Barrick Mining Corp (B) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2007 Barnes Group earnings conference call. My name is Lauren and I will be your operator for today.

At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I'd now like to turn the presentation over to your host for today's call, Mr. Brian Koppy, Director of Investor Relations Communications.

Thank you for joining the Barnes Group's fourth-quarter 2007 earnings call and webcast. This Brian Koppy, Director of Investor Relations and Communications for Barnes Group. With me this morning are Barnes Group's President and CEO, Greg Milzcik, and Senior Vice President of Finance and Chief Financial Officer, Bill Denninger.

I want to remind everyone that certain statements we make on today's call, both during the opening remarks 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 Web site at BarnesGroupinc.com.

Similar to last quarter, we issued an enhanced press release this morning. We implemented this new process as part of our continuing efforts to enhance our communication with the investment community and be a leader in investor relations activities. Our enhanced press release has incorporated information that was previously only provided as part of the prepared remarks portion of the quarterly conference calls. As a result, we will begin today's call with only a brief opening statement by Greg Milzcik, and then open the call up to your questions.

Now, let me turn the call over to Greg.

Good morning. I am once again pleased to report a very good fourth quarter and excellent full-year results for Barnes Group.

For the full year, the Company reported a 14% increase in sales, a 30% increase in operating income, a 37% increase in net income, and a 27% increase in EPS growth. Profitability increased primarily due to sales growth and operational improvements in Aerospace and Industrial. We view these results as the fruit of our continuous improvement culture that we are establishing. They are driving rigorous, aligned business practices with a keen focus on employee and organizational growth and development to further our success in all our businesses.

Turning now to the business segments, Aerospace lead with revenue growth of 32% for the full year with an impressive 74% increase in operating profit, along with record operating margins. Barnes Aerospace is making significant progress by focusing on continuous improvement. The Aerospace team is driving toward a lean enterprise with lean operating practices being deployed in manufacturing, service, and back-office operations. As we look into the next one, two or three years, we remain very optimistic for continued success within Aerospace, given our continuous investment in revenue-sharing programs, product expansion in the maintenance repair and overhaul businesses, record backlog levels, customer outsourcing trends, and the ability to improve on production capabilities.

Industrial continued the transformation that has been ongoing for nearly three years now and finished the year with full-year operating margins of 13.5%. Importantly, Industrial's results included key organizational investments along with strategic decisions that have positioned the business for further improvement. During 2008, Barnes Industrial will be focused on expanding their market presence and driving profitable growth.

Distribution is certainly heading in the right direction. During 2007, Barnes Distribution took on a significant amount of risk and a lot of challenges. So far, we believe we're winning. There is still a lot of work to be done. With the recent organizational changes, a strong management team, clear objectives, the right tools, and a top-tier sales force, distribution is positioned to achieve the profitability and sales goals set forth for 2008.

During 2008, we will begin to see the benefits of our Project Catalyst initiatives. Our preparation has enabled Barnes Distribution to become one business, one team which remains customer-focused in order to deliver on its promise. Through customer retention, customer penetration, and customer addition, we're optimistic that our highly dedicated and talented sales force will be able to drive an operating margins of at least 8% in 2008.

The critical components people will make up Barnes Group have created a reliable, high-quality products and services global company with a demonstrated track record of meeting customer needs. The customer is the center of everything we do. Ongoing operational improvements include lean manufacturing and a systematic goal deployment. We continued help drive the company's business activities to new levels of efficiency and effectiveness to meet the customers' needs and improve their performance.

In turn, Barnes Group's financial performance will continue to climb higher. Our enterprise-wide investments in continuous improvement mindset, focused on employee development, process improvement and strategic planning, are expected to generate another year of success and position all of our businesses for consistent, sustainable and predictable results which will deliver stockholder value.

Now, I will turn it over to Brian.

Thank you, Greg. We will now open the call to your questions. Operator, first question, please?

(OPERATOR INSTRUCTIONS). Matt Summerville, KeyBanc.

Good morning. A couple of questions -- first, on distribution, can you talk about what you're seeing in terms of current order activity in both North America and Europe? If you can characterize that by some of the major end markets you serve, that would also be helpful.

I think one of the things I will comment on, because a lot of people look at distribution as a leading indicator because it's such a diverse market -- but we see little of softness here and there but overall, it's still pretty stable. We don't think that there's a broad-based decline in any of the end markets that we're servicing.

Do you expect this business in North America to rebound, or North American business to rebound to positive organic growth begin in the first quarter? I guess, as we move through '08, you talked about what you anticipate for margins. What are your organic growth targets for both North America and Europe?

Well, first of all, we are very cautious. One point in time does not make a trend, and January is the only numbers that we have, plus part of February. We've taken everything into account and recommitting to the 8% operating margin for 2008. We also believe that we have made a lot of changes and there's still going to be some turbulence, but we expect margins to improve throughout the year.

So I guess can you go back to my organic growth question and maybe give little a more detail just on what your expectations are?

I'm still a little lost.

I'm trying to figure out what kind of topline growth, Greg, you are in embedding into getting to that 8%, that's all.

Well, first of all, I think that we've always characterized it as a GDP-type of growth business because of its diverse end markets, but I think that we've been committed towards margin first, and we've given the management and leadership throughout the organization the flexibility that if they see sales that do not meet our model and our criteria, that we can attrit of sales. So I'm hesitant to commit to a topline, other than I expect it to be relatively in the range that it is right now.

Okay. Then I guess with respect to the Aerospace business, can you maybe comment? Looking back historically over the last six or seven quarters, you've had a pretty nice sequential build in backlog. On a sequential basis, this is the smallest delta we've seen in a few quarters. Can you provide just some outlook on that?

Sure, there's several things. First of all, we've kind of been talking about not emphasizing the backlog. The reason I don't think we should emphasize the backlog so much or the orders rate, I should say, is simply because the aftermarket component of the orders doesn't really cycle through the backlog the same way. The majority of our profits in Aerospace do not come from the OE build; they come from aftermarket. So it's not necessarily a good leading indicator.

Also, there's a tremendous fluctuation in orders from quarter to quarter because of the type of programs we bring on, etc. So I would never point to a single quarter as a trend in Aerospace orders or backlog.

I don't know how to make it any clearer. Unfortunately, I think the major trends there that you look at are things like our aircraft flying and how many hours they are flying, because that will be a key driver to the aftermarket business.

Sure. I guess just to follow onto that, can you put, then, those comments in context of -- I mean, you sound a little bit, in the press release, like you might be hedging around the 787. Can you talk about what you are seeing with respect to that particular aircraft at this point?

I'm pleased to say that, for years, literally -- and there's previous transcripts you can go back to -- I expected this program to be delayed at least a year. It's a very complex aircraft. It's truly the first new aircraft type since 1958, so I expected a delay to be built in.

The second thing is, in our guidance, we've already built in the schedule delays that Boeing has announced, which are less than I had anticipated. But also keep in mind that the early production volumes are relatively small, and there's really not much profit content in the early volumes because of the learning curve associated with the production of the product. So we don't anticipate much for profit impact from the 787 delay, even if it slips out a few more months.

Okay. Then last question, and I'll get back in queue -- as far as the 62 million diluted shares that you are embedding in your EPS guidance for 2008, I guess I haven't had enough time to can go through that chart you provided, but what stockprice would that assume?

We assumed a stockprice average for the year of $37.

Okay, great. Thank you.

Christopher Glynn, Oppenheimer.

Thank you. Can you talk a little bit again about the trends through the year? I know you're not getting too specific, but just kind of the scale of the ramp at distribution, and you probably reiterate your exit rate at that, but maybe something on the entry rate in the first quarter.

Then similarly at Aerospace, in the quarter, margins were a little off-trend. Obviously, they are high but off-trend a little bit. I think there was a lot of investment in aftermarket opportunities. You know, is there another quarter or two of that before there's a more comparable year-over-year way to look at it?

Well, I will take the last part first, and that is that we've reiterated our guidance of 19% to 20% for Aerospace for full year. Most of the costs were one-time events associated with a ramp-up of a new product line, which should benefit us for years to come. So we try not to manage quarter-to-quarter, and we've committed to that over and over again. So we give you the annual guidance based on everything we know at the time, and I think that's pretty accurate.

The reason we are also hesitant to give you quarter-to-quarter guidance on distribution is we expect a little bit of turmoil here and there. I mean, we've made so many changes; we have an entirely new comp plan that we believe is a win for the customer, a win for the employee, the field sales force and a win for the Company. But at the same time, it's a complex undertaking to try to consolidate 17 plans into one. So we expect a sequential improvement in margin through the year, but I don't want to quantify the entry or exit point at this time.

Okay. Then inventory had a pretty big jump. Could speak to that a little bit, please?

That was primarily driven by Aerospace aftermarket, as we ramp up to this new project. We invested operating expense but we also invested inventory, roughly $20 million in the quarter.

Okay. The language in the press release sounded a little bit more general and broad-based, but here you just mentioned for a specific new project. I don't really have a reference point for that. Could you elaborate?

Well, it's just a new product line. When we look at our aftermarket business, we focus on exotic materials; we are continuing to focus on that. So the product line we're bringing on is primarily a complex hot section component that we've teamed with one of the OEs in order to offer repair service for airlines around the world. It involves a wide range of technical capabilities but it's essentially a hot section component that broadens our capability beyond what we had established up to this point.

Okay, and then I will jump out after this one but any raw materials impact? I don't know how much you use platinum or --.

Well, when we talk about Aerospace raw materials, we've said many times in the past that most of it is covered by pass-through agreements. In other words, the OEs negotiate the specific price for a commodity or a forging and then if, that price moves up, it will pass through directly to the customer. But there is some areas where we have to buy material, and in that case, we have long-term agreements that cover most of that.

Okay, thank you very much.

Peter Lisnic, Robert W. Baird.

Greg, I guess if you could maybe just add some color on that last question. In terms of new programs, maybe not just in '08 but beyond, what are some of the big things that you see coming down the pipe? Maybe can you talk about -- you know, you alluded to growth in Aerospace over the next one, two and three years. Can you give us a little bit more color behind that?

Oh, I could go into five and six but I don't believe anyone would believe me on the forecast.

I will settle for one to three.

On the one to three, first of all, there's been some major analyst reports coming out and talking about strong growth for three years, but after that, it's kind of unknown. I would argue that, when you look at all the data, that the fundamentals are very strong. When you look at the need to replenish in the defense business, the usage of helicopters, the usage of some of the other components associated with Aerospace and defense, when you look at the continued robust growth in both freight and commercial traffic, this all bodes well. Also, in some ways, higher fuel prices are actually drawing some new customers in who have been using older aircraft that are less fuel-efficient. So I think the dynamics are as good as I've seen it, and I started my career in Aerospace 28 years ago. This is probably as good or if not probably better than the '80s.

To go further than that, we've positioned ourself even better. The reason I say that is we've focused on a differentiated approach with exotic materials, so we have a higher margin area to work in. But it's also the type of programs we've chosen to invest heavily in have been highly successful. We've been lucky enough to be in an industry that's increasing in its outsourcing. There's also an effort, a dollarization that's going on in Europe. It's pretty clear that the weak dollar is helping our Aerospace business tremendously. I think there's a lot of room to continue that trend, if you are looking for something that I think is a general trend that we could capitalize on, both the outsourcing trend as well as the dollarization effort. We're going to continue to keep our discipline focused on a differentiated approach to exotic materials so that we can continue to have superior margins, going forward.

I think it would be easy for us to add a lot of sales dollars, but then we deviate from the differentiated approach. I don't think we would be near as successful.

Okay, that's good color on that.

I guess, if I could ask a question on distribution, and that would be you seem pretty comfortable with the 8% target for margin for '08, but can you give us a sense as to what the risks are? It sounds like there are -- there was obviously some pretty significant disruptions and turbulence as you put it, going on there, but what would or what are you most concerned about or what would be the biggest hurdle for you to get to that 8% in '08?

That's fairly easy. The first thing I would say is, up here, we are always paranoid. We think that you should always worry a lot, and we do. We worry an appropriate amount.

But I think the area we need to focus on most is in Europe. I think that was always looked upon as an '09 benefit. In other words, we had a lot of integration associated with Catalyst in '08, but I think we have to put more emphasis on improving that business. That's probably the one area of focus that I think is drawing my attention.

Okay. Then if you kind of go back to your earlier comments, it sounds like you are taking a relatively conservative view on what the topline growth might be. If you get any sort of leverage, relative to your expectations, is it safe to say that you're pretty comfortable saying or thinking that the margin could be above 8% in '08?

No, I would not commit to that. I'm also -- one of the things we've said long-term over time, this is a double-digit ROS business, but at the same time, we've got more investments to make in order to make sure that we're doing everything right.

We also believe that, over the long-term, that this is a strategic growth platform, that once we get our ducks in a row, we will be turning on the acquisition machine again; we will be looking at making heavy investments in expanding our field sales force and our technical capabilities through a broad range of different avenues.

Okay, all right. That's good. Thank you.

We think it's a great business, and we're looking forward to the next several years.

Thanks again.

Matt Summerville with KeyBanc.

I just want to clarify. The 8% margin target, Greg, is for the full year, not an exit rate, correct?

That's correct.

Okay. Then, what do you anticipate, if any, ongoing expenses to be from Project Catalyst in distribution '08, and is that included or excluded in that (inaudible)?

It's included in our guidance, roughly $1 million, $1.2 million is the estimate for 2008.

I will reiterate that we try to keep all of the expenses within our guidance. I think last quarter was unusual because we found some opportunities and we disclosed them during the quarter as best we could.

As far as other anticipated restructuring costs in the other businesses, is there anything on the table at this point?

No, there isn't; not yet.

Okay. Then just with respect to distribution, as you're going through all of these changes, can you talk about how you've progressed as far as sales force retention? Then I also want to talk about what you're doing -- or a little bit more specifics around low-cost sourcing, if you could maybe share some statistics around -- and I think you've talked about this before, so maybe just to refresh what the number, I guess the potential reduction is to cost of goods sold over time, and what mix of your buy you think qualifies for low-cost sourcing, and then whether or not, as you go through these steps, I guess how is the quality of the products you're procuring?

I will take a shot at that in a broad sense first. One, I'm very proud of the management team and the folks out in the field. We've done more this year, as far as trying to streamline our organization, make it more, than you can imagine. I think the global procurement initiative is yielding the expected results. We stated, in the press release, we've made significant progress, and that's tracking to what we had expected for global procurement for the Project Catalyst.

The field sales force automation is clearly a key component to the rest of the program, and that has been fairly successful. None of this is without bugs and it's kind of like sausage -- making it tastes good in the end, but there's a lot of work in it. Likewise, with our Dallas warehouse management system, there was a lot of bumps and bruises but it's functioning very well right now as far as our fill rate and our targets that we've established for that.

But most importantly, I think, it's been the consolidation of the sales force management and the sales force. Instead of going to market as numerous sales forces, we're now combining the strength of Barnes Distribution under one umbrella with multiple product lines. The market segmentation approach I think is also going to be highly successful.

The comp plan that we finalized in Q4 and into the first quarter, we used to have 17 different comp plans for our North American field sales force and it's been consolidated into 1. It was unmanageable the way it was before, and it was very difficult to try to make that all work. I think that was one of the biggest risks because you know, we tried to simplify it but we also tried to make it a win-win for the folks out in the field so that they could actually make more money, that the Company would benefit, that by leveraging the global procurement initiative we would be able to focus on the margin aspect of the business, and that's all built into the comp plan.

So far, we've seen no increase in attrition due to this, and I think that's because the field sales force has understood due to the leadership going out to the field and meeting with the folks. I think there will be some things that we have to adjust over time because it's not going to be perfect, but I think, in general, that's working fairly well.

I think, again, Europe needs a lot of work, but when it comes to global procurement numbers, I think we are tracking. We believe that we have some more room to go.

Matt, We haven't disclosed any absolute dollar amounts on global procurement, but I can tell you that we estimate that roughly 40% of our bag can be globally sourced at savings of 20% to 30%. So it's significant.

I will comment on the quality, too. One of the things we said early on was that we were going to have a Ford quality assurance program. In other words, we were going to have it in-country rather than waiting for it to enter our inventory system or hit the field. That's what we did. We've hired a very talented staff out in the global procurement center out in Shanghai; we also have initiatives in Eastern Europe, in Taiwan. Having the folks out in the field, testing the product and evaluating customers and quality control systems out front I think is helpful so far.

Then with respect to Europe, you mentioned that a couple of times. Could you talk about what, more specifically what the issues are in Europe and maybe how profitability there looks compared to North America?

We haven't disclosed the difference between the two, and I don't want to go down that path right now. But I could tell you it's basically about the same type of things that we have to do in Europe are what we've done in the past year in North America -- not identical, because I think Europe has some particular differences. But with the integration of the KENT acquisition and the consolidation of warehouses and the like, we couldn't afford to take on all tasks at one time, but I think that's what we're going to be focused on in '08, and that will be an investment that will pay off in '09.

As far as M&A within distribution, I think you mentioned earlier, at some point, you'd be willing to get back in the game there. Do you think that's more of an '08 or '09 thing at this point for you?

I certainly hope in '08.

Then just to shift over to industrial, and then I will get back in queue -- can you talk about, I guess, as we've moved through now into mid-February, if the end-market conditions that you talked about in your press release that were present in the fourth quarter is a similar picture to what you have here in Q1?

I guess are you looking for a specific area, Matt, or (multiple speakers)?

I think, in the fourth quarter, you mentioned heavy truck, telecom, electronics being challenged as well as some of the precision valve businesses as it pertained to consumer type of markets, and then strength in nitrogen gas, tool and die, etc. I guess I'm trying to get a feel for whether that picture is changed from the fourth quarter until now.

Keep in mind that the heavy-duty trucks, the year-over-year comparison was basically because of the environmental regulations associated. Most people, when they look at the forecast going forward for heavy-duty truck, it's improving. So I'm not expecting heavy-duty truck to fall off the face of the earth. Nor do I expect -- it's not that big of a market for us, so it's not going to have a tremendous effect.

Likewise, the compressor market for -- and compressors are used in air conditioners that are used in homes and things of that nature. We've been impacted by that, certainly, but again, that's built into our guidance.

Also, I think that telecom is a very small percentage of our sales, and in some ways, you really have to stretch to find these things. When we look our broader markets, the larger markets, especially the international markets and the aerospace markets, they're very solid.

How much do you think of Barnes, total Barnes Industrial now is North America versus international?

It's about 55% international, 45% domestic.

Okay. Then I think you mentioned, in the release, in the Barnes Industrial discussion, that you had a record backlog within some of your product lines. Can you talk about how you expect those orders -- or excuse me, those shipments to progress? Because I know that business can be a bit lumpy at times.

It can, but it's also a shorter cycle than the Aerospace backlog cycle, and it varies by different product lines and in different specialty businesses. So, I would have a tough time quantifying it right now.

But it's fairly quick-turn, Matt.

Okay, that was really more my question. Thank you.

Yvonne Varano, Jefferies.

The just on Industrial, you talked about expanding your market presence there. Can you just give a little bit more color on how you're going to approach that?

We've done a few things. One is we've expanded in China tremendously. I think, if we look at our sales and sales of product, especially in some of our specialty businesses in China, have just been blossoming.

Also, when we look at continuing to diversify our market efforts, both in investment and new sales initiatives, as well as new product lines, I think they are all going to pay off in the long run. We recognize that we've been on a margin improvement program at Industrial for a couple of years and that we're making investments now that will pay off in the long-term with organic growth.

Yvonne, if I can just add the industrial sector is really the area of focus currently for our M&A program.

Okay. Are you looking more for international business?

Yes, yes.

Okay. Then when you look in it, you talk about new product sales. Do you have a feel for how much of your expansion is going to come from new products versus maybe --?

No. As time goes on, Yvonne, we're going to disclose more about our strategy, but we are right now very focused on the differentiated approach. When we look at what we've focused on, whether it's the Aerospace or industrial markets, they're very similar -- differentiated, whether it's materials or the type of production involved or engineering content. We're going to continue that as we look for different opportunities, both through organic growth and acquisitions.

Geographically, is there any focus? I know you mentioned China, but are there other areas that you are emphasizing?

I think that we look at the world as our oyster. We've really embraced globalization from the perspective of we've made heavy investments in Southeast Asia and Singapore. In fact, I'm heading out to Singapore in a couple of days for some more meetings.

We've invested in China, not as much for production capability but more for distribution of our products that we manufacture in other locations. That's worked out very well for us.

When we look at Europe, it's a prime candidate for vendor-managed inventory. We also have a very robust business going on in there in manufacturing, which some of the market segments in Europe are doing quite well.

I think it's all linked through the benefits of globalization. We frequently talk about the problems associated with globalization. I look at this as a real strength, especially given the uncertainty of domestic markets.

Sure. Okay, great. Thanks.

Holden Lewis, BB&T.

Can you speak a little bit -- going back to the Project Catalyst effects and the 8% margin, you know, we can kind of figure out -- you know, assuming that revenues are flat, you kind of know what kind of numbers you need to do to get that 8% margin. I guess the question I have is some of the initiatives of Project Catalyst are really productivity initiatives, things like the WMS and the in-the-fields computers and things like that.

Sure, yes.

Given that some of them are productivity, which basically says that you can do more with the same, you know, and only some of them are intended to actually reduce costs, I mean if volumes or if revenues stay flat, are you still able to do that 8% margin? Or do you really need to see some volume to really tap that productivity to get to that number? How should we be looking at that (multiple speakers)?

I don't think we need volume in order to hit the 8% number. Again, I think the management team as a whole has done a very good job of margin expansion at Aerospace, and then at Industrial. I think we are using the same philosophy in approaching the distribution business, and that is evaluating markets and customers based on what we bring to the marketplace and how the customer values it. We've been evaluating everything. There's no sacred cows, or the joke goes sacred cows taste best. So we've looked at every aspect of our business. You're absolutely right when you look at productivity; we believe it is a key to growth. Not only that, it's better for the field sales force folk, that if they are able to do more with their time, they are able to earn a higher commission and therefore they benefit, we benefit, and I think the customer is getting a better product and service.

Okay, but even if volumes stay flat, you think you (inaudible) to that margin, so if you actually get a better environment and volume to tick up and productivity becomes more -- you know, enters the equation better, I mean, conceivably, you could do better? You don't want to commit to that.

I'm absolutely in favor of volume. I think that I'd take margin before volume, but I also recognize, in the long run, you have to have organic growth in order to sell yourself long-term.

Got it. Okay. Excellent.

Comment a little bit about the (inaudible). I think you may have alluded to this, although in the quarter, you saw the Aerospace margin I guess come down a fair bit from what you had done the prior three quarters, then obviously you have it returning to the full year --

Sure.

-- back to that high level. I mean, what was it about the one quarter that caused the delta and sort of what seems to be a rather quick snapback?

Well, one comment is -- and I think that there's a positive light to this, too -- is, one, when you are trying to digest just too much, it can cost a lot to ramp up faster. One of the things I've commented to other folks is that I think the delay in 787 is largely good for a lot of suppliers. I think it slows down the ramp-up, and I think that's helpful. So in a lot of ways, I'm very happy with the pace that the 787 program is going at.

To comment on the other thing, we made a conscious decision to take on a bigger task because of the market opportunity that presented itself. We recognize that we were going to pay a price for doing that. We also believe that it was short-lived, so we made a calculated business decision.

Did the drain on the margin -- was it because of costs incurred with regard to this program or was it a function of distractions or --?

Holden, it was really costs incurred, roughly $2 million, in the quarter. It's an investment for building up the capacity for future years' growth.

This is the only quarter, really, that you incurred that?

Yes.

The program as a whole is tracking the way we laid out in our fourth quarter.

Those costs were for adding salespeople and things like that?

No, no.

This was labor primarily, temporary labor.

Okay, I got it. That flows out of the P&L pretty quickly?

Yes.

Then lastly, just I guess going back to trends, you know, in trying to sort of look, in distribution and to a lesser extent industrial, you know, over the course of the year, if you look at it in sort of local currency terms, you definitely see the rate of growth go from modestly positive in Q1 to pretty convincingly negative in Q4. I mean, the trend would seem to suggest a meaningful weakening. But that seems to conflict with sort statements that you think things are generally stable. can you comment about that, please?

First of all, during the year, we expected disruption in distribution because we were making radical changes. We attribute most of that to those type of things. I mean, we did things that were, that kept me up at night because I thought it could be disruptive. I think the team as a whole and the folks, especially the folks out in the field, did a superb job adjusting. I can't say enough good things about how much risk there was in last year and how well it came out in the end. It's not that we're out of the woods by any sense of the imagination; I think we have a lot of work to do. But I think that was a good part of it.

I also think that, if you look at the heavy-duty truck impact, that accounts for a good portion of the year-over-year change in Industrial, and that was anticipated as well. It's always nice when you've got the big ramp-up because of an environmental issue with a deadline, but it's easy to forget about the following year.

Okay. I mean, in terms of next year, you sort of talked about taking margin over sales and giving sales the flexibility to (multiple speakers) business if it's not value-added to you.

Do you expect sort of these negative numbers continue as a function of that, or do you think you've gotten to the point with Project Catalyst that the disruption has past and maybe we start to see better numbers very, very soon?

I think the sequential approach that we talked about, sequentially through this year, that we expect to see margin improve. Of course, we just finished the sales force comp plan, and then we expected some disruption during the first quarter, but I think, in general, it will continue to improve throughout the year.

Okay, great. Thanks, guys.

(OPERATOR INSTRUCTIONS). Christopher Glynn, Oppenheimer.

In the Aerospace segment, can you break free of capacity constraint this cycle, or is that going to be a challenge throughout the cycle? Does that present any tangible risk to the margin guidance for Aerospace in '08?

Not in '08, but I think that we've got to be perpetually cognizant of the capacity issue. One of the things that we try not to think beyond the three-year period because you could get really carried away with what happens in year five and add capacity that you'll never use. Anyone has been through a couple of cycles -- and I've been through a few of them -- knows that you have to plan that way.

When we look at our capacity expansion, we have scrubbed it a number of different ways. We feel reasonably comfortable with it, not perfectly, but we're also looking at adding specific capacity in our advanced [avocation] business. We're adding capacity with a new plant out in Utah. That's distinctly planned for capacity that we know is coming online or demand that is coming online because of particular programs such as the Goodrich program we announced a year and a half ago. This is to support the 787, and that's tracking well. I just had a review on the building construction and we are progressing there. We've expanded in Singapore because it makes sense for us with the type of product that we offer, due to the revenue-sharing program, -- sorry, revenue-sharing program.

So I think we're planning it very carefully, but at the same time, with the current, fairly disciplined ramp-up rate of the two choke points, being Airbus and Boeing, we can see ahead of time what they are trying to do and we can try to match it not only through the engine manufacturers but our own capacity. So we have a fairly good leadtime on what to expect.

Okay. Then can you address any opportunity what Boeing might be doing with 777, expanding monthly deliveries?

Well, they've already ramped it up to a pretty hefty level. In fact, when we launched the GE 9115 program in 2001, we never dreamt we would get to the type of numbers that we're at right now. It's been a very, very good program for us; we like our partnership with GE. They've been an excellent customer, very demanding but at the same time, they've been a tremendous opportunity for growth in our business.

I'm not going to comment on whether they are going to expand the 777 offering because I think there's enough pundits out there in the aerospace industry to comment on it. I think that there's a number of different areas they may choose to go, depending on what happens with the A350, especially where it starts to bite into the 777 area.

Okay. Then just on the pass-through of raw materials from a prior question in the Aerospace, is that to preserve margin or just to recover incremental cost inflation?

Yes, it really just recovers incremental. We don't gain any (multiple speakers).

There's no margin element or enhancement.

It would be nice; it's a good idea. I might propose to the customer, but I don't think they will buy it! (LAUGHTER)

Okay, so it's actually a little bit of a margin pressure, then?

Yes, slightly.

Yes.

Okay, I got you. Thanks again.

This concludes our question-and-answer session. I'll now turn the call back over to Mr. Koppy for closing remarks.

Thank you very much, everyone. I appreciate your time on the call this morning. If there are any additional questions about any matters discussed, please feel free to contact me. Once again, thank you for joining us today.

Thank you for your participation in today's Conference. This concludes the presentation and you may now disconnect. Good day.