Baldor Electric Co. Q1 2009 Earnings Call Transcript

May. 2.09 | About: Baldor Electric (BEZ)

Baldor Electric Co. (BEZ) Q1 2009 Earnings Call Transcript April 30, 2009 11:00 AM ET

Executives

Tracy Long – VP, IR

John McFarland – Chairman and CEO

Ron Tucker – President and COO

Analysts

John Franzreb – Sidoti & Company

Steve Sanders – Stephens

Jason Feldman – UBS

Kristine Kubacki – Avondale Partners

Eric Glover – Canaccord Adams

Jon Braatz – Kansas City Capital

Brian Meyer – Robert W. Baird

Jennifer Chadwick – MetLife

Operator

Good morning, everyone and welcome to the Baldor Electric Company First Quarter 2009 Earnings Results Conference Call. This call is being recorded. With us today from the company is John McFarland, Chairman and Chief Executive Officer; Ron Tucker, President and Chief Operating Officer; and Tracy Long, Vice President of Investor Relations.

At this time, I would like to turn the call over to Ms. Long. Please go ahead.

Tracy Long

Thanks, Kristen. And good morning, everybody. We appreciate you being here with us today. Our press release came out yesterday afternoon and if you don’t have a copy, there is one posted on the web site. I just want to remind everybody that some of the comments we make today may be forward-looking in nature. Those statements are not guarantees and our actual results could be materially different.

And with that, I’ll turn the call over to John.

John McFarland

Thank you, Tracy. Good morning, everyone. Thank you for joining our call this morning. In the first quarter of 2009, we reported sales yesterday of $402.5 million, a 14% decline from sales one year ago. Net earnings for the quarter included a one-time gain from the modification of our debt. Excluding that gain, our net earnings for the quarter were $14.8 million, a 42% decline from one year ago. Earnings per share, again excluding the one-time gain, were $0.32, down 43% from a year ago.

As with each quarter, there are a number of things that we were pleased with and some that we were not pleased with. And so, I’ll comment on both, starting with those things that we were pleased with during the quarter.

First of all, we were pleased with some of the successes that we had with our Bounty Hunt program. The Bounty Hunt program pays an incentive to our sales force to obtain business from agreed-upon new accounts. It’s a program that we are using both in our Dodge business and in our motor business.

The program was used very successfully in the last recession and we were able to secure $35 million worth of new business as a result of this plan. With our much broader product line today and larger sales force and with the successes that occurred in the first quarter, we think we are on track to have more success this time than we had with this program in the last recession.

We are also pleased to report this morning that our cost reduction efforts are slightly ahead of our estimates. You’ll recall, in December we announced $80 million worth of cost reductions for the year 2009. Through the first quarter, we are slightly ahead of that goal.

We are going to be in New York on June the 9th to hold an investor conference and we will update you on our progress in much greater detail at that time. We hope those of you can attend in person will do so or if you are unable to attend in person, you can to listen to the presentation on the Internet.

We were also pleased with the performance of our plants during the first quarter. Managing productivity in a plant that is being underutilized because of low sales is difficult. Our manufacturing team did a good job in the first quarter. As a result of our cost reductions and the management of our plants, we saw an improvement in our gross margin to 28.9% compared to 28.5% in the fourth quarter of 2008.

We were also pleased to report an improved operating margin over the fourth quarter of 2008. During the first quarter in 2009, our operating margin improved to 11.2% from 10.8% in the fourth quarter. Again, we feel this is good evidence that our cost reduction strategies are being achieved.

Also, the first quarter has the least benefit from the cost reductions of any quarter in 2009. We were able to achieve this inside of $70 million less in sales in the first quarter compared to the fourth quarter.

We were also pleased to complete an amendment to our debt agreement during the quarter. We saw and achieved an amendment that would give us plenty of headroom in both the near term and the long term so that we would not violate the covenants of the agreement.

Oddly enough, ratification of this amended debt agreement caused a one-time non-recurring non-cash gain of $35,740,000 or $0.47 per share. We have attempted in our press release to clearly show this and separate it out so that you can see how we actually performed during the quarter without the one-time non-cash gain.

As usual, there were a number of things in the quarter that we were not pleased with. First of all, you can never be pleased with a sales decrease of 14%. In fact, we are never pleased with any kind of sales decrease. However, in spite of the decline, I believe our sales and manufacturing organization did a good job during the quarter.

We were also not happy that our inventory remained steady during the quarter. Our plan was to slightly reduce our inventory during the first quarter, make additional reduction in the second quarter, and additional reduction in the third quarter. Unfortunately, we made no progress in the first quarter, but we do expect to make progress during the second and third quarters, with most of that progress coming in the third quarter.

In the fourth quarter of last year, we made good progress at reducing the time it takes to collect our accounts receivable. We were disappointed in the quarter just ended that we made no progress in this area. We will continue to focus on this as a source of cash for debt reduction and believe we will make some progress over the coming two quarters. We have not seen unusual increase in bad debt.

We are disappointed that we were only able to reduce our debt by $7.7 million during the quarter. As explained in our press release, the first quarter is a difficult quarter for debt reduction as we have a number of large cash requirements including $13 million for funding of our profit sharing plan, our semiannual bond interest payment of $23.7 million, $8.3 million of non-recurring fees related to our credit agreement amendment, and we paid both the fourth quarter 2008 and the first quarter 2009 dividends during the first quarter of 2009. This caused an additional $7.8 million for the year, second payment during the quarter.

We expect to increase the pace of debt reduction over the balance of the year and expect a minimum debt reduction of $100 million this year. This is down from our previous goal of $125 million, primarily because of weaker-than-expected first half sales.

During the quarter, we made good progress towards the completion of the integration of the former Reliance Electric plants and Reliance Electric products, and also the plants and products of Maska, a company we acquired last year. There are meaningful cost reductions associated with getting all of these plants on to the Baldor computer system, or as we refer to it, the Baldor information system.

During the quarter, we added our two plants in Canada and our plant in Mexico to our information system and this will help improve both of – all three of these operations. We also made some further progress toward the integration of the Reliance and the Baldor motor product lines. We expect to continue making progress until the motor integration is completed at the end of next year.

During the quarter, we continued to see above average growth of our Super-E motor product line. Sales of Super-E motors, our high-efficiency motors, grew by more than 25% during the quarter and now accounts for 12% of total motor sales. We expect to continue seeing above average growth with these products as we move toward the implementation of the 2007 energy bill at the end of next year.

We have also begun the development of motors that are even higher on efficiency. This development is being done with the assistance of the United States Department of Energy. Our goal is to produce motors that are higher in efficiency than anything available today and to produce motors that are smaller in size and use less material.

While this development will take several years to complete, we believe these products can have a substantial impact on energy consumption around the world. Almost a third of all the energy produced runs motors like those we make. As mentioned in our press release, you can learn more about this effort by going to the Department of Energy website and we’ve provided a link to the website to make it easy for you to go and read their press release.

During the quarter, large motor sales were stronger than small motor sales and although they did decline for the first quarter in a number of years. We have a much smaller – the decline was about half of what it was for smaller motors. We have a much smaller market share in large motors and we continue to see this as a place where we can gain market share in the future.

During the quarter, our international sales were down by 4%. All regions were down with the expectation of Canada. Canada showed good increase. While sales were down, incoming orders continue to be reasonably strong. In fact, our Chinese plant had the second highest incoming order rate in history during March. This plant produces large, self-start gearboxes, primarily for mining application and it’s beginning to produce a few special motors. We expect we will continue to see our international sales performance outpace our domestic business.

During the quarter, we began to see some signs of distributor inventory destocking is beginning to slow. This is causing the rate of sales decline at our Dodge business to improve. Also, the Dodge business is tied to the aggregate and cement markets and quoting activity in that area has picked up. Some of this maybe related to the increased infrastructure spending expected to begin in the last half of the year. We believe this greater spending on infrastructure will benefit our business and in particular, our Dodge business.

Looking forward, we think the second quarter will be our most difficult quarter of the year with sales down in a range of 15% to 20%. Also, a little over a week ago we announced that during this quarter we will be consolidating two of our plants into other existing Baldor plants. This consolidation will cause some non-recurring expense during the current quarter of approximately $4.5 million.

We expect to realize about $9 million of annual savings beginning in the third quarter of this year. This is in addition to the $80 million in cost savings we announced in December. These closings involve a large motor plant and a sleeve oil bearing plant. Both of these products, we expect greater-than-average growth on in the future. So, we are careful to do this consolidation in such a way that it will not limit our ability to take advantage of those opportunities as we go forward.

Again, thank you very much for joining our call this morning. As I said earlier, while we are always disappointed in a decline in sales, I think we accomplished a lot during the past three months. With the things that we’ve accomplished over the past three months and our plans to accomplish during the current quarter, we are becoming more optimistic about the last half of the year.

We see our efforts to obtain new customers working. We’ve seen an increase in quote requests from our OEMs. We see a slowing pace of destocking on the part of our distributors and we see an increasing benefit from new products that we will be introducing and have introduced and we see some benefit from the increased amount of infrastructure spending.

In addition, our efforts to improve – in addition to the efforts to improve our top line, our cost reduction efforts announced in December are expected to exceed our forecast. Our lean flex-flow productivity improvements in our plants and some of the improvement in material costs are causing us to be more optimistic about the last half of the year.

So with that, we will be glad to open the line to any questions you might have about our second quarter performance or anything else that you like to ask about this morning.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And we’ll pause for a moment to assemble our queue. And we will take our first question from John Franzreb with Sidoti & Company.

John Franzreb – Sidoti & Company

Good morning, guys.

John McFarland

Good morning, John.

John Franzreb – Sidoti & Company

My first question is regarding raw materials. You said it was up on a year-over-year basis, but you kind of anticipate low raw material costs in the second half of the year. Can you kind of update us on where that flow-through currently stands? Do you expect any kind of raw material benefit to flow through into the second quarter?

John McFarland

We expect – we don’t expect to be penalized in the second quarter on raw materials like we were in the first quarter. We do expect – on an incremental basis, I mean we are not anticipating any gigantic drops in raw material cost, but we do anticipate some improvement in the second quarter, a little more again in the third quarter, and probably a little more again in the fourth.

John Franzreb – Sidoti & Company

Okay. Care to put a number to how much of a kind of savings we can expect from that?

John McFarland

No.

John Franzreb – Sidoti & Company

Okay.

John McFarland

You’ll always try every call, though.

John Franzreb – Sidoti & Company

John, you mentioned the Chinese operations doing extremely well. Could you give a little bit more color on what kind of motors you are providing to the Chinese market and what’s driving that?

John McFarland

Yes. Our primary focus in China today is manufacturing large gearboxes for the mining industry and for the aggregate business. And our order books are strong in that product line and then in that plant. The first quarter was not a particularly great quarter for the whole region, but it was pretty good for the plant. And we think that the second quarter will be good as well.

As I mentioned, the March incoming order rate was second highest in history and I noticed this morning when I came in that we had gotten a nice order yesterday for products on that plant. We are – we did enlarge the plant last year so that we would be able to begin producing some motors in China and the motors we produce there now are special adjustable speed motors. We anticipate adding production later this year of some hermetic motors. These are motors used by – in the HVAC and refrigeration business.

Eventually, we intend to produce a full line of motors in China, not this year, but this year we’ll focus on adding some of these niche products that there is a demand for in China and not many competitors for. And then later on, next year and the year after, we will be adding a full line of motors so that we can really get into the general purpose motor business in China.

John Franzreb – Sidoti & Company

Now, you mentioned that the large motor decline overall is half that of the small motors. Based on the quotation activity that you are getting – and I know you just singled out a large motor win in China, would you expect the large motor sales to decelerate or what were your expectations on the large motor trends? I would figure that that business would soften going forward compared to with the trends in the smaller motor market.

John McFarland

What we expect to happen and what we’ve seen thus far is that the small motors soften before the large motor and we would expect to see the small motor business come back before the large motor business would come back.

In our case, small motors is a much bigger piece of the overall pie than the large motors. I think we have great opportunities and all our sales people are here and I was just talking to some of them this morning. I mean, we all agree, we have great opportunities in the large motor business, but today that’s where we have our smallest market share.

We have begun to see a little bit of slowing in that business, not nearly as much as we have in smaller motors and I would expect that that could continue. A lot of it is tied to oil and gas and as we have a weakening investment climate in the oil and gas market, it would affect that probably more than smaller motors.

But then again, when the things begin to recover, it recovers first with smaller motors because those are the motors that distributors carry in inventory, they don’t carry – very few distributors carry large motors in inventory because of the custom nature of the product.

John Franzreb – Sidoti & Company

Right. One last question. Could you kind of give us a sense of when the timeline is for finally completing the integration of Reliance and Dodge?

John McFarland

Well, our goal is – on the product side, is 2010. We are probably going to go a little beyond 2010 when it comes to getting all of the plants onto our computer system and that sort of thing, but the product integration will be finished by 2010. All of the decisions have pretty much been made on which product survives and that sort of thing. We are working through – we’ve got some rearranging of the manufacturing footprint, we won’t be closing any further plants, but we will be moving some products from here to there and all of that will be done by the end of 2010.

The Dodge business, we have begun the process of integrating the Dodge business into our computer system. That was started in the – during the – just in the last few weeks and I’m not sure – I don’t recall what the timeline is. Do you recall what the timeline is on getting that finished?

Ron Tucker

That should be – the Dodge sales piece should be on this year, the Dodge plants may go a little bit further past 2010.

John McFarland

So to kind of summarize, majority of everything will be finished before the end of 2010.

John Franzreb – Sidoti & Company

Okay. Thanks a lot, John.

John McFarland

Thank you, John.

Operator

We’ll take our next question from Steve Sanders with Stephens.

Steve Sanders – Stephens

Hi, good morning everyone.

John McFarland

Hi, Steve.

Ron Tucker

Good morning, Steve.

Steve Sanders – Stephens

I guess, first question on the cost cutting side. Your initial target of $80 million included about $10 million from interest expense savings and I think you gave that back with the debt amendment. So, I just want to make sure I understand it correctly. It sounds like you are ahead of schedule to be able to stick with the $80 million, losing the $10 million.

John McFarland

That’s correct. That’s correct. We don’t – with the amendment that we put in place during the quarter, we are not going to save the full $10 million that we had anticipated in our previous update, but we are going to offset what we are losing there, we are going to offset in other areas. And so, we are a little bit ahead of our $80 million goal.

Steve Sanders – Stephens

Okay.

John McFarland

And incidentally, the $80 million goal does not include the $9 million related to the plant consolidations that were just announced about a week ago.

Steve Sanders – Stephens

Right. So, now we are at an $80 million plus number for the year and going into 2010 in terms of a run rate, with a better a number than that. Fair?

John McFarland

Correct. That’s correct.

Steve Sanders – Stephens

Okay. And then the pickup that you are seeing on the Dodge side, is that beyond what you would expect to see from a seasonal perspective, meaning giving some of the aggregates and construction exposure there, is there something there that’s encouraging beyond just a normal seasonal pickup?

John McFarland

Well, there is a normal seasonal pickup in the Dodge business at this time of the year. And what we are seeing is we are still seeing sales decline at Dodge, but the rate of decline has slowed and of course there was a seasonal pickup last year as well. So, what we really – and talking to some of our distributors and sales people so far, what we are seeing is that the rate of destocking that’s been occurring in the Dodge business, again Dodge is 80% distributor as opposed to the overall company, which is only about half distributor, the rate of destocking on the part of distributors is slowing.

Steve Sanders – Stephens

Okay. And then obviously a strong performance on the gross margin in the quarter and you highlighted a few things that are working there for you from a productivity perspective, but you also indicated some frustration not being able to work inventory down. So, as I think about the production days you cut in the first quarter and what you need to do in the second quarter to start to make a little more progress on inventory, do we expect significant pressure on the gross margin from that in the second quarter relative to the first?

Ron Tucker

Well, let’s say, it’s obviously going to be a little bit more pressure on the gross margin, but again the second quarter will get a little more benefit from the cost savings as you said, and also a little more benefit on the raw materials side.

Steve Sanders – Stephens

Okay.

John McFarland

And also, we are not going to have a lot fewer production days in the second quarter. We have been holding our – we’ve had a real firm hiring freeze on. So, when anybody leaves we don’t replace them; and as people have left, it causes us to have less daily capacity. And so, we are not – we don’t anticipate in the second quarter a lot fewer days than – taking a lot more days out of our schedule than we did in the first quarter.

Steve Sanders – Stephens

Okay. Thank you. And then, final question, I think the sales numbers were down 16% or so in December and then we saw a bit of a snapback in January, down 9%. Obviously, February and March, it feels like was more like December than January and your guidance for Q2 would indicate that as well. So, can you just provide a little bit more color on what you saw in February and March and then what you are seeing in April and the point is to just get some comfort that the outlook for 2Q is based on a continuation of recent trends rather than any improvement?

John McFarland

The January – of the quarter, January was the – had the smallest decrease in sales and March had the largest decrease in sales. And we don’t anticipate – we think probably April is going to be a lit bit larger than the first quarter average because of the calendar. We feel pretty comfortable with our forecast of 15% to 20% decline in the second quarter.

Steve Sanders – Stephens

Okay. And on the pricing side, how much pushback are you getting? Can you just kind of give us an update on what you are hearing from customers there?

John McFarland

Well, we don’t like to comment much about pricing. We are getting some pushback, we are getting a pushback on pricing – if we were working seven days a week, trying to keep up with demand, we get some pushback on pricing. But we are getting some pushback, we handle it pretty well and I think evidence of that is the 14% sales decline we had. I mean, that includes any pushback, and so on, on pricing.

So, we are doing a good job I think with pricing. We have a great sales organization and you don’t always have to give a customer a price reduction to give a customer a cost reduction and we can often provide cost reductions in other ways that benefit us both and that’s what we are working hard to do.

Steve Sanders – Stephens

Okay. Thanks very much.

John McFarland

You are welcome, Steve.

Operator

We’ll go next to Jason Feldman with UBS.

Jason Feldman – UBS

Good morning.

John McFarland

Hello, Jason.

Jason Feldman – UBS

So, we don’t have the full cash flow statement yet. But from what we have, it doesn’t like look there was too much of a move in working capital and you’ve touched on the inventory topic already. How much of your debt repayment target this year is tied to working capital reduction? Is that the primary source of the debt reduction?

John McFarland

Well, we are not going to break it out between what that is and what’s earnings, because, again, that would be basically forecasting earnings for the year, which we – we don’t want to do that.

Jason Feldman – UBS

Okay. As a follow-up to the pricing question a couple of minutes earlier, has there been any kind of shift in market share, competitors behaving in a way that is suboptimal? Anything going on in the market like that that we should be aware of?

John McFarland

I haven’t seen any – I mean, if you are asking if there is anybody out there in the market that’s just totally irrational or if there is any shift in market share, it’s really hard for us to say about shift in market share, but I don’t feel that there is either of those things occurring.

Jason Feldman – UBS

Okay. It doesn’t look like there is someone getting very aggressive on price in an attempt to keep up volumes or anything like that?

John McFarland

No. And I think, again, the whole market is different today than it has been in past downturns in that there are so many fewer competitors today. And we bought our number one competitor in Reliance and Regal Beloit has consolidated a number of companies into their company. And so, we really see fewer competitors today.

Jason Feldman – UBS

Okay. And when I think about demand for the second half of the year, I mean we’ve already heard about the cost savings and how that will help in the second half, but from a demand perspective, I certainly understand that inventory destocking will cease to be as much of a headwind. And you mentioned some pickup in quote activity. But what else kind of gives you – is there anything else that’s kind of giving you the confidence that second quarter might really be the low point from a demand perspective?

John McFarland

Yes. We have the Bounty Hunt program underway and throughout our business at both the Dodge and at – and in the motor side of the business and we have some good wins in the first quarter with Bounty Hunt. Bounty Hunt pays our sales people a little added incentive for picking up new accounts. It’s net of anything you lose. So, there is no – and they work hard to pick up new accounts and work hard to keep the ones that they have.

And when we look at what we are able to pick up in the first quarter and start projecting that out and when we look at the rate of some of the behavior of our distributors that carry large inventories, we just think that the second half of the year is going to not be as severe as the first half.

Also, we do see some benefits coming from the stimulus plan both on the – in the Dodge business because of our strong ties with the aggregate in that market and therefore, the infrastructure spending, but also through the – some of the high-efficiency motor incentives that are in the bill or at least things in the bill that encourage people to be more energy-efficient, which would include our motor. But we really see that the second half of the year we think we will be a little bit – I’m not forecasting big sales increases or anything, I’m just saying I don’t think it will be as severe as the first half.

Jason Feldman – UBS

Thank you very much.

John McFarland

Thank you, Jason.

Operator

We’ll take our next question from Kristine Kubacki with Avondale Partners.

Kristine Kubacki – Avondale Partners

Good morning.

John McFarland

Hi, Kristine.

Kristine Kubacki – Avondale Partners

Just to dive a little bit more about the distributor behavior, you just made a comment that the inventories, it’s continuing to destock, but at a lower level. I was wondering, we’ve been hearing from distributors who are saying that demand is in fact stabilizing and I’m wondering, on a historical basis, are inventories kind of coming down to where they should be or are they taking inventories down to severe lean levels? And then in that case, if we did see demand being a little up in this year, not only stabilize but recover into the back half of the year, what’s the chances that the supply chain would be a little bit stretched?

John McFarland

Well, I respect you for being an optimist. You can be – somebody told me one time you can be shot for being a pessimist or an optimist. And if you are going to be shot, you might as well be shot for being optimistic. But when we look at the distributors I think the thing that you see today in the distributor market is they are bringing their overall inventories down.

Anybody that’s ever managed an inventory will tell you that it’s easy to bring down the fast-moving items because they turn regularly and it’s more difficult to bring down the so-called B and C items, items that move a little bit slower. And what we see in the orders that we are receiving is that a lot of that fast-moving stuff is out of the pipeline and being ordered now from us. And so, we think that the biggest part of the inventory reduction, which is the removal of the fast-moving items, has been and will be completed in this quarter and that we will see some benefit from that on a go-forward basis.

And also we’ve noticed that the timing of some orders has led us, with respect to the end of the quarter and stuff like that, causes us to believe that inventories are getting down to where they need to be for current demand.

Kristine Kubacki – Avondale Partners

Okay. Current demand, but if things were to pick up, you would definitely see some – perhaps restocking in the channel at some point.

John McFarland

Well, I think there is a little bit of a delay and during that delay – I mean, people are going to want to see that it’s picking up and it’s going to stay better. And so, it’s during that delay that we typically do well at Baldor because we stock more items than anybody else, both in our Dodge business and in our motor business.

We have a broader range of stock items and we have more inventory and we keep that inventory out where the customers are throughout our warehouse system. And so, when the distributors – when you get to that point where the demand starts picking up and the distributors aren’t quite ready to put in inventory because they are not sure if it’s going to last, that usually benefits us.

Kristine Kubacki – Avondale Partners

Can you comment then on the OEM side? Is there the same level of destocking or inventory in that channel?

John McFarland

It’s a little more difficult, Kristine, for us to see in the OEM side. Our OEM business was not down as much as our distributor business. In a normal recession, if there is such a thing, in most recessions past I’ll say, the distributor business strengthens because people tend to repair things rather than replace them.

Currently, the distributor business is weaker – was in the first quarter, was weaker than the OEM business, which says to me that’s all caused by reduction in inventories. And on the OEM side, OEMs don’t carry as much inventory as distributors because their product manufacturing cycles sometimes are longer. And so, I – but I don’t really have a feel about their finished goods.

Kristine Kubacki – Avondale Partners

Okay.

John McFarland

So, I don’t think I can give you a good answer there.

Kristine Kubacki – Avondale Partners

Okay. And then, just my last question. A little color on the cash flow in terms of how you think about debt repayment for our models through the year? You gave us some of the cash flow needs in the first quarter. So, I was just wondering if you could kind of give us how we should think about the next three quarters in debt repayment, if there is any cash flow timing outflows that we need to be thinking about, how that debt repayment will flow through the year.

Ron Tucker

Okay. Well, again, one of the things about the first quarter as you can see from the chart is the large cash items that we have. We don’t have the interest payment in the second quarter. So, second quarter should be obviously better than the first. In the third quarter, we – our plants will be on vacation for about a week. We will see a large inventory collection that quarter. That will again – that cash will be used to repay the debt. So, I think you would see more debt repayments in the second half of the year although a better second quarter than a first quarter.

Kristine Kubacki – Avondale Partners

Okay. That’s helpful. Thank you very much.

Ron Tucker

You are welcome.

Operator

We’ll take our next question from Eric Glover with Canaccord Adams.

Eric Glover – Canaccord Adams

Hi, good morning.

John McFarland

Good morning, Eric.

Eric Glover – Canaccord Adams

Just wondering if you guys could provide an update or any insights you might have into the Senate’s energy bill, which, as you know, contains a rebate program for energy-efficient motors?

John McFarland

Well, the – let me just say, one of the things that we are really happy about it is the fact that without any rebates or incentives or anything other than just the fact that they are a good deal, our high-efficiency motor line, Super-E product line, continued to grow at 25% during the quarter, which it’s done now for four years and that’s a pretty dramatic number when you compare it to the overall decline of the motor business of 11%. And that’s without any incentives.

But there is an amendment to the energy bill, which is moving through the Congress and currently being debated I guess, that would provide a $25 per horsepower rebate or tax incentives to the purchasers of high-efficiency motors that essentially meet the – that meet the 2007 energy bill. So, what in effect would be happening is you are going to advance the – you could advance the implementation of the 2007 energy bill into a year or so earlier.

In addition to the $25 per horsepower rebate for buying a high-efficiency motor, you’d be eligible for it if you were replacing a motor made before 1997 and that motor was destroyed. The distributor who destroyed that motor would be eligible for a $5 rebate for destroying it and then would have the scrap value. There is some scrap value in an old motor.

We think that it would have a meaningful impact on our business, our high-efficiency motor business and we are hopeful that it gets enacted. And we think not only – I mean, obviously, we think it would be good for us, but I think it would be good for the country as well.

Motors use – over the last 20 years or so, the amount of electricity that’s consumed by the type of motors we make has gone from about a quarter to now around 30% of the total electricity we use. So, adding – using more high-efficiency motors, replacing old motors that are inefficient makes a lot of sense. It will help companies to become more competitive by having lower electricity bills; it will help our country use less energy and thus pollute the environment less.

So, I think it’s a positive thing whether or not it gets – it’s early in the process, I can’t – I wish we knew it for sure that it was going to be included in the final bill. It was passed through the committee unanimously. It seems to make sense, so we would hope that it is in the final bill.

Eric Glover – Canaccord Adams

Do you have any idea when the bill might be voted on?

Ron Tucker

Well, the last thing I heard on the news (inaudible) that the Speaker of the House thought – she hoped to have this bill passed by the end of the year.

Eric Glover – Canaccord Adams

And based on what you are seeing, it sounds like you would expect your premium efficient motors growth to be well above 25% if this is signed into law.

John McFarland

Yes, we believe it would be.

Eric Glover – Canaccord Adams

Okay. Thanks very much.

John McFarland

Thank you, Eric.

Operator

We’ll take our next question from Jon Braatz with Kansas City Capital.

Jon Braatz – Kansas City Capital

Good morning everyone.

John McFarland

Good morning, Jon.

Jon Braatz – Kansas City Capital

John, a couple of questions. Number one, you have a fairly broad product line. Is there a specific motor that maybe would prove to be a leading indicator that things are turning up? Is there something within your product line that would give you a sense that things are getting better?

John McFarland

I don’t think there is really a specific motor that would be a leading indicator, but generally, as I said earlier, our small motors – the smaller the motor, the earlier it seems that you see – you see the downturn first in small motors and the recovery first in small motors and I think that’s the way it will happen this time and that’s primarily because distributors stock small motors.

Jon Braatz – Kansas City Capital

Yes, right. Okay.

John McFarland

So, not many of them stock large motors.

Jon Braatz – Kansas City Capital

Okay. In regard to your relationship with the Department of Energy on the new high-efficiency motor, assuming you develop – successfully develop a new product and it is X percent more efficient than what’s currently out there, is that a knowledge that you have to share with other people? Is that something specific and proprietary then to Baldor? What is that relationship like with the Department of Energy?

John McFarland

Well, I don’t have the details of the relationship, Jon. I mean, we’d be glad to provide them or I’d be glad to put you in touch with somebody, but it is not – I would just say that by the time this is completed, just developing this product line is only a piece of what’s required to get it into the marketplace. There is also a lot of tooling and manufacturing decisions that have to be made and so on.

And I believe that – we’d be making those along the way concurrently with the development so that even if technology has to be shared with someone else, and my gut feeling is that it doesn’t, but if it did have to be shared with someone else, I believe we’d be quite a ways ahead from the – having the ability to make the product and sell it.

Jon Braatz – Kansas City Capital

Okay. So, you’d be, let’s say, the sole financial beneficiary of any development along those lines?

John McFarland

Well, I don’t know if we’d be the sole beneficiary. But we – let me just say, this product in a few years from now will have a great – it will provide great opportunities for people to further reduce their energy consumption. It should be a very good product for us and we are working hard to make it happen.

We are actually going to have some products in this family available fairly soon, but they will be electronically controlled and our goal would be when the new product – the project we are working with the DOE on would be to figure out how to keep from having to electronically control those products. That makes them a lot more – the return a lot better.

Jon Braatz – Kansas City Capital

Have you discussed, maybe I missed it, about how much more energy efficient these products may in fact be?

John McFarland

We have not and I don’t think that’s included in our – in the DOE press release, but I can tell you that we are using something similar in an application, variable speed application, driving a fan. And in that particular case – and this is more – this is probably not representative of what we are going to actually end up with, but then in this particular case, we are getting about 15 points of improvement, which is huge in this particular application.

I wouldn’t expect that much improvement from – but we are getting that 15 points in part because we are replacing some gearboxes and we are adding adjustable speed drives. And so, we are doing some other things that we wouldn’t doing in an across-the-line smart [ph] application.

Jon Braatz – Kansas City Capital

Okay. John, thank you very much.

John McFarland

Thank you, Jon.

Operator

We’ll take our next question from Tom Klamka with Credit Suisse.

John McFarland

Hello, Tom.

Operator

Tom, you may want to check your mute function. Hearing no response, we will move to Brian Meyer with Robert W. Baird.

Brian Meyer – Robert W. Baird

Good morning, guys.

John McFarland

Good morning, Brian.

Ron Tucker

Good morning, Brian.

Brian Meyer – Robert W. Baird

If I could start off just by clarifying something on the destocking. And clearly you guys have said that it’s kind of gone past its peak now, it’s less intense. Is it fair for me to assume that the lion’s share of this depletion then is over by the end of the first half or do you think – is there any chance it carries into the second half at all?

John McFarland

Brian, in my opinion, the lion’s share will be over by the end of the first half.

Brian Meyer – Robert W. Baird

Okay. Got it. And then moving on to the – your sales mix this quarter, I’m just curious just because your Dodge business was down, I think it was what 19% or 20% in the quarter, which is comparatively more versus motors. Was there an adverse mix impact from that? And then, as you look out to the second half and presumably the smaller motors accelerate first and distribution reaccelerates first, does that mix then turn favorable at that point?

John McFarland

The distributor mix that is – the better the distributor mix, the more favorable it is for profit.

Brian Meyer – Robert W. Baird

Okay.

John McFarland

So – if the distributors begin to restock, it typically brings up our mix and that favors profit. With respect to Dodge, Dodge is 80% distributor. And so, with distributors reducing their inventories, Dodge is naturally going to be more impacted. In the case of motors, we are only about 40% distributors. So, we are not as impacted by an inventory reduction as with Dodge. The Dodge margins are attractive and in an ideal world, you wouldn’t want to see them shrinking more than motors. It does put some pressure on margins.

Brian Meyer – Robert W. Baird

Got it. And then, just one final one here. If you look back to the last call when we are talking about the debt covenants and how much cash flow you can generate from working capital, I think all of those goals were based upon kind of a worst case sales decline of 15%. I’m just curious if there’s any update to that scenario in general both in terms of the cash flow that you can potentially generate and also what a worst case sales decline might be at this point?

John McFarland

Well, I mean, we just said that for the second quarter our sales could be off as much as 20% and we think that the second quarter is the most difficult quarter. So, the first quarter was off 14%.

Ron Tucker

And in terms of working capital, I mean again – we will – we are going to bring the inventories down to a lower level and the receivables will improve. So, our goal is still going to be to bring the working capital down proportionately – close to proportionally with the sales number.

Brian Meyer – Robert W. Baird

Got it.

John McFarland

And I think you will – in June when we are in New York, we intend to provide a lot more color on this subject and a lot more detail like we did in December where we were specific about cost reductions and working capital reductions. When we are in New York on June the 9th I think it is – we are going to be a lot more specific in these areas. So, you’ll want to be sure and be there.

Ron Tucker

And remember, when we talked about the goals, those were annual goals and annual sales declines. It wasn’t quarter by quarter, and that’s important to remember also.

Brian Meyer – Robert W. Baird

Okay. That’s all I’ve got, guys. Thanks very much

John McFarland

Thank you, Brian.

Operator

We’ll take our next question from Jennifer Chadwick with MetLife.

Jennifer Chadwick – MetLife

Good morning.

John McFarland

Good morning, Jennifer.

Ron Tucker

Good morning, Jennifer.

Jennifer Chadwick – MetLife

I have two questions for you. Can you tell me a little bit of sales of 50 hertz motors?

John McFarland

Yes. Sales of 50 hertz motors were up in the quarter. Tracy is – I believe, how much?

Tracy Long

A little more than 20%.

John McFarland

Sales of 50 hertz motors were up a little over 20% in the quarter.

Jennifer Chadwick – MetLife

Great. That’s good. And can you tell me a little bit about specific sectors that were good and bad during the quarter?

John McFarland

There really weren’t many to report good. We did – I believe our mining shipments were up in the quarter and – but that’s pretty much – I mean, there wasn’t much else and that was really up. It’s a pretty broad-based decline. In talking with our sales people this morning, they were talking about some specific customers in various industries that they thought were maybe doing a little bit better than others and – but really, I mean in our numbers we don’t see anybody doing really well other than – we did see a small increase in mining shipments.

Jennifer Chadwick – MetLife

Thank you.

Operator

(Operator instructions) And it appears at this time we have no further questions in our queue. I would like to turn the conference back over to Mr. John McFarland for any closing remarks or additional comments.

John McFarland

Okay. Well, thank you very much for joining our call this morning. As I indicated, I mean, you’re never pleased with a sales decline, although I think I can say that every person at Baldor and every person in our sales organization and our manufacturing group, engineering, throughout the company is working hard to make 2009 as good a year as it can be.

And we do feel like we’ve put in place the right cost reductions. And we do feel like we’ve put the right sales initiatives in place that we will have a little bit easier time in the second half of the year.

With that, I’d like to just say – again, thank you for joining our call and tell you that we appreciate the confidence you have in Baldor Electric. And we know we have to work to maintain that and we do that every single day. So, thank you very much for joining us this morning.

Operator

That does conclude today’s conference.

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