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Raven Industries Inc. (NASDAQ:RAVN)

F3Q09 Earnings Call

November 20, 2008 3:00 pm ET

Executives

Leslie Loyet – Financial Relations Board for Raven Industries

Ronald M. Moquist – President, Chief Executive Officer, Director

Daniel A. Rykhus – Executive Vice President, General Manager, Flow Controls Division

Thomas Iacarella – Chief Financial Officer, Vice President, Treasurer, Secretary

Analysts

Michael Cos – Piper Jaffray

Jeff Evanson – Dougherty & Company LLC

[John Rankin] – [Barenco Management]

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Raven Industries Inc. third quarter 2009 earnings conference call. (Operator Instruction) At this time I would like to turn the call over to Ms. Leslie Loyet of the Financial Relations Board. Please go ahead.

Leslie Loyet

Thank you. I'd like to thank everyone for joining us today. Yesterday, we sent out a press release outlining the results for the third quarter of fiscal 2009. If anyone has not received the release, please either call Hon Hoy at 312-640-6688, and she will send you a copy. Or visit Raven's website at www.ravenind.com to retrieve a copy.

Joining us today from management of Raven Industries, we have Ron Moquist, President and Chief Executive Officer, Tom Iacarella, Vice President, Chief Financial Officer, and Dan Rykhus, EVP and Flow Controls Division Manager.

Management will provide an overview of the quarter, and then we'll open the call up to your questions. But before we begin, I'd like to remind participants of the information contained in this call is currently only as of date of this call, November 20, 2008.

The company assumes no obligation to update any statements, including forward-looking statements made during this call. Statements made by the company that are not historical facts, are forward-looking statements that are subject to the Safe Harbor Disclaimer in yesterday's press release. With that said, I'd like to turn the call over to Ron. Please go ahead.

Ronald M. Moquist

Okay thanks, Leslie, and hello again, everybody and thank you for joining our third quarter conference call. Well a lot has happened since the last time we talked in August, and many of the recession's negative effects have really just started surfacing in the last 45 days or so. Before that it was all about the financial markets, but now we're seeing it hit the customer and the consumer and the industrial markets. And, so it's really gone from Wall Street to Main Street.

And what I'll do now is I'm going to start out as I always do, highlighting the quarter just completed. And then we'll talk about the fourth quarter, and how we see the recession affected our various market segments, and what we're doing about it at Raven.

Our third quarter sales were up 22% from last year's third quarter and net income was up 13%. That's a record in our 31st consecutive quarter of year-over-year record earnings growth. These numbers were somewhat better than what I projected during our second quarter call when I said that I thought we would have single digit percentage earnings growth.

And again that's mainly because of the better-than-expected performance in our Flow Controls Division. Results in our other three operations were pretty much where – what we expected them to be. Our Engineered Films Division had a strong sales quarter, but again, operating income fell short of last year's total.

Sales for the third quarter were up 23% but operating income was down 7%. Most of the revenue growth was because of volume increases, but some came from price increases. And a good way to evaluate real growth is to compare the amount of plastic resin that was processed during the quarter and on that basis, poundage was up 14%. That's not a perfect metric because of changes in product mix, but it's probably the best one that we have.

Unfortunately our price increases couldn't keep up with increases in plastic raw materials. And to give you an idea of how volatile the market is for plastic resins, last quarter we were buying plastics for $0.90 a pound – that's about where it peaked out, maybe a penny or two higher than that – versus $0.70 a year ago. That same plastic today can be bought for around $0.40 a pound.

We do very little hedging of raw materials, so we're not caught in an unfavorable hedge position. But we probably have two to three weeks worth of expensive plastic resin to work off before we get to the cheaper resin, but if we can hold some of our price increases, margins should start to improve, but again, that's a big if.

I probably said this before in the last two or three conference calls, but we're still excited, feel good about our new multi-layered extrusion capability. Without that capability and capacity we'd have almost no opportunity for growth, although we certainly haven't had the level of growth we've projected with those new products.

Especially encouraging are the vapor and gas barrier film products for radon or methyl bromide barriers that are used to sterilize the soil in strawberry fields. And these are the types of products that give us some growth potential.

Our major markets in films are energy. These are pond liners typically for oil field drilling, agriculture for grain covers, industrial packaging and construction for various moisture and gas barriers. Year-to-date, energy is about 40% of the sales total. Agriculture is 9%. Industrial is 11%, and construction is 35%.

Well, how will these markets do as the recession deepens? Energy is the wild card because less drilling will be done if oil stays below $60 a barrel because most of the materials we sell to drillers are in marginal fields which have higher recovery costs.

We've already seen sales to oil fields drop in the last 30 days. I can assure you wouldn't – oil was up to $120 a barrel, up to as high as, I guess it peaked at about $147, that was a very hot market, and we were selling a lot of film. But now that we've dropped down to $60 and I think it may be as low as $54 or $55 today, we're certainly seeing a softening of that market.

Agricultural markets should be all right and hold up in a recession. Industrial packaging will probably drop and construction is tough to call. The question I have is can it drop any further than it has, or have we hit the bottom? New housing starts are about a third of where they were just two years ago. I think there were about 2.3 million new starts a year or two years ago and now we're down to about 800,000 on an annualized basis.

So how much lower can they go? I suppose they can go lower. They can go totally to zero, I imagine, if people stop building and start using up the inventory that we have in the marketplace.

Our Engineered Films Division is what we call our "Canary in the Coal Mine." They give us an early warning system because we operate on a two-week backlog where our other divisions operate on a two to six month backlog. And there's no question that we've seen a softening in new orders in the last 30 days.

Some of that is distributors working down their inventories as you'd expect, and some of the drop is in the end user demand. But either way, there's some slippage and that's not going to reverse course any time soon.

Given the softness in our markets and the effect of lower prices, as raw material costs drop showing top line revenue and bottom line income growth, is not possible over the next 15 months in Engineered Films. But expanding our margins is possible and that's what we'll be focused on.

Our game plan is to, one, purchase plastic resin at the best industry price, which we can do because of our volume and our strong financial conditions vis-à-vis the competition. Two, hold on to some of the price increases we've implemented over the last six months. Last year raw materials as a percent of sales, was running at 58%. This year-to-date it's 66%.

Each percentage point, it means about $1 million in operating income, annually. So this is our biggest leverage point, and could really help us and it's one that we're really going to be focused in on.

Three, we have to get tough on cost controls. We do that always at Raven so that's nothing new there but we're going to have to get a little tighter and a little stricter on that. We'll be restructuring the division and cutting expenses in staffing and you may have received the press release yesterday that indicated that we had cut 42 of the staff of the Engineered Films Division. And it's one of the reasons that we came out with our financial statement a day earlier.

We were getting a lot of questions from the press, from TV stations, newspapers, about what we had done, why we did it? What the future looked like? And we were really in a quiet period and couldn't comment. And in a small town Sioux Falls, you can't just say no comment, so we felt the best thing to do was release our financial, third quarter financials a day earlier and that's why you got them a day earlier than you normally would.

And that went pretty well, by the way. You hate to cut people and in a town like this, where unemployment's been below 3% for the last 10 years it's a big deal. Sioux Falls hasn't seen much in the way of layoffs and cuts. And so in our community Raven Industries, which is kind of the bellwether manufacturing company in the city, is looked at that way. And it was a big deal in the community. By the way that cut in staffing, that 42 people, that should not result in a one time restructuring hit in the fourth quarter, at least nothing significant.

And then number four, we'll cut back capital expenditures from about $4 million this year, to no more than $1 to $2 million next year. And again, we're talking just about Engineered Films at this time on CapEx. And five, we'll continue to introduce high margin multi-layered film such as the radon barrier. Engineered Films is our toughest challenge, but I think we've got a good plan in place.

Our Flow Controls Division, which sells precision solutions for agriculture, such as GPS steering and planting and chemical spraying devices, had another very, very strong quarter with sales up 61% and operating income up 64%. For the first nine months sales have gone from $48 million to $83 million, and operating income from $15 million to $29 million.

Really, all of our product areas in Flow Controls are doing well, including our GPS steering devices, including low-end systems like our QuickTrax, and high-end, dual-frequency RTK systems. And our square controls, especially our boom section controls and our chemical injection systems used in conjunction with planning operations are doing well.

Both of these systems help to reduce chemical usage and to apply it accurately. And, our new and upgraded tractor cab-mounted video monitors and data management systems are also doing very well.

I said this before, but I really believe that our broad and deep range of products in our 30 years of experience in this market gives us a lot of advantages over our competitors since we can offer total solutions and not just single-purpose devices, such as steering controls or yield monitors.

And we continue to grow our international ag business. Year-to-date it's grown 91%, while our U.S. sales have grown at a 72% rate. International sales are now 18% of our total, for Flow Controls we're talking about we're talking about here now.

Our main concern here is to keep a close key on credit worthiness. We believe we have evaluated risk properly, but even so we took a $450,000 reserve against bad debts in the third quarter just to be on the safe side. And that also reflects the fact that Flow Controls is selling at a much higher revenue level and we felt it was prudent to beef up the bad debt reserve. We don't manufacture in foreign countries and sell in dollars almost exclusively, so you won't see currency fluctuations affected our bottom line.

As I mentioned last quarter, our long-term strategy is to provide a complete offering of products in Flow Controls, as well as advisory and information services to growers and that includes collecting and distributing critical input data, providing recommendations and prescriptions for their field operations, supplying advanced hardware and software to execute those recommendations, and fourth, helping them build the database, which over time can help to take variability out of their operations.

This is of course a long-term strategy that will take five years to implement it, which means there's still a lot of opportunities beyond the hardware and software solutions we are currently providing.

The farm commodity prices have changed dramatically since July, when corn was at $7.50 a bushel and soybean $15; they're now selling at $3.75 and $8.25, respectively. Still decent prices, but I don't think farmers, I'm sure farmers didn't think that those top prices would hold, but I also don't think they believed that they would drop back as far and as fast as they did.

As a result we're hearing that the big equipment manufacturers of tractors and combines, these are the $200,000 plus rigs, are seeing a few order cancellations. And, that could be because of commodity prices or availability of credit, or both, but farmers are in pretty good shape with their ratio of debt, which is the lowest it's been in many years.

We haven't experienced any cancellations to this point, and our backlog through October is up 37% over last year. New orders for the last 60 days are up 56% so we haven't seen too much of a slowdown. We know we won't continue to grow at the rate we did this past year, but we still look for growth in the fourth quarter, a good growth in the fourth quarter and a good year, but moderating next year.

Even so, Flow Controls will be watching expenses closely, as we all will be and executing its organizational build up cautiously in focusing on the best opportunity so that we don’t get ahead of ourselves.

Our electronics systems division had its best quarter of the fiscal year in terms of operating income but it still fell far short of last year's third quarter, which was outstanding. Sales for this past quarter were down 12% from last year and operating income was down 49%. Last year’s third quarter had some special shipments that had high profit margins that were not repeated this year.

Sales and electronic systems are focused on three basic markets; handheld controls for beds, military and electronics for encrypted communications and printed circuit boards used in avionics. The avionics and government markets should do okay while the bed control market is very much a link to consumer spending and home construction. But again as I mentioned, we’ve already dropped in sales volume of bed controls from $18 million two years ago to an estimated $7 million this year. So there isn’t a lot more to loose when it comes to the bed control business.

Our avionics business, by far our largest segment is up year-to-date 30% from $20 million last year to 26 million. We think this business should hold up unless we start seeing aircraft cancellations. It’s also our lowest margin business.

Our military electronics business also should hold up well in a recession although it’s relatively small at $10 million in annual sales. Well we knew this was going to be a tough year for electronics systems and we haven’t been disappointed. We continue with our plan to make this division a contributor to Raven’s success and we have, one, reduced customer base and small and profitable customers and focused on a few important customers. Basically we have three major customers that make up most of the revenue.

Second, we are right sizing the organization and continue to emphasize the bottom line in operational excellence. This is not a division we are counting on for a lot of top line growth.

And third, we are shifting assets and personnel to support our Flow Controls division. Electronic Systems has advanced equipment and manufacturing techniques and these capabilities are needed in Flow Controls. So there is an ongoing effort to share resources which will keep our capital expenditures down and facilitate Flow Controls growth. Actually Flow Controls is Electronic Systems division's fourth biggest customer.

As I’ve mentioned many times before chasing cheap labor has turned out to be a false promise except in a few cases where volumes are high and technology is low. It’s a good place for a Wal-Mart but not for most companies. Many companies are starting to realize that and are cutting back on their investments in China and I think Raven will benefit as that shift occurs and more work is brought back to America.

Electronic Systems is struggling now but it can be a solid contributor and an important part of our future because of its advanced manufacturing capabilities and its relatively stable customer base.

Our fourth operation, our Aerostar subsidiary, had a good third quarter in line with what we were projecting with sales up 42% and operating income up three-fold to $900,000.

Aerostar continues to grow and show margin improvement but they still only represent 8% of total company sales and 5% of operating income. No parachutes shipped in the third quarter due to an army hold up but a large shipment of $2 million was finally released in the first week of November and of course that doesn’t show up in the third quarter results. And shipments of parachutes should continue on a steady monthly basis on a go forward basis.

Our monthly or our military protective wear contracts shipped on schedule in the third quarter and margins improved by almost two full points. And high altitude research balloons also shipped on schedule and continue to generate good profit margins. I think particularly encouraging for aero star was a recent order for $1.8 million worth of tethered balloons for military use.

I’ve been talking a lot about the potential for tethered Aerostats and we have several good prospects. So this is a positive sign, finally closing on a military customer to validate that there is a market and that we’re a player in that market.

Of all of our operations Aerostar is probably in the best position to weather the recession. We have long-term contracts for parachutes and specialty protective outerwear and our Aerostats at this point is mainly a military, scientific or NASA purchase. This is our smallest operation but it’s in good shape as we look to the fourth quarter in the year ahead.

So overall it was a good third quarter for Raven; better than we anticipated when I talked to you last quarter. But I also said at that time that I thought the fourth quarter would be strong and that’s no longer our belief. Things are changing rapidly and I hesitate to get to specific, but right now I would say the fourth quarter looks relatively flat on a year-over-year basis.

It’s almost foolish to be giving guidance in this rapidly changing environment but I would say this; I like Raven’s prospects in the short term and long term. We’re in some good markets. We’re diversified. We’ve got good cash flow and we’ve always run the company conservatively and I just believe we’re in better shape than most companies out there.

I mentioned our diversification and not too long ago diversification was a dirty word and investors wanted diversification to thinking when they could buy mutual funds. Well that helped investors but not necessarily individual companies who became tethered to a single market, like construction or automotive parts which in a severe downturn can bring them down even though they might build a good product and be good operators.

At Raven we’ve always believed in a diversified portfolio and that’s something we’re going to continue to do. In today’s environment the balance sheet becomes as important as the income statement and our balance sheet is strong even though we paid out a one time dividend of $1.25 a share on November 14th.

That pay out cost us $22.5 million in cash but as of today, and I mean today not the end of the third quarter, as of today we still have $13 million in cash. And with our strong earnings, lower capital expenditures, and an emphasis on inventory reduction and receivables collections, we’ll continue to rebuild cash reserves over the coming year.

I’m glad we paid the special dividend. People ask me about that all the time. Would you do it again knowing what you know now? Yes, again, I’m glad we paid the special dividend. We can afford it. The cash was earning a minimal rate of return for us. Our shareholders can use the cash and the tax treatment on dividends is still favorable. We’re probably less committed to making a near term acquisition and that played into the decision also.

Regarding stock purchases, they’re probably off the table as long as there is so much volatility in our share price. We bought a number of shares early in the year but again with this kind of volatility I think it’s foolish for us to be stepping in and buying shares at this time so it doesn’t look like we’ll be buying any shares for the rest of the year.

But our regular dividend will continue to increase on an annual basis on a rate consistent with earnings to increases; returning cash to shareholders is basic to our business model. We generate enough cash to grow internally and still pay a nice regular dividend which has around a 2% yield as of today.

So looking at next year my visibility is pretty cloudy. I just don’t see any upturn in the economy in ’09 and it could get a lot worse. We’re seeing a massive deleveraging of the world economy with consumer spending and GDP growth likely to drop further. My only projection that I feel confident giving at this time is that Raven will do better than most companies and outperform the market.

I tell our management that we can’t control the economy but we can control how we mange and lead and my charge to all of our 1,000 or 1,100 employees is to emphasize quality, quality customers, quality products, quality profit margins, quality balance sheet, quality inventory turns and accounts receivable and quality leadership and workforce.

These are all things we have control over. These are things that we can improve regardless of the market. These are the things that we are going to be working on in the months and years ahead. And with that I think I’ll open up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Michael Cos – Piper Jaffray.

Michael Cos – Piper Jaffray

My first question is on the Flow Controls side. You had mentioned the growth and the international being 91%. Was that a year-to-date number and if it was could you provide the difference between international and domestic growth for the third quarters specifically?

Ronald M. Moquist

Dan can you handle that one?

Daniel A. Rykhus

Pretty specific. I’ll try. I believe our third quarter growth was about 4.8 million, our third quarter sales of international, to our international customers was 4.8 million. I think in the third quarter we – our growth in international markets came closer to our domestic growth.

I can’t give you the specific percentage numbers right now but our Q1 and Q2 growth in our international markets far outpaced certain domestic growth and they’ve come closer together in the third quarter.

Michael Cos – Piper Jaffray

And then as you look at the international markets I presume that you’re still seeing good opportunities from a penetration perspective and maybe talk a little bit about opportunities to continue to expand outside the U.S. knowing the types of headwinds that the U.S. economy is facing?

Daniel A. Rykhus

Sure. We continue to be committed to growing in the international markets where we’ve established a footprint over the last two to five years, especially the last couple of years and those are South America, Australia, Western Europe, some in Eastern Europe and Canada primarily. And right now we’re not looking over the next 12 months to do a lot of work in new international markets, but we still see good upside potential as we talk to our partners in Australia and the UK and some of our South American partners.

We still see lots of penetration opportunities. They each have their own unique obstacles that they are working through but we continue to believe that we can grow those markets as we look forward to next year probably at a pace above our domestic growth.

Michael Cos – Piper Jaffray

I guess looking into the crystal ball do you believe that 2009 can be another double digit growth year for the Flow Controls segment overall?

Daniel A. Rykhus

That’s a tough question right now. Like Ron said, it’s cloudy for us and we’re doing-- we’re going to execute on our strategy that we have for the last couple of years which is to develop a better channel for the grower in the U.S. and you’ll see evidence of that in the coming quarters, some announcements we’ll be making.

We, like I had just talked about the second initiative is our international growth initiative that we’ve been executing on and we still think that there’s opportunities for us there and then third is a suite of new products that we have under development that largely get at this information and data management piece as well as some additional hardware pieces.

So those things, that's the positive side. What we’re unclear on is what’s going to happen to the base business. One thing that I’ll say, because somebody else will probably ask the question, is we have a fairly strong counter cyclical argument.

If general ag market is going down a little bit for large equipment we tend to have the purchase price point on precision ag products. It's lower and the purpose of buying a precision ag tool is to improve efficiency. That tends to give us a little bit better perspective or outlook in a tough market conditions. So all that said we’re looking to grow this operation some and I’m not able to commit if that’s double digits, but we do expect some growth.

Michael Cos – Piper Jaffray

I guess just a general question perhaps for Ron, as you look out to next year and you’ve made some different tough decisions around headcount reductions and facility consolidations, as you look at next year do you foresee additional reductions, or said differently, what type of economic events would you need to transpire to move in that direction?

Ronald M. Moquist

Yes, good question we were talking about that at lunch today as how do you get out in front of some of these things? Because things are moving so quickly and where do you see yourself in three months, six months and there will continue to be other changes. There will continue to be consolidations and I think you’ll see that at most companies.

I think most companies are, some companies at least are in denial and they just think this is temporary but I am not one of those and so we won’t hesitate to do what we have to do to right size the organization, make it competitive and make it viable again to generate cash flow and to pay dividends, because I think those things are going to become increasingly important to investors.

Number one, the viability of the company, number two, the cash flow of the company, and number 3three, are they paying dividends, because I don’t think anybody’s expecting great things in the stock market over the next 12 months, maybe they are. but I don’t think so. So people are going to be looking for those quality companies that are going to be strong and are going to continue on and generate good returns.

So we’ll continue to do that. We’ve always done that though Michael, I mean as far as making the organization fit the business that we have and that’s not going to change. So we made some tough cuts this week. They’re always difficult, even though it’s less than 4% of our total workforce they’re still tough cuts. But we’ll continue to do what we have to do to keep this company strong and profitable.

Operator

And we’ll go next to Jeff Evanson – Dougherty & Company LLC.

Jeff Evanson – Dougherty & Company LLC

Ron, I guess I’ll start with Engineered Films. I guess I’d be curious to know do you ever run into situations where price is not the number one or number two consideration in an engineered film sale?

Ronald M. Moquist

Yes, and those would be the cases where, prices always have some consideration for sure, but where price becomes less of a consideration is where you’re providing a product that’s unique and does something so special, so unique that you get spec’d in and people simply need and want that product, and what I’m referring to there are products like the barrier film for methyl bromide.

We’re working with the EPA in California. We’re working with various agencies. As you know, methyl bromide is a banned chemical because it destroys the ozone and it’s banned worldwide. But there are exceptions to that rule and if there are no alternatives for sterilizing soil you can use methyl bromide. Unfortunately, if you use traditional plastic, methyl bromide will leak right through the plastic because it’s not a barrier film and you have to use two or three times as much chemical as if you would if you used one of our barrier films.

So we’re doing a lot of testing in California on that basis. So that would be a case where – and that’s why we’re putting so much effort into these multi-layer barrier films for radon and methyl bromide or other applications, but –

Jeff Evanson – Dougherty & Company LLC

And you include those sales in the ag mix break out that you gave at 9%?

Ronald M. Moquist

Well the methyl bromide barrier and the silage barrier, which keeps silage fresh and prevents deterioration, they would be in the ag. The radon barrier, for example, would be in construction because that’s put under the slab, concrete slab of a building to prevent radon gas from permeating through the concrete foundation; so that’s in construction.

Jeff Evanson – Dougherty & Company LLC

I guess what I’m getting at is so maybe 20 to 30% of your sales, and I’m making up this number, but maybe 20 to 30% of your engineered film sales you're in a less than typical competitive bid situation. Would see you being able to hold price in that area, but how is it that you see being able to hold price increases in other areas, given that frankly we’re probably seeing a lot of excess capacity in this space. Probably to you guys is an example of if you’re cutting headcount, you are in a sense, cutting capacity.

Ronald M. Moquist

There’s no question that we’re going to have to cut price; there’s no doubt about that. The question I’m posing is, the proposition I’m posing, is that it’s possible that we’re going to be able to buy raw materials as well or better than anybody out there.

We buy a lot and we pay our bills and we pay our bills on a timely basis and that’s very important to companies these days. So if we can work that angle and buy very, very well, even though we have price decreases, we may get to a point where we can pick up some margin because we haven’t had to drop the price decreases as far because we’re buying better and the margins, therefore, will be improved over what they would otherwise be.

So yes, we’re going to have price cutting. There's no question about it like you say, when you got excess capacity in the system people cut prices because they want to fill up those machines. And so it’s a play between how far do you have to cut your price and how well are you buying raw materials?

Jeff Evanson – Dougherty & Company LLC

And you do have some defensible segments.

Ronald M. Moquist

Yes.

Jeff Evanson – Dougherty & Company LLC

How often is – we’ve talked about this in the past, that shipping costs are an important part of this whole puzzle. How often is distance to end market a benefit to you?

Ronald M. Moquist

Well at $4.00 a gallon of gasoline, it’s a lot more important than $1.69. I don’t know what it is in Minneapolis, but we’re seeing gas for $1.69 or $1.79 how can that be? From $4.00 and some in July, so it’s less of a case, less of a situation and so we ship product coast to coast. We ship it from California to New York and from Minnesota to Texas.

And there are times when it becomes a bit of a problem and we give some consideration and we give some freight consideration to certain customers, but most of the freight is paid for and it hasn’t been a big consideration at this time. I’d say that.

Jeff Evanson – Dougherty & Company LLC

All right, the Flow Controls Division, still performing very well but frankly my personal feeling was the outlook a quarter ago was substantially more bullish than it is this time around.

Ronald M. Moquist

Yes.

Jeff Evanson – Dougherty & Company LLC

I can imagine some of the factors that are feeding into that, but just kind of kick off maybe the top two or three factors that are contributing to that more conservative tone for that division?

Ronald M. Moquist

Yes and I think that’s correct and I don’t think so much it’s one of not believing that we have the potential and the possibility of growing quite aggressively, as much as it is our ability to see out and our ability to get clear direction from our distributors and some of our customers isn’t what it was.

And people are waiting longer, people – and you see it in industry. Every CEO I talk to when they’re talking about capital equipment is saying well, we’re going to push it out 90 days and then we’re going to see what happens, and maybe they’ll buy maybe they won’t. So what we’re seeing is people starting to push these things out, the decisions out. Not that they aren’t going to buy; they simply aren’t in a position to buy early as they might have been last year or the year before.

So I’ll let Dan take it from there but, I don’t – there’s certainly a difference about how we feel today versus three or four months ago, no question about that, Jeff. But I think we still feel pretty strong about our ability to grow that business and from there I’ll let Dan kind of fill in the blanks.

Daniel A. Rykhus

I would say as far as our, the changes, the drivers of our change in our outlook for Flow Controls is pretty much exactly what Ron said. It isn’t so much that our backlog is changed, it isn’t that our flow of new orders is changed. In fact it’s still quite strong like Ron said in his opening remarks.

But as I talk to our retailers and our OEMs, there’s certainly a carryover effect to their end user customers of the general economic concerns that are out there. And it’s frustrating for them. As I talk to them, some of them, many of them share with me that if their customers could just turn off the TV and not read the paper and continue to be told how bad the economy is, the fundamentals underneath are still reasonably strong for them.

So it’s frustrating for our end users and our resellers, I should say, but the feedback I get is that they’re looking at corn prices not recovering as quickly as they’d hoped. They’re looking at certainly the input costs for fertilizer and diesel fuel will be down but some of these input costs are not going to be down, like cash rent and chemical and seed prices.

So it’s a mixed bag out there and there’s just uncertainty and it’s regional. There’s certain regions – some of the wheat country seems to be more positive than the corn belts and there’s certainly uncertainty with ethanol and where that part of the corn consumption equation is going to go over the next 12 months. So I guess those are some of the underlying causes that are making it a little less clear for our resellers and users of product to give us the kind of confidence that we saw going into last year as we look forward to next year.

Jeff Evanson – Dougherty & Company LLC

To kind of extend on that, there’s been some consolidation in the implement component market in the past quarter here. What are your thoughts about how that’ll impact you?

Daniel A. Rykhus

Implement component market.

Jeff Evanson – Dougherty & Company LLC

Planter components? Air clutches?

Daniel A. Rykhus

Yes, I really don’t want to comment on that; I will comment on our play and our strategy to approach the planter market I feel is strong. And that is based on some specific development projects that we have with various manufacturers of seeding equipment throughout the world. And also we’ll leverage our development of our domestic grower market channel with some general products.

It’s a crowded market. I mean there aren’t that many large row crop planter manufacturers in the U.S. And those three or so that hold most of the market share have some pretty mature partnerships in their control technology. So it’s not an easy road in to manufacturers play for us, but we have, like I said, we have some specific projects with some other seeding companies and manufacturers, as well as some standalone products that we’ll be introducing that we think will get some attention.

Jeff Evanson – Dougherty & Company LLC

My last comment, you’re warned, it’s not a question it’s a comment so I’ll keep it very short, but in markets like this it’s the effective operators, the efficient allocators of capital that win. So I trust you guys will not let a good crisis go to waste.

Ronald M. Moquist

Well said, Jeff.

Operator

(Operator Instructions). And we’ll go next to [John Rankin] – [Barenco Management].

[John Rankin] – [Barenco Management]

First of all on the FEED-Fresh that I read in the press release, could you give us a little color, more color on how big that market could be?

Ronald M. Moquist

Yes, I’m going to be a little bit at a disadvantage on that because I have not studied the market size on that, but for all covers of grain that traditionally have used single layer polyethylene, cheap polyethylene to cover the grain, we have the possibility of replacing that with our multi-layer film. And in doing so we are able to keep the grain fresher, we’re able to minimize spoilage and so there’s an economic reason for switching over to our plastic.

And will 100% of it switch over? Not likely, but whatever the size of that total market is for grain coverage, and it changes every year because depending on the crops and depending on the storage capacities, depending on yields, that changes, but again, that’s – when I said that that particular segment of the market was 9%, 9% of about $100 million, so for us it's about $9 million, $9 million $10 million market and we're just one of many players in that market.

If we have a superior products, which I think we do, that's a good growth area for us, so right now it's a $10 million market and I think we can grow that.

[John Rankin] – [Barenco Management]

Second question, two quarters ago you indicated that you were doing pond liners for irrigation ditches and at that time I believe you said you hadn't done a lot with it and I indicated there's a huge demand in the West to hold seepage in these 100, 125 year-old ditches. Has there been any progress on that at this point?

Ronald M. Moquist

We're working with people in California. It's slow going. They have no money so that's a problem, but it's got to go. I agree with you. It's got to go because they are wasting so much water. They are not only wasting water because of seepage, they're wasting water from evaporation so we could line it and cover it and we could probably cut evaporation and seepage in half. And so I keep telling our folks keep at it, keep working it because at some point that's going to start selling.

But to be honest with you we haven't sold much but it's a market I think is very strong and all of the reasons for buying are there. It has huge return on investment so I'm still bullish about it as you are.

[John Rankin] – [Barenco Management]

Who is it who doesn't have money because the water companies, at least in this part of the West, are about the only ones, and the municipalities all have the money.

Ronald M. Moquist

Well the folks we're working with, and we are working with some private people, too, with canals, private canals and so it's not all government agencies we're working with and that's been a problem. A couple of projects that we have, or thought we had got delayed and we still plan to get them but a few got delayed for financial reasons.

[John Rankin] – [Barenco Management]

My next question, Ron, again I think I asked you a couple of quarters ago, you're 62 and you were – did you indicate that you would be retiring at 65, or?

Ronald M. Moquist

Unfortunately I'm 63. Yes I turned 63 September 15th and I haven't announced retirement but I'm not going to go beyond 65, so mid-2010 my birthday's September 15th so it's in that August, September timeframe in 2010. Yes.

[John Rankin] – [Barenco Management]

I'll have to have Warren Buffett talk to you. He's just getting started.

Ronald M. Moquist

Yes.

[John Rankin] – [Barenco Management]

My last question, and this is for Dan, I noticed that '09, March of '09 we're still at $4.00 corn and $9.00 beans. Dan, in the corn belt can you kind of give me a little bit on what these folks' cost of production is? I mean I think they're still profitable at those rates.

Daniel A. Rykhus

Yes, the last thing I saw was out of, I think it was the University of Illinois, and they had projected a breakeven point of around $3.80 on corn.

[John Rankin] – [Barenco Management]

What was the BEEP for beans?

Daniel A. Rykhus

They didn't do beans, so, yes. It's pretty close, pretty tight, and that was not – that study I believe was looking at people who own the land and not applying the cost of capital for that or cash rent costs.

Operator

(Operator Instructions) And there appears to be no further questions. At this time I would like to turn the call back over to Mr. Moquist for any additional or closing remarks.

Ronald M. Moquist

Well thank you. I wish I could give you more clarity about our future prospects but things are moving too rapidly and dramatically and because of that we'll be changing the way we communicate with you. In the past we've only communicated on a quarterly basis and if we stuck with that process we wouldn't be talking to you again until March.

So if something develops that significantly alters our thinking about the fourth quarter or the year ahead, we will communicate that with you whenever that occurs. So that's a change in the way we're going to communicate with our shareholders and with the analysts because as rapidly as things are moving and changing I think that good communication becomes more important than ever that you understand what's happening with us and we communicate that clearly with you.

So, thank you for joining us today and good luck. Good-bye.

Operator

And that concludes today's conference. We thank you for your participation and have a great day.

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