Barrick Mining Corp (B) 2003 Q2 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Barnes Group, Inc. second quarter earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. I would now like to turn the conference over to Mr. Phillip Penn, Barnes Group’s Director of Investor Relations. Please go ahead, sir.

Thanks, Heather, and thanks, everyone, for joining us on the call and webcast to discuss our second quarter results. With me as usual, are Ed Carpenter, Barnes Group’s President and CEO, and Bill Denninger, Barnes Group’s Senior VP of Finance and Chief Financial Officer.

In keeping with our past practice on these calls, I’d like to ask if you have any questions that are purely data related, you hold them for me for after the conference call. That’s going to give us more time to focus on broad issues that are of more interest to everyone on the call today. Second, I just want to remind everyone that certain statements we make on the call today, both on the formal presentation and during the Q and A session, may be forward-looking information, as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from those contained in the statements. We would encourage investors to consider these risks and uncertainties that are described in our periodic filings with the Securities and Exchange Commission, which are available through the investor relations section of our corporate website. With that said, let me now turn the call over to Ed Carpenter.

Thanks, Phil, and good morning. We know everybody is busy with a lot of releases today. In fact, someone told me there were over 200 conference calls, so we’re going to move through our formal comments quickly and get right to the Q and A. If you’ve had a chance to look through our press release, you’ll know there are no surprises this quarter.

Let me refer first to schedule one on our webcast and start with a few take-away points that we wanted to stress. First as I said, we had a solid quarter. Our operating folks did a terrific job. Our sales up 10 percent hit a new record, just shy of $230 million. Thanks to our Distributions business acquisition of Kar Products this past February. For those of you new to the story, this is the first quarter – that is, this calendar second quarter, in which we’ve owned Kar for the entire period. Had record sales, despite, quite frankly, a strong headwind. With the recent market rally it seems as though we’ve forgotten about SARS, Iraq, etcetera. Now, we think the industrial economy is, at best, still stuck in neutral. We believe we were and are dealing with those challenges in a very effective manner. And our operating people have done a terrific job.

Second point on schedule one is that our profit growth this quarter was equally sold. Operating income was up nicely and grew at a rate faster than sales, so our operating margins also continued to move higher. This was driven by a number of factors which Bill and I will help describe as we go through this discussion. Third point, the diluted earnings were up slightly even with an 11 percent increase in that income. Integration of Kar Products, I should mention is running smoothly and we’ll talk about that in a little more detail. And as a final take-away, we completed a very successful stock follow-on offering that has allowed us to continue to grow the company profitably. We were very pleased with the results of that offer.

Let me give you some additional color on the three businesses if you can refer to schedule two. First, Associated Spring had another strong quarter. It’s sales were off slightly at about down 2 percent, where we saw particularly on a domestic basis, light vehicle production in North America drop about four times that amount. Looking at how sales broke out by major product groups, sales of our nitrogen gas products climbed at a double-digit rate year-over-year, while industrial products, which include retaining rings, were up more than 20 percent. While some of that was currency driven, it was underlying growth as well.

As I mentioned, sales for our products for light vehicles were down about 9 percent, versus last year, which was a good showing, considering that light vehicles – down 4 percent, considering that light vehicles were down about 9 percent. So thanks to all the work for the guys at Associated Springs have done in the last five years to diversify that customer base. The production impact was definitely mitigated. In fact, we grew sales to the automotive transplants in North America by more than 10 percent this quarter.

Our sales to telecomm and electronics in Associate Spring was down about $1.4 million, but the rate of decline has shrunk appreciably since Q1. And based on the orders and some quoting activity we’ve seen, there may be some life there again, although I’m not sure how low the life is. We don’t want to call it a trend based on one quarter, but the activity right now is suggesting we finally moved past the bottom of that cycle.

As I said earlier about Spring, profits are up nicely. We saw good profit growth in nitrogen gas Spring for the quarter and we’re now reaping the benefits of our shutting down our Dallas plant and exiting certain heavy duty products. Partially offsetting these positives was the profit impact of the lower sales volume. But even with that, both Associated Spring’s operating profit and operating margin improved year-over-year and I would expect fairly solid results from Associated Spring going forward.

If we look at some broader issues, on the most recently published data, light vehicle inventory has moved down a bit since June 3rd to about 60 days, but that’s still – our guys would feel that’s about five days too high. And with the North American production in the third quarter expected to be down 2 percent or so, if sales stay at the recent pace, it’s possible that the inventory on hand, in terms of light vehicles, could be resolved by the end of September.

One other item worth mentioning for Associated Spring, Ford has launched a new F150 pickup truck this fall. Traditionally that’s been their best selling light vehicle in North America, about 900,000 units. Thanks to design wins that Associated Spring achieved for the new model over the last couple of years, our content on the new F150 will go to about $17 a unit from $13 existing, or an increase of about 25 percent. I think it speaks well to our engineering abilities in this area. So even in what’s likely to be a period of lower light vehicle production, we’re looking forward to some incremental benefits from that program.

Let me now move to Barnes Aerospace. Sales volume was off in the quarter, which unless you haven’t been reading newspapers in the last two years, should be expected, considering where we were in the commercial aviation cycle. Profitability though held its own. In fact as we grew our operating margin from last year, as we’re now seeing the benefits of our reduced employment in other productivity improvements we made last year, without the costs of those actions, which we incurred last year.

We have said consistently that we expect Barnes Aerospace to remain profitable throughout his part of the commercial cycle and I think the team is demonstrating that. We booked about $29 million in orders this quarter, which is below our recent run rates. We have some push-outs in deliveries that stem from SARS, the war and from one military deferral. Also dampened our order input for overhaul and repair, as international travel declined sharply. In aggregate, these items probably reduce our orders by about $5 million. We also had about a $2 million order reduction from our decision not to make a particular component for one of our OEM customers, because we didn’t think we could make money on it. And we worked hard with them to find alternative sources.

We see orders returning to something in the $40 million range. Those of you know that’s kind of the number we like to think about running this business at in this part of the cycle, between 40 and $45 million. We see that the orders are going to come back to that range as traffic continues to recover and the new GE90-115 program begins its launch.

Orders related to the US military for both direct and indirect channels were about 30 percent of the totals from last quarter, even though military push-outs we mentioned. It was up slightly from Q1, but lower than where we’d like to see the future, as several new military programs make transitions to production orders over the next few years. Our backlog ended the quarter at about $136 million, essentially all of which is OEM. We continue to have a solid base of business to build over the next year.

Finally, for Aerospace, I want to share a little bit more detail on the upcoming GE90-115B engine program. As many of you know, this is an exclusive engine on Boeing’s 777-300 extended range ER aircraft, which will have its first customer deliveries in about 10 months. Our content on the new engine is about $600,000 per unit or about 2.5 times what we have on the current GE90 engines. With firm orders for 60 aircraft, two engines per aircraft and the spares beyond the initial order, it’s easy to understand why this is a very important program for Barnes Aerospace. We expect to see some production orders for this to be released in the second half of this year, giving us some sizeable impact on sales starting in ’04.

In fact, our most recent information suggests ’04 could be the best year for the GE90 since the ’97, ’98 peak. But we’ll wait and see how production orders develop. So incrementally, things may get a bit better for Aerospace over the second half and again, as we mentioned before, see substantial improvements in 2004.

Finally let me turn to Barnes distribution. Here again, a good story. Kar Products is an important driver to both top and bottom line of Barnes distribution, adding about 30 million in sales and most of the operating profit improvement. Organic sales were essentially flat last year, which is consistent with industrial production and ISM data we saw for the second quarter and what we’re hearing competitors describe. We have a number of key initiatives starting to gel, which are somewhat masked by this. We talked to you about our national regional selling programs and our e-commerce initiatives. These initiatives generated about $3.5 million in sales during the second quarter, close to double that of a year ago.

We signed 41 new national and regional customers last quarter, giving us 191 new accounts since we started to focus on those size customers, January 18 months ago. Our e-commerce sales tripled to about 1.1 million this past quarter, so we’re starting to see some critical mass evolve there. We’re finding that this e-commerce initiative is vital in securing national accounts and giving us customer solutions for instances where sales people servicing the location would almost be impossible. We’re seeing good returns from our new tier two strategic partnership. We’ve entered with four major suppliers in the MRO space. These partners cover a range of industries including general MRO, electrical, fluid transmissions, and PVF – pipes, valves and fittings areas.

Over the first half of this year we’ve seen sales of $3.7 million from this relationship and over time we’ll see this grow to $10-$20 million per year in new sales for us. [Indecipherable] this program, which clearly augments our sales, even as the overall industrial activity has stalled.

The other key initiative at Barnes distribution which is really taking a significant amount of the folks time there is the consolidation of Kar Products. In a nutshell we’re right on schedule for completing the integration within 12 months of our ownership. We had some key milestones in the second quarter, included nearly all the financial integration. We rationalized some of the product lines and consolidated most of the other headquarter functions. The next key step will be the integration of the order entry system, which is slated for later this summer. And once that’s completed we’ll begin the consolidation of the distribution centers.

While the numbers are still in motion, we feel comfortable at this point that achieving cost savings from Kar consolidation in the range of $10-$15 million per year is a reasonable estimate. We should be at that run rate mid-2004 after the consolidation is complete. We’ve also confirmed this week, the closing balance sheet adjustments on Kar, and we’ve effectively seen a reduction in our purchase price now it’s about $76 million. So at distribution things are clicking on a number of fronts and I’m fairly optimistic this will lead to an even stronger organization going forward.

In summary, the teams of all three of our businesses executed well in the first half. We’re all working hard to keep up that momentum. Let me now turn the call over to Bill Denninger, who will give you more detail on the financial review of this quarter. Bill?

Thank you, Ed and good morning. Let me recap the financial highlights from the second quarter. Referring to schedule three, you can see that sales were up about 10 percent, to 230 million. This was, as Ed said, a quarterly sales record for the company. I’ll discuss the sales picture at each of the three businesses in a moment.

Second quarter operating income increased 16 percent to 16 million, generating an improvement in operating margins from 6.6 to 7 percent. Cost of sales were about 2.9 percent and selling and admin expense was up 26 percent, due primarily to the addition of Kar Products in early February of this year. That would, of course, includes selling and commission expense to the 600 new sales people joining Barnes distribution.

Interest expense increased 14 percent due to an additional draw down on an additional draw band on a revolving line of credit, which will be used to fund the current acquisitions. We successfully completed a follow-on equity offering in May, raising 42 million in net proceeds that were used to partially pay down the revolver. And going forward, our current borrowing levels, interest expense should be at a run rate of about 3.5 million per quarter.

Net income for the second quarter of 2003 increase 12.4 percent, to 9.7 million, translating to a diluted EPS of 46 cents, up from 45 cents a year ago. Diluted share count was up 11 percent in the quarter, due to the completion of the follow-on offering. Overall, as Ed said, a solid quarter.

Turning to schedule four, let’s take a look at each of the businesses, starting with Associated Spring. The slight sales decline at Spring reflect lower sales in the light vehicle, telecomm and electronics markets. It also reflects Spring’s planned exit from a product line for heavy trucks, which accounted for approximately 2 million in sales a quarter, a year ago.

North American production light vehicles was down about 9 percent from last year in the quarter, while our light vehicle sales were down only 4 percent. Sales to the big three auto OEMs were down 6.4 percent, but were up 12.2 percent over Japanese transplants that continue to gain share. Operating profit was up 18 percent, with an increase in operating margin to 10.6 percent, from 8.8 percent, due in part to the benefits of the mid-2002 Dallas plant closure and an absence this year, of 800,000 in inventory step-up costs related to Seeger-Orbis we recorded last year.

Now let’s take a look at Barnes Aerospace where sales were down about 18 percent as a result of the continuing downturn in the commercial aerospace industry. But there were in line with what we anticipated for quarterly sales at this point in the cycle. Operating profit was down only 400,000 and operating margin increased to about 6.5 percent as a result. This improvement stems from the actions take last year by the management of Barnes Aerospace to position the business for a difficult commercial market, with sales of 40 to 45 million per quarter. At Aerospace salary and hourly employment is down about 11 percent, versus this time a year ago. And down about 15 percent compared to June 2001. And that doesn't include an additional 100 temporary positions we’ve eliminated since 2001.

Further, investments made over the past year brought productivity improvements in the OEM side of the business are now paying off. Orders for Barnes Aerospace in the second quarter were 29 million, down from the run rate of recent quarters, due to order cancellations or deferrals of about 5 million, as Ed indicated in low activity on the MRO side. However, based upon current activity levels and what we see In the pipeline, we do expect to be back to about a 40 million run rate in the second half of the year, per quarter. And based on industry commentary we’ve seen, air traffic is expected to recover to pre-war levels by the fourth quarter.

Anecdotally, we also believe there is a significant level of deferred repair and overhaul work that needs to be done, as much of the park fleet in the desert has now been cannibalized for spare parts. But we do expect a better order rate for Barnes Aerospace over the balance of 2003.

Looking now at Barnes distribution, Kar Products, which again, was acquired in February of this year, contributed 31 million in sales in the second quarter. Excluding Kar, sales were basically flat with just about every end market showing signs of continued weakness. Our sales to Kar rental fleet and airlines were hit especially hard, down 11 and 25 percent respectively, due to the Iraq war and its effect on travel. The SARS scare did not help either. On a more positive note, we did see some strength in Canada, as the sales environment there was a bit better than in the US.

Looking at the US operations which made up about 50 percent of Barnes distribution second quarter sales, DSA or the daily sales average, was down about 2.7 percent, compared to last year, excluding Kar. And we think that’s very much in line with the level of industrial activity and indicators as we saw during the quarter. Even with the weakness in the industrial end markets, operating profit at Barnes distribution increased 42 percent to 4.9 million, driven primarily by the Kar acquisition. Gross margins for distribution US was 46.7 percent, up from 44 percent a year ago. Again, thanks to the higher gross margins associated with Kar.

Let me move on now to schedule five, where I’ll make a quick point on our tax rate. Based on our latest outlook, for the full year, mixed with foreign and domestic income, we booked an effective tax rate for the second quarter of 20.2 percent. This suggests the target for the full year in the very low 20s. However, over time as the mix shifts to more US income, we would expect a tax rate in the range of 22-25 percent in the medium term.

Moving on to schedule six, as a result of what we think was a very successful second quarter equity offering of 3.2 million shares, 2.4 million of which were primary, we netted proceeds of about 42 million. We used that cash to pay down debt, dropping our net debt to total capital ratio to 41 percent, and effectively reloading the balance sheet for future investments. Two other significant benefits of the offering that we would note are first, the substantially higher trading liquidity of our average daily volume has essentially tripled. And second, that we have removed the overhang in the stock from shares we had issued to Kar’s former owners.

Finally, we’re pleased to see that after pricing the offering at $19 per share in mid-May, the stock has responded extremely well in the after market. Now let me turn the call back to Ed for his wrap-up before we take questions. Ed?

Thanks, Bill. To wrap it up, the economy, as we said at the beginning from our perspective, is still bouncing along the bottom. We’re not seeing a lot of up-tick in the industrial activity, although we don’t see it – it does not appear to be going lower. Some of that may have been – some of this lower may have been because of Iraq and SARS and hopefully that continues to be temporary. But there’s no real strength out there. Because of this, we’re not anticipating any lift from our end markets over the back half of this year.

But importantly, I think we’ve demonstrated – I think the operating guys have demonstrated in the first half that we can still achieve sustainable, profitable growth, even without lift from the end market. We de-leveraged our balance sheet with the equity offering and are continuing to look for other [indecipherable] acquisition candidates to continue to grow our business. Thanks for your time, especially in this busy season, and now I’d like to turn it back over to Phil to begin the Q and A session.

Thanks, Ed. Heather, if we can please go ahead and start the Q and A activity.

Thank you, Mr. Penn. The question and answer session will begin at this time. If you are using a speaker-phone, please pick up the handset before pressing any numbers. Should you have a question, please press star, followed by 1 on your pushbutton telephone. If you wish to withdraw your question, please press star, followed by 2. Your question will be taken in the order that it is received. Please stand by for your first question. Our first question comes from Matt Summerville, with McDonald Investments. Please state your question.

Hi. Good morning. I have a couple of questions. First, Ed, could you talk a little bit about on the Aerospace side, how you saw the O and R business proceed if you will, throughout the quarter? Did you start to see a pick up in activity as we moved into the latter part of June as the whole SARS thing really started to abate? And has that continued on thus far here in July, which overall, booking levels with the airlines seem to be in fairly decent shape.

Let me deal with the latter part of your question first, Matt. It’s one of the things that traditionally happens at this time of the year, because of the higher seasonal demand between here and the year-end holidays. And so this is not a time where the airlines are traditionally taking down their fleets for maintenance. In fact, they’re trying to run almost everything they can. We saw some slight move during June, but I wouldn’t say there were enough swallows to make the Spring on that one. And as I said, July and August are typically low months for us. So we’ll be looking for the end of the summer to see where it goes. But overall, no big dips and we feel better about the air traffic itself.

Can you talk about how much your O and R business was down overall?

Yes, I’ll ask Bill to comment on that.

Matt, for the second quarter versus year ago, we said it was down about 15 or 16 percent.

Okay. And then as a follow-up with respect to the distribution business, you talk about things starting to progress pretty nicely in the national, regional and e-commerce initiatives. You know, what level of visibility does that provide you with here in the back half of the year? Should we see those numbers in terms of incremental growth continue to ramp up throughout the year? Is the second half, I guess is what I’m asking, going to be better, with respect to those initiatives, than what you saw in the first half?

Yes. There are really two separate ways we look at the segment. One would be what we would call our national accounts that we’ve had over a number of years – the larger businesses, versus our new accounts. We’re continuing to see that growth in the new accounts. But frankly, with this kind of industrial activity in North America, we’re seeing our existing accounts continue to be very careful about purchasing of our kind of products. And they’ve kept a very heavy hand not to increase it. So that while we’re seeing the improvement in regional and national and in some of the numbers I gave you earlier, would clearly demonstrate that that continue to ramp up and we continue to see successes. We tend to see some of the older, traditional customers just not really wanting to have a lot of inventory on hand.

Okay. And then last, Bill, you talked about the balance sheet a bit. Can you talk a little bit about cash flow in terms of what you saw from cash flow from operations, free cash profile of Barnes looked like in the second quarter?

Sure. We’ve got to be a little careful here that we don’t use too many non-GAAP measures, but I think free cash flow we’ve used before. And that number, that was around 17 million in the first half, which was quite a bit better than a year ago. Working capital does increase for Barnes with each first half of it, again this year, to the tune of about 12 million. That obviously was offset by higher income and depreciation. So, a pretty solid first half. I think we do have an opportunity, primarily in the manufacturing side of the business, for further inventory reduction and we’ll be focused on that in the second half.

Okay. And then lastly, Ed, the order bookings we saw in Aerospace at 29 million, I mean, we shouldn’t necessarily draw a correlation into look out into the third quarter in terms of what the revenue base in that business is going to be. It sounds like we should expect something in terms of revenues in that 40-45 million range. Is that accurate?

Yes. And again, they’re dealing with an almost $140 backlog, so there’s a lot there. Although I will say to you, we’re watching them.

Okay. Thanks a lot.

Thank you. Our next question comes from Holden Lewis, with BB&T Capital Markets. Please state your question.

Good morning. Thank you. On the distribution business, you kind of noted that it looked like the distribution organic rate, which I think was down about 20 percent, was largely in line with the general sort of industrial production statistics. But I guess I would have expected to see a little more out-performance there, I mean given that there’s probably about a 1.7 million increment from the national accounts, given that you probably got – just guessing, but a million contribution from currency. I guess it didn’t seem like we were seeing as much of an impact from the national regional accounts as I would have expected coming in. Can you make some comments on that?

The numbers that you quoted are what we saw. So the answer is we had that as the upside. But overall, the industrial activity by almost any other measure was down in the second quarter. I also would say to you that for the second and certainly for the first three quarters, maybe all quarters of this year, you’ve got a tremendous amount of activity that the Barnes distribution management, Holden, is working on, in terms of the integration of Kar. This is, for those who have never done those kind of activities, it’s a lot of work. A lot of people are working weekends and late into the night to make these kind of integrations happen and make them happen on a rigorous and demanding time schedule.

Having said that, when you’re doing that, you’re also not as proactive in terms of new product introductions and a lot of other activities. And frankly the value drivers that we see coming out of the Kar acquisition give that a priority over right now about some of those programs. That doesn’t mean that we’re not doing the day to day work. A lot of the folks in distribution, to do that, to have new sales initiative incentive programs, new products – and I don’t mean to say we’re not doing it. But we’re probably in full overload right now on that integration. And I’m very pleased with how it’s going. But it does compromise some of the new initiatives.

Okay. And I think if you try to account for seasonality and all that, the run rate of revenues for those national and regional accounts is probably in the 12-13 range annually. I know you had some guidance some time ago, I think of what, 10-15?

I think it was 20.

15-20 on [indecipherable]. Can you give us a sense of now what the national regional accounts kind of annualize run rate when they’re fully adopted would be? How much more room we have to move there?

Well, I think the target is going to continue to ramp up. Because that’s today’s sales and what their potential are, assuming you never got another new national account or a new regional account. Surely with the amount of resources we’re putting into those corporate and regional account development programs and working with large customers, we’re going to see that continue to grow. And I guess probably at some point we ought to be able to articulate to you how we’re seeing those kind of accounts grow as a percentage of our sales on the future and we’ll undertake to communicate that. It’s a good question and we’re focused on a number of issues now that are slightly different.

Right. I understand. Back in Q4 you gave a range of 10-20 million and I was just sort of curious.

We feel very good about that range and we probably would speak to the higher end of it.

Okay. And then I guess lastly, talking again about – moving to the Aerospace backlog, when you talk about moving back to the 40 million range for the second half, presumably that includes Q3, to what extent does that include expectations for orders flowing in from the GE119, versus just the base business recovering? And to what extent does it include some of these things that were pushed out, going in, so that maybe on a normalized basis we might still be a little bit below kind of the 40-45 range?

Of the three factors that you asked me to comment on, I’d say that the GE90-115, we talked about and we do think we’ll see orders during the second half there. And they are an important element for Aerospace, because of the size of the orders. I think the push-outs are not going to come back quickly. There was a reluctance after 9-11 for people to react too quickly and they didn’t push-out as quickly as we expected them to. In the more recent adjustments that we’ve seen now, people are reacting very quickly to changes. And so, I think there is a reluctance to add to the backlog or add to the order book until they’re sure they’re going to get the production orders. So, those would be my two comments on that and I also mentioned MRO, which I think has got some upside by the end of the year.

Okay. And then lastly, can you just comment more philosophically about – there’s a lot of comments about Airbus taking more share from Boeing in recent, sort of, battles there. How are you positioned, versus Airbus? How do you sort of view maybe a mix shift towards Airbus? How are you sort of addressing that industry change?

Well, as you know, we’ve had about 3.5 or 4 years now where we’ve had a European engineering and sales office, that initially was focused on Rolls Royce because of the engine manufacturing and is now more on Airbus itself. We had traditionally sold to other tier one vendors and acted as a tier two in the Europe environment, and now we’re a direct vendor to Airbus itself. If a Boeing airplane is pushed out of a hanger, it has more Aerospace content in it than if it’s an Airbus. And one of the things we’re trying to do is balance that and I think we will do a better job on it.

Holden, just to follow up on that, one of the things it’s important to realize is, that when an airline orders an aircraft there’s essentially two separate purchase decisions that get made. One is on the airframe itself and then the other is on the engines that get mated up to that. And from our point of view, we’ve done a good job of getting onto Rolls Royce, particularly as it relates to the Airbus side of it. But at the end of the day, when a new unit rolls off the line for an aircraft, we’re probably 85 percent concerned about the engine and only about 10 or 15 percent concerned about the airframe itself. And so we pay a lot more attention to what kind of engines are going on the wing as opposed to the airframe.

And the number of engines on the wing.

Right.

Okay. Thank you.

Thank you. Our next question comes from Mike Harris, with Robert W. Baird. Please state your question.

Good morning, gentlemen. The question here is on the margins at Associated Spring. I have to admit they came in a little bit higher than what I was anticipating. And I realize that you had the benefit of closing the Dallas facility. It seems like there’s a higher mix of nitrogen gas Spring products. Can you just help us get a better appreciation of how you were able to post double-digit margins in that segment this quarter?

I think you did. It is a situation where we had a relatively clean quarter in terms of any shutdown costs or anything like that, where we incurred major costs, which we did last year, both at Dallas and in the step-up accounting for Seeger-Orbis. But the other point, which you make, which is one that I would very strongly emphasize, is we continue to see very nice growth, double-digit growth in nitrogen products. And that continues to be our most profitable business.

Okay, so then when you look at Associated Spring going into Q3, I realize that there’s some seasonality issues there, but do you think that these type of margins, maybe 9.5-10.5 percent are sustainable?

I think historically those have been the kind of margins at Associated Spring when it’s running well, have been able to do. And the operating team there is doing a nice job at getting that. So, yes. The answer’s yes.

But Mike, do look at the seasonality, because volume obviously has a pretty big impact quarter-to-quarter.

Yes. Especially in the third quarter with a lot of things going on, shut downs and so on.

Okay. And then just staying on Associated Spring, was there any benefit from acquisitions to revenues in the quarter from that Spectrum Plastics acquisition last year?

Mike, it’s actually about 600,000. It’s pretty immaterial.

Okay. That’s what I was figuring. And then just a final question here. Can you quantify the benefit from foreign currency on the top line during the quarter?

I can tell you it was about 2 percent for the year-to-date period for the first half and in the first quarter it was about 3 percent.

Okay. Great, that’s all I had. Thank you.

As a reminder ladies and gentlemen, the floor is still open for questions. Should you have a question, please press star 1 at this time. Our next question comes again from Matt Summerville, with McDonald Investments. Please state your question.

Two follow-up questions on Spring, Ed. As far as your internal forecast that you’re using for the light vehicle build rate in the second half of ’03, could you share that with us? And then also, talk about whether or not – and I’ll use the term, the spread, between what you achieved in terms of your actual volumes, relative to the actual North American build rate, that minus 4, versus a minus 9 respectively, if you will. Is that sustainable in the back half of the year, one? Or can we see that perhaps even, that gap widening even further?

Well, you’ve asked the right question. It’s something that everybody’s trying to look at very carefully. One issue we deal with, as you can imagine is, while we still think our 16.3 number that we started the year, is probably about the right number for overall North American production. It’s the mix that we have to watch very carefully. We have enjoyed nice improvements at the transplant, as Bill enumerated. We’re seeing some disappointments in North American production of the traditional big three.

So, while we’re seeing that there, we’re still seeing, as you point out, the inventories that really are a little more than you want, if you look at it. It’s up anywhere from five to six days, which is more than they should have. If I look at the production schedules that they have currently given the industry, it looks at though they’re going to have this thing washed through by September. So I think the third quarter will be the last time we’ll see the negative adjustments in the production. But, it also depends on a robust environment for Q4 for sales. But we’re sticking with our 16.3.

Okay. And as far as the spread, which I'm trying to stress, because it’s pretty important for you guys, the fact that your business is only off roughly half of what the industry is off, is there upside to that, i.e. can that get better in the back half of the year, based upon, if nothing else, what appears to be a significant launch with this F150? Should we look for the out-performance to improve?

There could be a little bit in mix in things like the 150 and a couple of the transplant situations. Again, that would help us in North America production. But I think overall, we were pleased that in our automotive plants that we did better than the market and we would look for that. I think it would be very tricky in the second half to see that improve dramatically as what you call, narrow the gap.

Why was the Industrial Spring business up so big in the quarter? Was most of that up FX related or is there a story to talk about there?

Matt, certainly there’s that point, FX related, because a lot of the industrial that we do comes out of our Seeger plant out in Germany. However, we are seeing some pretty good trend in penetration in terms of a lot of new quoting activity that we’ve been doing. And you’ve got to understand that when we talk about industrial, that affects a lot of different areas. It’s kind of a catch-all category. So you’ll see a range of products in there from anything from generators to refrigerators, in terms of products that we make. So, we have seen some pretty good demand. Part of it, yes, was currency driven, but there is some underlying activity there as well.

If you pull FX out of the nitrogen gas business, how did that compare to your expectations for the quarter, Ed?

Go ahead, Bill.

Nitrogen gas is well ahead of plan. Clearly there’s a pretty significant FX factor there, but if you were to try and get back to a real growth number, they’re running ahead of what was planned for the year internally.

And do you still see nice growth out of that business again, X, FX in the back half of the year?

Absolutely. No reason to think that they’re going to sail off.

Okay, great. Thanks a lot, guys.

Our next question is a follow-up from Holden Lewis, with BB&T Capital Markets. Please state your question.

Thank you. I heard some anecdotes about the plant shutdowns and such, particularly in the automotive side and some speculating that it might be a little bit even this year, even lengthier than perhaps last year. Can you give some sense of whether or not you’re expecting longer or shorter type plant shutdowns this year on the automotive side, compared to last year?

Those are set up well in advance in most cases and we’ve got those baked into our schedules for the third quarter.

Holden, one of the things in talking at the folks over at Spring about this, is that if you look at 2002, some of the OEM manufacturers didn’t shut down for the entire two-week period, like they typically do around the July 4th holiday. And our expectation is and it was in our plan that they would do a full two week shut down this year. And the only other thing that we are potentially looking at that they may do, is do something around the Thanksgiving week if the inventory problem isn’t resolved by the end of the third quarter. But based on everything we’ve seen so far, we think that there’s a good shot that it’s not going to be more than a third quarter issue.

Okay. But I mean in terms of this round of shutdowns, if they do shut down for the full two week period, I mean, that would be a little bit longer than you saw last year?

It would be longer than we saw last year, but it’s definitely in our plan for a full two weeks.

Okay. All right, thank you.

Thank you. If there are no – I’m sorry?

Heather, if there are any other ones out there, we’ll take one more question, otherwise, we’ll just end here.

Okay. Well, I’m showing no further questions. So, I’ll turn the conference back to you for closing comments.

Terrific. Thanks, everybody, for joining us on the call today. If anybody should have a follow-up, please give me a call at 860-973-2126. Otherwise, we’ll talk to you in October. Thank you.

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