Regal Rexnord Corp (RRX) 2003 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Regal-Beloit second-quarter earnings conference. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for questions. Instructions will be given at that time. (CALLER INSTRUCTIONS).

I would now like to turn the conference over to our host, Chief Financial Officer Ken Kaplan.

Good morning, everyone. Welcome to our second-quarter conference call for Regal-Beloit. With me today again are James Packard, our Chairman and CEO, and Henry Knueppel, our President and Chief Operating Officer. If you have not had an opportunity to read the release, it is up on our Website and has been there since about 8.30 this morning. Now, before we have our question and answer session, we're going to make a few preliminary comments, but first I would like to ask Kathy, would you please provide the instructions for asking questions?

(CALLER INSTRUCTIONS).

Okay, thank you, Kathy. Before I briefly comment on our financial results, I would like to ask you all to keep in mind that, with the exception of historical facts, other statements we may make during the conference call may be forward-looking statements. Investors are directed to the Company's filings with the SEC.

Overall, we feel pretty good about our second-quarter results and the progress we made. Our $6.5 million of net income improved 7 percent from the first quarter, and at 26 cents per share, was 2 cents higher than the 24 cents EPS the previous quarter. Our operating margin and gross profit margin both increased in the second quarter -- operating margins of 7.8 percent from 7.3 percent, and gross profit margins of 24.2 percent from 23.6 percent. While we would have certainly preferred to see our sales increase more than the 1 percent they did, we were pleased to have some improvement in margins, as we had expected. As we talked about in our April conference call, we needed to achieve some reductions in inventories, and we were able to generate $4 million of cash flow in the quarter from inventory reductions. We expect to continue reducing inventories in the second half of this year. Capital spending increased to $5.7 million this past quarter, and actually exceeded depreciation of 5.4 million for the first time in several years. With about $10 million of capital spending year to date, we are pretty much on plan for the year. At the end of June, our debt was at $219 million, $3.7 million down from March 31st. We expect our debt reduction -- the pace of it -- to increase in the second half of the year, reducing our leverage ratio and debt-to-EBITDA ratios each quarter.

One more comment on margins. We said almost every conference call that the pace at which our plant consolidation and other productivity improvement programs improve our margins will be impacted by the rate at which our revenues increase, and we saw this in the second quarter. For example, because sales have been relatively flat, to achieve the appropriate inventory reductions, we've had to reduce production levels. This impacted the Electrical Group in particular, in their margins, in the second quarter, and offset benefits from our plant consolidation program. Now, I'll turn it over to Henry, who has some comments.

Thanks, Ken. I'm going to speak just briefly about some of the markets in the quarter and what we saw, and then a little bit about our cost reduction efforts. From a macro point of view, the second quarter was not a great quarter. I think last quarter, when we talked with you, we said that we were concerned about the impact of the war. Certainly, as the war started, we saw a backwards step in the marketplace in general, and unfortunately, or disappointingly, we never saw it step back up after the war was over. So, from a true market perspective, it was a soft quarter. We saw, in general, improvement in our power generation business during the quarter, generally speaking, in smaller generators and controls. And at the end of the quarter, we did see us a spurt in generators for the rebuilding of Iraq. And we expect a little bit more activity on that in this coming quarter. Other improvements included the distributor business that we do in bulk groups, and interestingly enough, we don't believe that there was any inventory building, but the rate of activity did pick up. We saw improvement in pumps and blowers. We saw improvement in valves for flow control in Europe, and some improvement in the material handling business. That was offset by the machine-tool business, which slowed, particularly the marine business, which was very slow during the quarter, and continued slowness in agriculture, pulp and paper and food machinery.

From a mix standpoint, we saw growth; the growth that we did see in markets was, generally speaking, for smaller motors, smaller gear drives and smaller generators. And that's typically a mixed blessing, I guess. The good news is that we see growth in the smaller end of our product range, typically, in advance of a general market improvement. So hopefully, that portends better things to come. The negative side of seeing that growth is that it pressures our margins because of the mix, and that has also been another difficult quarter from a market-price-pressure standpoint in the marketplace. The good side of what we have to tell you is that our profit improvement initiatives are working and working well. We finished all of the moves in the first quarter, as you know, in the Mechanical Group, and we began to see some results from that in the second quarter. It would have been much stronger, of course, in a stronger market. It was a very busy quarter in the Electrical Group, where we were in full bloom with all of our consolidation efforts. Those efforts will finish in the third quarter, and we expect to see strong improvements at the end of the quarter and into the fourth quarter.

By far, the thing that gives me the most pleasure to talk with you about is the impact of our new products and getting new customers. I think the difference between us reporting to you a general market decline of four, fix or six percent, as we think of the case in the market and being able to report slightly up revenues, is new products and new customers. New products included things such as our new shaft mount product lines, our patented torque cube at Hub City, high-efficiency motors, high-efficiency gear drives, marine duty motors and so on that we have been talking about for a couple of quarters. But those products have taken on a life of their own, and they're making a very significant difference in our business.

To conclude my remarks, again, I would say that the restructuring that we are doing is beginning to show an impact. Obviously, in a little stronger economy, it is going to show much stronger. Our global sourcing efforts are moving along as we had anticipated. We would expect them to gather steam in the second half of this year, as our new joint venture is now coming up to speed, and we are working on several other opportunities. Our new products and new customer base are certainly an important part of what we are all about this year, and hopefully, with a little bit of improvement in the industrial economy, we're going to see a very good second half.

With that, I will turn it over to Jim.

Thank you, Henry. This is Jim Packard. I'm going to probably have some closing comments, but at this point, what I would like to do is open it up for questions so we can get at the specific points that you might have. So we are ready to go on to questions.

Alexander Paris, Barrington Research.

I just want to get a feeling of the quarter. You mentioned a pickup at the end of the quarter in generators for Iraq. The pattern overall in the quarter for revenues and earnings -- were they improving each month sequentially?

No. May was actually a pretty soft month, and June started off soft and improved a little bit toward the end. April was down from March. I think that was when we were full bloom (ph) in the war.

What about the orders? Do you see a difference? Are the orders picking up?

Again, we saw a pickup in the small end of the business -- the smaller motors, smaller generators. We have not seen that in the larger motors or larger generators or large gear drive projects yet.

Overall orders -- were they trending higher, or pretty much the same all through the quarter?

I think they were flat for the quarter -- quite a mixed bag, I guess, within. But they were overall flat for the quarter.

The question, I think, Alex, is that we have -- did see any trend as we moved through the quarter?

Right.

April was weak, as Henry said; and may was, again, a difficult month. I think we did see a pickup in June, and that seems to be about level, at this point. It hasn't declined, which is kind of good news, because what we have experienced now for a number of quarters has been these little jump-ups in orders and then a big reduction in the next two weeks and then a jump-up and a reduction. And right now, it is kind of just holding steady. Now, whether that materializes into something consistent is yet to be seen. In my closing comments, Alex, I was going to say that I am concerned, on the one hand, July is traditionally -- and August -- have been vacation months, and the factory shutdowns, and there has been weakness. On the other hand, we are halfway through July, and if we look at August, I'm not sure it's point to make as much difference this year, because I'm not sure there are that many factories to shut down. There has already been such a reduction in workforce and workloads and so on that we may be seeing a more consistent third quarter then we have previously.

My question -- or my problem -- is I see a lot of these economic numbers -- the regional surveys by the Fed on manufacturing, the purchasing managers -- they are all -- May picked up from April, June picked up. The early -- the ones that have reported for early July are up. Durable orders will come out this week for June, and they are generally expected to be up as much as 1.5 percent. It's hard to see why this isn't translating into sequential improvement throughout the quarter for your business. What's really weak in your business, in terms of the end markets?

Well, as I mentioned, some of the weak areas include pulp and paper and marine. Ag is still pretty weak, machine tools, construction equipment. Oil and gas has picked up a little bit, but it's very minor so far.

And they are affecting both of your divisions?

Those items were probably more heavily affected by mechanical. The Electrical Group -- it was a little bit different picture, a little bit more positive.

Well, yes, except oil and gas was big for the electrical and food machinery. We just are not seeing big strength across the board. It's very spotty, still.

Just a numbers question. You had capital spending of 5.7 and depreciation of 5.4. Do you have handy the year-ago numbers for those?

Year ago?

Yes, for the quarter.

Let me see if I have them. No, I do not have them handy.

Michael Schneider, Robert W. Baird.

Starting on the Mechanical Group, first of all congratulations -- it looks like a nice sequential jump in margins, and at least by my model, the best number you're had in nine quarters, so we're starting to see the benefits. I guess, Henry, maybe you could comment on are there any expenses that lingered into the second quarter, or do you consider this kind of a clean cost quarter after all the restructuring?

No, there are some lingering things. They weren't real significant; we finished most of the physical moves early in the first quarter, and we still have ramp-up during the first quarter, and some lingering into the second quarter, but not big amounts. I'd say half of the quarter was impacted and half of it was not.

Are you still overstaffed in the sense that there are still some production inefficiencies that have not been worked out in that group as a result of the facility moves?

Mike, you are talking about Mechanical Group?

Yes.

We are still working our way back through -- when you make a plant move, you have got a lot of things you run for the first time a few months later because you didn't need them right away, so there is some of that. But at this point, as we speak today, it's not a significant issue.

And then, looking forward now, obviously the market is depressed. When you look at what's left after this restructuring, do you think you've done the moves that you need to do for the intermediate term? Or do you move into another phase for the Mechanical Group?

I think there are some product line things that we are probably going to consider. But the big moves are complete, at this point. There are a few more things that are small by nature that might be improvements for us.

And, again, looking at what you have left and where everything sits, $45 to $46 million of quarterly revenue right now, what do you believe your capacity is, so we can get a sense of where margins can go in that business?

I think in the Mechanical Group, we are probably not even at 70 percent. We are probably in that vicinity.

We probably still have the same capacity in the Mechanical Group today that we had at our high point, even with these consolidations. Because one of the things that -- while these consolidations are done, two of these facilities are still underway with -- I think it's two -- I know it's two -- with construction, where we are adding buildings on and space on. So we have still got, internally, some moving to do; but we haven't changed the capacity. We haven't reduced the capacity. We have produced a lot of floor space and overhead.

This may be a nuance, but if you look at the segments versus each other, we have seen at least some modest hope in the electrical revenue with some sequential increases now for a couple of quarters, probably reflecting the macro data that I think Alex was referring to. But on the mechanical side, we have still seen at least minor deteriorations or flat for the same time period. Do you guys sense any divergence in the businesses, or any one particular market that might explain it? Or, again, is the difference maybe too insignificant to draw anything from?

It's probably two pieces that are different. One is specifically marine is very soft, and this should have been in the second quarter and third quarter should be good quarters for marine, and it's very soft this year. And I think that's probably something that you will see and other people report on the marine.

The other thing that you kind of see between these two is that the replacement market for motors -- there's a huge installed base of motors. Motors don't last as long as gear drives and application, so in down times, I think motors are never going to be as volatile as gear drives. So there is certainly an element of it that's that. So because of the diversity of our Mechanical Group and the kinds of products, there are a lot of little bits and pieces, and they just happen to all be aligned the wrong way at the moment. I don't think there's anything that's big that's lurking in the future to hold it down more than the electrical.

A final question -- I traveled with you guys earlier in the quarter and learned a lot about your China strategy. Can you just give us some more color on what the next moves or likely alliances, joint ventures would be as your roll out this strategy?

Not much has changed for us. We still have a strong focus. We actually have done some additional reorganization and added some senior management to our sourcing strategy, which is not just focused on China. But essentially, right now, that's where we're working. We still feel like that we need to have a greater presence in terms of manufacturing in China, as opposed to just sourcing there. And we still are pursuing additional joint ventures, both that will service the mechanical business and the electrical business. So the SARS thing kind of slowed down some of those activities, but we are back at it again. Our people have been there now in the last quarter, and we are moving along with what I hope will be some additional joint venture activities, and/or even possibly start-up activities in China. So we still feel strongly about the need to be able to produce products in places other than the United States and in addition to the United States. And I think the only other thing that I would add to that is that we have put a pretty, I think, sound plan in place in China, and we are now starting to execute with reference to selling our products -- not only the products we produce in this country, but the products that we produce in China with our brand-names on it into the China market, because our customers who might be having their products produced over there will feel better, I think, about having an American-branded motor or gearbox on their product when it comes back to this country. So we still feel that's a key important thing for us to be focused on.

Holden Lewis, BB&T.

I just wanted to get a sense of how much you have thought about a couple of subjects. First, on the automotives side, I you have commented -- concerns about shutdowns and all. But I guess my sense is that shutdowns in most industries are probably more severe last year than they are likely to be this year, with the exception of automotive, which might go the other way. So I'm curious if you might just kind of comment on what your automotive exposure is, whether that's something that you are seeing and are concerned about. An then, secondly, companies have been out there, a couple of distributors -- Fasten-all (ph), Granger (ph), in particular have recently begun to wind down kind of an inventory infusion program, and they have been buying a lot of product and getting more into the stores. And that is starting to wind down here, and I'm curious the extent to which you are concerned that their spend may have been greater of late, and maybe softer over the next couple of quarters from a comparative standpoint.

Well, let me address the second issue first. First of all, I don't believe -- and I would actually be interested to hear what Henry's comments are on this. There's not a lot of inventory in the system anywhere. And most of the things that you would find Motion (ph) or Granger or some of these people -- not so much Motion, but especially people like Granger and Fasten-all -- the kinds of things they put inventory dollars in are not the kind of things that we produce, other than our cutting tools. And I don't think they have been overly aggressive in that area. But if you look at where most of our products go, there is not a lot of inventory out there.

Now, moving over to the auto, we would like to think of ourselves as not at all affected by the automobile people. We don't sell directly to them on anything, nothing that we produce goes into cars other than a few electric motors, and that's never been a big focus for us, other than the R&D side of that. So, when the auto factories shut down, the good side for us is a lot of them retool, repair, refixture and so on. So we have actually seen some pickup in some of these factories that have shut down; they are putting in new lines, buying motors and gearboxes and so on. It's not huge, but it's more of a plus than it is a minus. And when they pick back up again, of course, that business goes away. As I said, it's not huge. But the automobile business affects our business, but it's a very distant, slow effect; it's not an immediate kind of thing. I don't know if that answers your questions or not.

I guess I characterize that as you think that the benefits to be had by shorter shutdowns than you saw last year in the business you do address would likely be greater than the indirect negative of automotives shutdowns being longer?

That's correct.

On the electrical business -- on the mechanical, first off, if you guys refresh my memory, I think in Q1, those inefficiencies -- those amounted to somewhere between 400,000 and 800,000 sort of one-time inefficiencies that were reversed this quarter?

No. We didn't give, in my recollection, specifics on that. What we were still doing, obviously, in the first quarter -- we closed and moved in the fourth quarter, and then we were still finishing up the move in the first quarter. Obviously, we had the inefficiencies associated with startup. But because it wasn't -- we were going into facilities that had experience, generally, with making what we were moving in, at least that type of product. We came down the learning curve more rapidly than maybe some other companies do when they make those moves. So the second quarter started to see those benefits. Now, the only thing we have said publicly, and we will reiterate that, is we said beginning in the second quarter, we felt that we would repay the 1.25 million charge we took in the first quarter before the end of this year on the mechanical moves. So maybe that's where you got some of your figuring from, but we didn't specifically address that.

And then on the electrical side, can you comment as to -- first, has the payout been pushed back from Q3/Q4, or was the payback of these initiatives always Q4? And then secondly, what kind of inefficiencies are we looking at from these physical moves that hit electrical in Q2, if any?

I think, in terms of the -- we would expect to start seeing some of the payback, so to speak, in Q3 and certainly much stronger in Q4. And I don't think that's different than what we have said all along. The second quarter was certainly the peak of activity in the Electrical Group. I don't think we said how much inefficiency there would be involved in that, specifically in the Electrical Group, Holden.

The other thing to keep in mind was the thing I made in my opening comments. With sales being relatively flat, it's muting what gets down to the bottom line. Obviously, if sales were a little stronger, obviously, our inventories would reduce better; we could up production, and then you'd see a lot more margin improvement than you can when sales are flat.

Of course, you'd see that with everybody. I think the difference with us, as we look at our margins, specifically in the Electrical Group -- you are going to find that probably they're running as good as any margins of people in the electric motor business are, right now. And we are still trying to dial it in.

Sequentially, you had about a 30 basis point decline in your operating margin for electrical. I am just trying to get a sense of, if you strip out the inefficiencies that inevitably were in there, was that number up? Or did the production cuts result in that number being down regardless, almost?

I guess it depends which way. If you looked at the production cuts alone, and you took out the 4 million inventory, that would probably explain the 0.3 percent drop that we saw in the margin from the first to the second quarter. There's no doubt that the inefficiencies associated with where we have moved are the much bigger impact, and when those efficiencies get eliminated, then a production level change to reduce inventory would not show down.

And then, this last thing, you made some comments about wanting to scale back inventories some more. Is that coming mostly out of electrical? Is it going to result in a further sort of reduction in utilization which impacts the margins going forward? Can you give a sense of what level of inventories you want to get back to?

Yes. It's kind of split pretty evenly between mechanical and electrical. We're not talking about big numbers; I would say somewhere in the neighborhood of probably $5 to $8 million of additional reduction by the end of the year. And obviously, it can move up or down, depending on how sales move. But no; I don't think you would see significant impacts any more than what we just saw. And obviously, with our ability to start improving the operation side on the Electrical Group as we complete all of our move work and we start coming down the learning curve, I don't think you should see any further reductions in margins.

But wouldn't you have to see some reduction in the overall utilization to get there, absent any kind of market pickup? Aren't we talking about a lower utilization of those plants to get there, still?

You still will have some of that. If you don't have any increase in sales, you would still have the same effect.

Well, except for one thing here. When you talk about lower utilization, obviously the plant that we are moving out of -- that was covered by purchase accounting. So, if you have, for instance, costs of continuing to pay utilities and things like that in a vacant facility, that stuff isn't going to impact the P&L; it goes against the reserves, from the time we acquire the company. You remember?

Richard Rossi (ph), Morgan Joseph.

One thing -- you've mentioned and we have talked about here on the call the absence of, really, an inventory fill in the field. I am just wondering, with certainly a possibility of a slower-growing economy and a sloppier recovery than historically we are accustomed to, whether an inventory buildup may not be in the cards going forward? Any thoughts on that?

Certainly, it would be a long, debatable item, not only in these quarters but elsewhere. But my personal opinion is that for some time -- I don't know what that period of time is, but much longer than we might normally think -- I think there is going to be a reluctance to have inventory. And that's not new; that's actually gone on even before we saw these kind of slow-downs. Distributors are less inclined to be stockers, and factories are less inclined to have inventory. And so the real performance plan is going to be to people who can provide the product, carry the inventory or have the systems, whether it's logistics, which is what we focused on because our belief is, my belief is, that the company that can get the product to the customer the quickest is still going to, in this business, retrieve a lot of orders, and eventually can affect market share. You don't win and lose market share on one order or two, but in the long haul you do. So I am not expecting inventories to increase like we might have traditionally thought that they will or would. Certainly, the Motions, the ITs (ph) and the Grangers and so on will put a little more inventory in busier times than they do in slow times, but I don't think they will go back to what they have been accustomed to having. So a long answer, but I hope that answers what your --

Yes. In terms of competitors, one thing that I noticed we hardly ever see, although we always hope for it, in a sense, is that in these periods of economic slowness or problems in economy that there is a shakeout, and you get a contraction in the industry capacity. That has gone on in other ways, in consolidations, et cetera. But any signs out there that some of the players are possibly going to move away from the market?

I guess it's still a rumor, but there seems to be pretty solid evidence that GE, as an example, is interested in getting out of their motor business, and doing some consolidation with some other companies. That's a big one; they are one of the big players in the sector that we are in. There have not been -- there have been some other, smaller companies. We have seen acquisitions. Right now -- there's not a lot right now. I think those that would like to get out of this business really would prefer to have the car a little better waxed and look a little cleaner than it does right now before they try to merge it or sell it. And that's very difficult to do for some of these companies.

On the margin side, really related to costs, was there much of a difference between this quarter and last quarter, in terms of pension, health-care costs, energy costs, things that were a factor over the last couple of quarters?

Well, yes. Not in pension or some of these others, but obviously, you still have the pressures like on workers' comp insurance was a little heavier. But we did have some benefits in our health insurance costs. While they are up some over last year, they are not up nearly as much as we had kind of put into our planning and everything. And the basis for that is that we have had a few less large claims this year. You know, that can turn any time. But we also changed our deductible programs and things like that, which has allowed us to reduce the rate at which these costs are going up. And that's a big positive.

Yes; Healthcare was -- I think the emphasis there is that it's higher than it was last year. We just slowed down growth of it. But we are seeing -- in costs -- your question about costs -- we are seeing costs increasing -- continue to take place in all the utilities; of course, everybody is. The insurance, outside health insurance, liability, you name it -- unemployment insurance, across the board, all those costs continue to grow up. So we're still getting a lot of indirect expenses, and we can't avoid the cost increases. We are having to offset those with productivity and so on.

And productivity was good. Our performance variances were improved over the first quarter and the second quarter, in both groups.

And when we get a little volume that will even accelerate.

Absolutely.

Bob Shanowski (ph), CIBC.

Ken, if you can clarify something for us. You bought in the debt during the quarter, but your interest expense actually picked up sequentially, even with more cash on the balance sheet sequentially. Can you just comment?

The reason for that is that we had a 50 basis point increase, because of the way we are matrix-priced (ph). As of the end of last year, our funded-debt-to-EBITDA ratio moved up to a little over 3. And when it hit over 3, on March 1st, we started paying 50 basis points more. Now, obviously, eventually we will get that back down below 3 and then we will go below the -- we will get the 50 basis points back. So that's the reason it was higher in the second quarter.

Does that become a 2003 event, do you think, to get it back down?

It's going to stay there through the end of the year. And in fact, with where we were at the end of the second quarter, we are going to get another 25 basis point jump on August 15th because of the next price point, but of course the Fed dropped 25, so that should offset. So the 50 should be there probably for the balance of the year.

And just a couple for Henry or Jim, if you would. The comments on the end markets that you have stated mirror many of what the other industrials have said, as well. But as you talk to your customers, are you getting any sense of a change, either for the balance of this year or more likely for '04, where customers have actually held back some expenditures to date?

What I have seen, the sense, -- and Henry, you speak to a different group of people than I do on this, so you can comment, as well. This is all good news to me. People are trying to talk themselves into more, and that's what we need. And they are saying a lot more about the fourth quarter looks like we could see an uptick. There's a little talk about the fourth quarter being better and they are doing some planning in that regard. I think there is a little more activity in terms of quoting and capital goods and even some of the machine-tool people, so there's a general hoping kind of attitude. We have had so many false starts that everybody is very, very cautious about really putting it down on paper and saying it's going to happen. It's the general attitude that things are getting better, they are going to get better; in the fourth quarter, we will probably see some industrial effects. You know in our forecast that we gave for the next quarter, we are basically not forecasting any improvement in our earnings over the second quarter.

Right, and that's relatively consistent with what we're hearing. But does this feel any different that it has, as you think about last year and the year before, when there was hope for that second half and fourth quarter from some of your customers?

It does to me, personally.

Is it a sense now that they just have to start to spend on some of this equipment because they haven't done it for so long?

I think there is certainly a piece of that. In our own company, if you take a look at our capital spending, because of a couple of years of slowing down the capital spending, we are spending at a faster pace this year, because we have a pent-up demand, so to speak, of projects that have great paybacks. It's not because we need it for capacity, but because the opportunities are there to take costs out and do it in a very effective way. And I think a lot of companies are starting to look at that. Certainly, some of the tax changes are going to encourage that, where it was on the margin, so to speak. That hopefully will push people over. So I agree with Jim; what we see is people now saying that the stage is set better than it's been set in a long time. And I think probably more of a feeling that it is going to start to improve.

If I could, just one more for Jim. Jim, you were just talking about the lack of build of inventories from your customers. I just want to get one more note from you on that. Do you also get a sense that one of the key differences, cycle to cycle, is going to be that -- you know, in the early 90's, everybody talked about just-in-time, but you really still had just-in-case inventories, whereas maybe the chain is much better today?

Well, I think the chain is far more efficient. It had happened because of a whole series of things -- productivity improvements that industries had really shortened the delivery time, the out-the-door time. Some of the e-commerce things that have taken place -- a lot more knowledgeable about what they need and don't need and the ability to get the orders executed quicker. Yes, there's a difference.

Walt Litpack (ph), McDonald Investments.

I don't know if you would give us the debt-to-capital goal for year end, Ken?

The debt-to-capital goal?

You are going to pay down some debt?

I would say that we expect to be down in the below 3, probably in the -- I'm going to give you a number. It's probably a little more of a range, but say around 2.75. We think we will be able to reduce that pretty well in the second half, and that's even predicated on EBITDA not being what we all would like it to be. So I think you are going to see the ratios come down nicely over the next six months.

And just from your -- the verbage about revenue and seasonal weakness, it sounds like third quarter could be seasonally weak, but it sounds like, if it's down, it might be down 1 million to 5 million, like it has over the last couple of quarters?

As Jim said, the third quarter is what the third quarter is, and there are going to be normal shutdowns, but probably less volatile than it was last year.

And I think you mentioned that product pricing was an issue. Were you talking about the Mechanical Group, Electrical or both? And can you quantify about how much pricing is down?

I'm not going to try to quantify it specifically, but we see it in both groups. It's certainly more prevalent -- the area that we see it the most in would be the Electrical Group, but I don't think in the manufacturing business there is any business that isn't price-pressured in a slow market. And so that is just continuing the process.

Is that product pricing in the Electrical -- is that coming from international competitors or U.S. competitors?

You get it from both. We get it probably more in the motor side of the business -- one company in particular, out of Brazil. And that's just a very difficult situation. In this country, actually, I think most of the competitors have kind of settled down and realize you don't win the war by getting more orders one quarter and less the next. So there's a little less there. And then, of course, you have the effects of the products coming in from China in particular, even -- you know, we are doing that ourselves. So we are running up against competition there, as well. So it's kind of coming from every place.

And then the offset to that, you mentioned, was the new products. And you talked about the market being down 4 to 5 percent, but it was flat revenue. Are you talking about incremental revenue from new products of 5 to 10 million?

Well, I didn't add it up that way, Walt. But we had a good quarter from a generator, power generation standpoint. So I would have to subtract that out.

(inaudible)

The difference between us being where a lot of other people have early (ph) reported and where we are is a little bit in the power generation area and a lot in new products and new customers.

Holden Lewis.

First, was there any currency effect at all that's material?

No.

And then secondly, one of your peers that has reported kind of commented that they were doing a little bit more in the way of promotion and things like that to sell some of their higher-efficiency motors and things of that nature. When you do comment about the pricing, is there anything new out there? Is it getting more promotional rather than less that we should be aware of, that maybe this quarter you didn't really see much, but there might be some building pricing issues coming up?

No, I don't sense that there is a building pressure on pricing, but there has been very strong pressure now for two years, and it certainly has not let off.

(CALLER INSTRUCTIONS). We have no further questions at this time.

I'll just make a couple of quick comments here. Not much different than I think we have been in other quarters -- I'm still pretty enthusiastic about the things we have going on in our company, the rationalizations that we are doing. Our logistics program, which is saving us money, and we're still a long ways from being where we need to be on that. Our sourcing initiative continues to be a major thrust for us, and I am just really pleased with some of the things I'm hearing and some of the things starting to materialize in that regard. All around the company, I think there has been strong recognition that it's a tougher battle out there, we have got to be a different group of people and we have to have a different set of strategies then we operated under a few years ago. And our people seem to be up to the challenge, and I continue to be optimistic that we will -- once accomplished, these things return to the high-performance company that we have always been measured by. And so one more quarter to get through here that I would consider difficult, and we will see how things go in the last half of the year. But I think we are going to see some improvement. In this day and age, any kind of improvement seems to be exciting.

So with that, we appreciate everybody calling in. We look forward to seeing you and talking with you in the next meeting, if not before. And thank you, and we're going to sign off.

Kathy, you were going to say something about -- or have you already, and I missed at -- about the replays?

Ladies and gentlemen, this conference will be available for replay after 1.30 PM today through midnight Friday, July 25th. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code 690908. That does conclude our conference for today. Thank you for your participation, and for using AT&T executive teleconference. You may now disconnect.

(CONFERENCE CALL CONCLUDED)