CLARCOR Inc. F1Q09 (Qtr End 02/28/09) Earnings Call Transcript

Mar.19.09 | About: CLARCOR Inc. (CLC)

CLARCOR Inc. (NYSE:CLC)

F1Q09 (Qtr End 02/28/09) Earnings Call Transcript

March 19, 2009 11:00 am ET

Executives

Tom Lawrence – Dye, Van Mol, and Lawrence

Norman Johnson – Chairman, President and CEO

Bruce Klein – VP, Finance and CFO

Analysts

Antonio Antezano – Macquarie Capital

Kevin Maczka – BB&T Capital Markets

Jeff Hammond – KeyBanc Capital Markets

Adam Brook – Sidoti

Gary Farber – C.L. King

Rick Eastman – Robert W. Baird

David Lebowitz – Verizon

David Mandel [ph] – William Blair

Jake Rebushek [ph] – Royal Capital

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the CLARCOR Incorporated first quarter 2009 earnings conference call. Today’s conference is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. It is now my pleasure to turn the conference over to Tom Lawrence of Dye, Van Mol and Lawrence. Please go ahead, Mr. Lawrence.

Tom Lawrence

Thank you. We appreciate your interest in joining us on CLARCOR’s conference call to discuss results for the first quarter of 2009. By now everyone should have received a copy of the news release that was distributed yesterday. If anyone does need a copy, it is available on CLARCOR’s Web site at www.clarcor.com or you can call Bonnie Cash at 615-244-1818 and she will send you a copy immediately.

Before I turn the call over to Norm Johnson, CLARCOR’s Chairman and CEO, I remind you that all statements made in the news release, and during the conference call, other than statements of historical fact are forward-looking statements. These statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

The company believes that its expectations are based on reasonable assumptions. However, these forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the company’s actual results, performance or achievements or industry results to differ materially from the company’s expectations of future results, performance or achievements expressed or implied by these forward-looking statements. In addition, the company’s past results of operations do not necessarily indicate its future results.

Finally, we wanted to let people know that the information statements made during the call are made as of the date of the call, March 19th, 2009. Those listening to any replay should understand that the passage of time by itself will diminish the quality of the statements. Also, the contents of the call are the property of the company and the replay or transmission of the call may be done only with the consent of CLARCOR.

It is now my pleasure to turn the call over to Norm Johnson for his opening remarks.

Norman Johnson

Thank you, Tom. Good morning and thank you for joining us today. With me are Bruce Klein, our Chief Financial Officer and Kim Moore, our Corporate Controller. During our last call, I said earnings in the first quarter of 2009 would be lower than 2008. I would be the first to admit we did not expect the economy or our sales would fall as much as they did. Our sales decline was further exacerbated by our customers’ reducing inventory levels as they reacted to the uncertain times. We believe that inventory reduction effort is mostly over in orders for the balance of the year will be more in line with the general economy in new business we generate.

While we are disappointed in our results, the sky is not falling in. I’ve recently visited all of our obligating companies to make sure I had the pulse of the business. I came away from those visits seeing the glass is half full. Our people are doing a great job in reducing costs and at the same time, building for the future. Undoubtedly, we, along with many companies who have a tough couple of quarters, but we have not lost any major customers, actually have gained new ones. And I see us coming out as the strong turned stronger than ever. Our balance sheet is strong and we have the ability to weather a long downturn, which we hope won’t happen, to make acquisitions that are buy back stock. Not a bad position to be in.

While we did have some unusual charges during the quarter, the majority of our earnings’ decline is attributable to lower sales. We just could not reduce cost fast enough. December was the worst month we’ve had in my 19 years with the company. January (inaudible) a little better, but still not at 2008 level. If there’s any good news, we expect our performance to improve for the remainder of the year as our cost reduction actions are realized. At the same time, we are not expecting any worsening of the economy, nor any improvement. Our current outlook is that each quarter for the rest of the year will be sequentially better and the second quarter would be the most challenging.

I want to give you a quick update on some of the actions we’ve taken. We have implemented all of the cost reductions you expect such as freezing headcount and sales [ph] reducing travel, etcetera. The current cost would be lower for the balance of the year as our cost reduction plans are realized. Bruce can provide more detail, but being in a frightful [ph] economic system, we had to write off costs in the first quarter from material cost per eighteenth we capitalized last year. As a result, material cost did not reflect the lower prices we are now paying. They will be lower in the balance of the year.

We have not reduced our sales customer service and any product development activity. We are gaining new customers and adding new products by playing off that. Our customer service levels and total rates are the best they’ve ever been. This is even more important than customers have reduced our inventory level. Having the product means order it. Our balance sheet remains strong and we expect to generate positive free cash flow in every quarter. Our factories, which produce industrials for the natural gas market are fully booked for the second quarter, and we expect industrial sales for natural gas to be about 18th to last year. While this could end anytime, and don’t read too much into it but it is a glimmer of hope, so far in March, we have seen an upturn in orders.

I (inaudible) want to summarize this by saying we are managing our way through the downturn in the economy, however bad it gets, and at the same time, preparing ourselves to be stronger than ever when the economy improves. Bruce will now review the financials and then I will discuss in more detail our outlook and plans for the future.

Bruce Klein

Thanks, Tom. In order to press and seek further about our plans and expectations for the rest of 2009, I would add a few more details to what he has said. Raw material cost, as Norm pointed out, has declined significantly in the first quarter, continuing a trend from the very end of 2008. Very little of these reductions made it to the bottom line in the first quarter, as we first had to rope [ph] to a higher cost of inventory that we had.

The lower input cost are now reducing across the sales. The cost deduction extend over many different commodity types but for us, most significantly in metal prices and fuel particularly, hydrocarbon-based materials such as adhesive, resins, and colorants, and energy and freight costs. We have initiated a freeze on salary increases for all domestic employees and also on certain non-U.S. locations where we could legally do this.

We have also reviewed every discretionary stance we have and we will continue to do so, and to make cost cuts where appropriate. As we noted in the release, we’ve purchased two companies and one product line in the first quarter. One company and the product line manufactured aerospace shelters [ph]. The other company manufactured woven wire and wire mesh filtration products for a variety of industries including fibers, resins, and aerospace. We expect to close on the purchases remaining 20% of our Chinese heavy-duty (inaudible) company in the second quarter and also complete the purchase of another manufacturer of heavy-duty engine purchase, also located in China in the second quarter as well.

We come to provide more specific details this quarter on our expectations for sales for the rest of the year. Often, when sales decline, profits would drop faster than sales. We do not expect that to happen in our two filtration segments, based on our many cost reduction initiatives and improvements we expect at CLC Air this year. Though we do expect that profits will be lower over the rest of the year than 2008, the opposite is true for our packaging segment, where we expect increased sales and profits for the next nine months compared to 2008.

The CLC Air restructuring is going well. This quarter, we closed 2 manufacturing plants, one warehouse, and CLC Air’s headquarters in Louisville, Kentucky, and moved all of these into a single facility in Jeffersonville, Indiana. The first quarter of the year is always the weakest for CLC Air and these were HVC [ph] air filtration companies in general. Shipment have not yet started for the air conditioning further chain job system season and the winter heating season is already over. In most years, the second and third quarters are the strongest for CLC Air and we said that to be true this year as well.

The margins in our industrial-environmental segment were down this year because dust collector system sales were down. Then control filter sales for oil and drilling were down. Filter sales for automobile plants were lower and plants out of closed for semi-annual further chain jobs were delayed, and HVC further general stole [ph] for this quarter, but this is not unusual in the first quarter, as I mentioned. The combination of falling sales in these areas left us with unobstructed overhead. The sales drop was sudden and we still couldn’t reduce our cost structure quickly enough. This is now changing.

To summarize several financial issues for the first quarter of 2009, international sales comprised approximately 27% of CLARCOR’s total sales, compared to 32% in last year’s first quarter. The interest rate swap increased interest expenses $600,000 in the first quarter and this is because of a drop in interest rate and specifically short term LIBOR during the quarter. The current serve value of the swap is a negative $2.6 million and this amount will reduce interest expense throughout the rest of 2009 and into December of 2009 as well. Cash flow remains good and borrowing a significant acquisition, we expect to reduce that during 2009.

We did not buy back any stock this quarter. We still have over $180 million available under our current share repurchase authorization and we retain significant borrowing capacity. We expect capital expenditures for 2009 will be approximately $35 million to $40 million, about the same as last year.

We have now the forecast in the EPS rates for 2009 of $1.60 to $1.65. I am sure you understand that forecast is a bit more difficult this year than usual. Having said that, we are confident that we will be in this range and hopefully, at the upper end. Thank you. Norm?

Norman Johnson

Thanks, Bruce. Over the last 16 years, we’ve had a record of growth and consistent earning. Until now, we have weathered every downturn with increased sales and earnings. Obviously, this downturn is the most sudden and possibly severe of my career and I was working during the 1980 recession. I remember well the company was looking to attend last money [ph]. We are nowhere near that. We have not watched based on our current revenue model, while at the same time recognizing our sales and earnings fell more than one would expect because of customers’ reducing inventories and higher material cost related to (inaudible) economy. We went from double digit sales increases to double digit decline in a matter of three months. We believe the magnitude of those drops are now behind us, but at the same time, we will not achieve the earnings or sales we did in 2008.

We do expect to have the third best earnings per share we’ve had in the 104 year history of the company. But most of the markets we serve are weaker than a year ago. We have excellent long term growth potential around the world. Trucks, airplanes, locomotives, gas pipe plants, buildings, oil wells, refineries, waste water systems, and a lot more will always need filtered. We are the leading supplier to most of them. We believe despite our first quarter performance, our recurring revenue businesses will perform well in both the short and long term. We might sell less to a down economy, but there will always be a demand for our products.

As Bruce said, I am pleased to report JL Clark, our packaging company, has seen more growth than the past and we expect 2009 to be a better year in sales and profits than 2008. To be honest, we don’t know when the economy will improve and have not met anybody who does. We do know that we are making money at today’s sales levels and we’ll make more as the year goes forward through cost reduction programs and new businesses, which will be coming on stream. Of course, there’s always a chance that things could get worse. Even if it does, we expect to generate a profit and positive cash flow.

We have made several recent acquisitions in China and still believe in the long term growth prospects for our products there. One, as Bruce said, this is a business to manufacture the products we sell to the fibers and resin industry. We’re a leader in North America and we’ll be able to offer customers in China the same quality products as we sell here. We are acquiring the remaining 20% of our joint venture in China, which manufactures all Baldwin filters, UAS dust collectors, and sand control filters. I’m convinced it’s one of the best filter plants in China.

We also acquired another Chinese company, which is a low cost manufacturer of engine filter products. We expect China to be a major growth vehicle for us in the future, as we add more products and technology. We are still seeing good demand in our natural gas (inaudible) business, actually more than I had expected. Increasing our oil and gas after market business is a key corporate objective and it is growing.

While we have become less dependent on engine filtration, it still drives our company. As Bruce indicated, sales were lower in this segment were lower than we expected in the first quarter and end use demand plummeted, and some distributors, as I’ve already said, reduced inventory. We expect sales for the balance year to be around 68% lower than last year, which is half the rate of decline of the first quarter. The decrease will be less in North America than the rest of the world and the rate of decline will be less throughout the year.

As we said during our last conference call, CLC Air, our HVAC business is our ace in the hole. We expect to benefit from both new customers and our cost reduction initiative. At the same time, we did see lower sales during the first quarter, as some customers skipped the filter change. We expect to rebound over the balance year as customers replace inventories and do change filter. The lower sales, however, did enable us to consolidate our global operations more rapidly as we move up to closing of two factories and one warehouse, and consolidated to a new facility.

Providing earnings guidance is a challenge. We’re now estimating a $1.60 to $1.75 per share, which is based on no recovering economy but also no further deterioration. If things improve, the second half of the year will be better. We will benefit from cost reductions in materials, as well as lower manufacturing, management, and selling expenses.

There are additional cuts we could make, but as I said earlier, we are not cutting back on our selling customer service and new product development activity. Perhaps we could make another (inaudible) share, but we build and aspire better to invest for the future. I remain enthused about our long term future and the opportunities we have. Filtration is a great market, which will continue to grow faster than GDP. We intend to be a leader in the industry.

We will now be pleased to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator instructions) We’ll take our first question from Antonio Antezano with Macquarie Capital.

Antonio Antezano – Macquarie Capital

Good morning. I was wondering, in your guidance, you throw light, what do you expect for the next three quarters and nineteen days is mentioned a lot, Q2 is still being difficulty, although you make a sequential improvement and probably a stronger recording in the second half. So I was wondering, what are your, micro-assumptions for that expectation or whether it’s more bottom half based on the order flow you see and that you expect for the second half of the year?

Norman Johnson

I’ll address on how we do our forecast, we do a bottom up. We get submissions from all of our operating companies based on how they see the economy and then we look at probably more of macro assumptions here at the corporate level before we provide the final earnings guidance. As we said, the sales in the remaining of the year, the second half will be better than they are and the – let me start over again. The sales in the second half of the year will be better than the first half, but the second quarter should be better than the first quarter.

Antonio Antezano – Macquarie Capital

All right. And so when we focus our attention on the second half, what businesses or I would say, market do you expect to be the strongest for the second half of the year?

Norman Johnson

Well, what we expect for the balance of the year, as I’ve said before, that our engine mobile business was down 16% in the first quarter, that certainly we do not see that trend continuing. As they said, we expect our engine mobile business to be down 68% for the balance of the year with being more down in the second quarter than the second half. We also expect significant improvements to date of, hopefully, I said, from our CLC Air HVAC business that will lead the way to the second half. Plus, sales in the after market for our natural gas business, as we are more aggressive in the replacement business versus the first (inaudible) business.

Antonio Antezano – Macquarie Capital

All right. And then final question on your cost reduction initiative, how should we think about the savings being generated over the next three quarters? Is it more back loaded or we should see that starting in Q2?

Norman Johnson

Well, it’s all back loaded, but we should start seeing cost reductions in quarter two. Then we’ve taken the action regarding asking our people and everybody in the company to make a sacrifice on wages. And as I’ve said before, we didn’t recognize the material cost savings in the first quarter due to having to write off the capitalized bare [ph] interests, so that should start hitting in the second quarter as well.

Antonio Antezano – Macquarie Capital

Thank you. I’ll go back to the queue.

Norman Johnson

Thank you.

Operator

We’ll take our next question from Kevin Maczka with BB&T Capital Market.

Kevin Maczka – BB&T Capital Market

Norman, Bruce, good morning.

Norman Johnson

Good morning. How are you?

Kevin Maczka – BB&T Capital Market

I’m good. First, a question, Norm, on the inventory de-stocking. You mentioned that in the release, it sounds like you think that’s mostly played out, but I think a lot of your engine mobile business and the total filtration business in general is quick turnaround – 24, 48 hour turnaround from the time you get an order. So can you just comment on how much inventory is typically even in the channel to begin with to be de-stocked and then, given that quick turnaround, is that – how much visibility can you have that that’s done?

Norman Johnson

That’s a lot of questions and you have a specific number for all of them, I know, but let’s start. First of all, the quick turnaround is from our distribution centers to our distributors, whether they be OEM dealers, new credit distributors, end users, or whatever, and right now, we are shipping 98% of all orders within 24 hours. What’s commodity inventory, which I’m sure you understand, is the not an inventory that our distributors hold. For example, that we were – in our sales, we’re up double digit the fourth quarter of ’08 and we went to double digit declines. So them taking out a week or two of inventory, sometimes you get into year-end tax situations as well, is what has the impact.

Our visibility comes from what our sales people report what’s going on. And this has been true for as long as I’ve been with the company and in the after market business. There’s some negative thing in the newspaper and the news and distributors will get nervous and say, “Well I’m going to skip a weekly order”, or whatever.

Actually, in some respects it’s good news because the less inventory there is in the field the better it is for us because we can ship with – in 90 – immediately. And the business will rebound a little bit more because of the pain [ph] that we took in the first quarter.

Kevin Maczka – BB&T Capital Markets

Okay. And then can you just give a little more color, Norm, on specifically what you’re distributors are saying? What I’m getting at is de-stocking and taking a week out of inventory is one thing. But it’s another thing when end customers are parking trucks and parking construction equipment and just don’t need filters and that won’t necessarily rebound in Q2.

Norman Johnson

There’s no doubt that all of that is happening. Trucks are being parked, construction equipment, or whatever. And that’s the reason why we’ve made this statement that we’ll be looking at what we forecast. Just getting off the phone before I walked in here to make absolutely sure I know what was going on for our monthly orders.

That I said a glimmer of hope that we do see our sales in the Engine/Mobile business – our orders in the Engine/Mobile business better than we had projected. Now we’re still projecting a decline but it’s coming in a little better than the decline, which is the best indicator we can get actually what they’re ordering.

Kevin Maczka – BB&T Capital Markets

Okay. And just one final question, Norm. I was hoping you could give a little more color on these major sales contracts that you cited in your press release?

Norman Johnson

I’ll tell you what – I can’t for some confidentiality reasons. As soon as we can make them know and we’ll be glad to tell you.

Kevin Maczka – BB&T Capital Markets

Okay. Thank you.

Norman Johnson

You’re welcome.

Operator

We’ll take our next question from Jeff Hammond with KeyBanc Capital Markets.

Jeff Hammond – KeyBanc Capital Markets

Hi. Good morning, guys.

Norman Johnson

Good morning.

Jeff Hammond – KeyBanc Capital Markets

You mentioned CLC as your ace in the hole. I just wanted to get a better sense of why the restructuring benefit wasn’t more apparent in the first quarter? And then is there something within these customer wins [ph] that falls within that, that gives you a boost later in the year?

Norman Johnson

The first thing why it wasn’t more apparent is because, as Bruce indicated, we sold less to the automotive companies. But also that the benefits of the cost reduction since we took the action in the first quarter we didn’t realize. And we had a few expenses to make them happen.

As far as future sales, I don’t know what’s going to happen to the automotive companies. So let’s just assume that that’s still going to be bad. But certainly, as the heating season changes – the nice thing about – if you look at it, whether it could be your furnace at home or an industrial building or whatever, if you don’t change the filter, sooner or later it’s going to clog and the unit is going to freeze up. So they have to change the filter. So we see that increasing.

We’ve got the new products coming on. We’ve got the cost reductions coming on, which should all be good trends. Are there going to be some negative because of some downs in the economy upsetting some of that? Yes. But we think the plusses – we know the plusses outweigh the negative.

Jeff Hammond – KeyBanc Capital Markets

Without naming the specific customers, what businesses are you seeing as new – new customers?

Norman Johnson

I just don’t want to go there. I would love to tell you. But I guess you’ll just have to take it out at face for this one. Or just count everything I’m saying.

Jeff Hammond – KeyBanc Capital Markets

Okay. And then you mentioned, in your prepared remarks, March was feeling a little bit better. And that was right following the PECO comment. Is that specific to PECO or just broadly you’re seeing better –

Norman Johnson

It was broadly. It’s not for everyone of our businesses. But it’s certainly for – for more than one.

Jeff Hammond – KeyBanc Capital Markets

Okay. So where are you – where are things feeling better in the March –

Norman Johnson

As I said, I was just demonstrating that right now our Engine/Mobile orders are coming in a little bit better than we expected. That could change overnight. What is it? The 18th? 19th? So, through 18 days it’s looking good. And I was looking for some optimism. And the orders are better than what we had projected. Whether that could – not a lot but at least better. At least the decline seems to be over. Whether that continues, who knows?

Jeff Hammond – KeyBanc Capital Markets

Okay. And then, I think your – in Engine/Mobile, you’re calling for a smaller – a decline, but a smaller decline, and I guess the similar decline on the top bottom line is the top line – I mean your decrementals [ph] were much more challenging in the first quarter. And I’m just wondering how, in Engine/Mobile, you pulled those decrementals – as you’re seeing still volume declines in the latter part of the year?

Norman Johnson

If you’re talking ,how do we hold decrementals, how do we hold margins or whatever?

Jeff Hammond – KeyBanc Capital Markets

Yes, yes. I mean I think, you’re saying, still down 68 margins essentially flat.

Norman Johnson

Obviously, it has to be because of the cost reductions, whether it be the turn or the other actions that we’ve taken.

Jeff Hammond – KeyBanc Capital Markets

Okay. And then final question, you mentioned the capitalized variances in the first quarter. Is there a way to quantify the impact to that?

Norman Johnson

I’ll tell you what, I’ll let Bruce explain it because I’m not really sure I fully understand it also.

Bruce Klein

Basically, during 2008 for most of the year, raw material prices were increasing until the very end of the year. And the costs went off – FIFO basis, the inventory we have on hand to fix our balance sheet, our PLOs (inaudible) are quicker than the inventory bought later, which would be slightly lowering raw material prices towards the end of the year and during the first quarter. We had to get through that. The difference between our input prices from beginning of ’08, for example, to the beginning of ’09 is significant and in the millions of dollars, but I don’t have the exact number in front of me.

Jeff Hammond – KeyBanc Capital Markets

Okay. Thanks, guys.

Operator

We’ll go next to Adam Brook with Sidoti.

Adam Brook – Sidoti

Hey, guys, just to start on the balance sheet. I noticed there’s a little bit of a tick-up in inventory. And traditionally, you guys have a little of a hop-up in Q1 and maybe cycle that down. Is that trend going to continue this year and maybe we’re going to see that come back down to what it started at the end of ’08? Or is this kind of a back up to a slowdown in demand?

Norman Johnson

Well, a lot of it is going to be dependent upon – on the sales. But right now, our inventory levels, we know they’re high. A lot of it, as I’ve said before, is to maintain the customer service levels that we are because the more our distributor cut their inventory, they depend upon us for shipments, and it’s just the way that we can gain market share.

Bruce Klein

And also, as we mentioned, it’s typical in the first quarter because of building inventory for the HDHT air conditioning season. So it’s very typical.

Adam Brook – Sidoti

On the SG&A line, last year, there’s a decent hop-off in (inaudible) percentage of the sales, I’m guessing because of the Peco acquisition. Is there a chance that we see a nice drop off in that? As things settle down a little bit, I guess, I’m asking how far the acquisition’s going. And could we see a decent drop in SG&A despite the sales declines.

Norman Johnson

We’re watching all of our costs. And we expect that, certainly, SG&A as percentage of sales was higher this quarter than it was in this quarter of last year, in percentage terms. Although we had a – as the dollar declined, and we expect to see a further dollar declines, but I don’t believe it’s going to be quite as significant on a margin basis.

Adam Brook – Sidoti

So are we looking at a maybe a year-over-year decline that’s somewhere between 3% or 5% for each quarter, more or less, or –?

Norman Johnson

I don’t have it in front of me by quarters for SG&A. I’ve got the information, I don’t have it in front of me. But I can tell you that we expect – in a worse case, barring acquisitions of course, we’ll probably hold M&S roughly the same dollar amount as last year or a little bit less. And sales will be down, so the percentage will be up, but I’m not expecting the dollar amount to be up.

Adam Brook – Sidoti

Okay. All right, thanks a lot.

Operator

We’ll take our next question from Gary Farber from C.L. King.

Gary Farber – C.L. King

Yes, hi. Just a couple of questions, on the margin contraction in the first quarter, are you saying that it’s all volume and there’s no – that you’re still getting priced? Is there any – I guess what’s the situational price in the first quarter? And then, your outlook for the second half of the year, you’re saying that your months improving as you’re going. Is that the basis for your second half of the year or is it more so what you’re hearing back from your sales people?

Norman Johnson

First, the first quarter, we said volume was the major contributor that they were certainly the – if we touched maybe too much about advise, the inventory that capitalized (inaudible) had to write off. We also had some higher pension costs and things like that. Go back to your question about the second half of the year because I want to make sure I understand.

Gary Farber – C.L. King

Is your outlook for the second half based upon what you’re seeing so far in the first three months of the calendar year. Or is it – and I know you’re saying you have contrast – or is it based upon more so what you’re hearing from your sales people on the field what things might look like?

Norman Johnson

The forecast, as I indicated earlier, is a bottoms up that we get from each of our operating companies. So certainly, it would reflect what they are hearing from their sales people and what we expect. And certainly, we look at it, review it, to make sure it makes sense from a macro – if they were coming up with a 20% increase, being really optimistic, we wouldn’t believe it. So we do a check for that. But all of our people, when they were given their forecasters, were instructed to give us a forecast not based on wishful thinking, but one that they could make in today’s economy – in a non-improving economy.

Gary Farber – C.L. King

Right. What’s the relationship as far as price with your customer base these days?

Norman Johnson

Really, when you look at price, there’s always price pressure, but pricing is not having a significant impact in the forecast one way or another.

Gary Farber – C.L. King

And in the first quarter?

Norman Johnson

Not then either.

Gary Farber – C.L. King

Okay. Then, just lastly, receivables, any changes on that front?

Bruce Klein

We think we’re pretty well reserved for potential bad debts. And when we issue our 10-Q in the next day or so, you’ll see the details of that. But there’s no doubt that receivables are more challenging, questions are more challenging now than they were a year ago. We’re seeing more strain in some of our smaller customers, particularly, than we’ve seen recently. So it is something we are watching very closely. We have (inaudible) about reserves and the consequence, and I think we’re pretty well reserved, but it – there’s no doubt that it’s a bigger issue now than it was earlier in 2008.

Gary Farber – C.L. King

Okay. Thanks.

Operator

We’ll go next to Rick Eastman with Robert W. Baird.

Rick Eastman – Robert W. Baird

Hi Bruce, Norm.

Bruce Klein

Morning, Rick, how are you doing?

Rick Eastman – Robert W. Baird

Good. See, when I roll up, the other paragraph in the press release and some of the acquisitions here, the couple small ones, you had a close on this 20% that you’ve already – that you don’t own. But if I roll together on an annualized basis, the revenue that you haven’t already consolidated, does it amount to much? Or is it, $5 million a year or $10 million a year? Follow me?

Bruce Klein

It’s more than $5 million, less than $10 million.

Rick Eastman – Robert W. Baird

Okay. So not – okay. And then, I just want to go back for one second, I think I understand this capitalized inventory cost. But essentially on FIFO, you turn your inventories just over a quarter. So presumably, what you had at a higher cost in inventory is largely flushed through in the first quarter? And we should see the benefit of the materials cost pretty much here in the second quarter?

Norman Johnson

That’s right.

Rick Eastman – Robert W. Baird

Is that how that works? (inaudible).

Norman Johnson

When I work out the math that’s the way it works, Rick.

Rick Eastman – Robert W. Baird

Basically, the FIFO accounting is nothing more than that. Okay. And then also, given where we are with CLC Air, and I understand, first quarter would seasonally be a weak quarter. But given the guidance, it appears to assume that you will still turn maybe a $5 million profit in CLC air based on the restructuring. Even if maybe the top line is lighter than you expected. Is that how you’re looking at the guidance there?

Norman Johnson

That’s correct.

Rick Eastman – Robert W. Baird

Okay. So we’re quite confident that those remain in place then?

Norman Johnson

We’re quite confident.

Rick Eastman – Robert W. Baird

The benefits –

Norman Johnson

And that’s one of the reasons (inaudible) we make down to the air will be better than the first quarter.

Rick Eastman – Robert W. Baird

Okay. And then Bruce, could I just ask, what the interest expense number was in the quarter? And other income and other expense, could you just (inaudible) –

Bruce Klein

Interest expense was slightly less than $1 million, total.

Rick Eastman – Robert W. Baird

So total, that’s net expense that includes the swap?

Bruce Klein

Includes the $600,000 charge for the swap. Without the swap, it would have been net $300,000.

Rick Eastman – Robert W. Baird

Okay. I get you. Okay, thank you.

Norman Johnson

Thank you.

Operator

We’ll take our next question from David Lebowitz with Verizon.

David Lebowitz – Verizon

Good Morning. A few unrelated issues. First, what is your plant capacity running if you made your operations right now?

Norman Johnson

Certainly, less than 100%. David, I don’t – we have 26 factories in North America and 10 in Europe and around the world. So coming up with that number, but it was indicated, one of our problems in the first quarter was on absorption. But I don’t have the exact number.

David Lebowitz – Verizon

Are there any thoughts about having to mothball any of those facilities?

Norman Johnson

As we indicated, what we – in our CLCO restructuring, we did move a couple up and shut them down. I don’t see anything on the immediate horizon that we will be closing any factory. We might be working some less hours or things like that but no major shut downs of factories.

David Lebowitz – Verizon

Okay, now in your remarks, you mentioned specifically you’ve seen an upturn in orders in March. Is that company wide or is that for a specific operation? I did not hear the antecedent to that.

Norman Johnson

What we said, another person asked a similar question, that we have for some of our businesses, specifically our Engine/Mobile plus a couple of our industrial environmental businesses as well. Not across the board, but it’s certainly spread across the company.

David Lebowitz – Verizon

And, that is an upturn from what? The year before? The month before?

Norman Johnson

It’s an upturn from what we would usually when we did our forecast. And as far as the – I said we expect the economy not to deteriorate or improve – so it’s higher than what we expected, I guess would be a way to say it.

Bruce Klein

David, one way of looking at it David, we said that we expect Engine/Mobile sales to decline over the next three quarters by 68%. That’s what we’re comparing it to, the 68% decline.

Norman Johnson

Thanks, Bruce.

David Lebowitz – Verizon

Okay. Thank you on that point. And lastly, you were very quiet on the fact that you had a dividend increase record that is very impressive and yet nothing was said about the potential for keeping that record growing.

Norman Johnson

I see no reason at this time that our dividend policy would be any different this year than any other year. If everything really, really went south – based on the forecast that I’m giving, that we’ve given right now, we would see no change. If everything really deteriorated, who knows?

David Lebowitz – Verizon

Okay. And the last point, do you have much in the way of back orders in any of your operations at the moment?

Norman Johnson

Back orders?

David Lebowitz – Verizon

What are your backlogs?

Norman Johnson

Back orders from backlog that – we’re very current on our shipping. Some of our businesses are backlog business, the vessel business would be one.

David Lebowitz – Verizon

Okay. Thank you very much

Norman Johnson

David, you forgot that one question, I was surprised that – going back probably farther than anybody with our company, that I thought you would be very impressed that JL Clark, the packaging company, we expect, based on the orders that they’ve received, they would have a better this year than they did in 2008.

David Lebowitz – Verizon

Well actually, I was going to ask the question in the sense that, why did we even mention JL Clark other than it’s the only bright light in the whole firmament of the company at the moment.

Norman Johnson

I’m sure you’ve made all the employees of JL Clark all very, very happy.

David Lebowitz – Verizon

Well, they deserve all the kindness we can give them.

Norman Johnson

We don’t think it’s the only firmament, but we do – I think we’ve got some lights burning – every place out, but they’re doing a great job.

David Lebowitz – Verizon

Thank you very much, Norm.

Operator

We’re going next to Brian Drab with William Blair.

David Mandel – William Blair

Good morning, this is David Mandel [ph] sitting in for Brian. Building on the acquisition question, what markets in the geography do you view as the most attractive going forward?

Norman Johnson

That’s a great question. Certainly, the markets that we like best tie in to our recurring revenue model. Obviously, we just made a couple of acquisitions in China. We’re very happy. We acquired them very quickly to get the remaining 20% of our joint venture, which is a great company. Certainly, expanding in the industrial environmental segment, is something we look at very attractively. But if the right Engine/Mobile business came along, we would take it. Probably, we would prefer Asia more than we would Europe at this time because of the better growth. But in the acquisition environment, a lot of times you have to go with what’s available. So we would take a look at everything, but again sticking with recurring revenue is our goal.

David Mandel – William Blair

Okay. Thank you.

Operator

We go next to Jake Rebushek [ph] with Royal Capital.

Jake Rebushek – Royal Capital

Hey, guys, help me get in touch a little bit more on the margin point. Obviously, in Q1 margins year-over-year are down about five net basis points, and going forward do you expect that to be flat? I was hoping maybe you could break it down a little bit more for us in terms of how much of that delta is turned by input cost, how much is headcount or salaries’ reductions and how much is other initiatives you’re undertaking.

Norman Johnson

Having specific number to do all that, we don’t have in front of us. But the majority of it – not majority, but the bigger piece would be material cost because that’s our biggest piece of sales. Certainly, we’ve reduced manufacture expenses productivity, it’s across the board, it’s not one easy answer.

Jake Rebushek – Royal Capital

Is there any way to say what your margins would have been in Q1 if you were operating at your current input cost levels?

Bruce Klein

Can we do that? Yes. I’m sorry, we don’t have the amounts in front of me, I’ll have to go back and work on it. But can we do it, yes.

Jake Rebushek – Royal Capital

Okay. Fair enough. Thanks, guys.

Norman Johnson

You’re welcome.

Operator

We’ll go next to Jeff Hammond with KeyBanc Capital Markets.

Jeff Hammond – KeyBanc Capital Markets

Hi, guys, just a question on Peco. Have you seen any vessel cancellations to this point?

Norman Johnson

Not that I know of. There certainly could have been some delays, but I don’t know of any cancellations.

Jeff Hammond – KeyBanc Capital Markets

Okay. And then, you said that business is holding up better than you would have expected. Are you counting on some deterioration in your guidance on the second half of the year?

Norman Johnson

Are you saying that are we going to lower our guidance for the second half of the year?

Jeff Hammond – KeyBanc Capital Markets

No, I mean, within your guidance, how do you think about the Peco business for the latter part of the year?

Norman Johnson

Well, it’s about flat, is what it’s going to be.

Jeff Hammond – KeyBanc Capital Markets

Okay, thanks guys.

Bruce Klein

Actually, it’s going to be up a little bit, on sales lines from last year, if forecast you currently have for the last three – three quarters comes to – comes through. Not a lot, but a little bit.

Operator

(Operator instructions) We’ll go next to Rick Eastman with Robert W. Baird.

Rick Eastman – Robert W. Baird

This is a follow-up. Bruce if I – and Norm if I walk through the Canada press release, Canada sales guidance for the back three quarters and also the out profit guidance for the back three quarters. The variability in the out profit margin guidance is really narrow. In other words, the difference between your high-end guidance and your low-end guidance on out margins is like $0.03 per share. So when I look at, say $1.60 to $1.75 as an EPS range, what’s – the range is quite wide. And I’m just curious, what do you see as maybe the variables there that can move from low to high-end. Sorry, it’s kind of a messy question.

Norman Johnson

No it’s a great question.

Rick Eastman – Robert W. Baird

Maybe just give me a sense of what we should look for, maybe the low-end and versus the what’s the high-end type of expectation –

Norman Johnson

I’m thinking of turning this one over to Kim Moore our Corporate Controller she (inaudible) fire, but that would not be a nice thing to do. What we think Rick, we have, when we get all of our forecast a single-point number that we use in as a basis. Then we go – what kind of range do we want to give you. Obviously, we want to give you a range that we can make. If you look at variability, what could go wrong? Sales could still deteriorate. The vessel business that we just talked about, we don’t have the experience in Peco that we do some of our other businesses that could deteriorate the second half of the year, it’s not what we’re projecting but it could.

Based on our credibility factor, for CLC air, there are still some other things that could go wrong. We still have some upside for this forecast that things could go right. But if I’m looking at variability, those would be the main ones.

Rick Eastman – Robert W. Baird

And would it be fair to say that you have more control to manage to that out profit dollar number with cost, with the restructuring? The variability here is more top line.

Norman Johnson

That’s absolutely correct.

Rick Eastman – Robert W. Baird

Okay, thanks again.

Norman Johnson

You’re welcome.

Operator

(Operator instructions) We’ll take a question from Gary Farber with C.L. King.

Gary Farber – C.L. King

Yes, I just want to be sure what you’re saying as far as the trends you said at the beginning of the year. Are you saying that January and February, in aggregates for the company were actually better than December? And that your commentary on March is that it still might be negative year-over-year but better than your guidance would imply for the rest of the year?

Norman Johnson

That’s correct.

Gary Garber – C.L. King

Okay. Thanks.

Operator

At this time it appears they have no further question. Mr. Johnson I would like to turn the conference back over to you for any additional or closing remarks.

Norman Johnson

Well good, thank you for joining us today that we can – tried to lay it out exactly what we think is going to happen. I want to repeat that we still think we have a strong business. We know what we have to do for sales and cost. Our people are doing a fantastic job in this environment for making it happen so thank you very much for joining us.

Operator

Thank you ladies and gentlemen, that does conclude today’s conference call, you may now disconnect.

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