Barrick Mining Corp (B) 2005 Q1 法說會逐字稿

And today, ladies and gentlemen, and welcome to the first-quarter 2005 Barnes Group conference call. My name is Anne Marie, and I will be your coordinator for today. At this time, all participants are in listen only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's conference, Brian Koppy, Director of Investor Relations for Barnes Group. (technical difficulty)

Good afternoon, and thank you for joining Barnes Group's first-quarter 2005 earnings call and webcast. This Brian Koppy, Director of Investor Relations for Barnes Group. And with me this afternoon are Barnes Group's President and CEO, Ed Carpenter, and our Senior VP of Finance and Chief Financial Officer, Bill Denninger. Following their prepared remarks we will be happy to answer your questions.

In addition, I want to remind everyone that certain statements we make on today's call, both during the formal presentation and during the question-and-answer session, may be forward-looking statements as defined in the Private Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements.

We encourage everyone 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 sections of our corporate website.

Now, let me turn the call over to Ed. Ed?

Good afternoon. We will be quick, because I know it is a busy time for all of you. Let me highlight a number of significant items during the quarter, and then Bill will walk you through a detailed review of our financial numbers. Let's go to Schedule 1.

First, highlights. Total sales for the quarter were $274 million for a new record for the Company, up 11% from last year and 25% from two years ago. Importantly, each of our three business segments generated record sales for the quarter, including organic growth in each segment -- a balanced effort. On that sales growth we generated solid improvement in both operating profit and net income.

The second highlight. Net income rose 33% to a record $12.8 million, generating diluted earnings of $0.54, which represents an increase of 35%.

The final takeaway. The earnings generated in this quarter represented strong operational performance in all three businesses, and provides the necessary confidence in the sustainability of our profitability growth strategy.

Moving on to Scheduled 2. There are a number of strategic actions under way within each one of our businesses that are important for our continued success. For Barnes Distribution, the first key area is sales growth. We continue to emphasize growth opportunities within the strengthening growth (technical difficulty) North American market. Strategic sales growth in our corporate accounts and tier 2 customers was 13 and 48%, respectively, in the first quarter. A nice positive. With this sales growth was an improvement in gross margin.

The second area is productivity improvement. As you know, we have achieved targeted customer service levels, and we continue to make improvements. While productivity improvements are being driven by re-engineering efforts on high-volume transaction areas, such as order processing and packaging, we are gaining additional leverage through growth in average order size, both in terms of the number of lines as well as the dollar value per line.

In Associated Spring, during the first quarter our strategic growth areas, such as nitrogen gas and industrial product businesses, continued their strong profitable grown, even as our legacy domestic automotive business under performed. Our focus in this area will continue to be -- one, productivity improvements or aggressive action, which include a 12% reduction in our North American salaried workforce, which is approximately 4% of our total worldwide employment, along with a 17% total sales growth, equal real productivity growth.

Two, raw material prices. For the first quarter higher raw material prices impacted results by approximately $700,000. We continue to make progress in mitigating the effects of raw material through price increases and other operational initiatives, and will maintain a rigorous focus for the remainder of the year in order to continue our momentum.

Three, growing revenues and diversifying our business. We continue to realize strong sales growth across our key markets within Associated Spring, including the beneficial effects of the DE-STA-CO manufacturing businesses, which was acquired in September of last year. Our market position and our product offerings within nitrogen gas, a business which grew 17%, and the industrial products business which grew 29% in the first quarter of 2005, will enable us to continue to penetrate and further diversify our customer base.

During the first quarter those (technical difficulty) resulted in reducing the big three light vehicle direct sales concentration in Associated Spring's overall business to 20% from a year ago level of 25%.

Turning now to Aerospace, which had another tremendous quarter with record sales, orders and backlog. The strong profit performance in our aftermarket business continues to validate the strategy of diversifying our aerospace business. Aerospace sales in the aftermarket area grew 45% from a year ago, and now represent 25% of the total group sales, compared to 18% in the first quarter of last year. We expect the pace of our aftermarket sales to continue and benefit from a full year of sales for those RSP agreements executed in 2004.

OEM sales were firm, and we continue to generate record orders and backlog. For example, the GE 90-115 B engine backlog is essentially double from a year ago. Our orders' shipment cycle continues to track on schedule, and will begin to translate into strong shipments as the backlog fills in.

Each business is maintaining its focus so it can achieve its challenging 2005 goals. The actions we implemented in the fourth quarter last year gained traction, and our continued success in the marketplace, combined with focus on specific strategic initiatives, have positioned the three businesses for enhanced sales and operating profit growth in 2005. With the strong first quarter and the current market conditions, we are increasing our full estimate of diluted EPS to $1.80 to $1.90 from our prior estimate of $1.70 to $1.80

With that said, let me turn it over to Bill.

Thank you, Ed, and good afternoon, everyone. Please turn to Schedule 3. Sales for the first quarter increased 11% to 274 million, including about 3% from the DE-STA-CO acquisition, and just over 1% from foreign exchange rates. For the second consecutive quarter each of our three businesses had solid organic growth. I will go into more detail on sales when I discuss the results for each business in a few moments.

Constant sales of 64% improved slightly from prior year, driven by additional sales volume within each of the business segments, lower-cost from Barnes Distribution as a result of the successful Kar acquisition integration, productivity improvements within Associated Spring, and a business mix shift from OEM toward aftermarket within Barnes Aerospace.

Total selling and administration expenses were flat as a percentage of sales with the prior year at 28%. Operating income was up 34%, driven by higher profitability within all three business segments, and operating income margin increased 130 basis points to 7.7%.

Net other expense of 100,000 was down year-over-year, primarily due to lower interest income and lower equity income from our Nasco (ph) joint venture, which continues to be negatively impacted by higher raw material costs.

Interest expense of 4.2 million was up about 10% primarily due to an increase in the effective borrowing rate, specifically the short-term rate on our revolver and money market borrowings. In addition, average borrowing for the quarter was 19.4 million higher this year as a result of increased working capital needs driven by higher sales.

Turning now to Schedule 4, I will review the results of each of the businesses, starting with Barnes Distribution, where sales for the first quarter of 113.6 million were up approximately 7% from the first quarter of 2004, including about 1.4 million, or 1%, from currency changes. We continue to experience improvement in our key customer-related performance indicators, including average order size, lines per order, and dollar value per line, as well as customer service level.

Barnes Distribution's operating profit was 5.9 million, up 47% from 4 million in 2004. This significant improvement was driven by higher sales volume, price increases, benefits from the reduction in force, and the beneficial effect of the Kar acquisition integration, along with higher customer service levels, partly offset by increased product cost. Overall, adjusted costs were down over 15% from last year as a result of improved fill rates and successful completion of integration-related activity.

Operating margin for the first quarter was 5.2% compared to 3.8% in 2004. As a result of the initiative undertaken and completed during 2004 and the planned execution of our critical initiative in 2005, we are now predicting Barnes Distribution's operating margin for full year 2005 to be in the 5 to 7% range, up from 3.2% in 2004.

Moving now to Associated Spring, whose first quarter results reflect record sales of 109.5 million. Sales were up 17% from prior year and reflect strong growth in each of the Associated Spring's key customer markets, with the exception of telecom and electronics, which was flat from the first quarter of 2004. Acquisition-related sales were 8.4 million, and the foreign exchange impact was a positive 1.9 million, or about 2%.

The nitrogen gas spring business continued strong year end sales pace, with sales of 21 million for the quarter, an increase of 17%. Nitrogen gas sales continue to grow as a result of product enhancements and additional sales penetration. Industrial product sales of 30 million, an increase of 29%, included approximately 19% organic growth. Sales into the heavy truck market were 6.5 million, a 16% increase over last year, and the third consecutive quarter of over 6 million in sales. We continue to have a favorable outlook for demand within our heavy truck business.

Telecom and electronics sales were 3.5 million, and flat versus last year, primarily due to engineering changes and slow product launches. The electronics end market continues to improve, and we believe our manufacturing capabilities are well-positioned to capitalize on new technology, including some of the internal components of the newest generations of phones.

Sales of light vehicle products increased approximately 12% to 48.5 million in the quarter. Transplant (ph) light vehicle sales continued to outpace the overall U.S. automakers' sales, growing 7% quarter over quarter. Our direct sales to U.S. automakers was down approximately 5% from last year, yet outperformed the reduction in their production levels of approximately 11%. Other light vehicle sales grew approximately 49%, driven by acquisition-related sales.

Associated Spring's operating profit in the quarter was 9.4 million, compared to 7.6 million recorded in the first quarter of 2004. The 24% increase was driven by the additional sales volume, partially offset by higher net raw material costs of about 700,000, and approximately 600,000 of startup costs in our new Monterey, Mexico facility, which began shipment at the end of the first quarter.

Associated Spring's operating margin for the first quarter was 8.6%, compared to 8.1% in the first quarter of 2004. For the full year 2005, operating margin was projected to be around 8%. Also, regarding the negotiation between United Auto Workers and Associated Spring, there is not much to report other than that both sides continue to discuss the key issues in an effort to reach a settlement.

Moving on to Barnes Aerospace, the first quarter generated record sales of 53.7 million, an increase of 8% from the first quarter of 2004. The strength of the overall aftermarket environment, coupled with success in executing our aftermarket strategies, including additional volume in our aftermarket RSPs, and maintenance repair activity in Asia, upheld our aftermarket sales to 13.2 million, up 45%.

OEM sales for the first quarter were up slightly to 40.4 million. Sales from the GE 90-115 B engine of 5.6 million grow approximately 5% from a year ago. Commercial sales were 28.9 million, military sales were 8.7 million, and industrial gas turbine sales were approximately 400,000 for the first quarter. Even though our overall OEM sales grew modestly during the first quarter, orders in backlog remain very strong.

Barnes Aerospace orders for the quarter were 89 million, up 61% from 2004, and a backlog of 29 million increased nearly 50% from prior year. Commercial and military orders in the first quarter were up significantly to 55.1 million and 18 million, respectively. Included in first quarter orders were approximately 16 million due to early customer orders related to increased raw material lead times.

Barnes Aerospace operating profit in the first quarter was 5.8 million compared to 4.5 million in 2004. This improvement was driven by higher sales volume and the increased percentage of aftermarket activity. Operating margin for the first quarter was approximately 11% compared to 9% in 2004. The 2005 full year, Barnes Aerospace operating margin is projected to be in the 10 to 11% range.

Let's turn now to Schedule 5. The effective tax rate of 24% is up slightly from last year's rate of 23%, but is within our stated range of the mid-20s. Our capital expenditures for the quarter were 5.4 million compared to 8.5 million a year ago. The decrease was relates to expenditures on two new distribution centers in Ontario, Canada and Chicago last year. Capital expenditures for 2005 are expected to be in the range of 29 to 33 million, with an expected depreciation in the same range.

The projected year-over-year increase in capital expenditures was primarily due to additional investments needed to increase capacity. The estimated amortization of intangible assets was projected to be 3.4 million in 2005.

Turning to Schedule 6, cash on our balance sheet at the end of the first quarter was 39.4 million. The gross debt to capitalization ratio was 44%, within our targeted range of 40 to 45%. We expect to maintain a gross debt to cap level within that 40 to 45% range during 2005, absent any significant acquisition activity.

Our trailing 12 month debt to EBIT ratio was 2.74 times versus a debt covenant of 3.25 times. As a result, we continue to feel that our balance sheet is well-positioned to support near-term growth initiatives.

Also affecting the balance sheet was our decision to convert from a LIFO to the FIFO method of inventory evaluation, effective January 1, 2005. As a result, all inventories are now valued at the lower cost determined on a FIFO basis or markets. Prior year results have been restated for comparability purposes. And there was no effect on the first quarter 2004 EPS number from the restatement. We will be providing restated financial reconciliations for each quarter of 2004 in the Investor Relations section of our website.

In conclusion, it was a solid quarter, with meaningful contributions from all three businesses. Thank you. I will now turn the call back to Brian.

Thank you, Bill. We will now open the call for your questions. We ask that you limit yourself to one question (technical difficulty) so that as many individuals as possible have an opportunity to ask their questions. Operator, the first question, please?

+++ q-and-a.

(OPERATOR INSTRUCTIONS) Matt Somerville, McDonald Investments.

Ed and Bill, can you talk a little bit about what price increases you are achieving in your distribution business? And if -- and what sort of success you have had in Spring as well? And what you anticipate being able to levy for the full year?

Sure. In distribution, Matt, we have been able to achieve pass-through price increases and virtually offset the impact of the higher material costs and surcharges in that business. So probably margin-neutral is the net result. And we expect to be able to continue to do that to the extent that raw material costs continue to increase.

In Associated Spring, on the last call we talked about a net impact in 2005 of 2 to 3 million. We think at this point that that is still a pretty good range based on some pretty good success in the first quarter, and offsetting some of the increases we continue to see.

Okay. And then maybe, last question, and then I will get back in queue. Can you talk about the issue in Aerospace between the longer lead times due to some raw materials? Is that titanium? And what do you think would be the timing then of these orders? What is the best way for us to look at that?

We specifically called out that 16 million, because we wanted you to understand that was probably a onetime effect, where we looked at our release schedule and went back to specific OEMs and said, based on either casting, forging or -- and that is really where it was, sumshi (ph). Our lead times now, instead of 40 weeks are now out in the 60s. And we need you to hunt (ph) specific products. We need you to cover us and give specific releases.

And so of the order input in the first quarter, 16 million of that was as a result of that effort. That is a onetime effort. And now you will just see those orders flow through with that kind of lead time until such time as we see we don't need it. And then of course, you will see some debooking as you go back to more normalized lead times. But it is a lead time issue, not necessarily an availability issue at this point.

And you had actually commented, I think on the last call about some concern about availability. Can you maybe go into a little more detail on what your current thought is there?

It is more a question, Matt, of lead time, not so much of the ultimate availability. And then as Ed said, that is why we extended out to about 60 weeks.

But we are watching it very carefully.

Okay, and then just one more quick one. In terms of the automotive-related business, in Spring, obviously on the big three side you comfortably grew an excess of underlying production. On the transplant side, it looked to me like maybe you grew a little bit under the production level. Can you talk a little bit about the dynamics there?

It is just -- a lot of it has to do with model mix and which vehicles were on. We felt fine on it. We don't see any issues.

Holden Lewis, BB&T.

Can you just give some clarity on the change from LIFO to FIFO? I guess first, usually there is a lot of hoops you have to jump through in order to get that pushed through the various organizations. What was the rationale that allowed you to make that change? Isn't it usually frowned upon to go in that direction?

Holden, let me address that, and I will give you a little history as we go through. Barnes adopted LIFO in 1974. At that time it was a tax driven decision which allowed us to immediately deduct the inflation amount included in the LIFO inventory balance -- or the FIFO inventory balance. And that made a lot of sense at the time, but times have changed.

In fact, in the last -- in five of the last six years, we have seemed deflation instead of inflation in our costs, resulting in higher rather than lower taxable income. Something we don't necessarily strive to do. And we also believe that FIFO today presents a more accurate depiction of fair value on the balance sheet than LIFO does.

And as I said earlier, there was no impact on the LIFO to FIFO change in the first quarter of last year, and no LIFO at all in this year's first quarter numbers. So it was not a factor. We did work with our external accountant. A number of companies are making this move. In fact, the SEC has indicated that it is generally now does favor FIFO over LIFO from a fair value perspective.

Essentially though when you flow through your cost of goods now, you are pulling from product which is priced, I would think at least in the case of Associated Spring and the raw material increases that you had seen -- are you now going through product which is costed a lot lower than what you would be doing if it was still LIFO? And shouldn't that have some impact on this quarter?

It will have very low impact, based on the fact that we turn our inventory very quickly. When we made this change, our inventory value in total on the balance sheet was increased by about 14 million. But we don't expect to see a significant impact on cost of sales in the second quarter.

And in the first quarter, was there any?

Not significant.

Okay, by my math it would probably be about 20 basis points, just looking at the LIFO evaluations from last year and all that. Does that seem like a reasonable number?

You would really have to compare terms. I mean last year for the Company in total, we had a LIFO expense in the first quarter of about $50,000. Obviously, it was zero this your.

Fair enough. And then, just give a little bit of color, I guess from the timing of the price increases -- I think would we had your fourth quarter conference call back in -- what was it, mid-February -- you had sort of talked about how you were trying to get price increases through on Associated Spring to offset the raw materials, but you hadn't had any success yet.

And then March 31 all of a sudden it seems that we are having a great deal of success. Can you just give me a little bit of history of how we have seemed to have gone from spinning our wheels a bit to seemingly having a great deal of success on that?

Well, let me answer it generally. Bill, can give you some numbers. But don't confuse that we are having some success with having success with all the customers. In other words, smaller customers, industrial customers, customers where we are more value added we are having success. Your friends in Detroit are still stone walling most suppliers to that community, and they are still doing it.

And I would also add that the management at Spring has done a good job in making certain -- or getting certain vendor changes approved by the OEMs. There has been some changes on material where that makes sense. They have done a good job focusing on price increases on some of the lower volume accounts. And then when you add that altogether, it pays dividends. And the other issue is over time you get more dollars for your scrap as you sell it.

The 700,000 we talked about for this first quarter was in line with what we said in the February call in terms of the full year range.

Right, and so if that number is good going forward, then in Q2 the net effect from material pricing should be neutral. And then you should actually be getting some gains in Q3 and Q4, given those impact last year. Is that correct?

No, that's not correct. We still think the full year is going to be 2 to 3 million. We are expecting some additional price increases toward the end of the second quarter, which will impact the second half of the year.

Some of our imported product is long enough lead times that we had contracts out as far as June and July that were on a one year basis. And we would expect that we are going to see increases in those. In fact, we are negotiating them right now.

So for instance, if the negative impact was 0.7 million in raw material, that is on top of the 0.2 million negative impact that you had last year Q1. And you had less than a 1 million -- by Q4, you had an incremental $2 million impact. Shouldn't you be then -- should I be reading then that you should actually be having positive comparisons by the end of the year?

No, we factored that in when we came up with a 2 to 3 million range. Obviously, the comparisons get easier each quarter, as we took bigger hits last year.

David Siino, Gabelli & Co.

One question on the Aerospace margin. You are saying 10, 11% for the full year. Given that presumably that the mix will (indiscernible) aftermarket will be better year-over-year, is there any potential upside to that margin?

You are right in drawing attention to the fact that there is -- because of the difference in margins in the two general categories, that to the extent that aftermarket grows faster, you would have a higher margin. But right now, we had a real nice growth in aftermarket in Q1, and really almost what I would call flattish growth in the OEM segment, even though the backlog grew. And that was in part because our military -- we had a very strong military shipments last year versus this year. So we saw the commercial move, but we are not ready yet to move our guidance above the 10 to 11.

And as Ed is saying, I think we are going to see a heavier content in the total sales there on the OEM side than we did in the first quarter, so we are being a little conservative for that reason.

Peter Lisnic (ph), Robert W. Baird

Just a quick question to follow up on the LIFO/FIFO change. Does that change create any sort of cash flow or retroactive cash flow adjustment for tax purposes this year?

It will not affect tax in the near-term. We have a NOL we are working off, so no tax effect this year. It does serve to reduce the NOL.

Okay. And then the distribution business, we have had a couple of very good quarters of growth here. And then this quarter, I am just wondering -- in terms of your service levels are back where you want them to be. How much of the growth do you think is coming from the fact that you are back where you want to be on the service level front versus growth from perhaps gaining customers or share gains, for the lack of a better term?

Well, one of the things we pointed out is that the tier 2 and the national accounts group are better than the average. And that is where we are continuing to emphasize it. I think in our core business, the broader-based business, it clearly is -- the service level has given us a couple of things. One is it has increased I think the sales force's confidence that if they put an offer in, it will be delivered.

Number two is that you can see that a little bit in the sales, the order size growth itself, which was both in number of lines and in average line item order price.

And just one more quickly on distribution. The Far East, the purchasing office that you set up there, is that online providing benefits? Kind of where are we at on that one?

They have just started to flow through. We keep track of actual product receipts by week. Because the fact is it doesn't matter how much you have ordered; it really does -- you don't get the benefit until actually you have received the product, get it in the shelves, and were shipping it out to the customers. And so I would say that we are going to meet our targets for this year, but the real impact will not occur until later in the year, second half.

Okay, and do you mind just reminding me what the targets are, or have those not been publicly stated?

We have not discussed those publicly.

Robert Ballard (ph), Banc of America Securities.

Just a couple of things. First of all, touching on distribution again. You had a pretty decent quarter for growth and margin in this division. Do you think that this level of revenue growth is sustainable going forward for the full year and maybe into next year? And also looking at the margin, do you see any upside on from this (indiscernible)?

Well, the comparisons on growth will get a little harder in the second half of the year because our service level improved throughout the year so that first quarter was probably an easier comparison from that point of view

We feel comfortable with the operating margin guidance that we gave you. In addition to that, we saw growth in our gross margins in that business. So I think overall, we feel pretty good about it.

And moving on to Aerospace, you alluded to a mix issue to some extent between civil aerospace and military aerospace. Can you break out what sort of growth you saw on the commercial side versus the what the decline was on the military side?

We saw -- on the first quarter we actually saw our shipments drop by about 25% in military, whereas they grew in commercial -- no, I am sorry, about 45%, excuse me. And then we saw 25% growth in the larger part, which was commercial.

Defense was down 45 and civil aerospace was is 25?

Yes, we had a couple of large shipments -- large orders and large shipments, onetime things that occurred in the first quarter -- first couple of quarters last year.

Can you say what programs they are related to?

They related to some tank programs.

Pre-comm (ph).

Just finally, I was wondering if you could comment on your cash deployment strategy? You said that you are falling roughly in the lower end of your debt to cap target. Do you see further opportunities out there for more RSPs, more acquisitions, or anything else?

Yes, right now, I think we reported 44%, which would be at the higher end of our targeted range of 40 to 45. As you know we have virtually all that cash is offshore. Quite a bit of it has been used in April to make some remaining payments on the RSP. We also wound up at the end of the first quarter with borrowing capacity on our most restrictive covenant set to (ph) EBITDA of about 55 million. So certainly we feel very good that whatever investments we wish to make, our growth, be it internal or acquisition-related, we are in very good shape to do.

If you were to look at, say, more RSPs are these -- is there availability of it?

We don't comment on that. We are always looking at things just like we are always looking at acquisitions. But until we are ready to really have something firmed up, it would be premature to speculate.

And just currently, you said the tax rate -- you said you were looking at the mid-20s. Do you see that being volatile on a quarter to quarter basis, or it will remain relatively (technical difficulty)

You know, from an operating point of view, no. But these days, there are lots of events which are considered discrete events, and you take the tax affected immediately. And for that reason -- I mean, there are lots of issues out there that could at some point in time result in a significant swing in the tax rate on a onetime basis in a given quarter. But if you were to strip those out, no, I think the mid-20s is where we will be.

(OPERATOR INSTRUCTIONS) Matt Summerville, McDonald Investments.

Bill, do have a cash flow from operations number for the quarter?

Hold on one second.

And then while you are looking at that, what your expectations would be for the year?

Cash flow for the quarter -- actually a negative 5 million. It was about a negative 5 million a year ago. We tend to use cash in the first quarter, and sometimes in the second quarter, and generate cash in the second half. And what is driving that negative cash flow in the first quarter is working capital, which used about 26 million of cash, given by the higher sales. I mean, our days working capital isn't expending as a result of the higher working capital.

And our outlook for the year -- I am not sure, Brian, that that is a number that we disclose.

Yes, that is not something that we would typically provide a projection on. But we will work into analyzing that as we put together the financial data.

Okay, and then you talked about fill rates and distribution. And historically, you have given color as to where they are at. And if you could do that, and then talk about revenue growth in distribution outside of the corporate account and tier 2 initiative?

We don't typically give precise numbers on -- we say we would like to be in the 97, 98 range, and we are there now.

And so from that, that is kind of where we -- we have been there for like five or six months in a row, so that it has really given us -- and given the field sales force a lot of comfort.

What was your second question? I'm sorry.

In terms of -- if you look at distribution, you have that your business outside of what you are doing from a corporate account and tier 2 prospective. And if you could talk about what the growth rate that you saw? And if I can refer to it as the core business, I will refer to it as that in the core business and distribution.

I don't really have that here. I guess, to the extent we can get it for you, why don't you follow up with Brian on that one? It would require us to put and take a couple of numbers.

Not a problem. And then you mentioned startup costs related to Mexico were 600,000 in the quarter, Ed?

Yes.

Well, what does the solder a startup curve look like? How much cost should we be anticipating that you encounter this year? And where are you with the ramp, if you will?

Well, the ramp -- we are really only operating on one line right now. And that just started shipments in March. So it will take us a full year to get that thing ramped up. The second line that is due in that plant isn't due in until the fall. So we budget it to not make money in that operation this year. It is a startup, and we recognize it, and we are going to do it --.

We will be moving toward breakeven probably the end of the third quarter.

Okay. I guess I am trying to get a sense for if I model this out when these startup costs are going to hit. It sounds like the big slug will be in Q3. Is another 600,000 what I should be thinking about? That is really what I am trying to get at.

No. Because a lot of those costs -- when you add the second line, is that would you were thinking about?

Yes.

No. It just doesn't happen that way, because a lot of the overhead costs are baked into the first line. And so when you add a second line, you are really probably talking about 5 hourly people being added to the workforce -- maybe 7.

Okay, and then can you talk about within Aerospace the performance in the aftermarket business outside of the RSPs whether or are you are seeing pickup there, and whether -- the level of sustainability in which you see?

We are seeing some very significant growth on the MRO side, excluding the RSP aftermarket in our Asian operation, fed by some of the Asian based carriers. And some of the operations in Europe in fact, are moving parts into Asian. So we have seen some very nice growth. Brian, do we have a number on that without the RSP?

Without the RSP, it is about 23%.

Okay. And do you think that is sustainable?

Certainly, we would suspect that it should be within a range.

Okay, and then can you comment on what the outlook is the military portion of the business for the full year, given that shipments were down pretty big? And I do remember you had a tough comp there. But just what your thought is on that business for the full year?

We had -- actually, the first quarter from an order prospective was very good. It was like our second or third best quarter we have ever had from that point of view. So we think -- we continue to think that we are going to have good, strong performance in that area. It is just going to take us a while to get back to the older levels.

And we built the order backlog in military by about 10 million in the first quarter.

David Siino.

Bill, sorry if you went over this already. Inventory, even if you look at the restated number and out stripped the sales growth, was there any buying in advance or just buying to assure a supply of certain components, given the raw material situation?

The single biggest factor -- we continue to build up inventories for the RSPs. The last thing we want to do is have an inventory shortage in any of those programs. In aerospace there has been some spot buys on certain components. There is also a bit of new product inventory build on a number of the aerospace divisions to support new product development.

There is a number of reasons for that increase. If you are compared to a year ago on distribution, we did have some fairly significant amount of inventory into the system to help improve the customer service levels. We would expect to see some of that come out over time. It is an issue we are watching, but not overly concerned about.

And as distribution gets bigger, does your rebate -- level of vendor rebates go up?

It does, yes.

So we might see a little uptick on the gross margin side in that business?

Yes, that is one of the factors, sure.

Okay, thank you, operator. If there are any additional questions about matters discussed this afternoon, please feel free to contact the Investors Relations Department. And thank you again for joining us today.

Thanks for your participation in today's conference. This does conclude the presentation. You may now disconnect. Have a great day.