Barrick Mining Corp (B) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2010 Barnes Group earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to your host for today, Mr. Brian Koppy. You may proceed.

Good morning and thank you for joining Barnes Group's second-quarter 2010 earnings call and webcast. This is Brian Koppy, Director of Investor Relations and Communications for Barnes Group, and with me this morning are Barnes Group's President and CEO, Greg Milzcik, and Senior Vice President of Finance and Chief Financial Officer, Chris Stephens.

I want to remind everyone that certain statements we make on today's call, both during the opening remarks and during the question-and-answer session may be forward-looking statements as defined in the Private securities litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the financial statements. Please consider these risks and uncertainties that are described in our periodic filings with the Securities and Exchange Commission and are available through the Investor Relations 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. With the reported second quarter results today, we are now six months through the year and continue to see positive trends as we capitalize on stabilizing market conditions and our increased efficiencies. Profitable sales growth is a priority this year and second-quarter results demonstrated the significant strides we are making.

We posted a 10.5% revenue increase over the prior year and 8% on a year-to-date basis. Importantly, our net income for the second quarter of $14.8 million improved 42%, an excellent dropthrough ratio. As a result, diluted earnings per share increased 37%.

Our strong second-quarter net income performance, the highest level since the third quarter of 2008, was due to a combination of better-than-expected end market demand, particularly within the automotive industry, contributions from our prior restructuring actions, lean initiatives over the past 18 months, and certainly strong execution by our employees. In addition, our enterprise wide operating system is enabling us to continue to meet and exceed our customer expectations for service, quality and delivery, and further drive key productivity measures.

The second half of 2010 will remain focused on outstanding execution and capitalizing on opportunities we see in the marketplace. Key to continuing our momentum is remaining diligent on our 2010 priority. Profitable sales growth and continued deployment of lean throughout Barnes Group. Now let me discuss our two business segments in more detail.

In Logistics and Manufacturing Services, the impact of market conditions is different for each of our businesses. Starting with the aerospace aftermarket business, the end markets have yet to realize the expected increase in overall activity.

While sequential sales were up approximately 3%, we are not confident this is the beginning of accelerated activity. We continue to closely monitor input from the original equipment manufacturers, the overhaul shops, and the airlines themselves for signs of activity. But quite simply, maintenance remains depressed. We strongly believe in a favorable long-term prospects of our aftermarket aerospace business and remain confident that the ongoing deferred maintenance and limited scope repairs will come to an end.

Positively, recent economic data suggests that passenger traffic is increasing, which will eventually translate into additional repairs or spare part orders. However, it appears likely the sluggish growth rate will persist throughout the remainder of this year and, at some point next year, we would expect to see an acceleration of activities.

For our North American distribution business, we are seeing signs of renewed activity. For the second quarter in a row, we have experienced sequential revenue gains. Importantly, our DSA, or daily sales average, has returned to levels not experienced since the fourth quarter of 2008. We continue to add new sales reps and our average order size has started to show nice signs of improvement with its highest levels since the fourth quarter of 2008.

In addition, the increasing IPI machinery index is also encouraging. However, we continue to believe customers are managing costs and maintaining minimum levels of inventory as they remain cautious regarding economic growth.

Regarding our European Distribution business, while base revenues were essentially flat compared to the same period last year, foreign exchange adversely affected overall growth. General business activity continues to be adversely impacted by the economic conditions in the rate of recovery within the European economies.

Turning now to Precision Components. Precision Components posted another impressive quarter, with second-quarter sales up 22% and operating profit and margins up significantly from the prior year. Order rates were strong once again, up 83%, outpacing sales for the third consecutive quarter. This is a good sign for sustained recovery in our key automotive and industrial end markets.

The high level of demand within North American automotive markets continued through the second quarter. While there has been some noise around North American auto production levels for the back half of 2010, we believe that automotive production for the full year will remain at our projected level of 11.5 million units.

Our European manufacturing business and their export driven focus have been able to capitalize on the global growth, and saw their order rates improved 73% compared to last year and 15% sequentially. Aerospace OEM sales declined approximately 5% year over year. However, order intakes increased 122% over the prior year, pushing OEM backlog to $350 million from $326 million at the end of 2009. This increase in orders was driven by a significant uptick in GE 90 orders during the quarter, which resulted from the announcement to return this Boeing 777 production rate back to seven per month beginning in mid-2011.

Our aerospace OEM business continues to incur significant amounts of NPI or new product introduction, development work that will expand market opportunities. This year, the quantity of new parts that we are actively working is more than two times greater than the same period last year. Within Aerospace OEM, NPI is part of an overall diversification strategy to ensure we have a broad breadth of parts and content on multiple engine platforms, including new engine programs such as on the A350.

While we view the long-term outlook of the Aerospace OEM market favorably, we recognize the business is cyclical in nature and are conscious about appropriate platform diversification strategy. In regard to the Boeing 77 -- 787 program with its GEnx and Trent 1000 engines, it continues to progress.

Our current content on a Boeing 787 is approximately $500,000 per aircraft. As we examined the end market and overall dynamics, it is important to note that in sourcing trends combined with material cost adjustments and changes in material applications will likely reduce our overall dollar content per plane.

Realizing these trends in the overall market potential, we continue to seek out and quote on new margin enhancing opportunities within the 787 program, where [there] are currently a strong pipeline. Our current assessment will put our estimated content level per aircraft in the range of $350,000 to $450,000 by 2012.

In summary, though our performance has generally been in line with expectations, we continue to remain guardedly optimistic. We began the year convinced the recovery will take time to develop, and we have not varied from that opinion. We remain focused on capturing new business by providing industry-leading quality, service and delivery to our customers.

In addition, we will continue to look for opportunities to apply lean tools and principles in order to reduce waste and increase efficiency. Together, we expect this to enable the Company to build on its success and drive sustainable, profitable growth for increased stockholder value.

Now I'd like to turn the call over to Chris, who will run through some of the financial details. Chris.

Thanks, Greg. Good morning, everyone. I would like to first start off with providing some details on our results for the second quarter, as well as the first half of 2010, and end with a few comments on our full year outlook, which we have summarized on an earnings supplement chart that is available on our website.

Starting with the topline, the Company reported double-digit sales growth in the quarter. Our second-quarter 2010 net sales of $282 million, including the negative impact of $1.8 million from foreign exchange, increased approximately 10.5% from prior year.

Continued topline growth looks encouraging within our Precision Components business segment, as demonstrated by increased order rate of 83% and a backlog that improved 10%. For our Logistics and Manufacturing Services business segment, an improving industrial production index should support continued growth opportunities within our distribution businesses. Overall, we continue to leverage our expertise and capabilities in new ways to retain and attract customers and new markets, and introduce new products to achieve our growth targets for the year.

Operating income increased 67% from prior year and quarterly operating margins for the quarter was at 8.4%, a solid increase from prior year operating margins of 5.5%. The increase is primarily driven by higher sales volumes mostly within our business units that serve the Automotive and Industrial Manufacturing end markets. In addition, we continue to realize the benefits of a lower fixed cost structure, given the actions we have taken over the past several quarters.

Although we generated a nice improvement in our overall operating margins during the quarter, our margins continued to be negatively impacted by the change in business mix, due to higher margin Aerospace aftermarket business growing at a slower rate than our other businesses, especially those businesses that sell into the automotive end markets.

Turning now to cash flow. During the second quarter, we generated operating cash flow of $25 million. Cash flow from operating activities, less capital expenditures of $9 million was $16 million or 107% of net income. For 2010, we expect capital expenditures to be in the range of $30 million to $35 million, and depreciation and amortization are expected to be around $50 million to $55 million.

With regard to share, second-quarter diluted average shares outstanding increased [to] 5% from the prior year to just over 56 million. As we noted on previous calls, the increase is primarily due to 1.2 million treasury shares issued in the second half of 2009 to repurchase some of our convertible notes. For 2010, we estimate our diluted share count will be in the range of 56 million to 57 million shares.

Moving onto the tax rate, the Company's effective tax rate for the first half of 2010 was 16.4%, as compared to 8.9% in the first half of the prior year. The increase over the prior year rate is primarily due to swings in our mix of earnings among our global operations.

Before I conclude my opening comments, but by discussing our outlook for the rest of the year, I did want to highlight that, on Friday, we filed the Universal Shelf Registration. This filing is simply a proactive action on our part to provide flexibility to our capital structure and does not indicate an offering is pending nor contemplated.

Turning now to our 2010 full-year outlook. We are encouraged by our performance through the first half of the year. Sales were up 8%. Operating margins have improved to 8%, and diluted EPS is up 15%.

While our profitable Aerospace aftermarket business continues to be impacted by depressed conditions, we are pleased with signs of stabilization and growth in most of our other end markets. As a result, we are maintaining our full-year 2010 outlook of $0.90 to $1.10 per diluted share. This outlook continues to reflect topline-based revenues improving 6 to 9%, including the impact of a stronger US dollar. Operating margins are projected to be approximately 8% and, as we communicated early in the year, our outlook continues to be dependent on a number of key factors.

On the higher end of the range, we would benefit from the second-half recovery in our profitable aerospace aftermarket business, better volume leverage and stronger productivity gains given the benefits of fixed cost reductions we have implemented. The lower end of the range reflects the possibility of a softer economic recovery, given recent market uncertainty and a continuation of the Aerospace aftermarket business activity at similar levels experienced over the past few quarters. In addition, results would negatively be impacted if we experienced increased pricing pressure in the second half of the year.

In closing, our double-digit sales increase and solid margin improvement drove a 37% growth in EPS this quarter. In the second half of the year, we will continue to drive towards profitable sales growth and lean enterprise efforts to improve our performance. Our strong market presence and a more efficient operating structure should continue to position Barnes Group for long-term success.

With that, let me now turn the call back to Brian.

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

(Operator Instructions). Christopher Glynn with Oppenheimer & Co.

Thanks. Good morning. Just a couple questions on distribution. On the European side, just wondering where you sit strategically as you are contemplating being in a runoff vote there, or what is the status of the health of that business?

Well, fortunately, I just returned from Europe, I think it was two weeks ago from doing a business review, as well as attend the Farnborough Air Show. We're pretty happy with the progress on the infrastructure associated with the Barnes Distribution Europe business, and that was a real effort last year, part of the integration process and some of the stream lining that we added, gone through over the past 18 months.

We have a number of activities in place to lift topline and that is really where the future lies for that business. The basic infrastructure is sound. I think the quality of our work force is very good. It is really a topline issue that has been somewhat muddled by the disruptive nature of the European economy over the past several months.

So we expect to see some progress towards the end of the year. And I will have more comments to say on that at the end of the year.

Okay and then on [BDNA], any -- how are you judging how to pace the investments there? Noted increased investment in salesforce.

That's a very good point because this is somewhat unusual. We had a program we called Powering Out of the Curve, where it is counterintuitive to do things. We started making big investments last year and we expect those to pay off. We had -- June showed a 10% year-over-year improvement for the quarter. It was roughly 8% year over year. We had sequential gains.

So I think we are heading in the right direction there. The costs that we have associated with it are adding new sales representatives to penetrate new markets. And typically it is out of period gains.

In other words, it takes more than a year for a salesperson to break even on a cost basis and that, in the past, has probably deferred -- deterred some of the sales gains. But we are determined to make those types of investments. And we think there is going to be some good games next year from that.

The way we pace it basically is, there is only so much you could bring on at any one time in order to train them appropriately and deploy them effectively. And we are still investing money in that area to try to streamline the investment process and the training process. But we feel pretty happy right now that we are heading in the right direction, and the North American distribution business, as well as our catalog business, are both on track for the recovery.

And I might add, it is slower than we want it to be. I mean the IPI industrial index is still well below previous session levels. We think the first half had some restocking effects, so that there was some benefit there. But we think there is still an underlying growth in the core markets. It's just very slow.

Okay and then on the aftermarket. If we were to look at what GE is talking about with their engine overhaul schedule for the balance of the year, how closely do you tend to track that?

Well, first of all, one of the opportunities we had at Farnborough is we sat down with a lot of the major OEs, as well as their overhaul shops. We sat down with airlines. And that complements our third-party research work as well as our own in-house work where we have people visiting these shops all the time.

And all the data is positive. Load factors are up, premium traffic is up, [park fleet] is down, especially the competitive park fleet. International traffic is up. Airline profitability is up, freight growth is up. So all the macro economic indicators are positive. In fact, I don't think I've ever seen a consistent alignment like this.

However, we are seeing a muddled response by the airlines is far as overhauls. Most people, right now, are predicting single-digit growth, low single- , mid-single-digit growth for the balance of this year. With some potential fourth-quarter uptick. But most people are looking at a demographic bulge of like limited part overhauls in the first half of 2011. And that is the best data we have right

And just as far as tracking with GE?

Yes. Yes. It is fairly consistent because GE is a big overhauler of CFM 56s and the bulk of our RFPs as well as our maintenance care and overhaul activity is to get them 56-orientated.

Thanks, Greg.

Fred Buonocore with CJS Securities.

Good morning. Nice quarter. Just wanted to follow up on the discussion of BDNA and the pickup you're seeing there. Are there any specific end market type customers where you are seeing more strength than other areas?

In general, I think we are seeing things on (multiple speakers) freight, some of the manufacturing and transportation in general. And I think that is consistent with what you see early in the recovery and not to keep dragging you back to air traffic, but if you look at air freight, it has gone through the roof. And I think that that is transmitting itself into ground freight as the intermodal aspect of movement of freight around the world continues.

And that's a good segue into my next question. In the previous quarter, you had talked about being some catch-up on premium freight, some costs -- I guess some cost impact to you on the Precision Components side. Are you still seeing that? Are you still seeing where you are trying to get rush orders out to customers and that being a cost to you?

Yes, Fred, this is Chris. What we did talk about, especially in our associated spring business is they ramp up given the significant increases in North American automotive production. We did experience, as you recall, in the fourth quarter, and even into the first quarter, some premium costs associated with our ramp-up.

We have largely worked through those premium cost structures, meaning -- or the premium costs adds -- meaning we are kind of at consistent levels. And one of the things that we look towards for the second half of the year is a little bit uncertainty in terms of that North America automotive production build. So we had a great run the past, really, three quarters. Orders continue to be favorable although the second quarter is actually more in line with our topline sales. So we see some leveling off of that activity. So I would say we worked through that and we are operating at normal production levels.

Got it. And how about -- excuse me. In terms of facilities utilization or across the manufacturing business the [auto industry] is hard to generalize. But can you talk about (multiple speakers)?

No. One of the things we said during the restructuring that we went through, through 2008 and 2009, is we did it with a long-term focus. We can exceed $1.5 billion in sales with the existing footprint. There would be some additional capital equipment in certain areas, depending on where the accelerated growth occurs.

But I think that was well thought out, where we focused on centers of excellence where we could increase our efficiency in the larger location, etc. So we feel pretty comfortable right now.

And then, finally, on the aerospace aftermarket, you talked about a 3% sequential increase in the June quarter. Since then, has it largely been the same trajectory or are you seeing maybe improvement from there?

Yes, basically we saw -- we were just tracking it. The past eight consecutive weeks we have seen some improvement in orders and it is a very short cycle business, to the point where you go out to the shop floor and look at the loading dock at night before you go home. And it is feeling a little bit better but not the robustness that we were expecting.

And I might add that there still is two camps out there. One is, we are going to see growth of mid-single digits, maybe low double digits next year, etc. And there is -- others like me, say, depending on the demographics of your workload, you may see something much sharper than that and I'm hoping I'm right in this case. It is just a matter of timing.

Very good. That's helpful. Thank you, and we will look forward to seeing you at our conference in a couple of weeks.

Edward Marshall with Sidoti & Company.

Morning and thanks for taking the call. The aerospace aftermarket, the timing of that recovery, it sounds like it is getting pushed out a little bit from your initial expectations at the beginning of the year, which I think was for midyear recovery?

Exactly.

Okay. But I guess looking at the guidance and talking about how that shift, it looks like some of the other markets may be coming back a little bit faster, in particular, maybe automotive than maybe originally was thought?

Yes, I think that for the most part I think is in line with what we expect. There's been some about what is going to happen in the back half of the year on auto production, but we still think it is around 11.5 million units. We started the year off thinking with 10.6 million and in the first quarter we upped that based on more robust production levels.

So I -- in general, I think at this point in the year everything is going as expected. In fact we were commenting it's been kind of a boring quarter in the sense that the market has sort of settled down significantly.

As far as the aftermarket, I think you're right. I think the sense I get from the entire industry is everything has moved to the right as far as expectations. We have some people who still believe fourth-quarter of this year will see an uptick as some of the travel continues to -- on the ascent that there is going to be increase in demand on maintenance. But our guidance takes that into account.

If I had to bet today, I'd bet just over $1.00 with upside to $1.10 if there was a pickup. And that is what has been consistent.

Yes and if you recall in the first quarter as we kind of came off providing guidance at the end of the fourth quarter, we actually upped our guidance at the end of the first quarter, mainly driven by two reasons.

One was that North American automotive production increasing to 11.5 million from our previous estimate of 10 plus million. You know, high 10. And then also just the more favorable news and order activity we have had on the OEM side of aerospace.

But those two areas clearly was a reason for our increase in guidance. The reason we have this larger range out there is the uncertainty of aftermarket. I mean, it is obviously one of our higher margin generating businesses and, as a result, we have that upside potential in the full year if we see things improve.

So to Greg's comment, if we see some activity improve in the fourth quarter, that is where we would be guiding at that $1.10. So we are out there with $0.90 to $1.10 at this point and as things progress through the third quarter, obviously, we'd look to modify that.

And then, I guess following on that question brings me to two assumptions maybe you've made. The second half shutdowns in automotive. Is that baked into guidance at all?

Yes, for the most part. I mean General Motors is almost bragging about not shutting down for most of their plants, etc. But I think that is consistent with the 11.5 million units as far as expectations.

Yes that's factored in.

And then, of course, what are the assumptions, maybe for the euro for the remainder of the year? I think there's tough comps in the third and the fourth quarter.

You know, I tell you, I had -- remember six was it? Six -- two months ago, right? We are talking about parity and all of a sudden now were back up to 131. So I would say our best view is that we are not going to have much in the way of, it is not going to significantly impact. We don't [feel] our numbers.

About 20% of our sales are exposed to the euro from a translation point of view. So I would say it's really insignificant even if we range between [$1.25 and $1.35] with the euro.

And just a clarifications of something you said in your prepared remarks. The $350,000 to $450,000, I think you said in 2012 would have been the average content. Was that for the 787 or was that just all blended rates, all blended engines?

I'll explain that a little bit more in depth. First of all, we keep folks informed on the 787 progress, largely because it has a big incremental impact in the future years for our business. And for the next year and a half, there is really no change.

But what we've seen is a couple of things. One is a shift towards titanium material that is produced in China, which has a pass-through effect. And that brings our $[500,000] down to about $[420,000]. So there's just that one thing, the change in the Chinese material has a significant impact. And then there is some in sourcing trends that have not been completed, but we expect what should be offset by a new workload that is in the pipeline. That is why we gave a range of $350,000 to $450,000 and will continue to update that as time goes on.

We are essentially an outsourcing house. So that number will fluctuate. And it is also common for it to fluctuate when we are going from preproduction to production process.

So I'm still very upbeat on 787s. I think it is a great program. I think it is going to be one of our biggest programs in our Company's history, but it did temper our outlook a little bit and we wanted to make sure everyone is informed.

Sure and Ed, just a 2012 kind of outlook. I mean, we anticipate the next 18 months to be very very consistent with our current content levels.

And that's on both engines, both the Trent and as well as the GE engine?

That's a blended rate. Right now the Trent is actually doing better than we thought at 45% quarter rate, while 55% is going to the GEnx, and that shifted significantly in the past year. I think Rolls-Royce is doing a good job selling their products.

Thank you.

(Operator Instructions). Matt Summerville with KeyBanc Capital.

Couple of questions. First, in terms of the order rate you saw in Precision Components, can you put that in some sort of context what kind of comparisons we were looking at on a year-over-year basis? I guess I'm trying to get a sense of for, if we go back a couple of years how the current run rate of that business compares to kind of the prior peak and (multiple speakers).

It's still not there yet. As you recall last year, and I'm just going off the top of my head, but it was about a 50% reduction in orders last year. So an 83% increase doesn't get you back to last year's run rate, never mind peak points. So we still have some ways to go.

If you look at North American auto production for example, 11.5 million units is a hell of a lot better than 8.5 million units. But it is still a long ways off of a normalized 15-year run rate of about 16 million units. But we expect to continue growth over the next couple of years in most of the markets.

Industrial growth is slower than most people think and some of the things that I've seen are consistent with other CEOs I've talked to. And that is, the first half had a significant restocking event, but there is still underlying growth beyond that, and I think that is what we are seeing right now.

The restocking is largely behind us and not for all markets, but largely. And now you are going to see a more, for lack of a better term, slow growth rate in industrial components. And I think that may go on for a couple more years.

And I would add that last three quarters, our orders and our PC business have exceeded sales. So that upward trend is obviously very favorable for us, and we are seeing it in our results. But to Greg's point, I think that we are coming off such depressed levels, that 83% although sounds great, and it is, it's not at the levels we experienced two years ago.

And then just moving over to the distribution business. I just want to be clear on how that business is performing. So did we get -- did you get growth out of BDNA? Did you get growth -- ?

Yes. Oh yes.

Did you get growth out of Europe?

Yes, well, Europe was flat. That BDNA which showed a percent year over year growth. We had the best DSA we had in 18 months. We saw real growth. We are basically happy with our catalog and our BDNA business as far as the recovery rates. I should say the path we are on. It is still taking longer than we want. It still tracks very closely the IPI Industrial Index.

So it's slow growth, but it's heading in the right direction. We are confirming our cost structure, etc. So it is really more Barnes Distribution Europe. We have cleaned up that business significantly. Infrastructure is right there.

But we need topline in order to make a difference and we are not seeing it out of the market. So what we have done is we've put a number of actions in place in order to accelerate topline growth. New markets to penetrate new regions, etc. And we will see later on this year whether that gives us the type of results that we expect.

With regards to North America versus Europe, that is great color on the top line, very appreciated. When we look at the bottom line, are you at a point yet that North America is back, back in terms of profitability and then, suffice it to say does that mean Europe is -- remains unprofitable?

Yes. I think that for the, especially for the back half of the year, we expect the North American business to be profitable. We expect the business as a whole to be profitable for the year and it's not where we wanted to be, but if the topline continues, with the flow-through rates we have there, I think that we're all set.

BDE is, again, more interesting to see if some of the actions we put in place will yield results, and we will have more color to that on on the third- and fourth-quarter calls. We think we're doing the right things but it hasn't been proven out yet.

What are you seeing in the business right now in distribution, both here and in Europe in terms of pricing? And then, can you talk about your other industrial businesses, what you're seeing from a pricing standpoint?

Again, this is something that has surprised me in the past 18 months, is the lack of pricing pressure. It's not to say that there aren't specific areas here and there that are interesting, as far as a pricing challenge but that's in the normal course of business. We saw the same thing two, three years ago. We have not seen significant price pressure.

We are monitoring closely, however, increasing portion of our sales, our product that are obtained in China and we have to pay very close attention to the pricing pressures that exist in China. So that's something we see proactively that we have to work on, but for the most part right now it's pretty stable.

With regards -- this is my last question. With regards to Aerospace, is there -- do you see much additional risk, Greg, to that $350,000 to $450,000 range on the the 787 average per aircraft content, given some of the trends you saw -- (technical difficulties).

In that order?

France, Spain, Italy, Germany, and Britain are the big ones.

In that order?

No, I probably -- if I want to do, prioritize, I'm doing it off the top of my head. So don't quote me on it, but I would say France, Germany, UK, Italy, Spain.

Are the big ones, I'd say top five.

Okay. All right. And then also in your Logistics, your Logistics business, you've had very strong growth in the margins from Q4 up to Q2 specifically in the Logistics business. But it sounds like mixes has probably been a bit of a drag. You know, revenues are up a little bit, but it just seems like it's a very strong improvement, not fully explained by the revenue increase unless that is sort of the incremental margin expectations.

Can you just sort of talk about what's really come through the last couple of quarters to drive that (technical difficulties.)

So I think what we expect from flow-through on that business, we should be able to regain previous highs and then some with the costs up that we've had as we get topline growth. So --.

And then when you talk about productivity gains, I assume you are talking about sort of labor, headcount productivity, but you are actually increasing headcount in the European and US distribution. Is that -- factored that in when you talk about higher productivity or are you guys (multiple speakers) giving out those increases?

No, that includes it. And that somewhat mutes the productivity gains when you are using a simple measure. And we looked at a lot more complicated measures of productivity because sales per employees is -- can be manipulated. But on a clean sales per employee, including temporary employees, we had a 6% gain in the quarter.

That's even with the employees being up?

Yes.

Great. Thank you.

Peter Lisnic with Robert W. Baird.

I guess the first question, if you could talk about some of the development work. You mentioned the NPIs and some of these growth initiatives that you are pursuing in Aerospace. Can you maybe dive in a little bit deeper on some of those things? And then specifically, how should we should think about the expense burden that you might have to bear over the next couple of quarters, couple of years, just to help us with our forecast?

Yes. Sure. First of all, we don't do program accounting so you will find that we actually expense the new product introduction as we go along. That is very favorable compared to some of the experiences I've had with other companies where you don't want to be the guy closing out a program.

But in general, the level of new product introduction telegraphs where you are going years in the future. So it's a nice indicator in a sense that there is a fair number of platforms out there that are being introduced to the marketplace, and probably richer than it has been in some time.

If you look at whether it is a C-Series aircraft, a gear turbo fan, a Leap X engine, the potential new narrowbody down the road. The future bodes pretty well for the long term. And I'm talking three, four, five, six years out. So when you talk about NPI, there is some that will benefit us in the next 18 months, but a lot of it is further than that.

And we manage the expense within our current budget, so it is in our forecast, this level of new product introduction. And we've been working on managing efficiently new product introduction for some time. So I'm pretty happy with the talent that we have on board as well as the process.

Okay but it's already -- some of these programs are already embedded in numbers basically?

Right.

And does that accelerate in 2011 as some of these programs come closer to --?

Yes. It will -- like I said, you product introduction, while some of it will benefit '11 and '12, other parts of it will benefit the out years. I will give you an example. In 2001, we had huge expense associated with the GE 90-115 program and that was one of our largest new product introductions. We didn't see serious revenue gains from that until 2004 and that is not uncommon.

Yes. And that's why I'm wondering if, next year all of a sudden, we are going to get significant expenses related to platforms that might not come online until '14 or ;15.

That's something that we have been managing for some time. The 8-350 is another good example. We are increasing our content on the 8-350 and we are not yet prepared to disclose the content for aircraft because it is so early in the production cycle. But we are increasing our content in that aircraft.

I'm predicting right now that it will not fly when they say, and that is pretty easy to do. But you are talking about serious production levels, 2015, that type of timeframe.

All right and then, I just want to go back to the distribution Europe business. It sounds as though you put people in place and you are focusing on different markets, different geographies, that sort of thing.

We need topline.

What's that?

We need topline. That's really the key right now.

Yes. And I guess I'm just wondering you know what you start to get comfortable or confident that you are getting the topline? Is it -- I guess it's another way of asking, are these markets just ultra competitive to where your ability to get topline is going to be a long uphill battle? Or have you kind of looked at that?

I think you are right when you say that we put the right people in place, all the rest of those things -- I think the systems are working very nicely now. The programs that we started and initiated will gauge success probably towards the end of the year and fourth quarter. And we'll report on that, how we're doing.

Can you help us understand exactly what's different that will sort of enable you to go up against your competitors and take some share or penetrate some of these markets?

Again, part of it is our -- a European version of Speed to Ramp, which is a training program. So we are initiating a whole different series of training regimens as well as the product lines that we are offering -- the geographic reach, the way we are incentivizing folks, etc. Those are the type of programs that we are deploying to increase sales opportunities.

All right. That is very helpful. Thank you very much.

Edward Marshall with Sidoti & Company.

Just a quick follow-up. The -- did you say -- I just want to clarify my numbers. BDNA was up 8%? Is that year over year?

Year over year was 8%.

And then BD Europe was flattish and then did you say Aero aftermarket was up 3%?

Yes.

What -- if I look at the blended rate there and then I look at LMS up 1.5% for the year, what was the -- what was down in -- what caused the -- (multiple speakers).

It's my mistake. Sorry. It was, sequentially, the aftermarket was up. It was down year over year. Sorry.

Okay. So it was down pretty big year over year then?

Yes.

Do you have that number?

About 13%.

Okay. Thank you guys very much.

All right. That is the last question for today. Thank you very much for joining us. 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 today.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may disconnect, and have a great day.