Barrick Mining Corp (B) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Barnes Group, Inc. first quarter 2011 earnings conference call. My name is Oneka and I will be your audio coordinator for today. At this time, all participants are in listen-only mode. We will have a question-and-answer session towards the end of this conference. (Operator Instructions)

As a reminder, this conference call is being recorded for replay purposes. At this time, I would now like to turn the call over to Mr. Chris Stephens, Senior Vice President of Finance and CFO. Please proceed.

Good morning, and thank you for joining us. With me this morning is our President and CEO Greg Milzcik. If you have not received a copy of our earnings press release, you can find it on our Investor Relations section of our corporate website at www.bginc.com. Later on, I will be referring to the earnings release supplement slides which are also posted to our website.

I want to remind everyone that certain statements we make on today's call, both during the opening remarks and during the question-and-answer session may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the financial statements. Please consider these risks and uncertainties that are described in our periodic filings with the Securities and Exchange Commission and are available through the Investor Relations section of our corporate website at www.bginc.com.

We will begin today's call with brief opening statements by Greg, and then I will provide additional financial details. We will then open the call to your questions. Let me now turn the call over to Barnes Group's President and CEO, Greg Milzcik.

Thanks, Chris, and good morning. Barnes Group performed well in the first quarter of 2011. We are focused on providing our customers with superior products and services, which in turn will drive profitable growth. Sales in the first quarter grew nearly 15% year-over-year, continuing the steady top line improvement that we experienced in 2010. Operating profit was up 50%, and operating margins expanded to 9.2%.

This improved profitability was fueled by volume leverage we gained from strengthening end market demand, as well as a 14% quarter-over-quarter increase in productivity as measured by sales per employee. Net income was up 61% and earnings per share increased from $0.21 in the first quarter last year to $0.34. On our conference call in February, we pointed to potential upsides to our outlook from a faster ramp in our Aerospace Aftermarket business, stronger productivity gains and better volume leverage. All three turned out to be contributing factors in our performance this quarter.

In addition, we are largely successful in implementing price increases to offset the impact of higher commodity costs. With that as background, let me discuss the results of our two business segments in more detail. In Logistics and Manufacturing Services, sales were up 11% and operating margin increased to 8.7% from 6.2% in the first quarter of last year. Thanks to strong underlying demand for air travel and a growing global economy, we saw continued increases in overhaul repair demand in Aerospace Aftermarket during the first quarter. Aerospace aftermarket sales grew 15% year-over-year, so we are on track to exceed our previous forecast of mid- to upper-single-digit improvements in 2011.

Quarterly sales in our Aftermarket MRO business were the highest since Q2 2009. However, our Aftermarket RSP spare parts business has not seen a meaningful increase in demand which we feel is due to some extent to the breakup of older engines for spare parts. Although we believe fleet demographics will contribute to future growth in spare parts sales. We saw the highest top line performance since Q3 2008 in our North American distribution business, which delivered 10% sales growth in the quarter compared to a year ago.

Daily sales average, or DSA, continued to improve on a year-over-year basis each month in the quarter. Most of this growth is centered in the industrial and transportation end markets. Primarily due to investments we've made to improve sales force productivity in our supply chain in 2009 and 2010, Barnes Distribution North America is a much stronger operation than it was a few years ago. This business is now well leveraged to a rebounding economy and we continue to expect a year of profitable growth in 2011.

Now, let's turn to Precision Components, which delivered 18% year-over-year sales growth in the first quarter. Operating margins expanded to 9.6% from 7.8% in the first quarter of last year. Orders for the first quarter were up 14% and backlog increased $48 million from a year ago. This was another strong quarter for the North American automotive market and we participated in this growth.

The unfortunate tragedies that hit Japan starting on March 11 have not had, nor at this time do we believe they will have a meaningful impact on the business in 2011. The guidance we provided in February assumed between 12.5 million and 12.8 million units of North American auto production for 2011. Today's third party reports are suggesting a production rate of approximately 12.9 million units. As a result, we still feel good about the prospects in this market for this year.

Our manufacturing businesses in both North America and Europe continue to benefit from the global economic recovery in the first quarter. As we expected, the fourth quarter increase in orders at our export focused European manufacturing businesses created a good top line momentum and orders in the first quarter were up 44% from the same period last year. Aerospace OEM sales grew in the first quarter reflecting the stronger backlog we carried into the year. While backlog is a helpful indicator, I would remind you that sales can be affected by a number of factors over time, including in-sourcing decisions, material changes, production schedules and volumes of specific programs to name a few.

We are encouraged by Boeing's announced ramp-up in production rates on the 777 scheduled for Q1 of 2013, and remain hopeful that 787 deliveries will begin in the back half of this year. Our current content on the 787 is approximately $500,000 per plane. As we've previously stated, this amount is expected to decline next year primarily due to customer insourcing decisions. Our latest view for next year is approximately $350,000 per plane. Also as a reminder, our current content on the 777 continues to be approximately $1 million per plane.

In addition, we have a pipeline of opportunities for additional content for strategic platforms that we are actively pursuing which we hope to realize over time. Looking forward, we are pleased with the outlook of the end markets that are served by our Precision Components segment. Several of these end markets are still in the recovery cycle which we believe positions us well for a sustained period of growth.

In summary, our results this quarter demonstrated the positive and building momentum from the growth and profitability initiatives that we have implemented over the past few years. These initiatives have contributed to the fundamental value of our business and we expect to unlock more of this value in 2011 and the years ahead. As Chris will report, our balance sheet is in good position. Our focus on cash deployment has been to reduce debt and provide a return to our shareholders by our dividends, share buybacks and more fundamentally by consistently investing in the Company's future.

At the same time, we plan to evaluate and evolve our portfolio of businesses and look at opportunities to profitably expand the enterprise both geographically and in its breadth of our product offerings with the goal of delivering long-term value for our shareholders. Now let me turn the call back over to Chris who will take you through some of the financial details and provide comments on our updated 2011 guidance.

Okay. Thanks, Greg. As we have highlighted on slide two on the earnings release supplement, which is available on our website, net sales, operating margin, net income and EPS all improved year-over-year. I will walk you through a few of the details on our first quarter results and then wrap up with comments on our updated guidance which we have summarized on slide three of the supplement. Starting with the top line, our first quarter sales of $319 million, including the positive FX impact of approximately $4.8 million, increased 15% from the prior year. As Greg outlined, the end market dynamics in our Precision Components segment are favorable with continued strength in transportation and industrial end markets.

Orders overall were up 14% and up 44% in our European manufacturing businesses. This strong order intake helped grow Precision Components' backlog to $464 million as we ended the quarter. Our favorable sales performance in Logistics and Manufacturing Services was mostly driven by 15% sales growth in Aerospace Aftermarket and 10% growth in Barnes Distribution North America. Sales in our European distribution business were up 4% year-over-year and 16% from the prior quarter, including the favorable impact of FX.

Looking forward, we believe the potential for continued recovery in both Aerospace Aftermarket, and North America auto production positions the Company for sustained revenue growth and margin expansion. So overall the steady improvements continue in the end markets we serve and we are seeing the benefits in our financial performance. Our low cost structure and focus on lean is providing us with improved leverage on our sales growth. Operating income in the first quarter increased 50% year-over-year.

Operating margins for the Company came in at 9.2%, up 210 basis points from 7.1% in the first quarter of last year. Margin expansion was driven primarily by higher sales volumes and continuing productivity improvements, as well as our success in passing through a majority of higher commodity costs. Operating income performance during the quarter was partially offset by higher employee-related costs and investments we made in operational improvements and new product and process introductions.

Turning now to cash flow, during the first quarter, operating activities used $4.7 million of cash versus generating operating cash flow of $7.8 million in the first quarter of 2010. This quarter's free cash flow, after reducing operating cash flow for capital expenditures, reflected higher operating performance offset by larger investments in working capital. Specifically, accounts receivables were higher due to increased sales levels and capital expenditure increased as planned. For the full year, we still expect free cash flow conversion of 90%-plus.

With regard to share count, first quarter diluted average shares outstanding were 55.6 million which was relatively flat to prior year. We were an active buyer of our stock in 2010 and we have authorization to buy back another million shares under the Board's 2008 repurchase program. We may exercise this authority on occasion during 2011.

Moving on to the tax rate, the Company's effective tax rate for the first quarter of 2011 was 24.5% compared to 17% in Q1 last year. This was driven primarily by increased earnings from higher tax jurisdictions and an increase in the expected repatriation of a portion of current year foreign earnings. We are forecasting a full year 2011 tax rate equivalent to our first quarter effective rate. As you know, in March we announced that we have exercised our right to redeem the remaining $92.5 million principal amount of our 3.75% convertible notes. We have enjoyed this low interest rate on our subordinated debt for the past five-plus years. Given that our share price is above the conversion price of $20.62, redeeming the notes now avoids any additional dilution should our share price continue to rise.

We plan to fund this redemption using available capacity on our existing revolving credit facility. Our revolver expires in September of 2012 and we are now in the early stages of renegotiating this facility. Let me close with a few comments about our updated 2011 outlook. As you can see on slide three, we currently expect our top line to increase 8% to 11%, including the favorable impact of foreign currency translation given the weaker US dollar.

We expect operating margins of approximately 9.5%, and EPS to be in the range of $1.23 to $1.38 per diluted share, up 30% to 45% over 2010. This guidance continues to reflect the drivers we noted in our call in February. Pension expense is expected to increase approximately $2 million from 2010. CapEx is expected to significantly increase from 2010 levels to a range of $40 million to $50 million. Depreciation and amortization are expected to between $52 million and $55 million.

And highlighting certain key factors in our updated 2011 guidance range, to the upside, we would benefit from faster ramp in Aerospace Aftermarket, better volume leverage and stronger productivity gains given our focus on lean and quality. On the downside, we would be negatively impacted by a slowdown in economic recovery, the impact of higher oil prices, especially on our aerospace and automotive end markets, and other commodity price inflation that may be difficult for us to offset either through productivity actions or timing of price increases.

So to summarize, our first quarter was a good start to the year, delivering double-digit top line sales growth and operating margin expansion. With improved operating leverage and a strong balance sheet, Barnes Group is positioned to accelerate growth and capitalize on new opportunities. Operator, we will now open the call for questions.

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

Yes, good morning, Greg and Chris. Nice quarter.

Good morning, Fred. Thank you.

Just on the Aerospace Aftermarket, definitely good to see that starting to pick up for you. You gave the year-over-year increase. Realizing that seasonally it may not be a great comparison, but can you give us a sense for what happened with that business on a sequential basis?

Sure. First, the general comment on our aftermarket, it's really divided into two areas. One is the maintenance, repair and overhaul and the other is the revenue sharing partnership where we have spare part sales.

Right.

And we saw a gradual pickup last year through the year and that appears to be continuing into this year. Mostly analysts that I have been following who follow the industry fairly closely are looking at about a 10% lift this year. We are seeing a little bit more than that, largely because of the investments we made throughout the downturn in new process introductions, in other words, new repair offerings, et cetera. So I think we are beginning to bear the fruits of those investments.

But I'm encouraged by most of the information out there. The one hesitancy I do have is fuel prices. Obviously, one of the indicators we look at is the health of the airlines, financial health. With fuel prices, I think, yesterday was $1.12 or $1.14, somewhere in that range. Fuel prices account for about 30% of an airline's operating cost, and that is something to watch. So that is a potential downwind that could slow some of the recovery, but in general I am very optimistic.

Great. And can you give a sense for -- was it up decently from Q4?

Yes. Fred, we had a small sequential improvement since the fourth quarter last year. But as Greg mentioned, 15% growth quarter-over-quarter, but it was a small sequential growth.

Okay. And in the past you'd talked about having had capacity to support 30% improvement in that business, I guess. How are we looking in terms of capacity for the different parts of this aftermarket business now?

It varies by individual plant, but for the most part, we've continued to make investments overall. While we didn't see the huge organic spike from a lift like we saw in 2004, we did see the contributions that were significant year-over-year because of the investments we made and will continue to expand capacity. Our operation in Singapore, for example, has a tremendous amount of excess capacity available. By the way, that is a high growth area for maintenance, repair and overhaul overall. For the foreseeable future, we will probably see the greater Asia area start to increase in its dominance of maintenance, repair and overhaul activity overall. It will take time because the fleet is still relatively new by comparison to the rest of the world, but we are optimistic that areas like Asia will be strong growth areas for us.

Thanks. And finally, just on the impressive productivity increase, can you drill down a little bit more into what you attribute that to, and if you see additional running room there in terms of sales per employee improvement?

First of all, it is one of my favorite subjects. Even if you take FX out of it, it is still 12% to 13% productivity growth. One of the things that -- I am a long time believer in the lean enterprise concept. At Aerospace in 2000, we launched a lean program that ultimately delivered double-digit productivity over an extended period of time.

In 2007, we expanded that to our entire organization, where we set up extensive lean training, we have lean experts deployed throughout our organization. By most accounts, it takes 18 months to two years to start seeing the productivity growth that you can expect. The downturn had some distorted affects, but I think what we are seeing right now is the fruit of some significant efforts over the past several years to ingrain continuous improvement processes in our culture. So I am really thrilled to death because this has been a center to our long-term health and competitiveness.

Great. Thank you very much.

Your next question comes from the line of Edward Marshall, of Sidoti & Company. Please proceed.

Good morning.

Good morning. How are you?

Great, Ed.

So I am trying to understand the disconnect with your MRO business and some of the other MRO shops that are out there. I think your competitor, AAR Corp. had organic sales up 53%, yet you are guiding 10% lift this year and seeing small growth year-over-year. What am I missing there? What is the difference between the two businesses?

Well, there are significant differences between the businesses. In the sense of their spare parts trading as well as a variety of sub-components, et cetera. I haven't gone through their press release in any detail, so I can't comment on that. I can say most of the analysts are pointing to a 10% growth overall, but specifically you have to break that 10% down by airframes versus engines, versus what engine type, in other words, wide body engines versus narrow body engines.

So a lot of it, company to company, has to do with the mix that you are seeing. A lot of our MRO activity is actually in wide body fleet and the majority of our spare parts revenue comes from narrow body fleet. So there is some distortions in the marketplace along those lines.

Okay. And, Chris, do you have any guidance for the interest expense this year? I know you are paying down and refinancing some of your interest?

Yes. We've announced the redemption of our 3.75% convertible notes. We'll use the revolver which is a lower cost facility. And we are also benefiting from a lower interest rate in general. Lower blended rate, I should say, year-over-year. I would say from a year-over-year point of view, we have about $2 million to $3 million interest expense benefit 2011 versus 2010.

It is not right to annualize the first quarter number?

I would say as we continue to grow, right, throughout the year, hopefully, recognizing that we had a strong first quarter, but as we manage working capital going forward and we have the incremental capital expenditures that we announced previously, I would say I would be cautious to be more aggressive on that line.

Okay. And did you mean to say that the first quarter was going to be the seasonal strongest for the year? Because if you annualize that number, as well, it is about $1.36, which is close to the high end of the range?

I did some rough calculations and you can do them yourself, in fact, I encourage you to do them yourself. But if you take out the outlier, 2008, you are roughly 55% to 45%, first half, back half. And, again, that is really rough.

Okay. Thanks, guys.

And thank you, Ed.

Your next question comes from the line of Christopher Glynn. Please proceed.

Thanks. Good morning.

Good morning.

Good morning.

Question on the tax rate guidance. Could give some specifics on what the discrete impact of repatriation within that? Is it like two points?

Chris, let me just comment. As we see the improvements in the US as well as Europe, some of the countries that have rebounded strongly for us, we are seeing the higher tax rates from those higher tax jurisdictions, if you will. And as we look to the full year, the repatriation that we are planning to do incremental to last year represents about four points to our tax rate. So guiding, I will just round on 25% full year tax rate, we ended at 24.5%. If you use 25%, about four points is driven by that repatriation.

Okay. Then, just anything you can offer on how you are viewing the distribution Europe business growth? It seem as little tough to come by. You have other European businesses that are growing well. So how should we think about how you are viewing that business these days?

Well, we have seen both year-over-year and sequential improvements in the business as a result of our investments. We will continue to make efforts in improving the business. We have done this with other businesses and it has been fruitful, so we are optimistic.

But did it grow without currency fluctuations?

It did slightly, actually on a local currency basis, but it really, slight growth. Not meaningful.

Okay. And as far as the RSPs go, could you just add a little bit of color in terms of prospectively how that might participate this year in the industry recovery, or is it really more tied to the mix of newer engines and the phase out of older engines really putting that recovery at bay?

Well, first I would say we don't have a conclusive answer. I do have some indicators. Yesterday, for example, Safran, which is the parent of the CFMI joint venture with GE, had pointed out that their spare part engine sales rose 12.3%, but the CFX of 56 were half of that. They attribute it largely to the -- more wide body aircraft engines being overhauled than narrow body. I think that may be a temporary issue.

The spare parting of aircraft is to be expected and I think that had a small effect, but overall we are optimistic long term simply because the demographics of the fleet, that being the size of fleet, the age of the fleet and the models within the fleet. So we put it out there because it is something we saw. There was a disconnect between the growth of our MRO business and the growth of our spare parts sales, so a little bit more time and we will probably have a better answer for you.

Great. Thanks a lot.

Thank you, Chris.

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

Good morning, Matt.

Good morning. A couple of questions. First, on the Aerospace OE side of the business, I think you guys have been talking 787 moving from that $500,000 in content to a range of $350,000 to, I think, $450,000. Now it sounds like it's more towards $350,000. Greg, can you kind of walk through that step function down and what is kind of driving those two legs, if you will, negatively?

Well, first of all, I think as we previously announced a customer in-sourcing decision is the primary motive for lowering the content. We do have a pipeline that we hope to have, deliver stuff in the future. But until it materializes, we are not going to provide a number that far out. That is all.

Is there a content update related to the 747-8 then, as well?

I think there is no change in that, but I don't have that number in front of me right now.

Okay. Then with regard to the distribution business just focused on North America for a moment, can you give us an idea of how daily sales rates trended January, February, March, as we move throughout the quarter and to the extent you are still seeing that strength come through here now that we are almost through April?

I'll tell you I am actually tickled pink by the whole thing. We invested a lot in the distribution business over the past few years and it has just turned out to be a great investment. We had a surprise in February that with all the snow we anticipated a real disruption, and we had strong DSA growth in February. Each month through the quarter was continuing with year-over-year.

If I recall correctly, that makes about 12 consecutive months year-over-year of DSA improvement. In addition, it looks favorable in April, as well.

How should we think about -- I would assume North America is back making money at this point. How should we think about the incremental operating margins in this business on revenue growth going forward?

Well, it is a great business. We haven't really dissected it that granularly. I am hesitant to give you that number. But it does have a great flow through, superior to most of the other business models we see. That is probably about it.

And, Greg, just on the automotive side of the business, you talk about annual production in the high 12s, no real disruption coming from Japan. Is that a full year statement, or do you see any hiccups along the way? Maybe production is a little short in Q2, it's made up in Q3, or Q3 pushes to Q4. How are you thinking about that at all? And have you seen any disruption either from the components or raws that you buy related to Japan and do you anticipate that?

That is a good question because there is some short-term Q2 small stuff. We had business meetings and the numbers we saw were not meaningful in the sense they will not move the needle on our forecast. It is possible through the year that we find something we didn't anticipate because there is a fair amount of disruption in Japan. Therefore, we may find downwind that there is some hiccup, but the way we see it and few it as we see it today, it will not have a significant impact on our year forecast.

Thanks, Greg.

All right.

Your next question comes from the line of Peter Lisnic with Robert W. Baird & Company, Inc. Please proceed.

Hi, good morning. This is Josh Chan filling in for Pete. Congratulations on a good quarter.

Thank you.

I was wondering if you could comment on what if anything surprised you on the top line this quarter and what is kind of driving the better revenue outlook for the full year?

I think a couple of the things that we mentioned before. One is Aerospace Aftermarket was a little better than we expected. We had a little bit better in the distribution business than we expected. We improved the operating leverage from the fourth quarter, which was substandard, to this quarter, which is much improved and we are focused on our business issues. We had a very strong March to tie the rest of it off that is continuing into April.

Okay. So it sounds like it is more across the board?

Absolutely across the board. Every one of our businesses saw improvement both year-over-year and sequential.

Okay. And then kind of relative to that, to get to your total sales growth forecast for the year, what are your assumptions about growth by end market sort of balance of the year?

Well, we have already forecasted what we see for the automotive, which had an improvement from I believe 11.8% last year to something like 12.9% this year. In addition, we will continue to see industrial GDP growth in the US. Our industrial businesses such as the distribution business track very close to the RPI industrial index. I think the weaker dollar will help out with the export orientation of many US businesses which I think will continue to improve.

When you look at Aerospace on the OE side, you are seeing continued improvement in the overall condition of the market, but being market specific is nice, but you also have to be platform specific, and that is why we are optimistic longer term about the 777. As you know, they went back from five to seven last year, and looking into the future, you are seeing the 777 go up to 8.3 per month. So overall we are seeing all of our markets indicators are flashing green, and we think that there is a sustained improvement over the next several years.

Okay. Great. And then one more. Relative to R&D expenses in the Aero/OEM business. I realize it has always been part of the business for R&D expenses, but given the timing of some of the programs, or potential programs out there, could we see a relatively larger ramp in those expenses this year or in the near future?

One of the things that has contributed to our lower flow through rates in the manufacturing businesses has been both transfer of work and new product introduction. Those are things that were focused on very much through the first half of this year. We think we are getting handle on some of those expenses. Right now, the way I see it, I don't see a significant change in that going forward. We have some new product introduction on the 787 still, A350, among others.

That is part of the ongoing process in our business. Unlike many businesses that are involved in larger programs, we don't do program accounting. We actually expense this stuff as we go along, which I think is better for a business like ours. Okay. Great. Thank you for your time.

Thanks, Josh.

Your next question comes from the line of Scott Graham with Jefferies. Please proceed.

Good morning, Scott.

Good morning. Now that was a nice quarter, gentlemen. Very good job.

Thank you.

I wanted to ask you about a couple of questions. One of the things that I was curious about was when you were talking about upside versus downside to the numbers, I was surprised that you didn't include in the upside anything from the distribution business. And I was also surprised that you said that you've, to date, kind of priced your way through most of the raw materials inflation so far.

But raw materials inflation is still a risk factor, almost suggesting -- and I am not putting words in your mouth -- that is why I am asking for clarity -- that one of your downside concerns is the ability to catch up to that from here. So maybe kind of why not Barnes Distribution North America on the upside and why the additional raw materials inflation on the downside?

Well, I think, to answer your first question, Barnes Distribution America is very much better in the high end with the better volume leverage as the DSA improvement continues going forward the flow through rates are outstanding. That is a big part of that volume leverage. One of the things we talked about historically when it comes to commodity price inflation, you weren't around during the 2004 era, but we were hit very hard in this business, primarily in the automotive side with raw material price inflation.

Since that time, over the past several years, we have had a very concerted effort to get raw materials pass through and the folks in PC have done an outstanding job. The raw material pass through was roughly in the 90% range for most of our automotive and aerospace businesses in the same range and we have other ways to pass the price through. I was very happy when we did the first quarter reviews because there has been commodity price increases, and because of those efforts terms, conditions and agreements, material coverage contracts, et cetera, we were able to pass it through.

In addition, in many of our short cycle business, like Barnes Distribution North America, when we are seeing price inflation from China we have been able to pass it through and get a stick to it. That is adequate to counter the increases. So, so far so good. I still think the volatility of prices going forward is going to be an issue for all businesses.

Understood. If I could just ask you to maybe provide this additional color to that. Which raw materials are you most concerned about? In particular?

That is a great question. I worry about so many things all the time. I think most people are looking at steels. We use a lot of specialty steels. That would probably be one of the areas. In addition, many of the contracts, the terms and conditions that they have, have open points. In other words, we may have a quarter delay or a six-month delay depending on the agreement. So we may have to absorb some price increase for a short period of time before we can get the adjustments. Those are the types of things that may affect us at some time during the year. Right now, today, I am not real worried about it but it is on my radar.

All right. That is very helpful. My last question is, and I am sure you knew this was coming, can you just give us some more color on what happened with European distribution business this quarter, kind of where it is at least versus plan?

Well, I think one of the things that I'd like to do is, are we making investments and is it moving the needle? And it is moving the needle, not as fast as I want it to. When you see improvements sequential and year-over-year, that's nice, but I am more impatient than anyone can possibly imagine and we're putting a lot of effort into the European distribution business.

So how do I take that, though? If you don't mind me asking, are you maybe behind plan? The tone there was a little mixed. Are you behind where you want to be? Are you where you want to be?

Sure. I want to move faster. I don't know many CEOs that don't want to move faster, however, but we've demonstrated over and over again the ability to fix businesses and to improve profit margins and we are making the same efforts here.

All right. Very good. Thanks very much.

Your next question comes from the line of Holden Lewis with BB&T Capital Markets. Please proceed.

Thank you. Good morning.

Good morning.

I guess following up on the last part of that question, what about the profitability of European distribution and North American distribution? Can you give some color as to where we are there?

In North America we are getting great flow throughs and in Europe we need to improve. It is as simple as that.

Okay, so it would be reasonable to assume that North America has turned into a profitable enterprise again, but still short of the 10% you had at the last up cycle but you are moving towards that and Europe probably has not broken through break-even yet. Is that kind of the reasonable way to take that?

You are heading in the right direction. How is that?

All right. And trying to get a sense, on the sales forecast, given that you put up 14.5% growth in Q1, to get to 8% to 11% for the full year, that kind of assumes -- or that implies that you are looking for 6% to 10% growth for the final three quarters, or well below where you were in Q1, when you are talking pretty favorably about progress in distribution and improvements in auto and progress in areas of potential improvement in Aerospace. It just seems like it is a pretty sharp drop for the last three quarters of the year given the first quarter performance in the tone.

First of all, like I said, I suggest that you do the math more than me. When we came up with the 55%/45% ratio, it is not an exact science. There is mix, there's economic condition changes, et cetera, et cetera. That is part of what plays into it.

We took a very detailed look at our forecast. We sliced it a million different ways, and really that is the way it rolls out and that's the way it looks right now. And I think that there is not a whole lot of conservatism in it in the sense that I think the team came together and came up with the number and took into condition all the different aspects of -- to the forecast.

Okay. And then, I guess, last thing, I am trying to get a feel for the moving pieces in the gross margin. Your gross margin looked like it improved about 30 basis points year-over-year. With the Aero Aftermarket getting better and with sort of North America distribution acting stronger, I guess I was surprised there wasn't a bit more of a pop at the top line, productivity, all that sort of thing, or at the gross margin line. Can you give some color as to what the various moving pieces are that comprise that number?

When we looked at the year-over-year kind of the quarter-over-quarter performance and improvement in margin in general, I would say the productivity that Greg mentioned, we are seeing in the flow throughs and from a BGI point of view have improved. Obviously, we are pleased with the 9.2% operating margin for the quarter versus the 7.1%. Clearly, we can do better. We recognize that.

I think it was the mix of the businesses for the quarter. Most pleased with the 15% top line growth and being able to expand margins to better than 9%. We continue to focus on productivity and lean to drive additional expansion in margins. I would say there is no one particular item or thing that caused that change. We are pleased with our performance this quarter.

Okay. No, I mean, the SG&A leverage was very, very good. I get that. But would the mix of business have been a net positive or a net negative to the gross margin in the quarter?

You are pretty granular. As you know, we have quite a few businesses under each segment. I would say no one spike that is being negative or no one spike as being real positive. In general, all of our businesses performed well in the quarter and that is what we saw.

Okay. I guess, looking at the two segments, I guess, what have you, did you see gross margin improving in one of the segments, weakening? It is flat gross margin and good revenue growth where mix seems like it is favorable. I am just trying to get a picture for if there are some areas where maybe the gross margin was weaker versus some areas where it was stronger?

I think in general what we have seen over time was the issues with -- in our manufacturing businesses within PC, we had some issues with new product introduction and with transfer of work which led to flow throughs that were inferior. And I think in the first quarter, we saw big improvement in that. We still have a ways to go. As Chris said, we can do better. And I think with all the effort and focus we have on it, we will continue to improve.

Okay. Thank you.

Thank you, Holden.

Your next question is a follow-up question from the line of Edward Marshall with Sidoti & Company. Please proceed.

Just one quick question. You mentioned the drop in the GEnx engine for the in-sourcing. But was there any in-sourcing or is there any drop in the GE90? I know you said $1 million earlier?

I don't believe so. I don't have the answer to that. But we have been $1 million for some time now. The GE90 is also a little different in the sense that we have a longer-term contract that tends to be renewed. I don't recall the exact period, but we have been on the GE90 since 2001.

Do you know the last time it was renewed by any chance, or a ballpark?

No, I don't. I really don't.

All right. Thank you.

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

I have two follow-up questions. I want to spend a couple more minutes talking about your European manufacturing businesses. I think you mentioned 40% order growth, I believe it was orders, correct me if I'm wrong, on a year-over-year basis. Can you talk a little bit, other than just saying kind of general industrial, can you talk a little bit more specifically on what end markets are driving that strength, and conversely to your comment on the dollar situation helping your US export businesses, how do you think about the euro kind of moving higher, helping, or maybe not, your European businesses?

By the way, that is a great question, a couple aspects of it. One is, when we were hit hard in 2009, we were hit really hard in Europe. So this recovery is a nice plus. A lot of it is auto industrial, in the sense that nitrogen gas products, for example, one of our key businesses, sells a lot to the tool and die industry, which in turn, is dominant with the auto industry. So as auto sales globally rebound, so does the demand for tooling.

That is also a good long-term sign because it is not only tooling but it is also white goods like washing machines, dryers, et cetera, that need the tool and die support. The robust recovery there, I think, is a good indicator for the global industry. That business also is very global in its demand -- we have operations in China, et cetera, that feeds work from Europe through China and sub-manufacturing operations. In addition to that, we are seeing nice demand pickup in our German operation where we are seeing very widespread demand for basic parts that see Sieger produces, which also bodes well for the global economy.

The other great question that you had was about currency, if that is a concern. Switzerland has been strengthening -- I mean Sweden and Switzerland, for that matter, those currencies have been strengthening to the euro and dollar which creates pressure for us. And that's one of the things we have to counter going forward. The nice part is we have good profit margins, we can absorb some of it. But clearly, we have to take actions in order to keep that from harming our businesses long term. Because I don't think the weakness of the dollar is a short-term issue. I think this is a long-term issue that we have to contend with.

Got it. And then just one more question on PC, and I apologize if you gave these numbers out and I missed them, but can you give us the total backlog for PC this year versus last, and then what the Aerospace backlog would have been OE, obviously, this year versus last?

Sure, Matt. We ended with a -- PC backlog ended at $464 million. That was a growth from first quarter last year of basically $416 million. Sequentially, it is up about $20 million or so. And then for Aerospace OEM, we ended at $354 million, which is a growth from first quarter 2010 of $334 million, and that is a sequential improvement, as well. We ended last year at $348 million.

And remember, I've mentioned it many times over the years, but backlogs are funny things because of, the horizon changes on material lead times and different customers have different horizons and all the rest of that stuff. So you really look at it from a long-term perspective, those type of shifts.

Appreciate it, guys. Thank you.

Thank you, Matt.

At this time, there are no further questions.

Okay, great. We want to thank you all for joining us this morning. We look forward to speaking with you next quarter. This concludes our call. Thank you.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you, and have a great day.