Barrick Mining Corp (B) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2010 Barnes Group earnings conference call. At this time, all participants are in a listen-only mode, we will be conducting a Q&A session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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

Good morning, and thank you for joining Barnes Group's third quarter 2010 earnings call and webcast. This is Chris Stevens, Senior Vice President of Finance and Chief Financial Officer, and with me this morning is Barnes Group's President and CEO, Greg Milzcik.

I want to remind everyone that certain statements that 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 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 bgiinc.com. We will begin today's call with brief opening statements by Greg, and then I will provide additional financial details, and then we will open up the call to your questions.

Let me now turn the call over to Greg.

Thanks, Chris. Good morning. With reported third quarter results today we continue to see improved performance as our top line is benefiting from sales activities, improved end markets, and we continue to leverage operational efficiencies with our company-wide Barnes enterprise system.

In the third quarter, we achieved double-digit sales growth, and also improved profitability on a year-over-year as well as a sequential basis. We posted an 11.4% revenue increase over the prior year, and a 9.3% gain year-to-date. Operating profit improvement of 71% helped improve our operating margin, and resulted in our net income for the third quarter of $15.1 million, an improvement of 39% from prior year. Given the top line improvement and operational efficiencies our diluted earnings per share increased 35% to $0.27 for the quarter.

Our strong third quarter net income performance was due to a combination of new product introductions, end market demand, and the contributing benefits from prior restructuring actions. We see improvements within the automotive and industrial industries, as well as modest improvement in aerospace aftermarket.

Just as important is the strong execution by our employees, who continue to leverage the benefit of the Lean enterprise component of the Barnes Enterprise system to further derive key productivity measures.

As we close out 2010 and prepare for 2011, we will remain focused on outstanding execution and capitalizing on opportunities as we see them in the marketplace. The key to continuing our momentum is remaining diligent on our 2010 priorities, profitable sales growth, and continued focus on Lean.

Now let me discuss our two business segments in more detail. In Logistics and Manufacturing Services, our end markets continue to improve. The North American distribution business is tracking to plan with a 7% sales improvement. Importantly, our DSA, or Daily Sales Average and our average order size continued to show improvement over 2009 levels. Also in the third quarter, our North American distribution business returned to profitability, despite the higher costs associated with an increase in our sales force. This is an important investment for the future.

However, we continue to believe customers are actively managing costs and maintaining minimum levels of inventory, as they remain cautious regarding the economic outlook. And we would expect these customers to be especially cautious as we close out 2010.

The Aerospace aftermarket business is showing early signs of increased activity, and we are starting to get better indicators from industry experts of accelerating repair and overall activity in 2011. We are investing in this business with a concerted effort to expand our repair offerings, which will further be leveraged as the markets recover. We expect that ongoing deferred maintenance and limited scope repairs will decrease, making way for renewed growth in the Aerospace aftermarket business.

Regarding our European distribution business, all base revenues are essentially flat compared to the same period last year, FX negatively impacted overall growth. In general the traditionally week summer months were followed by a robust September. We also saw an improvement in our operating systems, and an expansion of our distribution network.

Turning now to Precision Components. In the third quarter sales improved 18%, and operating profit and margins were up significantly from prior year. Order rates were strong once again up 29%, outpacing sales for the fourth consecutive quarter, a very positive sign for sustained recoveries in the end markets.

The high level of demand within North American automotive market continued through the third quarter. The third quarter orders in our businesses that serve the North American's auto production end market, now more in line with third quarter sales we expect that auto production for the full year to remain at our projected levels of 11.5 million units.

Our European manufacturing businesses and their export-driven focus have been able to capitalize on global growth and delivered a 27% orders improvement compared to the same period last year.

Aerospace OEM sales were roughly flat year-over-year, however, order intake increased 51% over the prior year pushing OEM backlog to $362 million from $326 million year end 2009. As we discussed last quarter, our Aerospace OEM business continues to incur a significant amount of NPI, or New Product Introduction. This year we had a significant amount of new parts that we are actively working on compared to last year, an increased actively level is a positive sign, and part of our overall diversification strategy to broaden our exposure to parts and content on multiple engine platforms, including new engine platforms, such as the engines used on the A350 aircraft.

Our long term outlook of the Aerospace OEM market remains favorable, and we recognize this business as cyclical in nature, and are conscious of an appropriate platform diversification strategy.

Our content on the Boeing 787 is expected to be complemented with the Boeing 747-8 program, as they share similarities with the GEnx engine. It is important to note that the sole source engine for the 747-8 is the GEnx-2B engine. While similar, our content on the 747-8 with the GEnx-2B engine is approximately $350,000 per aircraft.

Also since the close of third quarter we have significant adjustments to the schedules for engines related to the delayed 787 and 747-8 programs. This rebalancing of schedule and inventory has pushed out over 50 engine sets out of the schedule, which will possibly result in an impact in Q4 2010, as well as the first half of 2011. The fluid nature of order adjustments makes it difficult to quantify at this time.

In summary, we are continuing to see improvements in our businesses, investment activities, as well as our end markets. Recovery is taking time to develop, and our performance to date has been in line with our expectations. We remain focused on capturing new business by providing industry leading quality service and delivery to our customers. We continue to look for opportunities to apply Lean tools and principles in order to reduce waste and increase efficiency.

As one team, we firmly believe the Company will build on its success, and drive sustainable profitable growth for increased stockholder value. Now let me turn the call back over to Chris, who will run through some of the financial details. Chris.

Okay. Thanks, Greg. Well, as Greg commented, we saw another solid top line quarter, as the end markets we serve continued to show growth and steady improvement. I would like to start off by providing details on results for the third quarter and our 2010 year-to-date performance, 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 top line the Company reported double-digit sales growth for the second consecutive quarter. Our third quarter 2010 net sales of $290 million including the negative FX impact of $2.7 million increased 11.4% from prior year.

Continued top line growth looks encouraging within our Precision Components business segment, as demonstrated by orders exceeding sales for the fourth straight quarter. Orders rate for PC during the quarter increased 29%.

For Logistics and Manufacturing Services, we continued to see steady improvement. An encouraging sign is our higher margin aerospace aftermarket business delivered a 7% increase in the third quarter sales, both year-over-year and sequentially. With an improving industrial production index, we are also seeing the benefits of growth in our North American distribution business, which grew 7% over last year, while our European distribution business has been relatively flat, consistent with end market conditions.

Overall, we continue to see positive indicators, that slow steady improvement is reflective of our end markets, and we are seeing that in our financial performance.

Operating income increased 71% from prior year, and operating margin for the Company came in at 8.6% for the quarter. A solid improvement from prior year operating margin of 5.6%. This increase is primarily from higher sales volume, particularly within our business units that serve the automotive and industrial manufacturing end markets, and the absence of restructuring charges that we reported last year.

Although we generated a nice improvement in our overall quarter-over-quarter operating margin, our Company margins continued to be negatively impact by out higher margin aerospace aftermarket business growing at a slower rate than the other businesses, especially our businesses that sell into the automotive end markets.

Turning now to cash flow. During the third quarter we generated operating cash flow of $14 million. This brings year-to-date operating cash flow to $47 million, and year-to-date free cash flow to $25 million, given the year-to-date capital expenditures of $22 million. Our year-to-date cash conversion of approximately 60% is significantly lower than last year's, mainly due to the increased working capital requirements to meet customer demand, given growth in the much improved end markets that we serve.

For 2010 we expect capital expenditures to be approximately $30 million, and depreciation and amortization to be around $52 million. With regard to share count, third quarter diluted average shares outstanding increased 2% from the prior year to 55.8 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 approximately 56 million.

Moving on to the tax rate. The Company's effective tax rate for the first three quarters of 2010 was 17.7%, as compared to 5.2% over the same period last year. The increase over the prior year tax rate is primarily due to increased earnings and higher tax jurisdictions.

Before we open up the call to your questions, let me first make a few comments on our 2010 full year outlook. We are encouraged by our performance through the first three quarters of the year. Sales are up 9.3%, operating margins have improved to 8%, and diluted EPS is up 23%. As a result of our year-to-date performance, we are tightening our full year 2010 outlook to $0.95 to $1.00 per diluted share, or a 32% to 40% increase in EPS over 2009.

This outlook reflects top line base revenues improving 8% to 9%, including the impact of FX, operating margins are projected to be approximately 8% for the full year, and our outlook continues to be dependent on a number of key factors.

On the higher end of our range, we would benefit from a faster ramp in our higher margin aerospace aftermarket business, better volume leverage, and stronger productivity gains given our focus on Lean. The lower end of the range reflects the possibility of a slowdown in economic recovery, more aggressive inventory management by our customers as they look to close out 2010, and increased pricing pressure.

So to summarize, our second consecutive quarter of double-digit sales growth and margin expansion drove a 35% growth in EPS this quarter. As we look to close out the much improved 2010 versus 2009, we will continue to drive profitable sales growth and Lean enterprise efforts to improve our performance. We believe our strong market presence and a more efficient operating structure will continue to benefit Barnes Group for continued long term success.

Operator, we will now open the call for questions. First question, please.

(Operator Instructions). Your first question comes from the line of Fred Buonocore from CJS Securities. Please proceed

Yes. Good morning, Greg and Chris, nice quarter.

Good morning Fred, thanks.

I just wanted to quickly touch base on the guidance with the slight reduction at the top end. What would you say that is most largely attributable to, just the Aerospace aftermarket maybe not getting the bounce that the top end had implied?

There are several components to that. That is one thing that we talked about mid-year was that we were hoping for a more aggressive improvement in the aerospace aftermarket. It is also some of the OE push-outs are not quantified yet and we expect some of that to be part of the year end issue.

We still don't know yet how aggressive inventory or cost disciplines by our customers will be this year compared to last year. That will shape our decision making as far as guidance.

Great. In terms of the Aerospace aftermarket business, I know you don't get so granular to talk about margins in the individual, or outside of the segment discussion, but can you give us a sense as to where margins are tracking in that business, relative to the LMS segment overall, and kind of how much room to improve what they have in volume improvement?

I think like any business where you have higher gross margins than traditional manufacturing business it is going to improve with top line growth. I think more importantly, our story with LMS and PC as a whole is over the past two years, while we have restructured the business and took cost out, we also made a lot of investments.

In fact, much of the growth we had in our aerospace aftermarket came from actually new process introduction or new repair introduction, but we will call it NPI just for the sake of simplicity. And I think that will really be leveraged as we grow going forward.

And we made big investments in our distribution business, as far as improving the systems, but also the number of sales folks we have in the field, and the number of service reps, et cetera. So, I think all of this is going to play a role. But we have always said that the aerospace aftermarket is a superior margin.

I would just add that in the beginning part of the year, we looked to the back half of the year hoping that the ramp in the aftermarket would come faster than we are obviously experiencing, as we look to the second half of this year. And most of what you hear out externally is it will be more of a first half recovery.

So I would say that is the one kind of primary driver, when we thought about and kind of looking at our overall business performance and the outlook the best we can see it, is the $0.95 to $1.00. Mainly driven by aerospace aftermarket recovery not being as robust as we would have first thought back in the early part of the year.

Sure. And then finally, I realize you will give your formal outlook when you are reporting in February, but can you give us kind of a sneak peek at what we should be thinking about looking at 2011 now?

I can only say our forecasting ability is getting much better than it was over the past two years with the downturn, and we will probably give you a pretty accurate picture in February.

Yes, we are going through the planning process right now, so we are obviously preparing to have that discussion in the first part of next year.

Okay. I tried. Thanks very much.

And your next question from Peter Lisnic at Robert W. Baird.

Good morning this is Josh (inaudible) filling in for Pete. On the aerospace aftermarket growth of 7%, some of the larger conglomerates out there that have been reporting much higher growth, why do you think the difference is between their growth and what you are seeing?

It is easy if you look at airframe versus engine that is a major difference between the two, and it also depends on what platform you are looking at. In other words, some people may be Pratt Whitney dominant, or GE dominant, et cetera. But we have a pretty good view on where the aftermarket business is going right now.

The emerging thesis, by the way, is that airlines which budget annually are maintaining some discipline until the end of the year, when they redo their budgets for 2011, that that will reflect an increase in maintenance budget. And there is some validity to that. We have been testing that theory in a couple of different areas and we think that is the direction it is going.

Okay. That is helpful. And then on your commentary about your customers possibly being cautious about inventory, is that something that you know is just a possibility, or is that what you are actually hearing from your conversation with customers right now?

No. It is more of a possibility. Because last year we saw very aggressive discipline and inventory control last year, and we can only assume that there is going to be some level, I don't think it will be as aggressive as last year, but it is one of those unknowns we build into the forecast.

A little bit reflective of what we are seeing pretty much most of the year. Just that conscious inventory management by our customers really on pretty much every end market that we serve, there is the caution of not buying too much in advance or too much ahead of economic certainty. As we all know there is still a level of uncertainty out there.

So our customers especially on our distribution side are much more cautious on the order quantity side, not to say orders aren't high. The quantities are just down relative to prior experience.

Okay. And then finally, there was a slight step up in the inventory this quarter which seems to be different from seasonal patterns. Is there a reason behind that?

Yes. I think really working capital in general and as we look at 2009 and took out significant working capital out of the system, anticipating increased or steady improvement that working capital requirement what we are seeing in receivables, just as a way of a September sales month being a strong month for us. On the inventory side it is just making sure that we keep those customer fill rates performance metrics up, and not miss an opportunity.

So we are being a little bit more bullish on the investment side and inventory to make sure that as that steady improvement comes we have the inventory to satisfy customer needs.

Thank you for your time.

Thank you.

And your next question comes from the line of Edward Marshall from Sidoti & Company. Please proceed.

Good morning, thanks for taking my questions.

Good morning.

The aerospace OEM or at least what I am seeing in the release here, and what your comments briefly were, aerospace OEM is flat year-over-year. To me that is a little surprising, given the materials component guides, the material alloy guides are showing some pretty good growth in that business over the last year or so. Maybe it is just a timing thing, but I was curious too, we talked in previous calls about the in sourcing at GE, is it more of that that going on here, is it related to that, what is causing the flat year-over-year OE business?

I think a lot of it has to do with what platforms you are concentrated on. If you recall, Boeing reduced the 777 production rate from seven to five, and is returning to seven from five now. There is a bit of that. That is our biggest platform as far as our overall content. So a lot of it has to do with mix.

I think more importantly is the increase in orders and backlog. That kind of telegraphs what is going to happen in the future and it is very robust. The industry as a whole is starting a little bit of an uptick. I don't think you are going to see an excessive increase in production rates for overall aircraft production.

Current orders at Boeing and Airbus are pacing at a point where they can preserve their rather large historical backlog, large by historical standards backlog. I am pretty bullish on the aerospace OE side of our business

I would add that our backlog in terms of Greg's comments, we grew backlog from 326, this is on our Aerospace OEM side, $326 million at the end of last year to $362 million. So that growth continues. So the orders activity within our OEM business has been very strong, very attractive.

We actually ended the year thinking we would have a decline in that piece of our business, and what we are seeing is more flattish mainly to the comments Greg made, given the announcement on 777 and you are well aware of our content on the GE90 engines, so I would say it is actually a little bit better than we anticipated in terms of this year. Now going into 2011, we are obviously thankful to see that backlog increase to a $362 million level.

If I could dig a little deeper on the backlog then, the rate of growth through the quarters on a sequential basis has slowed slightly, and knowing that production schedules are going up in the future I would have expected that rate of growth to accelerate sequentially through the first quarter to the third quarter. How much earlier do you guys produce for an engine that is going to be sitting on a wing?

Typically six to nine months but it can be longer than that, depending on demand of raw stock for example. I have cautioned people in the past that when you look at backlog and orders rate, you have to take a longer term view because many things can influence it. Different customers have different horizons, in other words, customer A may put in orders six months in advance. Customer B may be 18 months in advance, and depending on your mix of customers.

Also, during times when things like titanium lead times extend, then we will have order horizons extend. So I think long term trends are really what you need to look at, not necessarily quarter to quarter within a three or four quarter period. And we look at it positively, basically because if you look at the platforms that we have invested in the 777, we know where that is going, 787 while delayed, and 747-8 while delayed are programs that we are going to have lift in the outyears, so I am optimistic from that perspective as well. But clearly in the short term there will be some sort of inventory adjustment in the production schedules.

And in the backlog number you have given us in previous years the 787 component, do you have that now?

Yes it is roughly the same as it has been historically with no significant change.

Okay. And then did you quantify the amount of aerospace aftermarket? I know you said LMS was up 7% overall, or I am sorry, the industrial distribution but did you quantify the aerospace aftermarket?

Yes, it was about 7%.

Aerospace aftermarket was up 7% sequentially, as well as year-over-year.

Okay. And one last question. Can you give us a look into kind of what you have seen so far in October? It may be a little bit premature being that we haven't completed the month, but maybe on the distribution side of the business if -- ?

I think we are pretty much tracking to our expectations as far as our forecast goes. The Barnes distribution North America tracks pretty closely to the Industrial Production Index, the IPI Machinery Index. So we are pretty confident that we have made the right investments in the business, and it will continue to grow as the outlook improves. I wish the economy was growing more rapidly, but we are dealing with the cards we have been dealt, and I think that over the long run it will improve dramatically.

Arguably I guess Europe has shown some pretty decent strength, relative to what we see in North America?

On the manufacturing side, absolutely.

Right. Have you seen that pickup in your distribution business there?

No. Like I said in the last quarter, we have not found an index it tracks to appropriately, and we are pretty widespread, I think we operate in 25 countries throughout Europe, and the like. And there are differences, dramatic differences between the various regions within Europe.

So we are seeing improvement in the business overall. We think the operating systems are much better. We are seeing some lift out of our expansion of our distribution network, as well as our version of speed to ramp there, as far as our training and development program. So I think we will have a better idea at the end of the fourth quarter of how we sit with that business, but overall it has shown some improvement.

Okay. Thank you guys very much.

Thanks Ed.

Your next question comes from the line of Matt Summerville from KeyBanc. Please proceed.

Good morning, a couple of questions. Greg, you'd indicated in your prepared markets your anticipated content on the 747. I guess I am a little confused. As you talked about kind of the 787 content over the last couple of quarters, you always sort of led us to at least to my view, kind of saying hey, on that aircraft there are two engines, on this one there are four, so we are going to have a lot more content, and now it sort of sounds like per plane it is more like $350,000. Can you help close that loop for me?

Sure. And I apologize if there is any confusion. The big difference, basically, there are some technical differences but they are rather subtle. They don't share necessarily the same nacelle, and that is where we have a lot of the content on the 787. So that is probably the biggest difference.

And then are you still under the impression that as we move into next year, your content on 787 will migrate off that kind of $500,000 level, back into the $350,000 to $450,000, and then is there any update on how you feel about your ability to sort of see an uptick in your content level maybe moving into 2012 on that particular platform?

Sure. The first adjustment would be the $500,000 would really go to $420,000 because of material change, which has no effect whatsoever on profitability. We think it will still be in the $350,000 to $450,000 range, based on what we have current, as well as what we have in the pipeline that we have a high degree of confidence in obtaining. We think it is a great platform. We absolutely believe that we are making significant investments in obtaining new work on that platform, with both Rolls Royce and General Electric, as well as the nacelle providers.

With regards to Barnes distribution, when I look at the LMS numbers year-over-year, you have revenues up we will call it $8 million, operating profit down about $1 million year-over-year, distribution you said is making money. Aftermarket was up 7%. I guess I am having a hard time reconciling the year-over-year profit decline of distributions making money again and aftermarket is healthier?

Several things. One is we made a big investment in expanding our distribution staffing. We significantly overstaffed our distribution business intentionally, because there is a lead time between the time you make that investment and you see sales growth, et cetera. So a big part of that is investment in the number of sales folks and service reps we have out in the field.

A second part is we do have some mix issues, where the more profitable business is maybe down, while the lesser profitable businesses are up. And third, there are some commodity cost increases that we are seeing.

We are not as concerned, this is somewhat of a delay in the sense that a good portion of our business is a lot of price elasticity where we can pass the price immediately. With some of the costs we have to wait until the opening in the contracts, so there may be one month to 11 month delay in the time that we can recover the commodity cost increases, and we saw some of that, and we expect that to continue. We think commodity prices, especially stuff out of China, et cetera, are going to increase over time.

And then I guess if you can talk a little bit about sequential or year-over-year improvement you have seen in distribution with DSA, average order size. How are fill rates trending, are fill rates where they need to be? If you look at some of the other industrial distributors out there, you look at their growth, your look at your 7%, are you concerned about market share?

I will let Chris handle some of the details but I will say a couple of things. First of all, in our catalog business it has grown over 40%, so those type of improvements are pretty significant. The 7% is pretty much consistent with our expectations, because of the model. The model is more a service-based distribution model, rather than a catalogue or storefront, which has a different platform.

One of the superior components to our model is our ROIC ex-goodwill is 30% to 40% when it is performing at the double-digit ROS, which is roughly two to three times the alternative model. So while we do sacrifice some of the gains in rapid recovery, we do have a superior return overall.

And Matt I would just add our DSA in North America on the Barnes distribution side, really for all three quarters of 2010, are in excess of the average that we saw in 2009. So we are seeing that kind of high-single digit growth out of the business in general. And we would expect some of that to continue. We are just cautious of the fourth quarter, the traditional fourth quarter cycle, as you know in our distribution business has usually been down relative to prior quarters, but there is nothing in October that we see that is significantly different than our current performance levels.

And then I also asked about trends and fill rates?

Yes. The trends and fill rates, we are running in the high-90s, it is pretty consistent. One of the things that we are I would say more cautious of, and kind of going back to my earlier comments on the working capital build, is on the inventory side is to make sure that we maintain, I wouldn't say high degrees of inventory, but the right inventory. So we are looking consciously at increasing inventory in our distribution businesses to be able to satisfy that demand. Meaning we continue to expect and see slow steady improvement in [DD&A], given the investments we have made, and we are seeing that so far this year.

And just lastly, Chris, what effective tax rate should we use in 4Q, and just eyeballing 2011, can you give us a little color on what tax rate we should be thinking about for next year?

Yes. As you look at third quarter we had a catch up in the quarter, and the quarter ran around 20% given our best look of around 18%, a little higher than what we guided last time. I would say that increase was primarily due to income generation as I commented in my opening comments, based on higher tax jurisdictions. And traditionally I am going to hold off on the 2011 tax rate until we get through our planning cycle, but historically we have been running in the high-teens/low 20% on our effective tax rate.

Thank you.

Yes.

(Operator Instructions). Next question comes from Christopher Glynn from Oppenheimer.

Thanks. Good morning. On the range for fourth quarter earnings you talked about one of the things being the dependency on the rate of ramp and higher margin in aero aftermarket, but also you earlier in the call mentioned better indicators on accelerating MRO. Would you say you have the visibility to see significant step-up in the first half at this point?

What we are seeing is everyone has developed thesis over the past couple of years, and when, and some of it was based on historicals, et cetera, et cetera. We have done a lot of work with consultants to look at actually interviewing airlines, overhaul shops, and seeing what they are expecting. And there seems to be an increased emphasis on the budgets from the airlines.

A lot of it ties together, first of all, I will digress for just a moment, that all of the things we have seen year-to-date are continuing, whether it is fastener enplanements, freight traffic, profitability of airlines, all of the leading indicators are still pointing to a healthier industry. With that said, many people have pointed out and we verified, that people are eyeing the 2011 budget for increased maintenance. Because aircraft are starting to show signs of wear and tear that you would expect if you are flying six to ten hours a day, and eventually that catches up to you. We have talked to the major OEs that actually control a good share of the airline industry overhaul budgets, or not budgets, but actual overhauls, and they all seem to be optimistic towards the first half recovery. Whether it be first quarter or second quarter, who knows. And that again, that is something that we are looking at.

We believe we are maintaining higher inventory levels in order to handle that increase. And I think it depends on the platform you are on. We are very much invested in the CFM56, which is a very popular in demand engine, and we hope to see it some time in the first half.

Okay. And then on the OE side, would we expect pressure on the operating margin for PC on sort of the initial acceleration and the conversion of the aero OE backlogs?

Not really. In fact, most of the work that is in the backlog currently, is stuff that is beyond new product introduction. In other words, it is work that has been learned out, et cetera.

I should quantify that even with the 50 or so engines that we see pushed out, that is not going to have a major impact. It is probably about a $12 million worst case scenario, and it hasn't flowed through our electronic data scheduling system yet. So we don't actually know if it is a fourth quarter or first quarter impact, as far as the actual impact of that roughly $12 million to $15 million somewhere down the system. But again, our backlog improving and the different platforms that we are on, we are pretty happy where we are sitting right now.

Would you expect the $12 million to $15 million impact to concentrate in a single quarter, or ratably over the three quarters?

I have no idea. My experience in the past has been when you have these schedule changes, that it is like an accordion through the system with different tiers handling it differently, and end components to manufacturers getting some whiplash, both positively and negatively. So it all depends on the tier, and how much inventory they have in their system, and how they adjust to the schedule fluctuation, and it is very difficult to quantify right now.

We are working on it diligently, but until we start to see something firm up, which will be soon enough. I think the 787 -- Boeing is committed to delivering the first aircraft mid-first quarter, and I wish them the best obviously, and the 747-8 delivery later in the year. We hope that program will start to ramp, and when it does it will have a positive effect.

Okay. And last one I have is for -- well, a couple on the distribution. Europe, you talked about the expansion of the distribution network in passing. Can you talk about what that means?

Yes. That means basically we have in many cases we have sub-distributors that operate in more remote regions of eastern Europe, et cetera, and we enter in agreements with the distributors in those countries to pass our product through their system, and that is one way we have of expanding our economies of scale, as well as improve our operating profit and operating margin. So that has been reasonably effective.

We also are seeing an improvement in the type of product that we are delivering, in other words, our new product introduction scheme that we set up earlier in the year is unfolding appropriately, as well. So I hope by the end of the fourth quarter we will be able to report something more positively on the Barnes distribution Europe business.

And lastly on that BDNA, the operations, what are you seeing in terms of retention, and kind of cultural satisfaction in the sales--?

Actually, this year that business is tracking almost exactly to plan. The investments we are making, the turnover rate, everything is going pretty much exactly what we expected. And I am really happy with the business.

We expect a lot out of that business in the next few years because of the investments we have made. We are improving and making investments in IT, and in the training programs, et cetera. So I am optimistic.

Okay. Thanks. Just tax rate was 18% for fourth quarter?

Yes. Ended up at -- I would say fourth quarter, in terms of our best look it is around 18%, yes.

Okay. Thanks again.

And your last question comes from the line of Holden Lewis from BB&T. Please proceed.

Good morning.

Thank you. Good morning. You talked I guess about, if I remember correctly last quarter both North America and European distribution were sort of breakeven in that general vicinity. I think you gave a little bit of color. North America I think you said is returning a profit now, can you give some sense of order of magnitude? And then can you talk a little bit about where the European distribution profitability is at this point, given that revenues are flattish?

We are trying not to get too granular with the margins, it is positive, it is marginally positive. But it is tracking exactly the way we expected it to.

As far as European business, that is the only business in our portfolio that was negative in the quarter. But it had a very strong September after -- and turned profitable, et cetera, so we have to wait and see through the fourth quarter whether or not the actions that we have taken are a permanent improvement, or whether we have more work to do.

Okay. So European distribution was not profitable but in September which was stronger, it was?

Yes.

Okay. Great. Thanks for that. And then talk, I guess generally about the price-cost relationship. You kind of alluded to maybe concerns about price pressure, although it seems like that has been more sort of a generic comment, than something you are actually seeing in the market. But costs are clearly going up. Do you feel that you have the flexibility to sort of raise prices in association with that, or would you expect the price cost to become negative, and maybe you can sort of talk about that in sort of the big categories, since obviously there are differences in how you price each?

Absolutely, that is an appropriate question, as well. This is something for several years we have been working diligently on, based on some experiences we had in 2004, et cetera. Both on the aerospace and the industrial automotive markets. We make sure that through our pricing policy that is rigidly enforced, that we have pass through on material.

One of the problems with getting the pass through, however, in aerospace, I will digress for a second. Aerospace is pretty straightforward. It has traditionally been a highly volatile material market for aerospace products, so that has been one of the common standards for an extended period of time.

On industrial and automotive it is a little different. It is a timing issue. That is you may get quarterly or annual adjustments, depending on when contracts open, et cetera, et cetera. In some cases there is a delay, and we are trying to address that in a variety of different ways. So we feel that we have got about 90% coverage in our industrial automotive market, which is up from about 10% several years ago, and I think that is important because I do think that we will be in an inflationary commodity era.

And on our distribution business, most of the business has got extreme price flexibility, because it is purchase order to purchase order. But the part of the business that is contract, large commercial customers, et cetera. Usually there is a point in the contract, a quarter or annual where we can do the price pass through. That is something we are working on.

So we know we had some hits in the third quarter, but we will recover those hits. It is just a matter of how much time.

Okay. So as you go forward, do you have a sense of, I guess, what the price and the price-cost relationship was in the quarter. And are you expecting that to get better or worse as you go forward, just some color about what to expect on that dynamic?

I think for all businesses around the world, there is going to be increased commodity costs. So I don't see any way around that for the foreseeable future. But I think we are managing it very effectively for the most part. The attention that we have paid over the past three years has been crucial to our success in mitigating the cost increases.

Okay. So you don't feel like there is going to be any sort of big split between cost increases and what you can capture on price?

I don't think a major threat right now, no.

I would just add in terms of like Greg mentioned, just a timing issue. Many of our businesses will be timing.

Right. You might have some catching up stuff, but for the most part you are always in motion to catch up?

Right.

Right. You got it. But I am really pleased with the way the pricing policy worked out, and the way the effort by the folks in the field. They really paid attention to this over the past few years, and it is making a difference.

I would agree.

Okay. And then on automotive, how big, given that North American automotive probably is going to be stable-ish as you go into 2011, and the comps get tougher. A lot of companies are kind of expecting that growth to be coming from emerging markets, that kind of thing. Can you give us a little bit of color about how much of your transportation or automotive end markets -- what's sort of the North American versus sort of emerging market mix in that segment for you?

There are a couple of different things. First of all, depending on who you listen to, right now we are thinking about 11.5 million units in North America. Most of the forecasts that I have seen range for next year anywhere from 12.2 million to 12.9 million. They were pessimistic last year. If you remember the early forecasts were for 10.6-ish million, 10.8 million. And it came out higher than that.

I think it will be up around 13 million for next year, which is a substantial improvement. Heavy duty truck is also looking at improvement, even though that is a fairly small part of our business. European manufacturing as well is improving.

What we find that is difficult for us to forecast, is the global growth is what we base some of our businesses on. For example, in Switzerland we manufacture fuel injection nozzles, and those nozzles go to a customer that distributes them all over the world. So in that business, we look more at the global growth rate rather than North America as a whole. So we kind of slice up the business that way.

And North American or global auto production is expected to continue to grow for the next several years. And especially as the newer fuel injection systems come online, I think that is going to benefit us.

Yes. I guess what I was really kind of asking, what is of your total transportation business, how much of it is NORAM, and how much of it is sort of outside of NORAM, what is the split there?

We could get that, but I don't have it handy.

I would say of our transportation end market business, which runs about a third of our total sales, when we think about the geography of those sales, I would say three-quarters of that is kind of I would say North America, western Europe dependent, and then the other portion we have is kind of the rest of the world to Greg's comment.

Our businesses, like Heinz Hanggi, it is difficult to track where that ends up as it goes through fuel nozzles on a fuel system for a customer that sells globally, as Greg alluded to.

Same thing with our nitrogen gas products business. Again global customers, where their manufacturing base is all over the world. So it is hard to necessarily pinpoint a specific item, in terms of that end market demand. We look at it more broadly to Greg's comments, in terms of where that growth is coming from in terms of Asia, North America, as well as Europe.

Okay. And last thing is I didn't get whether you were commenting about the deferrals for the 787 and the 747-8. I didn't know if that was profit or revenue. Normally you could sort of look at production, and get a sense of how much revenue you can expect. First of all OE, do you have a sense on the revenue side of what those deferrals amount to for the full year 2011, even just ballpark, is it a 5, a 25?

That is the number I gave before, $12 million to $15 million.

Yes, top line Holden. The challenge for us is as we are kind of second in line here, in terms of the management of the supply base is those changes can happen on the fly.

Right.

And again, we just kind of go back to the macro. The macro is the price we have got $362 million of backlog sitting in our VA OEM business, which is tremendous benefit kind of closing out through 2010, and entering into 2011. If there is going to be continued kind of shifts starting with Boeing and onto the Tier 1s, the impact to us is hard for us to predict. It can happen any particular quarter, but what we have seen even during the recession is over multiple quarters, it is not just one big pop in a quarter.

Right this is not a case where it is basically pushed out from the first half to the second half. Kind of everything moves to the right?

Keep in mind I think that is the worst case number I gave. Like I said, this is an accordion, depending on the inventory of the tiers in between us and Boeing, and it will fluctuate. Our experience has been that way on production shifts on the 777 as well. So I am not overly worried about it. I think it is kind of a little blip on the way to a great program.

Okay, that is fine. Thank you.

Thank you Holden.

Now I would like to turn the call back over to Mr. Chris Stephens for closing remarks.

We want to thank you for joining us this morning. I will be available for additional questions about what we discussed. So feel free to contact me. And once again, I want to thank you all for joining us this morning. Have a good day.

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