Regal Rexnord Corp (RRX) 2002 Q4 法說會逐字稿

Ladies and gentlemen, good day and thank you for standing by. Welcome to the Regal-Beloit fourth quarter earnings conference call. At this time all participants are in a listen-only mode. Later there will be a question and answer session. Instructions will be given at that time. If you should require assistance during the call, please press zero then star, and an operator will assist you. And as a reminder, this conference call is being recorded.

I will now turn the conference call over to your host, chief financial officer, Mr. Ken Kaplan. Please go ahead, sir.

Yes. Good afternoon, and thanks, Barb.

With me today are Jim Packard, our chairman and CEO, and Henry Knueppel (ph), our president and chief operating officer. This call today is in reference to our fourth quarter earnings announcement release this morning. If you have not had an opportunity to read it, the news release has been up on our web site at regal-beloit.com since about 9:00 this morning. Before starting, please keep in mind that with the exception of historical facts, other statements we may make during this conference call could be forward-looking statements. Investors are directed to the company's filings with the Securities and Exchange Commission.

Barb, before we start, perhaps you'd like to provide the participants with instructions for asking questions a little later.

Certainly can. Ladies and gentlemen, when you do have a question, please press the 1 on your touch-tone phone. You will hear a tone indicating that you are placed in queue. You may remove yourself from queue at any time by placing the pound key. If you are on a speakerphone, pick up the handset before speaking. Thank you. Please continue.

Thanks, Barb.

Before beginning the Q & A, we do have a few preliminary comments. I'll start by saying that when you look at the fourth quarter result, they were pretty much as we expected. Earnings were within the range that we projected in October. We expected sales to be sequentially lower in the fourth quarter as demand would be weaker in our markets. This proved to be the case. We did as most of you know, take a 3 cent charge during the quarter for closing two of our mechanical group plants. In fact, they were closed before the end of the year. We are now looking forward to reaping the benefits as we move into -- further into 2003.

Now, that was pretty much all that I wanted to say about the financials at this point -- Jim.

Thanks, Ken. I'm not going to have a lot. Henry will speak a little bit to where we see business today and reflect a little bit on the quarter.

As Ken said, and as we reported, the quarter was pretty much as expected. I don't think there was any surprise in it. December is usually the tell-tale month. It started out as usual, very strong and ended very, very weak with additional factory shutdowns and business just really fell off in the last half of December. That's not substantially different than it is every year, but the impact of it probably was more significant given the ongoing performance of our markets. I think the good news was that we still didn't see what I would consider signs of more weakening and things getting worse. So, we still feel like, you know we're bumping along the bottom. We did not participate in some -- in the fourth quarter as has been traditionally the case, in efforts to increase revenue through heavier discounting and inventory programs and so on. So, there was pretty much the sales were what the sales were reported, and so, as we have moved into the first part of the year now, business seems to be back up and trucking pretty much like we saw in the third quarter and the first two months of the fourth quarter.

That's fair to say, isn't it, Henry?

Henry Knueppel Yes.

And everyone is trying to be as we are, reasonably optimistic given the concerns that we have in the world and still trying to figure out where things are going and what's happened. We continue to move along with our plans, improving our logistics program and our sourcing efforts around the world and made an announcement in the quarter to that effect with another joint venture in China, and that now is our second one, and we continue to expect -- we continue to work and -- in that area and expect to do more there as well, so, that's a very positive thing. Coupled up with the rational rationalizations that we likewise announced in the quarter for the electrical plants that we are shuttering. All of these things are things that we have been working on and are not really driven by the economy so much as they were driven by the rationalization that we knew we would do when we purchased the leasing operations. They are progressing well and we expect those to give us good returns in the future.

I'm going to ask Henry to address a few specific things about the company and the quarter as it relates to operations and markets and so on -- Henry.

Henry Knueppel Yeah. I just want to recap a few highlights, I think, that we're excited about overall. Some of this is for the year, and some of it is for the quarter. There are years when you obviously sew a lot of seeds and years that you harvest. We think that 2002 was a year that we sewed a lot of seeds. From a new product standpoint in both group, mechanical and electrical, we introduced a record number of new products. Some of those have to take some time before they get rolling. We think we are seeing good pickup in business and customers as a result of the products and emphasis that we have had on high efficiently products. The new product line that we bought in the late summer, early in the fall, Power Tracks (ph), which is totally integrated into the Richmond gear facility at this point during the November/December time frame and is showing great signs of life. We think that's going to be a great product in the future.

We introduced a number of new products in the power generation product lines. So, we're -- we think these are great products that are continuing to separate us from a lot of other competitors as being an innovative company. In addition to that, we added record number of new customers for the year, albeit in a much slower economy and at a time when it's more difficult to show that as a net new growth. But it was a record number of new customers for us, and it was somewhere in excess of 900 new customers between the two groups for the year. I think that's a testament to the things that we're doing from a market penetration standpoint, the success of the multi-brand strategy and certainly new products.

As Jim said, we also think we set a base for the future in terms of profitability with the consolidations. We announced in October, we would be closing two facilities, the mechanical groups and rearranging the product lines in three or four other facilities. I'm pleased to tell you that is on schedule and frankly may be ahead of schedule and it will offer a lot of synergies and cost reductions as we move into the new year.

Also, in December, we announced that we would be closing two additional facilities in the electrical group. We are just into the process there, but we believe we'll be on or ahead of schedule. Again, we think that that sets the base for the future. We also made a lot of progress this year in the sourcing area. We have said before that strategic sourcing was a significant issue to us. We were able to close on the joint venture of Shanghai Micro at the very end of the year. We think that's going to be a great opportunity for the future for small motors, both selling in Asia as well as the products brought back to the United States. It was an excellent company. It has a good history, and we're very pleased with where we're headed there.

And then finally, in the logistics area, it was another year of progress. We expanded our warehouse in Indianapolis. We think it's the largest motor warehouse in North America. With that, we were able to consolidate leasing, put finished goods into that warehouse and that will offer additional savings in the year ahead. So, it was a very busy year with a lot of progress made on a lot of fronts. If we get a little bit of help from the industrial economy, we are pretty excited about what the results will be.

With that, I guess I will turn it back to Jim.

Yes. What I think I'd like to do now, I know there are some specific questions that people are going to want to ask, certainly some other things that I want to make sure are responded to in the question and answer session. So what I think is probably the best thing for to us do and the best use of our time at this point is to open it up for questions.

Our first question in queue is from Alexander Paris (ph) from Barrington & Associates. Please go ahead.

Hello.

Hi, Alan.

Nice to talk you to again. Just some questions. You charged the $725,000. Where does that come in, at the gross level or operating level?

Yes. It's going in cost of sales.

It's all in cost of sales?

Yes, sir.

Okay. If we just wanted to adjust, we would take the whole amount out of cost of sales.

That's right.

Okay. So, do you have what your pretax income was? Or your tax rate or both?

Yes. Well, for the whole year, we ended up just under 35% in the whole tax rate. And pretax income was -

In the fourth quarter.

In the fourth quarter was 6.9 million.

6.9 million?

Yes. And that's -- so if you were adjusting, you'd add back 725 to that.

Great. And your depreciation and capital spending for 2002?

Yes. I have that for you. For the whole year or the fourth quarter?

The year is good.

Okay. It was -- depreciation was just over $22 million, 22.1 in amortization, 1 million even. Capital spending ended up at 10.8. I was indicating earlier that we thought it would start picking up, and it has some, and you know, in fact, we expect it to pick up a lot more in 2003.

Are you still planning -- I think the last time we had a conference call, you said you were planning 2003 for zero top line growth and to be able to show a profit for the year at that level. Is that still your planning target?

No. I think you misunderstood when we talked. What we said is we -- what we wanted to be able to accomplish is even if there was no sales growth that we could improve the profitability of the company through the initiatives and by other normal courses of actions to improve our margins. But that's not how we have developed our plan. Maybe Jim or Henry might have some comments there.

Actually, I think we have put -- this is Jim speaking. I think we put together, and we're not going to share that, obviously, because we haven't traditionally, but a reasonably strong growth plan for next year in terms of revenue albeit not until the latter half of next year. It's the typical hockey stick scenario, but I guess as you look forward in any situation it's close to what we're in, it will always look somewhat like a hockey stick. In terms of growth. But I think that what we wanted to say and hopefully we have said it appropriately is all of these things that we keep talking about that we're doing should provide us with a nice increase in profits without regard to whether we increase the top line or not.

Okay. So that in the first quarter guidance of earnings, which I think would be a little bit below last year, what are you assuming? Are you assuming for sales to be down then in the first quarter?

Down from a year ago?

Yeah.

Well, I don't think we'll comment on more than we put into the news release. I see where you are saying. Because we did 27 cents a share or 28, I think it was.

Yeah, 28 cents. So you are saying it's going to be down and you have a lot of new products coming out, and cost savings I presume?

Well, keep in mind that sequentially, you know, the numbers have moved down as the year in the first quarter last year we were at 150 million in sales, and now this past fourth quarter we're at 146 million. I think that we indicated we didn't really expect to see the beginnings of the recovery this quarter. So, coming off of where we were in the fourth quarter, which was at 21 cents, the 22 to 26-cent range would be showing margin improvement.

Right. Do you have any ideas that you want to talk about your expected cost savings from all of the plant consolidations in dollars? Or percentage or what?

Henry Knueppel Well, we had -- Alex, we haven't said publicly what we think the exact numbers are from the consolidations.

Well, here's your chance to say it publicly.

Unfortunately, if we were going to say it publicly, we would probably put it in writing and make sure it was widely disseminated and not just on the conference call.

I see.

The better way to say it is, we're not going to tell you.

The electrical plants. How soon do you expect those to be -- the consolidation to be over with there, in the first quarter?

Henry Knueppel No. It would be -- I'm going to say 90% complete by the end of the second quarter, there will be a little tail-out into the third quarter.

Thanks very much.

Sorry, Alex.

That's all right. I'll keep trying.

Next question is from Michael Schneider (ph) from Robert W. Baird. Please go ahead.

Good afternoon, gentlemen.

Hi, Mike.

Maybe we could just spend a minute on pricing. Jim, I believe that you had mentioned that you didn't participate in a lot of the year-end discounting. Could you elaborate on that, because clearly some of the numbering coming out and the other companies are widely disparate in terms of growth rates and even sequential comparisons. Is there some type of a pricing war underway or is there some unusual year-end activities out of some of your competitors?

Well, I don't -- I mean, I don't -

Henry will want to answer this differently than I will, Mike.

Well, you go -

It isn't so much -- at the end of the year, there are certain companies who have a real drive to do everything they can with something we have not done, maybe we should. We don't do it. Throughout the year, there -- it's been continually a lot of pressure in the pricing area. And I would argue that it's not that easy to compare one company against the next. I mean, it never is in anything. I know you guys like life to be that simple for us -- you, and that is - given the lack of information that companies like us give out anymore, it really makes your life difficult. But even though we're in the same marketplace as a lot of these other companies, as you can well expect, everybody kind of has their niches. You know, in the automobile market, BMW has theirs and Lexus has theirs, Chevy has their, and you can't compare auto sales one against the other, because they're selling in different markets. Some of our sales, you know, may not look quite the same, but you have to remember a good chunk of our business is in the mechanical area. A chunk of that is not even in the industrial sector as we know it. Those sales are down and Henry might be able to speak to that to some degree. As well as when you get into the motor area, a greater percentage of our motors are in the more severe duty -

Large capital.

-- large capital kinds of things.

When the oilfield was doing well, we were really doing well. Now, it's kind of slowed down and oil prices, we'll probably see a pickup there again. I could go on and on and on where there's mining and is 0 on. In our generator business, which as you know is a huge amount of business for us, we're making --we're not making generators for mobile homes and houses. We're making generators for telecom and large backup power and in some cases prime power. Our generator business is off, not unlike Caterpillar and Koehler's and other people in the world. When you sort those things out, the fact of the matter is our motor sales are up. We don't describe it that way, and maybe we have to start doing that, if we are going to do a McDonald's against Wendy's comparison.

Henry, you have some specific things.

Mike, if you look at again, as Jim said, the things get very difficult to analyze. When you look at motors only for the fourth quarter over fourth quarter the year before, we are up 2.5%, and that's the number that we don't break out for you. But to look at it that way. If you looked at it even in more depth, large motors going into large capital projects, we have great strength in the motors. We are industry leaders in high efficiency, we are industry leaders in severe duty and exposure-proof, marine duty, under the circumstances et cetera, et cetera, et cetera. Those are off year over year, and as the large capital spending continued to trail the best of the economy. Small motors are up a higher percentage. So we watch the stuff very, very carefully. We're pretty comfortable when we say that we're holding our own in a difficult market. We did see some interesting pricing in the fourth quarter from some competitors, and maybe more interesting than it has been other years.

As Jim said, we typically don't participate in that to that level. Maybe that's not the right thing to do, but we -

It's the course that we have chosen to take.

The other thing is when you look at our electrical group, as Jim said, large generators, if you look at the announcement that people like Caterpillar have made in the last week, it's not hard to see what's happening in that particular arena. Overall, we are comfortable that we are seeing some good results from the efforts that we have had in new products and in market penetration.

And, Mike, I would say one other thing. The other fact is that no matter how we look at it, we're still trying to get our act together. We have assembled the second largest investor motor company in the United States in the last five years, and we were not in motors before. You hear us talk about plant rationalization and so on, where you have other companies who are continuing to truck along, doing what they have always done, and they're good competitors and difficult competitors, but I don't think we're losing to them. Certainly, there's a concern on their part that they my may be losing to us. Those are good companies that are performing well, I don't know what else we can say. We have overanswered the question already.

No. I appreciate the detail immensely and would encourage you guys in the future quarters to give that type of detail either in print or on the call, because there is a lot of --obviously a lot of comparison that is done that is not exact. I appreciate it, maybe I'll push the envelope one step further and maybe Henry can give us elaboration in the markets themselves as to what is acting better. You said the small motors are up. Gas is tough and the power gen business is tough. But are there any specific motors -- or markets on the small motor side that are doing better?

HVAC has held its own all year. We don't participate at the OEM level to any degree in that, but we participate heavily in the aftermarket. That market has held up well. It's up year over year. We have seen some improvement in food processing equipment, things like poultry, packaging. But our high efficiency products have sold well this year, as more people, you know, get used to the fact that there's money to be saved, but, you know, again, even in the high efficiency, a lot of cases, those are larger motors, and so, it's one of the few bright spots, but it's a bright spot in a dim market in that particular case.

(inaudible)

I still didn't hear you.

Material handling, just broadly defined, would you consider that -

Material handling has firmed up a little bit over the last I'm going to say quarter-and-a-half. But it's -- in a year over year comparison, I would say it's pretty flat.

Just a minute on the restructuring. You mentioned that you will be 90% complete in Q2. Step back and tell us where you are in your master plan now in the motor division. And maybe give us a baseball analogy as to what inning you are in. Just some metrics to give us a sense of where you are in the master plan.

That's a good question. I would say from overall standpoint, we have announced the changes. If the market stays where we think it will, by is we're bumping along the bottom and we'll see gradual improvement as the year progresses, we have made the announcements we need to make. We're probably in the eighth inning and we have a little bit more time to get those things completed. In terms of -- I would say the same thing is true in the mechanical side of the which is. We have made the announcement that we feel we need to make. If business conditions go the other way, we would have to relook at that scenario. But we don't expect that at this point.

Presumably long run, any additional capacity is over in Asia as part of your China or Asia strategy?

Well, we are certainly adding capacity there for standard products and in some cases products that we don't make here, have not made here and don't intend to make here, but we think we can sell here. We would hope that as we continue to grow our business here, that we can eat up the capacity for those -- the sales that we might move that way by making the quick delivery custom products here.

Okay. Then could you give us some insight into the steel price issue? It doesn't seem to be as bad as many people feared, but what you have experienced and what you forecasted for 2003.

A year ago, of course, it was a major topic of concern because of the tariffs. As the year progressed, we worked it down to where -- I mean, it's an impact. There's no question. It will be an impact on all motor manufacturers. But, you know, in the scheme of thing, it's not going to be a big deal to us, Mike. I hesitate to put an exact number on it, but you are talking something let's that's less than $1 million in total impact.

That's good news. Okay. Ken, maybe just some specifics on the pensions' equation at your end, if you lowered your assumed rate of return and maybe what the contribution in cash will be this year?

Well, okay. First in terms of the assumptions that you will see us talking about, we have lowered our discount rate down to 7%, from 7.5. Now, you keep in mind in our company, we only have these defined benefit plans pretty much through the original Marathon electric. Okay. Everybody else has defined contribution. In terms of the asset return rate, we have come down from 9 to 8.75. We weren't up at some that I have just seen reported where in fact I won't mention the name, but one company was only up at 9.75, and they took a charge to come down to 9. In terms of cash, there will be no requirement for us to have a cash contribution in 2003 for any of our defined benefit pension plans. Defined contribution, you're putting in every year.

Right.

Does that give you what you were looking for?

That's perfect. Final question, the final question, the forecast for cap-ex, do you have a specific number we should use. You were saying it was going up.

You know our depreciation has been running 22 to 23. I would say that we're going to be hopefully with the kind of year we expect, we hope to approach that.

Okay. Thank you.

Okay. Good. Before we take the next question I want to give Alex an additional piece of information on the first question you had. We were comparing first quarter last year to this year, and I should -- I don't know why I missed it, but it's obvious that you know, we did the stock offering in the first quarter last year, Alex, and that came out at March 12. So, pretty much, we were still at our original 21 million shares. If you relate that to our projection for this quarter, you will find that it isn't really lower earnings, you are going to find that somewhere in that range is pretty much what we made last year, too. So, you know, it's kind of flat as opposed to down, okay?

Okay, Barb.

Next question is from Holden Lewis (ph) from BB&T.

Afternoon. Thank you.

Hi, Holden.

If you could speak more to the inventories, but I guess these are related. In your comment you speak of a renewed optimism that '03 will be the year that you see recovery. That's probably more strong than the dour comments out of most other industrials. I'm curious given the fast turn nature of your business what you base that on and related to that I notice that your inventories are up in Q4. I wonder if that's related to your projections and whether it poses any risk from be a absorption standpoint as we go into Q2, if you have to turn those down?

In terms of the inventory, there's two or three different things that kind of all hit in the perfect storm scenario in the fourth quarter, which is rarely when you saw that happen. One is that the customer shutdowns in December were pretty strong and we made the decision to not necessarily change your line rates during that period of time so, that by itself causes some buildup. Secondly, in preparation for the plant closures that we have announced, we needed to build inventory as a buffer stock. Finally, the dock worker's strike, when it released, we ended up with a bubble of product that came in all in the 11th hour, at least all within December. So, those three things were there. In terms of the impact, we don't think it's going to be a very significant. As you know, the year before we reduced inventory $16 million. I think the inventories were flat for the year overall.

That's correct.

When you look at that in context, if we see the economy improving a little bit, it will not create a big drag. In terms of the business level, you know, one of the things that we relate to is companies like us. You heard your our capital spending plans are up from where they have been in the last couple of years. We expect to drive those hard because there are opportunities for to us create additional productivity, and do things that we need to do. So, we think a lot of companies are like us. They have had a couple of years of pulling back on those thing, and the people we talk to at least are intending to be a little more aggressive in that front this year, and finally, I guess there's always some blind optimism at the end of the year that we're not immune to, but certainly, neither are the economists who are projecting what they expect for the year, either. And those things all seem to be somewhat in concert.

Okay. Could you -- you kind of stealthily made this announcement by finally appointing a president of motor sales and marketing. It seems like that's been a long awaited event and positive event. Can you just sort of comment about filling that spot, and, you know, what Mr. Mase (ph) is going to be doing in sort of -- sort of priority and such?

Yeah. It's a good thing for to us get done. We have had this position open for a gad while, but that really hasn't been a major concern to us because we have had Henry managing it, so we have had the best management we could possibly get on it anywhere with Henry managing it. So, in hiring this new gentleman he was formerly the president of the Essex Wire OEM group for Essex Wire. He knows the motor business. I won't get into all of the details about that. Of course, he's going to spend his time first of all familiarizing himself with the company and our organization and our strategy, and, you know, we're excited about having him on board. He's a powerful individual. I think he has substantially increased our ability to execute against the sales and marketing strategy.

I don't know what you would add to that, Henry?

He just brings a lot of experience and energy, and we think that there's some great synergies that -- as we have more time to focus on the marketing efforts with the motor brands and so on that we can take additional share in the marketplace. And he brings a lot of focus to that position.

Could you just speak to your cap ex a little bit. What is it going to be directed to? Is this kind of like a little catch up spending. Do you have major projects in the works? How do you envision that going?

Yes. All of the above. I mean, by far the biggest share is productivity. We have - obviously, with all of the things that we have always done, we have always put a major, major push on productivity, opportunities, and we have a number of very significant projects that are in this year. We have a couple of expansion projects that are reasonably sizable, divisions that we have consolidated into to provide us with space and room for the future. We have two or three very significant new product introductions that we're planning that will have cap ex attached to them. Then there's always the ongoing maintenance. When you talk about ongoing maintenance or replacement, the good side of that is that we almost never replace a one with a one. It's usually a one-and-a-half in place after one in terms of what it does for us. So, it's a healthy F.I.P., and it's all oriented to the things that we think will grow the business profitably.

What percentage is productivity?

I think 38% is productivity only.

The last thing, back to the pensions question. There was sort of a tick up in your other line and a little bit of a reduction in your equity. I assume that was related to the pensions in the quarter?

That's correct.

There was -- there was a relatively small compared to a lot of company, but still a drop in the equity.

Yeah. Okay. Okay. Thank you.

Thanks.

Next question is from Pat English (ph) from FMI.

Good afternoon.

Hi, Pat.

Henry, I don't know if you want to tackle this. Can you talk about you mentioned that you have a joint -- two joint ventures in china. Could you review the structure of those, the relationships, and talk a little bit about the exactly what's going to be done over there. You mentioned some small motors for the local market. Could you just be more specific, please?

Sure. The first joint venture that we have had since 1995, and that's a joint venture that makes generators, predominantly small generator, but for us, generators is still not the household type. We have -- we have a majority position in that one, and it's been growing very rapidly.

We do make some products for our sale outside of China in terms of all over Southeast Asia. We do bring some product here, but that's a minor product of what we do with the joint venture. Most of the product is sold in China. Shanghai Micromotor, which is the one we just completed, makes small motors that would be three-inch diameter motors up to a 56-frame size. They make an AC and DC motors. They have been a supply to us for a number of years. I don't know the exact number, but I'm going to guess in excess of five to eight years. They have been a supplier to us. So, we know the people there very well. We know their capabilities and their quality. They will be probably 25 to 30% of their business will be coming back this way initially. And that will probably grow over the next five years. The remainder is sold throughout China.

Henry, what's the percentage ownership in Shanghai Micro?

That's 50/50. The parent company there is a company by the name of Jing-Ling (ph). They are a public company on the Shanghai Stock Exchange. Very good company.

Thank you.

The next question is from Michael Caroly (ph) from Barry, Vogel & Associates.

A question about the charge. I know it was 725,000 after tax. Should we just use 35% tax rate and it would be like 1.1 million pretax?

Actually, the number is -- I can give you that. It was 1,150 million, Mike.

Okay. As far as the segment breakdown, how does that allocate between the two different segments?

How do you mean?

Is it all in the mechanical group?

Oh, no, no, no. That one-time charge was all mechanical.

It was all mechanical.

That's correct.

Great. Thank you.

A follow-up question from Alexander Paris from Barrington Associates.

You mentioned the first time in many years in the conference calls that you mentioned a number of new customers in a year. Is that because -- was that a much bigger than usual year?

No. Actually, Alex, it was because we had had that question just recently.

Okay.

By a couple of different people. One of our competitors, I'm not sure who it was, but somebody said that they had had several large number of new customers. It wasn't thing that we ever typically talked about. I mean, frankly, I'm not sure it means a whole lot. You get one new customer that buys one motor from you and you count it as a customer. How meaningful is that?

The definition of a customer, are those primarily customers who came in and bought a product and delivered, or is included in that companies where you have been designed into a product and that product has not hit the market yet

That's a more meaningful question. It's one that we don't readily have the information from. I think it's probably a good thing for to us start tracking more meaningful numbers when this comes to customers. Because just saying that you have got I think -- you actually had something like 1400 customers, new customers this year.

Yes.

I think that's a meaningless number.

Right.

But a real meaningful number are customers where you have designed things in, added meaningful kinds of volumes. You have picked up meaningful contracts.

We can presume that some of the customers are you've added, and you have not shipped anything to them yet

No.

No. These are all people that we have sold $2,000 or more to during the course of this year.

Okay.

But, Alex, it may be there are some undoubtedly some, that it was a one-time project or whatever as opposed to someone who's going to buy the same quantity or more every year.

Can you sense that among your customers there's still a lot of inquiry rates and somebody's --they're just waiting for somebody to kick them to actually place the order? Are there delays of projects that you know they're going to do but they just can't make up their mind because of the uncertainty?

We know of a lot of projects that have been shelved that the people are still working on. But I don't think there's anybody just waiting to be kind of kicked off the edge.

Okay.

No. I don't sense that. These are -- people are just sitting back saying I don't want to do this right now. I mean, it's going to be interesting because if things don't change from what they are economically, there's got to be more spending going on and some of the projects are just going to have to go just like they are with us.

I asked that because companies have said their inquiry rates have been high, but they're just not getting turned into orders as quickly. The lag between the inquiry rate in general and the actual order is longer than usual.

I would say that's true with us.

Yeah.

We haven't spoken to that, but we see' lot of inquiries and we know about a lot of projects, so it gives you this feeling that it just takes some confidence, you know. I mean, right now, who am I to say this, but everybody says the same thing. The only single thing that's slowing everybody down is what's going to happen with the war.

Right.

Just one question. You mentioned your oil related customers. I have talked to customers who were given what oil prices are done, they would have expected a lead indicator for their business like rig count to have turned up a number of months ago, but it still hasn't turned up.

That's right.

And you have -- if that's something that you track, are you -- is it the same thing that you are seeing, just strange, the lag between higher oil prices and the rig count seems to have been dislocated somehow.

Yeah. I think that's a fair statement. We saw this a little bit -- I mean, it took a long time, last time around, before there was enough confidence to really start increasing the rig count. Oil prices cannot spike for a few months and have the volatility that they have had and have people have the confidence.

People have noticed that although crude oil prices have been going up, oil stocks have been weak, and then you see my own feeling is once the war is -- the resolved, oil prices are going to collapse. I saw in the paper today, OPEC is afraid of a second quarter plunge in oil prices. So, my point is that a significant part of your business, and could that be a disappointment for you?

We are already getting the hit.

Right. You already got it.

It's a good chunk of business but fortunately, for us that's one of the nice things about our business. We're touched by a lot of areas, and no one single area just totally kills us. Right now, every area we touch seems to be difficult.

Thanks a lot.

Thank you. Once again, if there are any questions, please press the one at this time. Follow-up question or question from Brad Evans (ph) from High Rock (ph) Capital. Go ahead.

Good afternoon.

Hi, Brad.

Following the restructuring activities across the business, how should we think about incremental margins across the mechanical and electrical side on the operating basis going forward?

I think our -- we won't --don't and won't give specific, but I it think that if you ever make a forward-looking statement I guess we would expect them to go up. Certainly, the consolidation that we're doing with the mechanical group, we indicated we felt that that would pay itself back before the end of this year that we're in now, 2003, and that we didn't really expect to see the savings with any significance until we started moving in and through the second quarter. You know you know, if you take that against the $1.150 that we put into it, you know, you can make calculations. The same thing is true.

You said, you're just going to tell him.

No, no, no,. This is public information that these intelligent people can figure out on their own. Then in the electrical group it's more nebulous than that. We are not taking any charges against earnings for the electrical plant closings because it's part of our original purchase accounting of leasing. When you are -- clearly, people know that there's a substantial number of jobs that are being moved out of the Milwaukee area into Missouri, and upstate Wisconsin and lots of other savings that we're going to get. So, there's some real improvements coming there, and you know, we're constantly improving our logistics, our purchasing of parts, et cetera. Favorable margins in both groups as we move forward.

One other point that we have not made here, maybe as well we should, you know, this write off of the mechanical group, as Ken said, we don't have the same write off in the electrical group. We have all of these things going on. We're making these forecasts recognizing that we're going to create during the first half of the year quite a little bit of expense that's not chargeable anywhere. Because you have inefficiency, you have training costs. You have costs that you cannot write off that are built and baked into this -- at least this first quarter earnings thing that we're giving in, that we wouldn't expect to see reoccur as much as the second quarter and then hopefully not at all in the third quarter.

So, there's actually in my opinion a fair amount of improvement in earnings baked into this first quarter that we have not come out and tried to make a big deal of in terms of the inefficiencies in the write offs and so on. I think the other point that I'm going to make that we probably have not gone a -- done a good job of relating to people. These changes that we're going through in our company are not changes that are being absolutely and totally driven by the economic conditions that we face in the economy today, but probably driven as much by true beliefs that there's been a serious long-term change in the industrial structure of the country, and that we have to position ourselves to deal with that on the longer term. So, this is not run and hide because the economy is bad, and then when the economy picks up, everything will be all right. We're taking a much broader view about how to structure our company to deal with what we think is going to be a whole new economical scene, economic scene in the industrial sector.

Just as a follow on, then, I'm just curious, if we were to hypothesize an incremental dollar of revenues going forward, what's the variable selling and marketing expense associated with the incremental dollars going forward?

In other words, what do the sales and marketing cost on the variable basis run --

Yes, sir.

-- as a percentage of sales.

It's different all around. I suppose if we had a weighted number. I don't think we put that out.

No. We haven't talked about it, but then again, I don't know that necessarily is a real material thing. You know, when you look at commissions and thing, I guess that's the biggest piece of it. I think that to some extent we're probably about in the 4% or 5% range in the commission area overall.

5%.

5%. So you would have that as a variable. Then you have some other selling or anything. Perhaps in the 7% to 8% range. Okay.

So, if we are thinking over time if you get back in excess of a 25% gross margin, then, if we subtract even conservatively 10% for incremental selling expenses, the incremental margins could run in the 15% range. Is that a good litmus test?

I think we'll stop where we are and we'll leave that up to you. You know where our margins are. You know how businesses run generally. Hopefully, Brad that, would be enough to work that out.

I appreciate that. I'm curious. Could you just refresh our memory as to the debt structure at the end of the fiscal year?

Sure. We had a little over $220 million of debt, and probably all but $3 or $4 million of that in our revolver with, you know a group of banks. It's also variable rated. In other words, it changes as LIBOR changes every month, and during the month, and we pay a markup to the banks over that, depending on where our ratios are. So, that's pretty much our debt structure.

Very good. Thank you very much.

You're very welcome.

We have a follow-up question from Michael W. Schneider from Robert W. Baird.

Maybe you can spend another minute on the restructuring and give us a sense if you ballpark the numbers in the efficiency and costs that are not readily identifiable what you believe the drag on the first half is, and I guess what that implies for the stair step in the second half if you are complete by midyear.

You know, I don't think, Mike we'll go there. You know, I see Jim and Henry shaking their heads also. You know, I think we're going to leave it with the way we have. We haven't been more specific than that. I think the information we gave, though, at least in the general trend is meaningful. Sorry we can't do more for you there.

That's okay. Maybe we could do videoconference calls so we can -

If I was a little younger, Mike, I wouldn't be opposed to that.

Final question, Henry, I guess just capacity utilization. Have you identified any numbers as to where you will be pre and post restructuring in terms of capacity utilization?

Well, not -- we haven't identified specific numbers. I think we have been saying that we have been running a little below 70%. In all of these move, very frankly, we're going to still have a lot of capacity. We're keeping the most productive equipment. We're making changes that improve focus of the facilities. We're making changes that improve the flow therefore. And so, from a -- absolute capacity standpoint, we'll still have a lot of flex up, but we'll take out a lot of brick and mortar that is not necessary as owe opposed to taking out equipment and processes and people all at the same time. I'm going to say, it will moves up into the lower 70's. But it's not -- just won't be as big a drag because we have less overhead tailing to it.

Okay. And one final question -

You mean the second final question, right?

Right. Second final question. I apologize. I'll get back in line.

Follow-up question from Holden Lewis. Please go ahead.

From a numbers standpoint. You can break up the payables versus the accrued other as do you on the quarters to finish off the balance sheet. Give a little history, if you could, or perspective, I guess. It seems like the last two years in the fourth quarter, with the mechanical group has held up real. That's particularly the case in the Q4 this year, but you have seen sharp slumps in electrical. I thought that those two should at least have some relationship to one another. I'm curious as to trying to figure out, as you pointed out, the electrical wasn't down very much, but it still looks like an ugly slide. I'm trying to figure out the dynamics that are playing out here.

We didn't say that electrical wasn't down very much, what we said was motors specifically. Motors are a significant portion of the electrical group. You have power generation, marathon special products and leasing in Canada and so on in there as well. Having said that, the other thing that I would point out to you so that including this year, the fourth quarter has fewer manufacturing days in it for the electrical group than it does for the mechanical group just because of the way the quarter breaks fell. And holidays. Starting this coming year, we will have everybody on the same system, and I think that will be -- create less of the fourth quarter slide, so to speak that looks apparent in the electrical group, but probably isn't really as real as it appears just because of the days.

Okay. In the -- even if you add the 1.5 million in the mechanical group, it looks like the operating margin is still well below what you have seen at any point in the past. It looks like it's certainly lower than the past few years.

One of the main reasons for that this quarter is that with the closing of our Belva (ph) drive facility there were charges under absorption, as we started to move things out that you are not allowed to charge against a one-time charge, any training or you know, people coming in, and there's redundancy costs, things like that. So, the margin was suffering some because of that sort of thing this quarter. Plus, you know, sales were soft. While it may not have fallen sequentially as much, those things played on the margin. We should see those margins in the mechanical group move back up in the first quarter.

Like the charge you that you incurred there is stuff that you are not calling the charges that were the same one-time type events.

Basically that's correct.

Did you have the payables number?

Yeah. It's basically 50/50 for the corporation. Okay. You know, I -- the exact number of payables, including accrued taxes was like 33.3, then the current liabilities or the other current stuff was around a little under 39. Okay?

Okay. Thanks.

Follow-up question from Brad Evans from High Rock. Go ahead.

Have you given a prognostication for effective tax rate for fiscal '03 at this point?

Well, no, we haven't. But I will be happy to. We thought -- we knew it wasn't going to be down around 35. I guess we think it will probably be back to the normal one, around 38% as we go through the years.

Could you help us understand what component of the current tax bill will be deferred going forward. If not mistaken, you have been deferring a good portion of the tax bill, is that correct?

Yes. If you look at historically, the deferred income taxes and non-current liability, they have been going up in the neighborhood of 10% a year. Okay?

I'm sorry, just I didn't follow on with the other question in terms of the spread to liable on your bank loan at this point.

Currently through the end of -- currently today, it's still at 100 basis points.

Thanks.

Follow-up question from Michael Schneider, please go ahead.

Mike, we knew you would be coming back. I'm thinking that maybe we can wind down with this. Okay?

Final question is charges. The 725 in the quarter, the cash, non-cash split, Ken?

Well, I'm thinking that most -- you know, the cash will be spent over a period of time because as you close the plant, you get moth ball costs. Obviously some of that is not being spent. I would say about through the fourth quarter, we used up half of it, and that would have all been cash.

That's all severance?

It's different things. The biggest cost at this point, there was some severance, but it was literally the cost of moving everything out of the facility, the breaking it apart, moving it all where you want to put it and rerigging and setting it up again. That's where the biggest costs come from. Okay?

Okay. Thank you.

Okay, Barb. Is the list clean?

No one in queue at this time.

Okay. Well, then we'll say thank you to everyone for being with us, and I guess we did a lot of Q & A today. I hope it helped you.

Good. We look forward to reporting a good first quarter, and we thank you all for joining us. Good-bye.

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