor cleaning equipment as well as floor coating product lines and the related service organization, sales and marketing functions, and the dealer and distributor relationship. Kris joins us after more than 10 years at the [_____] Company. With Chris on board we are adding strong leadership for our largest geographic business while permitting our Chief Operating Officer James H. Moar and his team to devote their full attention to the many initiatives we have underway to strengthen our market position, to accelerate the pace of our product development efforts, to serve our customers better than any of other player in our industry, and to streamline our operation. Again our focus here is permanent sustainable improvement in our business. Improvements that widen the gap between Tennant and our competitors. I am confident the progress we have already made has us well positioned for the emerging recovery in the industrial economy. Before I conclude, I want to briefly discuss our opportunity to benefit from the way we managed our manufacturing capacity with the downturn and demand we began to see about a year ago. Rather than making wholesale reductions in our skilled manufacturing workforce, we matched capacity with demand, first by reducing overtime then by cutting a work week in short by cutting direct manufacturing hours rather than the larger number of skilled production workers. As a result we can restore capacity quickly and easily once the recovery in the industrial sector gains momentum. To sum up our first quarter results were inline with our expectations. As a result we are reaffirming our earlier guidance for the full year 2002 namely the earnings per share before unusual charges of atleast $1.70 for 2002. Our prior 2002 earnings guidance is assumed of first quarter inline with what we are reporting here today. We continue to expect period-to-period comparisons the turns favorable in a year's second half. That said our core industrial business is still down sharply from prior peak levels and we continue to expect volumes in our industrial product line to be below 2001 levels for the full year. This expectation assumed and is consistent with an IPI for the 2002 full year that is about flat with 2001. Given the historic correlation between movements in the IPI and order volumes for our North American industrial equipment a flat IPI would imply a decline in North American industrial revenues in 2002 compared with 2001. Offsetting the expected decline in our North American industrial products revenue will be contributions from new products such as the Centurion street sweeper. Meanwhile, we will continue to work on new products that will help our customers dramatically reduce their cleaning cost. We are also striving to give the supplier they find easiest to work with. In addition, our efforts to permanently reduce our cost are beginning to benefit our performance with further benefits to come in 2002 and beyond. Well, that concludes our prepared remarks, that Tony and I will be very glad now to take any of our questions. So I am going to ask the operator to being pooling you for your question.

Thank you. If you would like to ask a question please press * 1 you will be announced prior to asking your question. To withdraw your question please press * 2. Once again to ask a question please press * 1. Our first question comes from [Robert Beck] of [FNG] Capital.

ROBERT BECK]: Yes. Thank you for a very good presentation. I am asking about the Centurion rollout in a couple of few years.

Do you just want to know how we are going to do it?

ROBERT BECK]: Yes. How are you going to do it?

Well, it is already off to a good start. We are selling it to largely municipalities but also large industrial customers but it is very much municipalities. It is a market place that gives us lot of opportunities. We begin it by a tour of demos which are well underway now and the demos are frequently compared side-by-side currently cleaning and they have given us very high marks and so we are getting a lot of interest from our municipal customers and so right now, we are right on track with where we hope to be with the rollout.

ROBERT BECK]: Thank you.

Thank you. Once again, if you would like to ask a question please press '*1'. Our next question comes from [Stephen Lewis] of [Lewis] Capital Management.

STEPHEN LEWIS]: Could you give us an idea of the cash flow for the year especially with the start of the first quarter?

Sure. I guess I would steer you to our earnings guidance of at least about $1.70 share and indicate as I earlier did that we expect capital expenditure of about $15-20 million, depreciation and amortization to be in the ballpark of $17 million. Working capital will be driven by volume and as you saw in our 2001 fiscal year, we successfully reduced working capital. Much of that was the result of lower volumes as well as actions to actively reduce our working capital. So we would expect working capital to again be volume-driven.

STEPHEN LEWIS]: So you will have a use working capital as you did in the first quarter even with volume down?

Yeah. In the first quarter there is a little bit of an anomaly. Typically in our first quarter, because of the timing of price increases and the timing of orders, we have typically taken industrial prices effective March 1st. That usually results in an inventory build that happens during the first quarter. You are seeing the impact of that in the cash flow statement.

STEPHEN LEWIS]: Thank you.

You are welcome.

Our next question comes from [Julianne Henry] of [BlueFire] Research.

JULIANNE HENRY]: Good morning. First of all, trying to widen that gap between Tennant and competitors during the downturn making those investments, could you give us a little more color on were you trying to widen that gap? Is it by taking costs and/or quality? Secondly, given the [_____] that you just mentioned and the annual price increases, how do you see prices holding? What is your strategy there? Thank you.

Okay, I will take the first one and I hope that everyone has our annual report by their bedside. As we laid out in our annual report the goal of widening the gap is to widen the gap in all three areas, which is to reduce our cost of service so that we can be more price competitive, to introduce more products including new products that reduce the customers' cost of cleaning. So we are making products that no other competitor is making. Then also through our web-based capabilities and simplification of our processes to really make our company an easy company to do business with so that customers do not have any reason to want to go to anybody else. So it is really all three of those and the reason we think that this slowdown has been a good time for us is that even though many of our competitors are not public companies and do not have to report their results, we know that many of them because of debt loads and other things are not able to do the investing and get ahead in niches that we are in. So even though the slowdown is tough on us, we are quite tough on everybody else. So it is an opportunity for us to even widen the gap because of the slowdown. In terms of the pricing strategy that we have mentioned before, we introduced our annual price increase across both our industrial and commercial product lines and all indications that we were able to implement it and that it held across the product line. So it is holding no any issues. We have not experienced any issues that would compromise it. So again, that is a good sign.

JULIANNE HENRY]: Okay, good. Thank you.

You are welcome.

Our next question comes from [Eric Albell] of [Spinamore] Asset Management.

ERIC ALBELL]: Good morning. I have a couple of questions here. First of all, can you just elaborate a little bit more on your statement that with the expectation of an IPI that is flat that your volumes in North American Industrial will also below 2001. I guess based on some statements you made in the past, my understanding was that when you do have any upswing in IPI that you guys get a boost on the upside. If it does bottom out and is on its way back up, where you get a flat year-over-year, why you would not experience a similar effect?

Sure. It is a formula answer. Really it is formula-driven in terms of the regression analysis. The bottomline is that there is a multiplier impact. So by and large, decline in the IPI is going to result in a decline in our orders that exceeds that decline. By and large, an increase in IPI is going to result in the same influence. However, the stark point when you look at the regression line and where it starts, and again the second part of the bottomline is it takes roughly a 2% improvement in the IPI year-over-year that equals the beginning or really what caused flat order growth rate for us. So that is where the line begins.

ERIC ALBELL]: So it is just the mathematics with a timing on it?

Correct. Once you exceed the 2% increase in the IPI then you get the multiplier benefit occurring historically based on our orders.

ERIC ALBELL]: Secondly, I think I missed earlier in your call when you were just outlining what the difference amount for the charges this year. You had mentioned that most of them are related to severance costs related to closing the distribution centers in North America. But then, I guess, towards the end you stated a couple of other items that were in there?

Yeah. It certainly is the third-party logistics action. It is also the actions that Janet and I talked about relative to the centralization of the customer service function. We talked about reduction of 50 people that will occur in Europe and that is a big part of it. Also there are the actions that we discussed relative to the research and development organization.

ERIC ALBELL]: Right. Well, there are a few other items that you said after that?

Yeah. There were a few miscellaneous reduction in force items that but nothing that are significant or that were not detailed by us.

ERIC ALBELL]: Okay.

Yeah. And that again, in fact, in that earlier question I really looked a bit amiss on the working capital move because I should have included the explanation of receivables as well [Stephen Lewis] asked that cash flow question. But receivables typically increased in our first quarter as well and that was driven by the timing of the price increase. In both industrial and commercial we took a price increase on March 1st. A lot of orders get skewed towards the end of February and so those typically end up at being in the receivable line at the end of March. So you see a lot of break in the quarter in the third month, late into the second month - ordering activity that results in receivables that are being carried as of March 31st. Therefore typically and historically because of the timing of the price increase we have seen receivables increase from December to March.

ERIC ALBELL]: Okay. Are there any further charges looking out through the rest of 2002 that you are expecting? If so what would they comprise?

We have a number of ongoing initiatives to reduce our cost of service. I would not rule at some point in time that that might result in something but we are not announcing anything. Also there are a lot of actions that we can take that do not result in any kind of headcount reduction but really do reduce our costs of service.

ERIC ALBELL]: Okay. I guess that is all I have.

Thank you.

Thank you.

ERIC ALBELL]: You are welcome.

Our next question comes from [Bob _____].

BOB _____]: Hi, good morning!

Good morning, Bob.

BOB _____]: In your release you talked about the part of the charge related to an inventory write-down as you are consolidating distribution operations. Was that actually a product write-down?

No. That is just the expectation but as we consolidate distribution centers, there will be parts - after-market parts - that will decide [whether or not they] make sense and move to that third-party logistics providers. So we will write them down.

BOB _____]: Okay. Just referencing some of the comments in February versus today, the original earnings assumption for this year was using the industry expectation for the IPI of down slightly less than 1% or 0.7% as you had indicated at that time. Now you have got flat. Subsequently you talked about this multiplier effect. I guess that difference of less than 1% then versus now is not enough to meaningfully adjust income and expectations?

_____].

BOB _____]: Also in February - and this might be informative for the audience here - despite the anticipation of things recovering, it was indicated that your backlog was not yet growing. Yet, now you have announced that the backlog - again from a dollar standpoint it may be not all that large - has doubled from [$]5 million to [$]10 million from year-end to end of first quarter. Does that suggest that there was a noticeable improvement in order rates in the balance of the first quarter and/or that whatever orders that you saw of note that they came in very late in the period.

That backlog increase - if you look at historical trend - typically happens in the first quarter versus the fourth and there are a couple of reasons for that. One is that at year-end we typically try to get the backlog down to a relative minimum. So that has happened, generally speaking, every December. Then the second part of the phenomenon that caused the backlog to increase at the end of March is that price increase and the timing of it again. So what happens is that industrial customers get their orders in before the beginning of March some of which are not delivered until early in the second quarter. So that again is a typical historical pattern for us to see that backlog increase. So I would not look to that backlog increase for North America as a great indicator of improving trends. But I did want to add that in other international as we pointed out we did see some late-in-the-quarter ordering that cost us. The decline in revenues were 26% but when you looked at the orders they were down 10% - still weak but not as weak as the revenues would have signaled. So the backlog does have an element of an increase, if you will, relative to those orders that came in late in the quarter in the other international markets.

BOB _____]: Okay. Was the assumed price increase effective as hoped for relative to what your announcements and expectations in February?

Yes. We were very pleased that it went very well.

BOB _____]: Built into your income assumption for the year, what assumptions do you have on the revenue line?

Moderate increase in revenue. Again, that will happen as a result of what we talked about in the earlier part of the call about the fact that we were expecting a decline in the industrial revenues but will have expectation. We have the expectations of new product revenues such as the Centurion and that will help us drive some moderate revenues. I just want to add to that service continues to be an area as it was in the first quarter of continuous growth. I think we are now in our fifteenth consecutive year of growth in service and that continues to be an area of growth and of course, along with that comes an after-market part. So we continue to be pleased with the growth in that area.

BOB _____]: Okay. To the degree that you use the IPI as an indicator for your industrial business, have you begun to identify one for the commercial side? I am of the understanding that that has been a revenue driver from a very low or non-existent base some years ago.

Yes. We have not yet identified an external indicator such as the IPI for the commercial business but as that business continues to grow and becomes a bigger part of our company, we continue to be in search of such an indicator. As of yet, we have not discovered one.

BOB _____]: I am just curious; have you begun to notice any correlation with occupancy rates in general and commercial buildings and/or square footage growth in commercial construction.

Not a significant enough correlation to conclude. Let us say it that way.

BOB _____]: Would it be safe to assume though as utilization rates come down there or vacancies increase that it may restrain commercial sales?

Bob, the thing is that commercial sales are still diversified, from healthcare to building management - which is the area you are getting at - to retail. It is just made up of so many diverse subsets, which is what makes it attractive also because it is less prone to any particular recessionary cycle. But obviously for the office maintenance part that would be one factor that we can certainly look at. But it is quite a diverse market.

BOB _____]: In the industrial side there has been the expectation that with the significant contributor to eventual improved income performance as a result of the fact that demand should be increasing from a pent-up standpoint to a degree that you are still expecting somewhat reduced revenues here on flat IPI expectations. Does that suggest in a later period more than hopefully that that snapback could be more significant if it does not occur sooner rather than later?

That is exactly so. It is really a question of timing. If we recover really and pick up steam then obviously it becomes more and more of an opportunity for us.

BOB _____]: Okay. Have you been able to see anything on the part side of the business that may be an early clue in terms of the prospective fortunes of the industrial product business?

No, not really Bob. I think after-market parts were flat in the first quarter vis a vis the fourth quarter. It typically happens with the after-markets and even the service revenues. The slowdown is going to cost you somewhat of a counterbalancing impact on service revenues as well as after-market parts because as factories are being used for fewer shifts then our equipments are used less often and requires less maintenance, less after-market. On the other hand back to your earlier point up about pent-up demand, pent-up demand occurs because people delay the purchasing of our equipment and if that happens that will have a significant influence on after-markets because these we have to maintain the older equipment. So there tends to be some influences on after-market parts but no signals from that side of the business that would tell us that the recovery is imminent.

BOB _____]: Okay. From a mix standpoint I think your industrial products have higher gross margins with some of that cost reduction initiatives even with commercial outgrowing industrial. Should we see any stabilization or improvement in gross margins before industrial products turn up themselves?

I would say certainly from the standpoint of year-over-year we would expect to see some improvements in the margins because of some of the cost reduction measures that we have taken such as the transfer of production to Germany and frankly that influence is there in the first quarter yet as you heard that the margins are down. So we would expect to see some improvement to the margin. At the same time the biggest benefit in terms of improving margins is going to come if and when that snapback occurs.

BOB _____]: To get a better sense as to where we are relative to where we were and some of those initiatives that you have been talking from period to period, how much has your workforce contracted from the peak? What is the average workweek for those at the manufacturing level?

The workforce has contracted about 4-5%. There will be a further contraction as a result of the net reduction in force of about a hundred positions from the actions that we have announced today. So that is another roughly 4%. The hours contraction in terms of the plant in North America - we have gone from what we call overtime to $36 workweek with little if any overtime. So that is the influence that you see on our manufacturing side.

BOB _____]: Besides the Centurion, are there any other products in the pipeline that ought to say in the next 12 to 18 months importantly impact the revenue line?

One of our three important initiatives is to have more and new products and they are in the pipeline. For competitive reasons we obviously do not say what they are until we make our important public announcement. But I can tell you that they are in the pipeline.

BOB _____]: Okay, thank you.

You are welcome.

Once again, if you would like to ask a question please press '*1'.

STEPHEN LEWIS]: Can we go back to working capital needs that you have already made one amendment? When you do this consolidation - Europe and everything - does not that usually wind up with some extra piece going into working capital usage?

The consolidation in Europe is actually customer service. So that is not working capital-driven or working capital-related.

STEPHEN LEWIS]: So we have $1.70 which is $15.5 million and the $17 million in depreciation and amortization. That is $32.5 million. We are going to use 'x' amount of working capital. Let us say $5 million. So we are $27.5 million. Property and plant acquisition is $15-20 million. What do you do with the rest?

Well, currently we pay our dividend and that amounted to $1.08 million in the first quarter. That is up about $7 million.

STEPHEN LEWIS]: Well, we are getting fairly close to plus or minus a little bit of your operating cash flow. Okay, are we in agreement pretty much?

Well, you used most of our numbers.

STEPHEN LEWIS]: Okay, thank you.

You are welcome.

I am seeing no further questions at this time.

Okay, well, again thank you all for joining us today. This concludes our call and we look forward to updating you on our progress when we report our second quarter results in July. So see you all then.

Thank you and this concludes today's conference call and you may disconnect at this time.