Barrick Mining Corp (B) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2009 Barnes Group earnings conference call. My name is Gerry, and I will be your coordinator today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Brian Koppy, Director of Investor Relations. Please proceed, sir.

Good morning, and thank you for joining Barnes Group's fourth-quarter and full-year 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 the 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. To say the least, 2009 was an unprecedented year. Throughout the year, our focus was on generating cash, tight cost controls and investing for the future. These objectives, we were successful. In particular, the investments we made will serve us well in the months and years ahead as we turned towards driving profitable sales growth in what we expect to be a more favorable environment.

For the quarter, we generated net income of $6.2 million or $0.11 per diluted share with quarterly sales down 3% from last year to $256.5 million. While we believe our overall environment has improved, as demonstrated by increasing orders in backlog, we need to continue to be diligent in executing our goals and objectives.

Looking at 2009 as a whole, the global economic downturn impacted our end markets, and caused a significant reduction in our revenues. In response, we believe we took steps to deal with the downturn effectively, adjusted our cost structure to ensure we can operate profitably at these lower volumes, and realize incremental gains on revenue growth as the market improves.

Our 2009 operating cash flow of $143 million was a superb accomplishment in these difficult conditions. Our year-long focus on capital management proved effective and the prophecies we have established will continue to benefit us in the future.

Our robust cash flow performance and balance sheet management throughout the recession have enabled us to pay down our outstanding debt by approximately $115 million over the past 12 months. This has brought our year-end debt to capital ratio down to 34%, the lowest level in years.

In addition, we maintained our debt covenant compliance throughout the year and ended 2009 with a total debt covenant ratio of 3.1 times, which was well below the required level under our credit agreement of 3.75 times. As a result, we are very pleased with our balance sheet as we move into 2010.

Throughout 2009, we had to adjust our cost structure to align with lower volumes. To reduce our overhead and fixed costs, we reduced our global footprint by approximately 15% through facility closures and consolidations. In many instances, this has provided the necessary scale and expertise to improve our facilities.

In addition, while difficult, reductions in headcount were necessary to reflect the new level of activity. Over the past five quarters, we reduced headcount by 18%, and since the beginning of the recession, by 25%. And throughout 2009, we continued to invest in the future. We have made farsighted investments in our sales team throughout the organization, and targeted high opportunity customer relationships to drive future revenue.

As we enter 2010, we have already transitioned the Company from driving down costs to sales growth. We now need to take advantage of our reduced cost structure to bring greater value to our customers and improve our sales prospects for long term. 2010 for our Company is all about growth initiatives and lean enterprise.

For us, profitable growth has three components. Focused growth, which includes continuing our investments in our sales personnel, as well as expansion into key geographies and vertical markets. Focused platforms, which is identifying those platforms that leverage our competitive differentiators and have high growth prospects. Focused factories and services, which is maximizing our infrastructures through the creation of centers of excellence and improving our customer-focused prophecies processes, such as turnaround time, supply chain management, and the productivity of our sales force through technology.

Our Barnes Enterprise System and lean initiatives address three focal points. Aligned purpose, which is focused on creating and aligning the purpose of the organization to deliver value for our customers and stockholders. Aligned processes, which is focused on delivering value to the customer. And aligned employees, which is focused on engaging employees and their creativity in a continuous improvement culture to enhance our global competitiveness. Together, our focus on profitable sales growth and our aligned lean initiatives will allow the organization to accelerate forward and enjoy success in the marketplace.

Now, let me detail how our two business segments are positioned for growth in 2010 and beyond, and the view of their end markets. Throughout 2009, Logistics and Manufacturing Services continued to provide lower total cost of ownership to its customers through superior quality, service, and delivery.

At the center of this success is the sales organization. Even during the difficult economic downturn and the necessary reductions, the organization continued to invest in its salespeople. These investments include enhanced training and improved technology and are expected to benefit 2010. In addition, the segment has been expanding relationships with distributors, enhancing its catalog presence, and developing new products and repairs. These growth initiatives are targeting high growth platforms.

For example, within Aerospace aftermarket, key engines such as the CFM56, CF6, Trent, and GE90 will provide long-term, sustainable growth. Within Distribution, market gains within key vertical markets, such as transportation and manufacturing, will be essential to our success.

Successfully enhancing strategic channels to market, such as vendor-managed inventory, technical sales, and our catalog operations will enable us to grow profitably.

In our Logistics and Manufacturing Service segment, economic conditions continue to be challenging as customers continue to actively manage costs and inventory levels. Within the North American Distribution business, continued market pressures and seasonally low fourth-quarter activity pressured top-line growth.

With only modest improvements in the IPI machinery index expected for 2010, we are not expecting end market improvements until later this year.

Evolution within our European Distribution business continues. Revenues in the quarter were up over prior year and flat sequentially. However, European general industrial and economic activity, which these businesses support, is expected to remain soft, providing a tempered outlook for 2010. Nevertheless, we remain optimistic we can improve the financial performance of this business in 2010.

For the Aerospace aftermarket business, demand picked up slightly in the fourth quarter, but is still unclear as to the strength and longevity of this activity. While we remain optimistic that the ongoing deferred maintenance along with limited scope repairs and engine cannibalization will come to an end, the timing is difficult to forecast. Though many are expecting a recovery in the back half of 2010, regardless of the timing of the actual recovery, we strongly believe in the favorable long-term prospects of our aftermarket Aerospace business.

Turning now to Precision Components, Precision Components has been intensely focused on cost actions over the past year, and has been aligning its cost and footprint in a fashion that is leaner, yet more responsive to customers.

To position itself for growth during the time of cost focus, Precision Components did not reduce its sales organization size, but rather invested in customer facing people and training. These investments will enhance our ability to gain market share through new products and processes, and expansion of our presence in key geographies, such as India and China.

We also focused on strategic platforms such as the Boeing 787, the Airbus A350, and the Boeing 747-8. Within the automotive markets, platforms such as the new, more fuel-efficient transmissions for combustion, hybrid, and electric vehicles, are expected to have significant growth potential. In addition, alternative energy platforms such as wind and solar are expected to provide new opportunities for the business.

In looking at the end markets within Precision Components, demand within the businesses became healthier during the fourth quarter. Sales were up nearly 7% over prior year and order levels across all of Precision Components businesses were up substantially from a year ago. Orders increased sequentially despite the seasonally slower fourth quarter as well.

We believe the North American auto market will rebound nicely in 2010 and our expected auto builds of approximately $10.6 million for the full year, a 23% improvement over 2009 levels.

However, European auto production is expected to remain challenging throughout 2010. Within our industrial businesses, even though the inventory compression cycle appears to be coming to an end, we expect the markets to remain challenging. The Aerospace OEM business did see a pickup in quarter-over-quarter sales, though fourth-quarter 2008 sales were adversely impacted by the Boeing strike. Sales were down sequentially, but fourth-quarter 2009 orders intake was the highest level in seven quarters, helping to maintain our OEM backlog of $326 million. While near-term demand is likely to remain soft throughout 2010, we remain encouraged by the progress the Boeing 787 and Boeing 747-8 programs are making, which are key to our long-term success.

In summary, it's been a challenging year, but I'm proud that we continue to deliver and execute on our goals and objectives throughout the year. We are a stronger company for these efforts. Our investments to drive sales growth supported by our ability to produce our products and services as efficiently as possible will enhance our competitiveness and provide consistent and sustainable profitable growth in the years to come. Now, I'd like to turn the call over to Chris, who will run through the financial details. Chris?

Thank you, Greg. Good morning, everyone. This morning, I will provide some additional details on our results for the quarter and for the full year and wrap up with our 2010 outlook, which we have summarized on an earnings supplement chart, which you can find on our website.

Starting with the top line, the Company reported fourth-quarter 2009 net sales of $256 million, a decrease of 3% from prior year and a 7% decrease if you adjust for foreign exchange. For the full year, sales were slightly over $1 billion, which represents a 24% decline from 2008, and a 23% decline, adjusting for the impact of foreign exchange.

Clearly, our 2009 top-line results reflect the full impact of decline in each of our end markets that we serve. And while timing of end market recovery is still uncertain, our forward visibility is improving as the global market conditions have begun to stabilize, and we believe inventory compression has passed.

While the North America automotive production levels is expected to show improvement in 2010, we believe our higher-margin Aerospace business will continue to confront challenges.

Operating margin for the Company came in at 4.4% for the quarter and 5.9% for the full year, a decline from prior-year operating margin of 10.9%. The year-over-year margin decline reflects the significant reduction in our top line, partially offset by savings from cost-reduction actions.

Our margin for the quarter was lower than previous quarters in 2009, primarily due to -- one, lower top-line performance given the impact of seasonality, primarily in our Distribution businesses and continued softness in our Aerospace aftermarket business. Two, additional restructuring charges and other related expenses in the quarter of approximately $3.6 million. And third, incremental premium costs in a few of our businesses as we prepare to ramp up production for increased automotive production in North America.

The good news here is that the actions we have taken over the past several quarters are expected to benefit 2010 and beyond. And while we believe these actions to improve our cost structure and manufacturing footprint of the Company, have improved our global competitive position.

Turning now to cash flow, we are very pleased to report 12-month operating cash flows of $143 million. This represents a 28% increase over the full year of 2008. This is clearly a tremendous accomplishment in 2009.

Cash flow from operating activities less capital expenditures was $113 million in 2009. This represents a significant improvement over '08 levels of $60 million and a cash conversion, which is cash from operating activities less capital expenditures over net income, of approximately 290% in the year. The Company's ability to generate cash from operations in excess of its internal operating needs is one of its financial strengths.

Looking forward to 2010, we maintain our goal of achieving a cash conversion equal to or greater than 100% of net income. Regarding capital expenditures, for the fourth quarter, we had capital investments of $6 million. For the full year 2009, we had capital expenditures of $31 million, which was 40% lower than 2008. For 2010, we expect capital expenditures to be around $35 million, and 2010 depreciation and amortization are expected to be around $55 million.

As far as one of our uses of cash, Barnes Group recognizes the importance of dividends to our stockholders. During the fourth quarter, the Company paid a cash dividend per share of $0.08, and has declared a similar quarterly cash dividend per share for the first quarter of 2010.

Barnes Group has paid a cash dividend to stockholders on a continuous basis since 1934, and the Company remains committed to continuing dividend payments. Our actions to use cash will be consistent with our conservative financial approach we have maintained throughout the economic crisis and throughout the Company's long history.

With regards to share count, fourth-quarter diluted average shares outstanding increased 5% from the prior year to 55.7 million. The increase was primarily due to 1.2 million treasury shares issued to repurchase some of our convertible notes and approximately 737,000 shares issued to pension plans during the year. For 2010, the estimated diluted share count is in the range of 55 million to 57 million.

Moving on to the tax rate, as you saw in the press release today, the Company's tax rate for 2009 was 2.4%. The Company's effective tax rate from continuing operations in 2008 was 22.1%. It is important to note that during 2009, there were large swings in not only our overall profitability, but the mix of earnings among our global operations, thereby creating a significant reduction in the Company's tax rate. Our tax rate for 2010 is projected to be in the range of 13% to 18%.

Our outlook for 2010 reflects top-line base revenues improving 4% to 7%, including the impact of a stronger US dollar. As Greg mentioned, revenue growth will be driven by improvements in some of our end markets and by concentrating on key growth strategies, such as a continued investment in sales personnel in key vertical markets, and by focusing on key platforms, such as the Boeing 787, powertrain alternatives, vendor-managed inventory, and technical product sales.

Operating margins for Barnes Group are expected to be in the range of 7% to 8% for the full year of 2010. This improvement over 2009 reflects benefits we expect from top-line growth and productivity gains offset by incremental employee-related costs compared to 2009.

Our diluted earnings per share outlook for 2010 is in the range of $0.85 to $1.05.

Our conservative outlook is dependent on a number of key factors. On the higher end of our range, we would benefit from a faster recovery in our profitable Aerospace aftermarket business; stronger automotive production levels; above current external productions; and stronger productivity gains, given the benefits of fixed cost reductions we made last year and the continued focus on lean initiatives.

The lower end of the range takes into consideration the possibility of a slower economic recovery, increased pricing pressure, and the timeframe it takes us to benefit from our sales initiatives.

In closing, during 2009, we were focused on three important goals -- improving cash generation, adjusting our cost structure in response to the global recession, and investing for the future. To those ends, we are proud of our accomplishments and our success. As we move into 2010, and as Greg highlighted in his opening remarks, our focus will be on profitable sales growth and continuing to mature our lean enterprise efforts.

Needless to say, we are glad to get 2009 behind us, and we look forward to meeting our objectives in 2010 as we continue to position Barnes Group for continued long-term success. With that, let me turn the call back to Brian.

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

(Operator Instructions). Matt Summerville, KeyBanc.

A couple questions. First, can you help us understand, on a sequential basis in Logistics, your revenue was down round numbers, $3 million. Your operating profit down $6 million or $7 million. Can you help us understand some of the dynamics there? I know there's some seasonality in your Distribution business, but I assume there's something else going on there, given that the revenue shrink sequentially was only like $3 million.

Good morning, Matt. Some of it was the Aerospace aftermarket. And then also, some of the Distribution business.

Yes, sure. And Matt, the change is kind of quarter over quarter. We continue to make investments in our Distribution businesses. The speed to ramp exercises that we've got going on in [BD&A], as well as our efforts in BD Europe, are primarily the reason for kind of a sequential decline in our margins as we look to LNS. So those are I would say the primary drivers. And as you mentioned, we do have seasonality from a volume point of view fourth quarter traditionally being a lower quarter of the year.

How do you think margins then in LMS ramp off that 4% you did in Q4 as we progress through 2010? How should we be thinking about that?

I think in general when we look at the first half versus the back half of the year for the Company as a whole and particularly LMS, PC will have some transfer work costs in the first half of the year. The mix change is probably the biggest difference year over year with the Aerospace aftermarket being the driving force behind the challenges. But that's going to be offset by cost reductions.

On the back half of the year, LMS in particular, we hope the mix will improve and that we will see a bigger portion of the aerospace aftermarket taking hold.

And there's kind of two trains of thought when it comes to the deferred maintenance cycle. One is the historical sharp improvement like we had in 2004 after two years of deferral. And the other train of thought is it's going to be a gradual improvement. We are taking the position that we expect to see some improvement in the back half of the year, but not the big sharp improvement. If we do get the big sharp improvement like we did in the last time, then we will be at the upper end of our guidance. If we don't, then we will probably be at the lower end.

Greg, sticking with Aerospace, can you put some context around the backlog you have there? It sounded like it was relatively stable on a sequential basis. I guess, the order bookings you saw in the quarter, the strongest in the last seven, I think you mentioned; how much of that would be slated to ship in 2010? And how much of that I guess would be 2011? And then, what I'm really trying to get at is how should we think about 777 kind of gradually ramping down, or maybe it has already. And then 787 ramping up?

I'd looked at it as very good news in the sense that, as I mentioned a number of times, we are six to nine months in advance of the general cycle as we are placed in the supply chain. However, when I look at the, and dissect the backlog, about $11 million of it was orientated towards 787 work. And those deliveries actually start in the fourth quarter. And this is something that on previous calls I had mentioned I was hoping for. I had previous thoughts that it was going to be 2011 based on the inventory that was in the cycle already. But I became more optimistic when I started looking at the ramp rate that Boeing was looking at and the tier 1's being concerned about their ability to meet that ramp. So that's actually materializing. And I think we are going to expect to see continued 787 orders.

The other thing I would comment on there too, and one of the things that many people haven't focused on, the 747-8, which flew for the first time, I believe it was two weeks ago, has 100 orders with another 50 options -- that's in general, with four engines per aircraft. That's 600 GEnx engines in backlog right there. So that's another thing that we expect to benefit going into 2011 as we look at delivery cycles on that aircraft as well.

So in general, I think that we do expect the narrow bodies to ramp down a little bit because I think that most people, there's kind of a consensus that the narrow bodies are at too high of a production rate, but this may be offset by some of the new platforms that are coming on board. So even though there is expected to be declines in the overall production over the next two years, we think that we're going to be in better shape because of the platforms that we are on. So we expect it to be flattish, in other words, the new platforms offsetting the impact of the declines in other areas.

Just one final question, then I'll get back in queue. Can you guys comment on how much cost savings you were able to achieve in 2009? And then I guess how much dropped through the P&L, and what that's going to look like in 2010? And I guess how much reflation and expenses will wash against that?

Matt, as we kind of summarized for 2009, or kind of closing out 2009, we talked about overall cost savings on projects from restructuring efforts that we started when we began, kind of going back towards the second half of 2008. We feel good about the individual efforts that we've gone through in terms of reducing our footprint, reducing the fixed cost of our structure and positioning ourselves for a better future when end markets recover, which we're starting to see some of that, especially in the Automotive side.

So, overall we've been talking about a $45 million savings. I would say project-wise, we feel great about that. We did incur some incremental headwind in the quarter as we look to ramp up production of some of our businesses, I commented, given the North America automotive side.

So a fixed cost reduction that's coming out of the business, we are executing on those programs. We're trying to accelerate that activity in the fourth quarter. We saw some incremental expenses related to finalizing those projects. We have a few activities going into the first half of this year.

But we do, and it is reflected in kind of our margin assumption, that 7% to 8% going into next year, which would also take into consideration some variable cost headwind, whether it be employee-related activities that are going to be popping into 2010 that were not there in 2009, as well as headcount. That variable cost that we'd have to bring into the business to ramp up for improved top-line performances, which is what we expect.

Thanks.

Edward Marshall, Sidoti & Company.

Good morning, and thanks for taking my call. Reading through some of your comments, I guess, are you saying that you saw continued deterioration in the aftermarket in the fourth quarter on the Aerospace side?

If you look at first half versus sequentially it was not -- it was slightly up. The first half was much stronger than the back half of the year as far as the aftermarket goes. So we saw an intensification of the deferred maintenance cycle, basically, in the back half of the year. And for us, it's basically looking at maintaining our ability to surge upward if Q3 comes around like some people hope. It probably will be dependent on summer air traffic. If you see strong summer air traffic, you're probably going to see some repatriation of the fleet from the [arc] fleet, which has had a very high level. It's record or near record, far above what it was after 9/11. So I think we are cautiously optimistic about the aftermarket.

So it's realistic to see something in the third quarter start to pick up? I mean that's where your projections are right now?

Yes, there's two trains of thought. One is that there's going to be a gradual improvement. And the other one, that there's going to be a sharp improvement when airlines start to become competitive if traffic picks up in the summer. We need to maintain the capacity in order to meet either capability. So we're maintaining some cost structure that is prudent at this point. And I think that even if it gets delayed another quarter or two, I'm still confident that the level of deferred maintenance is the highest I've seen in my career. And I go back to the early '80s.

Okay. So when you talk about the high end of your financial guidance for 2010, you talk about faster Aerospace aftermarket recovery, are you talking about the timing, or are you talking about the sharpness of the recovery?

Both.

Yes, really both. Our projection reflects more of a second-half recovery. And right now, we're looking at that. And clearly if that starts to happen earlier, we would benefit more. So that's the view right now.

And you gave us automotive production for the US. Do you have estimates for Europe as well?

Well, Europe is looking at --

Flat.

Fairly flat. Keep in mind they didn't suffer as much last year. They had a very different type of Cash for Clunkers program. And I think being flat is okay in the sense that it's not deteriorating. All of our European manufacturing businesses are much improved over last year orders rate, sales, etc. And that's more driven by the end of inventory compression. We saw tremendous reductions in sales in our European businesses because the inventory compression was much more dramatic in Europe than it was in North America.

Okay. And then back to the Aerospace OEM, when do you think you start to see orders on the '47, as that starts to ramp up?

We're already getting them. The 747-8 uses the GEnx engine. And normally I don't talk airframes because we're 85%, 90% engine orientated. But in this case, the 747-8 is 100% GEnx. So we're seeing that in the GEnx orders that we're getting right now. So in some ways, I misspoke. 787 -- it's a combination of 787 and 747-8, because we can't tell necessarily which engine these parts are going to go on.

You mean the $11 million in backlog --?

Exactly.

Okay. So that's for both programs?

Right.

Okay.

And we expect to see that continue to improve because when you look at the ramp rates -- and by the way, we've had some folks out at Boeing recently, some of our sales people, and they said that the test program for the 787 is going extremely well. So we hope -- we wish them the best.

I guess one last question. The debt reduction, is that done or do we continue to see cash flow used to reduce that?

Yes, we -- the way I look at it, just given the working capital reduction we've had throughout the year and just the tremendous cash flow generation, we do feel we didn't have much in the way of change in sort of the working capital going third quarter to fourth quarter. We do feel we have taken out the working capital necessary, given the 2009 headwinds on the top-line.

Anticipating, to Greg's comments on the orders uptick and some of the improvements we see in some of our end markets, we think we are kind of at those lower levels. So we would expect some cash usage in terms of working capital to make sure we are well positioned for end market recoveries.

So I wouldn't see much in the way of working capital reduction. And having said that, that plays right into kind of our current debt position. Obviously, very pleased with overall cast generation for the year, tremendous accomplishment by the team. But I would say the current debt levels reflects the lowest level, and we will see that change kind of as we execute 2010.

Okay. Thank you, guys, very much.

Peter Lisnic, Robert W. Baird.

This is Josh Chan filling in for Pete. Just wondering for your revenue guidance, how much foreign currency are you exactly contemplating?

Really, we didn't -- we don't view it necessarily as all that significant, Josh, in terms of year over year. So in that 4% to 7% we contemplated kind of a very small portion being FX-related. Obviously, very volatile market, especially as relates to the euro the past week or so. But I would say it's pretty much neutral kind of a year-over-year look.

Okay. And then could you comment a little bit on the distribution businesses? I guess in terms of it terming positive in September for Europe? Was that maintained or how --?

Sure. A couple comments. First of all, Barnes Distribution North America remained profitable in 2009, although marginally. And I think we didn't take more cost out because we need the sales force intact and we maintained the sales force level at a fairly high level; and we're actually looking at adding about 10% more to our sales force in 2010. So, we think that the actions done in Project Catalyst as well as the investments we've been making recently, we've actually invested millions of dollars in new training programs and the ability to recruit and train and deploy folks there. So I'm pretty happy with the Barnes Distribution North America as far as where it's positioned.

As far as Barnes Distribution Europe, I think we made tremendous strides in the past six months, or actually the past year. If you look at how much effort has been placed in that business, we think we are structured right now for business that is capable of being profitable in 2010, as well as being able to grow. We're making investments in sales personnel there, etc. And in general, I think the two Distribution businesses, North America and Europe, are poised for growth in profitability.

Okay. And then finally on your --

I will make one final comment. I think that the fundamental one-time charges, etc., for all the businesses, and especially in Barnes Distribution Europe are behind us.

Okay. Great. And then finally, on the slides, you talked about potential pricing pressure; I mean, which end markets do you expect there to be the biggest risk in terms of that?

Well, one of the things I've been saying for several quarters is the one thing that surprised me most about this recession for the past two years has been the lack of significant pricing pressure. Normally, in an aerospace cycle, it hits you hard, and you know it real hard, real soon. This, we see it in isolated instances in particular areas and in some of the areas we served in Europe and in sporadic places in the US. But it's not what I would call significant yet. But you can't help but anticipate something like that, given the fact that world excess industrial capacity is so underutilized it's inevitable that you're going to have pricing pressure. So that's one of the things we prepared for in reducing our fixed costs and being able to be competitive. But we will tell you as soon as we feel it hard. But so far, it's been fairly light.

Okay, great. Thanks for your time and good luck.

(Operator Instructions). Fred Buonocore, CJS Securities.

Just wanted to follow up on the comments for the kind of takeaways from the Q4 operating margin. You talked about incremental premium costs as you were kind of ramping up production ahead of increased auto orders. Can you talk about the significance of that, maybe quantify it? Can you talk about -- is it something you expect to see through Q1 as well?

Yes, Fred, let me make a comment. Given the fourth quarter and we expect ramping up even higher in the first quarter for automotive production and we're going to continue to benefit from increased orders, especially on our associated spring business that serves most of the North America market. So that's all good news.

The challenge for us in the fourth quarter was driven by -- I would just call it premium costs related to additional activities we've had in the business to make sure we were ramped up and prepared. Freight-related, overtime-related, a number of items that from an execution point of view, we had to incur. So that was some of the headwind we faced in the fourth quarter.

Going into the first quarter, even I would say the first half of the year because we continue to see improved orders in that business, is we feel most of that is behind us, that we are well-positioned to benefit from that. And this is the business that we've primarily taken out a pretty significant amount of fixed cost reduction. And have expectations of being able to continue to improve margins in that business.

Got it. So, sort of along the lines of the transportation business, but outside of light auto, what are you seeing in the markets for heavier transportation-related things and with customers like Caterpillar, for instance? What are you seeing with respect to orders and indications there?

Yes, the heavy-duty side, I would say the market is expecting to have some sort of improvement as well. Again, most of our activity is in the light vehicle side. We do participate, clearly, with Caterpillar, one of our key customers, as well as a few others. But it's not sizable to our business. Really, the big play for us is on the automotive side, the light vehicle piece of our business.

Okay, got it. And then, back to Aerospace aftermarket. And Greg talked about the sort of two trains of thought. But implicit in your guidance, in your view, do you have some sort of assumption for a metric like RPMs or something along those lines when forming your view?

We look at something a little bit more relevant to us because, revenue passenger miles, for example, if they don't bring -- if they defer the maintenance, it's irrelevant. So we survey -- and we actually hire a consulting firm -- to survey and looking at shop visit forecasts. And that's what we're basing it on. We have high/low limit of what we expect for engine shop visits. And there is an underlying optimism out there that the deferred maintenance cycle is coming to an end. But until I see it reflected in those engine shop visits forecasts, that's really the driving force behind our estimate.

We expect, if nothing else changes, we expect the first half overall to be flattish to a little bit of headwind here with the transfer costs and things like that. The back half would reflect a modest improvement. And, if there's the improvement in aftermarket, then we will see the higher end of our guidance.

Great. And then finally, looking out a little bit further, realizing that this is tough to do, but it seems like 2010 could be considered a transition year for you from the roughness of 2009 to where it could hopefully be a great, great year given the cost-cutting you've done. Can you just kind of give us thoughts on where you could wind up as we go into 2011 and things kind of trend the way you are looking at, where you are going to be?

Let me take it by a few of our markets. For example, if you look at industrial capacity, industrial capacity by August was the lowest level since pre-World War II. And that's starting to improve. We've seen it through the fourth quarter, and I think you're going to continue to see that over the next couple of years, two to three years. So we think we are beyond the trough in that area. North American auto production, everyone is in agreement that we you're going to see three to four years of improvement. When I say everyone, folks like CSM, the consulting folks. So, a new normal may be 15 million units. But going up to 10.6 million this year is just the beginning. I think you're going to see two or three more years. So we're basically beyond the trough there.

The huge aerospace backlog is certainly -- we would like to see some orders coming in there. When I say Aerospace, industry backlog. But, but, if you're on the right platform like a 787, 747-8, the CFM56, etc. So I think I'm pretty positive there that while it's not going to be a significant growth area in 2010 and '11, I think we're going to fare better than most in that area.

The big thing is aircraft demographics for the aftermarket. And, if you look at the platforms that we are on, in particular the CFM56, which is the most popular engine in the history of commercial aircraft, we have a lot of focus on that engine. I did a little analytical work where I looked at the old engine shop visits forecasts and the new engine shop visits forecasts, and there's roughly 25% of the engine shop visits expected for 2009 were missing. And that's kind of quantifying the deferred maintenance level that's out there. So, I know it will revisit us, whether it's 10 or 11, that's a pretty significant improvement in one of our highly profitable areas. So, I'm looking forward to the upcoming improvements there.

And also, I think the balance of the Company with international about 40% plus -- I say plus because a lot of our work domestically actually ends up overseas. I think that's a nice balance.

So, in summary, I think most of the markets that we serve are beyond the trough. And that we should see improvements over the next several years. And, I think we did the right thing taking the fixed costs out because if the markets improve over the next several years, our ability to be competitive and at the same time improve profitability and margins should be there.

Very good. Thank you. That was helpful.

Holden Lewis, BB&T.

Someone asked earlier about the cost savings. I wanted to get a sense of, if the numbers that we have been talking about in the past are still good. I think you were looking to recognize -- was it $47 million or $48 million for 2000, and that would've included a significant step up in sort of Q4. Do you still think that you got that $47 million or $48 million? Or did we not get or realize the savings that we thought we would from those initiatives in Q4?

Holden, let me make a few comments. I think when we began kind of towards the end of 2008 and just looked at the significant heavy lifting that needed to take place in terms of consolidation and restructuring of this business given a 24% top-line decline, a number of initiatives were put in place in the fourth quarter of '08. We continue to execute on a number of projects throughout 2009.

The number we've been talking about in terms of project-related savings was $45 million. We feel good about those individual projects. Where we fell short in the fourth quarter is on execution in some of the other areas, where the premium costs out of our associated spring business, the continued I would say investments we've made and actions we've taken in some of our Distribution businesses. So overall, we feel good about the positioning from a fixed cost reduction point of view. We did fall net short of that business. And you saw that reflected in our fourth quarter.

Clearly, we were looking to drive for a better fourth quarter. We fell short of that. But at the same time, we took a lot of heavy lifting that is behind us, so as we enter 2010 and look to guide 2010 for margin improvement going to 7% to 8%, we're going to see those benefits, not only from the cost reduction efforts, but also for volume increases that we're expecting starting to see as Greg commented in terms of the aerospace, OEM side clearly down year over year; we're starting to see some improvements or we're looking at second-half improvement, the Aerospace aftermarket side, as well as just North America automotive production.

So orders are up. We're feeling that we are through the trough in terms of that activity. And the order activity is starting to pick up, as it has been actually, as we commented in the last couple of quarters. So each of our businesses is starting to show some improvement. That gives us confidence around the 4% to 7% top line and being able to expand margins and grow significantly our earnings per share kind of year over year.

Okay. So the way to look at this is, you originally had targeted I think it was something like $18 million in Q4. And you may have gotten that in terms of the fixed costs, but you then had to add these other costs in to prepare for revenues. So those costs that you've added in are not temporary; they're related to the expectation of higher volumes.

Yes, that's right. Somewhat is -- that's a fair way to look at, exactly. So that's why I don't want to mislead to say we, from a $45 million we've got it. I mean we feel good about the projects, but there were other things that from a net productivity point of view, we did not realize that overall expectation of that -- to your point, that incremental $[6] million, that $18 million in the quarter.

Okay, so then in terms of the savings run rate, if you will, you were sort of at a $12 million rate in Q3. One should assume that you were sort of at that $12 million rate as well in Q4.

A comparable rate. A little bit better than that, but you are right. That's a comparable rate.

Okay. And so, let's call it $13 million I guess or $14 million. But of the call it $50 million to $55 million in sort of annualized savings that that would imply, can you just break the buckets into how many of that $50 million to $55 million is sort of permanent savings? How much of it represents stuff that you are going to have to sort of reinstate, whether that was sort of management wage cuts or what have you, just stuff that at some point in the not too distant future, you're just going to sort of reinsert?

Yes, the fixed cost side of that savings, Holden, I think I commented even on last quarter's call is we represent about two-thirds of that business is true fixed cost reduction. So this is true plant closures, consolidation, permanent reduction in our fixed cost structure. So we commented around the operating footprint being reduced by 15%. That's obviously a big piece of it. So, that's what we looked at when we are guiding the 7% to 8% operating margin, that we're going to be able to expand margins 100 to 200 basis points as a result of fixed cost reduction as well as top-line improvement.

Okay. But does that two-thirds go up as a percentage? Because now obviously our annual savings rate is down from sort of $70 million, $75 million to $50 million, $55 million. And I would think that that $50 million, $55 million, the fixed portion would be greater.

No, I think the timing of which, and year-over-year performance it depends on when we execute on that fixed cost reduction.

Okay.

You know I'm saying? So, there is a little bit of -- we're going to get the benefits, as we saw most of the benefits in the second half of this year, that's going to carry into next year, reflected in our margin assumption of 7% to 8%.

Okay. And then everything else is variable. There's nothing that you're just going to have to sort of step up a big chunk of costs in that?

No, I mean we're going to have some -- the employee-related costs, for example, a simple item in terms of just all of the merit increases as an example, zeroing them out last year and having to institute that. We're planning on instituting that this year. So employee-related costs. Health benefits -- just for example, just the employee-related costs on the health benefits side, we are seeing an increase kind of year over year. So there are some variable costs that are going to be impacting us. But we took that into consideration in our margin assumptions.

Okay. Are you able to give us a sense of what those numbers look like?

It's reflected in our margin assumptions, Holden.

Okay. And then I guess I wanted to explore a little bit further the pricing. Because, I mean, I hear you, it has been a pleasant surprise the pricing hasn't been a bigger factor across the industrial landscape. But, you did sort of call it out specifically and distinctly last quarter in a way which was somewhat different. Has that pricing pressure gotten worse, stayed the same, gotten better?

Pretty much the same. I think I call it out because I'm being proactive, that I don't want to surprise anyone going forward. But it hasn't really changed that much. It's been sporadic, not industry-specific over the past year. And, it surprises me. And no one likes to be surprised, and I'm pleasantly surprised in this case.

Yes, I'll take it. Okay. And then last thing, with regards to sort of your balance sheet and all that, talk perhaps about what your appetite for M&A might be here. And also, talk perhaps about the share count. Your share count -- you have some pretty significant creeps there every year. Might you be more inclined, if you feel good about the balance sheet, to begin more aggressively buying back stock, to begin to mitigate some of that share creep? Or just if you can give us a little bit of color on those things.

Well, first of all, I think we are really pleased with the improvement in our balance sheet. And we are actually at healthy levels. And I think it will be a little healthier throughout 2010, especially as profitability improves.

Recognize that we used some of the shares last year to effectively improve the profitability of the business through the very effective convertible note repurchasing program. And that's one of the big drivers that happened in the past. As we move forward, we're certainly going to look at all the various options for use of capital. But I think we are a conservative company. And in these times, I think that's a prudent way to look at it. So we are going to start looking at M&A activity probably in the back half of the year again. We suspended it for just about a year and a half now. We are looking at a number of acquisition opportunities in the pipeline, nothing that I think is imminent. But at the same time, I think that's going to probably improve as we go forward.

We want to get back to the organic, as well as acquisition growth path that we've had historically. And, that's going to be one of the drivers to the decision-making process. And of course, we have a Board of Directors who makes decisions on the various sources and uses of cash as well.

What about the prospects for [you] buying back shares, to sort of stem the share creep?

I've looked at it and I understand the issue, but I'm not prepared to go any further than that at this point.

All right. Thanks, guys.

Edward Marshall, Sidoti & Company.

Thanks for the follow-up. Just one question. Impact on the product mix, as you shift to a higher run rate in automotive and the muted recovery maybe in OEM and Aero as well as aftermarket businesses. And how critical is that to your assumptions for guidance next year?

It's all for this year. It's all built into the forecast. We expect that the mix won't be favorable in the first half because automotive will be up. Aerospace aftermarket will be down year over year because the run rate Q4 into Q1 will be lower. And as I mentioned, we've got transfer of work costs in automotive that will still impact us more in Q1 than Q2, so that mix is somewhat offset by the cost reduction activities that we've had. So, we're looking for comparable first-half numbers roughly. But at the same time, the improvement will come in the second half of the year. So even if things don't improve materially, we still expect to be able to meet our low-end guidance. If things start to improve in the back half of the year, we think we will hit the upper end.

I see. Okay. Thanks very much.

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

And we appreciate your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.