Barrick Mining Corp (B) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Barnes Group Incorporated third-quarter 2009 earnings conference call. My name is Dan and I will be your coordinator for today.

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

I would now like to turn the presentation over to your host for today's call, Mr. Brian Koppy. Please proceed, sir.

Thank you. Good morning, everyone, and thank you for joining Barnes Group's third-quarter 2009 earnings call and webcast. This is Brian Koppy, Director of Investor Relations and Communications for Barnes Group. With me this morning are Barnes Group's President and CEO, Greg Milzcik, and Senior Vice President of Finance and Chief Financial Officer, 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, 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.

Barnes Group's third-quarter results continue to reflect the economic challenges that were present during the first half of the year for many of our end markets. We generated net income of $10.9 million, or $0.20 per diluted share, for the quarter. These results include a pretax restructuring charge of $3.4 million related to our efforts to reduce fixed costs.

Quarterly sales were $260.3 million, down 22% from last year but sequentially and even monthly trends are encouraging. However, the timing and scope of any market recovery is still anything but certain.

In the meantime, we remain focused on our internal initiatives to enhance our operations, strengthen our balance sheet, and generate cash flows to run our business. In particular, we had noteworthy execution in the quarter on improving our capital structure. Successful working capital improvements and convertible note buyback strengthened our balance sheet. We are pleased to say that our financial position is much improved versus where we were at the beginning of the year.

Our third-quarter cash flow from operations improved to a record $78 million. Our year-to-date cash flow from operations was $126 million, up over 50% from last year.

Throughout the year, we have improved our financial position and made progress rationalizing costs. While we recognize our end markets still provide challenges, we continue to distinguish the importance of investments in new products and services to drive future revenue opportunities.

Revenue growth will be driven by focusing on the right platforms that are supported by lean services and processes. Incremental revenue growth will leverage improved operations and core competencies, prudent investments in our sales teams, and targeted high-opportunity customer relationships. As our strategy is long-term in nature, we realize that these investments may not provide immediate returns and may potentially offset gains in certain areas, but we believe that these will position our business for the recovery.

Let me now detail some of the activities within each of our business segments for the quarter. In our Logistics and Manufacturing Services segment, end-user demand continued to be weak across our markets, although there were signs of increased activity levels during the quarter.

Within the North American distribution business, realized increased monthly/daily sales averages, which is encouraging. However, market price pressure increased. We believe in the quality of our services and have attempted to maintain our value-added pricing.

Continued market pressure and seasonally low fourth-quarter activities is likely to continue to pressure topline growth. We are not expecting end market improvements or at least normal environment until later in 2010.

Progress within our European Distribution business continues. Daily sales averages are improving here as well with sales for the last month of the quarter at the highest level all year. However, economic activity, which these businesses support, is expected to remain soft, providing a tempered outlook for the rest of 2009 and into 2010. While we have significantly improved operating structure and focused the business within Europe, our cost structure continues to pose challenges. Nevertheless, we have focused a considerable amount of resources on this business and are optimistic we can improve its financial performance in 2010.

For the Aerospace Aftermarket business, demand continued to be soft as both passenger traffic and freight volumes languish. Deferred maintenance, along with limited scope repairs and engine cannibalization, continued throughout the third quarter. These low activity levels, however, are finite and will come to an end. Unfortunately, the timing is difficult to forecast, but is expected to continue into 2010. We are, however, encouraged by the long-term prospects within our Aerospace Aftermarket maintenance business.

Turning now to Precision Components, demand within our Precision Components segment was similarly weak during the third quarter, though it appears as though the inventory compression cycle is coming to an end. Sequentially, our non-aerospace business experienced revenue growth. In addition, order levels across Precision Components non-aerospace business increased meaningfully, 35% for the second consecutive quarter. While this is encouraging, we remain cautious as the sustainability of these improvements remain unclear.

Within the automotive end market, even though third-quarter activity improved, it is too early to tell the lasting effects of the return to production of the automotive OEMs following their second-quarter shutdowns and the micro bubble created by "Cash for Clunkers". In addition, we are beginning to see signs of pricing pressure returning to some of our industrial businesses.

The aerospace OEM business continues to be adversely impacted by reductions in our customer inventory and production levels. Our aerospace OEM backlog of $326.5 million declined 13% from year-end due to a decline in orders during the quarter. Though near-term demand is likely to remain soft through 2010, we are encouraged by the strong long-term outlook prospects for the aerospace OEM market.

As we look to the end of the year and into 2010 our end markets appear to be stabilizing as each transitions to a new level of normal activity. In addition, our diverse end markets are not necessarily on parallel [apps]. While we believe the automotive market will show improvement in 2010, the higher-margin aerospace business will continue to confront a challenging environment for most of 2010.

In conclusion, I am encouraged by Barnes Group's performance and resilience throughout this challenging and volatile economic downturn. Despite our successes, visibility in each of our markets remain low and the realities of the current market require that we maintain a tight operating environment until we are confident a sustainable recovery is underway. Our efforts to pursue profitable revenue growth, enhance our operating platform, and strengthen our capital structure have positioned Barnes Group favorably so that we can invest in future growth prospects and prepare to fully participate in the eventual market recovery. I have every confidence that our continued execution of our long-term strategic plan will serve our company, stockholders and employees well.

Now, I'd 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'd like to do for you this morning is provide details on the results of our third quarter and highlight specific actions we have taken to strengthen our financial position during these difficult economic times.

Starting with the top line, the company reported third-quarter 2009 net sales of $260 million, a decrease of 22% from prior year and an increase of 2% from the second quarter. Overall declines in the global transportation and industrial markets along with declining airline traffic and capacity cuts and airline supply chain adjustments in anticipation of reduced aircraft production, adversely impacted sales during the quarter. As Greg mentioned, while we have experienced some progress, we remain cautious on expecting improved sales levels for the balance of 2009 and into 2010, given the current low visibility we have into our end markets.

The impact of foreign exchange continues to also negatively impact our top line though to a lesser extent in comparison to the first two quarters of the year. FX negatively impacted third-quarter sales by $2.4 million and $26.6 million for the first nine months of 2009.

During the third quarter, we implemented additional actions focused on refining our fixed cost structure through the closure of our previously idled Monterrey, Mexico facility and the closing of operations in Burlington, Ontario, Canada.

As Greg noted in his opening comments, these actions resulted in a pretax charge of $3.4 million and an after-tax charge of $1.7 million. As a result of the pay-as-you-go costs, we do not expect any net benefit savings in 2010 from these actions.

Our previous actions taken throughout 2009 continue to reduce costs and strengthen our capital structure. We continue to be on track to deliver the $45 million in previously announced annualized cost savings for 2009 as compared to 2008. We currently expect that roughly 2/3 of our 2009 cost savings will be permanent fixed-cost reductions as we enter 2010.

Operating margins for the company came in at 5.6%, a 720 basis point decline from the third quarter of 2008 and slightly better than the second quarter of 2009. Our year-to-date margins of 6.3% reflect a significant decline in our top line and the net effect of restructuring charges and cost productivity benefits.

Turning now to cash flow, we are very pleased with the operating cash flow we have generated in 2009. For the quarter, we generated $78 million of operating cash flow, bringing our nine-month operating cash flow level to $126 million, a 51% increase over 2008. Once again a reduction in inventory was a contributor to our cash generation.

Efficient inventory management has been a key goal for us this year, and this quarter's results validate our continued efforts. We successfully reduced inventory by nearly $13 million in the third quarter, bringing the year-to-date inventory improvement to $47 million compared to year-end 2008. Importantly, we have made these achievements with no adverse effect to customer delivery metrics. Inventory as a percentage of sales declines to 19% compared to a level of roughly 23% as of the fourth quarter of 2008. We are focused on continuing our efforts to generate cash through further working capital reductions.

Moving onto capital expenditures, for the third quarter, we had capital investments of $5 million, a 67% decrease from third quarter of 2008. Through the first nine months of 2009, we have reduced our capital expenditures by 41% compared to the 2008 period. Even though capital expenditures have been reduced this year, it has not been to the detriment of our long-term growth opportunities. We are committed and we will continue to invest in capital projects that contribute to our long-term success. We expect 2009 capital expenditures to be in the range of $30 million to $35 million and 2009 depreciation and amortization are expected to be in the range of $50 million to $55 million.

Turning now to highlights on our balance sheet, with our strong operating cash flow generation, we are focused on reducing our debt obligations. Debt at the end of the third quarter of $361 million was reduced by $105 million compared to year-end 2008 and $90 million sequentially. This demonstrates a lot of hard work by our dedicated employees.

Our debt-to-capitalization ratio decreased to 35% at the end of the third quarter compared to 44% at the end of 2008 and 42% at the end of the second quarter of 2009. At quarter end, $188 million was borrowed against the company's $435 million credit facilities. The debt-to-EBITDA ratio on our credit facilities of 3.26 times versus a covenant of 4.0 times was an improvement from 3.37 times at the end of the second quarter of 2009. The debt covenant ratio requirement will decrease to 3.75 times beginning with the end of the fourth quarter of 2009.

Throughout the year, we have been keenly focused on monitoring compliance with our debt covenants. And the actions we have implemented to increase EBITDA and reduce debt have allowed us to successfully sustain compliance.

During the quarter, we repurchased $29.7 million face value of our convertible notes for $11.3 million in cash and 1.2 million treasury shares worth approximately $17 million. This provided a net financial gain of $1.5 million pretax $0.9 million after-tax. The pretax gain is recorded as other income on the income statement.

On a year-to-date basis, we have retired $52 million face value of our convertible notes for $29 million in cash in addition to the 1.2 million shares that we issued. The net financial gain on a year-to-date basis within other income on the income statement is $3.8 million pretax and represents a $2.3 million after-tax gain.

In regards to share count, third-quarter diluted average shares outstanding decreased just over 3% from the prior year of $54.6 million. The decrease was primarily due to stock repurchases in the fourth quarter of 2008 and the decrease in the diluted effect of potentially issuable shares under the employee stock plans. The decrease was partially offset by the 737,000 shares we contributed to pension plans in the second quarter and the 1.2 million treasury shares we used in the third quarter to repurchase some of our convertible notes.

Lastly, I would like to comment on the tax rate. As you saw in the press release today, the company's tax rate for the first nine months of 2009 was 5.1%. It is important to note that the tax expense includes a $1.6 million tax benefit related to the third-quarter restructuring actions. In addition, changes in the company's tax rate reflect the projected change in the mix of income among tax jurisdictions.

In closing, we have made great strides in solidifying our financial strength and we are proud of the efforts of our employees. While we recognize there is much work to be done, our financial strength and discipline provide a solid foundation to build upon as the global economy recovers.

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

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

(Operator Instructions). Christopher Glynn, Oppenheimer.

Good morning. I'll start with just a question on the Barnes distribution in Europe. Greg, you mentioned the cost structure there. I'm just wondering now how much of what's being experienced now is more related to volumes versus still not being where you want to be on the operations.

I think we made some very significant progress over the past nine months. One of the interesting points was we actually made operating profit in September. I recognize that one point in time does not make a trend, so we are looking to see some improvement going forward. A lot of that had to do with volume. We had an improvement in volume in September, and as we go into 2010, we are confident with the things we've done up to this point continuing to refine our operations. And with some volume improvement, we will be able to turn the corner on that business long term.

Okay. Then moving over to aerospace, a couple of questions there -- comments in the press release on activity maybe picking up in the second half of '10, can you kind of parse those comments on the aftermarket versus the OE?

Sure, I think there's two things that are driving it. One is, if you look at the data coming out of third quarter and September in particular, while it is a mixed bag, there is certainly some improvement in everything from load factors to the health of the airlines around the world. Asia continues to grow, etc. So that's one of the key driving factors behind our thought process.

When we examined the post 9-11 results of deferred maintenance, then we overlaid that on the current environment, I think that the third and fourth quarter of next year will certainly see a pop in the maintenance repair and overhaul activity, at least that's our outlook currently.

When we look at the OE market, while many people are looking at 2011 and '12 as being recovery of actual production of aircraft, since we precede aircraft deliveries by six months to nine months and the 787 ramp-up we are building in that equivalent. And that assumes that the 787 will fly sometime within the next several months, even if it's not year end, close to year end. So we think that late in the -- or at least in the back half of the year we will start to see orders as well as deliveries pick up late in 2010.

Okay. Then on the inventory situation in the channel for aftermarket, can you comment on the at-the-airlines versus the supply chain, GE for instance and your relative exposure?

That is a great question, and it's actually a little unusual compared to historic cycles. There has been more emphasis this cycle on inventory compression within the MRO cycle in general, whether it's the OEs or the airlines, etc., It's harder to see, so we are relying on third-party sources and we expect that to continue right into 2010.

Okay. Thanks. I guess the last one would be, as the aftermarket recovers, what is the relative opportunity on the broader recovery versus the installed base growth in the last cycle, CFM 56 rolling into the --?

Well, we are certainly counting on it. As I've mentioned many times in the past, if you study the demographics of aircraft fleet, in particular the CFM 56, the age of aircraft -- they are in somewhat of a sweet spot for maintenance because they are coming down for the second or third overhaul cycle, and the installed base has increased tremendously. So we were actually, 14 months ago, we would have said 2009 would have been a boom year, but with the deferred maintenance, I think that's being put off. But there's no doubt in my mind that the deferred maintenance that is occurring right now will come back in some form in the next couple of years. Sooner rather than later is my hope.

Okay, thank you very much.

Peter Lisnic, Robert W. Baird.

Good morning. This is actually Josh Chan calling in for Pete.

You talked about encouraging or improving monthly trends and you shared a little bit about distribution, but I'm wondering about your thoughts on the other businesses like auto or aero I guess.

Sure, I'll start with auto for example. We saw a significant increase in orders. If you look at, for example, "Cash for Clunkers", a lot of that production was not -- or the sales were actually not production; they were taken out of inventories. So it accelerated the inventory lead-down significantly.

Orders and production are expected to pick up in the fourth quarter, late third quarter or early fourth quarter. That's substantiated by our increased orders in the associated spring business which is a primary but not only business associated with auto end markets. That's encouraging but it's still well below what we need for the long-term.

I think it's going to take several years for the auto market to recover fully, but that also means we're probably going to see an increase year-over-year of 1.5 million to 2 million units produced in North America. I think that bodes well with the costs we've taken out of the business, especially the fixed costs taken out of the business.

When I look at the other businesses, the distribution business in North America, it's small improvements but it has been sequential, so we are seeing some level of stability as well as slow growth. That's something we expect to continue for some time. We don't see a rapid recovery in the industrial end markets; we think that will take some time as well.

There's a couple indexes like the IPI index, etc., that we use to follow that. It tracks pretty closely to our industrial production as well as the distribution business.

So when I look at the stability in particular and the fact that with the exception of the aerospace end markets, most of the other things are starting to improve slowly, some more rapidly obviously but still have a long way to go.

In Europe, we also are seeing similar actions. We had very significant reductions in sales that were well beyond what you would expect from the end market decline. Again, that was largely inventory compression. We've seen sequentially a couple of very strong order recovery quarters but we are still well below a normalized run rate.

Aerospace I talked to recently, and I still think that's one of our strongest markets long-term. It is cyclical, both seasonally and long-term, and that's just one of the things you have to deal with. It is a growing market long-term, both in MRO and OE, and we have adjusted to that.

Okay. Thanks a lot for those thoughts.

Switching kind of to the balance sheet, obviously a lot of focus on debt reduction over the last couple of quarters. One, I guess do you expect to further pay down debt in the fourth quarter? I guess the second question would be how comfortable are you looking at other potential uses of cash at this point?

Well, I think that we are going to continue to pay down debt as appropriate. We are getting more comfortable with the balance sheet. Obviously, it is a different environment than it was two years ago, so that you have to have a certain amount of caution. But I'm very, very pleased with the cash flows from this quarter and the improvement in our financial outlook. Over the next several quarters, we will reassess where we are in looking at how we grow the business to amplify our organic growth efforts.

Great, thanks for all your time.

Fred Buonocore, CJS securities.

Good morning. I just wanted to follow up. Greg, you used a 35% increase metric; I think that related to automotive orders but I just didn't catch the whole thing. Can you repeat that for me?

Yes, that was non-aerospace orders within Precision Components.

Okay. So --

The aerospace stuff is on somewhat of a different cycle than the rest of it, but that's encouraging because I believe it's the second quarter sequentially that we have seen those order recoveries. But it is still well below a normal run rate. We are still, I think, 20% or so below last year third quarter, if I look at quarter-over-quarter.

Okay. I guess -- I think that was in the high 20s% for Q2 was the pickup you saw sequentially?

Yes, 27%.

Okay, so that was would largely be driven by automotive-related (multiple speakers)

Yes, because our European business is largely automotive. It is about 80% automotive.

Got it. Then just looking into the fourth quarter where you typically have a seasonal pattern of just fewer ordering days and shipping days, do you expect these sequential improvements that you are seeing in some markets to perhaps overtake that normal seasonal downtick pattern?

That's kind of -- it's a real interesting exchange because you have some declines in the higher-margin aerospace businesses and an uptick in the lower-margin automotive business, but I think that's probably pretty accurate. With the estimates we have right now, we are basically seeing somewhere close to third-quarter run rates.

Got it, so realizing that you don't give guidance, something that would be similar to the Q3 or better would be --.

Like I said, there's pluses and minuses in there, but at the same time, it is certainly not deteriorating.

Got it. And then not to beat a dead horse on the aerospace aftermarket but are you seeing any kind of flow through just from improving traffic or at least lower declines?

No. I think that's probably going to continue for some time. Like I said, the airlines are starting to show some signs of life but they are certainly not back to normal activity.

The thing that we are prepared for is you have to recognize, especially given the history of the last cycle, when the maintenance repair and overhaul activity pops, it usually does it with little warning. You might have 90 days notice when you find out that you are getting really big increases in demand. That's just part of the aerospace MRO business.

We had 30% compound growth back in 2004 largely due to the deferred maintenance after the 9-11 deferred maintenance cycle. So we are prepared. We have excess capacity available and we are monitoring the inputs from the airlines into both the OE and the airline shops as closely as possible so that we can get a jump on this if necessary.

Got it.

But I don't think it is imminent, but at least there's some silver clouds out there, or lining, in this.

Sure. Then I guess on the truck fleet servicing that you do for customers like Swift, should I think of that as -- I guess that is a subsegment of your transportation --

Right.

-- business, and is that, that's more heavily distribution side of the business?

Exactly.

What are you seeing there?

Just small improvements, there's nothing dramatic. If I dissect all the end markets, food services held up very well but most of the other things associated with manufacturing and transportation have been very hard hit. Again, the IPI Machinery Index, which is one of the things we use to track it and it correlates fairly nicely, we expect to have improvements going forward but there is no -- there's nothing there that says anything other than minor improvements. But keep in mind that, in August, most of these indices show the first improvement in a very long time, so I think I am encouraged from that perspective.

Great. Then finally just on the $3.4 million of pretax charges, is that all related to the Precision Components side of the business, or is that split between --?

No, it is all Precision Components with the -- all associated with the 8-K filing that we had last month.

Right, got it. Okay, thank you very much.

(Operator Instructions). Edward Marshall, Sidoti & Co.

Good morning, guys. Is there any way that you can quantify the benefit, both from probably a sales perspective as well as a margin perspective, from the auto stimulus plan?

From the auto stimulus plan?

Yes.

Well, first of all, the "Cash for Clunkers" had an effect on inventories more than it did production. If you recall, during the summer, most of the auto build shops were shut down in the "Cash for Clunkers" clunkers through July-August. It had more to do with clearing out inventory and stimulating orders that affected late third quarter into fourth quarter. So when you look at the significant increase in orders we have seen, it is largely to replenish inventory that was let down by "Cash for Clunkers". So, we will see that in the fourth quarter more than we will the third quarter.

My personal opinion, based on the data I've seen, it had a minor effect. If you look prior to "Cash for Clunkers" the forecast was roughly 8.2 million, 8.3 million units produced, not sold but produced. Right now, it is standing around 8.5 million, 8.6 million. So it is really not material.

I see. You talked about seasonality in the fourth quarter. Is that taking into effect a shutdown from the automotive (multiple speakers) that they do on a normal annual basis in December?

Yes.

Can I have some clarity on the $1.6 million tax benefit that you discussed in the quarter? Is that related to the $1.7 million of after-tax on the $3.4 million, or is that a separate benefit all by itself?

No, basically the charge we took for Burlington and Monterrey, the $3.4 million charge, it does have a tax benefit as we look at -- the businesses between the US and Mexico as relates to Monterrey, just clearing up the intercompany activity between the US and Mexico. We do have a benefit in the US as a result of that action.

Then our tax rate just in general is being lowered yet again in the third quarter at 5% versus 9% last quarter. It does reflect the higher income from lower-tax jurisdictions.

I guess my question is, is that $1.6 million related to kind of the $3.4 million minus the $1.7 million?

Yes, that's part of it. That's right.

Okay. Thank you.

Matt Summerville, from KeyBanc.

Good morning, a couple of questions. First, can you give any sort of sense of where you guys were at in the quarter with raw material costs versus pricing? I guess what I'm trying to get at is if you look out over the next couple of quarters, I think, Greg, you mentioned in several of your businesses that you are seeing a bit more pricing pressure -- how that equation you believe play out in Q3 but more importantly will play out over the next quarter or two?

It's a great question. I've commented on previous conference calls that, compared to my experience in aerospace cycles, this equivalent big cycle in a broad market -- we had not seen very high pricing pressure. That's just one of the few things that surprised me compared to what I expected.

At the same time, we are starting to see what I would call normal pricing pressures given the capacity that is out there right now. There's all sorts of ways to deal with that and we are being increasingly competitive whether it's making efforts in lean or looking at the way we offer the value.

One of the things that we had talked about some time ago, and I'm pleased to say that we have made significant progress in, is increasing our flow-through or pass-through of material cost increases on to our customer. If you recall, historically the aerospace business had always been fairly high, in the 80%, 90% range for pass-through. We are approaching a pretty significant level in our industrial and automotive businesses as well.

So I think we've made tremendous progress in the past couple of years on improving our flow-through terms and conditions. I think that bodes well for the potential commodity price issues going forward.

A couple other just follow-up questions -- as we think about, Chris, FX in the fourth quarter, how much tailwind do you think the company will have overall in the top line, and then if rates are held constant today, what that tailwind would look like in 2010?

Yes, as we saw the, obviously, the weakening of the dollar, we saw some -- obviously compared to the last year. As those rates kind of going into fourth quarter are pretty comparable, we don't expect much in the way of difference for fourth quarter.

2010, I guess it's tough to predict where the dollar is going to go, but as we saw the weakening of the dollar in the last I would say three months or so, we would do that same comparison over prior year. But I'm not sure where it's going to go, Matt; that's a tough one to predict.

With regards to the tax rate, Chris, what should we be using in the fourth quarter and what's your best guess now on 2010?

Yes, I would look at that -- obviously a lot of change going on in our tax rate this year, just given the income and where that was coming from, from a geographical point of view as well as the charge for the third quarter. I would say stay consistent with using that 5% for the full year.

As you look to 2010, I would -- our normalized I would say historical levels of around 20% would be a more appropriate rate to use for forward thinking.

Great, thank you.

(Operator Instructions). Yvonne Varano, Jefferies & Company.

A couple of things -- on the auto, is it safe to say that you saw most of the benefit really in September --

No.

-- and not really in July and August, or how would we look at that kind of monthly?

No, that's very appropriate, Yvonne. You are absolutely right. Construction orders and production really didn't start being lifted in our automotive businesses until September. I am referring to North American auto production. We expect the fourth quarter to be fairly robust compared to the past year, but it is still well, well, well off of normalized run rates.

We also are using CSM as some of our forecasting data, and it's now looking like we're going from about 8.5 million units to about 10.1 million next year. So we expect the run rate going into the fourth quarter to be tempered somewhat but not fully as we normalize some of the inventory versus sales levels.

But we've reduced a lot of fixed costs in that business, so we expect that our breakeven is probably in the 10 million or 11 million units for primary North American auto businesses.

Okay. Then your leadtimes versus production I would guess is pretty short.

Yes, it's relatively short. It could be 6 to 12 weeks, typically, but in some cases, it is a little longer/a little shorter. But I would say those are the averages.

Okay. Then just maybe give a little outlook on what you expect in automotive in Europe going into 2010, or your early thoughts.

Yes, so far, it has been more tempered than it was in North America in 2009. Right now, we're looking at it being flattish based on the data we are seeing.

Okay. Then lastly, I know you've done a lot in the distribution side of the business to cut costs. Where do we go now from a strategic perspective or what are the growth plans for that business?

Well, that's a great question. Let's start with Barnes distribution in North America, which continues to maintain profitability even through the downturn. There's a lot of things we could do to cut costs further but we're not going to. The reason we're not going to is we want to maintain an infrastructure for growth. In fact, we are investing millions of dollars in new training programs and recruitment, hiring people. We have a long-term plan to grow that business top line.

Historically, if you go back a, year we had double-digit margins in that business. I think we proved through Project Catalyst that we could achieve attractive end margins. Now the question is how fast we can grow that business long-term. So we are looking at ways we could support the folks out in the field with better tools and better product offerings. I think that's, that has a bright future.

When I look at Europe, I'm encouraged in the sense we've seen the Barnes distribution Europe business actually turn a profit in September. I think that's a significant milestone. But we are up also seeing improvements in the operating systems, in the o way we approach the marketplace. I think, with some increased volume, you could have some flow-throughs that are pretty significant, and that's what were aiming at, continuing to make investments there as well.

Okay, so with the addition of the salespeople, is it safe to say that it's just a kind of sales push that you're doing? Are there any regions in particular and are you finding that, with this downturn and you being in a stronger position, you are able to take some market share out there?

Yes, an interesting thing with the distribution business is, because it is both relationship selling but it's also business-to-business selling in a very specialized area, your service business, and it takes some time to train people. So therefore, the investments we make now may not pay off for 18 months, and that's why we're doing them now.

It is counterintuitive, obviously, to make investments in a downturn but we've been doing that. We started making big investments back in February in training and development, etc. As time goes on, we are going to have these investments continue. Therefore, there will be overlapping improvements in sales growth over the long term. It is not a difficult mathematical formula, and we are trying to improve the time it takes to get people fully up and trained and assigned, etc.

To answer the second part of that question, we are absolutely targeting specific market areas that value the vendor-managed inventory service model more than they would a storefront or a catalog business. For example, in mining operations, if you are 1000 feet below the ground, you want your product right there to be able to service your equipment; you can't afford to send someone 20 miles away to a storefront or wait two days for a catalog.

Sure. Okay, great, thanks.

Holden Lewis, BB&T.

Thank you. Good morning. Can you talk -- can you put some quantification to what the impact of price was? I mean, I guess piggybacking on that price-to-cost question, can you just sort of quantify whether that was a positive to you in the quarter, just at a lesser level, or a negative? How should we sort of view that in terms of order of magnitude impact?

Yes, Holden, on the pricing side, we are starting to see some pricing pressure. I would say on quantifying roughly around $1 million or $2 million, pricing pressures, what we saw in the quarter, just to kind of elaborate on Greg's comments, we're starting to see that in the marketplace more now than we have in the first half of this year. We would expect some level of pricing pressure to continue as we close out the year and go into 2010.

But you think it knocked you revenues down 1% or 2% -- the pricing?

No, not 1% or 2%, no, about $1 million or $2 million.

$1 million or $2 million, sorry.

Yes, yes, yes, just in terms of headwind.

But you would expect that number is going to get a little bigger?

We do. Some of it relates to just kind of competitive pressures. Others are obviously very hungry to kind of maintain some business level. So, we expect some pricing pressure to return where we have not seen much of that in the past I would say two or three quarters.

Then on the savings side, what was the realized savings in this quarter? And then, you made mention of two-thirds of those savings you think are permanent going into 2010. Does that mean that one-third of that 45 is coming back in for some reason in 2010?

Well, let's back up. So we have $45 million of annualized cost savings which we've been talking about. In the quarter, we benefited from roughly $12 million of savings, so the balance of that is going to be in the fourth quarter.

Remember, we talked about first half/second half, second half being obviously a better savings improvement for the full year.

The fixed cost/veritable cost portion was just to give a little bit more clarity that clearly we've had some permanent cost reductions, and we will experience the benefit going forward. The variable piece I would say is not going to be added back, necessarily. It all depends on market recoveries, but there was clearly discretionary types of savings that we experienced this year. How the market recovers, how we see improvement, will then dictate how we ad that back.

Okay, so there's not plans on the table right now at these type of levels to sort of bring in that $45 million back into the model?

Right, that's right.

Then can you give a sense of where you are from a production standpoint? You worked inventory down again, obviously. Do you continue to work off inventory and therefore keep production compressed, or with orders stepping up and inventory where it is, you think you can sort of bring production back up to the benefit of margins?

Well, there are certain things. First of all, we're going to continue to pay attention to working capital productivity; that's just part of our basic core business. We are paying a lot of attention to certain end markets in order to protect the upside potential. For example, I mentioned earlier about the maintenance and repair and overhaul where you have little notice before it comes back. Therefore, whether it's the spare parts inventory we maintain, we keep a fairly healthy inventory there, but there's other areas where we have a fairly lean inventory.

I also think, because there's such a lean inventory at our customers, it's going to require a very sharp reaction on our part from production and operations, and we are cognizant of that. We have been paying attention to a lot of directional indicators that will give us a sense early on. I think that is probably the best we're going to do right now.

Okay, I realize it is kind of segment-by-segment, but we look at consolidated balance sheets and things like that. I guess I'm just time to get a sense of, in aggregate, what you would expect from inventories going forward (technical difficulty)

Yes, I think they will be steady if not declined slightly over the next quarter or two.

Alright so the bottom line is production is not set to step up at this point?

No.

Okay. And then can you give a sense? With orders up 27% in non-aero sequentially in Q2 and up 35% in Q3 over Q2, how quickly does that translate into revenues? When do we begin to see that coming through?

It varies by specific business, but you're still talking about anywhere from six weeks to two or three months. Again, remember that these businesses had 50% declines in sales year-over-year, so it was a fairly hefty clawback going forward.

Right, I understand, but does that mean that the 27% increase in non-aero orders in Precision Components that you saw in Q2, does that mean that non-aero revenues, since pretty much all of it would be realized inside of three months, that non-aero revenues were up something similar to that?

Oh, sure, they are definitely trending in that direction.

Okay, but a similar kind of order of magnitude?

We are expecting that. The offsetting component of that of course is the decline in more profitable aerospace production. But at the same time, yes, we are seeing a recovery, in Europe in particular. I am optimistic long-term because, as that recovers, our European businesses have some nice operating margins.

Okay. All right, excellent, thank you.

Great. Thank you, Holden. I want to thank everyone for participating today. If there are any additional questions about any matters discussed this morning, 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. You may now disconnect. Good day.