Barrick Mining Corp (B) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Barnes Group second quarter 2007 earnings conference call. My name is Michelle and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn your conference over to the host for today's call, Mr. Brian Koppy, Director of Investor Relations. Please proceed sir.

Good afternoon and thank you for joining the Barnes Group second quarter 2007 earnings call and webcast. This is Brian Koppy, Director of Investor Relations and Corporate Communications for Barnes Group. And with me this afternoon are Barnes Group's President and CEO, Greg Milzcik, and Senior Vice President of Finance and Chief Financial Officer, Bill Denninger. Following our prepared remarks we will be happy to answer your questions.

This quarter based on investor feedback we have discontinued the use of slides during the conference call. All of the information previously provided on the conference call slides is available in our press release and a transcript of this call.

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 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 financial 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 section of our corporate website at BarnesGroupInc.com. I will now turn the call over to Greg.

Good afternoon. Our second quarter results continued the momentum we saw in the first quarter. Results were driven by strong Aerospace performance with record sales profit and backlog, as well as continued strength in our Industrial segment.

Our internal investments have focused on developing and enhancing the Barnes Enterprise through employee development and process and systems improvements, including lean activities. These investments are necessary as we build upon our 150 year legacy. Our objective is to drive a continuous improvement culture, rigorous business processes, and leadership development centered on our customers and our Company strategy. Throughout the organization we continue to enhance operational performance and global competitiveness to deliver strong financial performance.

By continuing to embrace lean and implement successful lean initiatives, Barnes Aerospace has enhanced their ability to generate consistent, sustainable and predictable results. Barnes Aerospace's commitment to disciplined capacity expansion, prudent transitioning of workload to other facilities, such as our Singapore operations, and continued improvement in productivity and operational processes are key to their current and future success. In addition, the robust Aerospace outlook provides an excellent environment for continued opportunities.

We firmly believe that the actions we are taking at Barnes Distribution this year are necessary and vital to the accelerated improvement in its operations, sales growth and profitability. Furthermore, investments in these initiatives now will provide greater customer satisfaction and performance, while positioning the segment for continued growth and financial improvement.

For Barnes Industrial their continued drive to implement operational improvements through lean activities is generating sustainable benefits. Key productivity measures such as sales per employee and operating profit per employee were up 13% and 65%, respectively.

Looking at the highlights for the quarter they include, first, revenue of $360 million grew 16% over the second quarter of last year. The 18th consecutive quarter of double-digit sales growth, led by revenue growth of 25% within Aerospace. Second, total Company operating margin for the second quarter was 11.2%, a 1.9 percentage point improvement.

We continue to invest and implement operational improvement initiatives throughout the Company, which are generating sustainable results, particularly within Barnes Aerospace and Barnes Industrial. Process improvement initiatives centered on our lean program remain one of our key corporate priorities, and will enable us to drive our business activities to new levels of efficiency and effectiveness.

Third, our meaningful revenue growth and profit center focus generated net income of $28.4 million, an increase of 58% over the second quarter of 2006, with EPS growth of 44% to $0.49 per diluted share.

During the third quarter we will be taking an important step to better our operations. We will allign our Raymond division, the mechanical spring catalog and custom solutions business, a business with approximately $50 million in revenue during 2006. This business currently resides within Barnes Distribution and will be transferred to Barnes Industrial.

As a result of this transfer we are first aligning our catalog and custom solutions business with its key supplier, our Associated Spring division, to create greater focus on integrated business activities and results. Second, we will be focusing on servicing our customer as effectively and efficiently as possible, and maintaining our focus at Barnes Distribution on the Project Catalyst initiatives and objectives.

The catalog and custom solutions business will become part of the Engineered Springs business unit, which includes the Associated Spring division within Barnes Industrial. This business is an important sales channel for Associated Spring's products. Currently approximately 60% of its sales are product manufactured by Associated Spring. In addition, new business opportunities can further leverage the engineering talent at Associated Spring's Product Development Center.

For Barnes Distribution this action reinforces and does not change the foundation of Project Catalyst. Managing our core vendor management inventory business is management's sole focus at Barnes Distribution. We're not wavering from our stated goals.

Regarding Project Catalyst, as we laid out last quarter there are four initiatives. First, global product sourcing; second, logistics network optimization; third, sales and margin improvement; and fourth, European market development.

We have made substantial progress on several fronts. As part of the global product sourcing initiative we opened and staffed an international sourcing center in Shanghai. The Shanghai Center will leverage an extensive network of reliable global suppliers for the Barnes Distribution, and as part of our forward development of a rigorous product quality assurance system. The team in the Shanghai Center has already received competitive quotes from a number of suppliers for key products, which will be an integral part of our efforts to identify alternatives to supplier cost increases. We will look for this and other investments in global product sourcing to benefit us next year.

Progress towards our global product sourcing initiative will be measured by the actual spend for globally sourced products versus total targeted global spend. For the logistics and network optimization initiative we have engaged outside consultant to assess the efficiency of our distribution centers and determine if the current network structure is optimal. We expect this study and the analysis to be completed by the end of the fourth quarter.

In addition, we implemented our new warehouse management system, or WMS, in our Dallas distribution center. The goal of WMS is to improve the overall efficiency of each distribution center, including receiving, inventory management, planning, fulfillment and shipping. Progress towards our logistics and network optimization initiative can be measured by the rollout of WMS at our Chicago and Reno distribution centers by the end of this year, and complete rollout of WMS to our remaining distribution centers by the end of next year. In addition, the improvement in warehouse expenses as a percentage of sales for those warehouses with WMS will be a key performance metric.

We also recently initiated a market focused realization of Barnes Distribution's core sales management structure as part of our sales and margin improvement initiatives. Our prior acquisitions created multiple layers of management and sales teams, which now have been streamlined. This is a significant step for the organization. The reorganization unites all Bowman, Kar Products, Curtis and Mechanics Choice sales and marketing resources under the Barnes Distribution service brand into one cohesive structure. The new structure, along with customer facing strategies and tools, are being implemented to drive sales growth.

The marketing segmentation plans are also part of our sales and margin improvement initiative. We have identified three core vertical markets for our products and services, manufacturing, natural resources, and transportation. Each will be further divided into targeted market segments that value the Vendor Managed Inventory supply chain solution. Market segments were determined based on market size, number of companies, average sales per company, and our current product offering and penetration. The new sales organization supports coordination and execution of the targeted market programs to achieve profitable sales growth.

Progress towards our sales and margin initiative will be measured by selling expenses as a percentage of sales.

The KENT integration, which is part of the European market development initiative continues to move forward. During the quarter we ramped up the operations of the newly expanded Fleurs, France distribution center, and rationalized and consolidated the back office operations. Throughout the year we will continue to provide progress on the integration and expansion.

Before I turn it over to Bill, I would like to take the opportunity to welcome Scott Deakin, Senior Vice President of Corporate Development to the management team of Barnes Group. We are pleased to have Scott join us at the Barnes Group leadership team to focus on identifying, assessing and pursuing high-quality growth opportunities.

Now we will turn the call over to Bill for the financial review.

Good afternoon everyone. First I would like to review the income statement followed by a segment review, and concluding with a cash flow and balance sheet discussion.

Sales for the second quarter of 2007 of $360 million reflect a 16% growth rate comprised of about 7% from organic growth driven by Barnes Aerospace, 7% from Barnes Distribution's KENT acquisition, and 1% from Barnes Industrial's Hanggi acquisition. Currency changes added another 1%. I will go into more detail on sales when I discuss the results for each business in a few moments.

The benefit of our double-digit sales growth was compounded by a 3.1 percentage point improvement in gross margin as cost of sales improved to 61.1% from 64.2% last year, with improvement realized at all three segments, but primarily driven by Barnes Aerospace and Barnes Industrial. The higher gross margin was due primarily to increased sales from higher margin businesses, higher sales prices, and operating efficiencies.

SG&A as a percent of sales was slightly higher at 27.6%, driven by increases in Barnes Distribution related to Project Catalyst and by enterprisewide investments, partly offset by continued improvements in Barnes Aerospace. Our enterprisewide investments will continue throughout this year and next. These investments should lead to productivity improvements and further develop a process-driven organization focused on continuous improvement for consistent, sustainable and predictable results.

Second quarter operating income of $40.3 million increased 40%, with an increase in operating income margin of 1.9 percentage points to 11.2%, driven by Barnes Aerospace and Barnes Industrial. Interest expense of $6.5 million was up 13%, primarily due to higher average borrowings, which increased $92 million over the prior year to fund acquisitions and organic growth initiatives, partly offset by a lower average interest rate.

The second quarter effective tax rate was 16.2%, a function of adjusting the full year rate to 19.9%. The adjustment to the full year tax rate positively impacted diluted EPS by about $0.04 a share. Changes in our tax rate are largely dependent on the mix between domestic and international earnings. This quarter's projected rate was particularly affected by lower Barnes Distribution results in North America and additional revenue sharing programs.

Net income for the second quarter was $28.4 million, a 58% increase over last year. And diluted EPS was $0.49, a 44% increase. EPS growth was adversely affected by a 9% increase in diluted shares to 57.7 million shares. The increased in diluted shares reflects the 38% increase in the stock price during the quarter, which significantly increased the dilutive effects of stock options and convertible senior subordinated notes. The dilutive effect of the convertible notes were approximately 1.8 million shares negatively impacted diluted EPS by approximately $0.02 per share. The anticipated weighted average diluted share count for the full year 2007 is now projected at 58 million.

In addition, I would like to note that due to the increase in the stock price our 3.75% convertible bonds became eligible for conversion on July 1. We do not expect most of our bondholders to convert. However, once the bonds are eligible for conversion, the unamortized convertible bond issuance fees are accelerated through the income statement. As a result, we will incur a non-cash pretax charge of about $2.4 million in the third quarter.

Turning now to the segments, I will begin with Barnes Aerospace where all elements of the business continued to perform very well. Second quarter sales of $92.4 million were up 25%. And operating profit of $18.6 million improved 75%. Total OEM sales for the second quarter were up 21% to $62.4 million. Total commercial sales were $49.2 million. Military sales were $13.2 million.

Barnes Aerospace orders for the quarter were $116.1 million, down from a record level set in the prior year of $124.6 million. Last year's was primarily driven by a high number of orders received as a result of specific contract extensions.

Order backlog increased 35% from a year ago to a record $440 million, of which approximately 62% is scheduled to ship in the next 12 months. Total commercial orders were $69.4 million, and total commercial backlog was $343.2 million. Military orders in backlog in the second quarter were $17.1 million and $90.6 million, respectively.

Aftermarket sales increased 36% to $30.1 million for the quarter, including MRO sales of $18.3 million, and aftermarket RSP sales of $11.8 million. Aftermarket MRO activity during the quarter was driven by continued benefits of recent maintenance repair and overhaul contracts requiring the high level of quality and service Barnes Aerospace provides to its customers. We continue to expect the rate of MRO growth we experienced over the last couple of quarters to moderate as we progress through the year.

Aftermarket activity will be positively impacted going forward as a result of an additional revenue sharing program that was entered into at the end of the second quarter. The investment commitment for this aftermarket RSP agreement is $38 million. These aftermarket RSPs continue to meet our expectations, and are an excellent complement to our maintenance repair and overhaul operations.

Barnes Aerospace has now produced quarter over quarter growth in operating profit for 14 consecutive quarters. Second quarter results reflect record operating profitability of $18.6 million, with an operating margin of 20.1%, up from 14.4% in 2006. This improvement was primarily driven by higher sales volume and the increased percentage of aftermarket activity.

During second quarter we announced the expansion of our large fabrication operations in Ogden, Utah with the planned opening of the new state-of-the-art manufacturing facility to produce precision Aerospace components for use in a wide range of aircraft engine and airframe applications. This expansion will particularly allow us to support the long-term growth prospects for the GEnx and Trent 1000 engines. In addition, it will enhance our ability to meet our customers' needs by employing the latest techniques and operational excellence. Construction of the facility is scheduled for completion in the first half of 2008.

Expenses related to this expansion are estimated about $2 million in 2007, with additional costs in 2008. The 2007 expenses are projected to be higher than originally anticipated due to additional lease costs expected to be incurred this year.

Considering Barnes Aerospace cost us a capacity expansion, transfer of production, new product introductions, and enterprisewide investments it's full year 2007 estimated operating margin is projected to be around 18%.

Turning now to Barnes Distribution, sales for the second quarter of $150.7 million were up approximately 20%. Organic sales growth was approximately 1% due to continued growth in corporate and tier 2 accounts, which were up 10% and 24%, respectively, mainly offset by continued declines in the core business. The KENT acquisition contributed $22.2 million or 18%, and currency changes provided $1.7 million or about 1% to overall sales growth.

Barnes Distribution's operating profit was $7.5 million, down 16% from last year's $8.9 million, and resulted in an operating margin of 5%. The second quarter of 2007 includes approximately $2 million of pretax investments associated with Project Catalyst, which negatively impacted diluted EPS by approximately $0.02 per share. Additionally, operating profit was negatively impacted by high procurement cost, business mix, and incremental bad debt expense as compared to the 2006 period. These counts were partially offset by higher selling prices and lower incentive compensation as compared to the 2006 period.

As Greg stated, going forward Barnes Distribution results will exclude the mechanical spring catalog and custom solutions business which will be included in Barnes Industrial. As a result, we have provided a financial supplement available on our website, which gives adjusted historical financial results for these two segments.

In general, the transfer impacts both segments' operating margins by approximately 2 percentage points. Barnes Distribution's operating margin decreases by approximately 2 percentage points, whereas Barnes Industrial increases by 2 percentage points. There is no change, of course, for the Company as a whole.

The adjusted full year 2007 Barnes Distribution operating margin is now projected to be approximately 4%, and takes into consideration onetime costs of over $9 million associated with Project Catalyst. The projected 2007 operating margin of 4% is approximately 3 percentage points lower than our guidance issued last quarter of about 7%. The transfer of the catalog and custom solutions business accounts for 2 percentage points, as I have said, and additional costs related to Project Catalyst and enterprisewide investments account for the remaining percentage points.

For 2008 it is important to note that we remain committed to, and we have not changed, the operating profit performance improvement target that was previously communicated for Barnes Distribution. The only difference is that the catalog and customer solutions business will no longer be reflected in Barnes Distribution's results, which reduces operating margins by approximately 2 percentage points. As a result, Barnes Distribution's operating margin goal for 2008 is now 8%, which is equivalent to our prior level of improvement of 10%. We also continue to expect some volatility in results as we implement Project Catalyst. But it is imperative that we quickly take the necessary steps to achieve our desired outcome.

Moving on now to Barnes Industrial, where sales of $118.7 million were up 6% from prior year. The sales growth results included $4.2 million from the Hanggi acquisition, and a favorable impact of $2.6 million from foreign exchange. Operating profit increased to $14.3 million, a 55% increase, with a corresponding improvement in operating margin of 3.8 percentage points to 12%. The higher operating profit resulted primarily from the profit contribution from Heinz Hanggi sales, as well as higher profits from operational improvements and other specialty operations.

Barnes Industrial is experiencing strong orders in backlog within its nitrogen gas products and retention rings businesses, and both set record order levels this past quarter. We remain cautiously optimistic about near-term acceleration in the growth of these two businesses. However, we continue to see significant pricing pressures in our precision valve business as the compressor market experiences softness due to the decline in consumer home product sales, coupled with the rapid move of tier suppliers to low-cost countries, and the associated localization of suppliers.

In addition, the heavy-duty truck market experienced its expected declines during the quarter, down about 10%. And we continue to expect the balance of the year to be significantly weaker than the prior year, impacting the Engineered Springs business.

Looking forward, the full year 2007 operating margin of Barnes Industrial, including the catalog and special order business and continued enterprisewide investment, is expected to be around 14%.

Turning to the balance sheet and cash flow. Cash was $22.4 million at the end of the quarter. The debt to capitalization ratio was 43%, within our targeted range. And our debt to EBITDA ratio was 2.35 times versus the total debt covenant of 4 times, giving us additional borrowing capacity of at least $309 million.

We achieved a terrific quarter in terms of operating cash flow, $43.8 million. Capital expenditures for the second quarter were approximately $11.4 million. Our full year capital expenditures are projected to be in the $45 million to $50 million range, and are directed primarily to investments needed to increase capacity and improve operational efficiency.

Depreciation is expected to be around $35 million. And the estimated amortization of intangible assets is projected to be around $11 million.

So in summary, I am pleased with the financial progress we continued to make. This quarter's EPS of $0.49 is a healthy improvement over the prior year. The adverse impact of Project Catalyst spending of $0.02 per share and the additional dilution of $0.02 per share were offset by the benefit of $0.04 per share due to the full year tax rate change.

Thank you. I will now turn the call back to Brian.

We will now open the call to your questions. We ask that you limit yourself to one question and one follow-up, so that as many individuals as possible have an opportunity.

(OPERATOR INSTRUCTIONS). Peter Lisnic, Robert W. Baird.

I am wondering -- I missed the first few minutes of the call. I didn't hear whether or not you talked about your EPS outlook for the remainder of the year or for the full year 2007. I guess the question is, A., did you? And, B., if you didn't, or are reaffirming I guess the numbers for the years, can you maybe give us a bridge from where you previously were to now? Because it sounds like there are some things that have been added in terms of expenses into that forecast.

We issued guidance at the end of first quarter, $1.74 to $1.83. We are holding that guidance, despite as you say, the fact that we do have some additional expenses this year, such as the convert issuance and cost write-off, and the additional investments for Project Catalyst, and the Ogden expansion. But we are going to be holding the $1.74 to $1.83. The offsets to those higher spend rates come primarily from Aerospace, which is just doing wonderfully.

Is there any way that you can possibly quantify what those incremental headwinds are in terms of the expenses? Specifically it sounds like the Catalyst expenses are maybe $1 million higher than you were forecasting a quarter go. The convert presumably is all that $2.4 million. Is there anything else? Am I getting the numbers right?

No, the convert costs are incremental to our prior guidance. The Catalyst investment at $9 million, that is a number we have just firmed up in the last month or two.

What was there number you were looking for last quarter?

We didn't have that quantified last quarter, because we were still building on the plan.

That's good enough for that. If I could ask a question on the Distribution side. Greg, you talked about the global product sourcing as target number one for Project Catalyst. Can you give us a sense as to what your targets might be like in terms of sourcing components there, and what you foresee as potential cost savings to those source products as being?

Sure. I will take two components of that. One is we're preparing some metrics that we will be publishing so that people have an idea of how we are progressing towards that target. But I think if you talk to most people on a generalized basis, getting between 20 and 30% reductions are pretty common. The initial indicators we have right now consistent with that.

Christopher Glynn, CIBC World Markets.

Just a question on the 4% guidance for Distribution. I understand the whole build up to that and the adjustments from the prior quarter. But just to be clear, you mentioned the word adjusted. I just want to be clear that 4% does include the $9 million?

Yes, it does.

Okay. Great. Looking at the 8% for next year, we're talking about really a doubling of operating margins in the year. Yet it seems that a number of specific pieces of the programs of Project Catalyst clearly have as much to do with them in '08 as '07. So it is just tough for me, and presumably some others, conceptually to see how the doubling of margins fits in when you expect the one report from the consultant just at the end of the fourth quarter, and some other things like that?

The first thing I would say is take a look at the track record we have had at improving margin at our other businesses, whether it is the Aerospace business or the Industrial business -- significant increases even year-over-year. I think that we're applying the same type of process to the Project Catalyst approach, and that is that we not only have itemized these four areas, but we have broken them down into very detailed subplans that have specific people assigned, as well as specific metrics internally. So we have a pretty good idea of what the issues and obstacles are year-over-year, and we fell pretty comfortable that we have a handle on the issue.

(OPERATOR INSTRUCTIONS). Matt Summerville, KeyBanc.

A couple of questions. First, with respect to the sourcing initiative in Distribution, since you're still kind of relatively early on there, I was wondering if you're having any quality or delivery issues? If you can comment on fill rates during the quarter, and then just how much I guess your noncorporate account and tier 2 business was down in North America?

Two things. One is one of the things that everyone agreed on early on when we were initiating the global sourcing program was that product quality was essential. And a forward deployment of our quality system was essential simply because we didn't want to have product in the cycle, the delivery, inventory, distribution center cycle, that wasn't satisfactory. So we made sure that we instituted a series of initiatives that were very -- they were forward in their nature. In other words, they were at the sites. As far as the fill rates, our fill rates are within acceptable levels.

That was kind of a three-part question. How much was your North American Distribution business down outside of corporate and tier 2?

If I recall, it was down slightly.

1 to 2%.

Then I guess I need to be clear with respect to the margin target and distribution next year. Did it used to be 10% and now it is 8? Can you just make sure I understand that properly?

The only thing we have changed next year is we have removed the Raymond catalog business, which is roughly 2 points. So that target drops from 10 to 8%.

But it also has gained in Industrial, so there's absolutely no difference this quarter from last quarter our commitment.

I just wanted to make sure I understand that. Then moving into 2008, and then I will get back in queue. How is management compensation aligned around hitting that 8% target?

Very tightly.

That 8% is their target.

Karl Oehlschlaeger, Banc of America.

I just want to ask about the growth rates. You touched on Distribution and North America being down 1 to 2%. Is that something that you were kind of expecting, or what is sort of driving that? And how should we think about that going into -- for the remainder of the year and into next year?

And the same with the Industrial. You strip out the acquisitions and the FX, you talked about areas that were kind of down. And I guess the heavy truck -- you're probably going to see it down for the second half of year. But what -- talk about that a little bit and where you think that should go for the second half and into next year?

It is a great question. I think that you picked up on heavy truck. We obviously expected that to be down and things of that nature. What we have been looking at are two phases to the program. The first is margin enhancement. And there's a certain trade-off frequently with margin enhancement, where we allow certain sales to attrit. I think that most of that has gone by in the Industrial business, and we have been making significant investments to grow particular areas of our business, such as our precision forming and blanking. So we're making the investments. We also understand there is a cycle to the investment to the payoff.

I think the same thing is going through -- that is happening at Distribution in the sense that we're making significant investments. And there is certain trade-offs when you're making these investments. We think that everything will pay off in the end with a more solid business, with core customers that we want to grow with. And we'll be continuing to make significant investments in the future to drive organic growth. That is the ultimate end game is to have a business that is more stable, that is cleaner, that is capable of growing organically.

If you were to try to quantify, what percentage of the growth of the revenues was impacted by you guys saying goodbye to the low margin sales?

We haven't quantify that.

Holden Lewis, BB&T.

I also just want to make sure I understood sort of how the costs and such in the guidance work. First off, the Ogden expansion, it sounds like -- I think last quarter you were thinking about $1 million, and now you're looking at $2 million in terms of Aerospace expansion.

Project Catalyst, I understand you didn't really have a number out there, but to have put guidance out, you must have been assuming something for Project Catalyst in that guidance. Can you give us a little more color about the $9 million you're looking at, what was the ballpark expectation prior to formalizing that number?

We were in the process of pulling the whole program together. As Greg said, there is many aspects to the plan, four major initiatives, but quite a few subplans under each. We didn't really have a number. We knew it was going to be expensive in terms of the investment, but we did not have a number when we came out.

So when you put the guidance of $1.74 to $1.83 out, you just zeroed out the Project Catalyst piece? And so the fact that there is $9 million more in there, that is all incremental versus the original guidance provided?

We also have identified the related savings this year to certain of the initiatives. That is a partial offset. We have also seen, as I said, better performance within the Aerospace group, so we're able to hold guidance.

Sure, okay. I'm just trying to get a sense of how much incremental -- how much incremental cost is in there. On your point about the savings, how much of the -- have you sort of talked about the annual savings expected from Project Catalyst, and how much of those do you expect to realize through 2007? We know what your runrate wants to be exiting, but how much do you expect to realize in 2007 savings-wise?

I don't really have that number. You can look at the overall guidance we have given of 4% to 8% to get a flavor.

Right. That gives us a flavor of what you expect to exit. I just didn't know how much you thought you would get this year. Then the convertible, the $2.4 million, I think that is pretax. What is going to be the after-tax number for that?

It is 60% after-tax, U.S. federal tax rate.

Now are you including that in the $1.74 to $1.83, or are you stripping that out as one time?

No, we are including that.

Then lastly, you mentioned strong topline trends at Associated Spring. And then you sort of I guess talked about pricing pressure. Can you talk about the push and pulls there? Are we likely to see margins improve because the orders and volumes are more significant than the price pressures, or was the message that it is reverse relationship? And I don't think you mentioned the margin target for Associated Spring for the year.

We said that we were seeing very solid orders, record order rates in our nitrogen gas springs business and retaining rings business, Seeger-Orbis. And the offset to that was the Barnes Precision Valve, where we have seen some significant pricing pressure on some of the customers moving offshore. Clearly the benefits from the stronger orders and sales and profits of the first two more than offset the shortfall at Precision Valve.

g Did you mention your operating margin target for the year at Spring?

Yes, we said it would be 14%, including -- about 14% including the transfer of Raymond.

That is assuming -- that is restating for full year impact?

Yes.

Christopher Glynn, CIBC World Markets.

I will try Aerospace this time. Aftermarket sales of -- just excluding the RSPs, just looking at the MRO piece -- obviously have been growing well above the market. Going forward are there additional wins to be had there that can bulk it up a little bit, or do we start to think about it as growing in line with global flying hours growth?

First of all, we do expect some moderation because there was a step function associated with particular contracts. But I think that we have a very solid team and very good relationships out there, so we expect to have above average growth rates in that business.

Above-average would model lots of global flight hours would be fair?

Right. In general that is a good indicator.

With that leveling off, should we think about that for the balance of the year as a runrate, just that MRO piece, what you did with the first half, or do you think sales would be higher in the second half than in the first half?

This is Brian. I think -- we don't give specific revenue numbers in each one of those, but certainly it is a reasonable estimate as how the second half would go.

(OPERATOR INSTRUCTIONS). Peter Lisnic, Robert W. Baird.

Just a quick follow-up. In the -- on the Aerospace side in the Q you talked about -- or at least there is some mention of management fees and how they potentially could impact margins and sales, specifically from the RSP programs. Can you give us a sense as to exactly what that is and what kind of impact that might have on our numbers?

It is a fee that we pay our partner on the RSPs for their administration of the program. And kicks in usually in the fourth or fifth year after we sign an agreement. It is a percentage of sales. We've got -- one of the programs kicked in this year. I think there is two additional that kick in next year. And as we add additional RSPs each year it tends to offset the impact of that drag.

What is the drag? Can you quantify that for us?

No, that is not something that we have disclosed.

Then on the Distribution side, the 8% target for '08, Project Catalyst sounds like a relatively longer-term sort of effort. Does '08 include any expenses?

Yes, does.

It does.

Do we have any number quantified there yet, or is that just --?

We haven't defined it externally. We have a pretty good idea internally, and we're still shaping certain aspects of it up. I would also say that 8% in our view is not where this business is going to top out at. And therefore we expect to continue to invest in sales growth. We expect to invest in improved margin. But I think the characteristics of the program next year will be different than this year simply because we will be focused much more on organic growth as we streamline our business, as we make it more efficient. There is only so much you can gain from those type of things. You have to grow sales eventually in order to gain the type of margins that we expect.

Is it safe to say that spending will be lower in '08 than it is in '07?

Yes, it will be lower.

Then if 8% is not where the business can go, where can it go?

We think it could go double-digit.

Low double-digit, mid, 10, 15?

No, we're sticking with low double-digit.

Matt Summerville of KeyBanc.

Can you talk about what the major components of the $9 million worth of Project Catalyst spend is?

That is not something we have disclosed, but there is cost in there related to severance, cost of setting up the Shanghai office, the onetime initial costs. And then some costs for the study on the networks --.

Logistics network optimization.

Logistics network optimization. And then some costs we assume we are going to be taking in the fourth quarter as result of that.

As far as the EPS number for the full year, that really includes all these items that you have talked about on the call, whether it be dilution from the convert, whether it be the onetime hit you take, the $2.4 million, as well as inclusive of the $9 million? That is correct, Bill?

That is correct.

Then I don't have -- I'm on the road and I don't have my Excel spreadsheet in front of me. What is the second half anticipated tax rate?

Our full year rate, which is the second rate -- second half rate, is about 19.9 or 20%.

That is what -- compares to -- 23 or 24 was your thinking before?

Right.

As there are no further questions, I will now turn it back to management for closing remarks.

Thank you very much. Thank you, operator. If there are any additional questions about any matters discussed this afternoon, please feel free to contact me. And thank you for joining us today. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.