Enpro Inc (NPO) 2009 Q1 法說會逐字稿

Good morning. My name is Tim and I will be your conference operator today. At this time, I would like to welcome everyone to the EnPro Industries' first-quarter 2009 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you, Mr. Washington. You may begin your conference.

Good morning, everyone, and welcome to EnPro Industries' quarterly earnings conference call. Steve Macadam, our President and CEO and Bill Dries, our Senior Vice President and CFO, are here to review the events of the first quarter of 2009 and our financial results for the quarter. They will also discuss the current conditions in our markets and how those conditions affect our expectations for the remainder of this year. Following their comments, as usual, we will open the line for a question-and-answer session. And in addition to Steve and Bill, Rick Magee, our General Counsel, is also here if there are any questions directed for him.

Before Steve and Bill make their prepared remarks, I would like to remind you that you may hear statements during the course of this call that express a belief, expectation or intention, as well as those that are not historical fact. These statements are forward-looking and involve a number of risks and uncertainties that may cause actual results and events to differ materially from such forward-looking statements.

These risks and uncertainties are referenced in the Safe Harbor statement included in our press release and are described in more detail, along with other risks and uncertainties, in our filings with the SEC, including the Form 10-K for the year ended December 31, 2008. We do not undertake to update any forward-looking statements made on this conference call to reflect any changes in management's expectations or any change in assumptions or circumstances on which such statements are based.

This call is also being webcast on enproindustries.com and a replay of the call will be available on the website later today.

If your questions aren't answered on the call or if you have follow-up questions, you can contact me later at 704-731-1527. And now I'll turn the call over to Steve.

Thank you, Don and good morning, everyone. Thanks for joining us today. I hope you have all had a chance to review our first-quarter results. Clearly, they were disappointing. Many of our end markets deteriorated very quickly through the quarter, which resulted in sharply falling volumes, which in turn put pressure on profits and margins. The deterioration was not only because of reduced primary demand, but also because of substantial destocking of inventories by our customers.

We are operating in a difficult environment, but we are comfortable in our direction and we are enthusiastic about our future. Our near-term objective is to deal with this environment in a realistic and decisive manner that strikes a balance between the need to control costs and the opportunity to invest for the future.

Controlling costs is critical and we are addressing the issue head on. We have reduced employment levels by approximately 8% from the end of last year and by nearly 10% from the peak in the middle of 2008. We have shortened work weeks, frozen salaries and reduced discretionary spending. We continue to monitor conditions closely and we are prepared to take additional steps should we determine that they are necessary.

We are fortunate to have a group of very experienced and capable managers who are driving our efforts to control and reduce our costs and we are fortunate to have already had the benefit of the productivity and efficiency programs that we have implemented over the past several years and that are continuing.

Although we are aggressively reducing and controlling costs, we are also prepared to invest where appropriate to assure we can take advantage of opportunities to grow. In the current economy, we expect to encounter many opportunities to use our leading market positions and healthy balance sheet to create an even stronger company.

In this vein, we continue to support product development and marketing programs that allow us to gain share and to seek acquisitions that provide us entry into new markets and new technologies. Bill will provide a full review of our first-quarter results, but in summary, they reflect the same kinds of conditions that we have seen across the board among industrial companies.

With few exceptions, our industrial markets are weak and overall, our sales were down 24% compared to the first quarter of last year. The Engineered Products segment, which was mostly impacted by the downturn, particularly at GGB, which dealt with very weak demand for both automotive and industrial bearings from OEM markets. As a result, the Engineered Products segment recorded a loss in the quarter.

Our Sealing Products segment fared better, but was also impacted by a significant decline in volume. The segment benefited from the high proportion of its sales that go into the aftermarket applications, which tend to be more profitable and less dependent on general economic conditions. The segment's nuclear power generation markets and certain parts of its upstream oil and gas markets were stable in the quarter.

The Engine Products and Services segment continues to be a bright spot. Fairbanks Morse Engine is executing very well and is turning in strong profits. The predictable backlog of Navy work, consistent aftermarket demand and the business' operating performance make it a strong and stable contributor to our results.

As a result of the drop in volumes, especially in the Engineered Products segment, we reported an operating loss of about $5.5 million in the quarter. An income tax benefit more than offset the loss, which led to a net income of $0.16 a share in the quarter. Bill will explain the circumstances that led to the tax benefit. On a non-GAAP basis, our earnings before asbestos-related expenses and other selected items were $0.29 per share.

As I mentioned, our near-term focus is on controlling our costs, maximizing our operating efficiencies and tightly managing our cash. In addition to reducing labor costs, we have initiated projects to improve pricing and sourcing practices and to reduce working capital. We also continue to support product development and marketing efforts so we can gain marketshare in a weaker economy.

Acquisitions remain an important part of our growth strategy, although our pace has slowed. We remain conservative in our approach to managing our balance sheet, but we are actively pursuing attractively priced opportunities such as the one we closed earlier this year when we acquired a small sealing business in the UK. This is a great tuck-in deal for Garlock and the kind of small acquisitions we have been able to do very well over the past few years.

The year has gotten off to a slow start, but we are confident we are dealing effectively with the realities of the current market. We have the financial health to continue to strengthen our competitive position and to look for opportunities to support renewed growth. And we have the commitment and focus of our managers and employees as we work our way through this recession.

I will talk more about our outlook at the end of the call, but now I will turn the call over to Bill for his discussion of our financial performance. Bill?

Thanks, Steve. The weak market conditions that we began to encounter late in 2008 continued into the first quarter of 2009 and as Steve mentioned, our sales dropped 24% from the first quarter of last year to $216 million. Six points of the drop came from unfavorable foreign exchange rates. On the positive side, acquisitions made a 2% contribution.

Gross margins were 33.7% in the first quarter this year, almost three full points below last year. The decline in volume in the Engineered Products segment drove the change. Both the Sealing Products and Engine Products and Services segments recorded an increase in gross profit margins.

Total SG&A spending was down from the first quarter of last year, although as a percent of sales, it increased by six percentage points to 29.1%. As Steve indicated, we are paying particular attention to these expenses and have taken steps to control and reduce spending. Many of these actions were implemented in stages over the course of the first quarter. You will see their full benefit later in the year, but we realized about $2.5 million of the benefit in the first quarter.

On the other hand, we have made the conscious decision in a number of cases to maintain spending for sales and marketing and for product development in order to support our goal for gaining marketshare to ensure that we are in a strong position when markets begin to recover.

After expenses, we reported an operating loss of $5.5 million compared to income of $24.7 million last year. Our tax benefit in the quarter was $11.7 million, which exceeded our pretax loss of $8.5 million. Our tax rate reflected the benefit of structural and organizational changes we put in place late last year and we will continue to benefit from them going forward. It also reflected losses incurred in higher tax jurisdictions, primarily in the United States and earnings generated in lower tax jurisdictions.

The tax rate on our adjusted earnings amounted to 27% in the first quarter, lower than our historical rate of 35% to 37%. Our tax rate is likely to be volatile throughout 2009 depending on our results. Beyond this year, we believe the rate will be more normal and somewhat less volatile. Of course, the actual rate will depend on a lot of factors, including the level and mix of our domestic and foreign earnings.

Interest expense was $3.1 million and reflects the new accounting rule for recording interest on convertible debt. Last year's expense has been restated to make it comparable. As we mentioned in our last earnings call, the new rule will result in an additional $5 million of non-cash interest expense this year.

After the tax benefit, our net earnings in the first quarter were $3.2 million, which translated into $0.16 per share. That compares to $0.58 a share in the first quarter of 2008. Before asbestos-related expenses and other selected items, we earned $0.29 per share in the first quarter compared to $1.04 in the first quarter of last year. The most significant factor in the decline is lower segment earnings.

Operating activity generated cash of about $500,000 in the quarter compared to $9.4 million in the first quarter of 2008. EBITDA, adjusted for asbestos-related expenses and other selected items, was $22 million compared to $48.5 million a year ago. On the other hand, working capital increased by only $8 million this year, significantly less than the $23 million increase in the first quarter of last year due to the decline in activity levels.

As we've pointed out before, working capital is at its lowest level at year-end, so increases are typical in the first part of the year. It is also worth noting that a fair portion of the increase came from Fairbanks Morse where sales volumes have increased and the units have a strong backlog of orders.

Total payments for asbestos settlements and expenses were about $13 million in the quarter compared to about $21 million last year. Insurance receipts also declined and net outflows for asbestos were about the same in both quarters.

During the first quarter, we spent about $10 million to pay off the last of our industrial revenue bonds that were issued back in 1993. With the repayment of those bonds, the convertible debentures are our only remaining debt outstanding. I should point out here that the new accounting rules I referred to before also resulted in a significant reduction in the carrying value of the convertible debt on our balance sheet.

In terms of available liquidity, we have an untapped revolving credit facility of $75 million and at the end of March, we had $56 million of cash on hand. Thus, between our available liquidity of more than $130 million and our conservatively leveraged balance sheet, we believe that we have ample resources to continue to weather the current economic uncertainties, as well as take advantage of attractively priced investment opportunities that may come our way.

Before I go through our segment results, I want to point out that we have changed the way we charge certain corporate expenses related to our operating segments to more accurately reflect the direct expenses incurred on their behalf. 2008 segment results and corporate expenses reported in our earnings release have been adjusted to reflect this change.

Looking at the Sealing Products segment, sales were down 21%, or $27 million, with 5 percentage points of the decline attributable to weaker foreign exchange rates. Segment EBITDA was down about $7.5 million and EBITDA margins were down 230 basis points to 17.4%. Within the segment, aside from certain portions of the upstream oil and gas market and the nuclear power generation market, Garlock's markets softened as sales, profits and profit margins declined.

The experience was the same at Stemco where the core heavy-duty truck market is very weak. New trailer builds are on pace to be down 65% in 2009 compared to 2007 and truck ton miles are on pace to be down 11% in that same period. These numbers are at historical lows and well below the peaks we experienced in the middle of this decade.

In the segment's two smaller units, sales at Garlock Rubber Technologies declined, although the impact on profitability was tempered due to the material cost reductions and improved productivity.

Plastomer Technologies reported a loss as the business dealt with the effects of the plant consolidation and soft conditions in key markets.

The effects of the economic slowdown are most evident in the results of the Engineered Products segment. Sales there dropped 34%, or $45 million, with the largest portion of the decrease coming at GGB Bearing Technology. Foreign exchange reduced sales by about 7% while acquisitions made a contribution of about 3%. Segment EBITDA dropped to $4 million from about $27 million in the first quarter of 2008 and EBITDA margins were only 4.5%.

As I indicated, GGB sales were off substantially. In fact, they were only slightly more than half of what they were last year in the first quarter since core automotive and industrial markets are primarily driven by OEM activity, which has declined significantly as the economy has slowed.

In addition to its OEM exposure, GGB has relatively high fixed costs, particularly in its European operations, which account for the majority of its sales. As a result, the large volume decline had a significant impact on its operating results and the business recorded a loss for the first quarter.

Sales were also down at Quincy Compressor and Compressor Products International and both of these businesses reported lower profits and margins as a result of declining volumes and in the case of CPI, restructuring costs.

In both the Engineered Products and Sealing Products segments, we have seen customers delay spending as they have used up existing inventories. Obviously, this destocking won't continue indefinitely and we believe it has largely run its course.

In the Engine Products and Services segment, sales were up about 20% compared to the first quarter of 2008. While Fairbanks Morse shipped the same number of engines as last year, the value of the engines and associated equipment was higher in 2009 and aftermarket sales increased as well. These improvements led to a strong increase in EBITDA and EBITDA margins.

Before I turn the call back to Steve, I would like to cover the evaluation of goodwill that we mentioned in our earnings release. Like many other companies, we are currently working to determine if goodwill has been impaired by the significant downturns we have seen in key markets.

In our case, the evaluation relates to about $110 million of goodwill at GGB and Plastomer Technologies. As our segment results indicate, these businesses have encountered difficult times and their near-term outlooks have deteriorated significantly. We cannot determine the exact amount of any potential impairments at the current time, but we expect to complete the evaluation in the second quarter. If an impairment charge is necessary, it would be recorded in our second-quarter results and would be non-cash in nature.

There are two important points I would like to make on this issue. One, nearly all of the goodwill dates back to the acquisition of the Glacier bearings business in 2001 prior to our spin-off from Goodrich. Two, we have not changed our view on the health or viability of these businesses. We continue to believe that they are fundamentally sound, well-positioned in their markets and ultimately capable of generating strong returns over the long term. With that, I will turn the call back over to Steve.

Thanks, Bill. The first quarter was clearly a challenge, but as you are well aware, we are not alone. Nearly all parts of our economy are struggling and many companies have encountered similar or even worse conditions. Nevertheless, our goals for EnPro and its future have not changed. We will continue to meet the challenge quickly and decisively and we will remain focused on what we believe is a very bright future.

A month into this second quarter, conditions are very similar to those we experienced in the first quarter. We don't see any evidence of further deterioration in our markets, which is an encouraging sign. And as Bill indicated, customers should begin to stabilize inventories and volumes should pick up, even if the improvement is slight. Although it is too early to say, if this is begun in any meaningful way, it could provide some benefit to our results later in the year.

Industry forecasts for 2009 indicate economic activity will remain significantly below last year's levels. In some of our markets, that is likely to mean a decline of 30% or more and in many cases, the decline is greater than we anticipated in February when we last updated you on our outlook.

The consensus of the forecasts across the industries that we serve suggests that overall activity in our markets will be 18% to 20% below the full year of 2008. We have already adjusted our costs for these conditions and we will take additional steps if necessary if future conditions warrant. The benefits of lower employment levels, shorter work weeks, salary freezes and cuts in discretionary spending should become increasingly apparent over the course of the rest of the year.

In addition, we are beginning to benefit from a sourcing initiative we have implemented to control material costs and from other productivity improvements we have put in place.

Since our February earnings call, we have also modified our restructuring plans and now expect to spend about $5 million on restructuring this year. By the end of 2009, restructuring, combined with our other cost-reduction initiatives, should enable us to be realizing approximately $30 million in annualized savings.

In closing, we are very confident that we are dealing effectively with the current climate. Our balance sheet gives us the flexibility to take selective advantage of opportunities that may arise and we are maintaining a strong presence in the marketplace to ensure that we remain market leaders in all of our businesses. Aftermarket activity should continue to provide a relatively stable level of sales at attractive margins. Although customers may make delay or postpone new investment activities, they are likely to continue maintaining and repairing their facilities and equipment.

We have clear priorities. We are controlling costs effectively and we are pursuing opportunities to improve the products we offer and to expand the markets we serve. Our team of employees is dedicated to our success and we are confident we will remain healthy in this downturn and emerge from it strong and ready to continue our growth. Thanks for your attention. We will now open the lines for your questions.

(Operator Instructions). Joe Mondillo, Sidoti & Co.

Good morning, guys.

Good morning, Joe.

First, I just want to start on the restructuring. Could you just go into a little more detail on how much restructuring was realized in the first quarter, how much you expect to realize going forward, such as the second quarter and further? And you mentioned that it is going to be saving, what, $30 million annually by year-end, is that correct? If you could just go into detail.

Yes, that's not only the result, Joe, of just the restructuring; that is basically all-inclusive of the cost-reduction efforts that we've put in place. And the reason the restructuring is lower than what we said in the last call, the restructuring number, frankly is that we have decided to not implement as aggressive steps in France as we were originally anticipating because of the cost of negotiating the social plan in France proved to be prohibitive. So we are going with an alternative approach that won't require as much restructuring expense. But Bill, why don't you address --.

We had total restructuring charges of about $2 million in the first quarter and as Steve mentioned in his report, we currently estimate something in the neighborhood of $5 million and the balance of that will be pretty well spread throughout the balance of the year pretty evenly.

Okay. And when -- and you are expecting to realize the $30 million by year-end. So most of it will be realized in 2010 or can we expect some to be realized in 2009 as well?

Oh, certainly. Yes, and many of the actions have been implemented and will continue to be implemented. The $30 million is an annualized run rate number.

Okay. And then also in regards to pension expenses, which you talked about on the call, the last call, could you give some detail on how that was -- how that affected the quarter and how that is going to be affecting going forward?

Sure, Joe, the last call we had we had indicated that we had anticipated our pension expense for the year would about triple. Our pension expense last year was in the neighborhood of $5 million thereabouts and we were expecting it to be closer to $15 million this year and that is about what we saw in the first quarter. Our total pension expense for the quarter was a little over $4 million and that compared to about $1.5 million last year. So it has run --.

Okay, so you still expect $15 million for the year?

Yes.

Okay. And then if, Steve, maybe you could talk about the engine business, just trying to get a little more visibility on what you guys are seeing. I know it is a lumpy business quarter to quarter, but maybe you can talk about what you are seeing for this year as a whole. And I am not sure -- I know it is a long-term business, so I don't know if you can talk about 2010 at all there too.

Well, as we have indicated before in the calls, the backlog there is pretty long. We don't have a ton of visibility into 2010, but we have got good visibility through 2009. Our backlog has remained relatively flat from where it was at the end of the year, so we haven't seen any decrease there. So far, the aftermarket and service portion of that business is healthy and the new engine shipment schedule this year should be fairly consistent with last year in total. So we anticipate year-over-year improvements in Fairbanks from last year.

Do you have the backlog number at year-end '08 compared to year-end '07? Do you happen to have that?

Sure. This is the total backlog.

For the engine business.

Sure. Total backlog was about flat at the end of the year, was about $260 million. And the engine business was about $170 million of that. So it is about two-thirds of the total Company backlog and that is up about 7% or 8% from the end of the year.

To now.

To now.

To now. What about at year-end '07? Do you have that?

No, I don't have that readily available. My recollection is it is in that neighborhood though, maybe a little lower.

We are not looking at that now, Joe. You can follow up with Don if you want and he can provide that.

All right. That is all for me for now. So thanks, guys.

Gary Farber, CL King.

Hi, I just had a couple of questions. On this inventory destocking, are you saying that it has run its course or you would expect it to continue for another quarter or two?

No, I think, Gary, our sense is -- obviously, it varies across the different end-use segments, but our sense is it is pretty much run its course. In fact, we have actually seen, in some pockets around the world, some reordering levels that we did not experience in Q1.

Can you say in what areas, what type of end markets?

Well, we have seen some auto business return in Brazil and in Europe where orders were very, very slow in Q1 into GGB, would be the one I would mention. And we have also seen the aftermarket in the trailer business for seals out of Stemco has stabilized as well and we don't continue to see that declining.

Now again, I don't want to indicate that we are going to -- that we are anticipating some kind of sharp rebound in volumes. That is not the case. But we have seen at least some glimmer of hope that the rate of decline is decreasing. We flattened out in some cases and in some cases, actually seen reordering that we haven't experienced for three or four months. So that is why we kind of feel like it has more or less run its course.

Right. And then in Europe, I don't know if you give it out in the Q at all, but is it possible to quantify year-over-year revenue for your Company as a whole, how much revenue was down in Europe?

Boy, I don't have the -- I don't have the number at hand to be honest with you. Obviously, GGB is primarily European. It drives about two-thirds of its sales from Europe and its total revenues are down half of what they were a year ago. So it is -- but I don't have the European/American split.

Right. Using like say a baseball analogy, can you talk about what inning you are in when you think about the downturn there in Europe, just broadly in your businesses?

You are speaking specifically of Europe, Gary?

Yes.

Well, it's tough to say. As you know, we have just -- we had six straight months of sequential greater than 2% GDP decline right on top of each other in Europe. So Europe went down very, very dramatically. So if you put a gun to my head, I would say we are probably in the fourth inning maybe. Bill, what is your view?

I think I would play it safe. I think that is probably a pretty good assessment.

Okay. And then lastly, just on the trucking business, you are saying that it is still weak. I know it seemed like for a while it was just sort of riding a bottom. Is it getting weaker than the bottom or is it still riding a bottom?

I think it is still riding the bottom. It did weaken a little bit in Q1, particularly in the trailer builds. The aftermarket continues to be obviously more stable. And revenue miles are forecasted to be down about 11% from two years ago, from '07. Those are not our forecasts; those are public forecasts. But our OEM business is down substantially out of Stemco, but as you know, the lion's share of that business is aftermarket for us anyway. Our marketshare in aftermarket is much higher than OEM.

Right. So you would say on OEM that trucking, it may have been a little bit worse than the previous bottom, but not that much worse. Is that a fair way to look at it?

You mean than where we were? (multiple speakers) -- bottom was historic low and we have now broken that.

Okay. And that is on the OEM side or on the aftermarket side?

The OEM side.

Okay, so you have sort of reached like a second leg down on the trucking market you're saying?

Yes. I mean just to give you a feel, I don't have all the numbers right in front of me so don't hold me to these, but in general perspective, when the new trailers -- and these are trailers not trucks, which trailers is the lion's share of what we sell into. New trailers that were built at the peak of this cycle, which is probably 2006 -- there were over 250,000 built and the industry forecasters are basically saying this year, it is going to be about 70,000 built. And I would say a midcycle number would look more like 160,000 to 180,000, in that neighborhood. So we are well less than half of even a midcycle number. So we're pretty comfortable that is a bottom.

Right. And then just lastly on this $30 million savings program, that is savings that will come out of both the cost of goods sold and SG&A side?

That's correct.

And that is what you can think about for fiscal '10 as far as being the opportunity really?

The ingoing run rate I would say.

Yes, okay. All right, thanks so much.

Todd Vencil, Davenport & Co.

Hey, guys. Good morning. When you think about your margins, you didn't mention this, so it is probably okay, but how is your price/cost relationship in the quarter? Is that kind of where you want it to be? I mean not in terms of your fixed cost, but in terms of your input.

Yeah, I mean in terms of the input, we were pretty much -- we may have been slightly negative, but I don't think it was meaningful. It is -- obviously, to your point, fixed costs -- the downward leveraging in the volume has cost us significantly. But in terms of the input and our pricing, there was not a significant difference. I think we have pretty well kept pace.

So is it fair to say that pretty much all of the decline you've seen in the margins, either year over year or from whatever a normalized level ought to be, was just due to that underloading of fixed costs?

Yes, no question about it.

Okay. And of that $30 million that you are going to save, how much of that comes back when things pick up again or do you get to keep all those savings?

Well, a fair bit of that savings is -- a fair bit of that savings obviously is direct labor costs. So you shouldn't be thinking about it that that stays out when volumes return.

Probably three-quarters of that number, Todd, are headcount-related and as Steve said, a good chunk of that is our direct labor. So as volume starts to return, presumably we would be bringing those people back.

But maybe you're bringing the other quarter -- maybe $7.5 million is sort of structural from the restructuring?

Yes, but again, those would be more SG&A costs and engineering costs and stuff like that that we would probably bring back at some point. Obviously, we are operating off of pretty strong markets in early '08 and '07 so --.

Okay. Final question I guess from me, just sort of thinking optimistically or thinking not optimistically, but thinking about opportunity I should say. You mentioned that -- you have been mentioning it. Can you give us a little color on how you think the opportunity set out there that you are looking out for acquisitions is -- or growth is changing, is it improving? What do the opportunities look like at this point and what should we expect from you guys in terms of timing on any actions, if you can even think about that?

Yes, I would say we feel opportunities increasing. We have continued to maintain our program of building the pipeline and trying to identify strategic acquisitions. We have been quite successful. We have a bunch that are lined up in the pipeline and the challenge to us now is managing the timing of those. Many of those, as we have said before, are not active processes to sell, where we are essentially the only person in there talking to the target. And so many times they can be deferred without us risking losing it or risking having someone else buy them.

So we are trying to manage that. We don't want to fundamentally affect our pretty nice liquidity position today until we do feel and see a little bit more visibility into the future. So we are being a little bit cautious. We are exploring alternative ways to do deals and continue to grow. You may have seen a recent press release we had with a Brazilian brake friction company for commercial trucks called Duroline. We have entered a partnership with them to be their exclusive agent, selling that product in North America. We are very excited about that, but that is an example of a growth lever that we have pulled with our Stemco business that is not hugely capital-intensive on our part. So we are starting to explore other alternatives that I guess I would say that continue to grow without our traditional straight acquisition in order to preserve capital.

So I think the expectation should be, throughout the year, that we would continue to moderately invest in small, tuck-in deals that make sense strategically. But I don't think you will see us doing anything that fundamentally changes our strong liquidity position. (multiple speakers). Bill, would you add anything to that summary?

No, I think that's a good summary.

All right, thanks a lot for that.

Gregory Macosko, Lord Abbett.

Yes, thank you. Most questions have been answered. Could you just talk about the asbestos situation? The number was, I guess, basically flat. How do you stand with the insurance companies and kind of what should our expectations be on a longer-term basis kind of running through for the future?

Yes, okay. Hi, Gregory. How are you?

Fine.

Good, good. Rick Magee, the General Counsel and the person responsible in our Company for asbestos, is actually here with us to help us with asbestos questions. So I'm going to let him comment on that and then I may jump in at the end. So Rick, why don't you take a stab at that?

Sure, Steve. Gregory, several quarters ago, we began disclosing in our quarterly reports the remaining insurance by year in which we expect to collect it. So not only do we lay out our total remaining insurance, but we lay out sort of a map of how we expect to collect that remaining insurance over the next decade and so that is pretty clear. I mean our insurance arrangements are in place, there are no disputes about the amounts. We feel good about our insurance carriers and keep our eye on that and their ability to pay. So the insurance side we feel like we have got a pretty good handle on.

But as you can see from those numbers, that is a declining number and we will collect significantly less insurance this year than we did last year, about the same amount next year and then there is another decline as we run through the remaining insurance. So our challenge is to continue as we have to lower the total cost for asbestos so that we can try to keep pace with our net outflows and not have a significant uptick there.

We will probably experience some years where we have an uptick where the insurance falls off significantly, but our goal is to continue to have the outflows that you have been seeing over the last several years to be fairly stable over time and not to have a dramatic increase in the net outflows for asbestos. It is a challenge. It is uncertain out there. We are in the courtroom a lot, but we are confident that things are going (technical difficulty).

Gregory, does that cover it?

Yes, that's good. Yes, thank you very much.

Okay.

Rob Young, Wm. Smith & Co.

Hey, guys. Good afternoon. Hey, just a quick question regarding the possible just incremental impact of an auto manufacturer going bankrupt. Is that going to have a significant impact or is basically the incremental change fairly neutral?

Frankly, I think it is fairly neutral, Rob, just because we supply obviously to Tier 1, Tier 2 level suppliers, not directly to the auto folks. We have been -- everybody has been well aware of this stress in the supply chain. We have been able to manage our receivables accordingly and appropriately as I think everybody in the supply chain has. And quite frankly, I think that the industry has already curtailed so much capacity. I don't think the bankruptcy process will really materially impact us. It might in a few spotted areas if both GM and Chrysler file. We may have some bad debts out there, but in terms of actual ongoing volumes -- but even there, it is not a huge number. We have looked at that. I don't think our exposure is dramatic.

So you think -- would it be fair to say that, from an auto perspective, the volume in that particular application or that particular end market, is that in basically a bottoming phase right now?

I don't think there is any question about it. I think it has to be. It has been -- I mean obviously, as you know, everybody who plays in any industrial space knows there was a ton of inventory washed out of that supply chain from October through the end of the first quarter that basically -- plant shutdown took a hugely extended downtime. Many of the European auto plants were down for the entire month of December and then into January. So I think that industry has been very focused on trying to lean out that supply chain. So yes, I think we are in a bottoming phase there as well. That is my sense. Now, I am not an auto expert by any stretch and keep in mind, auto sales to us is only 8% of our total Company sales of which almost all goes through GGB. That is why GGB has been so affected by this dramatic downturn.

Okay. And then I know that you talked about some possible lower-level acquisitions that don't seem to be as capital-intensive. Can you talk a little bit about the specific markets that you may be going into, the markets that you may see throughout the rest of this year, as well as going into 2010?

From an acquisition perspective?

Yes.

Yes, look, we still have goals of trying to grow the Sealing Products segment. Garlock has a wonderful worldwide footprint and strong brand name and is really the leading static seal company in the world and is recognized as such. We would like to grow in India. We would like to grow in the UK and in Europe. There are a bunch of add-on productlines and technologies that we have got our eye on in that business. Stemco is another business that we have got that we -- like I mentioned with the friction company that we just did the alliance. We did, as you know, the Kaiser acquisition, Kaiser Engineering about a year ago for kingpins for commercial vehicles and that acquisition has gone extremely well and fit in. So that is another area we would like to grow.

And we still feel very positive about our Compressor Products International business and growing that. We are one of the leading players in the aftermarket there and although in the near term, you have some energy -- there is not as much demand for energy as the worldwide economy slows down. We still think that natural gas excavation and exploration and transmission and whatnot is a good market for us to be in. So those would be areas where we are particularly focused.

Okay. So are you recognizing that the spread between what you are willing to pay and what the seller is willing to sell, that spread for the M&A market, is that kind of contracting and hopefully will improve throughout the rest of this year? Is that what you're kind of feeling?

Yes.

Okay, perfect. That is all I had. Thank you.

That concludes today's Q&A session. I will now turn the call back over to Mr. Washington.

We thank you all for joining us today and as I said earlier, if you have any further questions or your questions didn't get answered, please call me at 704-731-1527. Thanks.

This concludes today's conference call. You may now disconnect.