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Executives

Paul Melnuk - Chairman and CEO

Steve Schumm - EVP, CFO and CAO

Analysts

Jay Harris - Goldsmith & Harris Asset Management

John Walthausen - Walthausen & Company

Dax Lasses - Gates Capital Management

Mike Snyder - McShield

Jordan Hollander - Jefferies & Company

Thermadyne Holdings Corp. (THMD) Q4 2008 Earnings Call March 11, 2009 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Thermadyne Holdings Corporation Fourth Quarter and Full Year Earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions)

This conference is being recorded today, Wednesday, March 11, 2009. This conference will be available for reply after today at 12:30 Eastern Time, through March 25th at mid night. You may access the replay system at any time by dialing 1-800-406-7325 or 303-590-3030 and entering the access code of 4002573.

At this time, I would like to turn the conference over to Paul Melnuk, Chairman and CEO. Please go ahead sir.

Paul Melnuk

Thank you, Tad, good morning, everybody and welcome to Thermadyne’s earnings conference call. My name is Paul Melnuk, Chairman and Chief Executive Officer. With me today is Steve Schumm, our Chief Financial Officer.

We issued a press release yesterday with our 2008 fourth quarter and year end results and we also filed our Form 10-K with the SEC. A copy of the press release and 10-K filing may be obtained from our website at www.thermadyne.com or by contacting Investor Relations at 216-464-4600.

As we begin, let me remind you that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect management's current expectations and involve a number of risks and uncertainties. Actual results may differ materially from such statements due to a variety of factors that could adversely effect the company's operating results. These risks, and other risks, relating to our business are set forth in documents filed with the Securities and Exchange Commission, specifically our most recent annual report on Form 10-K, and other reports filed from time to time with the SEC.

In a moment Steve will discuss the 2008 financial results with a primary focus on the fourth quarter results and recent trends. Before he does however, I would like to offer a few observations on the current environment and our position to face it.

In January, we held a call to update you on the trends due to the fourth quarter and as you will see our results are consistent with what we were expecting at that time. Both the abruptness and magnitude of this decline is something that none of us have experienced in our lifetimes.

What I have learned from my experience in commodity businesses during the 1990s that one can not do anything about the economic environment. What one can do is face the environment head on and use it to your advantage. I also learned that if this cost will grow, prosper and create and value in difficult environments and this is what we at Thermadyne are focused on.

As we face today's economic challenges, we are well positioned; we have made great strides over the last few years, improving our operations in our financial position. Operationally, we continue to see further substantial ongoing improvements.

I would like to stress that financially we have a good debt maturity profile and positive operating cash flow. We also have an expanding global footprint, leading brand names and products, a unique tiered brand strategy, improving customer service and a strong management team. As a result, we have confidence that our performance will resume its improving trend even though the economic environment may not improve for sometime.

With that I will turn the call over to Steve to review our financial results for 2008 and then I will have additional comments on the outlook and how we are addressing it. Steve?

Steve Schumm

Thanks Paul and good morning. Net sales were approximately $105 million in the fourth quarter of 2008, a decrease of 16% over the prior year’s fourth quarter. Our sales decreased slightly less than 10% when one excludes the effect of foreign currency translations.

Our international sales during the fourth quarter actually increased 2.5% when viewed in local currency.

Sales in the Americas declined 17% during the quarter with a 20% decline in November and a 25% decline in December when compared to those months of the prior year. Sales in our markets outside the Americas held up a little better than this in our Asia-Pacific markets which is dominated by our presence in Australia. Sales were essentially flat in the fourth quarter in local currency.

However, sales in this region did experience downward pressure as the quarter progressed. With sales declines of 5% and 10% in November and December respectively.

Sales in Europe and the Middle East were down approximately 80% in local currency and trended at this pace throughout most of the quarter.

For the year, sales in markets outside the US represented approximately 45% of our sales which was an increase from the 41% in 2007 and the 37% we had in 2006.

Our international sales growth has been particularly strong in the Asia-Pacific region over this period of time.

In the fourth quarter, our gross margin percentage of 24.6% is significantly less than the 32.7% gross margin of the prior year’s fourth quarter and less than the 32.2% margin we had realized for the first three quarters of 2008. In either comparison this was approximately an 800 basis point decline.

The reduced margin percentage results from the following, the $2 million non-cash charge from the LIFO inventory method caused 200 basis points of this margin decline. Manufacturing inefficiencies resulting from the rapid decline in volumes produced charges of $2.5 million or approximately 250 basis points for the margin decline.

We experienced 30% to 40% volume declines in our main operating plant in Texas in November and December as compared to the prior years causing these manufacturing inefficiencies.

In addition, the negative impact of the high cost of previously purchased materials that we are flowing through cost of sales during the quarter. Represented another 350 basis points i.e. approximately $3.5 million.

Our November 1, price increase produced minimal benefit in the quarter due to the reduced levels of orders occurring in November and December.

Our mix of product sold during the quarter was comparable to that of last year's fourth quarter and to that of the first nine months of this year.

SG&A costs in the fourth quarter of 2008 were $24.4 million and included two unusual items that were largely offsetting. The first one was a reversal of $3.8 million of incentive compensation accrued earlier in the year.

A second item was a charge of $3.6 million to record the severance costs associated with our organizational restructuring. As previously announced we eliminated approximately 110 salaried positions or 13% of our salaried work force to reduce cost in response to current economic conditions.

So with the inclusion of these two unusual, but largely offsetting items the SG&A costs represented 23.3% of sales reported in the fourth quarter. This exceeded the 21.2% level of the first nine months of 2008 due to the very rapid decline in sales during the fourth quarter.

However we have started 2009 by taking quick action in right sizing these costs and all costs in order to align them with our reduced sales volume.

Our goal going forward is to maintain SG&A cost at a ratio to sales which is consistent with the recent past. This represents a range of 21% to 22% of sales.

However, we also are tailoring our actions in an attempt to remain strategic as much as possible. So, for example, we have attempted to minimize impacts to the sales force and we recently added resources in Russia. In addition, we have retained and redirected engineering resources to increase the focus on several exciting new products and with added focus on cost reduction initiatives in our products.

Interest cost declined $1.3 million in the fourth quarter to $4.5 million as compared to 2007. Our debt balances averaged $8 million less than in the fourth quarter of 2007. Our average effective interest rate was 200 basis points less than in the prior year due to declines in LIBOR and in the special interest adjustment on our bonds.

The special interest adjustments increased 50 basis points effective April 1st because our leverage ratio as of December 31, 2008 exceeds 3.50.

Continuing operations resulted in a loss of $3.5 million in the fourth quarter as compared to last years net income of $6.4 million. Operating EBITDA as adjusted from continuing operations was $8 million for the fourth quarter of 2008 as compared to $15.3 million in the prior year. The schedule is attached to our earnings release showing the computation of EBITDA.

Let's take a closer look at our cash flows. During the fourth quarter of 2008, we generated $2.2 million in cash flow from operating activities. A contrast in the prior year's fourth quarter we generated $23 million of cash.

Major differences in our cash flows from operating activities between these periods were as follows. The net loss in the fourth quarter of 2008 has adjusted to exclude depreciation deferred taxes used $3.4 million in cash this year, while we generated $8.5 million in the fourth quarter of 2007.

The changes in our working capital investments provided only $5.6 million of cash in the fourth quarter of 2008 as compared to the $14.7 million of cash provided during the fourth quarter of 2007.

In the fourth quarter of 2008, customer receivable and inventory balances decline and generated $20.3 million of cash. However, inventories did not decline commensurate with our decline in sales volume. We had approximately four months supply on-hand as of year-end 2008 as compared to the 3.25 months supply at year-end 2007.

Our increased investment in inventory is evidenced in our use of cash to reduce accounts payable by almost [$16 million] in the fourth quarter. We paid suppliers in normal course, but as we have indicated, inventory turnover slowed. As an another point of reference accounts payable as a percent of inventory declined to 30% as of December 2008 from the 44% at September 2008 and 35% year ago in December.

In the fourth quarter of 2008, we also used cash to acquire manufacturing equipment in the amount of $5.3 million as compared to $2.7 million of capital expenditures in the fourth quarter of 2007. In 2008, we were accelerating the installation of various productivity improvements our operational team had identified. We are optimistic that actions like this will prove particularly beneficial in these more economic times. As of December 31, 2008 we had $12 million of cash, we have borrowed $32 million and we had $36 million of unused availability to our working capital facility.

Our sales in the first two months of 2009 have been approximately 25% to 30% less than last year excluding local currency for excluding currency effects. We have extended the temporary layoffs in our manufacturing plants and taken the actions we discussed in our January 22nd call. In addition to that, we had good participation in a voluntary retirement and voluntary vacation buy up plan we offered employees in late January. The annual savings for these two voluntary programs is approximately $2.5 million, this is in addition to the $7.5 million of estimated annual savings from the salaried head count reduction program we discussed in our January 22nd call.

In the first two months of 2009, we have used cash for our semiannual bond interest payment and continue to reduce payables to our suppliers. However, despite the significant uses of cash, our cash balances and availability today are comparable to the 2008 year-end balances.

As Paul mentioned earlier, we do have near-term debt maturities. In this environment we are something asked about the key financial covenants within our debt structure, which we must satisfy in order to continue to preserve the very attractive terms and maturities of our current debt structure. The most immediate financial covenant is a fixed charge coverage ratio test contained in our working capital revolver with GE Finance. Under this covenant we are required to have a 1.10 minimum coverage of EBITDA to fixed charges. This is measured on a trailing four quarter timeframe, a fixed charges in summary are defined to include interest. For 2008 this was approximately $20 million.

Second item is scheduled payment of principle, this was approximately $2 million in 2008. Third item, our income tax is currently payable that was approximately $7 million in 2008, and capital expenditures, however, it does not include capital expenditures which are financed.

So, you can see that the overall determination of fixed charges is very substantially influenced by the capital expenditure amount during the period. In our 2009 plan, we have a number of very attractive equipment investment opportunities, however, in this environment we will not pursue them unless we have equipment financing. We believe we will be able to finance these opportunities continuing the strategic momentum and cost efficiency improvements we have been demonstrating over the last few years.

In our planning and in the actions we have taken we are very focused on this covenant, we believe we will satisfy the fixed charge coverage ratio test throughout 2009 and beyond.

With that I will turn it back to Paul.

Paul Melnuk

Thanks, Steve. It seems that 2008 was a long time ago. Much has changed in the last five or six months and I am sure, its going to continue to change in the months to come.

In the short-term, cash flow and liquidity are important measurements of company health and I am pleased with our position today. We had $48 million of cash and liquidity at year-end and as Steve indicated we are in about the same position today even though the first quarter is a heavy cash usage period for us.

We have flexibility under our debt covenants and while we are cognizant of these terms, we don’t see this as an issue at this time. We also do not have any significant debt maturities for a few years and with working capital as our single biggest operating asset, as it is reduced as a consequence of lowers volumes; we get the benefit of cash flow. It will take time to realize this benefit as the reductions work though the entire supply chain, which has become longer due to the abrupt unanticipated sales decline.

However, if volumes were to remain where they are today, we should be able to generate at least $20 million to $25 million of cash from operating working capital in 2009 compared with essentially nil in 2008.

As I mentioned earlier, we have made strides over the last few years to improve our financial position extending debt maturities and having maximum operating flexibility in the terms of our debt agreements.

In this regard, we have $14 million of second lean facility due in late 2010 that would comfortably be repaid out of cash flow and/or liquidity. Our working capital facility is not due until mid-2012 and is an asset-based facility with fewer covenants than typical cash flow based credit facilities.

Lastly, the largest component of our debt is $175 million of subordinated debentures that are unsecured and do not have financial maintenance covenants. As such, our debt profile is an advantage in today's environment.

The other key challenge in this environment is resizing the business in light of the lower levels. Our approach is to assume that today's volumes are here to stay, and therefore we have to match our cost structure to these levels.

We do this by maintaining operating ratios at or near the levels we have achieved over the last few years. So far, we have taken steps to reduce discretionary and variable costs as much as possible.

We are also reducing the number of people in our fixed cost areas to the extent possible and are completely open to every idea on how to reduce other fixed costs. We are monitoring the markets closely, and are prepared to take swift and decisive action to take cost out to achieve our operating ratio goals.

It will take time for some of our actions to be visible in our performance, likely not until the second half of the year. Gross margins percentages will suffer in the first six months due to the impact of previously purchased higher cost inventory, the inefficiencies from lower production volumes in competitive markets.

In addition, it will take time to renegotiate price reductions from our vendors and new purchases and it will then take more time before these benefits flow through reported gross margins. It will also take some time before the full effect of our SG&A cost-saving initiatives are fully reflected in the run-rate. However, we are aggressively addressing these challenges and are pleased with our progress to-date.

Operationally, we have what we believe to be substantial potential for ongoing improvements. For example, benefits from our TCP continuous improvement process, such as process and equipment efficiency improvements in our manufacturing operation, better purchasing practices and reengineering our products to increase their value in the marketplace should generate additional cost savings in productivity gains as they have in each of the last four years.

Although some of the improvement opportunities will require capital investment to realize, our priority is to maximize cash flow, so we may defer some very attractive opportunities that have lower paybacks.

Although we are taking actions to scale back our cost structure, we are not sacrificing our ability to serve customers and are also continuing to invest to increase market share through new product introductions and penetration of certain new markets.

In fact, we are excited about some new products that we will be launching later this year. We have also added sales resource in some markets where we feel we can quickly establish a profitable presence.

As I said at the start of the call, I have the experience of managing commodity businesses during protracted periods at very low prices. In given the much higher proportion of fix costs that those businesses have relative to us, I feel confident about our business model and our ability to thrive and prosper despite the economy. I know that is not easy. Difficult decisions must be made, and we must engage the experience in creativity of every person in the organization to help achieve our goals.

We must also continue to serve customers better than any one of our competitors and find opportunities to grow. However this has been the essence of our business plan for the last four years, and therefore we are continuing to focus on what we have been doing during this period.

Today, all we are doing is increasing the intensity in the sense of urgency or execution. Not completely changing the direction of our organization. These aggressive approaches to operations combine with our conservative financial position and a high free cash flow and return on investment business model, place us well to withstand the economic downturn.

And with that [Ted], I would like to now open up the call to questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And our first question is from line of Jay Harris with Goldsmith & Harris Asset Management. Please go ahead.

Jay Harris - Goldsmith & Harris Asset Management

Good morning, gentlemen. Steve, on January 16th, conference call, you had some slides which indicated that the debt of the company would be roughly inline with at December 31st with where it was at the end of September. Why are we seeing different numbers now for December 31st that were implied in the slides.

Steve Schumm

Jay, I think the slides, we had a target on there that was shown debt net of cash, and I think we reasonably inline with that.

Jay Harris - Goldsmith & Harris Asset Management

Okay. I just remember a $215 million to $218 million of debt level.

Steve Schumm

Yeah. Let me check something real quick here, Jay, but I am pretty sure we are within a pretty tight range of those numbers. Let me.

Jay Harris - Goldsmith & Harris Asset Management

All right, the next question I have is, you indicated just now on the call that your cash was flat at the end of February with December 31st. What about debt?

Steve Schumm

I think I said that debt availability.

Jay Harris - Goldsmith & Harris Asset Management

No, not debt availability. Debt incurred.

Steve Schumm

Debt incurred is comparable.

Jay Harris - Goldsmith & Harris Asset Management

All right, so that you were cash flow-neutral in the first two months of the year.

Steve Schumm

What I also pointed out was in that period of time on February the 1st, we paid more than $8 million on our bonds, and we also continued the trend of reducing payables. So payables went from about $30 million at the end of the year, down below $20 million.

Inventories continued to lag a bit. So, we were continuing to increase our investments in inventories. Despite that, cash did not, we still kept our cash and debt position about where it was.

Jay Harris - Goldsmith & Harris Asset Management

Excellent. Paul, as you modulate your cost structure to your perception of ongoing business, where do you think the SG&A will flatten out relative to revenues, 20% or some different number?

Paul Melnuk

But as we have indicated in our comments, we are looking to maintain it at or better than the ranges experienced over the last couple of years which was between 21% and 22% of net sales.

Jay Harris - Goldsmith & Harris Asset Management

Alright. Thank you.

Steve Schumm

And Jay, I went back and chat, the way we describe it in the earnings release, we talk about our debt obligations net of cash being $222 million as of December 31, 2008.

And on our call, we hat that cute little graph where we had retained the Disney cartoon guys and there is a little target that kind of lays right on top of $222 million and kind of over shadows and under shadows to 20. So, I think we.

Jay Harris - Goldsmith & Harris Asset Management

They are roughly the same in other words?

Steve Schumm

Yes. And kind of hit the mark.

Jay Harris - Goldsmith & Harris Asset Management

Alright. Thanks very much.

Paul Melnuk

Thanks, Jay.

Operator

Thank you. Our next question is from the line of [John Walthausen] with [Walthausen & Company]. Please go ahead.

John Walthausen - Walthausen & Company

Yes, thanks. One of your comments was that you expected to bring about $20 million out of working capital this year, would I take it that most of that is coming out of inventory?

Steve Schumm

Well, both inventory and receivables declined relative to the decline in volumes. Where we have over and above that where we have opportunities for improvement is to improve inventory churns. And so the net cash will come from all three of those sources decline in volumes and receivables and inventory plus efficiency gains in inventory management.

John Walthausen - Walthausen & Company

Right. I guess when I look at inventory I would say which was at year end $102 million, some of that is basically that you have inventory that's high cost and there how much of that 102 is sort of excess costs that are in the inventory. So we should pretty automatically as you roll over and how much of it is actual physical reduction you think you are going to accomplish?

Steve Schumm

Well, I don’t have the absolute magnitude, but we will have exhausted all of our higher cost purchases by the end of the second quarter with a vast majority of it depleted by the end of the first quarter.

John Walthausen - Walthausen & Company

Right.

Steve Schumm

And John one way to look at it also is so in terms of inventory returns the $102 million of inventory at December 31st had churn associated with just a little bit more than three. If you go back to earlier in the year we were close sort of four in fact we were almost four at one point, I think our goal would be to get much closer to four, you can do the proportionality.

So that's one element that brings it down and then if you are doing it proportionally and so then if you are doing in absolute dollars, you are right. There is I think yet another factor where the cost of items in inventory I would not necessarily say high costs but we had inflation that was kind of ramping through the third quarter and we were still bond and that's into the fourth quarter. Lot of costs are coming down, so as we turn over the inventory box that’s just another factor that brings inventory down. So there is a lot of potential in the inventory number.

John Walthausen - Walthausen & Company

Right. Okay, well I guess one of the issues was that you have been doing a lot of buying under contract. Are those contracts that required you to take products or materials that prices that are higher than currently prevailing, are we through those or were we through those at the end of the year or are they still something that we are having to absorb. I realized that we are what's in the inventory still has to be worked through over the next I guess four months or so?

Steve Schumm

In terms of, we buy a very little under longer-term contracts. The commitments that we make to purchase are generally just made under purchase orders. But because of the lead times from the time you commit to purchase to the time that material component or finished good comes into inventory can be as long as three or four months.

John Walthausen - Walthausen & Company

Right.

Steve Schumm

The vast majority of our higher costs outstanding purchase order commitments will be fully consumed in the first quarter there will be little bit of carry over end of the second quarter.

John Walthausen - Walthausen & Company

Okay, so okay that helps me get understanding but the magnitude is there, thank you very much.

Steve Schumm

Thanks John.

Operator

(Operator Instructions). Our next question is from line of [Dax Lasses] with Gates Capital Management, please go ahead.

Dax Lasses - Gates Capital Management

Yeah, I was just wondering, so for the calculation on the fixed charge coverage ratio what was the CapEx, was it the full $13.4 million for 2008?

Paul Melnuk

Yes sir.

Dax Lasses - Gates Capital Management

Okay and than for 2009 would you expect, what are you projecting your CapEx to be for the year?

Steve Schumm

Well, we say in 10-K that our business plan envisions that it could be as much as $20 million because some where in to the past we have a number of exciting efficiency projects however we also were indicating we are not going to spend that unless we obtain financing for it. So that if taken context of the direction of your question, the 20 would be pretty much zero in that manner.

Dax Lasses - Gates Capital Management

So you are saying all funded by capital leases?

Paul Melnuk

Whatever type of financing one might have capital leases or equipment financing.

Dax Lasses - Gates Capital Management

Okay, but other than that you don’t expect to spend any money?

Steve Schumm

That’s our goal, now obviously there might be some emergency things that come up but we are in various discussions and we have a high degree of confidence that we will be able to finance it or we won’t do it. I mean none of it is mission critical keeping the lights burning but we will continue to advance because I think we have demonstrated in the last couple of years of continued improvement efficiency of the business.

Dax Lasses - Gates Capital Management

Right. And what are the scheduled principle payments for 2009?

Steve Schumm

It will be comparable to what we had in 2008.

Dax Lasses - Gates Capital Management

Okay

Steve Schumm

[Couple of them].

Dax Lasses - Gates Capital Management

And then I guess it's the way that I calculated it and I didn’t get to read the whole 10-K yet, but as far as the special interest calculation what would be special interest rate be for the first quarter?

Steve Schumm

First quarter it continues to be at 25 basis points adder starting on April 1st and going through the second quarter it increases to a 75 bps adder so it goes up 50 bps.

Dax Lasses - Gates Capital Management

Okay, so it’s still at 25 bps and you are projecting it at for only 75 bps?

Steve Schumm

Yes, that’s more than a projection there is a specific calculation that is done as of the end of the quarter and then the effective date is April 1st. So based on the maps and what we filed with the trustee it will become effective on April 1st of 75 bps adder.

Dax Lasses - Gates Capital Management

Okay.

Paul Melnuk

There is a one quarter lag in the way it works.

Dax Lasses - Gates Capital Management

And then it looked like if you, it was hard to, I guess the offsetting charge of the severance and the reversal of the stock options expense offset each other, so that basically at the fourth quarter we are at like $24 million, SG&A run rate something like that. And will that go basically down to like the low 80s on an annual basis then. Are you projecting more like somewhere between $80 million and $85 million for the year? Can you bring it down that much?

Steve Schumm

Our goal is to get it in that 21-ish percent range relative to sales, so the work we have been doing and projections we have on sales is, we think we can fulfill that obligation, we can’t promise we get it right every quarter. What you are offering we think is in the realm of possibility.

Dax Lasses - Gates Capital Management

Okay, great. Thank you very much.

Operator

Thank you. Our next question is from the line of [Mike Snyder] with [McShield]. Please go ahead.

Mike Snyder - McShield

Great. Thanks. Hey guys, how are you doing?

Paul Melnuk

Hey Mike, how are you?

Mike Snyder - McShield

Good. Just two quick questions, just can you provide just a little bit more color and granularity on the accounts payable and sort of what your strategy is there and kind of what you might be able to do this year, if you wanted to extend terms, how flexible is some of your vendors.

And then just the second question, any further thoughts on this sort of stimulus bill and the timing that you might see any impact from it in terms of some of your end product?

Steve Schumm

Mike, on the accounts payable, it gets us two levels of answer; one is business moves to more normal relationships regardless of the operating volume, we are going to get a beneficial cash flow impact from accounts payable, because inventories and payables will move back in to a more normal relationship where we used those statistics before what the relationship of payables the inventory was more in that 35% to 40% ratio.

As we march through the year our goal would be to get there and probably do better than that which I think you have seen on our track record as we gotten better on our working capital efficiency and it's not so much that we would be skewing our vendors as we are getting better and better on maintaining the inventory at lower level. So our net investment and inventory we think returns to normal and continues to progress.

I wouldn’t say nor encourage you putting thing in your spreadsheet that would suggest we are going to come up with any magical new terms with vendors. I think what you have seen in the past and what we are striving to which is kind of normal practice is, what we are focused on.

Paul Melnuk

Okay, I would just add to that that, what we have been through to the fourth quarter and end of the first quarter is, where there has been a significant decline in the levels of purchases. Because we have not only have volumes gone down, but we have reduced purchasing activity to facilitate reductions in inventory.

We, through this process, we have been extending terms with vendors everywhere that we can and we continue to aggressively go after that, we will go after that. What Steve is referring to is, when levels of purchasing activities return to normal, we will get the benefit of a positive cash flow impact of that activity.

Your question is on the Stimulus bill and clearly that the Stimulus bills that are being passed, not only here in the US, but throughout the world, essentially all have components of infrastructure building, investments in roads and bridges and transportation are all metal-intensive investments.

And therefore will benefit our industry as our investments in alternate energy, infrastructure, things like that generally require a lot of our type of product and will definitely provide a boost to the industry. And we are anxious for that spending to incur and generally our customers feel the same that it will help their end user customers and help their level of activity.

Mike Snyder - McShield

Is the feeling that shovel-ready element to it, it's more backend of the year into 2010 before you really see any significant impact from it?

Paul Melnuk

Well, I think, I have been talking to reaching out to a lot of customers myself over the last few weeks. And my sense is that people, they are waiting to see exactly what shovel-ready means.

Mike Snyder - McShield

Yeah.

Paul Melnuk

There is still just a lot of uncertainty out there, but a lot of anticipation and state and local governments are starting to gear up and there is more talk about what what's going to go forward, but I guess, yet there is still not clear definition of the projects.

The customers that are faring the best now are those that are benefiting from existing infrastructure in projects that were underway and are continuing. And where the stimulus bills will help is that it will provide a pipeline of new products, the new projects coming on stream to be online and generating demand for product when others have begin to taper down.

Mike Snyder - McShield

Okay. If you can just add one little thing to that. In terms of existing backlog of commercial projects, either in the US, internationally and kind of looking out in terms of potential new projects going into the next year, and this is more commercial real estate than it is infrastructure, any additional kind of anecdotal views that you have on how that is proceeding?

Paul Melnuk

Well, Mike as you know, we interact with distributor customers.

Mike Snyder - McShield

Right.

Paul Melnuk

And who then service the end user customer, and so we don't service particular industry segments and really can't comment on any one sector versus another. We can talk generally that regionally in the country, in the Golf Course region, which has been a beneficiary of energy infrastructure that would be seem to be one of the stronger areas of the country manufacturing is slow. Government related work is pretty strong and agriculture has been a little better than some of the other areas as well.

Mike Snyder - McShield

Okay. Thanks very much.

Operator

Thank you. Our next question is from the line of Jordan Hollander from Jefferies & Company. Please go ahead.

Jordan Hollander - Jefferies & Company

Hi, guys. Just a couple of quick ones. When you guys mentioned your operating ratio goals in the press release, can you just give us a reminder what those are, is it just a target operating margin similar to where it has been?

Steve Schumm

Yes. So the gross margin level similar to rates we are running through the first three quarters and on the SG&A, the 21% to 22%, so trying to keep the cost structure inline with the sales volumes.

Jordan Hollander - Jefferies & Company

Okay. Okay, great. That's helpful. And then just back to the fixed charge question and CapEx. What's maintenance over CapEx around the business?

Steve Schumm

We have estimated that $3 million maybe $5 million range, but most indications are its closer to 3, I am not sure you could do that for a 10 year period of time but if you look out over the, next year we are pretty confident right now.

Jordan Hollander - Jefferies & Company

Okay, and again, you don’t expect any of that CapEx to fall through on that fixed charge ratio?

Paul Melnuk

Well, that’s our goal. We are hard at it, obviously some risk at it but we will emphasize we are very focused on that in active discussions to get a finance mind set within the organization.

Jordan Hollander - Jefferies & Company

Okay, great. Just last one, I guess, first quarter you get some indication sales levels how is our international business held out against the Americas business in the early first quarter?

Paul Melnuk

Generally international markets are very by region Europe, Middle East have been pretty much tracking the US performance, US markets. Latin America business is been impacted by relative strength of the US dollar which made product prices into that region more expensive and that I think is impacting demand in that market. Asia-Pacific, Australia has been South Pacific Australia and New Zealand have been one of the stronger markets. More recently they are experiencing some additional weakness. Southeast Asia and North Asia, China are on a relative basis stronger markets but they are certainly operating at much lower rates than they were previously.

Jordan Hollander - Jefferies & Company

Okay, great. Thanks a lot guys.

Paul Melnuk

Thank you.

Operator

Thank you. Our next question is a follow-up from the line of Jay Harris with Goldsmith & Harris Asset Management, please go ahead.

Jay Harris - Goldsmith & Harris Asset Management

I apologize for this question you probably have answered but I did not hear the response to the question on what the capital, the magnitude of the capital projects there, capital expenditures would be this year. I though I heard some discussion about how would finance it, but I do not think I heard the actual number.

Paul Melnuk

Jay, we have in front of us on the table our business plan and we note this in the 10-K that there is $20 million of CapEx largely in our manufacturing operations that like the past has high payback. High payback for us is two to three year variety that we would like to proceed with to keep the momentum going in our business however, a business plan also says in this environment, we do not think we are going to do it plus we have a way to finance it which moves it out of the fixed charge coverage ratio so.

Jay Harris - Goldsmith & Harris Asset Management

How does it, where do you get an operating lease then?

Paul Melnuk

I am sorry, Jay could you say it again?

Jay Harris - Goldsmith & Harris Asset Management

So if you finance it you will end with an operating lease?

Paul Melnuk

Either that or just term equipment financing.

Jay Harris - Goldsmith & Harris Asset Management

Okay.

Paul Melnuk

They don’t consume the.

Jay Harris - Goldsmith & Harris Asset Management

But if you do it on either of those how will that affect your cost of good sold or your gross margin ratio?

Paul Melnuk

Well, if we make these capital expenditures it should help us improve gross margins. because if you look back at the history of the company it would be this concept we have referred to as TCP our continuous improvement program that help to track record. A lot of that improvement cost savings comes from the efficiencies of capital investments and we want to continue that momentum, so you would see it coming through with ongoing margin improvements. Does that responsive to your question?

Jay Harris - Goldsmith & Harris Asset Management

Yes. So I guess I am concluding that for the source and application of funds for 2009, we would see this $3 million plus of maintenance capital go out and then the rest of the capital investment how would that be buried?

Steve Schumm

Well you should see it as a source and a use.

Jay Harris - Goldsmith & Harris Asset Management

Well would you have an entry in capital expenditures?

Steve Schumm

Yes, I am envisioning that if we do these things they will be from an accounting perspective, capital expenditures and whether they are leased or equipments I am assuming it’s going to be treated as financing, so you would see it as a CapEx and then the source of funds coming in.

Jay Harris - Goldsmith & Harris Asset Management

Alright.

Steve Schumm

Now whether we fully achieved the 100% offset I am not sure but we were very cognizant of that in these.

Jay Harris - Goldsmith & Harris Asset Management

What would you do about $10 million of the $20 million this year in '09 and the other half in 2010?

Steve Schumm

Probably.

Jay Harris - Goldsmith & Harris Asset Management

Okay.

Steve Schumm

But even there the $10 million that we would do, our goal that I am pretty optimistic think is that we would be able to fund most of that, meaning finance most of it. So, but it's not in that fixed charge computation. There would be an addition of debt, I acknowledge that.

Jay Harris - Goldsmith & Harris Asset Management

Alright. What was your blended interest rate for the March quarter, I mean the December quarter.

Steve Schumm

John, I know you always get me other question I have been answer, I got a little schedule work, but I don’t have it in front of my eyes.

Jay Harris - Goldsmith & Harris Asset Management

Well, we could come back after the call then, I would be interested in the fourth quarter and what you think the blended interest rate looks like in the March quarter.

Steve Schumm

Yes, I have got the few number flowing in my head.

Jay Harris - Goldsmith & Harris Asset Management

And just to tighten up. Do we have any expectations of when our customer's inventories will have normalized?

Paul Melnuk

I think how we judge that is that even though our order volumes are down, or the numbers of calls that we are getting into customer care are about the level that they have always been with a much higher percentage of the calls now coming in checking on pricing availability. And so that’s assigned to us that, the customer base is pretty much got their inventories down where they want them to be and their sales people are concerned about having inventory available to them in the event as demand picks up.

Jay Harris - Goldsmith & Harris Asset Management

Or do you have you any evidence that on a weekly or daily order basis, that business is upticked at all in March.

Paul Melnuk

We saw a bit of an up tick in February versus January. And thus far in March, it's running about the levels that we saw in February.

Jay Harris - Goldsmith & Harris Asset Management

And is there a much difference geographically as to where this is occurring?

Paul Melnuk

As I said earlier, Asia-Pacific markets are generally a little stronger, have been stronger than the Americas and Europe, Middle East.

Jay Harris - Goldsmith & Harris Asset Management

All right, thank you much.

Paul Melnuk

Thanks, Jay.

Operator

Thank you. And I show no further questions at this time. Please continue.

Paul Melnuk

Okay. Thank you for your participation in the call and for your questions and we look forward to seeing you all in the near future and please call us if you have any further questions or comments, and good luck for the quarter.

Operator

Ladies and gentlemen, this concludes the Thermadyne Holdings Corporation fourth quarter and full year earnings conference call. Thank you for your participation, you may now disconnect.

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Source: Thermadyne Holdings Corp., Q4 2008 Earnings Call Transcript
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