Toro Co (TTC) 2003 Q2 法說會逐字稿

Thank you for standing by. Welcome to the Toro Company second quarter earnings release conference call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded Wednesday May 28, 2003. I would now like to turn the conference over to Ken Melrose, chairman and chief executive officer of the Toro Company. Please go ahead, sir.

Thank you, April. And good morning, ladies and gentlemen. Greetings from our Minneapolis headquarters. I appreciate your calling in this morning. We have good news to report and we look forward to sharing this with you. I have with me this morning our usual team, Steve Wolfe, Chief Financial Officer. Tom Larson, who is our Assistant Treasurer and Steve Keating, Director of Investor Relations. As usual, I'd just ask you to keep in mind that during the call we'll make certain predictive statements to assist you in understanding the company's results. You're all aware of the difficulties in making predictive statements in a highly seasonal and cyclical business. Our 10-K details some of the important risk factors that may cause actual results to differ from those in our predictions. Our news release this morning by way of the PR news wire can also be found in the investor information section of our corporate web site www.ToroCompany.com. The information required to be disclosed about non-GAAP measures discussed during this call is available in the news release, which includes a schedule to reconcile our GAAP results with results excluding certain items. Even though I'm under regulation G it's more cumbersome to provide non-GAAP measures but we believe presenting such measures permit more meaningful comparison of our operating results in performance.

While it's spring here in Minnesota, it's the time of year when the rain and warmer temperatures bring homeowners and their Toro lawn mowers back out doors to get their yards looking groomed and manicured. It was rather cool spring in many regions and our country's mid section experienced more then its fair share of tornados in April. But a sunny warm Memorial Day weekend in much of the country helped us gain ground in the lawn and garden season. Unfortunately, this didn't include New York City. So I'm sorry about that. Please follow along with your company this morning's earnings release as I review the highlights for the second quarter, which is historically our strongest. Despite continued economic uncertainty we reported net sales of $495.8 million compared to $470.3 million for the second quarter of fiscal '02. That's an increase of 5.4%. Several innovative new products played a key role in this increase and I'll talk further about them in a moment. It's important though to note here that favorable foreign currency exchange rates had a slightly positive impact on sales and was minimized by our traditionally conservative approach of hedging our plan and by other European and Australian dominated expenses. Toro reported net earnings of $42 million for the quarter, compared to $38.1 million last year. And I'll go through the earnings per share numbers as I have in the past showing how the reported earnings GAAP fall in the GAAP basis differ from the adjusted ones or non-GAAP or pro forma presentation. Keep in mind, please, that per share figures for fiscal '02 are adjusted for the two for one split of the company's common stock which was effective April 1st this year. So let's look first at the second quarter stand alone. You can see that our reported diluted earnings per share for the quarter which ended May 2nd of this month was $1.61 compared to the quarter that ended last year at the same time, $1.46 or a GAAP increase of 10% from one quarter to the other.

Now, if you add our subtract the foreign sales corporation tax benefit that we booked last year in the second quarter from a previous year's adjustment in our foreign sales tax and delete seven cents from the $1.46 a more reasonable operations and operations comparison, which is non-GAAP, would be $1.61 versus $1.39, which is a 16% increase. Either way, we had a very good quarter in terms of earnings gain and it met our goal of double digit earnings objective. Now, turning to the six months comparison, which is obviously going to be more complicated because of what happened last year in the first quarter, earnings reported per share includes some fairly significant changes. The reported diluted earnings per share on a GAAP basis for the first six months of this year is $1.89 against last year's first six months of 33 cents. As you want me to do the math for you that's 573% increase from last year's six months. Of course, that doesn't make a lot of sense. So we then adjust out the cumulative effect of change and accounting principal, the impairment charge for our worldwide [ag] business of 95 cents that occurred last year, in last year's first quarter, along with restructuring and other expenses of 26 cents last year in the first quarter. Which was due to the closing of two of our plants and moving that production to other existing plants. Again, we have to add back in the seven cents of the foreign sales tax benefit to last year's first half. But in addition to that, we need to adjust the first six months of '03 and reduce a one-time restructuring gain of one penny that came about from a gain of the sales of the facility in Australia that occurred first quarter of this year, plus a previously reported patent infringement legal settlement that occurred in the first quarter of this year of eight cents.

So if you take the penny on the eight cents off the $1.89, you adjust the GAAP earnings for the first six months down to $1.80 per share, and then when you add back for the most part it's additional earnings per share to the GAAP 33 cents that we reported a year ago for the first half, plus also add the tax benefit of seven cents, all of that gives you, for last year's first six months on a pro forma basis $1.47. So you're left with an adjusted diluted earnings per share that is a more operations to operations comparison of $1.80 for the first six months of this year compared to $1.47 of last year or a 22%, much more reasonable, gain in earnings. So I hope that's clear and hopefully it is, because we've gone through this exercise a few calls before. Our stronger than expected second quarter benefited from revenue growth, particularly in the professional segment. And I'd like to highlight two key elements that were factors in our top line performance. First of all, we committed to strengthen our reputation for innovation in the second quarter, driving revenue growth with several new products that offer our customers more productivity. Our sales increased with strong customer acceptance and initial stocking orders of these new products and in addition products for landscape contractors, golf and grounds masters and homeowners, all new products in those categories. Secondly, our top line growth was supported by our improved ability to meet market demand for golf and residential/commercial irrigation products. The more effective business model for the manufacture of these products enabled us to integrate our planning forecasting and production scheduling much more effectively, with changing customer and competitive requirements. So these two areas were the chief drivers of our growth in the second quarter.

If we turn to operations for the company, our performance in the second quarter of '03 was better than expected, with gross margins improving to 35.4%. That's up almost 1 whole percentage point or.9 to be exact from the same period last year. We are also able to leverage a larger share of our revenue growth to bottom line profits thanks to a favorable manufacturing variance resulting from previous plant utilization strategies, including the physical transfer of irrigation manufacturing as I had said before to our El Paso and Juarez facilities. Sustainable improvements from our 5X5 initiative, including increase supply chain efficiencies and heighten productivity, also contributed to our positive performance. Our SG&A expenses for the quarter grew at approximately the same rate as did revenues. Remaining at a rate that we still believe is too high. However, by focusing aggressively on new opportunities to leverage our resources, we have ample opportunities now in the future to achieve sustainable improvements in this category. Net inventories, as I'm sure you saw, totaled $260 million. That's up significantly 10.5% from the same period last year. So let me just explain why that increase occurred. And it was due to three factors. The first is the impact of the exchange rates on international inventories. These inventories had a much stronger Euro or Australian dollar than before, created a higher valuation of these inventories. Secondly, in early season retail promotion that we discussed during our last conference call pulled forward a large portion of off-power mowers into the first quarter to support that.

And thirdly, we had a cool April, which slowed retail sales. I'm sure you're all aware of the cool April that we experienced in many key markets across the country. Now, the bulk of this results in a timing issue and we're intent on getting back to plan and bringing our inventories level in line with retail demand. Now let me break down the results of our performance by our major segments here. The professional segment, our sales increased 8.2% to $314.1 million. All operating earnings before restructuring and other income were up 19%, to $63.4 million. Improved field inventory levels in new product introductory for Toro [Inaudible] for X Mark entry level zero turning radius, [Inaudible] stronger revenues increases in the segment. Other contributors for this result included the new commercial Grounds master 4500 and 47 hundred series. Improved position irrigation products in the marketplace and expanded retail distribution for our site work systems products. So that gives you a synopsis of professional. Turning to residential, which didn't perform quite as well as we had hoped. We were actually disappointed with our residential top line sales for the quarter. That totaled $172.5 million. After two relatively strong months, where we're going quite nicely, a wet cool April in several key markets slowed our sales of off-power mowers and lawn and garden tractors giving us only a modest gain of 1.6% revenue growth over the same period last year. At the same time, stocking orders for the new [TimeCutter Z rider] that we introduced this year and sales of the new line of retail irrigation products remain strong. But despite these challenges, we were pleased with the leveraging of the segment's revenues finishing the quarter with an increase of 20.8% over last year in operating profits before restructuring and other income. So our sales growth wasn't as high as we had expected or wanted. But we still had a good outcome in the residential earnings performance. Now, turning to the third segment and last segment, distribution. The sales in this category for the first quarter was $35.3 million. That's down almost 20% or 19.9% from the second quarter of fiscal '02. The negative effects of the sale of a company owned distributor effective December 31st, 2002, was apparently offset by the acquisition of a smaller distributor in the southeast part of the United States. Let me just turn now lastly to our outlook for the business for the remainder of the year. Our second quarter performance does indeed reflect the sustainability of benefits from our 5X5 initiative and our ability to drive revenue growth through innovative new products. At the same time, we're very cognizant of continuing uncertainties in the economy, including the usual [Inaudible] Factors such as weather that may impact our growth performance.

The good news in all this is we remain optimistic about meeting our profitability goals and [Inaudible] benefits of 5X5 plus favorable currency exchange rates and stable material contracts. Moving forward we believe it's possible to improve our financial performance even further by leveraging our heritage of innovation the strength of our brands and our balanced portfolio of products and markets. We'll talk more about how we plan to do this in future conference calls. But for now, given our optimism for the year and a more normal weather outlook we're pleased to adjust our guidance for fiscal '03 earnings per diluted shares upwards to $3 per share or better. Please note that in keeping with the new regulations regarding GAAP, this forecast does include the eight cents per diluted share benefit from a favorable patent infringement settlement, which, as I've said before, we recorded in the first quarter. And it should be noted that all these numbers reflect a two for one stock split, and that occurred during the second quarter. So thank you now for your attention and let me turn it back to you for any questions that you may have which April will orchestrate.

Thank you ladies and gentleman to register the question please press 1 followed by 4. You will hear three tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration please press 1 followed by 3. If you're using a speaker phone please pick your handset before entering your request. One moment please for the first question. The first question will come from the line of Jim Lucas (ph) of Janney Montgomery Scott. Please proceed with your question. .

Good morning, guys. A couple questions, if I might. I wanted to start first with the 5X5, could you go into a little bit more detail, give us some more color on the gross margin improvement of where that's coming from, if you could speak a little bit to the specifics of whether it's on the supply chain, manufacturing efficiencies, moving more of the production to Mexico, just kind of by the different buckets of where that gross margin improvement is coming from and where do you see that number if we were to look out into fiscal '04 and beyond?

You've answered part of that question with your elaboration of some of the drivers. The first and perhaps the most compelling driver that is moving production from Riverside, California to El Paso and Juarez. That was the biggest gain in gross margin. But there were some other important elements of that. We talked a year or two ago about changing our purchasing to strategic sourcing and a part of our initial 5X5 view was to focus on purchased materials as one of the biggest areas of opportunity, since that alone cuts to the greatest cost to the company. So we've done a lot of work in material cost and material contracts, whether it's steel origins or resins or plastics and so forth. Those major components have been very helpful. A third area is asset management. Keeping inventories in better check, work in progress, finished goods and focusing harder on that. And the fourth area, which I think you also mentioned, was looking at our manufacturing processes and making them more robust and working through the supply chain initiatives that create more efficiency. So all of those were factors. And I think the way the order that I mentioned these were perhaps in the order of most importance.

As we look to '04, and that's an insightful question, what's going to happen in '04 now that we've gotten these very good benefits? And as I alluded to in the opening remarks, we need to take 5X5 reconstituted to another level and we're in the process now of looking at how we can raise the bar again and find new ways to drive costs out, quality up and customer satisfaction higher as well. And so we're looking at more sophisticated operating methods and as I said we will talk about those in more detail. I'm not quite sure which conference call. Sometime later this year, though. And we will overlay that with another 5X5 effort that will focus on SG&A that will drive our culture to a new level so that we integrate both performance use with people values commensurately as we have in the past. So we're just beginning in some ways, as we end the 5X5 initiative. So I hope that answers your question. I know it's a little vague. But we're not quite sure exactly how we're going to do this. But we've got some things going and we'll be talking more about that.

Okay. And then to use that as a SEG way, think I know the answer based upon your response. But you referenced in the call about SG&A not being at a level where you would like it and that you've identified opportunities to make the improvements. Is there any additional color you can make with regards to the SG&A side of the equation?

Well, this has been an issue that you and your associates have asked us about over the years, and we haven't done as good a job in this area as we would have liked. And so we do think there are opportunities in warranty, for example, driving that down, insurance costs has it us like it has hit everybody else. We've had expenses related to our tax strategy. We've had over the, I don't know, the last three or four years, we've had surprise distributor change and that's cost us some money that we didn't expect we've made in the last three years some pretty major investments in IS. Not that we won't continue to make those kind of investments, but we've had some upsets and things that are unexpected, some things that we think we can address in a more concerted way to drive SG&A as a percent of sales down to a more acceptable level or a more on par level. When you look at our SG&A and compare it to others, I would say make sure that you're comparing similar costs of goods sold elements with ours. So we tend to put some cost of goods sold in areas in SG&A that others, we think they're SG&A but others put them into cost of goods sold. So it's always hard to compare ours with others. But we know that it's still too high right now. We need to drive some of that out.

What would an example of some of those costs be?

Well, warranty is an example. Some companies put warranty. Some companies put warehousing in their cost of goods sold.

Okay.

And warranty for us has been, unfortunately, a higher number than it should be. That number should come down as a percent of sales and will but it will remain in SG&A.

Okay. If we could switch gears to the cash flow statement. Clearly the earnings improvement has really stood out for several quarters now. But if we take a look at the cash flow for the first six months, the operating cash flow is a little less than desirable. Can you talk about what it is you're going to be able to do in the second half to make that improvement on getting cash flow and where do you see that versus a year ago level for the full year?

I'll let Steve Wolfe answer that.

Hi Jim, how are you?

How are you Steve?

When you look at the earnings piece and you compare it to last year's six months, when you add back in the accounting changes and all that, you got about a $10-11 million pickup in terms of earnings. The big number changes really are on the lines of receivables and inventory. And we had driven both of those down, as you know, pretty dramatically last year at this point. And the thing that Ken talked about in terms of inventory build, were particularly on the consumer side with power mowers. So the point in time when we've shown this cash flow, both receivable and inventory, although receivables are up less than a percent than our sales are up, so that's good, and what we need to do is get inventories back in line during the second half of the year based on retail and whatever adjustments that may take to our production schedule. So the real key to this is managing the inventory and receivables and receivables pretty much manage themselves. A little more we sell to Home Depot those are shorter terms, typically. And then managing inventory down so at the end of the year our cash flows are more consistent with last year. And that's what we would expect we'll be working on that for the second half for the end of the year we would expect that our cash flow, free cash flow again particularly depending on how much we put into cap ex will be probably in the same range as last year, 85-90% of where we were last year.

Okay. And following up on that comment of you said managing production levels to get the inventory in line, could that possibly lead to, how will that impact your gross margin, I guess is what the focus would be?

Depending on how dramatic those adjustments are and obviously if you're cutting hours out of the plant, your absorption may increase, but we think we've got room with the numbers and the projections we've given here to be able to manage the inventory to a level we want to see at year-end and absorb whatever it is might be. But that may put a little pressure on the margins, but we would hope the second half to, back to your question before, from where we are today, we can still add a couple points to where we are today for the rest of this year, second half, and then add a few more points to that as we go into '04. So there may be some pressure on absorption, but nothing that we at this point we can't handle.

Okay. Thanks a lot.

Next question will come from the line of Andrew Mathis (ph). With Mathis Capital Management. Please proceed with your question.

I have two quick ones here. The first one is you mentioned currency contribution and it was minimal. I was wondering if you had a number on that for the quarter and also your expectation for the year.

Impact on sales was less than one percent or in the one percent range and for the rest of the year that's probably a good guide to use for the rest of the year.

Okay. Then I had another two quick questions. What are the current reserve positions in receivables and inventory?

Don't have that with us today.

The reason I'm asking in Q1 the receivable reserve declined dramatically and if you assess the impact on earnings, it was rather high. And the same happened with inventory. And I was just wondering kind of what your thoughts are going forward and if you think it's proper to lower reserves appreciably while you beat numbers, street numbers appreciably as well and don't disclose it?

You need to look at how those reserves are calculated. And looking at percent of sales or just dollars quarter to quarter doesn't always tell the story. There are pieces of those reserves that are on a fixed percent of sales type basis. There's a piece of all reserves that are based on issues that you see, whether that's bad debt issues in the case of accounts receivable or obsolete products in the case of inventory. And we go through a very extensive calculation to come up with those reserves. So you really need to get behind those numbers in terms of what's driving them and what drives the expense and the end reserve balances against that. So it's not as easy to just look at what the dollar amounts say or the percent of sales say. It's much more complicated than that.

But what interested me was the decline from the end of the year until the first quarter. I know it's seasonal for inventories, but it also reached your lowest level ever in terms of reserve coverage for inventories and in the receivables it dropped from 2.8% to 2.08 which was rather dramatic, with the growth in the actual receivable dollars. When I added those all together it was about 27 cents of EPS gain for the quarter. When you reported I believe 36 cents after you back out the lawsuit gain, it just seemed like a pretty big number to not kind of talk about or at least address.

Again, that has the receivable thing you're talking about has to do with a large dealer account that we had reserved for in the earlier quarter that we subsequently wrote off. So our need for that reserve went down because of that. So there again you've got to really look at the transactions behind that and what you're basing those reserves on. You can't just look at the dollars and the percent.

And the write off would have shown up in the SG&A?

Yes.

All right. Thank you.

I think Andrew it might be helpful because like you can assess from Steve's remarks, it's fairly -- it's quite complicated but it's detailed and there was a lot to it, and we got a question on this earlier and it would be maybe helpful for us and for you to maybe offline have you on the phone at another time have Steve and Steve talk you through this.

That would be great.

And I think once you see the calculations and how we get to it, I think you'll have a much better, at least a feeling of peace that it was not only appropriate but it made sense.

Okay. Thank you.

Once again, ladies and gentlemen, to register for a question please press the 1 followed by the 3 on your telephone. Excuse me, one followed by the four. Next question will come from Dick Henderson (ph) with Pershing LLC. Please proceed with your question.

Good morning. I had a question on the gross margin. You mentioned you made substantial improvement versus the second quarter of last year. However, you were down a bit from the first quarter. If you look back at previous years, generally on increased volume it would be the seasonally stronger quarter, you would show some kind of improvement. Was that a mix issue or what?

Partly it was resin, our resin prices went up pretty dramatically in the second quarter due to the whole oil situation. Let me just confer with my associates. And freight. What happened when we moved our plants, in particular out of Riverside down to El Paso, we temporarily had to move all of the tooling production, it didn't flow quite as well as we thought. So we ended up having a period of time in the second quarter where a lot of the molding was done outside and we incurred excess freight from that and we incurred some other charges relating to that that we hadn't expected. And then there was the mix in the first quarter against our plan was much more favorable than we expected and the mix in the second quarter was more normal.

Okay. Second question, on that subject with the gross margin and your response to the prior question on what happens post 5X5, I get the sense that the major opportunity of the plant restructurings has pretty much passed and now the focus will be more on processes and working with your buying partners, strategic sourcing. Is that a correct observation?

That's correct.

Third question, on the SG&A, again, you addressed that one, that being the major opportunity kind of moving post 5X5, you mentioned that there would be improvement. Not getting too picky, but is this something that we will incrementally see in upcoming quarters or is this more of a 2004, 2005 issue? And I don't mean a major impact, I mean an incremental improvement?

I think you've expressed it accurately but your latter view is correct you're not going to see the next quarter or even the quarter after that material change in '04 and 2005 you will see incremental change and I think you'll see that even beyond 2005.

Last one on your mark-to-market positions, could you just give us a little color on how you think you're doing vis-à-vis the competition in both of our major segments and second of all maybe you could give us your assessment on the outlook for the golf market.

I think we're doing fine in most of our segments. I think the industry, the lawn and garden industry in the residential part of the business was doing well up until April. The engine manufacturers and our competitors, most of them anyway, would admit to having a slower April than we expected. But they would say they had a pretty good early spring, as we did. The John Deere is obviously getting some very nice incremental growth from their Home Depot initiative with their tractor, just as we did with our lawn mower line a year ago. That probably sticks out as a big spike as far as our industry goes and we enjoy that same kind of triple digit growth, if you will in that category. The professional side, our landscape contracting business, that industry has slowed some. It's probably at the verge of moving from double digit to single digit growth, as an industry. We're still growing that nicely. Mainly continuing to improve our share position. Golf is hard to read, because it continues to be depressed. It's not -- we don't think it's declining more. The number of golf, new golf and renovation golf projects are actually a little higher this year, not materially, but a little higher than last year. It's easy to count because you know every single one that's going on. In the equipment side, it's more a function of budgets and revenue generation from rounds. Rounds were off last year due to the economy in the weather, some of the same things are occurring this year. But there's a lot better weather for golf and you don't have dry golf courses in many parts of the country. So I think rounds will be up some. But the new golf construction is I think going to continue to be at this level for quite a while. And we seem to be holding our own both in the equipment and in irrigation. We have high shares and they continue to be about at the same level as we measure them.

Thank you.

The next question will come from the line of Adam Weiss (ph) with Chilton Investments. Please proceed with your question.

Good morning. Could you talk about sales to your dealers and the mix of business that your dealers do. Do they -- I'm trying to get a sense for what extent they may be feeling any competitive pressures from your business at Home Depot or are your dealers much more skewed to the professional market?

Well yes and no. Our dealers have grown over the years. They're landscape contractor component of the business more, partly because their residential homeowner business was declining due to the growth in the home centers and the mass merchant pie getting bigger. That's been going on for many years. It's slow and it may have reached kind of a steady state relationship today, just because the service component is continues to be a very important reason for being, for the dealers. So whatever that mix was say two years ago, it continues to be about the same, the number of dealers that are leaving the business are leaving at a declining rate so that's beginning to stabilize more and the good dealers are doing well, if not better. Now our business with our dealers is better this year than last year in the consumer side partly because of the new Z mower that we introduced this year, which is more of a dealer product than a large volume national retailer, although we are selling some in the Home Depot and the off power mower business is up quite nicely and actually the product that we're selling to dealers probably we wouldn't have been able to do had it not been for our initiative with the Home Depot. That benefited dealers because it facilitated their having a Toro line and a much more attractive price than I would guess the John Deere dealers would be telling you that they're benefiting from a better tractor value because of the Home Depot volume.

So the mix of your residential business between your dealers and the traditional retail channel isn't changing that much? Both are growing at roughly the same rate?

Well, it's not changing much from last year. Last year was a significant change because of our off power mower introduction at the Home Depot. This year it's doing about -- it's about the same. We haven't made a major change in the mix this year as we did last year. It's been pretty stable.

What you're saying is you think the dealers are benefiting as you sell more products to Home Depot just because of the exposure the brand is getting?

That's part of it. But it's driving -- it has created a better value that the dealers are enjoying because now they have a Toro, line of Toro mowers at a lower price than they have before we went into the Home Depot.

And their profitability from Toro isn't being diminished because now your products they're having to match the pricing set by Home Depot?

Their margins stayed the same. It was really driving down costs, margins stayed the same. Volume went up in both the Home Depot and the dealers. So the amount of money made for the dealers increased.

And that's happened at your company as well? Your volume has made up for the lower pricing that you're getting, that you're selling to Home Depot?

Our net margin would be improved. I wouldn't say that our gross margin is improved over what we used to sell when we were selling just dealer only. But when you drive it down to the bottom, it's an improvement.

I'm sorry, the dealer margins are the same or the profitability in dollars is the same? Because they're selling more at a lower price?

Margins are the same, because our discount structure didn't change. Only the retail prices came down, which obviously benefits the homeowner, but the economic structure didn't change so the margins stayed the same for the dealers.

Okay. Thank you.

Your next question will come from the line of Fritz Vonkarp (ph) With Asset Management please proceed with your question.

Good morning gentlemen, you talked about the weather in the second quarter. Have you seen some snap back from that in parts of the country where the weather has been nicer?

Yes it's anecdotal. We don't have a lot of qualitative evidence that holds a lot of water, if you will. But anecdotally, what our distribution is saying is orders have picked up so reorders are occurring and the pace of business is much stronger than April. So I would say the April caused about a three week delay in the curve of the business. And when we're back at that pace -- now the question is how much of that will we make up? You never make up all of it. And if the weather remains as it is today for a few more weeks, then we'll make up a good part of it. But I never think we, if you have to go through like a four week period, with weather, it's bad in the main part of your season, you don't make it all up. But you can make some of it up. And looks like we're doing that to some extent now.

Thank you.

The next question will come from the line of Jim Lucas with Janney Montgomery Scott. Please proceed with your follow-up.

Thanks. Steve, first question for you. You made a reference to, we're talking about free cash flow, depends on what you're going to do with CAPEX this year. Can you speak to what your CAPEX goal stands at right now and where that money is being spent?

Sure. When you looked at what we had in our plan, going into the year, it was up pretty significantly. And that was because of a lot of the plant things that we've been in the process of doing here over the last 12 to 15 months. If I had to guess today, we're probably going to be not too far off last year's number in terms of CAPEX and probably the same in terms of depreciation. We won't get -- what I'm saying is we won't get spent everything that we had in our plant. And when you look at -- in our plan. When you look at where that money is going, Jim, it's two or three different places. The bulk of it is El Paso and Juarez, getting all of those plants up and going and as efficiently as we can. We had some [ag] lines that we put in internationally that we used some of that CAPEX and then we've done some things in our [windem] plant and our other [thoma]plant to upgrade tooling and things like that. But the bulk of it is still focused on the Mexico and El Paso operations.

Okay. And then if we look kind of bigger picture, you've made this dramatic turnaround over the last few years. We'll call it dramatic improvement not necessarily turn around, we'll choose the words more carefully, the improvement is getting made, the margins are going in the right direction you're doing much better on the asset management side, the balance sheet continues to strengthen. As you begin to build a cash balance, what are going to be the uses of the cash that you're building as you get a stronger balance sheet?

I think the first priority today is growth. We haven't been terribly happy with our growth. We expected this year to be a double digit or near double digit growth. I don't know that we'll achieve that now, given the effects of poor economy and weather. But I think we need to, if you will, do a 5X5 on our growth model and find new ways or make heavier investments in areas that we know create a growth yield. I would say that's one and maybe the highest priority use of cash. Another is to continue to invest in the next level of financial improvement. And again that's going to take, just like 5X5 took some upfront investment, the 10X10 or whatever we launch for '04 and beyond will also take some investment. But I think that's the name of the game. That's continuing to create more growth opportunities and then leverage that to a better bottom line is what it's all about. So that's where we'll focus cash, and let me just see if Steve wants to add anything to that--.

When you see growth is that both internal and external? And if I were to go out further on the question, that as you begin to generate cash, I mean what kind of acquisition opportunities present themselves from a strategic standpoint would you be identifying?

As we're healthier and healthier we have more capacity to do that. But the tapestry hasn't changed much our strategy is to look at bolt on opportunities to make us more important to our core customers and to secondly to find synergistic opportunities that where one plus one equals more than two, are still the foundation of our acquisition strategy and the players are still the same. And the appetite, I think, to either buy or be bought hasn't changed a lot. We see some smaller opportunities as we have taken opportunity in the recent past. We see some more of those percolating up and we will pursue them. Big opportunities I think are few and far between. There are some, but so far a marriage has not been contemplated by all the parties.

Okay. Then finally, this sounds funny saying this, but how do you feel about the current consensus of 96 cents for the third quarter?

How do we feel about 96 cents?

Yeah.

Well, we said that we thought we'd finish the year at three bucks or more. If you put, what is that, about a dime more than what the consensus is?

Right.

Okay. And you know that fourth quarter is a relatively small quarter. So the bulk of that extra dime, I think, would probably fall in the third quarter. Maybe not all of it, but most of it. So you do the math better than I do, Jim, and so you tell me that was more than a dollar.

Okay. All right. Thank you very much.

The next question will come from the line of Andrew Mathis with Mathis Capital Management. Please proceed with your follow-up.

On the currency contribution, you mentioned one percent basically of sales. So that's about 13 cents per share of earnings. Am I close on that?

No. That, again is not as simple as taking the top line and saying it all drops to the bottom line.

What percent, what roughly gets down there?

EPS on the quarter and the six months is probably two or three cents. It's one to two cents. Very small.

So there's a lot of other costs associated with that?

We had hedged a lot of contracts that, in the mid '90s, upper '90s. So we're not getting all the benefit of that. So even though you're getting some top line gain and there again the top line isn't that big, it's one percent. We had a lot of business just drop to the bottom line.

Do those contracts continue forward or might you get gains going forward?

Yes, we'll get some gains going forward.

And would there be a number you'd guess for the whole year if we have two to three cents so far?

That's probably a good number to use for the rest of the year.

Okay. Thank you.

Gentlemen, there are no further questions. Please continue.

Well, if that is a wrap on the questions, let me just conclude, thank you very much for your attention and appreciate all the questions. That energizes us and we'll be back with you in three months. As I say we're optimistic for the year. We expect the weather to continue as it is and barring any ELNINO effects we think we'll get through the spring and summer in pretty good shape. So thank you for calling in and we'll look forward to talking to you next time.

Ladies and gentlemen, that does conclude your conference call for today we thank you for your participation and ask that you please disconnect your lines.