Baldor Electric Co. Q4 2008 Earnings Call Transcript

Baldor Electric Co. (BEZ)

Q4 2008 Earnings Call

February 06, 2009 11:00 AM ET

Executives

Tracy L. Long - Vice President of Investor Relations

John McFarland - Chairman and Chief Executive Officer

Ronald Tucker - President and Chief Operating Officer

Analysts

Steven Sanders - Stephens, Inc.

Kristine Kubacki - Avondale Partners

Yilma Abebe - JPMorgan

John Franzreb - Sidoti & Company, LLC

Brian Meyer - Robert W. Baird

Manish Somaiya - Citigroup

Tom Lamb - Weybosset Research

Presentation

Operator

Good morning, everyone and welcome to Baldor Electric Company's Fourth Quarter 2008 Earnings Results Conference Call. This call is being recorded. With us today from the company is John McFarland, Chairman and Chief Executive Officer; Ron Tucker, President and Chief Operating Officer; and Tracy Long, Vice President of Investor Relations.

At this time I'd like to turn the conference over to Ms. Long. Please go ahead.

Tracy L. Long

Thank you, Dustin. And good morning, everybody. We appreciate your time. Thanks for being here today. Our press release was filed yesterday afternoon and you can find the copy on our website, if you don't have one already. I need to remind everybody that some of the comments we make today may be forward-looking statements. Such statements are not guarantees and therefore our actual results could be materially different.

With that I'll turn the call over to John.

John McFarland

Thank you, Tracy. And good morning, everyone. Thank you for joining us this morning for our year-end conference call.

I am pleased to again report record sales for both the fourth quarter and the year. Fourth quarter sales of $474 million were up 4% over 2007. Net earnings in the fourth quarter were not a record, net earnings in the fourth quarter were $18.6 million, down 22% from 2007 net earnings of $23.4 million. Earnings per share in the quarter were $0.40, down 20% from 2007.

For the full year sales were a record at $1.954 billion, up 7% and net earnings were a record $99.4 million, up from $94.1 million in the year before or up 6%. Earnings for the full year were $2.15 per share, up 3% from $2.08 in 2007.

During the year cash flow from operations allowed us to repay $49.4 million of our debt and also acquire Maska, a company up in Canada for a little over $40 million. Maska is a great addition to our company and is performing well. We are really proud that they are now part of Baldor.

While the quarter started on a very positive note, it did not end that way. On December 15th, total sales for the company were up approximately 10% for the quarter. Over the next three weeks we saw extended closings by many of our customers. We saw our distributor customers aggressively reduce inventories and by the end of December, sales were down 16% for the month.

Even though our sales in December were more than $35 million less than the month of October, we did have the best operating margin of the quarter in December. We believe this along with the results from January are clear evidence of the success of our cost reduction efforts.

As we previously announced, we expect to reduce costs in 2009 by approximately $80 million through the elimination of overtime, a hiring freeze, a reduction in discretionary spending and lower interest expense on our debt.

January results show we are achieving all of our targets in these areas. January sales were down nearly 9% disappointing, but somewhat of a rebound from the 16% decline in December. While earnings in January were down less than 17% contrasting with the fourth quarter when sales were up 4% and earnings down 20%. While we aren't happy sales and earnings were down in January, these results are evident that our cost savings are developing and we expect them to build throughout the balance of the year.

Later in the year we will update you on our targets and report in more detail on our progress.

During the quarter, as promised on the last call we made good progress in reducing the days needed to collect our accounts receivable. Day sales outstanding improved by eight days from the third quarter, but partly because of the timing of some large payments and two days from the fourth quarter, a year ago. We continue to focus on this as a source of cash for debt reduction. Also, our inventory dropped during the quarter by approximately $6 million from the end of the third quarter.

We were disappointed in the small decline during the quarter in our power transmission sales. These products are heavily tied with some heavy duty applications such as aggregate, cement and forestry products and 75% of the sales are through distributors. We saw distributors during the quarter and continuing in the January reducing inventories.

We are very confident in the future that an infrastructure spending increase in the United States would benefit our power transmission business. In the meantime, we have number of initiatives underway to broaden our customer base and broaden our success in industries other than aggregate and cement.

Our motor business during the quarter was up 8%. I'm very pleased with the performance of this group during the quarter in light of the softness in the market in the last few weeks of the quarter.

The Baldor Reliance industrial motor business is clearly the leader in North America and the leader in high efficiency motors.

Our high efficiency Super-E motor sales increased by more than 30% during the quarter and 25% for the year. This is a fifth straight year of strong increases in Super-E sales and January 2009 showed the biggest year-over-year increase in the five year period.

While we are clearly the leader in North America in motors our goal is to be the leader worldwide. During the quarter we were extremely pleased with the 18% sales increase we had internationally.

Our international sales were up double-digit rates in Latin America, Asia-Pacific and Canada. They were down moderately a small amount in Europe. In addition to this, we had strong growth at 50 Hertz motors, which we supply to domestic costumers.

50 Hertz motors are not used in the United States and so we know when we supply a 50 Hertz motor to a domestic costumer that the motor will be exported. On this basis, we believe our exposure to the international market during the quarter was approximately 23%. Also we've seen a very positive change in our profitability in the international business. Profitability of our international business is now as good as our domestic business.

Our backlog of orders dropped during the quarter from approximately $260 million to $225 million, still a healthy amount. We've not seen any unusual cancellations and in January the backlog went up by about $10 million.

During 2008, we reduced our debt by nearly $50 million and have reduced debt by approximately $225 million since February 1, 2007.

At the end of 2008, our debt to EBITDA ratio stood at 3.81, well below our credit agreement ratio of 4.25. Per our credit agreement, this ratio grasped a 3.75 on December 31, 2009.

While we are only required to reduce our debt by approximately $7 million during this year, we need a greater amount of debt reduction in order to comply with the 3.75 debt to EBITDA ratio on December 31st.

Our plans and our expectations are that we will reduce debt by a minimum of $125 million this year and that this debt reduction combined with our cost reduction efforts and sales initiatives will keep us complying with our debt covenants.

As we stated in our presentation in December, a sales decline more than anticipated. Debt reduction could be greater.

In addition to our cost reductions, we also expect to see some decrease in material cost. But the majority of this will not develop until the last half of the year.

Let me conclude by discussing our outlook for 2009. We have aggressive strategies in place to secure new customers throughout our company.

I believe our strategy and our sales people will outperform our competitors during the rough economy we expect in 2009. In the motor business alone we have identified $75 million of target customers as part of our Bounty Hunt Program.

The Bounty Hunt Program was the program we ran back in 2001 very successfully. We had the same plan in our power transmission sales group as well. This plan was effective in the last recession when we picked up $32 million of our targeted $45 million in new customers.

We don't underestimate the challenges this year will bring and the importance of reducing unnecessary expense in bringing down our debt. When we acquired Reliance Electric Company two years ago, we expected a difficult recession in the first few years.

And we became comfortable before the acquisition with our ability to weather it. We remain comfortable today. We do expect sales to be down during the first half of the year and we are making adjustments in our manufacturing cost structure and adjusting our inventories to the required amount for our expected sales.

While we've been unhappy to see a 9% sales decline during January, we are pleased with the progress we've made in our cost savings efforts. The challenge in a year like 2009 is keeping the company healthy in the short-term while not sacrificing the long-term growth opportunities.

As many of you know, the Energy Bill enacted in 2007 to become effective at the end of next year gives us great opportunities in 2011 and beyond. However, we've got to get from here to there.

We have put in place and continued to pursue strategies that will keep our company healthy now, but also allow us to realize our potential in the future.

So with that we would like to thank you again for joining our call this morning. I will now open up the line to your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). We'll go first to Steven Sanders with Stephens, Inc.

Steven Sanders - Stephens, Inc.

Good morning, everyone.

John McFarland

Good morning, Steve.

Steven Sanders - Stephens, Inc.

Couple of questions. First, John on the January sales being quite a bit better than December, was that heavily weighted towards the first half of January? In other words do you think it's reasonable to think sort of down 9-10% for the quarter is sustainable or do you think you had a snap back in early January and things are kind of returning to December like levels?

John McFarland

Well, we don't see any evidence that things are returning to December like levels when sales were down by 16%. We're about five weeks now into the quarter and the first week of February it looks like its going to be a long pretty much like the January.

I wouldn't say that January was heavily weighted to the early part or to the late part, it looked pretty consistent week to week. But certainly much better than the decline in sales. In December the decline in sales, Steve was all in the last few weeks of the month going into. Actually on the 15th of December, we had a 10% sales increase for the quarter and were expecting to close the quarter strong and suddenly the tap just was turned off. So I don't see January, January was not as bad as December and I doubt that February would be that bad either.

Steven Sanders - Stephens, Inc.

Okay. And then its pretty clear the OEMs are outperforming the distributors. Within the OEM business, what is showing some relative strength kind of using that loosely in this environment? What seems to be holding up the best on the OEM side?

John McFarland

The OEM business was much stronger in December than the distributor business, considerably stronger. I mean, distributors were obviously dropping inventories. Actually, that's been a little bit of a reversal of that in January. And it looks like the distributor business in January came in little bit, just above the OEM business.

The OEMs that were strong in the quarter were OEMs in the pump business, and the compressor business, mining continues to be strong. Orders have been strong in January for mining, motors, material handling. Oil and gas had a good quarter, up double digits and farm equipment continues to be strong. And it looks like that's going to be strong in this first quarter.

Steven Sanders - Stephens, Inc.

Okay. And then a question on the margins and again, just kind of assuming that recent sales trends continue. We've got obviously margin pressure from the top-line arguably a bad mix, less absorption and I know we've got some of the benefits on the cost reduction side and hopefully falling commodity prices. Is it reasonable to think if we hold around these levels in terms of sales that you guys can hold double-digit margins through the first half?

John McFarland

Ron?

Ronald Tucker

We have to dissuade Steve. If you look at January results, you have 9% decrease and then earnings down 6% to 8% or so whatever. Compare that to the fourth quarter when you had up sales and then earnings down 20. I remember January is going to show the least amount of cost savings and the least amount of material savings of any month of the year. So I'm not going to really forecast. I think we didn't forecast the margins double-digit but I think that's indicative of how we should perform.

Steven Sanders - Stephens, Inc.

Okay. And if we think about the $125 million number and I realize there are a lot of variables there as well, how does that look early in the year? In other words can you hit sort of a run-rate there on the debt reduction in the first quarter or does that build as the year progresses?

Ronald Tucker

It would probably be way of more heavily to the second half of the year.

Steven Sanders - Stephens, Inc.

Can you provide a little more color there? If I mean first quarter could you get 20 to 25?

John McFarland

Well, we haven't forecasted our debt by quarters Steve, so--

Steven Sanders - Stephens, Inc.

Okay.

John McFarland

We're not prepared to do that this morning, but we will make some debt reduction in the first quarter, we will make some in the second quarter.

And obviously, the last half of the year should be easier because number one, we think that business may not be as bad in the last half of the year as it currently is. And number two, our cost savings accelerate as the year goes along.

Steven Sanders - Stephens, Inc.

Right, right.

John McFarland

So we think we will be in a better position to make more debt reduction last half than the first half. But we're really focused on, I mean, we brought our inventory down during the quarter. We bought our receivables in and we are really focused on cash making sure our inventory is clean. Now we don't have inventory, we don't need, making sure our receivables are good and making sure that we collect them timely. And all of that in order to pay down debt.

Steven Sanders - Stephens, Inc.

Okay. Two other quick questions and I will get out of the way. On the CapEx, side beyond the $15 million of maintenance what is getting funded this year and what's been pushed out? And then the second question is, is Ron may be if you could just reconcile the roughly $2 million of year-end adjustments with the $3 million or so of other income, kind of give us a sense of what's normal netting those out? Thank you.

John McFarland

Well, we fund anything related to two, anything related to safety is funded in our capital fund program. We fund things that help us with productivity, especially if it's quality related. We are funding some pretty major purchases of machine tools that are going to be used to manufacture motor laminations. We are going to be needing a big increase in motor laminations in 2011 when the Energy Bill takes place plus our high efficiency motors are growing, have been growing by more than 25% for the last five years and they were up by more than 50% in the month of January.

So they all have more laminations. So we are putting in, we have some very large purchases this year of machine tools to make laminations. And then a variety of other things. There is some investments in China where we intend to begin, making some orders. Just a variety of other things.

Steven Sanders - Stephens, Inc.

Okay.

Ronald Tucker

Then your question, question on the other income and the SG&A, a couple of things. The other income is really a function of foreign currency gains. So we would I mean depending in light of the currency. Right now we'll be on the same type of run-rate we see over the last few quarters.

On the SG&A it was higher this time in actual dollars and then that's a combination of a cup of three things. One is the acquisition of Maska, obviously had some amount of dollars to it. Also, the mix, mobile torch motors which it means higher commissions, higher commission rate. And then the other items were normal type of year-end items of about nearly $2 million that if you had the same type of sales level next quarter, this quarter would be about $2 million less in dollars because of that.

Steven Sanders - Stephens, Inc.

Okay, okay. So I guess we should think about it is kind of netting the three and the two, is that a fair way to look at it, ForEx and the year-end true-ups?

Ronald Tucker

It's probably okay.

Steven Sanders - Stephens, Inc.

Okay, okay. Thanks very much.

John McFarland

Thank you, Steve.

Operator

Next to Kristine Kubacki with Avondale Partners.

Kristine Kubacki - Avondale Partners

Good morning, everybody.

John McFarland

Hi, Kristine.

Kristine Kubacki - Avondale Partners

Just wanted to circle back to the sale trends in January, I was wondering if you could break out the trends on power transmission versus motors, if one was accelerating more downwards than the other?

John McFarland

The power transmission business declined much more rapidly in January than the motor business. It is mostly distributor and so it was hit more by the distributor de-inventorying efforts, de-stocking efforts, I should say of that in the motor business.

Kristine Kubacki - Avondale Partners

Okay. And then I guess just on that case that you didn't talk about pricing and what you're seeing in the channel and kind of what your expectations are going from here given the declines in volumes, are you able to hold on to pricing at this point on both the power transmission and the motor side?

John McFarland

Well, 75% or almost 80% of our power transmission business is with distributors and we certainly believe that we can hold onto any pricing actions there.

Also the power transmission business is not as subject to some of the declines in material costs, there is no copper in those products and not the same type of steel. So yes, we think we can hold on to the pricing in that business.

In the motor business, our pricing is roughly flat. We're holding on to the pricing. And really we've had some customers enquire about it and we've been honest with them, we don't really at this point, we are not realizing the drop in copper because of our hedging program.

For that reason they never sold the $4 copper that's within the spot market a year or so ago. And we are not willing or able to give something we don't have and so our pricing has been pretty stable.

Kristine Kubacki - Avondale Partners

And when you say flat, you mean with the fourth quarter than in... or third quarter, you kind of rolling not year-over-year pricing?

John McFarland

Well, it's up year-over-year but it's been flat with the fourth quarter, yes.

Kristine Kubacki - Avondale Partners

Okay. And then in terms of interest expense, that ticked up a bit higher than what we were expecting given the debt repayment, so I was just wondering if you could comment on that and how we should look at that going forward?

Ronald Tucker

Little bit of that would be with Maska, due to Maska debt. But it should have been about what you expected based on the debt reduction.

Kristine Kubacki - Avondale Partners

Okay.

John McFarland

And the debt reduction was, the debt reduction we made during the quarter was made right at the end of the quarter. And so for the debt reduction we made during the quarter, we didn't get any benefit from it, it's a January benefit.

Kristine Kubacki - Avondale Partners

Okay. And then just one last question, I know you talked about the second half getting better in terms of raw materials. But thinking about it on more of a sequential basis, are we expecting things to improve here at the end of the first quarter and then may be into the second quarter and then get the real year-over-year kind of improvement in the third and the fourth quarter? Or are we talking about things that are going to kind of be flat here to the first and the second quarter in terms of raw material pricing?

John McFarland

Well, we'll get more benefit in the second half of the year and on a year-over-year basis, we had a big run up in the second half of last year in raw material cost. And so when you compare the two, you are going to see more benefit in the second half than you do in the first half. But also our copper hedging and program really kind of keeps us with higher pricing on copper through most of the first half.

Ronald Tucker

If you compare January, January for steel. If you look at, we actually... things like electrical steel and copper is little higher than last January than we have which is another reason we're happy with the results we saw in... not happy but at least we were satisfied with results you saw in January due to the cost savings.

Kristine Kubacki - Avondale Partners

Okay. Well, thank you very much for your time.

John McFarland

Okay, let me just add to that we wouldn't probably be happy with those results in the February because with these cost savings billed month-to-month.

Kristine Kubacki - Avondale Partners

Okay.

John McFarland

Thank you, Kristine.

Kristine Kubacki - Avondale Partners

Thank you.

Operator

Next to Yilma Abebe with JPMorgan.

Yilma Abebe - JPMorgan

My question has been answered. Thank you.

Operator

(Operator Instructions). We'll go next to Tedd Hage (ph) with ING.

Unidentified Analyst

Yes, thank you, good morning. Can you talk a little bit about your liquidity both at December 31st and where you are currently specifically with the revolver balances and letters of credit outstanding?

Ronald Tucker

Yeah, we've adequate liquidity. We have in excess of... I'm not sure the exact number over 100 or $100.25 million in liquidity.

Unidentified Analyst

And that's inclusive of cash?

Ronald Tucker

Yes.

Unidentified Analyst

Okay. And you guys are holding what 13-ish million or so cash, is that right?

Ronald Tucker

About $13 million.

Unidentified Analyst

Okay, okay. And is your electrical steel hedged?

John McFarland

No, we are not able to hedge electrical steel.

Unidentified Analyst

Okay, okay. Well, I was trying to go with this one of the things that you cited and the I think in the additives were kind of higher cost of goods sold and so forth that's kind of impacted you that hasn't rolled through the system yet. I am assuming by kind of your earlier comments about expecting an essentially roll through second half of the year, is that a fair statement?

Ronald Tucker

Are you referring to the cash or the income of and the impact of the raw materials?

Unidentified Analyst

Impact of raw materials.

John McFarland

Sorry.

Unidentified Analyst

Impact of the raw materials.

John McFarland

We have our major components, the major components that we buy are steel, copper, aluminum castings and with steel being the largest and copper being the second largest, and we had copper hedges in place through most of the first half that prevented us from realizing any of the decline in the copper price. As we get on into the year, we hope to realize some decline in copper pricing, so raw material savings should build toward the end of the year.

Unidentified Analyst

Okay. Great, thanks guys.

John McFarland

Thank you.

Operator

We will go next to John Franzreb with Sidoti and Company.

John Franzreb - Sidoti & Company, LLC

Good morning, guys.

John McFarland

Good morning, John.

Tracy Long

Good morning. John.

John Franzreb - Sidoti & Company, LLC

Could you just give some color around the backlog. I recognize that over the years you have had shutdowns in December. So there is some I guess seasonality in there. But is there anything else you can serve from the sequential drop either on the motor size. The size of the motors or any kind of color you can provide there?

John McFarland

Like every public company, I think we were trying to shift everything possible in December and we did have a very good month on, in our large motor business, which is where a lot of the backlog resides. And I don't think it was.

Shipments were a little bit stronger than orders in the quarter, but the backlog down. In the month of January the backlog went up by about $10 million. I really don't, I mean there's really not much change in backlog I mean, it was a little high probably going into the quarter little higher than it should have been may be.

John Franzreb - Sidoti & Company, LLC

And John in your prepared remarks you talked about the increased profitability on international sales, is that an FX issue, or is there something else there?

John McFarland

No, that's operational and again it's related to the operation in China, which is a very profitable operation.

John Franzreb - Sidoti & Company, LLC

That's good news.

John McFarland

And an operation agreed that grew by double-digit amount in the quarter.

John Franzreb - Sidoti & Company, LLC

And you said Super-E in January sales were the highest ever, what was the previous tie?

John McFarland

Well, there were highest... from year-over-year percentage increase, I don't remember what it was previously, but it was over 50% in January.

John Franzreb - Sidoti & Company, LLC

And is there anything that you can just run behind that spend?

John McFarland

Only that, only that energy cost continue to high and people are recognizing that high efficiency motors make a lot of sense. And we clearly are the leader in that business now we have done a few things to try to increase the sales of those including adding a number of ratings that we haven't had before. But we just had really good year, a good month in January on high efficiency motors.

John Franzreb - Sidoti & Company, LLC

What do you think high efficiency could be as a percent of motor sales by the end of the fiscal year?

John McFarland

It's about 10% now and it's, it will go to about 50% in 2011 or something like that.

John Franzreb - Sidoti & Company, LLC

I guess so.

John McFarland

And we think that we can cause some of the switch that's mandated in December 2010. We think we can cause some of that to happen early by encouraging particularly OEM so we're designing equipment, not to design in motor that will be obsolete and they can't use come December 2010 to go ahead and design in a high efficiency motor now and we're busy doing that. But I'd expect I mean something that have to change for it to not grow by another 25% this year, it's growing that rate for five years now and accelerated actually in the fourth quarter and in January.

John Franzreb - Sidoti & Company, LLC

And just, remind me there is higher margins in that but just modestly higher margins not to spend in the regular motor business, right?

John McFarland

That's correct.

John Franzreb - Sidoti & Company, LLC

Okay thanks a lot.

John McFarland

Thank you, John.

Operator

We'll go next to Brian Meyer with Robert W. Baird.

Brian Meyer - Robert W. Baird

Hi, good morning, guys.

John McFarland

Hi, Bryan.

Brian Meyer - Robert W. Baird

Standing in for Mike. This one has got a few questions for you. First on pricing, I was just curious what the... can you give a number or percentage in terms of what that conservative growth this quarter may be directionally?

John McFarland

About?

Tracy Long

How much of the 4%

John McFarland

How much of the 4% was price?

Brian Meyer - Robert W. Baird

Yes, exactly.

John McFarland

Well all of it.

Brian Meyer - Robert W. Baird

Yes, okay.

John McFarland

I mean we had two price increases last year with the last one being in July, so pretty much all of it was price.

Brian Meyer - Robert W. Baird

Okay. And another kind of clean up question, what was the Maska contribution to the quarter on revenue?

John McFarland

$8 million.

Brian Meyer - Robert W. Baird

$8 million?

John McFarland

$8 million to $9 million.

Brian Meyer - Robert W. Baird

Okay, fair enough. And then getting back to this discussion on January thus far you guys, you said that sales were down 9% EPS was down I think you said 6% and you were comparing that to and I'm sorry if I didn't catch this right I think was the December period, is that right?

Ronald Tucker

What we said was sales... year-over-year January sales were down nearly 9% and earnings were down about 16%.

Brian Meyer - Robert W. Baird

Earnings down 16%?

Ronald Tucker

Yes.

Brian Meyer - Robert W. Baird

And you'd compare that to--?

John McFarland

Well, we compare that to December Brian where we had a... or we could actually, we compare it to the fourth quarter.

Brian Meyer - Robert W. Baird

Okay.

John McFarland

Where sales were up 4% and earnings were down 20%.

Brian Meyer - Robert W. Baird

Got it.

John McFarland

And I guess the point we want to make is that we've put in these cost savings and they are beginning to build and we saw them clearly in December when our margin, our operating margin in December was better than October with 35 million less in sales. And we continue to see these cost savings recognized in our January results.

Brian Meyer - Robert W. Baird

Got it.

John McFarland

And we will expect them to build over the balance of the year.

Brian Meyer - Robert W. Baird

Good, okay. And then just one last one. You talked about the OEM versus distribution break out a little bit during the quarter it sounds like OEM was a bit ahead, I was hoping you could may be quantify with the growth rates we are in each category?

John McFarland

Yes, I've got that here with me where is that Tracy? Right here, the total distributor business in the quarter declined by 6% and the OEM business increased by 7%.

Brian Meyer - Robert W. Baird

You say increased by 7%?

John McFarland

Yes.

Brian Meyer - Robert W. Baird

Got it. Okay, I think that's it for now guys, thank you very much.

John McFarland

Thank you, Brian.

Operator

Next to Manish Somaiya with Citi.

Manish Somaiya - Citigroup

Good morning, guys. Good morning, John, Ron and Tracy. Couple of questions, one, I think you mentioned in your opening remarks that the leverage covenant steps down at the end of '09 and obviously in this sort of current environment, based on your LTM leverage, I mean having more flexibility would be better than approaching the banks at the last minute?

So I just want to kind a get your thoughts on what plans do you have currently to talk to the bank group about a possible cushion for your leverage covenant? And second how much do you think that would cost you in terms of potentially higher coupon on your bank debt?

Ronald Tucker

Well, we are always in talks with our banks. But from what we've seen, we're confident that we'll stay within the covenant, we'll be in compliance with the covenants throughout the year and at the end of the year when it steps down. But again we are constantly in contact with our banks about a variety of issues but we are confident that we'll stay within the covenants.

John McFarland

All of the banks are hungry right now for business just like we are hungry for motor business and they are in here constantly. We talked to all of them when we evaluate all of their proposals. But our plan right now is to meet this covenant at the end of 2009 by paying down debt, reducing our costs and having a good sales year.

Manish Somaiya - Citigroup

John, I think you had mentioned earlier that you expected that business may not be bad in the second half and I guess I was seeking a bit more clarification on that, I think you would kind of touched on the raw materials portion that, that could be a benefit in the second half, so when you say that business may not be bad, were you referring to the top-line or were you referring to the raw material costs?

John McFarland

Just for the record, I am seeking some further clarification on that myself.

Manish Somaiya - Citigroup

I am sorry that's what I jotted down. So--

John McFarland

Well, I think our... about half of our business is distributor business and really I think for us to see some improvement in our business, we are going to have to see distributor inventories decline. And at some point as distributor inventories decline, they will decline to a point where business will start to improve for us and the aggressiveness of distributor inventory decline in December, I have never seen before. I mean the last decline in distributor purchases in December and we get some information from some of our largest distributors about what they are selling and what they're and then we compare to what they are buying.

But there is some very aggressive inventory reduction going on and so I'm thinking that by the second half of the year may be the third or fourth quarter, that's a lot of that will be washed through. And that we may see a little bit of an improvement late in the year. And I think that's from the top-line.

Now from the bottom line as we said before, we've got $80 million where the cost reductions that we talked about back in December and we're reviewing those and we are working to find even more and we're going to probably in the second quarter have another meeting like we had in December to update people on what those cost reductions are where we are and may be update the amounts.

And so I think as the year goes by, the cost reductions will flow into the performance a little bit more each month and so our bottom-line as well should improve.

Manish Somaiya - Citigroup

So John just following up on your distributor comment then, I mean do you have a sense for the financial health of the distributors, would there be the capacity to survive the next few months which could be very tough economically. I was hoping that perhaps you can add some color on that?

John McFarland

Well, we have... it's hard to answer because we have about 3,000 or so distributors in total for all of our different types of our products. But I am going to tell you that the largest ones that we do business with certainly have the ability to survive a tough environment in 2009 and even into 2010. When I look at the amount of inventory some of our distributors carry I mean there is a long way they can go bringing inventories down. They have brought down a lot of inventories.

Now, we have some smaller ones that may have more trouble. But our major distributors are in good health and I think we will be okay.

Manish Somaiya - Citigroup

Just two quick follow-ups then. One is Ron, can you give us a sense for some of the cash costs. As I kind of look at free cash flow, I don't think you guys have given full year EBITDA or EPS forecast, so perhaps if you can just give us a sense for the different set of line items that we would look at or consider and coming up with the free cash flow number. I think the CapEx figure you gave out on was $37 million for the year. So interest expense would be what like approximately $100 million or so for the full year in '09, dividends of around $31 million?

Ronald Tucker

Right now I would assume the same dividend rate.

Manish Somaiya - Citigroup

Right, so, dividends of 31, interest expense of 100 or so, CapEx of 37, cash taxes I mean what should we be thinking about cash taxes?

Ronald Tucker

Our rate will be around the same rate we saw last year.

Manish Somaiya - Citigroup

And then finally, with, either sort of cost savings initiatives that you've outlined, should we be thinking about cash restructuring cost associated with those?

Ronald Tucker

We don't anticipate any kind of material cash restructuring costs at all.

Manish Somaiya - Citigroup

Okay.

Ronald Tucker

These cost savings that we consider right, really in the... we made this positive in December also, other than savings that we have identified this $80 million, really requires no other pocket costs to achieve.

Manish Somaiya - Citigroup

Okay.

John McFarland

And let me just on the interest expense, our interest expense last year was $102 million. And one of the cost savings we have is we think will be approximately, we expect to pay approximately $10 million less, in interest expense, so it would be more in the $90 million range than the $100 million.

Manish Somaiya - Citigroup

Right. And then I guess it's probably fair to assume that working capital should be a source of cash and perhaps if you can give some guidance on that. That will be helpful.

Ronald Tucker

We do anticipate to be a source of cash, but without the sales number it's hard for us to really project what that source of cash is going to be. We are committed to bringing you down our inventories in better managing our receivables and bringing those downs as sales are down. And then we talked about, we talked about that in terms of debt pay back.

John McFarland

But when we are in New York in December, we did outline some of that. And I think we talked about on what we thought would might be a worst case scenario on sales, should be a 15% decline and on that basis we'd have well over $50 million dollars worth of cash from inventories and out of that $30 million from receivables.

Ronald Tucker

We spoke to about $100 billion I believe over 50% of decline in sales of the $1 billion (ph).

John McFarland

Yes.

Manish Somaiya - Citigroup

Okay. Thank you so much.

John McFarland

Thank you.

Operator

Next to Tom Lamb with Weybosset Research.

Tom Lamb - Weybosset Research

Good morning, everybody.

John McFarland

Hello, Tom.

Tom Lamb - Weybosset Research

I was just wondering if you could give us some color on the pace of orders, the OEM orders in the various sort of end market categories that you mentioned. The pump, compressor, mining. Have you seen any noticeable increase or decline in any of those categories?

John McFarland

Well, we have seen as I mentioned earlier, I think the ones that have been strongest for us for pumps and compressors where we had a good double-digit increase during the quarter. And the mining, in our orders, we make some real special mining motors in our orders for those have been very strong, very strong in the quarter and have been in January.

Material handling was up double-digit, oil and gas was up strong double-digit for the quarter. And our farm equipment business which is pretty nice business for us was up real strong and I believe we had the highest increase.

As far the industry is showing minus, food processing showed a double-digit decline and there is a few others, HPAC was... we only do business on the industrial side of the HPAC, we are not residential. And it was about flat in the quarter whereas it had been running up during the year.

Tom Lamb - Weybosset Research

In terms of the former group, the positive group with those numbers that you saw, are those year-over-year numbers that you are including in terms of--

John McFarland

Yes, year-over-year for the quarter.

Tom Lamb - Weybosset Research

So quarter-over-quarter, year-on-year. Sounds pretty good. All right, thanks a lot, appreciate it.

John McFarland

Thank you, Tom.

Operator

Next to Matt Vittoriso (ph) with Barclays Capital.

Unidentified Analyst

Hi guys, just curious very quickly, does zero credit agreement allowed your basket to buy and to repurchase bonds and if so was that something you would consider as it means the help coming under your leverage covenant?

Ronald Tucker

The level of average purchase of bond--

John McFarland

There is a call back on them, but you can't buy the bonds back at all, no.

Unidentified Analyst

So no basket, okay. And just very quickly is there anything interesting about the way EBITDA was calculated in the credit agreement as if pretty straightforward, do you have LTM EBITDA before the credit agreement just so we're all on the same page just as far as where leverage is, etcetera.

Ronald Tucker

It's pretty straightforward in the calculation, it's not really anything, there is not anything real exotic in there.

Unidentified Analyst

Okay, all right. Thank you.

John McFarland

Thank you, Matt (ph).

Operator

Next to Allan Matroni (ph) with Sylvan Lake Asset Management.

Unidentified Analyst

Hi, thank you. Just a follow-up to that last question. Can you give us what LTM EBITDA was for the last 12 months based on the covenants?

Tracy Long

We know that ratio is 3.81 at the EBITDA.

Unidentified Analyst

3.81, okay. I just wanted to understand if you could add back share-based comp for example to--

Ronald Tucker

We just add back, yes, you are right.

Unidentified Analyst

It does add back, okay. And any... what about shortages if you single out your specific charges?

John McFarland

Those we do not have, if you have a charge, those could add it back.

Unidentified Analyst

Okay, that's great. Okay that comes to about $348 million roughly. If I just take this 3.81. Do you have any other balance sheet items may be you can give us the simple ones so we can do a couple of calculations. May be what current assets were, current liabilities or payables?

Tracy Long

Current assets would be 717, payables would be total, current liabilities of 287, payables of 98.

Unidentified Analyst

Okay, and thank you. And what about goodwill write-downs or goodwill adjustments? It's been a couple of years, since you made the acquisition. Obviously, your market value has come down significantly, the stock market value and a lot of companies are taking goodwill impairments for deals they did a year or two years ago. Which seem to be now inflated prices. Have you looked at that with your accountants for your costing agreement?

Ronald Tucker

Yes, we've done the year-end testing out and there is no impairment.

Unidentified Analyst

No impairment. Okay, great. And then may be I just want to understand your optimism a bit. It seems like a lot of your competitors are much more pessimistic about where business is going and the rate of change in terms of OEMs and capital spending budgets. When I took a look at some of the largest customers in the aggregate side and others their capital spending looks like it's getting cut by 40% to 50% year-over-year oil and gas has been slashed, are you guys just not seeing it yet because your are delayed and your distributors are cutting back quickly and the OEMs are the next ones to go, but why after I listen to Emerson talk, Regal, Boyd and many others and who are expecting somewhere between 10% and 15% sales declines. Are you guys not thinking that could be the place and may be planning from a cost cutting perspective if that could happen?

John McFarland

Well, we haven't forecasted our revenue at all for the year. And we only said that it was down little over 8% in January. From a cost cutting point of view you know we in December we made a presentation in both New York and Boston, it's on our website if you haven't seen it.

Unidentified Analyst

I saw that.

John McFarland

There we assumed a 15... fine that we said that was the worst case scenario. And then recently we felt it was the worst case scenario, number one we have never seen that before, number two, if we have none of our sales people we're forecasting a 15% decline. And we were seeing that in any of our orders, but that's where... we are focused on our cost cutting based on a worst case scenario and so we are doing that.

Now, with respect some of the other industries, I mean we are really looking at our numbers and what are they showing us and for example you mentioned oil and gas, I mean for us oil and gas was up 21% in the fourth quarter. It was down slightly for the year, but it showed a really strong fourth quarter. And just looking at our orders, we haven't seen any... we don't see a catastrophe on the horizon.

Unidentified Analyst

How much visibility do you typically have in your orders versus when you get the order when you ship the product?

John McFarland

Well, it depends on the type of motor, if it's a large motor we have about six, seven, eight months, if it's a large generator, we will have six months usually.

Unidentified Analyst

What sort of majority of the order for lot of the motors and things like that I mean just--

John McFarland

Most of that, half of our business, almost half of our business is sold from inventory and we pretty much ship the day we get the order. The other half we have from two weeks to seven months worth of visibility.

Unidentified Analyst

Okay. I would just encourage you to look at some of the bigger OEMs and take a look at what their capital spending plans are and whereas AC sales projections, may be you could put the line together because it just seems like there are lot more pessimistic maneuver which I hope they are wrong. But it just seems that way in listening to a lot of competitors.

One another question, where do you... how come you can't take down your working capital more as you are going through, the integration still with Reliance and I should putting through the... why is working capital as a percent of sales and specifically trade working capital still so high in the 20s, little 20s, as opposed to being in the high teens?

Ronald Tucker

Well, we can't take it that further. We did anticipate taken that further and we've made progress this quarter particularly compared to last quarter. Our fourth quarter compared to third quarter and there are some things we're still worked on in terms of working capital. I'll give you an example.

This is a year we've begin to put the Reliance motor plans from the Baldor's bus system, or I'd say pay system. And that will generate working capital savings in terms of working process inventory. We've just seen... we've completed late last year, early middle of last year that the move to the financial department which brings it this collections and receivables together.

So there is projects going on. The assumptions we've made on the 15% decline on our working capital assumed no improvement in DSO or inventory turns. We think we can improve DSO and improve our inventory turns. So I think I agree that it could be better in fact it's too high but its moving in the right direction.

Unidentified Analyst

Have you changed bonuses also this coming year based on working capital improvement or based on certain metrics that you want to see to make sure you generate the cash flow, so that you stay within covenants?

John McFarland

Yes, we have.

Unidentified Analyst

Great. Okay, thanks a lot.

John McFarland

Thank you, Allan (ph). And let me just say one more, let me just comment one more on your comment about people being optimistic or pessimistic. I am not optimistic about sales. I mean I am optimistic about how we can perform this year.

But I am not optimistic that sales are going to be... that this is going to be a record breaking year on sales. I think we are going to be down in the first half. I think we had the opportunity to do a little bit better in the second half and that's primarily because of the way our businesses is mixed.

Half of our business is distributor and we see right now distributors dramatically bringing down inventories. At some point in time that stops and they begin to work out of our inventory. And not everybody in our industry had such a high mix of distributor business compared to the total.

Ronald Tucker

I'll also just add one thing I think we're optimistic... we're obviously going to sense that I think we have a great sales force. I mean those of our guys out there, we talk about the Bounty Hunt Program, stay within the five new accounts. They had a really good hit right back at 2001 during the recession. So I think that's another piece that gives us some amount of confidence.

Operator

And at this time there appear to be no further questions. I'd like to turn the call back to over to Mr. McFarland for any additional or closing comments.

John McFarland

Okay. Well, thank you very much for joining our call this morning. And we are busy implementing our cost reductions which we outlined in New York. We will hold another meeting in New York some time before mid-year to update you further on those projections.

As we mentioned our January results have arrived where we expected them to be with respect to the cost reductions. And we believe we'll certainly be able to achieve the $80 million and we'll update you between now and mid-year on what we, on whether or not we think we can increase those amounts.

So thank you very much for joining us our call this morning.

Operator

That does conclude today's conference call. Again, we thank you for your participation. You may disconnect at this time.

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