Simpson Manufacturing Co., Inc.
Q3 2008 Earnings Call Transcript

Published: 31 Oct 2008

[Operator:]

Welcome to the Simpson Manufacturing Company's third quarter 2008 earning conference call. I would like to turn the meeting over to your Chairman Mr. Barclay Simpson.

[Barclay Simpson:]

Thanks for joining Mike Herbert, our CFO and myself. I assume that most of you may be a bit surprised at how good were our results for the third quarter, certainly I am. Sales being up a hair is not a big surprise, but earnings being up and a gross margin of over 40% had me thinking that something was the matter with the numbers. Not so. They were real numbers due to several costs that were surprisingly good. Both material and labor costs were down as were factory and tooling cots, relatively sales were surprisingly good part of which was due to buying ahead of our price increase. Sales in the fourth quarter so far are not good and our branches in the U.S. are not optimistic about the fourth quarter or 2009. We are most reluctant to lay people off but now we're having to do so around the country. On the plus side, Home Depot sales were up 4% and overall home center sales were up 12%. European sales increased to 15.5% of total sales and international was 23.1% in the quarter. As yet China is not significant. When our new factory is in operation next year and our sales force has had a chance to gain experience in the potential market, we expect the Chinese and other Asian markets to start to become significant. Our long-range goal remains to become much more of an international company. In that connection our European manager is in the process of putting together a more organized entree into Eastern Europe. Western Europe is a mix right now between strong sales in Germany and France and considerably lower sales in England. Canadian sales were up 12.9% for the quarter but like our U.S. branch managers, our Canadian manager is anticipating lower demand in the fourth quarter and next year. Our Swan Secures acquisition sales were up 5% in the quarter, a remarkable achievement in today's market and partially due to the Swan managers working with Simpson branches to develop a joint sales effort. A key part of our culture and one of the reasons that we can attract and keep the very best people is that we do promote from within. The manager of our Brea operation is retiring and his place is being taken by the current manager of our Columbus, Ohio branch whose job is being taken by his sales manager. Simpson Dura-Vent still has quite a bit to do to adjust to the changes in its markets but it had a remarkably good quarter with sales being up 32.5% and showing a profit of 6%. Large sales increases in pellet stove venting systems and chimney products were quite significant. With the closing of Vicksburg Manufacturing the changes in product mix and the acquisition of ProTech future projections don't mean much yet, too many new factors, but such a good quarter certainly is a plus. On the acquisition front for the first time in quite a while we do not have anything near to closure. We continue to look, though, and our strong balance sheet continues to give us an advantage which gets more important as the economy stays down or gets worse. To conclude and just in case anyone is wondering, we remain a long-range company. We are not for sale and we're more and more excited about becoming an international company. Questions.

[Operator:]

(Operator Instructions) Our first question comes from Arnie Ursaner – CJS Securities.

[Arnold Ursaner:]

My first question is related to margins and sort of the level of activity as it relates directly to steel. Obviously in the early or mid part of the year you were absorbing massive steel increases, you built up inventory. You mentioned on your last call that you weren't fully recovering your higher steel costs. Steel has come in a fair amount so I guess a two-part question, one is are you getting closer to more recovering your costs and B, do you think it impacted your customer demand quite a bit in September and may be one of the reasons you're seeing a pretty aggressive slowdown in the short run.

[Barclay Simpson:]

Yes, I think at September there was quite a bit of buying ahead and I think that made our sales higher, it goes both ways. One time we won't be able to get a price increase nearly as soon as our cost goes up for basic raw materials, and other time you have a little bit of an advantage. This time we had a little bit of an advantage, that is we were able to buy some steel ahead at the lower price and it lasted for just a little bit but that's over.

[Arnold Ursaner:]

I'm trying to get a better feel for how we should think about gross margins going forward. Obviously if your steel costs come in a little bit and you are able to maintain price that would be a positive for margin offset by less plant utilization. How should we think about balancing those two out?

[Barclay Simpson:]

I think margins, that's not a realistic margin over 40% in these markets particularly as, I don't know what you're looking at, but what I see mostly say that it's not going to get better probably it's going to get worse for a while. So, certainly we don't expect our gross margins to stay up there. In fact, what do you think it's going to be, Mike?

[Michael J. Herbert:]

I think 37, 38% if we're lucky going forward in the next couple of quarters.

[Operator:]

Our next question comes from Barry Vogel – Barry Vogel & Associates

[Barry Vogel:]

First question, can you give us the change in sales for the west excluding California, California, south-southeast, Midwest and northeast?

[Barclay Simpson:]

Excluding California the west was down 14%, the Midwest up 3%, the south southeast down 3% and the northeast up 27%.

[Barry Vogel:]

How about California?

[Barclay Simpson:]

California down 13%.

[Barry Vogel:]

Can you give us some color on Texas and Florida?

[Barclay Simpson:]

Yes, Texas ran past Florida. Texas is now number two and Florida is number three.

[Barry Vogel:]

How about percentage change in sales in those states in the quarter versus last year?

[Barclay Simpson:]

Texas is up 14%, Florida is down 14%.

[Barry Vogel:]

Did I hear you correctly that your largest home center was up 4%?

[Barclay Simpson:]

That's correct.

[Barry Vogel:]

Your total home center sales were up 12%?

[Barclay Simpson:]

That's correct.

[Barry Vogel:]

Can you tell us how much Strong-Wall sales changed in the quarter versus last year?

[Barclay Simpson:]

Yes, Shearwalls were down 14%.

[Barry Vogel:]

How about anchoring systems as a category?

[Barclay Simpson:]

Anchor systems was up 4%.

[Barry Vogel:]

How about Europe as a category?

[Barclay Simpson:]

Europe went from 12.9% of our total sales to 15.5%.

[Barry Vogel:]

I have a couple of questions for Mike. What can be a tax rate for the year in your opinion?

[Michael J. Herbert:]

Between 39 and 39.5% for the total year.

[Barry Vogel:]

What's your best guess as capital expenditures and depreciation and amortization this year?

[Michael J. Herbert:]

The capital we'll be spending less than I said previously approximately $15 million now and the depreciation amortization $30 million.

[Barry Vogel:]

What's the status of your attempt to sell that property in California?

[Michael J. Herbert:]

We have recently had some interest in it. We are still actively marketing it so we do not have a contract yet.

[Barry Vogel:]

So, is there a chance of a contract in the next few months?

[Michael J. Herbert:]

I hope so.

[Operator:]

Our next question comes from Alan Robinson – RBC.

[Alan Robinson:]

Given the apparent decline in perhaps demand for your steel connected products and the decline in the price of steel itself, do you view the price increases you instituted in the third quarter as temporary? What are your thoughts there?

[Barclay Simpson:]

It's kind of like trying to predict what's going to go on in the stock market. Right now our people think that steel is probably going to go up again a little later next year, and right now it's flat.

[Alan Robinson:]

So, as it stands now the price increases you're planning on having no change there?

[Barclay Simpson:]

No, it's already in. We're not planning on anymore price increases unless, of course, it rockets up. Steel generally doesn't affect us too much, except just temporarily because if our steel costs go up so does everybody else's and so we can raise the price and if it goes down significantly we will drop our prices also.

[Alan Robinson:]

That's what I wanted to hear. Secondly, you mentioned that Europe was pretty strong in the quarter, but could you give us an idea of sales trends you are seeing so far in the current fourth quarter specifically in Western Europe?

[Barclay Simpson:]

Yes, Germany is still quite strong for us. I think, though, it's more that we're doing a much better merchandising and sales job than we were doing as little as a year ago. I don’t believe it's the economy. In the UK the economy is poor and so are our sales. In France we're still up significantly, Scandinavian countries showing some weakness.

[Operator:]

Our next question comes from Steve Chercover – D. A. Davidson.

[Steven Chercover:]

Congratulations I guess we're all a little perplexed. Can you try and give us a little more color on how you can have sales of Strong-Ties down 2.1% when housing's down call it 35. Are people putting in more products per start? As there new skews that you're offering? Is there some sort of migration towards nonresidential which I know is part of your strategy.

[Barclay Simpson:]

We did have some costs for raw material go up substantially and we did have a price increase which had something to do with it, but I think basically we're doing a better job. We're doing a better job of merchandising. Have you checked our website recently?

[Steven Chercover:]

Not probably since the last email came in.

[Barclay Simpson:]

I think we're doing a better and better job with it and we're not cutting back on our sales force and we're not cutting back on merchandising. In fact, costs they're going up. The quarterly earnings to us yes, we'd like to see them up, but we're much more interested in the long-range and we're willing to spend money now for the future. So, you will see a bunch of things where maybe the competition and I can't say for sure I don't know, but maybe the competition has felt obliged to cut back on merchandising and sales efforts and we haven't. We’re putting out a greater effort than we ever have.

[Steven Chercover:]

You kind of indicated that you might be making some tough decisions in terms of employment levels. Has that happened? What kind of savings can we expect and will there be charges for that or is that just going to happen through attrition?

[Barclay Simpson:]

No, it just happens that, as you've heard before, we really wait a long time before we let anybody go because are employees most of them have been with us for a quite awhile. So, finally though in our branches around this country, we have had to lay off some people and it doesn't look like, who knows, but it doesn't look like there's going to be a turnaround in housing starts in the short run, by short run, who knows maybe a couple of years.

[Steven Chercover:]

I have to say I agree with that.

[Barclay Simpson:]

I gave a talk to a bunch of entrepreneurs, earlier this week, about 43 of them, and all but two thought that it was going to be at least two years before it flipped around.

[Steven Chercover:]

One last question and I'll get back in the queue. Do you feel in Q4 thus far kind of similar to how you did last year? Do you think that the seasonal decline in earnings will be similar or worse?

[Barclay Simpson:]

It doesn't look good right now. It's a little early to guess, but I think they're going to be down against last year.

[Operator:]

Our next question comes from Don DeFosset – U Capital.

[Don DeFosset:]

I had a two-part. One, I was curious about how you could lay out for us the sensitivity on maybe on a cost per ton for steel and maybe we could have some sort of a sensitivity table of our own to adjust the gross margin along those lines. Number two, sorry I don't think I saw it in the release, but how much CapEx did you guys spend on the quarter and how much do you envision going forward for next year?

[Barclay Simpson:]

What do you think Mike?

[Michael J. Herbert:]

Capital, as I said earlier, for the year it's going to be about $15 million. I think we spent about my recollection is $4 million for the quarter, so we'll spend approximately $5 million in the fourth quarter. Most of that is finishing up the China facility. For next year there's a couple things going on. We are going to expand our French plant, that’s going to be approximately 5 million Euros. We're doing a little bit of work in our Maple Ridge plant. That's going to be around $1.2 million, but half of that will be spent this year. Taking those two events out our capital budget came in next year around $15 million. We're going to [inaudible] half of that be spent in the first half of the year and then evaluate how the economy is in the second half of the year.

[Don DeFosset:]

Okay, and also maybe on the steel side as well.

[Barclay Simpson:]

Well, the steel side, it really is like trying to predict the stock market and this information is right up to date. You hear different things like, they are apparently as they've done in the past the steel mills they'll cut off an operation so that demand instead of being less than supply, it equals or is greater than supply, and how much they'll do with that this quarter and next year, who knows. Right now we're guessing that it probably will be about the same and maybe they will try to put in a price increase early next year, not too early.

[Don DeFosset:]

That's absolutely right. I guess my only question is for every $50 per ton change in the price of steel is there and EPS sensitivity or gross profit margin number you can give us?

[Barclay Simpson:]

No.

[Operator:]

Our next question comes from Robert Kelley – Sidoti & Company.

[Robert Kelley:]

The first question is for Mike, the last kind of update you gave us on CapEx was $21 million coming out of 2Q, exactly what are you cutting as far as the balance on the year here?

[Michael J. Herbert:]

We decided to, basically as demand has slowed down we decided to delay expenditures that we had planned for new projects that are in the plans.

[Robert Kelley:]

So just putting them out –

[Michael J. Herbert:]

Yes.

[Robert Kelley:]

Into 2009 or you'll just take a wait-and-see approach.

[Michael J. Herbert:]

It's going to be a wait-and see-approach. Demand has softened dramatically in October and so we then hear everything else that you hear with the economy and so we're being very cautious.

[Robert Kelley:]

In response to an earlier question, you had talked about maybe margins not being sustainable at 3Q 2008 levels but in the range of 37, 38%, and that's a pretty significant improvement over what you guys were doing in 1Q. What is fueling that improvement?

[Michael J. Herbert:]

Well, the future is uncertain and it's really hard to say. As I look at the changes we've seen in October so far, I hope it's going to be in the 37% range, but if our demand falls off dramatically, if the economy continues to deteriorate, we could see a much worse margin than that. So that's my best guess at the moment.

[Robert Kelley:]

Okay.

[Michael J. Herbert:]

It's very tough out there for us at the moment.

[Robert Kelley:]

Understandable, northeast growth of 27%, pretty impressive in this type of environment, is that all acquisition related?

[Barclay Simpson:]

No.

[Robert Kelley:]

Share gains and any help there.

[Barclay Simpson:]

No, I really can't tell.

[Robert Kelley:]

Dura-Vent being profitable, kudos to you all, the kind of sequential in year-over-year improvement in sales, is that 100% [inaudible] and ProTech or are you seeing kind of the core Dura-Vent business pick up a little bit?

[Barclay Simpson:]

No that was the core business, things like pellet vent sales way up and some chimney products way up.

[Robert Kelley:]

So, if we could dig down some of the changes that you've made in Dura-Vent over the past six months, nine months or so, stripping out the acquisition is the core Dura-Vent business now profitable?

[Barclay Simpson:]

Well, it certainly was in the quarter. The projections are a little murky right now. There are too many of variables, the closing of Vicksburg and the change in products. The change in products that are on the markets that Dura-Vent hits, it's rather drastic and any projections right now, I'm not comfortable with them.

[Robert Kelley:]

Right, understood, but I'm just saying the changes you've made thus far are driving the profitability improvements at Dura-Vent.

[Barclay Simpson:]

Yes, definitely.

[Michael J. Herbert:]

And you have to remember the Dura-Vent business is seasonal and cyclical and when oil was high earlier in the year a lot of people decided to go in and buy, increased pellet stoves and wood stoves for the heat this winter.

[Operator:]

Our next question comes from Keith Johnson – Morgan, Keegan.

[Keith Johnson:]

Just a couple follow up questions maybe starting with Dura-Vent. First of all, are the changes with the old Vicksburg facility complete and everything fully integrated in California?

[Barclay Simpson:]

What do you think Mike?

[Michael J. Herbert:]

No they are not. Due to the demand in the chimney side, and we still have three chimney lines running down there, it's our intent to keep those running up to December 31 of this year and then we will move those lines to California. Then the Vicksburg facility will remain a warehouse distribution center with about 40 to 50 people in it until we sell that building.

[Keith Johnson:]

Is there a way you can give us an idea of how much costs you may have incurred to date or when we look at the operating losses that we saw in the first half of the year in this segment, how much of that cost was related to moving lines from Vicksburg to California. Just trying to gain an idea of what drove the substantial improvement in operating income.

[Michael J. Herbert:]

I think you should focus on substantial improvement on my comment earlier about the cyclical demand in pellet and wood stoves based on people buying when oil was really high and that's the big driver.

[Keith Johnson:]

Those are just higher margin type products, or it was that big of a…

[Michael J. Herbert:]

It's demand.

[Keith Johnson:]

Better utilization.

[Michael J. Herbert:]

Demand has spiked so high.

[Keith Johnson:]

Could you give us an idea of what the revenue from your acquisitions were I guess by each acquisition during the quarter?

[Barclay Simpson:]

Have you got that, Mike?

[Michael J. Herbert:]

I do not have that easily available.

[Keith Johnson:]

Just to make sure I’m thinking about it right, it’s Swan, Liebig and then ProTech all contributing.

[Barclay Simpson:]

Well Swan is pretty clear, they’re doing extremely well. They were up 5% in the quarter.

[Keith Johnson:]

I guess the Liebig acquisition helped anchor system as a whole and definitely helped you?

[Barclay Simpson:]

Not as yet, it certainly will but not as yet.

[Keith Johnson:]

Then ProTech I guess added a few million, couple of million to Dura-Vent?

[Barclay Simpson:]

Again, it takes a little while to get them integrated and make it work out and at first you have costs, and then you get it working. It probably helped a little bit.

[Operator:]

Our next question comes from Timothy Jones – Wasserman & Associates

[Timothy Jones:]

Couple of questions, I’m a little confused, you said that 15% or so rise in your inventories is basically due to higher raw material costs, I suspect steel, yet you said the steel prices of the quarter were down slightly. Is that just because they rose so much in the first, the prior nine months or something?

[Barclay Simpson:]

What do you think Mike?

[Michael J. Herbert:]

Steel did rise dramatically on the first part of this year.

[Timothy Jones:]

First half of the year, so it’s basically a period comparison.

[Michael J. Herbert:]

Right and it has flattened off in the third quarter.

[Timothy Jones:]

Anything on the change between raw materials or the finished goods?

[Michael J. Herbert:]

I’m sorry I really don’t understand your question?

[Timothy Jones:]

The finished goods part of your inventory is it pretty much up in the line with the total inventories?

[Michael J. Herbert:]

I do not have that data in front of me, that would be in our - -

[Timothy Jones:]

That’s okay, couple of others, your largest customer you were up 4% which is pretty good since their sales were down about 4%, but you continue to do it with the newer other big box stores. What is going on there, are you adding, are you improving with the two smaller stores or are you going to different newer customers? What’s going on that you keep on going about three times as much with the newer ones?

[Barclay Simpson:]

I think as time goes on we get better relationships with that particular industry, and I think that merchandising, that we we’re working better together on merchandising and I think that shows.

[Timothy Jones:]

What percent right now is the largest store as opposed to the rest of the total?

[Barclay Simpson:]

The largest store I have no idea.

[Timothy Jones:]

I mean your largest chain, do they accomplish –

[Barclay Simpson:]

Oh you mean the largest like Home Depot?

[Timothy Jones:]

How much is Home Depot of the total?

[Barclay Simpson:]

Well Home Depot is about 9.5% of our total sales.

[Timothy Jones:]

The total is how much of the total sales?

[Michael J. Herbert:]

We do not disclose that.

[Barclay Simpson:]

If it’s more than 10% which it was at one time we have to disclose it, otherwise we don’t.

[Timothy Jones:]

Do you have any, with Home Depot, exclusivity situations? I mean them being so important to you [inaudible] different products to the competitors?

[Barclay Simpson:]

No we don’t.

[Timothy Jones:]

I was always wondered about that. In the gross margins improvement you say is basically the lower raw material costs sequentially.

[Barclay Simpson:]

Well there were a whole bunch of reasons why the gross margin was so high but as you’ve heard, we don’t think it’s going to stay there.

[Operator:]

Our next question comes from Barry Vogel – Barry Vogel & Associates

[Barry Vogel:]

Mike, I forgot to ask you, what was the operating process of your different segments and I just want to make sure I have the right sales figures for connect the product and venting products.

[Michael J. Herbert:]

The income from operations for connecting product was $35,310,000 and for venting products [1777].

[Barry Vogel:]

With the sales figures $192,400 for connectors and $27,400 for venting?

[Michael J. Herbert:]

Correct.

[Barry Vogel:]

Out of that $27,400 how much was from acquisitions or was it practically nothing?

[Michael J. Herbert:]

I do not have that number.

[Operator:]

Our next question comes from Scott Mackey – AAD Capital

[Scott Mackey:]

You had mentioned, Barclay, I think perhaps a little bit of a pre-buy in September, when I say pre-buy, customers buying ahead of pricing increases, I didn’t know if you could walk us through the quarter and just the year-over-year sales by month just to get a feel for maybe the magnitude of what that potential customer pre-buy ahead of price increases might have been, or how that might have affected sales in September?

[Barclay Simpson:]

I’m sorry I don’t have it split month-by-month.

[Scott Mackey:]

Do you have a general feel order of magnitude?

[Barclay Simpson:]

Well just generally the pre-buy the price increase went in September 1st. So you can figure out when the pre-buying was.

[Scott Mackey:]

Okay and so even after that price increase in September then it sounds like customer demands remained solid and you got the benefit of price increases.

[Barclay Simpson:]

Well no, we are seeing now in the start here of the fourth quarter the demand is down.

[Scott Mackey:]

Final question, as I think about steel costs and I appreciate the comments or the help just in trying to understand gross margin going forward, you guys have been buying inventory ahead of higher steel costs. I didn’t know if you could help us a little bit with what I guess I’ll call lead times or that inventory turn, the products you are shipping in October is there an average month during which that steel was actually purchased. In other words, are October shipments generally coming from say April’s fuel purchases on average or is it more fluid than that, more recent than that?

[Barclay Simpson:]

Well, right now our steel buyer is just not buying ahead. We aren’t because too hard to predict it, so in the past it varies all over the lot. At one time our buyer thinks that prices are going to go up and get some information from our suppliers and buys ahead of time, the next time the other way around. It really varies, one time we make a little extra money and the next time we lose. Usually we lose a little because we can’t get the price increase in there. We don’t just put out a notice that our prices are going up. Our sales force goes out, talks to all our customers, finds out what they’re thinking and then we finally come up with numbers that we put in the price increase and we don’t do it just like that.

[Scott Mackey:]

I see, maybe if I ask in another way. If I think about sales in the fourth quarter are those going to reflect, will those immediately reflect the lower cost of steel that maybe has been experienced more recently or is there still some relatively higher cost steel inventory that has yet to come through?

[Michael J. Herbert:]

There is still some relatively higher cost steel inventory that’s going to come through. We value that on a weighted average basis and so as the rest of that steel comes into the system that is going to also affect our margins and in the slowing economy you need to be very cautious as what our margins are going to be in Q4 and Q1.

[Operator:]

Our next question comes from Patrick Kirksey – Perimeter Capital Management

[Patrick Kirksey:]

Most of my questions have already been answered. I just wanted to follow up real quick on the inventory. Have you guys ever had to write-off inventory in the past?

[Barclay Simpson:]

Yes.

[Patrick Kirksey:]

Given the high inventory levels currently in the demand forecast going forward, do you have any concerns about the inventory or do you feel like that it's not going to run into obsolescence charges?

[Barclay Simpson:]

No, we have no more concern about the inventory than we always have. We are watching it all the time and trying to figure out what's going to happen and it really isn't any different.

[Patrick Kirksey:]

Texas was pretty strong. Do you think that's from hurricane repair work?

[Barclay Simpson:]

I understand that building codes in some areas of Texas are now stronger, by stronger I mean they're being enforced more than perhaps in the past, so Texas has run passed Florida, although our Texas branch also has Florida.

[Operator:]

Our next question comes from Robert Kelley – Sidoti & Company

[Robert Kelley:]

It says in your release that the inventory increase is mostly due to the raw material increases. Are finished goods flat slightly at the year-end-year. How do we read into that as far as finished goods?

[Michael J. Herbert:]

They are about the same level as last year.

[Robert Kelley:]

As far as buying steel, you purchase on spot, correct, not contract?

[Barclay Simpson:]

We purchase all kinds of ways. Sometimes our steel buyer will have information ahead of time to a price increase in which case we'll pour it in, or the other way around, so it varies.

[Robert Kelley:]

Basically if steel moves down it benefits us, correct?

[Barclay Simpson:]

If it goes down, well it all depends on how much it goes down. If it goes down much we're going to lower our prices. That of course hasn't happened in quite a while.

[Robert Kelley:]

If there was accretion from the Liebig and ProTech in the quarter what that was.

[Barclay Simpson:]

No, we don’t have that, not yet. Next year we'll have them integrated and be able to figure it out much better and give you a decent answer.

[Operator:]

Our next question is from Alan Robinson – RBC

[Alan Robinson:]

Mike, in your press release you discussed the increase in your G&A costs and mentioned higher professional costs and bad debt provisions, so how much of the increase would you say was one time I nature in terms of your G&A costs during the quarter?

[Michael J. Herbert:]

We had two failed acquisitions that we spent approximately $700,000 on. The bad debt kind of predicts for the future especially the economy as it comes up in the future. The one big event was the two failed acquisitions.

[Alan Robinson:]

In terms of a go forward quarter G&A run rate you would be looking presumably somewhere around the $24 to $24.5 million rate on a quarterly basis?

[Michael J. Herbert:]

I don't have that exact number in front of me, but if you take our press release less that $700,000 that's a good number.

[Alan Robinson:]

Is there any specific seasonality in your G&A run rate. I noticed your fourth quarter of 2007 rate was a significant decline sequentially. Will we see a similar pattern this year?

[Michael J. Herbert:]

We have cap profit sharing and the company does results deteriorate that also deteriorates and that will also impact on what we pay to our employees. Our next question comes from Jim Wilson – JMP Securities

[James Wilson:]

Wanted to get your thoughts on Asia so both what you've been seeing so far of late in terms of general conditions and what you think if it's going to follow the world into a slowdown are you going to look to be a little more aggressive to try to penetrate the Asian market through acquisition or anything else?

[Barclay Simpson:]

Asia is really exciting. We see it as the wave of the future and as you've heard we're spending a great deal of money there and its just going to cost us for probably two or three years until it starts to payoff. We have a 15-person sales office in Beijing and it takes any salesperson a while to figure out just what the market is, who the customers are going to be, how we're going to approach them, what products we're going to make there in this new plant that we're building. Asia is a major part of our future and we're not sparing any expense that will hasten our entry and our entry in some power into that market. It's going to take a while. It took us a while in Europe and at least in China we don't have as much variety of peoples and languages and so forth as we had in Europe and the market is much bigger, and they also have natural problems. So, we are sure that it’s a major part of our future and we are putting a large effort into it and that'll continue, but right now it isn't significant. The sales as yet are not significant.

[James Wilson:]

Anything you've seen even post Olympics that you're folks over there have seen in terms of slowdown or slowdown construction or anything that you can comment on?

[Barclay Simpson:]

No, no slowdown. Our next question comes from Garik Shmois – Longbow Research

[Garik Shmois:]

Quick question on acquisitions, there weren't any in the quarter although it seems like two didn't work out. Are you seeing anything here just over the last one to two months maybe more potential sellers coming to you? Can you just talk about the acquisition environment right now just with the economic environment?

[Barclay Simpson:]

Generally it seems like there should be more coming out, but we're always looking at several acquisitions but right recently I haven't heard of any real increase in the number that makes sense to us. Have you, Mike?

[Michael J. Herbert:]

No, I have not either.

[Barclay Simpson:]

We think that will come and that's why we have such a strong balance sheet which is a little bit unusual these days.

[Operator:]

Our next question comes from Gary Lenhoff – Ironworks Capital Management

[Gary Lenhoff:]

My question was related to acquisitions, Barclay, can you comment on the two acquisitions that failed. Are they permanently failed or is there something that might come back?

[Barclay Simpson:]

No, we just didn't buy them.

[Michael J. Herbert:]

One of them is permanently failed now, and the other one may come back in the next couple of years.

[Operator:]

Our next question comes from Barry Vogel – Barry Vogel & Associates

[Barry Vogel:]

Mike, can you tell us what the overall cost of your China expansion is going to be for this year per share?

[Mike J. Herbert:]

I do not have that number. It's not going to be significant.

[Barry Vogel:]

You had talked about [inaudible] several times in the past, is that a probable number?

[Mike J. Herbert:]

That's probable. We intend to open a Shanghai sales office in the fourth quarter and are meaning to look at other investments in that part of the world so we can invest there.

[Operator:]

At this time there are no further questions.

[Barclay Simpson:]

Thank you very much.