Enpro Inc (NPO) 2009 Q2 法說會逐字稿

Good morning, my name is Justin and I'll be your conference operator today. At this time I'd like to welcome everyone to the EnPro Industries second-quarter results conference call. All 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.

Well, thank you, Justin, and good morning, everyone. Welcome to our quarterly earnings call. In just a moment Steve Macadam, our President and CEO, and Bill Dries, our Senior Vice President and CFO, will review the second quarter of 2009 for you and then a little later we'll open the lines for your questions.

But before Steve and Bill make their remarks I'd like to remind you that you may hear statements during the course of this call that express the 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 events and results 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 and the 10-Q for the first quarter of 2009. We do not undertake to update any forward-looking statements made on this conference call to reflect any change in management's expectations or any change in assumptions or circumstances on which such statements are based.

This call is being webcast on EnProIndustries.com and a replay of the call will be available on the website as well. If your questions aren't answered on the call or if you have any follow-up questions, please feel free to contact me after the call at 704-731-1527. And with that I'll turn the call over to Steve.

Thank you, Don, and good morning, everyone; thanks for joining us today. When we reported our first-quarter results we believed market conditions were just beginning to stabilize, and now that the second quarter is behind us we're even more confident that this is in fact the case.

As you see in our earnings release, the year-over-year comparison of our results shows sales were down 26% and our adjusted EBITDA was down 54%. These declines are obviously driven by the severe contraction in demand that we've experienced in nearly all of our markets. Our results are further reduced by a non-cash goodwill impairment charge which led to a loss of $5.30 a share compared to income of $0.96 a share last year. On an adjusted basis, before asbestos-related expenses and other selected items, we earned $0.47 a share in the quarter compared to $1.35 a share last year.

There's no doubt that the global recession continues, but even so our second-quarter results give us reason for optimism. Our engine products and services segment had another strong quarter with significant improvements in sales and profits. Part of that improvement came because of better prices for the engines shipped this year, but the results also reflect solid execution and continued improvement at Fairbanks Morse.

Activity in the Sealing Products and Engineered Products segments was flat compared to the first quarter and the decline in their markets appears to have run its course. While we don't yet see any signs of significant recovery in their markets, activity has settled to a low but somewhat stable level. Going forward in 2009 these segments will continue to show a decline compared to 2008, but the level of new orders and the benefits of our contingency plans should improve the year-over-year comparison.

Our engine products and services segment should continue to perform well and has a very solid second-half outlook. In this environment we remain focused on controlling costs, improving efficiencies and the judicious use of cash while we continue to pursue initiatives to support growth. We outlined a number of actions in this regard last quarter and we continue to implement new programs including short work weeks, employee furloughs and various other cost control initiatives.

In total as a result of these programs are current employment levels are about 17% below peak levels of our operations last year, excluding Fairbanks Morse. The cost reductions helped us lower SG&A spending by 17% from last year and 5% from the first quarter. We expect to realize additional savings over the course of the rest of the year.

At the same time we made progress on our objectives for improved pricing, sourcing, commercial excellence and working capital management. We've conducted pricing workshops in all of our major operations to explore opportunities to optimize prices and we've implemented a number of changes that will benefit our price structure and our results over the balance of the year.

On the sourcing side we're ahead of our year-to-date plan, achieving substantial savings on materials through coordinated sourcing and in some cases changes in suppliers and material to reduce the amount or cost of material used in certain products without compromising quality. Our division's commercial excellence programs are improving the way each one goes to market.

The effort emphasizes a repeatable sales and marketing management system which creates a consistent focus for our sales effort and better measurements for our performance across all our businesses. This includes voice of the customer, action plans and rigorous customer specific short, intermediate and long-term goals for growth.

As we've said, we expect our businesses will have opportunities to gain market share in the current environment and our progress towards commercial excellence is helping us achieve the gains. Our working capital initiative involves and extensive review of our process for managing accounts receivable, accounts payables and inventory. We've piloted this effort at two divisions and have begun the process of rolling it out throughout the entire company. We will do this business by business in stages over the next 12 months.

Our capital spending is about half of what it was in the first six months of last year, but it is in line with the rate of depreciation. Our Pikotek business, which is operated under Garlock, moved into a new facility during the quarter. Pikotek has grown substantially since we acquired it in 2003 and needed more space to continue its growth as well as to improve productivity through a better layout and product flow.

We made no acquisitions during the quarter, but we continue to look for and evaluate opportunities that fit our existing businesses and meet our strategic and financial criteria. As you would expect, we are seeing evidence that acquisition multiples are moderating.

We continue to expand our product offerings as is evidenced by a new alliance that makes STEMCO the exclusive North American distributor for [Duraline]. Duraline is a leading manufacturer of high-performance brake pads for heavy-duty trucks and is based in Brazil. The alliance benefits STEMCO with a natural addition to its product line and gives Duraline access to STEMCO's large customer base and extensive distribution network in North America.

Although we're committed to a conservative approach to managing our cash and our balance sheet, we'll continue to invest in our businesses when opportunities arise. Our cash balance combined with our credit facility gives us about $125 million in liquidity to support our initiatives for growth and improvement in profitability. Now I'll turn the call over to Bill for his discussion of our financial performance. Bill?

Thanks, Steve. As Steve mentioned, sales declined by 26% from the second quarter of 2008 and segment EBITDA was 57% lower. Both of these percentage changes were close to what we experienced in the first quarter. However, segment EBITDA margins were down slightly at 12.2%.

Sales amounted to $235 million in the second quarter compared to $317 million last year. Weaker markets accounted for a decline of 21% and the negative effect of foreign exchange accounted for another 5% decline. Acquisitions had a negligible impact on the year-over-year comparison.

As you can see in our earnings release, both our Sealing Products and Engineered Products segments experienced double-digit percentage declines in sales just as they did in the first quarter. On the other hand, the engine products and services segment had its second consecutive double-digit percentage increase in year-over-year sales.

Our gross margins were 31.7% this quarter, down 4.5 percentage points from last year. Weaker performances in the Sealing Products and Engineered Products segments were responsible for the decline which was driven largely by the impact of significantly lower unit volumes on the absorption of fixed overhead. However, in the Engine Products and Services segment, gross margins made a solid improvement and were up 5 percentage points. I'll discuss our segments in more detail shortly.

Our SG&A spending declined by 17% to $60 million from the second quarter of 2008 and was down about 5% from the first quarter. About a third of the year-over-year decline is related to foreign exchange. As a percent of sales SG&A increased about 2.5 points over last year to 25.4%, but that compares to 29.1% of sales in the first quarter. The decrease from the first quarter indicates that we've started to see benefits from the various contingency plans and cost reduction initiatives that we implemented earlier in the year.

Asbestos-related expenses were a couple million dollars higher in the second quarter of this year at $14.3 million. The difference is primarily because of increased defense costs.

We announced the $113 million non-cash charge for goodwill impairment a couple of weeks ago. As we noted then, the impairment reflects the weak near-term outlook for two of our business, GGB Bearing Technology and Plastomer Technologies, but it doesn't change our commitment to these businesses. We believe both of them are sound and have bright futures.

About $109 million of the impaired goodwill is associated with the acquisition of GGB, which occurred prior to EnPro's spin-off into a separate independent company. The balance relates to Plastomer's acquisition of Amicon plastics in 2006. The $5.1 million of other operating expense in the second quarter relates to restructuring charges primarily at GGB's operations in France. We've begun a process that will lead to a 25% reduction in GGB's labor force there and will put these operations on more solid footing to deal with the very weak conditions of their markets.

Impairments and restructuring charges led to an operating loss of $118 million in the quarter. If not for these items the second quarter of this year would have been about breakeven. By comparison we had about $30 million of operating income in the second quarter of last year and a slight loss in the first quarter this year. Net interest expense was about the same as last year.

Other income of $19.5 million for the second quarter of 2009 pertains to a reversal of an accrual for retiree medical benefits that we disclosed a couple of weeks ago when we announced the goodwill impairment at GGB and Plastomer. This brings us to a pretax loss for the quarter of $101 million and a tax provision of $4.5 million.

The tax rate is significantly different than one would normally expect. But as we said in our first-quarter earnings call, our tax rate was likely to be volatile throughout the year. In particular the second-quarter rate reflects the fact that about half of the goodwill impairment charge will not be tax-deductible. However, the charge will have no impact on our cash taxes from what they otherwise will be.

Our net loss in the second quarter was $106 million or $5.30 a share. Before asbestos-related expenses and other selected items, including the impairment and restructuring charges and the reversal of the accrual, we earned $0.47 per share. These earnings are 65% less than last year when we had record quarterly earnings of $1.35 a share, but again, an improvement over the first quarter when we earned $0.29 on an adjusted basis. The tax rate on our adjusted earnings in the second quarter was about 26%.

Turning to cash flows, we generated about $4 million from operating activities during the first half of the year, down substantially from $55 million in the first half of last year. The drop is primarily due to lower adjusted EBITDA which was $49 million compared to $107 million in the first six months of 2008.

Although sales volumes declined working capital increased marginally in the first half of the year as is typical of our seasonal cycle. Our working capital tends to increase in the first half of the year and decrease in the second half. However, the increase in the first half of 2009 was only about $10 million or about one-third of the increase we saw in the first half of last year when activity was at a record high.

Total asbestos-related payments were about $59 million in the first half of the year compared to $46 million in the first half of last year. Net outflows after insurance collections were about $20 million compared with about $2 million last year. The difference is primarily related to timing. For the full year we expect both total payments and net outflows to be in ranges generally comparable to last year.

Our capital spending in the first half of 2009 was about $14 million or just over half of what it was through the first six months of 2008. Spending on acquisitions was also significantly lower at just over $5 million compared to about $37 million last year when we completed three acquisitions in the first half.

We retired $10 million of debt this year leaving us with a cash balance of $58 million at the end of June or about $18 million less than we had at the end of last year. As Steve mentioned, the combination of our cash balance and funds available under our revolving credit agreement give us about $125 million of liquidity. We believe this level of liquidity is sufficient both to meet the demands of the current economic climate as well as to take advantage of attractive investment opportunities as they arise.

I'll finish up my remarks with a review of our three segments, beginning with Sealing Products. Weaker markets led to a 24% decline in sales in the segment while foreign exchange accounted for an additional 4% decline. Sales totaled $98.1 million with every unit in the segment lower than a year ago reflecting the soft conditions of most of our sealing markets.

Falling volumes led to a decline in segment EBITDA of over 45% to $18.5 million and a drop in EBITDA margins to 18.9% from over 25% a year ago. In the Engineered Products segment sales were down even more dramatically dropping 34% before an additional 5% decline from foreign exchange. The segment's total sales in the second quarter were $88.3 million.

While sales were down at every operation GGB experienced a significantly larger drop than either Quincy or CPI. GGB's markets remain very weak when compared to a year ago reflecting conditions in both its automotive and industrial markets especially in Europe which typically accounts for about two-thirds of its sales.

The segment reported a slight loss before interest, taxes, depreciation and amortization, although that includes $4.6 million in restructuring charges primarily at GGB. If not for restructuring the segment would have been profitable on this basis. Essentially all of GGB's loss was in Europe while America's unit generated breakeven results. Both Quincy and CPI were profitable in the quarter, although at significantly lower levels than a year ago.

the Engine Products and Services segment, Fairbanks Morse Engine remained a bright spot. Sales were just under $50 million or 38% higher than last year based on increases in sales of engines and aftermarket service. Fairbanks Morse shipped just one more engine in the second quarter this year, but all of the engines were more profitable than a year ago due to improved productivity, reduced costs and increased prices. Sales and service also increased. The result was a 100% increase in segment EBITDA to $10.5 million and then an almost 700 basis point increase in EBITDA margins to 21.3%.

In summary, market conditions reduced sales and lowered volumes in our two largest segments compared to a year ago. The decline in volume led to negative leverage on fixed costs and profit margins fell along with sales. However, we successfully negated inflationary cost increases with increases in selling prices and our initiatives to reduce costs. And we continue to benefit from the performance of Fairbanks Morse Engine.

The comparison to the first quarter of this year is more encouraging. Markets for our Sealing Products and Engineered Products stabilized and sales and profits were flat with the first quarter in both segments. The Engine Products and Services segment, on the other hand, showed a strong increase over the first quarter.

Our pursuit of cost reductions as well as initiatives to maximize pricing and sourcing, achieve commercial excellence and tighten working capital management is relentless. We're confident that our progress in these areas will benefit us both in the near term and in the future. With that I'll turn the call back to Steve. Steve?

Thanks, Bill. Although the first half of 2009 has been a challenge, we feel we've met it well and weathered the worst of the economic storm. Our contingency plans have been effective in helping us to cut costs as a reduction in our cost structure shows. As Bill noted, we're also making progress in our objectives for pricing, sourcing and working capital as well as in our objectives for operational improvements. We benefited from these activities in the first half of the year and we'll continue to benefit from them in the second half.

We're prepared to take additional actions if necessary to deal with changes in our markets, but as we enter the second half of the year we appear to have reached equilibrium. Our markets have stabilized, although at a low level, and we don't expect them to weaken further.

\We mentioned last quarter that a consensus of economic forecasts indicated overall activity in our markets was likely to be down 18% to 20% for the year. At this point in the year those forecasts are in-line with our experience in the first half and they remain the basis of our expectations for the second half.

Should conditions deteriorate beyond our expectations we are prepared to address them quickly and effectively. However, we don't think those plans will be necessary and, as a result, we don't expect to have significant restructuring charges in the second half of the year.

To reiterate our earlier comments, in the second half of 2009 we expect a more favorable year-over-year comparison to 2008 in the Sealing Products and Engineered Products segments even though activity will remain well below the levels of a year ago. We expect the sequential comparison to reflect typical seasonal patterns in these segments as activity slows in the summer months before returning to a higher level later in the year.

The engine products and services segment had a very strong first half both in sales and profits. Although we expect sales to continue to be strong in the second half of the year, the product mix isn't likely to be as profitable and we don't expect Fairbanks Morse to repeat the results we saw in the first half of 2009.

Our cash balance and credit agreement give us ample liquidity to meet our ongoing needs as well as to explore opportunities for acquisitions and other investments that we believe create value.

In closing, I want to say that I feel very good about where we are. We've worked hard to take costs out of our business and improve the efficiency of our operations. We put in pricing, sourcing, commercial excellence and working capital programs that are already taking root and will provide substantial benefit for the long term. We've got a great team of employees who are dedicated to doing things right and supporting our priorities. In short I'm confident we're in a great position.

I can't tell you how long the current downturn is going to last, but I can tell you we're dealing with it effectively and we're going to come out of this strong. Thanks for your attention. Now we'll open the lines for your questions. Operator, if you could instruct everyone, please, on how to ask a question?

(Operator Instructions). Todd Vencil, Davenport.

Good morning. You talked about -- a little bit about cost and price. I'd like to dig around in that for a little bit if we can. What are you seeing overall or broadly in terms of your input costs at this point? Are they starting to rise?

Yes, I think they're starting to rise from where they were earlier in the year. But they're still well below where they were a year ago.

Right. Do you have kind of an overall -- I mean, realizing that you buy and use a lot of different things. Is there an order of magnitude that sort of [bounces] off the bottom that you're seeing?

In aggregate cost of goods?

Yes.

Bill, do you have a ballpark?

Well, I'm not sure I'm following -- what's your question -- I'm not sure I'm following.

I think he's saying going forward for the rest of the year what's our expectation for aggregate cost of goods.

Yes, I think material prices should pretty well stabilize. We were able to realize pretty nice reductions through the first half of the year. But very recently that's begun to flatten out. So I think we'll reap the benefits of the reductions we've seen in the first half of the year year-on-year but I don't -- we do not anticipate any further declines in that pricing through the balance of the year.

And I don't -- the opposite is true too, Todd. I don't think we see a big thing that's going to all of a sudden be out of control going up. We've locked in a number of things, we've negotiated longer-term deals, we've had a pretty aggressive coordinated sourcing effort going on. So we're seeing some nice results from that.

Excellent. If I can ask, what kinds of things are you locking in on?

Well, not pure commodities like copper and steel and that kind of thing, but MRO stuff, electric motors, electrical components, services, etc.

Got it. Good. And then you mentioned -- I was going to ask about cost along just similar lines -- I'm sorry, prices. And you mentioned that you're achieving some of your pricing objectives. What have you seen there, what have you been doing and what are your pricing objectives at this point?

Well, we've had a pricing effort that we've been spending a lot of time on. And really it's a -- I would call it a tactical pricing effort, Todd, where you kind of go in and you array all of the customers and products and you look for who are the bottom feeders, who are you selling to at prices that are lower in terms of the actual pocket price that you get.

And then the team really works hard to identify why that's the case and how we can work our way out of it, is it a cost to serve issue, is it a pricing issue. And we go in very tactically and might adjust prices or negotiate in certain ways where we're -- to the bottom of either the customer group or the product line and work those prices up.

And so it's a pretty -- it's a pretty technical process, it involves a lot of facts and data and analysis to try to identify this. And the first half of the year we did basically the diagnostic work in all our major operations and late in the quarter and going into the third quarter the teams are working on implementing what they can of these changes. So that's a high level what we're talking about.

Got it. And then finally on the cost saves, if I'm hearing you right it sounds like, assuming things have stabilized, you think that what you've done is what you need to do unless things take another leg down.

That is accurate.

Okay. So given that, how much more benefit do we have to look forward to that in the back part of the year?

Well, we had -- in our last call we had quantified our annual benefit to be in the neighborhood of $30 million. Again, we were implementing various of those programs and processes through the first half. So we would see basically the full amount of the annualized benefit in the second half of the year.

Okay. So call it $15 million over the back half and $30 million going forward until such time. And my recollection on that is that there was a fair amount of variable that came out of that. So again, without looking at my notes, I think more than half of that would probably come back when volumes come back? Am I thinking about that right?

That's probably reasonably fair, although it's always easier to improve productivity in an increasing demand environment and not add people than it is to increase productivity when you're also downsizing the workforce, as you know. Just operationally in any manufacturing operation that's a different challenge. But for your purposes ballpark that's probably a reasonable estimate.

Okay. Thanks, guys.

Joe Mondillo, Sidoti & Company.

Good morning, guys. I was wondering if you could just touch on some of your end markets, what you're seeing and where you really see the fastest/strongest recovery as the economic recovery prevails?

Well, Joe, that's a very tough thing to call because, as we've said in the past, we've got -- other than Fairbanks Morse Engine we've got a very short cycle visibility into the future. And so there's still a lot of uncertainty I would say about the pace of the recovery that we're hearing in the marketplace as our guys are talking to customers and whatnot.

I think what we have seen in the first half is that this whole supply chain destocking phenomenon is behind us. That wound its way down through the first half. And so at least now we feel like we're feeling what the primary demand would actually be. I don't think we're seeing -- I wouldn't describe us seeing any significant inventory builds. I would say what we see is consistent reordering to keep inventories constant through the supply chain. So I'd say that's number one.

The second is, the segment that got hit the worst for us obviously was the Engineered Product segments where we're far more dependent at the OEM level than we are in the aftermarket. And that's where we really suffered badly and a lot of that was in GGB because that business sells one-third of its sales and half of its volume into the auto industry and the other half goes into industrial goods that have been just as weak -- in fact, actually our business has been weaker there than even in the auto industry.

But -- and that's where we saw a lot of destocking because it rippled all the way through the supply chain. But that business, we've now seen the order pattern has stabilized in the last few months. We've seen customers come back and order things that we haven't seen for four or five months that sat there without ordering -- these are regular customers that we have where we're specced into their products.

So I think the fact of -- if you said to me what's your prediction in how quickly they'll come back? I would say what's your prediction on GDP growth in the major countries of the world? Because we pretty much track that over the long haul. I know I'm kind of evading your question, but it's just very, very difficult for us to have any real visibility into this recovery that's, quite frankly, any better than anyone else's on the call.

Right, I think Steve mentioned in his comments that we just haven't begun to see recovery yet. So it's almost impossible to predict which particular industry sectors we're going to see it in. We haven't seen it yet.

Right. If I could reword it, just comparing the Sealing segment versus the Engineered Product segment, is it fair to say that since you have so much aftermarket exposure in the Sealing segment, that that segment might rebound stronger or faster compared to Engineered Products? Or would you say because the decline in Engineered Products segment was so deep that that might see a faster recovery? I don't know if you can comment on that?

Yes, I -- again, my sense would be that if you're just looking at sequential comparisons we'd probably see a little bit more from a percentage basis in improvement in Engineered Products just because the aftermarket, as you know, on the way down the decline has not been as severe. The OEM demand for any given segment that we sell into versus the OEM sales year over year versus aftermarket is literally down three sometimes four times as much year over year. So just by definition I think on a percentage basis the rebound is going to have to be -- would be more robust on the OEM side which is, as we said earlier, more concentrated in the Engineered Products segment.

All right. And then on the last conference call you guys sort of put a perspective on what you're seeing in Europe in terms of what inning in a baseball game, I think you've said about the fourth inning. Have you seen that region stabilize or are you still seeing a slight decline over there? If you could comment on what you're seeing over there in that region.

No, I think we have seen Europe stabilize and some segments begin to return a little bit. So I'd say we're in the sixth inning and we scored a few runs in the fifth and sixth, so we're doing a little better.

Okay, great. And then lastly, just wondering if you could comment on the backlog in the engine business and what the order rates are looking like going forward?

Okay. Bill?

Sure. Our total backlog -- we come into the year with about 260, we're down slightly, about 235. The engine backlog is about the same, $155 million, $160 million, so it represents two-thirds of the total, which means that our non-engine backlog has dropped some, but it's still in that five to five and a half week worth of sales range.

And again, we've got on the non-engine part of the business, again given our limited visibility, even in normal times we don't really expect to see that number change. The engine business has a couple of good prospects out there. Their outlook still remains very bright and we would anticipate them to continue to build their backlog.

So just looking at the order rates, do you think that business will stay flat or how -- what you're seeing from right now how are you looking at that business going forward in the back half, say, in terms of the orders?

Yes, I think Bill mentioned in his comments that the activity level should be good. We don't think the mix will be quite as rich in the second half as the first half of the year. So we don't expect to repeat the bottom-line performance of Fairbanks in the second half compared to the first half. Although when you look at the full year it's still going to be a good year for the business.

Okay, great. Thanks a lot, guys.

Gary Farber, C.L. King.

Good morning. I just had a couple questions on gross margin. Can you just comment on how that might play out for the rest of the year and then also into next year? I mean, what kind of -- to get a 100 basis point jump in gross margin, is there a certain level of volume increase you need to see to get that?

I'd say, yes, there's a certain amount. If you ask me to quantify it I can't. We would expect to see the gross margins at least stabilize if not pick up some. As Steve indicated in his comments, we still have retained some elements of seasonality this quarter, the third quarter -- typically a slowdown when you hit the summer months. And hopefully we would expect it to start to pick up later in the year and therefore be able to leverage some. So I think we ended up about 31.5 in the second quarter plus or minus and I would expect it to be stable to slightly better than that in the second half.

And then if you saw just 100 basis points of volume or something like that what can that do to your gross margins? Can it move it much or you need to see more?

100 basis points of volume --.

Like a 1% increase in revenue year over year.

Well, I mean generally speaking, all else being equal, on average we would look for an incremental profit of $0.30 to $0.40 on each additional dollar of sales. So you can do the math. We'll benefit to the extent that we -- we increase our volume and therefore our production levels will benefit, that's what cost us in the first half of the year. That was probably the biggest determinant in terms of why our margins are down so much. So we leverage down fairly significantly, we -- at the level we're at now we ought to level up just as significantly.

And then just -- I might have missed this on the cost aside. Assuming things get worse or slightly worse, how quickly -- if there's more cost to be taken out how quickly can they be taken out, in a quarter or likely to take two quarters to start taking them out?

No, it can happen in -- actions can happen, will happen in a quarter, but the effects that you see on the P&L will typically lag a few months. An example is the restructuring that Bill mentioned that we had in GGB Europe was from a pretty significant social plan that we put in place in the French operations of GGB. And even though we took the restructuring charge and we're beginning to see benefits of that, the people will exit in different stages through the back half of the year.

So there's always a lag that's either a severance agreement or -- there will be a restructuring or whatnot. Because obviously it's primarily labor that we're talking about. So -- but again, I don't think that we'll see a significant or even really a moderate reduction in our volumes going forward simply because the aftermarket I think is already at a level which is pretty darn close to the minimum required to sustain these applications that we sell into.

And the OEM markets are -- have been -- the first half of the year have been so weak it's really hard to imagine them getting any worse. So we really don't anticipate any continued decline in our demand. I'll be very surprised if we see that. That said, we are prepared to continue to respond as we have in the first half.

Right. And then just last question on the asbestos, I don't know if you touched on this. The asbestos charge you took in the second quarter, the expense, that will be pretty similar throughout the year or is that going to move around?

No, I think the way to think about it is a year-over-year comparison, Gary. In other words, there's a lot of timing that deflects cash flow, expense differences from quarter to quarter of when we get payments, etc. But our expectation is that this year looks a lot like last year in terms of expense and net cash outflow.

Which was what -- last year it was like $38 million or something like that, I think?

Net cash outflow, that's right.

And is there anything you're seeing, are there any changes in the pace of the case -- is there anything different that's been going on say this year versus two quarters ago? Or your outlook for it?

Well, Gary, Rick Magee, our general counsel who manages asbestos, is actually in the room with us. So let me ask Rick to just address that.

I guess the first half of the year certainly we -- part of the reason you see what you see there is that we had to resolve more than a half year's worth of the cases. We expect through for the year that that will get a little bit closer to a normal process. I think year over year we probably will resolve more cases this year than we have in the past several years. And the challenge is to do that for approximately the same number or lower numbers of dollars.

I think if anything we're not really seeing the impact of what we expect to see from the incidence curve yet, declining incidence of serious disease. We know that's out there, (inaudible) confident in that. We're not scientists and epidemiologists, but that experts say that's happening. We're not really seeing the effects yet in any kind of year-over-year reduction, but we certainly expect to.

Right, okay. So the case -- you're saying the number of new cases being filed is sort of flattish, would you say?

No, I guess the number of new cases overall is down fairly significantly. But if you just examine the serious new cases, the meso cases, which as you know is hard to do, we have to do that on a lagging basis because you can't always tell when one is filed what the disease is. But if we look at those we think they're very flat. We are continuing to see a lower number of the non-disease, what we refer to as junk cases in the past. So the overall number of cases has come down some. But in the series of these cases we do think we're seeing a flat year over year -- which has really been about flat for three years now after a reduction back in the 2006 year.

Right, right. Okay, thank you.

(Operator Instructions). Rob Young, William Smith & Co.

Good morning. I just had a quick question regarding policies coming out of Washington. Are those going to have any unusual impacts especially in the auto sector piece of your business? I know that it's not a huge piece, but is that going to have any material impact for the Q3 quarter?

I would say no.

You'd say no, okay. And then in terms of acquisition strategy, you mentioned that you were looking, as always, into potential acquisitions. Is there a specific geographic region that you're looking into?

No.

Okay. And the multiples that you mentioned are coming down, are those -- what level of -- in terms of the drop have they -- can you quantify that at all?

I'd say we're seeing a turn of EBITDA, a half to one and a half on average in general, as well as obviously a reflection of a lower EBITDA base. So it's reasonable. We worked very hard on an acquisition in Q2 and really we're in the due diligence stage and the seller backed out because he decided that he didn't want to sell his business really -- nothing to do with valuation or the market, he just -- he was the owner entrepreneur.

So we thought we are going to have one to announce a few weeks ago, and unfortunately it fell apart kind of at the 11th hour. But we're still active. And again, it's the small bolt-ons that we really like that fit right into one of our existing businesses, kind of a $10 million to $50 million business. So I would not be surprised if we have something -- we hope we'll have something to announce in Q3.

Okay. Okay, so it wouldn't be a measure of any type of financing, you'd basically just be paying for it off the balance sheet?

Yes.

Okay. And then in terms of your CapEx plans, are those basically supposed to stay at slightly more than half of what you had for fiscal year '08? Is that kind of what you're thinking for the back half of this year?

No, we'll probably be -- when it's all said and done we'll be higher than half of '08. We were in the 40s. Our spending will probably pick up a little bit in the second half of the year. But I'm thinking that we'll be in that 30-ish range plus or minus.

Okay. And just lastly, what type of effective tax rate should we be using from an adjusted basis for the back half? Can we stick with the 26% or is it --?

Yes, I think on an adjusted basis, again the rate on the GAAP earnings is going to be all over the place. On an adjusted basis I think that kind of 26% to 27% range is a pretty good estimate.

Perfect. Well congratulations on the quarter. Thank you.

At this time I show no further questions. I'll now turn the call back over to the presenters for any closing comments.

Well, we appreciate you all dialing in and listening to the call this morning. And as I mentioned earlier, if you have any questions please feel free to call me at 704-731-1527 and we look forward to talking to you again next quarter.

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