Barrick Mining Corp (B) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2008 Barnes Group earnings conference call. My name is Fab, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). As a reminder, this conference of being recorded for replay purposes.

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

Good morning and thank you for joining Barnes Group's second-quarter 2008 earnings call and webcast. This is Brian Koppy, Director of Investor Relations and Communications for Barnes Group, and with me this morning are Barnes Group's President and CEO Greg Milzcik and acting Chief Financial Officer and Vice President and Controller Frank Boyle.

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 website at BarnesGroupInc.com.

Our press release was issued this morning, and we hope you have had a chance to review it. We will begin today's call with the brief opening statements by Greg and Frank and then open the call up to answer your questions.

Now let me turn the call over to Greg.

Good morning and thank you again for joining us today. I'm pleased to once again report very solid year-over-year results for Barnes Group. Our global diversification strategies, along with our differentiated business groups, are allowing us to enjoy steady improvement. Each of our groups are uniquely positioned to sustain our success. Our Barnes Aerospace business is taking advantage of strong industry fundamentals. Barnes Distribution continues to position itself for significant profitable growth, and Barnes Industrial is effectively managing through a global economy that shows strength in Europe and Asia, while certain markets in North America are under pressure.

As a result and on balance, we continue to deliver on our goals for Barnes Group Inc. For the second quarter, revenues were up 6% with strong organic growth at Barnes Aerospace. Net income of approximately $35 million and earnings per diluted share of $0.60 were both up 22% over last year. Importantly, net income and diluted earnings per share were also up approximately 21% for the first six months of 2008 over the same period last year, reflecting the continued progress we are making in managing our portfolio of businesses.

As an organization, we have diligently focused on driving enterprisewide operational improvements. We are establishing a fully integrated operating system which standardizes, aligns and enhances our operations. Our enterprisewide systems will enable us to continue to meet and exceed our customers expectations for service, quality and delivery and further drive key productivity measures such as sales and operating profit per employee, which were up 11% and 27% respectively.

Throughout 2008 we will continue to take the necessary actions to enhance our businesses, so we can maintain our robust productivity improvement levels in 2009. Since economic issues are the main topic of discussions lately, I would like to provide you some insight and perspective regarding Barnes Group.

Within Aerospace it is important to note that Boeing and Airbus have already recorded a full-year book-to-bill ratio of onetimes by the end of the second quarter. Importantly, the driver of this growth has been non-US customers. Therefore, an economic slowdown in the US is unlikely to materially affect the industry trends.

Barnes Aerospace's growth in the manufacturing business has also been driven by more fuel-efficient aircraft, which are not targeted for retirement by airlines and, given the current price of fuel, are likely to be flown more often. Our strong backlog with 787 orders that have yet to enter our backlog and our focus on newer generation engine platforms justifies our optimism for continued success and growth in Aerospace OEM.

Furthermore, our Aerospace aftermarket activity is expected to remain at above industry average growth rates given our global customer base and platforms we participate on.

Recently we expanded operations in Singapore to increase our global aftermarket capacity and enhance our ability to meet growing customer demands in the market.

Within distribution we are realizing success in North America, despite the economic slowdown across the US. While we have achieved double-digit returns on sales within Barnes Distribution North America, we remain cautious about the general economic conditions. We expect the actions we have taken in addition to our market segmentation strategy to position the business for long-term sustainable growth.

In Barnes Distribution Europe, the issues are not necessarily related to the economy but rather execution. We're committed to achieving success in this business as we have done in the US, and we have the capability and resolve to do so.

Turning now to Barnes Industrial, Barnes Industrial's North American transportation-related businesses are facing headwinds for overall growth. However, management's productivity and process improvement initiatives, along with a rigorous focus on pricing, are offsetting some of the sales declines.

In addition, Barnes Industrial's diversification outside the US is allowing the business to benefit from strong global demand. European and Asian businesses continue to generate strong revenue growth during the second quarter.

When I reflect on our portfolio of businesses, I'm pleased with our overall performance. We're a diversified business and make strategic decisions for long-term success. Our businesses operate globally, which allow us to take advantage of varied economic conditions and end markets that are often on different economic cycles. Our second-quarter results exemplify this.

We are fortunate to have a collection of businesses that take advantage of the strong market fundamentals such as Barnes Aerospace. This allows us time to reposition other businesses for future success such as with Barnes Distribution. But our focus remains the same -- that is to generate year-over-year earnings improvements.

2008 promises to be no exception. We expect that 2008 will generate increased stockholder value, and we remain committed to positioning all of our businesses for consistent and sustainable profitable growth over the long-term.

Now I would like to turn it over to Frank.

Thanks, Greg. It is my pleasure to be here today. I would like to start by addressing two items before opening the call up to questions.

First is in regards to the use of the Company's cash flow. We continue to generate favorable cash flow and strategically review our decisions to invest internally, make acquisitions, pay dividends, reduce our debt and/or repurchase shares. During the second quarter, we appropriately used cash to fund internal growth, pay dividends, reduce debt and purchase Company stock.

Currently our investment opportunities favor acquisitions and internal growth. We're focused on running the business for the long-term, and we will continue to balance the Company's needs and priorities with our opportunities as we move through the second half of this year.

The second topic I would like to address is our inventory levels. As an organization, we are keenly focused on managing our working capital. However, we also need to make sound long-term business decisions. At times this may adversely impact certain financial measures.

As most of you are aware, we decided in late 2003 to enter into aftermarket revenue sharing programs for Aerospace spare parts. These are very attractive long-term programs for Barnes Aerospace, providing consistent and sustainable growth.

However, as part of these programs, it is necessary to maintain a high level of inventory. As a result, our inventory levels have steadily increased as we entered into additional RSP programs and as the programs continued to grow.

Carrying the cost of this inventory is significantly outweighed by the opportunity risk of not having the spare parts in stock.

In addition, during the second half of 2007, we increased expenditures in Barnes Aerospace's maintenance, repair and overhaul business to increase production capacity for current and expected future demand. A new long-term business opportunity required us to increase our inventory levels as we assimilated the manufacturing of the product line into our facility. The short-term negative impact of carrying the inventory is more than offset by the long-term benefits this program will bring to the organization. The key point is that our decisions were and will continue to be consistent with our strategy to benefit our stockholders for the long-term.

Thank you. Now I will turn it back to Brian.

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

(OPERATOR INSTRUCTIONS). John Emerich, Iron Works Capital.

The tax rate was lower again than I was modeling a couple of quarters in a row. What is the right number to use going forward?

We're looking right now at a projected full-year rate in the range of 22 to 23%, and that is driven largely by the fact that we were projecting the mix of income to favor international.

So it has been a little lower than that, and the first half will be a little higher than that in the second half to get to that average? Is that the way to think about it?

That is the way we look at it.

Great. Thank you very much.

Peter Lisnic, Robert W. Baird.

I was wondering if we could talk about distribution a little bit, particularly the non-US operations. Greg, I guess you are running at -- I just what to make sure I understand, it sounds like you are running at double-digit operating margins here in the US. Is that correct?

We achieved double-digits during the quarter, and I would like to say that I am thrilled to death with the performance of Barnes Distribution North America. I think we made significant progress, especially year-over-year results. It has not been easy by any stretch of the imagination. So I think that the management team, as well as the sales folks out in the field, have gone through a lot in the past year, but I think that we're showing the results which I'm very pleased with.

However, shifting to Europe, it is clear that Europe is definitely underperforming. We had a complex integration that was going on throughout last year that was somewhat less focused than the Project Catalyst project in North America. And to be quite honest, it got away from us in the sense that the integration of the computer system, as well as the warehousing and the number of product line introductions and sales force, the complicated integration did not go near as well as we had anticipated. We have taken actions since then. We've put a new management team in place, which we are further strengthening throughout this quarter. And we're taking the same approach to Europe that we did in North America, as well as at Aerospace and industrial over the years, where we are dissecting the business, looking at the key drivers for the long-term I might add.

Obviously we have to stabilize the business, and through late in the second quarter, we saw stability in the sales force and things of that nature. But we have a lot of work left to do. It is a more complicated integration. It is a more complicated system simply because the different cultures and geographic barriers in Europe. But, at the same time, I have complete confidence that we're heading in the right direction there as well.

Okay. And that was at least alluded to in I guess in my next question, which was along those lines I'm guessing that Europe is basically operating at a loss if North America is at double-digits.

Absolutely.

Yes, and I'm wondering is there anything structurally different there that you cannot necessarily fix? Or another way I guess of asking this is, is Europe -- if we think about North America as a double-digit margin business, should we think about Europe as sort of a mid to high single digits, or is it something that eventually can get to a double-digit margin business?

No, first of all, I would say that I don't think there's anything that we have seen that is fundamentally broken. It is really a matter of the integration process. Like I said, it is more complex.

Traditionally there is a lower margin in Europe than in North American distribution businesses. I'm speaking generically. That is largely due to increased general administrative costs due to the languages and the different laws and support that you need in order to manage a pan-European business. So I think that is something to be expected.

But I have learned my lesson. I'm not going to give a target for distribution North -- or distribution Europe, sorry, and but I do think that fundamentally we have a business that is capable of succeeding. And I will also go further to comment that we found that our particular service business works well in areas where there's high labor costs within the core manufacturing or industrial base, and that certainly fits Europe.

Okay, great. Thank you for all the color. I will jump back in queue.

Yvonne Varano, Jefferies.

Just sticking with distribution Europe for a minute, what are you seeing more on the macro side there? Are you seeing weakness start to creep up in certain markets?

We have not actually. If I recall, the sales are actually up in Europe, and that is kind of an awkward situation to be in. Flat somewhere around there, but it is certainly not a dramatic change. I think that in most cases you read a little bit here and there about some softness in Great Britain, for example, in other areas, but we have not really seen it in a dramatic way. We look at it as much more of an execution issue than a fundamental macroeconomic issue.

Okay. And then just on Aerospace, obviously there has been a lot of concern about the aftermarket business and how the trends that we are seeing in the US with all the part planes is going to impact you. And you seem to indicate that some of the platforms you are on should help hold up better. Can you just maybe give a little more color there?

I can give you a lot more color. I have been working Aerospace almost 30 years, and I have rarely seen the fundamentals as good as they are now, but everyone seems to be taking a really pessimistic view.

So I have reviewed dozens of industry analyst reports. I have talked to our customers, looked at their internal production schedules both for the aftermarket slots that they place. Looked at production schedules for engines and airframes, internal schedules that are not necessarily public. I have looked at -- I recently returned from Farnborough where I -- the Farnborough Airshow where I met with countless customers and competitors. I might add that Boeing and Airbus reiterated their multiyear production schedules. And I have come to the conclusion that we are not in a major cycle of any sort. If anything, it is very segmented to a very narrow area.

Fuel costs. Keep in mind, fuel costs disproportionately affect North American carriers primarily for several reasons. One is the oil price in the US dollar. So if you are buying in Euros, it does not have the same impact. Number two is many foreign carriers are regulated where they don't have the price elasticity issues that you have in North America. And three is many foreign carriers are subsidized by the national governments where they look at it as a public transportation support system.

So when I look at the losses of airlines, it is primarily North American carriers that don't have large numbers of aircraft on order to begin with. So when I look at that macroeconomic fundamentals, it is really not bad.

Also, the orders to date are 300 plus at Farnborough. Plus, you are talking about a full-year book-to-bill for the entire year. So we are already running at a very robust rate for new orders. So I'm not worried about the OE side.

However, the original question was about maintenance, repair and overhaul, and our analysis shows about 2% to 4% of global fleet being impacted. But these are primarily older aircraft such as the DC9-30s, 737 classics, etc. And these are the least fuel efficient and most maintenance intensive aircraft that we have little content on when it comes to the maintenance, repair and overhaul side. Therefore, we do not see a significant impact. In fact, through the second quarter, our maintenance, repair and overall sales and aftermarket sales in general were both up.

Sorry for the long answer, but I felt like I had to get that off my chest.

No, I appreciate all the color on that. So we should not be as concerned as we see the part planes increased it domestically because most of those are probably planes that you were not on on a maintenance perspective anyway?

Not a whole lot, although I will comment that I don't like to see airlines suffer. I mean airlines are our friend ultimately. And I think that anytime we have airlines losing money, it precludes them from purchasing newer aircraft, and I think that is not necessarily a good thing. But I think when you look at the big picture, the global marketplace, about 80% of global aircraft sales are now being driven by outside the US. And I think that is a good thing for us.

I appreciate that. One more quick thing. Frank, I thought you said you repurchased shares during the quarter?

Yes.

Could you just tell me how many?

About 45,000. It was not a big buy.

(OPERATOR INSTRUCTIONS). Chris Glynn, Oppenheimer.

I got cut off temporarily, so I apologize if my questions has been asked in anyway. But just at Barnes Industrial, the operating margin guidance held steadily. It looks like it would imply about 100 basis point year-over-year decline in the second half, really strong second quarter. I was wondering if you could comment around that if we should, in fact, expect declining year-over-year margins at BI in the second half?

Sure. I think in some cases we are expecting through third quarter extended shutdowns at some plants both in Europe and North America. And some of this has been confirmed; some of it is hypothesized, but that is one of the driving forces.

Okay. Relative to last year prior year, what is causing the increased magnitude? What is going on there?

Well, it is basically transportation-related industries. Whether it is tool and die work that is being delayed on implementation of a new platform, or if it is an extended shutdowns that causes less air-conditioners to be manufactured, things of that nature. I see transportation-related volumes are certainly declining. Although it is a much smaller percentage of our overall sales, it still has a minor effect.

Okay. And did you say Barnes Distribution Europe sales were actually up?

Well, I think year-to-date they are up, but I think for the quarter they are flattish.

Okay. I am just wondering, this has come on fairly suddenly it sounds like, some of the issues over there. What did your experience with Project Catalyst do for you in terms of addressing -- you know haven't gone through Project Catalyst in North America. There are some aspects of Europe that given your education with product Project Catalyst you can really tweak pretty quickly or so? I mean it seems like the North America Project Catalyst might be kind of done here in the double digits, and only swing factor to the second half would maybe beginning some traction in Europe to help the margins.

I think there is a couple of things. One is there certainly are things that we learned from Project Catalyst, a variety of them. I mean we made our errors along the way without doubt. But I think things like global procurement process I think applied very directly to Europe, and it goes both ways. There are Eastern European low-cost suppliers that we could help provide North American product, as well as the existing sourcing that we have been able to do in Asia will help Europe. So I think there's some things that we could directly apply one-on-one.

I think there's also things that we learned through a variety of different areas. But I also think that we have to be cognizant of the differences in the cultures between Europe and North America, as well as the individual countries. So I think it is a little more complex.

And I will also digress to say that for the most part, the management team has been fairly consistent throughout the processes. We view the same type of analytical approach in Aerospace over the years and in Industrial, as well as in distribution North America. So I think the fundamentals are there. It is a discipline within Barnes Group Inc. that permeates throughout the groups that is the way we approach problems is where I think the solution lies.

Okay. And is my assumption correct kind of that North America is done, and that is not favorable in the second half relative to the first half?

I would like to think that nothing is ever done, but you will not hear me refer to Project Catalyst anymore. I think that is largely a 2007 initiative. But I think it accomplished almost all the goals that we were looking for. And, like I said, it was not easy and was painful and the like. But I think when I look at, did we achieve what we are laying out to achieve with Project Catalyst, the answer is yes. And now I think we are turning more North America towards some tweaking of things where we have got a little tweak of the comps plan to address some of the feedback we got from our sales reps. We are also looking at adding more people as we go forward as we start to look more at growth in 2009 rather than a cost-led plan.

So I think that with market segmentation approach, which is something that we have laid out, is starting to get some traction. I think that we're going to continue to see that effort throughout 2009. So I think there is a fundamental shift going on through the balance of the year in distribution North America aimed less at cost and more at improved performance and how we grow the business over the long-term.

Okay. And with regards to that (inaudible) growth, can you comment on the size of the sales force, where you think you want to take that and how sales force hires might be ramping up currently?

I would rather not comment on that yet. And the reason is, there are some areas where we are looking at increasing geographically, as well as by the segment, and we have not completed some of the planning cycle yet.

Okay. Thanks a lot.

I will provide that information in the future.

Edward Marshall, Sidoti & Co.

I have a question. I thought the distribution segment was predominately North America, about 75% of revenues. (multiple speakers)

Two-thirds or something.

Two-thirds. So Europe must have been a pretty big drag there (multiple speakers) bringing margins down.

Absolutely.

I mean are we talking double-digit loss here?

No, but we also saw stability and improvements later in the quarter, and that is why we are encouraged. We certainly had some structure cost that we took out in the quarter. But I think that I'm not worried from the perspective of that we have a freefall or anything of that nature. I think it is more stable than it was. I think when we look at the systems and how they have matured over the past six months, they certainly have matured. And when I talk about systems, it is IT systems, as well as the financial and infrastructural systems as the integration progresses.

So from that perspective, I'm not that concerned from that point. I'm more concerned that we spend the money and do what we have to do to make this business a profitable, long-term growth opportunity for us, and that is really what all our focus is on right now. It is not crisis management.

Okay. It may be too early to tell, but is there a timeline that you could provide for profitability in the European segment?

I would rather not comment on that right now. I have gotten in trouble on that before.

Fair enough. The backlog seemed to tick down just a bit, and I understand the $20 million in the 787. But what is driving the remainder of the year-over-year or the sequential decline?

Well, it is a combination of two things. We had a really strong quarter in sales combined with the fact that, as you see pushouts, you also are not getting the orders in that you would have expected otherwise in the 787 program. So it is a combination of both of those. So we expect that to pick up again out in 2009. But you are suffering kind of the double whammy on the 787 pushouts.

Okay. And going into Boeing's call yesterday or Wednesday I guess, the 787 looked like their timeline was third-quarter '09 delivery. So there is really no change there.

I guess my question is, if we start to see the ramp-up in fiscal -- I mean in 2010 -- will we see a benefit kind of hit second-half '09 for you as those orders for those engines start to come into play?

Absolutely. Typically it is anywhere from six to nine months between the time an engine hits the wing of an aircraft before the parts are ordered, and I might add that has compressed considerably. I think that the OEs, GE, Rolls-Royce have done a great job of compressing that timeframe. And also the majority of our sales or a large portion of our sales are on the sale components for Goodrich on the deal we did last year that we announced. And our Ogden plant is coming online very nicely, and that is coinciding with the need. So I think that we are looking at late in the back half of 2009 anyhow that we should see some significant uptick in production.

It also gives us time I might add to take out costs through concurrent engineering and the like. And normally you have very little profit in early production articles simply because of the learning curve issues, and we're using that time not only to work with the OEs to take costs out of the product, but also to improve the profitability before the larger production ramp-up.

Profitability is where I was leading that question to. So I mean I guess we can assume that by what your comments just were, we should see that as a profitable segment for you going forward in the second-half '09 for the 787 business?

Again, it is based on demographics of the product, as well as the time frame for learning curve, but we expect it to be reasonable to profitable.

And Frank, one last question. I think when you mentioned the cash flows, I may have missed it, but I did not hear anything about -- I heard acquisitions, I heard internal growth -- but I did not hear anything about share buybacks. I know you have a 5 million share repurchase in play and at $24. I'm just curious as to what management's thoughts are or board's thoughts are about buying shares back at this level?

Well, again, as I said earlier, we have a number of issues that we deal with where we are dealing with our free cash flow. So we have a lot of priorities as we look to the long-term. We do have specific plans, though, as it relates to stock buybacks. In other words, we have specific prices laid out. And if and when the stock price hits those, we will be active buyers. While we did buy some shares in the second quarter, there were not a lot of shares, but I anticipate that if the stock does fall to the levels that we have laid out, we would become more active.

John Emerich, Iron Works Capital.

Last one. What was organic growth in the quarter?

For the Corporation as a whole?

Yes.

I believe it was just over -- well, we will get it accurate.

Actually it was down slightly. I'm sorry. Yes, organic growth was down slightly.

Then what were the -- (multiple speakers)

The organic growth overall for the quarter was 3.6% if you're talking about the Corporation as a total.

What was it down slightly in reaction to then?

I'm sorry. I was looking at -- we had negative organic growth in some of our other businesses, but overall for the total business, as Frank mentioned, it was about 3.6% for the quarter, the base revenue percentage change.

Seaver Wang, Utendahl Capital Partners.

You guys kind of touched on this already, but I am just wondering if there were any plans for smaller kind of business portfolio changes in the near future? You have a divestiture of Spectrum Plastics. Was that profitable?

One, we have not announced any changes in our portfolio. The divestiture of Spectrum was largely because the plastics business is not core to our overall marketplace, and I think that it is going to do much better in an organization that acquired it, which is a core plastics business.

I will comment that our pipeline is very full when it comes to our acquisition candidates that we have out there, and we're actively pursuing potential acquisitions. But I will tell you that we have a very high standard that we are looking at when it comes to acquiring a business. We have a very defined filter, and we're very pleased with the level of activity out there. I think some of the other people -- I have listened in other conference calls where they say that with the private equity players being less participative -- I cannot even say it -- having less of an effect on the market, that multiples are reasonable and that the number of opportunities out there are definitely there.

Are we talking about more Aerospace? Because you guys kind of got priced out of that because of all the private equity guys and just the high valuations of --?

It is a wide range. You know, everything, every area that we are looking at I think that there's opportunities. I would also say during economically difficult times, there are always opportunities that you might not find during robust years. So we look at this as a good opportunity, good time to be in business.

Okay. So acquisition -- the pipeline is pretty --

It is very active.

Active for all three segments?

Well, we still have a moratorium on our distribution business. Over time if one point in time does not make a trend, but if we continue to see the type of support that we saw in North America, we will certainly consider lifting that.

Matt Summerville, KeyBanc.

A couple of questions. First, can you comment on the sequential operating margin performance Barnes Distribution North America Q2 versus Q1? Did margins improve on a sequential basis? And then similar with respect to Europe, did the loss actually widen on a sequential basis?

Well, the answer is it improved in North America sequentially, as well as year-over-year as you know -- or you may not know. We did. But I think in Europe there were onetime issues, etc. that we had to take impacts on. So I think it was disproportional to North America as far as its impact. But we did some things that we had to do in Europe.

The $1.5 million that I think you disclosed in the press release, how much of that was Europe?

I would say about one-third of that was European. About one-third.

As we move into the back half of the year, you're at about 4.5% operating margins in distribution to the first six months. You're looking to get to 6%, so that means you need to do somewhere in the neighborhood of 7% to 8% in the third and fourth quarters I guess. What are you seeing right now in Europe that gives you confidence that you're going to get there, even though you won't commit to an exact timeframe where Europe makes money. I would think it pretty much has to in the back half of the year for you to hit 6% unless I am thinking about this wrong.

I think your math is good.

I would comment that I do see some continuing improvement in margin in North America. And then combine that -- combined with that is some stabilization with some improvement in Europe. We're not just selling significant improvement in the second half as we see that this is going to take a longer time than we had originally anticipated to turn it around to the degree that we think it needs to get to to perform at the level that we think that business can perform at.

Have you seen either within industrial or within distribution any signs of softening in Western Europe at this point? And then can you comment with respect to distribution North America as we move through the second quarter on kind of a month by month basis the trend that unfolded with daily sales rates?

Alright. The first part I will talk to, not only distribution but our industrial businesses in general in Western Europe. And because some of these businesses have global customer bases, we have not seen the softness. In fact, it is quite robust and continues to be. So we have not seen that.

As far as daily sales average on a monthly basis, I don't think that is something that we have disclosed in the past, and I'm not sure it is something we want to start.

Well, alright. Maybe then I guess what I was looking for, Greg, is, did daily sales rates erode as the quarter progressed, and are they still eroding here in North America?

Alright. Well, we have only got a couple, two, three weeks into July, and the way our months work there's two trigger points in the month. So we would not be able to tell if there is a trend in Q3 just yet. But I have seen no significant drop-off.

Okay. So organic growth in distribution, just to be clear, was definitely positive in Europe in the second quarter. For distribution to be down 5% then, North America had to be off high single digits. Was that fair?

Yes, that is probably what you will be looking at. That is a good assumption.

Okay. Then I'm still a little unclear, and part of the reason is I don't think I heard the full answer. But the backlog shrinkage of $50 million from the end of 2007, $20 million of that is related to 787 deferrals.

One, is that going to get worse do you feel based on the discussions you're having with your customers there? And then two, what exactly was the other $30 million?

Well, also you also not only had deferrals from existing orders, but you did not place the new orders that would have normally been accompanying the 787 had the schedule not slipped. So you have a double whammy. You debooked, as well as not received a new booking.

Okay. Alright. I got you.

So that is the bulk of it. But when looking at the internal schedules and the like, we think that is the bulk of the adjustments. And at the same time, I'm not panicked in the least. In fact, I think that the 787 I think both the GEnx and the Trent engine have a very bright future in front of them.

The other thing that people have not commented on, and many of the industry analysts, is the secret successful program is the GEnx on the 747-8. When you look at the number of orders out there and the fact that the 747-8 has four engines rather than two -- and by the way, the more engines on a plane, the better I like it since we're primarily engine focused. That has definitely been a successful program by anyone's standard for airframe of that age, especially something that has such a bright future in front of it.

Okay. And then, Frank, what was your operating cash flow in the second quarter, capital expenditures?

You want operating cash flow or the capital expenditures?

Both please.

Right now, for the second quarter -- and this is I will call this a semi-preliminary number because I have not disclosed this -- was about $51 million of operating cash flow for the quarter. And I'm looking at -- give me one second -- about the same level of -- no, sorry. Slightly up. I'm up around $14 million of capital expenditures in the second quarter, up from around 12 in the first.

Okay. And then lastly, can you just give the numbers and growth statistics within Aerospace and the different buckets you have historically talked about, RSP versus other aftermarket and then on the OE side commercial versus military?

Yes, Matt. For those, I can give you some of that color off-line.

Alright. That is fine. That is all I have.

Fred Buonocore, CJS Securities.

Greg, I just wanted to follow-up on that excellent overview that you gave on the Aerospace segment. That was very helpful. I wanted to talk about some of the older platforms. Have you quantified in the past your contents as a percent of your Aerospace revenues on platforms like the older 737, DC-9, MD-80?

It is so low that we don't spend a lot of time on it. When you look at those type of aircraft, we tend to focus on things that require higher levels of technology. So when we look at things like our superplastic forming on the OE side, superplastic forming of titanium or electron beam welding, things that we do very well, they tend to lend themselves more towards more advanced engines. And that is simply the primary driver of why we don't pay attention to old JT8D and JT90s, the earlier generation turbofans.

So it is simply a matter of our technical focus that has driven us towards more fuel efficient aircraft.

Right, I see. So while you are on some of these platforms, the revenue generated from them is virtually insignificant?

Believe me, it is a rounding error.

Got it. Got it. And then on the industrial side, are you benefiting or do you stand to benefit from trends in alternative energy, specifically the buildout of a lot of wind power that we're starting to see?

Actually we attended the wind energy forum down south recently last month I believe it was, and we had a fair amount of interest. We do some retaining fasteners for -- large retaining fasteners for wind energy gearboxes and the like, and it has been a business that is primarily out of our [Sier] location in Germany. And it has been a very robust business for us. It is amazing how many of those wind turbines are out there and how many are coming.

Right. Well, very good. That is all I have, and we will look forward to seeing you at our conference next month.

Peter Lisnic, Robert W. Baird.

Yes, two quick ones hopefully. Just on the 45,000 shares you bought back, can you give us an average price on those?

I do not recall what they were.

Okay. And then Greg, can you give us a sense as to what the materials costs outlook might be, and what that might mean for margins in the back half of the year for the industrial business?

For the industrial? We did see some modest increases in some of the flat stock, and we believe that most of that we will be able to pass through, although we anticipate some sort of increase in Rostock. But what defies logic is, when you look at the decline in North American auto production for example, that should theoretically have a significant drop in demand for that particular commodity. So it is a real question on whether that is sustainable or not as far as any price increase.

For the most part, we have been able to pass through that material cost. However, when we look at some of the more specialized material, that is where we are more challenged and we have to work harder at, and that is things like valve grade steel wire, things of that nature. But that is built into our forecast as well.

Alright. That covers it.

Chris Glynn, Oppenheimer.

So comments that the acquisition pipeline is full and comments around the strict disciplines, I think you have been saying it has been pretty full for quite some time. Have you thought about at all if maybe some of the disciplines are unrealistically strict?

No, actually I think we have only commented on that probably six months ago is when we made the last comment that it was full. So it has not been that long. But yes, I could be -- people could accuse me of being too picky. I agree. But at the same time, I think that is good for us long-term.

We have spent a lot of money building up a very sophisticated corporate development department where we have a lot of people evaluating businesses, evaluating specific markets, evaluating long-term trends that match the marketplace to our acquisition targets. So we do a lot of upfront work on these. But I think when we do an acquisition, you will find it fits very nicely with us for the long-term.

So if there is a criticism, I accept it that I'm very being very picky.

Okay. Just lastly, do you know when the Q will be out?

It will be going out next Friday.

David Sachs, Hocky Capital.

A couple of questions. One, on the US distribution business, could you talk a little bit about your strategy there? You have mentioned sales were down high single digits. Is that a function of pruning unprofitable lines or unprofitable customers, or is that a market share issue?

It is a little of both. One of the things that we mentioned earlier in the Project Catalyst is that we definitely planned on some sort of attrition of customers that did not value our service the same way that other specific market segments did. So there is a portion of that. Can I quantify it for you? No, I cannot. But our estimate based on anecdotal evidence talking to sales folks, etc. is it is a portion of each.

Okay. And I guess we were also changing the compensation structure for the salespeople. Was that a function -- (multiple speakers)

I absolutely believe there was salesforce disruption due to the comp structure changes. It was an absolute necessity. We had 17 different comp plans, and you cannot have 17 different comps plans in a single organization. And we also had to fundamentally shift it towards a profit-centric focus versus a sales-centric focus, and I think that was healthy for everybody.

But at the same time, we've spent some time listening to the folks in the field. We made a change early in the year, and we made a change that we announced yesterday. And that is totally based on the feedback of the sales folks, which we value tremendously.

So we made those adjustments, and I think fundamentally it will work over the long-term. And as time goes on and market conditions change, we will make further adjustments. But I think for the most part, it went smoother than I personally anticipated, but I think it was in line with what we had expected as far as disruption.

And do you feel that the revenue basis is call it rebased at this level, and we should see some improvement from here, or are we still trying to feel our way to a landing point?

I'm more cautious simply because a lot of the salesforce is based in North America, of course, and North America has a segmented recession going on. I say segmented because some specific industries are really going badly, as you know, housing or the transportation industries. So it is hard to gauge that without doing some pretty serious analytical work.

Your profitability has recovered to an unprecedented level, at least in the last decade as you point out. So in the context of declining sales and comp change, your profitability has been rather impressive.

Yes, I think there is a lesson I learned many years ago when the boss told me that you don't grow into profitability. You grow profitability. And I think that has stuck with us over the years whether if you talk a couple of years back, three years back when we looked at trading certain sales at our industrial business or what we did in Barnes Distribution. The fact is that if you're going to grow sales, you have to make sure you have the right sales base to start with.

So I think that fundamentally until you are profitable, if you think you're going to grow into profitability, I think that is somewhat of a fallacy.

On the M&A question from earlier and the buyback question, are you comparing acquisitions versus the inherent value of your stock at a certain price to determine what makes more sense, or is the -- how are you comparing sort of use of capital or allocation of capital?

Any business leader does that all the time. We have obviously fairly strong cash flows, and we have alternative uses. I will also say that the marketplace has been fairly irrational when it comes to our particular stock price. We believe we are significantly undervalued by comparison to the alternatives. So that there is an opportunity to take advantage of that. But at the same time, we are balancing that against the potential acquisitions we have in the pipeline.

And is there a level of debt to cap or EBITDA to debt that you're comfortable assuming or moving them to?

The range that we like to deal in is 40% to 45%. I will not tell you that if we have an opportunity we will not go above that. Right now we're slightly better than 40%. We are around 39%. So we're very comfortable at those levels.

Okay. Last question. Just in terms of the initial thinking for 2009, are there any thoughts you can share with us in terms of how you're seeing the Aerospace demand or topline in your other businesses looking for 2009?

What we're positioning for both in our productivity improvement programs, which have been very successful, if you look at the productivity growth year-over-year, that was substantial. We had 11% sales per employee benefit for the entire Corporation, and I think we're looking at continuing that into next year, as well as we expect the actions we take between now and the end of the year will continue to foster growth in 2009. So I think in general we remain bullish on the overall business.

There are no further questions at this time. I would now like to turn the call back over to Mr. Brian Koppy for closing remarks.

Thank you very much, and if there are any follow-up questions, please don't hesitate to contact me. Once again, thank you, and have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.