Tennant Co (TNC) 2004 Q2 法說會逐字稿

Good morning and thanks for holding I would like to inform all parties they will be in a listen-only until the question-and-answer session of today's conference. I'd like to inform all parties that the call is being recorded for replay purposes. If there are any objections you may disconnect at this time. And I'd like to thank you for your participation in the Tennant Company Second Quarter Earnings Teleconference. Beginning today's meeting is Ms. Janet Dolan who will be with Tony Brausen, President and Chief Executive Officer for Tennant Company. Ms. Dolan you may begin.

Thank you Joyce (phonetic). Good morning everyone. This is Janet Dolan and despite what [Joyce] may have told I am the President and CEO of Tenant and with me for our second quarter results conference call is Tony Brausen, our Chief Financial Officer. Thank you for joining us this morning. Welcome also to all of you who are participating in the webcast of this call. Before I proceed I will ask Tony to provide 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 expectations of future performance.

Such statements are subject to risks and uncertainties and our actual result may differ materially from those contained in those statements. The risks and uncertainties include factors that affect all company's operating in global markets as well as matters specific to our Company and are described in today's news release as well as the documents we filed with the Securities and Exchange Commission. We encourage you to review those documents particularly our Safe Harbor statement for a description of risk and uncertainties. Our news release is issued this morning via PR Newswire and is also posted in the Investors section of our website tennantco.com. The information require to be disclose to about non-GAAP measures discussed during this call is available in the news release which includes a schedule that reconciles our 2003 year-to-date GAAP results with the results excluding unusual items. We believe presenting the non-GAAP measures permits a more meaningful comparison of our operating results.

Tony will review our financial performance for the quarter in detail in a moment. To begin, I'll provide an overview of our results.

Overall we are pleased with our second quarter results. We saw a healthy growth across all product categories and all geographies. Our second quarter equipment and after-market sales grew at double digit rates. In North America, we saw the strongest quarter-over-quarter increase in sales in nearly three years. In Europe's sales also grew strongly, even including exchange effects, although we are comparing against a weak 2003 second quarter.

While our second quarter performance reflects some help from external factors especially a recovering North American industrial sector and favorable currency exchange rate. We believe our results also demonstrate the emerging benefit of actions we took to strengthen our business throughout the prolonged economic downturn. Those actions were all consistent with the 4 key strategies we discussed last quarter and on which we continue to focus. They include becoming a world-class marketer, being the industry's innovation leader, extending our market coverage, and leveraging our cost structure. I'll comment further on how our progress on this strategy is beginning to benefit in our performance after Tony provides further detail on our second quarter results. Tony.

Thank you Janet. For our 2004 second quarter, we reported earnings of 41 cents per diluted share on net sales of $128.8 million. That’s a 14% increase in earnings per share and a 16% increase in net sales compared with the 2003 second quarter. Results for the quarter included a 5 cent per share dilutive effect of the Walter-Broadley acquisition. For the year-to-date, net earnings were 69 cents per diluted share on net sales of 247.9 million. That compares to GAAP net earnings of 64 cents per diluted share on net sales of 223.9 million in the comparable prior year period. As we have previously reported, our GAAP results in the 2003 year-to-date period include two unusual items from the 2003 first quarter. The first was the recognition of 6.4 million of deferred revenues, resulting from the amendment of a contract, which resulted in a benefit of 20 cents per share. The second was a charge of 14 cents per share related to the dissolution of a joint venture. The effects of these items on our 2003 year-to-date results are noted in a separate column on the earnings statement we included with our new release. Excluding them, our net earnings per share for the first 6 months of 2004 increased 19% compared with the first half of last year on net sales growth of 14%. The rest of my discussion of our earnings statement will be excluding the unusual items in that 2003 year-to-date period. With respect to the 2003 year-to-date, I will be discussing the results in the earnings release schedule in the column labeled "Excluding Unusual Items".

Consolidated net sales for the second quarter totaled $128.8 million, up 16% from the second quarter of last year. Favorable foreign currency effects added about 2% to net sales in the second quarter and price increases added about 1%. Our January 2004, acquisition of Walter-Broadley Machines Limited accounted for about another 2.5% of the increase. For the year-to-date, net sales increased 14%. Favorable foreign currency exchange affects added about 4% to net sales for the period and the Walter-Broadley acquisition added another 2.5%.

Turning to North America, second quarter net sales increased 12.6% to 87.8 million. As Janet noted we saw the sharpest quarter-over-quarter increase in North American sales in nearly three years. Sales grew in all categories with the strongest increase coming in equipment sales. That increase resulted from the continuing recovery in the North American industrial markets, as well as contributions from new products such as FaST -equipped scrubbers and a new line of commercial vacuum cleaners. Consumables, that is products such as squeezes, brushes and detergents, were the largest contributor to the double-digit growth in North American after-market sales. This suggests to us that the utilization of our equipment among our customers is trending higher. For the year-to-date, net sales in North America increased 9% compared with 2003, with favorable foreign currency effect adding about 1% to the year-to-date total. In Europe, sales for this year's second quarter totaled 28.7 million that's up 36%. Foreign currency exchange added about 9% to net sales for the quarter and the acquisition of Walter-Broadley added about 13%.

The balance of the increase in the European sales resulted from real volume growth compared with a weak 2003 second quarter when uncertainty about the situation in the Middle East slowed business overall there. For the year-to-date, sales in Europe totaled 57.3 million, that up 33.9% from the prior year period.

Foreign currency effect added about 13% to net sales in Europe in the first half of 2004 and the acquisition of Walter-Broadley also added about 13%. In our other international markets, net sales for the 2004 second quarter increased 5.1% to $12.3 million. Favorable foreign currency exchange effects added about 6% to net sales, so overall the volume in other international market was down slightly compared with the 2003 second quarter.

During the quarter higher sales in Australia and Asia were offset by weaker demand in Latin America and the Middle East. For the year-to-date sales in other international markets increased 9.6% to $24 million with foreign currency exchange effects accounting for about 8% of that increase. Our gross profit margin for the second quarter was 39.7% compared with 40.8% in last year's second quarter. Factors contributing to the margin decline include a write-down of slow moving and excess inventory, and the impact of steel costs which we had expected would affect our second quarter results. In total these two items reduced our second quarter gross profit percentage by nearly 4 point.

The inventory write-down results from a comprehensive review to identify excess and slow moving inventories and reflects progress in our ongoing inventory reduction efforts including our implementation of Lean Manufacturing principles. With respect to steel costs while we implemented a surcharge on certain products during the second quarter to try to offset higher steel costs, the implementation of the surcharge lagged the affects of the higher steel costs resulting in short-term margin erosion. For the year-to-date our gross profit margin was 40% which compared to 40.2% in the prior year's period. Our R&D spending in this year's second quarter totaled 4.4 million which is up slightly from 4.3 million in the 2003 second quarter. We intend to continue to invest 3-4% of net sales in R&D in order to maintain our position as the industries innovation leader consistent with the core strategy Janet mentioned earlier.

Selling and administrative expenses for this year second quarter totaled $40.2 million compared with $35.4 million in last years second quarter. About a $ 1 million of the increase is the result of foreign currency exchange effects while another $1 million resulted from the Walter-Broadley acquisition. During the quarter we also encouraged higher cost for performance based incentive compensation in increased our marketing spending to support in-depth market research and the product launches scheduled for later this year. Our health care cost and cost related to the Sarbanes-Oxley compliances also increased compared with the 2003 quarter.

As we said in the past, our financial metric for performance based incentive compensation is economic [process] which rewards management and employees for operating profit improvements along with effective asset utilization. As I will cover in a few moments the benefits of this system are being realized with improved working capital assets utilization. That success is driving in increase and performance based incentive compensation expense this year.

Selling and administrative expenses declined to 31.2% of sales in the 2004 second quarter from 31.9% in the 2003 period. Our operating profit for this year second quarter totaled $6.5 million compared with $5.5 million in last years quarter, an 18.2% increase. This increase is primarily the result of higher sales volume and favorable foreign currency exchange effects. We achieved this improvement in operating profitability despite the previously mentioned inventory write down and the impact of steel cost. Together, these two items reduced second quarter operating by about $1.1 million or 7 cents per share.

For the year-to-date, operating profit increased 24% to $10.8 million and operating margins for this year second quarter was 5% that’s flat with the 2003 period. Year-to-date our operating margin improved to 4.4% from 4% in the comparable 2003 period. Our tax rate in the quarter was 38.6% compared with 39.9% in the year ago period. The decline in the second quarter results from the reversal of a deferred tax valuation allowance on a capital loss carry forward. For the full year, we expect our tax rate will be between 41% and 42%.

The direct financial impact of foreign currency exchange effects is primarily the weakness of the U.S. dollar compared with the Euro, the Yen, the Canadian and Australian dollars, increased EPS by about 8 cents for the second quarter and by 18 cents for the year-to-date and as we have noted in the past, our estimate of the direct impact of foreign currency exchange effects excludes some indirect factors that are not quantifiable. As a result, the beneficial direct impact on foreign exchange on our earnings are likely somewhat overstated. Among these indirect factors, are the offsetting effects of pricing actions related to the weakness of the dollar as well as the dampening impact on our sales volume in regions where the dollar is particularly weak against the local currency.

The dilutive impact of the Walter-Broadley acquisition totaled approximately 5 cents per share in the 2004 second quarter and 8 cents per share in the year-to-date in line with our expectations. And as of the end of the second quarter Walter-Broadley has integrated into our European operations within our ERP system and as a result effective with the third quarter we will no longer provide information on the contributions of the acquired operations to net sales nor on the EPS impact of the acquisition.

Turning to cash flows in the balance sheet. While we are pleased with our top and bottom line results in the second quarter the continuing improvement in our cash flow performance and in our asset utilization was especially gratifying. For the year-to-date net cash flows from operations totaled $16.5 million, that's up from $7.6 million in the comparable 2003 period. Cash and equivalents at the end of the quarter totaled $20.9 million which is up from $8.7 million a year ago despite our investment of $9 million in the Walter-Broadly acquisition in January of this year. Compared with December 31st of 2003, our inventories at the quarter end are about -- are down about $2.4 million despite increases related to the January 2004 acquisition and compared with the end of 2003 second quarter excluding the effect of Walter-Broadly acquisition inventories are down by $8.2 million. Our FIFO inventory days on hand are down to 89 days in the 2004 second quarter compared with a 112 in the 2003 second quarter The improvement reflects benefits derived in part from the implementation of Lean manufacturing principals which I mentioned earlier.

Net receivable at quarter end are up about $2.5 million from year end and up $12.2 million compared with the end of last years second quarter. The increases reflect the higher sales volumes in this years second quarter and include $2.6 million from the Walter-Broadly acquisition.

Accounts receivable days outstanding were down to 61 in 2004 second quarter compared with 63 a year ago. Our capital expenditures in this year second quarter totaled 8.1 million and we continue to expect full year capital spending of 18-23 million. Our debt to total capital ratio at June 30, 2004, was 5.4% compared with 3.6% a year ago. And that concludes my overview of the quarter. I'll turn it over to Janet now to update you on the state of the business and our outlook for the remainder of 2004.

Thanks Tony. As we reported in our second quarter results announcement, based on our performance through the first half of the year we are reaffirming our expectations and our earnings per share for the full year will range from $1.55-1.85. The benefits of the actions we have previously taken to strengthen our business should favorably affect our financial performance in the year's second half. In addition, our second half results should also benefit from some new products scheduled for launch later this year.

Overall, as reflected in our guidance, we are optimistic about our outlook for the second half of the year for several reasons. First, based on our results through June, we believe we are finally seeing a turnaround in the North American industrial sector. North America is of course our largest market, so improving business conditions here have a particularly strong impact on our performance.

Second, our second half result should benefit from contributions from new products scheduled for launch in the third and fourth quarter. I don't want to reveal much about these new products at this time, but expect us to have much more to say when we report on our third quarter results in October. In addition, we continues to use insight gained from the market survey, we completed in 2003 to anchor our marketing strategies and improve understanding of the needs and motivations of specific sets of customers.

Third, in our results through the first half of 2004, we are beginning to see the benefits of prior actions we have taken to strengthen our business. We believe those benefits will be further magnified as overall sales volume continue to improve and as we continue to focus on our four core strategy, becoming a world class marketer, being the industry's innovation leader, expanding our market coverage and leveraging our cost structure to improve profitability. For instance, our investments in market research are helping us becoming knowledge based, data driven marketer. We are now better able to uncover -- unexpressed customer needs and to segment our markets more precisely. The insights from this research combined with our focus on the development of new products offering meaningful innovations in cleaning performance, labor productivity and health and safety benefits are expected to yield more products such as our fast foam-activated scrubbing technology. We continue to extend the use of FaST to more and more of our scrubbers, including [writing] scrubbers for industrial use. FaST equipped machines represent new products offering value added functionality that enhances customer satisfaction, distinguishes our product from competitive offerings and helps drive top line growth. In the second quarter sales of FaSt-equipped machines exceeded our internal target, contributing to the double-digit sales growth we experienced.

We have also invested in extending our sales and service coverage to particular markets in Europe, and to increasing our direct sales presence in Japan and China. Our acquisition of Walter-Broadley earlier this year further expanded our sales and service reach in the United Kingdom, particularly among building service contractors serving major retailers. In our second quarter result, we are beginning to see the benefits of this wider coverage in the form of growth and equipment sale and after-market revenue in Europe. The market study I referred to earlier has also helped us to more effectively segment our markets. We use this segmentation data to guide a realignment of our North American sales organization that is making us more agile in addressing our markets with a coordinated sales effort. For instance, we have integrated all sales channels into coherent go-to-market approach to better leverage our sales and service organizations and our distributor network. This has led to better national and local market coordination, enabling us to go to market more consistently, providing customers focus solutions rather than a collection of products and services. It has also pushed our decision-making closer to the customers and is there by making us more responsive to customer needs.

Under this alignment we are focusing particularly on the attitude market segment we call " cleaning pros". These are cleaning professional in multiple categories, healthcare, retail, education and more who are particularly concerned with health and safety issues and who tend to highly valve solutions that Tennant offers, because of our ability to delivery performance and productivity benefits. We are beginning to organize or sale resources around cleaning pros at the local market level, while continuing to serve our exiting customers base. Our market research shows that local markets and geographies across North America are highly differentiated. As a results, our new strategy provides territory managers the flexibility to adjust their sales approaches to suit the customers base, the competitive landscape, the distributor resources, and the growth opportunities in their respective markets.

At the national account level however we are transitioning structure and focus away from geography and towards specific vertical market such as industrial, healthcare, retail, and education. We have also improved the coordination between our national accounts team and regional sales and distributors to ensure better local market execution and improved customer care over the life of our agreement with our key national account customer. We believe the benefits of realignment of our sales force and the creation of a better integrated go-to-market encompassing all channels are benefiting sales growth.

Finally as Tony's recap of our second quarter financial performance showed we have made solid progress in providing and in improving asset utilization. Our progress is reflected primarily in the sharp increase in our cash flow from operations compared with the first half of last year, as well as reductions in inventory levels in DSO. The progress on these fronts is the product of a concerted effort across the company involving many of the employees and I want to take this opportunity to acknowledge the commitment and hard work responsible for this improved performance.

To sum up, we are pleased with out second quarter and first half results; we are confident we are on track to deliver earnings per share for the full year in line with our initial guidance. We expect to benefit from a strengthening North American industrial sector, new product introductions and the impact of our past and our continuing performance improvement actions on our financial results. That concludes our remarks, and we will be happy to take your questions now.

If there are any questions press "*", "1" -- "*", "1" to ask a question. You will be prompted to record your name at "*","1" to ask a question.

Gary Giblen your line is open from CL King Associates. Gary Giblen your line is open.

Hey thank you. Just wondering on the steel price of the -- what are the circumstances and what are occasional circumstances where you can't pass on the steel prices is it your largest customers or new one that you trying to get on board, I mean what's the typical situation there where you can't pass it on?

Welcome good morning Gary. Well there are some circumstances I 'd like to, -- I will say we are going to and working hard to pass on the increase in steel costs as often as we can, and as we indicated in our last conference call when we were anticipating we now have implemented a steel surcharge on May 1, and we did it we think as fairly as we could which makes it more palatable to customers because we are basing it on the percentage of steel in the product, so it varies depending upon the product. And so we do think we will be able to recover a majority of the impact. But you are right there are certain -- obviously certain competitive situations, bid situations just as we said about sales coverage has to be local obviously pricing is very particular, but we think we will be able to recover the majority of it. I will say I have certainly been listening to other calls, we would certainly reflect the experience of other manufactures which is, while there might have been some leveling off in the last two weeks we are certainly another increase in the cost of steel. So we are certainly watching it closely.

Okay and can you give us an example of the Six Sigma discipline, I mean, I see that your inventory days are down which is great, anything else that you can point to?

Well first of all, we are in the early stages of it but we are -- so we are very pleased to see the results we have and it's not just Six Sigma it is really Lean Enterprise principle that we will be applying all across the Company, but we are really starting in the plant and you can see very significant changes in the way that we are laying out our work and manufacturing right on the floor, we are configuring one-by-one our production lines, we are moving more and more towards a true pull system and for those that aren't familiar with manufacturing, a pull system is when you really do build to order and you have smaller production lock sizes you reduce your work in progress inventory, you certainly reduce your finished goods on the shelf and then we also are having Kaizan (Phonetic) events which means that you also continuously, you never stop you continuously improve the efficiency of every line and all of the support areas that supports the line, so the inventory is certainly one of the first places you will see that we will certainly be focusing on improving customer satisfaction levels reducing times to serve customers in a wide range of areas within the Company so it starts on platform but it affects the full company

Okay and finally anything in the -- that you can point to in terms of synergies in either direction from Walter-Broadley, you know, where they help you do business better in the U.K. or you are helping them?

Well there are synergies in both directions. Certainly we are bring some synergies bringing things to them and I would give you a perfect example which is as we've said I think many times they are really strong in the retail sector and the building service contractors that serve the retail sector. So obviously great synergies we can bring to them, as we have a much more complete product line than they had. So we can cross sell and bring many more of our products into those same customers, so that's great. Now, going the other way, they had a larger service organization than we did, but together we now have the largest service organization in the U.K so then that helps attract business across all the customer segments but particularly the national accounts, but we've also been able to fold all of our operations into their facility, so we have been able to eliminate our former facility, so that the synergy they brought us, we've also brought in and completely converted their IT systems on to our one global ERP platform, so that's the synergy we brought to them. We've eliminated about 25 positions between the two organizations, so most of the integration is completed and we think there has been fair amount of or a significant amount of synergy.

Okay, thank you very much Janet.

Eric Eldel (phonetic) from Fimmer Asset (phonetic), your line is open.

Good morning, both.

Good morning.

Hi Eric.

Let's see a couple of questions. First of all, I wanted to know how much Gary is paying you to be first in line every call. Every call I try to beat him and he just somehow squeaks by me.

I think he has cracked the code.

I'm telling you. In any events, let's see. Questions, first of all I just want to make sure I heard correctly, in the gross margin issue you had said if I -- my notes are correct, the combined impact of the inventory write-down or the charge or inventory and then steel costs impact combined was about 1 percentage point.

That's rights, it is -- that's absolutely right.

Okay, now I am doing my math here and that gets -- if you add that percentage point back, that gets you roughly to the level where you were last year. So I guess my question is, given that you talked about the higher level of industrial sales this year, and you have said many times in the past that industrial is a higher margin area for you, that's one area where when that business picks up again we really should see some margin expansions, I am wondering why we didn't see more of an impact on the gross margin line there, even factoring in the any other additional one-time issues if you will?

Yes, good question. Eric, and the answer to that is, basically in the statements we talked about which is we actually had balanced growth across all product categories during the quarter, but [whether] you will get that product mix impact as being favorable is when the higher margin products grow at a faster rate than the rest and what we are seeing as fairly consistent growth across the product category. So you are not going to get that benefit that you were just referring to when you get the balance growth as we have seen.

Okay.

The good news is we've got balanced growth.

Right, okay. Which again leads into one of the other questions I jotted down, when you talk about North America, you sated double-digit growth in both equipment and after-market service, I was wondering if you could just press that a little bit more, what was the difference between equipment versus the Apio market service?

Yeah, pretty consistent.

Okay. So that goes to your last statement.

Exactly.

Okay. Let's see, next I just want to explore a little bit you know the up-turn that you have been seeing, to the extent that you can see -- read anything into this, how is this tracking with I guess previous economic recoveries or scenarios in terms of the pace of it, the type of orders you are seeing, the sustainability you expect from it's - and then also how is it tracking versus, you know the increases in IPI index, which you have stated in the past and you know when you look at that index you do see the increase over the last 12 months. So, you know your rebound in these areas, kind of matches with your statements but, you know is it-- is that degree of increase relative to the index the same as the past recoveries? So, overall what you are seeing today, how does it compare to past environments?

I'll start here. First of all I think my first answer is, it is a bit too early to tell, We certainly track year-by-year and so think it's going to take a quarter or probably even more, you know -- three to four quarters to truly start to get to that pattern and say what's the real correlation here.

Right.

So part of what I would say is behavior and anecdotal at this point and we are certainly seeing an increase in big orders, which is always a behavior that indicates a capital confidence. We are seeing an increase in areas like distribution centers and component manufacturing which is of course is usually an early indicator of industrial performance.

Okay

And transportation. So I would say the behavioral indicators are very similar.

Okay

On the two mathematical correlations, we don't -- we usually do that on a annual basis

Right obviously really just to Janet's thoughts there like fingerprints no to recessions are the same nor are the recoveries that follow them are the same, so I would just echo her sentiments on that and in terms of tracking to the IPI Janet is spot on. We really have not tried to break that down in to the quarterly correlation I think that would to be too refined.

Right.

But certainly I would say the trending we have seen and based on the IPI numbers and statistics that have been reported we have seen consistency with the past from that perspective in a generic sense. And then also we had talked previously, we expected a one to two quarter lag from the onset of the recovery and I think we have seen that as well

Right

And I see some of the things certainly looked to be familiar in terms of the past recessions but certainly some of the other points you talked about -- the pace and the types of orders and I think in those cases we got to back to that comment that like finger prints.

Right.

Recoveries aren't like either.

Right. Okay understood. And lastly just to understand a little bit more on the inventories issue again, the write down -- you know how much of it was really related to you know your change to your manufacturing technologies and so on or you no how much of it can really be attributed to the core improvements you are making in your manufacture versus dead inventory that was sitting out there?

Yeah I would say Eric they are very much related. We really underwent to comprehensive global review to identify excess and slow moving inventories and I think it reflects the progress that we were trying to make in our ongoing inventory reduction efforts as well our implementation of Lean manufacturing principals. If you think about it certainly from a standpoint of Lean manufacturing principals having excess and slow moving inventories sitting on the shelf or sitting in the warehouse or sitting in the plant along the lines.

Alright.

Are detrimental from the efficiency standpoint. So there is a connection.

Sure.

Of Lean manufacturing principles. At the same time, what we have done here is we have used our global SAP system to look across the company to provide us the ability to pinpoint potentially access and slow-moving inventories. And so we are going through that new reporting on a line-by-line basis with the intention of identifying what's considered to be access and slow-moving inventory. So there is a new process associated with this review. It had not had been in place before and its linked back to the ability to use our global SAP system in this manner.

I just going to add the same thing Eric which you know we have been reading and speculating about the power of technology and how its transforming everything we do and its is amazing you just get more and more sophisticated replenishment software programming and you just are able to do so many more things now in terms of managing your working capital and we could you know in as years past.

Right. Okay. That’s all for me. Thank you.

You're welcome.

Elizabeth Lilly from Woodland Partners. Your line is open.

Hi guys, it is Beth Lilly.

Oh, hi Beth.

Hi there Beth.

I have a couple of questions. You know I want to follow on this Lean Enterprise and Six Sigma that you are implementing on. Tony, can you quantify the opportunity in terms of the [inaudible] working capital you think you can take out of the business?

Yeah that’s tough Beth because when you -- there is two ways to look at that, one is in dollars of reduced inventory in this case if inventory that you are talking about lean manufacturing. And that’s what runs through the cash flow statements so of course you know that’s what everybody want to model. We really look at it little bit differently, we look at the days of hand as being the driver that we are trying to manage because as revenue grow all out sequel if days on hand stays the same inventory is going to grow same pace and our objective isn't to reduce inventories that in terms of dollars it is to reduce that days on hand level and that's what we talked about 12 months ago. It was about 113 and now its down to 89, that’s a huge drop and of course our job now to make sure that sustainable and of course we are going to have some seasonality influence there from quarter-to-quarter but that's the objective and that’s what we are after and now we are down to 89. We want to keep it there and get it lower

Okay so that 89 -- can you can you talk about where you thinking regarding [inaudible] 89 day to?

Well I certainly would say it would be [safer] for us to target 80 for now but like I say one of the first objective is to keep it at 89 or keep it in that neighborhood and we are going to see some seasonality there as I mentioned. But from a target standpoint I can tell we could get as low as we can and so if we can get it to 80 that’s not to say we will stop at that point

Is there a --let me ask you the question this way is there a number that you fixated in your mind where you want to drive it to?

Yes there is. But we are not prepared I think -- I don’t want to talk about that publicly but certainly internally we've got objectives.

Yeah, okay. And I would imagine its lower than 89 or maybe even lower then 80?

Okay.

Okay. My second question is in terms of margin, you know we have spoken about it in the past and I just wanted to kind of get your sense directionally I mean -- the business is picking up -- I mean your revenues grew nicely and you guys are starting to -- you doing a good job managing the balance sheet and you are taking cost out and stuff. Historically, I think your margins -- your operating margins were at a peak run 9% or 10% and I'm wondering if you can give us a sense of the coming year, if you think you can expand, your operating margins, as those will start to grow as the business grows again.

Certainly we have the objective of expanding the operating margins, and you are absolutely right, we peak at about 9% back in the year 2000 and of course, that was prior to the significant 3 year industrial sector recession and of course that caused a significant sales mix shift within our revenue base and you know, while we are beginning to see a recovery here of course of that, we are still not back to the level of unit revenues if you will, in the industrial sector that we had enjoyed back in the year 2000, so that certainly is a factor that overtime with a recovery if history repeats itself, we'd expect the expansion of our operating margins. We can also tell you and you heard us say it in the comments earlier that we are experiencing the effects of higher cost as well.

Right.

And you know, Sarbanes Oxley is an example that healthcare costs, steels is another one that have huge so we are seeing some pressure as well on the -- going the other direction, but we are working hard to get that operating margin level up.

And returning to the 9% level it is realistic at some point?

Well, we believe, over the longer term, yes.

Yeah.

I wouldn't be prepared to try and give you a timeframe right now, and I think that's going to be depended upon the pace of the recovery and the duration as well as, you know, I mentioned earlier, Mike and during Eric's question about the balance growth in terms of the revenue. So that we are -- if we continue to have the industrial sector growing, I mean that pace ultimately exceeds the pace that the rest of the product mix or the products are growing and we are going to see gross margin expansion from that factor alone.

Yeah, okay, great. Well thanks so much.

You're welcome.

Sorry I have Brent (phonetic) from Lloyd Albac (phonetic). Your line is open.

Good m opening, everyone.

Good morning.

If I could first ask you about the guidance that you gave and I certainly appreciate in the turn environment both regulatory as well as economic that it's -- you are in a difficult position as far as I'll [inaudible] tried to get on this. But, you tipped the guidance, you reaffirmed the guidance, but if we -- yet if you look at the low end of that guidance range, it would require for you to have a second half of '04 that underperforms, the second half of '03, is that a realistic thing to look at right now?

I think, you said it out. Laying out some of the factors we certainly considered which is I think all of us recognized that. Not only is there as you have said though, the economic uncertainty but we see certainly the uncertainty of the election, the uncertainty of the geopolitical leading up to the election and so I think all of us recognize that we are in very uncertain times at least for the next few months.

Okay. If I go back to the margin question or the previous question it was commenting on or questioning about, you had stated the 9% operating margin rate that was attained in 2000, and again if I go back and review the gross margins that we attained at that time, they really were not much different than the gross margin that we are looking at currently. Certainly if I give you credit for the 100 pips -- retention that you took this quarter due to steel costs and the other comment that was mentioned, or the inventory write-down? So you are saying that it was really you know the 9% operating margin is really made on a leveraged of the SG&A when I heard you discuss however I really don't see the SG&A going down from these levels perhaps getting a leverage up on increased sales but to get to that 9% operating margin are we really looking to press into the 41% gross margin level?

Well I just want to make sure you are looking at the same thing that I am, I am looking at the ten years financial history of the annual report, and it shows that in the year 2000 our gross margin was 43.8%.

Okay then I am, -- the number I am looking at on this database are different so --

Okay, because back then that we were including R&D expenses as part of the gross margin and we have since broken that out, so my guess you have got a database that may have a -- reduce that gross margin by R&D expense.

You'd probably put some R&D down in the SG&A area?

Yes.

Okay. So from the way we are reporting gross margins now to get to the 9% level, are you really looking for outside of just leverage on the revenue line to the SG&A line are you looking for SG&A to move down any, I mean that seems to be a pretty difficult issue in this time.

Yeah in the short term that’s the difficult issue. You re absolutely right, but I think to expand our operating margins we are looking at both I mean proving and extensions of the gross margins as well as reducing our SG&A expenses as a percentages of sales over the long term.

Okay, and certainly you had impressive results I don't mean to be a party cooper here but if we could just talk about the other international for a little bit, I understand it’s a small -- very small part that -- it is on a -- if I you know net the sales growth against the FX it is the only area where we have a negative number, what is going on there and you know to what extent do you see this changing?

If I think that we have -- first if of all experienced pretty decent growth in the other international category over the last 12 months so, in some parts of the world actually the cost of recovery has been ahead of the U.S. and so I think that some of what you are seeing there, and as we mentioned we have experienced during this quarter higher sales in Australia and Asia, but the demand in Latin America in particularly the middle-east were weak and that took the results back to close to flatter actually on slightly before foreign exchange.

Right, I mean you certainly mentioned in the release that weaker demand in Latin American and middle-east, but what in particular is going on and why is Latin America particularly weak in mid-east compared I guess, if I understand that [inaudible]?

Well I would just said that first of all as you pointed out when you started, it is a smaller part of our business, so the performance can fluctuate more from quarter-to-quarter, and so really if you look over to past several quarters you will see net of our currency, our other international loss will be at 9 or 12% so it can vary from quarter-to-quarter because you could have one quarter which you may have fewer big orders than you had in another. So just generally as a principle that part of our business can fluctuate more often, and plus it is made up of a combination of markets as you know, that are much more volatile. In terms of Latin America, the Latin America has certainly is a more volatile part of the market, and it has certainly seen some of its business go to China which has dampened some of the demand there and then they also have been impacted by the rising cost of steel and other things as well. So it's just a more volatile part of the market.

Okay. Thank you very much.

You're welcome.

If there are any further questions or comments press "*","1" -- "*","1" to ask a question. Gary Giblen from CL King your line is open.

Hi. Well, may be I’ll be last as well as first.

The first shall be last.

Yes there you are. Any update on the condition of the municipal market in terms of access to their -- access to budgets and so forth and --?

Well I think that we have consistently reported over the last two quarters that we have certainly seen an impact in the municipal sector because of the slowdown in revenues. It has been impacted certainly our -- we have continued to report as I am sure -- and kept -- continuing to grow despite the slowdown, but we certainly have seen some impact in our other equipment that we sell into state and local but I would say that we would expect just as states are starting to report, you know they are again seeing the benefits of the recovery and they are seeing improvements in their revenue stream and in most of the states I thinking that are reporting to them so they are beyond the -- the deficit state that they were in last year. We would certainly expect to see that growth in municipal and state spending start to pick up

Okay. Because many municipality have a June fiscal year end so have you seen a lot of the new budget and you are saying that there are generally increased?

Well we don’t have a crystal ball but we certainly make inference when we hear the state, local whether its Mayors or Governors feeling quite confident about the -- they’ve turned the corner and they are seeing their improvement in their revenue stream, that’s of course going to translate into improve business for us.

Okay. And just to clarify because -- I just missed it because of the disturbance here, what was inventory write off in terms of dollars and or basis point on gross margin?

Yeah the inventory in the steel combines 1.1 million pretax and that’s 7 cents a share

Okay. Combined with steel, okay and both of most of those are gone now from the in terms of not, not continuing into third quarter

Well I wouldn't say that and I mentioned our inventory exercise is ongoing and while we are -- we've certainly analyzed the majority of it I wouldn't say we are completely finished. And then obviously the steel impact as well was a primarily a timing matter. And as Janet mentioned in the second quarter it was primarily timing but Janet also mentioned that we are working hard to offset the steel cost in the aggregate but not necessarily going to be successful in doing so certainly we will be successful in offsetting the majority off it but not necessarily all of it. So I'd expect that could influence the third and fourth quarters as well.

Okay. On the hedges -- on the inventory, I mean, was that a particularly thorough sweep of inventory and then some -- a little bit will be ongoing or could it be significant ongoing?

Yeah, it is a very thorough sweep and so -- it will certainly be ongoing, but in terms of, of cost of change in the approach for the review and the use for the SAP report that I talked about, this is, you know, call a one time or certainly during the course of this year, it is a change and as I mentioned already, we have through the end of the second quarter covered the majority of that analysis.

Okay. Good and thank you.

You are welcome.

I am showing no further questions at this time. Once again, if there are any questions, press "*" "1". I am showing no one in queue.

Okay. Thank you Joyce (phonetic). Well, that concludes our call. Thank you all for calling in and we look forward to reporting to you on our third quarter results in October.

Thank you for participating in today's conference. You may all disconnect at this time.