Barrick Mining Corp (B) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2009 Barnes Group earnings conference call. My name is Lauren, and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Brian Koppy.

Good morning and thank you for joining Barnes Group's first-quarter 2009 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 Senior Vice President of Finance and Chief Financial Officer, Chris Stephens.

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. Please consider these risks and uncertainties that are described in our periodic filings with the Securities and Exchange Commission and are available through the Investor Relations section of our corporate website at bginc.com.

We will begin today's call with brief opening statements by Greg, and then Chris will provide some financial details, and then we will open the call up to answer your questions. Now let me turn the call over to Greg.

Thank you and good morning. Despite the current economic environment, we have made progress on our various strategic initiatives in the first quarter. In the face of slowing sales and softening demand, we have remained focused on reducing our operating costs, improving our capital structure and cash generation ability, investing in lean enterprise activities and growth opportunities and continuing to provide quality products and superior services to our customers.

Let me take some time today to detail these activities. Back in 2008 we took several significant and proactive steps to align our cost structure with a changing business environment. These actions provided a meaningful benefit in our first-quarter results. While these actions were difficult, particularly for the employees and communities affected, they were necessary to maintain our long-term financial and competitive position.

Since the first quarter of last year, we have reduced our workforce by 16%, completed or announced the closure or idling of 10 of our facilities totaling approximately 400,000 square feet or roughly 9% of our total square footage, and implemented a variety of other organizational changes that will serve the Company well in both the long and short term.

Additionally, we continue to take prudent stance on investments in our business. We are committed to improve our operating cost structure without sacrificing our long-term strategic objectives. The cost-saving actions we undertook last year are on schedule to achieve our projected $40 million in anticipated savings, and further productivity improvements in our business will provide incremental benefits.

Our capital structure continues to be another area of focus. We have no significant debt payments due until September 2012 and ample credit available on our revolving credit facility. Nevertheless, we continue to work towards improving our operating cash flows.

During the first quarter, we improved our cash flow from operations by $16 million over the prior year, typically the first-quarter results and net cash usage, but we generated $5.4 million from operating activities this year. Our Companywide efforts to improve working capital will further strengthen our cash flow as we move through 2009, and Chris will share these details and projections with you.

Our lean enterprise activities remain an important long-term initiative. And in the first quarter, we continue to realize the benefit of these actions. The ongoing development of our Barnes Enterprise System, or BES, allows us to standardize, align and enhance our operational activities for optimal performance. The enterprise-wide system strengthens our ability to meet and exceed our customers' expectations for service, quality and delivery and further drives key productivity measures. Our ongoing lean enterprise training and deployment of lean experts throughout the organization are providing tangible operational efficiency benefits and are providing opportunities in the marketplace as we focus on delivering additional value to our customers.

For example, in our Aerospace MRO business, turnaround time is critical. Focused lean activities reduced turnaround time on a complex engine component repair by 46%, and this type of operational efficiency is being achieved throughout the Company. As we continue to streamline our operating platform and drive efficiency, we are also committed to the continued delivery of high quality products and unparalleled customer service. We have been making and will continue to make investments in sales recruitment and sales training programs as we build out capabilities in our Distribution business and in Aerospace for the ramp-up of 787 production.

Our broad portfolio of offerings and the strength of our customer service positions us well in our markets, and we are optimistic about the long-term opportunities.

Let me now provide you with an update in each of our business segments for the quarter. In our Logistics and Manufacturing Services segment, we saw continued softening of demand in many of our key markets, particularly in Transportation and Industrial, although we have been able to sustain our position for critical market segments such as food processing and waste disposal. Lower demand across the end markets of our Distribution business, as well as continued inventory compression, impacted sales. But we remain encouraged by our Aerospace market and the stability provided by our aftermarket maintenance business.

Sales within the Aerospace aftermarket were impacted year-over-year due to incremental management fees on the revenue-sharing programs. However, sequential sales did experience a slight pickup.

Our continued focus on retaining and increasing orders with existing customers while adding new customers and penetrating existing customers, particularly in targeted end markets, should establish a strong base for long-term growth when the market recovers.

In regards to our actions taken in the fourth quarter to address the European Distribution business, we are encouraged by its ability to generate sequential sales growth and improve results given the recent structural changes and difficult macroeconomic environment.

Logistics and Manufacturing Services will continue to focus on delivering superior customer service, improving productivity through the implementation of lean activities and improving inventory management to position it for success when the market recovers.

Turning now to Precision Components, the slowing pace of sales globally drove revenues down in the first quarter. We are encouraged by the relatively flat sequential sales for the segment but remain cautious given the reduced visibility.

Precision Components was impacted by severe declines in the Transportation end markets. Even though Precision Components direct exposure to the big three Automotive OEMs is small, the indirect exposure to the automotive industry is approximately one-third of sales. As a result, the significant auto production declines are impacting our broad automotive customer base.

The Aerospace OEM business experienced some increase in demand following the end of the Boeing strike. But this is partially offset by reduced production in inventory levels within the industry. Our Aerospace backlog of $365 million remains healthy as orders improve sequentially. The Aerospace OEM backlog at the end of 2008 was $377 million.

Regarding Boeing's recently announced cuts to 777 production next year, as many of you know, our production of GE90 engine components generally lead the 777 aircraft deliveries schedule by six to nine months. Based on Boeing's announced production reduction of seven to five airplanes per month, beginning in June of 2010, it is expected that we will be impacted in the second half of the year. We have approximately $500,000 per engine or $1 million per airplane of production value. This translates into an annualized impact of $24 million. We were proactive in preparing for this event as the announcement was anticipated, although the decline was greater than expected.

In addition, the ramp-up of 787 production is expected to offset some of the 777 production delays. Although stresses in our end markets, particularly Transportation, have exerted pressures on topline growth and operating margins, Precision Components remains focused on strategically aligning its sales effort, improving productivity, reducing costs and increasing capital efficiency. We believe that Barnes Group will be competitively positioned to deliver strong sustainable financial results in the long term.

We remain focused on executing our cost-saving initiatives and prudently managing our cash position. We have made progress this quarter to rationalize our costs and improve efficiencies without impairing our near-term opportunities. This process was started in 2008, and we will continue to build on our momentum by strengthening our sales recruitment and training programs, enhancing our value-based selling approach and driving our lean enterprise activities to improve our operating efficiencies of our organization.

Before I turn the call over to Chris, I would like to take the opportunity to address a topical issue with Chrysler and General Motors. We continue to monitor the developments at Chrysler and GM, and today I would like to share with you where Barnes Group stands. GM and Chrysler together represent less than 2% of total direct company revenues.

Over the past few quarters, we have seen volumes at GM and Chrysler decline well in excess of our overall volume declines.

In regards to Chrysler's bankruptcy and restructuring, it is too early to determine the impact on their business and ours until the plan becomes public. However, we are certainly closely monitoring the situation. Our receivables outstanding for Chrysler as of April 30 was approximately $700,000. As it stands today, a number of Chrysler and General Motors operations are expected to be down to multiple weeks. We expect the disruption in our operations as a result of these events as our customers react to the shutdowns, and we have implemented cost reduction countermeasures to partially offset the financial impact.

Finally, as further details of the situation become available to us, we will respond promptly and prudently.

Now I would like to turn the call over to Chris who will run through some of the financial details. Chris?

Thank you, Greg. Good morning, everyone. What I would like to do for you this morning is provide details on the results of our first quarter and provide additional color on our revised 2009 full-year outlook. Let's start with the topline.

The Company's reported first-quarter 2009 net sales of $262 million, a decrease of 32% from prior year. Sequentially sales were essentially flat from fourth-quarter 2008. Our ability to generate sales growth was impacted by sharp declines in the North America Transportation market and the global Industrial markets, as well as declining airline traffic, capacity cuts and the supply chain adjustments anticipated by reduced aircraft production.

Another driver to the sales decline was the impact of foreign exchange given the stronger US dollar. International sales were negatively impacted by $14 million in the first quarter of 2009 compared to the first quarter of 2008.

In addition, last year's sale of Spectrum Plastics resulted in a sales reduction of $1.3 million as compared to the first quarter of 2008. I will also comment there were two fewer working days for us during the first quarter of 2009 compared to prior year.

While sales were lower than anticipated in certain businesses, the impact of productivity actions, including the benefits of cost reduction efforts announced in the fourth quarter of last year, positively impacted overall financial results.

Operating margin for the Company came in at 7.8%, a 560 basis point decline from the first quarter of 2008. The actions taken last year have provided a considerable cost benefit to the quarter and continue to track towards our full-year goal of $40 million in savings.

As Greg mentioned, we have undertaken additional actions to improve our cost structure and operational efficiency. These actions are broad-based and include such items as workforce furloughs, incremental material and labor productivity actions, and further reductions in discretionary spending as compared to 2008. These actions are expected to yield additional cost benefits to the year to partially offset continued pressure on our topline.

Turning now to cash flow, we have been pleased with our cash generation over the last six months, considering the challenging economic environment. We are confident that our cash flow generation and credit facilities are adequate for the Company's anticipated requirements.

As we have previously mentioned, given the importance of cash generation in this environment, we've put in place a number of incentives and initiatives this year to improve cash generation, mainly focusing on reductions in working capital. Although we were still a cash user of working capital during the quarter, it was at a lower rate than the first quarter of 2008. A highlight in working capital was lower inventory levels at both business segments during the first quarter of 2009 compared to the first quarter of 2008. Inventory management is a key area of focus for us this year, and in the first quarter, we successfully reduced our inventory levels by $18 million compared to year-end 2008 and no impact to customer delivery metrics. We are confident we can continue to make significant progress in reducing inventories and improving our working capital as we move throughout 2009.

Moving on to capital expenditures, for the first quarter, we had capital investments of $9.6 million, represents a 21% decrease from first quarter of 2008 and reflecting mostly from capital approvals that we had towards the end of last year. Based on our latest outlook, we now expect 2009 capital expenditures to be in the $30 million to $35 million range. We are committed and we will continue to invest in capital projects that contribute to our long-term success.

Based on the favorable cash flow from operating activities this quarter, we remain confident in our ability to achieve our goal of a cash conversion equal to or greater than 100% of net income.

Turning now to highlights on our balance sheet, our debt to capitalization ratio was 45% at the end of the first quarter compared to 44% at the end of 2008. At quarter-end, $261 million was borrowed against the Company's $400 million facility, which matures September 2012.

The debt to EBITDA ratio on our credit facilities was less than three times versus our debt covenant of four times. Based on this ratio, our facilities would allow for additional borrowings of approximately $176 million, well in excess of the Company's unused credit facilities of $139 million. Moving forward, of the company's long-term debt portfolio, only $15 million is due this year and $15 million is due in 2010.

The Company's effective tax rate from continuing operations for the quarter of 2009 was 18.7% compared with 21.4% in the first quarter of 2008. The decrease in the effective tax rate from '08 was primarily driven by lower results in operations based in North America. The tax rate for the full-year 2009 is projected to be between 18% and 20%, which is lower than the initial estimate of 22% to 24% due to lower growth in high tax jurisdictions.

First-quarter diluted average shares outstanding decreased nearly 6% from the prior year to 52.9 million. The decrease was primarily due to the dilutive effect of potentially issuable shares under employee stock plans, stock buybacks in the fourth quarter of 2008, and convertible notes, which are impacted by the change in the Company's stock price.

In prior quarters a significant portion of the diluted share count was impacted by the convertible notes given a higher stock price. The level of dilution from convertible notes begins at the conversion price of $20.69, which was above the average closing stock price of the last 30 trading days of the quarter. As a result, during the first quarter, the convertible notes were not dilutive. For 2009 the estimated diluted share count is in the range of 53 million to 55 million.

It is important to remind everyone that the accounting for convertible debt instruments changed effective January 1, 2009; therefore, prior periods have been retrospectively adjusted. The reduction in diluted earnings per share for 2008 was $0.08. As a result of this adoption, we have provided a financial supplement on our website reflecting the retrospective adjustments to prior-year results back to 2005, and our 2009 guidance has already taken this into consideration.

Now let me end with a few comments on our revised 2009 full-year guidance. Given the continued difficult economic environment and the rapid decline in demand we experienced in many of our key markets, we have revised our full-year guidance from $1.20 to $1.35 per share, which is the low end of our previously issued guidance of $1.20 to $1.50. This reflects a revised topline decline of 15% to 20%, which includes the foreign exchange impact from a stronger US dollar as compared to 2008.

As a result of the reduction in revenues and our ability to generate additional productivity benefits, our full-year operating margins are now expected to be in the 9% to 10% range. We continue to remain confident that the fourth-quarter 2008 cost reduction actions, combined with a number of incremental productivity actions, will yield important savings for the coming quarters.

Our 2009 goals of improving cash generation and adjusting our cost structure are providing benefits. These efforts, along with our ability to generate profitable new business, will position Barnes Group for continued long-term success.

Now I would like to turn the call back to Brian.

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

(Operator Instructions). Christopher Glynn, Oppenheimer.

Greg, just wondering on the trade-off between the 787 and the 777, I guess you have visibility on the ramp down of the 777, maybe lacking clarity on the 787. But anything you could fill in there, and additionally kind of the operating margin trade-off as that program gets going.

Great question. One, I think a lot of people have gotten in a lot of trouble trying to forecast the 787 schedules overtime. But I think I am encouraged when the aircraft is -- the first lead aircraft, of course, is in the paint shop, and that is the final task before you prep it for actual flight, and that is expected this quarter.

We do have initial production schedules for the balance of the year. I will wait until that airplane flies before I comment on that, but the trade-off is such that it is a negative trade-off in the sense that early production of the 787 components whether they be airframe or engine will have a learning curve associated with it. While the 777 is learned out and fairly efficient. So I won't give you the exact numbers, but dollar for dollar they are not equivalent.

Okay. And what is -- not putting a starting point on the ramp-up, but what is the lead time to get back to replacement margins?

I think we're probably talking about the middle of next year.

Okay. Great. And then just on the Aero aftermarket, if we could dive into the outlook for the year in terms of sequential revenues, you have right now using that as a baseline, and what do you have for -- you alluded to some new wins. Maybe what do you have layering in as the year goes on?

Sure. I was just down at MRO Conference, Maintenance Repair & Overhaul Conference in Dallas, and the term I heard more than any other was flat is good. That is what we're basically expecting out of MRO for us this year, and that is based on the fact that the aircraft demographics favor us significantly for the narrowbody engines and in particular CFM56, etc. But with deferred maintenance and some of the groundings of fleet, I think that will temper that growth rate, so we will end up with a net flat. So I'm expecting through the balance of this year to have a roughly flattish year throughout the year.

That is with the first-quarter levels?

Yes.

Great. Thank you very much.

Fred Buonocore, CJS Securities.

Yes, good morning, gentlemen. In the past you had given a sense for what profitability looked like in the Distribution business in North America versus Europe. Now understanding there is a lot of moving parts going on and with your cost reduction initiatives and volume declines, that might be tougher to do, but can you dimensionalize that for us somehow?

Sure. There's a couple of things. One is, as you know in the third quarter of 2008, we achieved double-digit [ROS], which is a historical run-rate through much of Barnes Distribution's history, and we are very pleased with that. We remain profitable through the first quarter, and I would also say that we are taking specific actions that will not help profitability but will be an investment in the long-term. And that is we have a stable salesforce of about 1100 people that has been level since last summer. We actually expect to be adding to that through the balance of the year. So we are actually looking at our Distribution business as being an investment for the back half of the year and into 2010. As the economy starts to recover, we need the salesforce in place out in the field. So there's things that we could have done to improve profitability, but we are not because we're looking at it as an investment.

As far as Europe goes, it is very encouraging. I think the actions we took in the fourth quarter were very deliberate, and we expected a step change function in profitability, which we did achieve in the first quarter. And we could comment on that more in the second quarter because we look at it as one point in time does not make a trend. But I think I see a lot of encouraging signs in Europe. I think, especially given the macroeconomic headwinds we're facing, I'm very encouraged. I think some of the other actions we have taken such as reducing the number of distribution centers at the Atlanta DC closure, we actually have an improvement in first run fill rates. After that was accomplished, I think that is a real tribute to the operations staff.

We also improved our sourcing activity tremendously with the global sourcing operation, so that is actually aiding the Distribution business in a big way. I hope that gives you a little more color.

No, that is helpful. Thank you. And then just a follow-up, understanding that Transportation is weak across the board and around the world, can you give us a little bit more granularity or color around the different drivers of your Transportation-related business in the Industrial side versus the Transportation-related business in your Distribution side?

Sure, several things. First of all, many of the businesses that have direct or indirect -- Transportation, Automotive, etc. -- are down more than 50%. Our European manufacturing businesses, collectively the hedges and gas products, Seeger and Hanggi are down 50% roughly.

The good and the bad about this is the end markets are not down 50%, which tells you immediately that this is a temporary inventory compression. That is more than rhetoric because you can look at the US GDP numbers and see that a good part of the 6.1% reduction in GDP was inventory reduction. So I think that in many ways the dramatic declines are temporary, and I expected through the first half of the year to see that inventory compression take place. I hope to see in the later half of the second quarter that relax a little bit.

As far as the LMS or our service side of the business, a lot of that has to do with transportation associated with fleets such as the trucking fleets and the maintenance support of those things. We also see a big reduction in manufacturing activity and mining.

So there's a lot of changes in the Industrial marketplace that are directly related to reduced economic activity on the Industrial side of the business. I hope that gives you a little more idea of what is going on.

Yes. Thank you very much.

Edward Marshall, Sidoti & Company.

Can you talk about the trends in the Distribution segment we saw from some of the competitors? You know, the month to month trends sequentially getting worse heading into the quarter and into April? Can you kind of talk about the trends that you are seeing? I mean have you seen a slowdown quarter to quarter, or has it actually gotten a little bit better?

We have not seen it get better, and I will speak not only of the Distribution business. A lot of people look at that as a leading indicator. What we have looked at is our catalog business being a better leading indicator because it tends to focus on tool and die industry and things of that nature.

That is the only bright area I could point to is that quote activity was the highest of the year in the tool and die catalog business, which is a part of the LMS. That is the only positive indicator I can see right now. And that is not fulfilling the orders; that is just quote activity. The rest of the businesses are fairly flat throughout April as well, and the only bright thing I can say there is it is not falling as it had been through fourth and first quarter. So it's a lot better when at least you see some sort of floor. I still expect second-half improvement even if the macroeconomic market does not improve simply because inventory compression will be completed, so we should see some level of recovery even if the end markets remain flat. So I won't put a percentage gain to that, but clearly our sales drop markedly more than the end markets have.

Now when you say you are expecting a second half replacement of inventories, are you talking about some kind of significant restocking or just kind of orders being in line with demand?

No, it is simply orders in line with demand. If you look, for example, at let's take auto production, it is down, let's say, even if it's down year over year 30%, our decline has been over 50% in many cases. So even if we recovered just to the normal production rate of 30% down, we would still see a significant uptick in the back half of the year. And that is just one market. There's a lot of markets that we're looking at the same type of issue.

Sure. And then from a working capital standpoint, you mentioned it a few times. Do you have a target for the year, first, whether it will be use or cash inflow? And then if you would like to take a stab at the national (inaudible) number.

To kind of comment on the fourth-quarter call and as we saw some benefits here in the first quarter, we are obviously pleased with our inventory reduction in working capital, but overall we were still a user of cash. It still does not take away from obviously our overall objective is to be a cash generator this year versus last year being a user as we commented on.

Hard to put a specific number on that. I could say we are pleased with the actions we have seen so far in inventory, but we have got a long way to go yet. When we are in a state of being able to kind of put some numbers around that, we will do that. But we are still focused on cash generation in the year.

How much inventory do you think you can take out of the system this year?

We were able to reduce it by almost a little over $15 million during the first quarter. I think a lot of it will also be driven by what we see in the top-line, right, just to kind of build on Greg's comments in terms of that replenishment to the extent it comes through and the impact it is going to have on our inventory numbers. We see reduction year over year, but it will obviously depend on how much given the topline.

Sure. And then finally, the impact of currencies given that on the topline. Could you discuss with respect to operating profit in each of the segments and what the impact of the currency was?

Yes, just in terms of the topline, what we saw in strengthening the dollar year over year, and it is roughly $14 million in terms of our driver on the topline. I would say we were able to profile that. The mix of that operating margin line is really insignificant. It is really just the topline.

Matt Summerville, KeyBanc Capital.

A couple of questions. First, Greg, can you quantify how much of the $40 million in cost saves you achieved in the first quarter?

I will let Chris handle that one.

Sure. When we talked about the $40 million kind of coming off the fourth quarter, we said this was definitely going to be kind of a first-half, second-half story, the first half being a little bit less than the second half. Our latest look recognizing some of those actions are in front of us. We will roughly save 40% of that savings in the first half, 60% in the back half. So if you kind of quantify it, $15 million, we achieved almost half of that in the first quarter. So we're tracking well to our $40 million in savings, and we are encouraged with our progress to date.

With respect to the topline guidance for the year, you were down 32% all-in in the first quarter. You're looking down 15% to 20% for the full year. I just want to make sure I understand, Greg, what you are sort of baking in there for the second half of the year in terms of a recovery if anything? Because I would think with the impact you talked about maybe in Aero that that business maybe gets a little worse in the second half before it gets better. I want to make sure I understand the second half versus first-half dynamics in terms of the topline.

Sure. A big part of that has to do with the inventory compression ending. So even if -- and my personal opinion, as well as many economists, that we won't see much of a macroeconomic recovery in 2009, more likely into 2010.

With that said, even with the recovery of the inventory compression when we take a look at our gross reductions in the first quarter versus the actual end market run-rates, we should see a significant recovery in the back half of the year on the topline simply with no end market improvements.

How much -- if organically ex-currency your sales were down instead of the low 30s with currency, maybe the high 20s, how much do you think your end markets contracted by in the first quarter?

You have to be specific. If you look at the auto industry, the numbers that we have seen, and I'm not talking sales, I'm talking production, are down about 50%.

So one of the things that I would say that is promising is, if you look at the attrition rate of vehicles on the roads and the average age of vehicles out there, that there is bound to be a recovery eventually to attrition rate levels at least, and that would be roughly a doubling of the current production levels.

So I'm encouraged in the sense that we have gotten costs in line, and we have been able to remain profitable despite these type of reductions. And eventually when the economy recovers and the run-rate is normalized, we should have a very healthy business.

How should we think about Aerospace OE and aftermarket first-half, second-half of the year?

I commented earlier that I thought that the MRO would be flat for the year, and my hypothesis, of course, is based on the demographics versus deferred maintenance, and deferred maintenance is a common response airlines have. And I think that in the first quarter, the numbers are roughly what I expected, and I think that will continue through the year.

I think the OE side of it is a little more complex as we look at the 787 ramp-up through the year and into next year. I think after the aircraft flies, you are going to see a change in the order of backlog for that aircraft, and I think we will all be encouraged by that. But I do expect the OE side of Aerospace to have a small reduction in sales in the back half of the year based on current schedules, and keep in mind we are bringing new workload on. We have new production as we announced about some expansion of our Phoenix operation. We have new workload going into our Ogden facility. So it is not that we are inactive in the OE side of the business, and I would also comment that we have increased our sales efforts tremendously in both Industrial and the Aerospace market. So I don't expect it to be a large decline, but I do expect that going into 2010 we will probably be experiencing a light level of decline as well.

Your MRO comment being flat for the year, is that flat sequentially versus Q1 or flat 2009 versus 2008 Barnes Aero MRO?

It would be flat to Q1.

Okay. And then with regards to your comment on the inventory situation in the various channels you sell in Distribution, Transportation, general Industrial markets -- just speaking about sort of the old three reporting segments -- how do you feel channel inventories look now? Are you starting to see or are you still seeing inventory coming out, or has that stabilized?

Unfortunately, I still see inventory coming out. That April results were roughly flat with the first quarter as far as topline goes. And I would love to tell you that I see some sort of green shoots out there, but I don't.

You had mentioned, I think it was you, Greg, in your prepared remarks, that there were some incremental management fees I think you referred to them as in your Aerospace RSPs.

Yes, that has been built into the actual contract that there is a step-up function, and I think it is year four or year five, and that is a normal part of the RSP contracts.

Can you give a little more detail on what exactly that is?

Well, it is just the cost of the management fees associated with distributing the product.

Okay. That is all I have. Thank you.

Peter Lisnic, R.W. Baird.

I was wondering, Greg, can you maybe help us quantify or ballpark what the inventory impact was for the first quarter?

As far as our reduction or in general?

No, no, just in terms of the topline growth that you saw in the -- (multiple speakers)

I would just -- (multiple speakers). You would have to take a look at specific industries. For example, our Automotive production or indirect Automotive in many cases like our European business was down 50%. However, if you look at production in Europe, it was down about half of that. So that the balance of the difference between the two would be the inventory compression.

When -- if I quantified that across the board, I have not done that specifically to -- I have done it for the individual businesses; not for the entire business as a whole. But that is the basis for a level of recovery regardless of what happens to the end markets.

Okay. Yes, I was just wondering if you had a blended number that we --

No, I don't have a blended number. I worked it by individual business.

Okay. Well, you have given us auto. Can you maybe run across a couple more of the big ones to give us --?

A lot of the Industrial we have been seeing a 25%, 30% reduction in some of the manufacturing and mining areas. In some cases it is less inventory than actual production.

Keep in mind that the LMS business is largely service-orientated. So you have a much shorter cycle time than you do on the long cycle Precision Components businesses, and I think when you look at visibility for the LMS business, you see the reduction in sales is significantly less than it was for Precision Components, largely because of that difference.

Okay. That is perfect. Okay. And then if I look at the guidance, the reduction in the top end of the range to $1.35, can you give us what the variables are that take that number down from $1.50 to $1.35?

A lot of that had to do with topline. The first quarter was a little worse than we had anticipated. When I'm looking at the second quarter, I don't see a significant improvement in that, and that is the primary basis for it. If you look at the first-quarter run-rate EPS and extrapolate that through the year and then add in the additional benefits that come from the inventory compression ending, as well as the cost savings, that is how we get to the range that we are looking at right now.

Okay. Great. On the savings we've got the detailed restructuring you put on the press release for, what, a quarter or so ago, but you talked about some incremental actions that you are going to be taking or are taking. Can you maybe give us a sense as to a) what the quantity or what the benefit there is, and b), how those layer in throughout this year and into next year?

As you mentioned in terms of the topline, we went from negative 10% to 15% and then increased that based on what we saw in the first quarter being a little worse than we expected. So at the worst case in terms of our current look being down that 20%, we recognize we're going to take -- we have been taking incremental cost actions. So in my opening comments between work furloughs, increased discretionary spending reductions, increased productivity picking up on Greg's comment in terms of global sourcing, there is a number of hosted levers that we are pulling in terms of driving additional productivity.

To be able to specifically track what you want to do for you because we talked about that $40 million in savings, I will just get back to my earlier comments that we are on track achieving that $40 million, roughly a 40% cost reduction in the first half, 60% in the second half. So coupled with the topline decline in the first quarter with second-half cost actions or at least the larger portion kicking in kind of guides us to that 120 to 135 range. You know, recognizing if the topline comes in better for us, then we will be able to track towards at higher end.

Okay. The piece that I'm really trying to figure out, though, is that $40 million -- we have got enough visibility where I think we could assess what piece of that might be permanent or what peace you might be able to get to keep when you come out of this. And -- (multiple speakers)

I intend to keep all of it.

We do.

Okay.

Yes, it is really -- it is a good -- we expect to get $40 million in savings for the full year, and that is a good number kind of going forward. And there were definitely structural changes in our business.

And I think that that is the important point. When we look at most of the decisions, all the decisions we make, we have a long-term hat on. And if you look at closing a plant, for example, we are not -- these are plants that are not going to reopen when things recover. It will be consolidated in existing facilities, and of course, the production will be expanded in the existing facilities, which we expect incremental improvement in efficiency and obviously the profitability as well.

Okay. Alright. And then very quickly just on acquisition environment, how does that look? Any chance of doing anything there this year, or what is the outlook?

To be quite blunt, I think besides some fairly small acquisitions, we are not seeing anything that really makes us that excited. There is a lot -- there are a lot of acquisition candidates out there, except a lot of them are distressed businesses.

Okay. Alright, that is very helpful. Thank you, all.

(Operator Instructions). Christopher Glynn, Oppenheimer.

Just following up on the comments of the savings being more or less permanent, as we look into the second half of the year, if there is kind of a demand uptick and certainly we could rationally assume some in Transportation, how would you characterize the operating margin sensitivity?

Well, first of all, we expect that, as you have heard over time, we are a big believer in production efficiency and improvement, and we have been able to actually double our operating margin for the Company over the years. The first-quarter operating margin was about 8%, which is still pretty healthy given the history of the Company and the markets we operate in. But I do expect that we should have some incremental gains on profitability. If you are looking for flow-through numbers, it would be based on the end markets where LMS has a superior gross margin than does Precision Components. The gross margin of Precision Components, being largely built of print businesses, are fairly narrow. So it would depend on the mix. But we do expect to improve margin in the long run, and the overall goal is that when the markets recover, we expect to have improved profitability on the same sales volume.

Right. And then on the Aero aftermarket, with the deferred maintenance, why wouldn't you be looking for a stronger second-half revenue there, Greg?

Well, because the history we have seen with deferred maintenance, when airlines get in trouble and they are looking to save cash, the easiest way to save cash is to defer maintenance as much as practical. There is a great debate internally on whether a lot of the life limited parts, which are one of the restrictions keeping aircraft from being deferred indefinitely, will play a larger role this year than it has in historical cycles.

But right now it is strictly a hypothesis. I really have nothing other than to say that if we look at our models, the model before hand called for a 20% uptick in CFM56 engine shop visits, and our theory right now is that the deferred maintenance will take that 20% down closer to zero and with other deferred maintenance from other engine types would be negative. And so far that is roughly what we are seeing. So there is a potential for it improving in the back half of the year. It is just that this is kind of uncharted territory.

Okay. So it is probably fair to say you are being reasonably conservative at any rate.

I think given the history of airlines I think we are prudent.

Okay. And then just lastly, any consideration of maybe saving some cash on the dividend this year?

That is a Board of Directors' decision, and we are having a board meeting this week and it is up to them. But I would also comment we have been paying dividends continuously since 1934. This is a Company that has survived all sorts of trauma over the years, ranging from the American Civil War through two World Wars, depression, etc. This is a Company that -- this is a Company you keep.

Understood. Thank you very much.

Holden Lewis, BB&T.

Just so I understand in terms of the savings you expect, you expect to realize about $15 million or $16 million of that $40 million the first half and then realize the rest in the second half, right? You are talking about actually realizing $40 million in 2009. Is that the way to look at it?

That is the way to look at it, yes.

Alright. So then we should assume that you realized about $7 million or $8 million in Q1 is the right number, or are you still ramping into Q2 as well?

No, about that, about that number.

Alright. So you're going to do $7 million or $8 million in Q1, another $7 million or $8 million in Q2, and then that steps up in Q3 and Q4. And I assume that step-up is because some plants come down, or why do we have the sequencing the way we have it?

No, that is right. There are some actions that are tailored towards the second half of the year.

Okay, and then --

I should comment that those plant closures have been announced so the folks out in the field know what is being affected.

Okay. When you talk about the headcount reduction, I think you said you would reduce heads about 16%. Is that 16% include the people in the plants that have yet to shut down, or are your reductions heading north of 20%?

It does not include the announced shutdowns that are going to occur in the back half of the year. So it will go up -- the end result will be higher than 16%.

Okay. And then when you look at what you did in Q1, and I don't know how seasonality plays in here, but I guess I'm having a hard time getting to the full-year number without some additional savings. I think you alluded to some additional savings on top of the $40 million. When you talk about those, are you just referring to the nonstructural stuff like reduced discretionary spend and that sort of thing or you have additional --

That is a good way of looking at it. I think if you look at the savings that we're having on material, for example, material for global procurement, other productivity efficiency items, we expect to have ongoing savings from items like those.

Okay. So it's not like we have additional headcount and plant shutterings or anything like that on top of what is announced for the $40 million?

There is no additional plant closures in the outlook.

Okay, okay. Fair enough.

Other than what has already been announced.

Okay. And then just in terms of what you said, you actually -- in North America Distribution you are still profitable, and then you actually saw -- I assume you -- I believe you lost money in Q3, Q4 in Europe. Did that step up to an actual profit in Q1?

Very close and there is still, of course, cost actions going on there, and that is why I'm very encouraged. But I want to see another quarter go through before we comment further on that.

Okay. But you did go from losses to actually roughly breakeven, even in Europe despite plunging revenue?

Yes, we actually had a slight increase in revenue sequentially.

Okay. (multiple speakers)

I guess that is a bright spot.

Well, it is because I mean you do have some seasonal trends to a large extent, right? I mean, how meaningful is that really?

Well, the interesting thing we are seeing in Europe that I think is encouraging is one of the upsides to the people keeping their vehicles longer is that our shop repair products are selling very well right now. So there's a lot of that. Our European business has much more emphasis on auto body shops and things of that nature, and that is doing very well.

Okay. And then the step up, the additional savings that you expect in Europe, that is unrelated to that $40 million. So that is kind of incremental on top of that, right?

Yes.

Okay.

And like I said, we are very encouraged. Hopefully in another quarter, we will give you a little bit more color to where we think we are going with that business in Europe. But I think the leadership has been doing a very good job of squaring away the business.

Okay. And then I guess -- and I know that the answer is you have a lot of these cost savings and things like that. But in past cycles, when you talk about better trough and better peak margins, I mean the last cycle I think you had margins down in the call it 5% range. You have been lower than that before. So you kind of know what the model could flex to, and you're doing everything you can to avoid that.

But what scenario would you envision causing the margin to again dip as low as 5%? Is it strictly volume and execution, or what would have to happen for the model to flex down there again this time?

First of all, we won't allow it. But in all seriousness, if you look at the first quarter, we were nearly 8% ROS. And I think that's going to be the trough of this cycle, that the great recession or whatever you want to call it, and I don't envision it going below that. It would have to have a significant decline in topline depending on the mix in order to get in the 5% range, and I just don't envision that based on everything that we see out there. I think that the level of production right now based on all the macroeconomic indicators are probably about as bad as this cycle is going to get.

Yvonne Varano, Jefferies.

You talked a lot in your opening comments about lean and growth opportunities, and we have heard a lot on the cost side. But maybe you could just touch on some of the growth opportunities that you're looking at or that you see out there and something with the Seeger-Orbis and the wind is something we should be looking at?

Sure. There's a number of things that we are looking at that we think are very positive for the long-term. First of all, if you look at auto production just rebounding to attrition rate, not even to a robust rate, but just replacement level, you could debate how long that will take, but that will have a significant increase in sales volume. And because we have leaned out the businesses, we should get incremental profitability on that. That is just one aspect of it.

But we are also investing heavily, for example, salesforce training in our Distribution businesses where we are looking at heavy investment in the training cycle. We expect to actually add salespeople in the back half of the year, and we are looking at capturing larger market shares by making that investment this year, and that additional cost is built into the estimate as well.

We are also roughly doubling our salesforce in our Aerospace and Industrial businesses because we think that companies like ours are going to benefit from the stresses in the individual market places. But we are also looking at investments like we have new platforms or new programs going into our Phoenix operation where we are investing in -- there's a landing gear components that we are -- this is brand-new to our business. That is an investment that is going forward. There is a lot of 787 work that is an investment.

We are also looking at a number of items with our Singapore operation where we have new programs going into Singapore. So when we look at it from all these different aspects, we think that the investments we are making this year will benefit 2010 and 2011, and we are actually looking at a way to rebound.

And not to be long-winded, but if you look at our Aerospace business after the last cycle in 2001, 2002, we made a lot of investments back then that helped us grow at double the rate of the overall industry for the past five years, and the same type of philosophy is going on right now. This is very much like a large Aerospace cycle. This is very broad based, and the investments we know we have to make in order to have above average, above GDP growth rates going out of this are costly, but they are worth doing.

And you just mentioned doubling the salesforce in Aerospace and Industrial. Is there the potential you think here to take some market share from weaker players in the industry as well?

Absolutely. I think that as long as the government does not pick winners, the recession will have the cleansing effect on the low performers, and we aim to help out our customers.

And then lastly, it seemed that your comments indicate that you think we are close to the bottom in terms of all the macro data points that we are seeing coming out. Is that your general feeling, or am I putting words into your mouth?

No, I think that is, and it's more -- like I said, it is more than just rhetoric. If you look at the government data, especially with the inventory coming down, I think one of the bright spots in the first quarter GDP number that many people picked up on was the inventory reduction, which is part of that inventory compression. But mostly if you look at factory orders, all the rest of those things, some are declining, some are increasing, but they are not dropping at a precarious rate like they were earlier in the year. I think that everything we are seeing right now is flat, and I would love to say that we are seeing early signs of recovery. But I think we will probably see that more towards summer.

And then are you just expecting a slow recovery or a faster recovery?

I personally am expecting a slow recovery. I think an L-shape is the common term. But there is nothing out there when you look at the shape that individuals, balance sheets, the balance sheets of companies, the government spending, all the rest of those things combined, there is nothing that points to a real V-shaped recovery going forward. And that is shaping the way we are restructuring for the long-term.

Fred Buonocore, CJS Securities.

Yes, just a quick follow-up on the Aerospace aftermarket conversation. I'm sorry if I'm making you repeat yourself from earlier. But does your assumption of basically flat for the year there, is there some underlying assumption of revenue passenger mile trends that that is built on as well?

No. It is more of a hypothesis that happened to come through in the first quarter because it is very difficult to predict. It is not a matter of how many passenger miles it is. It is the decisions, the individual decisions of leadership in the airlines and whether to defer maintenance or not.

I listened to the CEO of Delta the other day in a conference, and he was talking about how when they choose what aircraft to ground based on level of maintenance that is required, and they may remove one of the engines that has a lot more time on it and put it on another engine rather than do the maintenance. Those are the type of things that you could do to defer maintenance. So you can't really predict that based on revenue passenger miles. It has to be more theoretical.

Great, that's helpful. Thank you.

Matt Summerville, KeyBanc Capital.

Just a quick one. In terms of raw material costs (technical difficulty)--

We lost you.

I was wondering, Greg, if you could comment on what you're seeing in terms of price in sort of the three buckets -- Industrial, Distribution, Aero right now?

You dropped off. You are looking at our raw material impact in the quarter?

Well, no, I'm sorry. Can you hear me now?

Yes.

Okay. I guess what I'm more curious is to, with input prices coming down, steel costs have come down a lot obviously. Are you seeing when you layer in there the kind of demand trends we are talking about in the businesses? Are you seeing pricing pressure in either kind of the old three buckets -- Distribution, Industrial or Aerospace right now?

The first comment is on, as I've mentioned in the past, but it is still relevant now. The pass-through on Aerospace is largely a pass-through that is -- 85% or so of the material is directed purchase, which means that we have no gain or loss based on the material cost increase or a reduction. So you take Aero right out of it.

Common material like cold-rolled steel or the like -- the material that you see the biggest reductions on, we don't really operate much in that. We use heat-treated steels. We use almost exotic materials in some cases in our valve spring wire manufacturing, etc. And those costs have started to come down, but not near as much as we hoped they will, and we're having actions to accelerate that.

We are seeing cost reductions on the things for our Distribution businesses where the global procurement is hitting its stride, and I think we are even seeing superior pricing there. We have also saved a considerable amount of money on Transportation costs. Our freight costs are down significantly as well.

So excluding Aerospace, would you say pricing is higher, the same or lower in the first quarter versus last year?

I would say it is lower.

Thank you, and thank you, everyone, for joining us today. If there are any additional questions about any matters we discuss, please feel free to contact me. Once again, thank you for joining us.

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