Barrick Mining Corp (B) 2004 Q1 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the Barnes Group first quarter earnings conference call. At this time I'd 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 up for questions and answers after the presentation. I will now turn the conference over to Mr. Phillip Penn, Barnes Group's Director of Investor Relations. Please go ahead, Mr. Penn.

Thanks Mela, and thanks everyone for joining us on the call on the webcast to discuss our first quarter. With me are Ed Carpenter, Barnes Group's President and CEO and Bill Denninger our Senior VP of Finance and Chief Financial Officer. It's a specific time of year, so I ask that if you have any questions that are purely data driven, hold them for me after the call.

And if you have more than 1 or a multiple part question (indiscernible) others waiting in the question and answer queue, so we give everyone a chance to participate.

In addition, I want to remind everyone that certain statements we make on the call today both during the formal presentation and during the Q&A may be forward-looking information as defined in Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause their actual results to differ materially from those contained in the statements. I'd encourage everybody 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 turn the call over to Ed Carpenter.

Thanks, Phil, good afternoon. Busy time of the year so so let's get through our information quickly so that we can get on to your questions. Let me give you a few quick highlights from the first quarter and schedule one.

First of all, it was a solid quarter about where we thought we would be as we started 2004. Set a new record for sales very near the quarter billion dollar mark with sales growth in all three businesses. And on that sales growth we generated solid improvement in both operating profit and net income. Second point. That income which rose 31 percent so even with a 20 percent more shares outstanding than a year ago diluted earnings grew about 8 percent to 40 cents a share.

That's now the eighth consecutive quarter we've generated year-over-year EPS growth.

Third, integration continues to move along at Barnes Distribution with a consistent recovery during the quarter in our customer order fill rate.

Four Barnes Aerospace had an outstanding quarter by just about any measure. Sales and operating profits were both up sharply while orders at about $55 million are now back to the pre Sept. 11th levels.

We had indicated in our last few calls that December '03 was the bottom of the trough for aerospace space and now that '04 is going to be a much improved year currently we're moving in that direction.

Final take away on Schedule One. We had topline growth in all of our major end markets at Associated Spring. Light vehicle, heavy truck, nitrogen gas and down the line. You have to go back to about 2000 to find organic growth in every segment so we think it's significant that we started the year in that manner.

So to reiterate. Good start for the quarter, and from what we've seen in the first two weeks, momentum continues to carry in April.

Let's move to Schedule Two. Let me begin with Barnes Distribution. Operating profit and operating margin both improved nicely from a year ago. In fact margin was a little higher than we indicated it would be when we last spoke to you in February. We continue to see good sales growth from our strategic initiatives taken together the three initiatives, national accounts, e-commerce and our Tier 2 relationships we've developed with other industrial suppliers generated over 6 million in sales posted double that a year ago. We remain very bullish on the contribution of these initiatives and what it will do for Barnes Distribution both for '04 and more particularly for the longer run.

Bill rate which we talked about at the last call has been impacted by the fact that we brought three new distribution centers on line at the beginning of the quarter. We've recovered to over slightly over 95 percent by the end of March. Adds up about a full percentage point from the post consolidation low, that leaves us a couple of points below where we would like to be.

So we've lost some little bit of topline growth as a result. Clearly we have more work to do to restore the bill rate and we have significant resources tasked to do that. The final stage of the physical distribution center and integration, the opening of brand-new distribution center in the Ontario province of Canada remains right on schedule and is beginning -- expected to begin customer shipments during May. We've got the racking in and inventory is now going into the warehouse.

We are obviously spending our money on getting the integration complete and Bill Denninger will give you some more details there. But I would note that we are already at -- we are already operating at a savings rate of around $10 million a year. And that's where we're operating in line with our prior range already of an indicated range of $10 to $12 million.

As a final note on distribution, the strategic product launch within our Raymond unit, which we announced on the last call is off to a strong start with both significant levels of quoting activity in order development. We'd share with you at this point that the new product is a mechanical strut that covers a wide variety of industries and applications.

And although still getting off the ground we expect to give more specifics later in the year as sales become more meaningful.

Let me move to Associated Spring. There we set quarterly sales records for Associated Spring in over $93 million and for the first time in a long while we generated organic growth in all five of our major segments. And this was true both on a gross level and after adjusting for about $3 million worth of positive currency back during the quarter.

Let me give you some color on each one of those product segments. Keep in mind that these are without currency just to give you a better feel for the numbers. First sales in light vehicle products grew by a little over 2 percent so we continue to outperform North American light vehicle production which is as you know was flat for the quarter. Much of the same dynamics we've seen for the last several periods continue to hold true as Associated Spring benefits from strong share with transplant companies and higher demand for light trucks.

Heavy truck sales grew by more than 20 percent year-over-year to nearly $6 million which is a trend we're likely to see continued based on published reports we see in regards to demand on the heavy truck space. Hygiene gas products grew almost 13 percent again after adjusting for the foreign exchange impact. So growth there remains quite robust. New market development for new nitrogen gas products continues to do very well so we expect similarly strong results in nitrogen gas as we move through here.

Industrial product sales were up about 6 percent from last year which we view as consistent with the rebound in industrial activity we've seen in North America and elsewhere in the last several months. Provided the economic rebound continues, the industrial product segment should move at about the pace of that expansion. We are actively looking to augment that growth with future growth instruments particularly outside the U.S.

Finally, telecom and electronic sales grew about 6 percent from last year's first quarter. That's the first organic growth we've seen in this space for about four years. Given the margins in telecom and electronics versus our other product lines, we're hopeful that this is beginning of a true recovery. Based on the level of quoting activity we've seen and what we see in the press we're more optimistic on this part of the market that it may finally be starting to come around.

On the profitability side, while margins were up sequentially we're disappointed somewhat in the operating margin we had in spring of this quarter. But there were some moving parts that significantly impacted our numbers.

First let me say that in this quarter raw materials did not have a big impact. The team there is addressing our other costs aggressively and the disruptions of supply chain. We continue to work with our customers to help offset what we are beginning to see develop since last summer.

Second, we are addressing capacity issue at a couple of our plants. One where we're operating at our capacity limits. 724. The other where there's not enough volume meeting through the plant. We took on additional spending in the first quarter on overtime being initiatives and profit improvement to mitigate some of those capacity issues and improved profitability.

Also. We had also changed out some personnel people both in the prior quarter and during that quarter. While these steps are already starting to improve the operations we recognize that this will not solve the capacity issue on a long-term basis. Thus, we are announcing today that our Board of Directors approved the opening of a new facility in the Monterrey area of Mexico. This will be our second facility in Mexico.

They will begin moving equipment into the space shortly and expect to begin customer shipments in the fall. This will ease the workload being placed on the other two facilities and thus we'll have a long-term solution in place before the end of the year.

Let me focus on Barnes Aerospace.

This was nothing short of a terrific quarter for our aerospace team as sales, operating profit, orders, and backlog all rose substantially from the prior year. I think it's an important confirmation of everything we've been talking about for the last 12 to 18 months as a number of growth initiatives are really starting to have an impact on current period results.

As I said we generated 55 million in new orders in the first quarter -- the strongest level pre 9/11. Since 9/11. And that helped push our backlog above $150 million. We've been striving for orders in excess of $200 million for the year, and with a strong start, the team at Aerospace executing in the first quarter we have a good chance of getting there.

Notably -- notable in the orders for the first quarter were about $9 million in orders relating to GE-90-115-B engine, a bit stronger than we expected. All of our anecdotal information suggests the new 777 aircraft for which this engine is destined. It will have its first customer delivery in the next several weeks and will remain an important program for us in the coming years. We shared with you on the call in February that we were actively seeking more in the way of revenue-sharing program agreements. To that end, we're pleased to share with you today that we have signed an agreement for RSP No. 2 -- No. 3, excuse me, in late March. I'll let Bill walk you through the economics but sufficient to say (indiscernible) OEM partner, similar family engines, same strong level of returns we expect to make (inaudible).

The original two RSPs contributed closely to $2 million in sales in the first quarter and this was essentially with no contribution from the third agreement. With a very strong operating profit margin on these sales, I hope you get some sense of the significance of these programs and why we've been eager to make these strategic investments over the last several quarters.

As a final comment, although sales in aerospace's overhaul and repair segment didn't quite match that of a year ago, in one of our units we saw a short term uptick in sales last year relative to a particular FAA and dated repair which we knew was not going to be repeated this year. We're not concerned about the level, though as overhaul and repair orders in the month of March were extremely strong, the fact is we built over $1 million of O&R backlog in the month and the key will be to deliver those repairs in our high turnaround performance standard.

Sum it up. As we've been indicating for a while, 2004 was going to be a very solid year. Based on the first quarter we're moving in that direction. With that said, let me turn it over to Bill -- Bill Denninger, who will give you a more detailed financial view of it.

Thank you, Ed, and good afternoon. Schedule Three and I'll comment -- the first quarter of sales increase is good, significant organic growth in both spring and aerospace and incremental year-over-year sales from the Kar acquisition which, as you know, we completed in February of last year. I will go into more detail on sales when I discuss the results for each business in a few moments.

Cost of sales was up 13.9 percent. As you can see, it's slightly more than the growth of sales for the quarter due in part to a shift in sales mix (indiscernible) national accounts have lower gross margins and the rest of distribution sales, slightly lower gross margin Associated Spring.

This slight increase in counts of sales was offset however by only a 9.7 percent increase in selling and admin comps.

The result was a sharp increase in operating income, up to 19 percent per quarter as driven by higher profitability at both aerospace and distribution. Our operating income margin improved from 6 percent a year ago to 6.4 percent this first quarter.

Other income was up slightly year-over-year while interest expense was down about 7 percent, a function of higher average barreling in the year ago period, related to the Kar acquisition. First quarter net income increased 31 percent, translating to a diluted EPS of 40 cents which was up 8 percent compared to a year ago. Average diluted share count was up 20 percent from the first quarter of last year due to a number of factors including last May's follow on (ph) equity operating appears to be used as partial price consideration for the Kar acquisition. For the impact of higher stock price on stock option for an overall good comment on a very good quarter.

Turning now to Schedule Four, to talk about each of the business starting with Associated Spring.

Sales from the first quarter F Spring included the impact of positive foreign currency translation of about 3 million. Adjusting for this, organic sales were up a solid 6 percent. As I said, this increase in organic sales came from all of Spring's major market segments, including telecom and electronics.

Although coming up a low pace, this represents the second quarter in a row that we've registered year-over-year growth in that sector which hasn't occurred in about four years.

Operating profit sprang down slightly in the quarter actively impacted by additional spending, couple of facilities to address capital issues and higher personnel counts for pension and post-retirement medical, higher raw material price was all told, these factors reduced (inaudible) Spring by 1.7 million in the quarter offsetting the favorable contribution from higher sales volume.

With this said, a longer-term solution of the current capacity issues at Spring will be the new facility in Mexico and outlays related to this facility were included in our Capex plan for '04 and so I can reiterate that, for the full year, we're looking at CapEx total for the company in the 26 to 28 million range.

Turning now to Barnes Distribution. Kar Products contributed an incremental 10.4 million of sales during the first quarter 2004. Take this into account along with the impact of foreign currency translation organic sales with distribution were flat for the quarter. After a slow start in January our U.S. daily sales average of DSA recovered strongly in the months of February and March.

We also saw very good results from distributions growth initiatives. National account selling team opened 11 new relationships with the central sales value in excess of 2 million. E-commerce sales were up 66 percent versus the prior year, two accounts were up 47 percent. Taken together we're now at an annual run rate of about 26 million in sales from these strategic growth initiatives, up from a run rate of 14 million in the first quarter of '03.

Barnes Distribution posted a 5 percent sales increase in the first quarter - both of Raymond's key segments (indiscernible) by increased sales for the month of March. Especially strong, up more than 20 percent, could say it's another indicator that the general industrial economy is in fact recovering.

The 34 percent increase in operating profit of distribution was driven by incremental contributions from Kar and by comp savings from the Kar integration. Offsetting these gains were a slight reduction in gross margin but earlier with a function of growth in the corporate account and first quarter integration comps about 1.2 million, statement of over time, temporary labor and freight costs.

We were able to document Kar related synergistic savings of 2.6 million in the first quarter. This means we're running at the low end of the expected range of 10 to 12 million of annualized comp savings we've been talking about for some time now.

Turning to aerospace. The sales increase there was driven by growth of OEM sales and by the new RSPs. While repair and overhaul sales were down about 10 percent in the quarter we did see a strong uptick in March orders to continue into early April.

Order backlog at Barnes Aerospace at the end of first quarter were 153 million, up from 148 month end December. Orders from the first quarter were 55 million from -- that indicated strong orders continued for the GE-90-115-B engine and orders for the quarter. Both orders were about 15 million.

Cap rate in the first quarter suggested a run rate of about 60 million for 2004, well above the 47 million in military orders we did in 2003. Operating profit at aerospace was up 64 percent due to the higher OEM volume and to the profit contribution from the two aerospace completed in late 2003. Currently offsetting these gains was the profit impact of the decline in historically higher margin repair and overhaul sales.

I'll mention that RSP 3 was signed in the quarter upfront payment 25 million over time -- we will again use short cash. This relates to spare parts for a certain engine family, very similar in terms and conditions to the earlier RSP. So to summarize from an operational standpoint, a good solid quarter.

Turn now to Schedule 5. The outlook for the effective tax rate for this year is 23 percent as indicated and as we said on previous calls we expect to raise in the mid 20s in the medium term, dependent on the mix of income among the U.S. and foreign operations. Capital expenditures in the first quarter of '04 were 8.5 million, up from 3.3 year ago, about 4 million of that increase relates to the new state-of-the-art distribution centers Ontario Canada and Valis (ph) in Chicago.

Turning to Schedule Six, we ended the quarter with 32 million of cash on the balance sheet after a 15 million cash payment for the first quarter related to the RSPs. In the total RSP payment (indiscernible) to 32.5 million. As I said, we were able to fund these on future RSP payments with cash held outside the U.S. and that's able to reinvest a significant portion of our current cash into the strategic growth initiatives attractive financial returns.

Say that our growth as a cap ratio of 44 percent end of the quarter, down from 55 percent at the end of the first quarter last year and within our target range reported a 45 percent. While we feel that our balance sheet is well positioned for both internal and external growth investments going forward. Let me now turn the call back over to Ed for wrap up.

I think we started the year on the good foot, good momentum in each of our businesses. We said on the February call that there should be improvement for the Company as a whole each quarter as we move through the year and based on everything we know today we're still comparable with that expectation.

Thanks for your time. And I'll turn it back to Phil for the Q&A.

We're ready to go ahead and start the Q&A session.

+++ q-and-a.

[Operator Instructions] Matt Summerville, McDonald Investments.

Couple questions related to some of the things you're doing in Spring, Ed, you kind of talked about what's involved here. But can you more closely pinpoint how much money you spent in the first quarter on those things? What you expect to stand on an ongoing basis if there's more cost to incur in the second quarter and moving beyond that, what sort of savings do you anticipate from opening this new facility and what does that mean for the underlying margin potential for Associated Spring.

Okay. Just want to make sure all our competitors are online as we talk. First of all, what we've really been working on very hard in one of our facilities is to lean it out and get the productivity and get capacity that should be there done. We've done that and we're starting to migrate some of the product out of out of -- the facility that was really running 7/24s. We had large costs for special inspection programs at that facility. We had excess freight cost. And I don't know that I really got my hand on a very specific number but it was about $800,000 in the quarter. Round number. And we think -- we think that that -- that has dramatically slowed during March but from the inefficiencies and but we will have transition during the second quarter to move that facility. You should not expect any material operating margin changes from the Mexican facility during '04. We think that whatever savings we get, Matt, will really be offset with the startup costs associated with that. We are fortunate to have an existing facility in Mexico that performs very well and we'll be able to use part of that management team to do the startup. If it obviously is going to be savings for us but also more importantly in operations but also gives us additional two lines of capacity in Valve Springs, and a full line in transmission products so we're looking forward to this providing us not only capacity in North America. And if you look at the shift at where the engine and transmission plans are going and they're moving more and more towards the Southeast and Mexico, both domestic and transplant OEMs are doing. But also we traditionally shipped some of our European demand from the Mexican -- existing Mexican facility, we would expect to be able to do this. So we're not looking so much as a cost savings but an ability to generate capacity.

Okay and one follow up on automotive production. In terms of what your thoughts are on production for the second quarter and looking into back half of the year and the magnitude by which you think it's sustainable for Barnes to continue to outperform NAFTA like vehicle production going forward.

One of the things we should be careful -- explain so we don't break our arm patting ourselves on the back is one of the reasons that we're able to outperform that production is the vehicle mix that we have. We are very fortunate. Got a lot of the light truck production on the bigger engines and we've also got a disproportionately large share of the transplant activity and as you know as I know you know the details on this stuff. You know, the Hondas, the Nissans are in fact outperforming the overall rates. So that we think what we enjoyed in the first quarter will continue for the rest of the year.

Holden Lewis with BB&T Capital Markets.

Thank you. A couple of things on the Associate, or on the Distribution side. The first is originally I think you gave guidance that you were kind of expecting that any benefits you saw from the Kar integration would kind of be neutralized by the remaining efforts in the first quarter and maybe possibly the first-half and obviously your recognized run rate, you did substantially better than that. Are we ahead of expectations in getting to our ultimate goal? Or are we actually finding that there's more synergies then the 10 to 12 million you actually put out there. So even though we are ahead now we're not necessarily at our full run rate yet. There's more improvement to be had. How should we be looking at that?

Yes and yes. Yes, we think that we might have been pretty careful with our original estimates. And, yes, we ran a little better in the -- really the team at Barnes Distribution ran a little better in the first quarter. And we're still not getting the pop that you're going to get in to the extent that we see the revenue begin to climb up as the issues in the network with three brand new distribution centers in the U.S. and what will be a brand new distribution center, the major distribution center in Canada, as those operations smooth out in terms of their fill rate, in terms of although their turnaround time is excellent now and the productivity is good, as we see those things improve we can expect that the topline -- assuming the economy holds where it is -- and we certainly in other areas of our business are seeing that but we can expect it to get a double bang there.

And with respect to that fill rate issue, we touched on this, I think in the last call and I just wanted to get an update. One concern might be and if that's the reason why you're underperforming the general improvement in the economy, are there any concerns that even as you're getting up to your normal fill rate level that maybe some of the damage is a little bit more lingering than simply getting the 97 percent and turning on the sales again and therefore maybe we're looking at several corners of underperformance here. Is there any concern, or any visibility that that might be an issue?

No.

Mike Harris, Robert W. Baird.

This may be tough to quantify but is it possible to give us appreciation of how much of the organic growth during the quarter was from the benefit of price increases?

I would be -- it's very tricky because you've also got in particular both aerospace and Associated Spring have LTAs, that is long-term agreements, with customers. And so you start off January 1 in many cases with a automatic reduction in prices on a large number of parts where you got long-term 3, 5, 7 year kind of commitments and both company and both of those two groups tend to have that, distribution tends to have very little of that. No. 1, is you start with how you -- what all the managers are working on are productivity improvements and so on to get those price increases are to get to cover those price increases. I would say that the first quarter would be at best priced neutral to slightly down. Obviously, we are working hard on price increases. I think Bill and I happened to, I set in on a meeting that Bill was having with his people his commercial bankers and I said how long can the interest rates hold down? I mean, we know what's happening to inflation and material in medical costs and everything else so we're working hard as a company to reduce that but overall we are seeing that we are now having to be more aggressive, on the price front and so we -- what the stock market sees in the indexes are what we see in the real world every day. So I would say that as we move through the year we would expect to get price increases. Not only in terms of material pass-through with our large customers in Spring and aerospace but also as a general basis in distribution.

Okay, well, that's very helpful. You've already made several comments regarding order trends during the quarter, but just as a review and I don't know, you can do this either on a per segment basis or consolidated basis but can you just talk about how orders progress throughout the quarter January, February, and March and what you've seen in April? Your comment earlier, I wasn't sure if that was a consolidated comment or specific to Associated Spring.

It was an overall comment, it wasn't Spring that we saw a ramp. February was better than January and March was better overall for the Company than February. We just saw it ramp up month by month by month. It wasn't and it was -- it wasn't what I would call a typical cyclical or season (inaudible) typical seasonal pattern. This was just strength in the overall markets as we went through the quarter.

Okay, and, Ed, is it safe to say that today vs. when you had your last conference call mid-February that you're even more optimistic about a sustainable, industrial recovery?

Yes.

Fair enough. Switching gears here. Associated Spring -- it appears you guys are doing a good job in managing this steel raw material issue. My question is to you expect to see any more of the negative impact from higher steel prices in Q2 relative to Q1 and bear in mind I do realize that you have said that it did not have a material impact on Q1.

I think -- I think this is something where there will be a larger increase of steel -- of impact of steel price increases in the second quarter on the cost side but also we've had more time to get our pricing cannons in order. And so I would expect and that also occurs in distribution too. They and some of their product categories will see price increases and have seen them over the last three or four months and they will put in appropriate price increases to counter that.

We're also taking actions such as changing vendors where it makes sense and that will help mitigate the face amount of the increase we are facing.

(MULTIPLE SPEAKERS)

And Bill, can you remind us within Associated Spring, how was that inventory accounted for? Is that a LIFO or FIFO basis or is it a mix?

Primarily FIFO.

I have more questions but I will get back into the queue. Thank you.

Matt Summerville, McDonald Investments.

Two quick questions on aerospace. Ed and Bill, you had quantified before what you thought the revenue impact was for the first two RSPs -- I was wondering if you are willing to do that for RSP No. 3 and then, Ed, given that the orders that you booked related to the GE 90 engine appear to be tracking a little bit ahead of what you originally thought for 2004. If you could update us in terms of what you actually think you'll be able to book as revenue from that program this year and whether or not there's any additional upside to that?

That is still pending. We talked to the (indiscernible) 10K and we expected from the first two of our RSPs

a contribution from sales somewhere in excess of 5 million. Just for competitive reasons we will be a little bit cautious about this, with the 3 of them rolled together and the fact that we're a little bit outperforming our expectations at this point, the range in the RSPs for sales is probably 5 to 10 million for the full year for 2004. And if your second question if I heard it correctly is on the GE 90 in terms of sales for the year... ?

Yes.

During the first quarter of '04 we recognized sales on the 90 of about $5 million and that's probably going to be pretty close for the run rate you see for the balance of the year.

The existing model the 94B is balancing out a bit -- we said somewhere in the sort of 18 million range for the year on a net basis.

On an incremental basis, right and then is there anything out there that could drive upside to that going forward?

Realistically Matt, what's going to have to happen to drive upside is if Boeing decides to accelerate its delivery schedule for some reason. We've always modeled this out on the expectation based on what they had told us of and really this is (inaudible) G of about 1 1/2 (indiscernible) ramping to 2 1/2 month end of the year.

One follow-up on distribution -- if you guys could talk about how you expect core business to began to ramp up as the bill rate issues began to subside? Should we see sequential -- on a sequential basis should we see improvement in the year-over-year core growth in that business as we progress throughout '04? How should we be thinking about that as these expenses associated with the integration begin to roll off, you did 1.2 million in expenses related to the integration in the first quarter. Do you have a figure that you can talk about for the second quarter and then I guess I am trying to understand when we really start to see the pop in margins in that business?

Let me take a shot at that. The 1.2 as you said, was a constant P&L in the first quarter, we wouldn't expect to see a similar number quite as large in the second I can give you an exact number. We did see a significant sequential monthly increase in DFA at both Kar and historical Barnes Distribution in the U.S. and would expect that to continue into the second quarter. And so, I think we're going to see recovery. We're targeting to get our fill rates back up to the level we're going for by the end of the second quarter and with that will come higher sales combined with certainly market. Let me correct something I said previously. spring is basically on LIFO not FIFO, excuse me for misspeaking.

What we do is we measure the individual divisions on a FIFO basis and then we make an overall adjustment that converts from what we would see here on a detailed division by division basis. What you see when you see Associated Spring at the group level is LIFO.

And then, Bill, this is Matt, I have a question -- on the margin I really didn't get a good feel for when you expect us to see the pop here as these costs begin to subside and cost savings begin to overtake them if you will -- is it the second quarter, is it the third quarter? On the last conference call I think you talked about the run rate. You sort of expect that business to hit moving into the second half of the year and I guess I wondered if you could update us?

What we said previously I would expect that mid year we will be seeing just about the full effect of the savings we said were running at about 10 or so through the end of the first quarter. And no reason to think we won't hit the higher level at the end of the second quarter.

And Matt, just to follow up on that I would encourage people just to keep in mind, the seasonality of the business tends to run very strong in the first three quarters of the year and typically because the number of selling days and lower sales volume we generally tend to see in the fourth quarter there is some seasonality in that business that affects the margin as well.

Mike Harris with Robert W. Baird.

Thanks. Actually my additional questions were answered but I do have one additional question. Hopefully, this would just be a silly one. I noticed in the balance sheet other long-term liabilities of 27.6 million, which was a significant increase year-over-year and sequentially and just wanted to gauge what happened there?

All RSPs.

Holden Lewis, with BB&T Capital Markets.

Just a follow up on your plan Associated Spring for a new facility. I mean, it seems like you've got one that's running a little bit heavily and one that's underutilized. Because they are moving equipment around wouldn't it have made more sense perhaps to move equipment from the overutilized, the underutilized rather than putting up a third manufacturing plant and all of the additional capacity that's going to bring on? And it's just not totally clear to me strategically how that fits other than -- unless it's a geographic thing.

No, we're adding two brand-new lines. Well, actually three new lines. So we're adding capacity based on the volumes that we know we're going have to produce in '05 and what we're really stretching to try and do in '04. That's putting a lot of stress on that. So it's a capacity increase and, unfortunately, the kind of lines we're talking about don't really -- I can't put casters on the equipment and kind of move them around because they're not -- these are not just simple spring coilers. These are major high volume lines.

The other part of the answer which is probably pretty obvious to you is it's a lot cheaper in Mexico.

So really the new plant is to handle new lines that you're not producing currently. So it's in anticipation of that?

Yes.

So how does that serve to alleviate the overcapacity that exists at one of your plants?

There is really a two-step program here. Initially that's a plant that's been struggling, we've liened (ph) out, it now has capacity in the very short-term and the offloading the plant was running 24/7 at that second plant. From the new facility in Mexico is more incremental volume as that market expands.

And really be a long-term solution to our capacity issues, not just a short-term push around.

So whatever you're overflowing at the overcapacitized plant you're going to start moving that production to the under capacitized plant. And you're building a third one just to handle new lines that are coming on that are completely incremental beginning in '05? (inaudible) Gotcha and the production of those new lines should come at a better cost for you because it's just a lower wage area to produce in?

Absolutely.

I understand.

If there are no further questions, I'll turn the conference back to Mr. Penn.

Thanks for everybody's participation today. If you have any follow-up questions, I'm on 860-973-2126. Otherwise we look forward to talking to you again in July. Thank you.

Ladies and gentlemen, if you wish to access a replay of this call, you may do so by dialing 1-800-428-6051, or 973-709-2089, with an ID number of 347-739. This includes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.