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Executives

Barry L. Pennypacker – President and Chief Executive Officer

Helen W. Cornell – Executive Vice President, Chief Financial Officer

Analysts

Kevin Maczka - BB&T Capital Markets

Ned Borland - Next Generation Equity Research

John Moore - Robert W. Baird

Marty Pollack - NWQ Investment Management

Ben Phillips - Lord Abbett

Joseph Mondillo - Sidoti & Co. LLC

[Unidentified Analyst] - KeyBanc Capital Markets

Gardner Denver Inc. (GDI) Q4 2008 Earnings Call February 13, 2009 9:30 AM ET

Operator

Good day and welcome to the Gardner Denver fourth quarter results conference call. Today’s call is being recorded. At this time I would like to turn the call over to Barry Pennypacker, President and CEO of Gardner Denver. Please go ahead.

Barry L. Pennypacker

Thank you Kim. Good morning everyone and welcome. I’m joined this morning by Helen Cornell, Gardner Denver’s Executive Vice President and Chief Financial Officer. Before we begin our comments, though, Helen has a few words on our forward-looking statements.

Helen W. Cornell

All of the statements made by Gardner Denver during this call other than historical facts are forward-looking statements made in reliance upon the safe harbor of the Private Securities Litigation Reform Act of 1995. As a general matter, forward-looking statements are those focused upon anticipated events or trends and assumptions, expectations and beliefs relating to matters that are not historical in nature. Such forward-looking statements are subject to uncertainties and factors relating to Gardner Denver’s operations and business environment, all of which are difficult to predict and many of which are beyond the control of the company.

These uncertainties and factors could cause actual results to differ materially from those matters expressed in or implied by such forward-looking statements. Please refer to Gardner Denver’s fourth quarter 2008 earnings press release issued on February 12, 2009 for further information regarding potential uncertainties and factors that could cause actual results to differ from anticipated results. Gardner Denver does not undertake or plan to update these forward-looking statements even though the company’s situation may change. Therefore you should not rely on these forward-looking statements as representing the company or its management views as any date subsequent to today.

As a reminder, this call is being broadcast in listen-only mode through a live webcast. The free webcast will be available for replay up to 90 days following the call through the Investor Relations page on Gardner Denver’s website, www.gardnerdenver.com or on Thompson’s StreetEvents site, www.earnings.com.

And now I’d like to turn the call back to Barry.

Barry L. Pennypacker

Thank you Helen. It’s amazing how dramatically demand has changed in the last four months. We all knew that there were economic headwinds facing us in 2009 when we spoke in October but few expected the end markets to deteriorate as quickly or dramatically as we’ve experienced in the last three months of 2008.

Certainly we had indications in October. I believe I characterized it as “a light switch being turned off around the world.” But we were optimistic that this dramatic drop in demand was temporary and that we would see some leveling or improvement in 2009. In November it became clear that further deterioration was being realized in our end markets and we became taking steps to scale our business as quickly as possible. If you recall, we implemented consolidation plans in the third quarter of 2008 with the announced closure of two manufacturing facilities in the U.S. which was completed on plan and budget in the fourth quarter of 2008.

We followed these actions in December with additional profit improvement initiatives to streamline our operations, reduce overhead costs, and rationalize the company’s manufacturing footprint. We reduced our global salaried workforce by 9%, implemented a hiring freeze, and put strict controls on discretionary spending. We also accelerated our CompAir integration plan and announced the planned closure of a manufacturing facility in the UK to leverage our operations. We also began to realize our purchasing synergies by consolidating some supply dates for air compressors with that of our legacy business. But I’ll address the status of the integration in a bit more detail in just a minute.

In addition to these actions we took a number of European locations to short work time schedules in late 2008 and early 2009. Although it is more difficult to permanently reduce the workforce in Europe, the temporary reductions are relatively cost effective. In addition, it allows us to keep our trained workforce fresh and available for when markets return.

You’ll also note that our outlook for 2009 includes further restructuring expenses of $33 million. This reflects consolidation of manufacturing operations in the U.S. and Europe. We believe these initiatives will be completed in 2009 and as we enter our 2010 manufacturing capacity will be appropriate and our investment in lean will continue generating benefits in terms of manufacturing velocity.

We believe that generally manufacturing consolidations in the U.S. generate a one-year payback and those in Europe generate a two-year payback. So these efforts are expected to improve profitability in 2010.

Let me give you an example of recently accomplished activity through our lean efforts. In our Sedalia, Missouri manufacturing plant, our largest in the U.S., we manufacture blowers and compressors. Recently we have heard from our customers that our lead time was too long.

Our Gardner Denver away team immediately performed a value stream mapping exercise, a tool that’s used to identify waste in any business process, and determined that the change-over time of two critical pieces of equipment were too long. A team of five employees, four hourly and one salaried, spent four days utilizing one of the tools in our toolbox called SMED, single minute exchange of [dies] to improve the process. They were able to achieve a 60% reduction in change- over time, a 35% reduction in work in process, enabled the start of product flowing in one piece flow and achieved a 15% floor space reduction.

I single this event out only because it happened just last week. Once again I will tell you that you can’t see what I can see and if you could, you would see these types of improvement activities happening in all of Gardner Denver’s facilities. The Gardner Denver Way is becoming institutionalized. I told all of you that you would first see working capital improvements, then facility rationalization and ultimately a culture that delivers superior operating results. We are on track to do just that.

The point is that we have undertaken a number of projects to reduce costs and rationalize our manufacturing footprint. There is little we can do about the economic environment, but this is an opportune time for us to focus on our internal opportunities to strengthen the business so that we will be a leaner, stronger company at the end of this current business cycle. Through the use of the Gardner Denver Way we can insure that our business is scaled to meet current activity levels. We will continue to take action in order to meet the needs of customers and generate returns for our shareholders, two cornerstone principles of the Gardner Denver Way.

While we deeply regret the impact that these actions have on certain employees, their families and the communities in which they live, we are committed to pro actively managing our business through this economic crisis. Our strategies to improve the business are we will aggressively pursue after-market revenue streams to mitigate the cyclical demand of our industrial products and improve operating margins; we will attempt to gain market share, particularly against competitors that are struggling to find their footing in this new economy; we will simplify our business to reduce our costs, which includes expanding our implementation of SAP to acquired businesses.

We expect to go live with SAP in the CompAir UK and German operations in the second quarter of this year, which will represent the most efficient IT systems implementation we have ever achieved and a lot of hard work by our employees as well as a testament to the power of lean in all business processes.

This year we have undertaken a huge push in low-cost sourcing to reduce material costs even more than results from commodity costs declining, but more on this in a moment. And most importantly we will continue our focus on generating cash flow and further strengthening our balance sheet. We generate a lot of cash throughout the cycle and this cycle will be no different. I expect working capital to be a source of cash in 2009 and capital spending to be less than D&A.

We will use the cash to repay debt and possibly purchase shares under the outstanding buyback program authorized by our board last November. I also expect in this economic environment that opportunistic acquisitions will present themselves as a chance for us to effectively deploy and apply our acquisition model.

During this difficult current economic environment we will not waver in our conviction to bring our entire organization into the fold of the Gardner Denver Way. This is one of the highest priorities we have. And also we will not postpone new product development and innovation. This is the equivalent of robbing from our future to meet a short term cost expectation. We will certainly be selective in the products we fund, but our future depends on developing innovative products that bring solutions to our customers.

Now let me give you a little bit more color on the CompAir integration. We have been able to pull certain portions of the integration forward as activity levels have declined in our compressor operations, so the integration is actually ahead of schedule. Late in 2008 we announced the closure of the Gardner Denver plant in Gloucester UK which will be integrated into our Redditch and Ipswich UK plants of CompAir. We are preparing the sites now and intend to be completed with the move by the end of the year.

The Rotary Screw Compressor product integration and rationalization is on schedule and should be completed in late in the first half of 2009. This will allow us to reduce our product costs in Europe and leverage the utilization of our manufacturing footprint in Europe.

The redundancy of CompAir’s management team is expected to be completed in the end of the second quarter of this year. We have integrated key leaders from CompAir in the critical roles of our compressor business in the U.S., Europe and Asia so the organizational integration is a combination of the strengths from each organization.

Finally, we have a number of smaller integration projects underway to consolidate some of our sales offices around the world. This will yield both cost reductions but also will help us drive revenue growth as we leverage the combined channels of distribution. There are some exciting opportunities in channel leverage that we are implementing currently and we expect the leverage to provide incremental sales opportunities.

This includes adding Gardner Denver’s Champion Reciprocating Compressor product line to the CompAir U.S. distribution network, offering CompAir Rotary Screw Compressors to the Champion U.S. distribution network and adding CompAir’s Hydrovane product line as an offering to the Gardner Denver distribution network. We also see a big opportunity in making certain that CompAir oil-free products become the standard for our customers in the U.S.

These are exciting opportunities and it is exciting to see our integration plan being executed by this seasoned team. I’ve said it before, “We have a core competency in integrating acquisitions.” I’m also proud to note that Gardner Denver was again named to the Forbes Magazine Platinum 400 List, companies that Forbes determines to be the best big companies in America. The magazine lists sales and earnings growth, debt to cap, earnings outlook and stock market returns as criteria that they examine to select the Platinum 400 List. And 2008 marks the third year in a row that Gardner Denver received this recognition.

Looking forward to 2009 and the level activity that we are seeing so far in January and February, this is going to be a very difficult year. The actions we took late in 2008 and early in 2009 are proving out, but we simply cannot remove our costs as quickly as the order rates have declined. This is particularly true in our European operations where decline in orders has been amplified in U.S. dollar terms by the dollar strengthening.

Over the long term, however, the changes that we are making will put this business in a position to be very competitive when our markets return. The measurement of success in managing through this current economic crisis will not be found in the first quarter release for 2009 or maybe not even in the fourth quarter release for 2009. It’ll be three, five, ten years from now. Although we are moving quickly and decisively in our efforts to remove costs from the business, we are being very careful to continue to invest in the business to achieve long-term value for our shareholders.

Before I open it up to your questions, I’d like to turn it over to Helen to provide some more color on the data included in the press release. Helen.

Helen W. Cornell

Thank you Barry. I don’t have a lot to add to the press release because we try to include a lot of detail in the document itself for your consideration, but I think there are a few common questions that I’ve received and I’d just like to address these up front.

The year-over-year decline in Compressor and Vacuum Products Segment operating margin is partly attributable to the unusual items that we identified in the reconciliation of operating income. It’s included at the back of the earnings release. Excluding these items adjusted CVP segment operating margin in the fourth quarter would have been about 8.2%.

Acquisitions completed in 2008, primarily the CompAir acquisition, had the effect of reducing this result by four percentage points. Therefore, the implied adjusted Compressor and Vacuum Products Segment operating margin for Q4 2008 on the Gardner Denver Legacy Business before acquisitions was about 12.2%, a modest decline from the prior year comparable figure of 12.5% and the third quarter figure of excluding unusual items of 12.7%. However, it is a decline.

The reduction in sales and production volume continue to put downward pressure on our operating margins. We’ve taken measures to reduce our fixed costs in the face of declining sales and order rates and will continue to do so if necessary. The cost reductions are increasingly realized as 2009 progresses.

We are also improving our operations through acquisition integration programs, the continuing deployment of the Gardner Denver Way throughout our operations. Nonetheless it does take time to improve the operating margin and to achieve the operating margin goals and undoubtedly we’re going to spend some degree of time – it depends on to some extent how long the economic downturn continues before we are able to achieve our operating margin goals. Although we’re not projecting revenue growth in 2009, we do see some opportunities for margin improvement as the result of cost reductions are realized.

I’d also like to address our expectations regarding pension expense and funding obligations for 2009. Certainly we are expecting increases in 2009 compared to 2008, but as a result of our proactive approach in the past to freeze our defined benefits pension plans previously offered in the U.S. and the UK, the financial impact of the deterioration in the financial markets is somewhat less than I’ve heard from other industrial companies.

We expect pretax pension expense to increase about $4 million in 2009 compared to 2008. Our current funding plans generally are fairly comparable to those in 2008, so from a cash flow perspective we aren’t expecting significant changes in the funding obligations but about $4 million of incremental expense.

Despite the economic turmoil our balance sheet and liquidity position remain in good shape. We have about $120 million in cash at the end of 2008 and about $250 million of committed but un-drawn availability under our syndicated revolving loan facility. We borrowed our five year syndicated credit facilities in the fourth quarter of 2008 when we completed the CompAir acquisition so they don’t mature until 2013. And required principal payments from now through 2010 are only about $60 million U.S. dollars.

So despite our guidance for lower earnings in 2009 we still expect to generate significant cash from our operations in the upcoming year. We expect to liquidate significant amounts of working capital when our business levels decline and as we further implement the lean processes and this will certainly help our cash flow.

And as Barry mentioned we’ll be using the bulk of our excess cash flow to strengthen our balance sheet and reduce our borrowing further. I’ll turn it back to Barry now and he can begin to field the questions.

Barry L. Pennypacker

Thank you Helen. Kim we’re ready for questions now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Kevin Maczka - BB&T Capital Markets.

Kevin Maczka - BB&T Capital Markets

Barry I guess my first question is on the guidance. You said that the you know obviously the end markets deteriorated faster than you thought they would, the visibility’s more clouded now than it has been before, so I guess even without giving specifics in terms of revenues and margin guidance can you kind of frame where you view your macro outlook in terms of this guidance? Does the high end of guidance imply that we get a big rebound in the macro for instance?

Barry L. Pennypacker

Let me handle that a few different ways, Kevin. No, to answer the last question first it does not assume a substantial change in the current macroeconomic conditions. Our guidance depending upon the division as you’ve come to know the old five divisions in the past have revenue assumptions anywhere from down 5% to down 20%. This has been the most effort I think I have ever put into trying to understand where I think our business is going and we have done many, many different models to try and come up with this guidance.

And I think based on the ability for us to continue to rationalize our manufacturing footprint, continue to improve our overall efficiency in all of our business processes through the Gardner Denver Way I believe that we can absolutely meet the low end of this guidance.

Kevin Maczka - BB&T Capital Markets

And then on orders, you mentioned that orders were down in every major product line except loading arms. Can you give us some magnitude there and maybe talk about how things may have changed in January and February since the quarter ended?

Barry L. Pennypacker

You know, what we’re seeing Kevin is that everyone is just absolutely in what I would call hold mode. Our quoting activity continues to be strong, particularly in some of the segments that are reliant upon long lead time items. But we’re just not seeing them currently being converted to orders. But you know we’re not seeing cancellations. We are seeing strength in our loading arm business in particular where there are some major programs that we’re hoping to be part of here in the very near future.

Some of our medical markets are strong. I don’t know how long that will last. It depends upon how fast this Medicare change in the billing cycle gets passed through Congress.

But right now the industrial markets are performing at what they were in the latter half of December which is what we’ve basically decided that our guidance will be based on this year.

Kevin Maczka - BB&T Capital Markets

And then just finally on the loading arms if I could, and then I’ll hop back in line, the fluid business margins jumped back up to near record highs and I’m assuming that a big part of that was the high margin loading arm business. How much loading arm business did you have in Q4 and in 2008?

Barry L. Pennypacker

I don’t have the exact percentage and Helen could probably help me with that, but I will tell you as we’ve said before we love the loading arm business because we outsource a substantial amount of the manufacturing of that so we don’t have the inherent overhead. And the value in that business is really in the engineering which is what you know we continue to leverage across the globe. So as far as the percentage goes I’ll defer that to Helen.

Helen W. Cornell

Well, and to be clear from a revenue perspective the comparison in the fourth quarter of 2008 versus 2007 was unfavorable because we had that very large South American loading arm shipment which was over $20 million I think in 2007, fourth quarter 2007. So revenues were definitely down. Orders were positive but we haven’t received any really large what we would call “elephant orders” comparable to that South American activity. So it’s more just marine loading arms and some general investments in infrastructure in offshore applications.

I’d rather not get into the level of detail in terms of providing how much we sell on an annual basis in terms of loading arms but in aggregate for the year our loading arms business in 2008 was higher than in 2007.

Operator

Your next question comes from Ned Borland - Next Generation Equity Research.

Ned Borland - Next Generation Equity Research

I just had a question on the fluid transfer margins. You mentioned that there’s some steps that you can be taking to sort of fight off some of the decline you’re seeing in the drilling pumps. I was just wondering what some of those moves might be.

Barry L. Pennypacker

Well, we continue as I said to look at ways of increasing the velocity in all the business processes in loading arms. That includes everything from engineering complete to production. We have not been a company that has focused dramatically on material cost reduction and I think you heard in my comments that that is an area of extreme focus for us. That would not only benefit the loading arm business but it’ll benefit the entire fluid transfer segment and we’re very focused on that.

And you also heard us say that as we continue to lean out our operations we have the opportunity for footprint rationalization and I think you’ll see that will help the margins in that overall business.

Ned Borland - Next Generation Equity Research

So I mean in terms of a ballpark of margins we’re definitely not looking at a return to 2003 to 2005 levels, right?

Helen W. Cornell

Well, keep in mind 2003 was before we had the loading arm business so we don’t think that that’s a good comparison. We in the past have said that we expect the trough margins to end up I think around 16% for that business. I don’t know exactly where this business is going in 2009 but as I sit here today and look at what I’m hearing the outlook for the oil and gas industry in general and the number of rigs that are planned to be pulled from use I wouldn’t be surprised to see us exit 2009 near the trough levels.

Ned Borland - Next Generation Equity Research

And then on the share repurchase authorization that you announced in November was anything done on that?

Helen W. Cornell

Not yet.

Barry L. Pennypacker

Not yet.

Operator

Your next question comes from John Moore - Robert W. Baird.

John Moore - Robert W. Baird

Another question on the loading arms, if I remember correctly you had a few LNG loading arms in your backlog that I believe were scheduled to ship the first quarter of ’09. Were those pulled into the fourth quarter or are they still scheduled to ship in the first quarter?

Barry L. Pennypacker

No, they’re still scheduled to ship in the first quarter.

John Moore - Robert W. Baird

So do you expect the margins to be similar in the first quarter that they were in the fourth quarter? Or can you in fact – I guess achieve an even higher operating margin in the first quarter.

Helen W. Cornell

Well I mean you’ve got countervailing pressures there because you’re seeing declines in the upstream oil and gas activity. I don’t think that the margin is going to step off the cliff in the first quarter, but also the size of the loading arm that you’re shipping in the first quarter of 2009 is you know significantly less than what you were selling in the comparable period of 2008. So you don’t have quite the level of buying leverage that you had in 2008.

But sequentially from fourth quarter to first quarter I’m not looking for a huge drop-off. I think your downward pressure on the margins happens later in 2009 and as you continue to see declines in your backlog for upstream oil and gas activity.

John Moore - Robert W. Baird

And then on the CompAir acquisition it sounds like you guys expected to be basically well contribute basically zero to EPS in ’09. Just wondering what your guidance assumes in terms of how fast the operating margins ramp in that business. If I remember correctly I believe it generates operating margins of about 6%. Are you expecting it to reach – well it seems like from the guidance you’re expecting it to reach near the corporate average by the end of the year. Is that right?

Helen W. Cornell

Let me clarify. The 6% was CompAir before we acquired them. We are going to be pulling costs out but we have as we’ve gone through the purchase price valuation price determined that some of their intangibles are more valuable than what we initially thought, which is a good thing particularly this oil free quantum of products product line. But that also increases the amortization expense so that does put some pressure on that overall margin.

I don’t think that we will exit 2009 with CompAir at the overall optimum margin for that business because we’re not going to have the volume leverage. But we will have completed most of the heavy lifting on the integration activities by the time we exit 2009.

John Moore - Robert W. Baird

Can you guys I guess give us any idea as to what you expect cash flow from operations to be in 2009?

Helen W. Cornell

Really good.

Barry L. Pennypacker

Really good. You know as far as throwing out a number I mean I think if you look at our press release and look at some of the assumptions that we’ve made in there I think you can come up with a figure and I think you’re going to be pretty happy with what that figure is.

Helen W. Cornell

Certainly you’re getting less cash out of operations because you’re profitability’s going down and you’re getting – you’re consuming cash as we execute the restructuring programs which we assume are essentially completed by the end of 2009. But you would also be pulling cash out of inventory receivables both through volume declines and business improvement. And I think we said earlier that we would expect CapEx to be less than D&A. I think we’re giving you the pieces.

Barry L. Pennypacker

And also on the inventory front you saw that we generated a substantial amount of cash in the fourth quarter from inventory reduction. That will continue and our internal target remains the half a turn a year. And we’re going to drive to those results.

John Moore - Robert W. Baird

Helen can you remind us what the debt covenants are on your new facility here after CompAir? I mean I presume based on your comments about cash flow that that’s not going to be an issue.

Helen W. Cornell

No, it’s not an issue. And I think they’re available under some SEC filings but there’s really nothing constraining at this point in time.

Operator

Your next question comes from Marty Pollack - NWQ Investment Management.

Marty Pollack - NWQ Investment Management

Just wondered your comments about margins I think Helen you said 15% or 16% for the fluid transfer as sort of what would be a worse case type scenario but you seemed to indicate that scenario was likely to evolve by the end of the year because - I just want to clarify, are you suggesting that for the full year margins will not be there?

But if you’re saying 15, 16% this would be the sort of the falling into that level perhaps the last quarter of the year. Is that what you implied? Because otherwise the 230 guidance even on the low end would seem to be pretty difficult to achieve if you would land into that type of margin as early as – if that would be the average for the full year.

Helen W. Cornell

No, I don’t think we’ll be at the trough level margins for the full year. I think that margins in fluid transfer will deteriorate through the year and that you’ll exit the year probably near the trough depending on what happens with the upstream oil and gas. You could get most margins earlier if between now and the second half we have cancellations in orders and for fluid transfer products. That has not been our experience in the past. We’ve seen customers reschedule delivery dates but not necessarily cancel the orders out.

So it could be if they reschedule orders into the back half of the year that you hit the trough level earlier in the year but I still wouldn’t expect to average the trough level margins for the year.

Barry L. Pennypacker

Yes, Marty, I think it’s important to understand that we’ve got a very good backlog going into the second quarter of the year. Second half of the year is going to be much more difficult as you can tell from the pull back that the EMT firms have recently announced with regards to their capital spending in the second half of the year.

We are focused very intently now on the after-market because in some of the difficult shells that are very high producing the Well Stimulation Pumps that we have out there are performing extremely well and it’s our responsibility to tie up that after-market through the OEM sales that we’re having right now so that when their fluid end is needed it comes from Gardner Denver which will help substantiate our margins in the second half of the year.

Marty Pollack - NWQ Investment Management

Just also talking about the blending of the sales declining anywhere from 5 to 20% depending on the products within the two major segments, could you just more or less describe what you think is going to be the kind of the mix between the vacuum and compressor products versus the fluid transfer? I mean where are we likely to see a much larger decline in the revenue base?

Helen W. Cornell

Oh you’ll see a much larger decline in the revenue base in fluid transfer.

Barry L. Pennypacker

Yes. No question.

Marty Pollack - NWQ Investment Management

And as we just look at the CompAir impact on an apples-to-apples basis is the – are the numbers there more likely to be less than 10% decline year-over-year?

Helen W. Cornell

I’m sorry. I didn’t understand.

Marty Pollack - NWQ Investment Management

Including the CompAir obviously CompAir brought in revenues –

Helen W. Cornell

Oh, when Barry’s talking about the decline in revenues he’s speaking on a pro forma basis as if we’d held CompAir for the full year.

Marty Pollack - NWQ Investment Management

You indicated you have plenty of options for use of cash. You kind of enumerated some, obviously share repurchase you mentioned, I believe purchase of debt and opportunity to buy a business, can you just sort of describe the priorities and whether you see – just if you can give us a little color on what those targets are on all of them?

Barry L. Pennypacker

Yes. It’s by no mistake that our internal priority is to pay down debt first. We are extremely focused on that. You know you look at our history, that’s what we’ve done continuously. Should that proceed faster than what we anticipate and again I’ve reiterated that I believe this organization is really becoming focused on operational improvements to drive cash flow and should that exceed our expectations and debt is being paid at the levels that we think are necessary, we’d step into the share repurchase.

And as I also said there are opportunities going to present themselves this year for the ability for us to apply and deploy our acquisition model. And should they come about we’ll definitely be in the game.

Marty Pollack - NWQ Investment Management

It would seem for you to have the ability to really leverage on all those faults it seems the performance kind of numbers based on your guidance would suggest easily $150 million of free cash plus possibly more with working capital as a further source to that, so you’re saying you could be doing all three and still comfortably also in effect reduce the debt as your first priority. Current net debt I think is about $420 million. Do you see that number coming down to the low $300’s? Would that be the objective?

Helen W. Cornell

I don’t know that we have a specific target debt in absolute dollars. It’s more just a priority of repaying the debt near term.

Marty Pollack - NWQ Investment Management

With all the initiatives is there a way to put a number on the total cost savings captured in ’09?

Helen W. Cornell

I think we in the third quarter and fourth quarter of last year have gave some pre-releases and in the first one we identified cost reductions of about $8 million that we would be realizing in 2009. And in the second release we talked about cost reductions that would generate $7 million. So I think there’s $15 million there that the projects are done and the contributions are being made in 2009.

We identified another $33 million of cost reductions in 2009. The timing of the realization of those probably you end up net net including the costs having more of a drag on earnings in 2009 than you do benefit. So I don’t expect to realize the $33 million in savings in 2009. Barry gave you some commentary that part of it’s in the U.S., part of it’s in Europe. The European has a two-year payback so you wouldn’t even have $33 million in savings in 2010 because of the time that it takes to pull all of the costs out of Europe. But certainly we expect it to be contributing to earnings in 2010.

Operator

Your next question comes from Ben Phillips - Lord Abbett.

Ben Phillips - Lord Abbett

Just refresh my memory on what you’re paying on the new term loans. I believe its L plus $250. And then have you considered swapping any of this for fixed just given the low libor environment?

Helen W. Cornell

We started at libor plus $250 when in the fourth quarter. I think that we’ll be down at libor plus $200 as we go into 2009. And we currently have some fixed rate debt although we are considering the fixing at the low levels of libor, we try to look at what our repayment capability is and not target more than 50% debt being fixed and 50% variable. But we have in the past used interest rate swaps as the tool to fix the portion of debt.

Ben Phillips - Lord Abbett

Just given the slow cost of capital and you said you’re kind of open to opportunistic acquisitions, would you consider maybe something as large as CompAir or even larger if there were some distressed assets you could pick up on the cheap?

Barry L. Pennypacker

Not at this point. We’re going to stick to our game. We’ve identified the opportunistic acquisitions that fit and fill out our product portfolio and I can tell you that the ones that we’ve identified none of them are in the billion dollar range. We are very focused on making sure that when we emerge from this cycle all the synergies that we have put into our model for CompAir are realized. And until we feel comfortable that is fully woven in our fabric, large acquisitions like that are off the table.

Ben Phillips - Lord Abbett

Could you maybe consider one of those if it’s just a couple hundred million if it was a good opportunity?

Barry L. Pennypacker

Of course. Of course.

Operator

Your next question comes from Joseph Mondillo - Sidoti & Co. LLC.

Joseph Mondillo - Sidoti & Co. LLC

Could you tell me what your after-market sales for the total company make up now and what after-market sales make up in the fluid transfer products segment?

Barry L. Pennypacker

I won’t give you it for fluid transfer. I will tell you that it’s between 20 and 25% for the company. And you heard me say in my commentary that we have focused on five really strategic areas of growth for us and I will tell you that we are very, very, very, very focused on the after-market. And we are looking to very much change that needle from the 20, 25% range to adding 500 basis points to that.

Helen W. Cornell

And the challenge, Joe, on fluid transfer is it depends on what happens with the unit demand itself. The fluid transfer business has a very good after-market strain but the percentage of the total varies widely from maybe it’s as low as 25% up to as high as 60 to 75% depending on what’s happening on the units themselves. So it’s very hard to say what that would be.

Joseph Mondillo - Sidoti & Co. LLC

Could you give any color on how after-market sales in the fluid transfer products segment has played out over the last several months with the severe downturn here? Have they been holding up or how have they been playing out?

Barry L. Pennypacker

So far drilling activity is staying strong and when you look at our well stimulation business that after-market is continuing to show promise. And we are - if you recall we have mentioned over the last year that when the cycle turned down and then came up the last time we were not in a position to deliver. So throughout 2008 we’ve been investing in capacity in our well stimulation after-market business to insure that as the OEM activity drops off, we’re in a position this time to take advantage of that after-market. But we’re very focused on that and it is showing promise.

Now I just want to back up to one important activity with regards to the after-market. A very good portion of our business as you know is the Thomas business. And the Thomas business really does not have an after-market. It’s a throw-away item so for us to get 500 basis points of after-market improvement is a substantial breakthrough for this organization.

Joseph Mondillo - Sidoti & Co. LLC

How many sales from CompAir are – how much on the top line are you expecting to add onto for 2009 from CompAir?

Helen W. Cornell

You know, probably rather than try to provide color forecast for 2009, I think you can look at how much CompAir contributed in the fourth quarter which has the details provided in the press release and recognize that we owned them from October 20 through the end of the year and then maybe make some assumptions on an annualization based on that.

Joseph Mondillo - Sidoti & Co. LLC

Is there any seasonality in that business?

Barry L. Pennypacker

Not particularly.

Helen W. Cornell

Not really.

Operator

Your next question comes from [Unidentified Analyst] - KeyBanc Capital Markets.

[Unidentified Analyst] - KeyBanc Capital Markets

I just wanted to get a little color on the shipment timing for the loading arm orders you received in the fourth quarter. Is that a first half ’09 event or is that something being pushed out more to the second half?

Barry L. Pennypacker

It’s first half.

[Unidentified Analyst] - KeyBanc Capital Markets

And then orders in compressor are obviously pretty challenged in the quarter. Are there any outsized non-repeating orders or? You mentioned there weren’t any cancellations but I guess maybe OEM customers that haven’t come back to work yet. You know something that’s kind of making that look more unusual than maybe what the underlying demand really is.

Helen W. Cornell

A couple of things I’ll speak to. If you went all the way back to the fourth quarter 2007 press release you would see our organic growth in compressor and vacuum products in that quarter was actually 12%. And we received some great orders in OEM business particularly in Europe in the fourth quarter of 2007. And we also had some significant activity going into Asia, both [bear] compressors that were being sold for industrial expansion in China and in Asia in general, and then a lot of liquid ring pumps being sold for power plant development in Asia.

None of those things really recurred in the fourth quarter of 2008. So part of what you’re seeing is a very difficult comp because of the level of activity at the end of 2007. In addition to that, I would say that we in the fourth quarter we experienced a situation where OEM customers were drawing down their inventories so rather than placing orders that they typically would place for just blanket orders for their base business they instead were focused on consuming inventory. So I think that that negatively impacted our orders in the fourth quarter.

And then finally I think you had plants going on extended shutdowns in the fourth quarter and I think that had some impact as well. People as Barry mentioned earlier people were quoting but no one really wanted to pull the trigger on the investments.

[Unidentified Analyst] - KeyBanc Capital Markets

And you do you think that inventories de-stocking has kind of played out here or do you think it’s still going?

Barry L. Pennypacker

Oh yes. Absolutely.

Helen W. Cornell

It seems the de-stocking has played out. The question that remains to be seen is whether they buy new units.

[Unidentified Analyst] - KeyBanc Capital Markets

For CompAir since you’re not forecasting any significant accretion there – I guess any accretion, how should we think about the balance between possibly a dilutive first half, accretive second half? Is there any way that we should be modeling that?

Helen W. Cornell

I think that as I look at how the cost reductions play out you have progressive improvement each quarter because we continue to bring costs out of the business as the year progresses. And there’s not a significant amount of seasonality in their business. And then also as we continue to generate cash then interest expense goes down. So I’d say it continually gets better as the year progresses.

[Unidentified Analyst] - KeyBanc Capital Markets

Do you think it’s as dilutive in the first half or first three quarters though?

Helen W. Cornell

I would say probably at least in the first half.

Operator

Your next question comes from John Moore - Robert W. Baird.

John Moore - Robert W. Baird

I just wanted to follow-up one more time on the fluid operating margins this quarter. I guess I’m just not fully understanding this, but I mean operating margins were basically flat with the prior year which is impressive because you had the loading arm shipment in the prior year which I know is higher margin. So can you point to just how you were able to sustain margins even with organic growth down?

Helen W. Cornell

Sure. In about the second quarter we talked about the fact that we were seeing a significant improvement in orders for drilling pumps and that continued into the third quarter. And then in the fourth quarter we were shipping quite a few of those drilling pumps. So it was a favorable mix of the petroleum business in the fourth quarter that gave us the good margins this year as opposed to the favorable leverage of the loading arms in the fourth quarter of last year.

Operator

Your next question comes from Joseph Mondillo - Sidoti & Co. LLC.

Joseph Mondillo - Sidoti & Co. LLC

I remember what I was trying to get at there. With the rig count basically almost getting cut in half over the last six months, how do you see after-market sales playing out? I mean, are they going to be cut in half? How do you look at that?

Barry L. Pennypacker

Joe, I think our customers are being very prudent about how they approach the parked rigs. As you know there is a substantial amount of uncertainty on what the second half is going to bring next year. So there is some cannibalization happening. However, I think that there is also on the newer, higher productive rigs not as much. Therefore the after-market should still be available to us.

It’s all stimulation side. As I mentioned earlier, there is a substantial amount of activity in these difficult shells because they’re very productive. But it takes a lot of horsepower to get down there and free up that gas. And as that happens the after-market in our stimulation business is continuing to show promise. So that’s our current hope and model is that in the second half of the year when the drilling pumps are down substantially that we’ll grow our after-market in our well stimulation business to take advantage of the difficult shells.

Operator

And it appears there are no further questions today. Mr. Pennypacker, I’ll turn the conference back to you.

Barry L. Pennypacker

Okay. Thank you all for participating and we look forward to seeing some of you and talking to you again in a few months. Thank you very much.

Operator

That does conclude our conference call today. Thank you all for your participation.

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