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Executives

Tracy Long - Investor Relations

John McFarland - Chairman and CEO

Ron Tucker - President and COO

Analysts

Steve Sanders - Stephens Incorporated

Scott Graham - Ladenburg Thalmann

Kristine Kubacki - Avondale Partners

John Franzreb - Sidoti & Company

Mark Douglass - Longbow Research

Eric Glover - Canaccord Adams

Brian Meyer - Robert W. Baird

Bob Franklin - Prudential Financial

Jon Braatz - Kansas City Capital

Bill Baldwin - Baldwin Anthony Securities

Alan Mitrani - Sylvan Lake

Matt Vittorioso - Barclays Capital

Baldor Electric Company (BEZ) Q4 2009 Earnings Call February 5, 2010 11:00 AM ET

Operator

Welcome to the Baldor Electric Company fourth quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, Friday, February 5, 2010.

I would now like to turn the conference over to Mr. John McFarland, Chairman and Chief Executive Officer of Baldor Electric Company. Please go ahead, sir.

Tracy Long

Good morning, everybody. This is Tracy Long with Baldor Electric Company. I appreciate everybody being here this morning, and if you haven't had a copy of the press release yet, it is on the website, it came out yesterday at market close.

Let's just start by doing our forward-looking statements reminder for everybody before we begin. Some of the comments we make today may be forward-looking in nature. Those statements of course are not guarantees and our actual results could be materially different.

So our speakers today on the line are John McFarland, our Chairman and CEO; and Ron Tucker, our President and COO.

With that, I’d like to turn it over to John.

John McFarland

Thank you, Tracy. Good morning, everyone. Thank you for joining us this morning on our year end conference call. As you know from our press release, we ended the year with $1,524,072,000 in sales, down about 22% from the year before when sales were $1,954,679,000. Net earnings for the year ended at $59,769,000, down 40% from $99,423,000 the year before. Earnings per share were $1.28, down 40% from $2.15 the year before.

There were a lot of unusual adjustments during the year and some in the fourth quarter, so a more accurate picture might be to look at operating profit. At the operating profit level, sales declined 22% and operating profit declined 28% for the year. During the fourth quarter, sales declined by 25% to $356,413,000. Net income was $2,988,000, down 84%.

We did incur a one-time unusual income tax expense during the quarter of approximately $3 million, which reduced net earnings by $3 million to reduce net earnings of $6 million to $3 million and $0.13 a share by $0.07.

You recall in our third quarter, we forecasted that our operating margin would increase on a year-over-year basis, and operate margin did improve to 11.1%, compared to 10.8% the year before. This is particularly significant considering that the fourth quarter 2009 sales were approximately $120 million less than 2008. You recall that 2008 contained an additional week.

Cost savings during the year exceeded our $90 million target, and are expected to have a positive impact on our results in 2010. Operating margins on a year-over-year basis steadily improved throughout the year, thanks to the effectiveness of our cost reduction program.

Debt reduction continues to be our priority for free cash flow. During the year, we reduced our outstanding debt by approximately $121 million, exceeding our original forecast of $100 million for the year. Since taking on the debt 35 months ago, we have reduced our debt by approximately $347 million.

During the quarter, we made good progress at improving the collection time of our accounts receivable, reducing that time by four days. We also were able to reduce our inventories by an additional $12 million in the fourth quarter. These efforts and others provided record cash flow for the year from operations of $214,105,000.

During the quarter, we had record shipments in our generator business with sales up 48%. We believe strong sales growth in the generator business will continue during 2010, and I have more to say about that later. Sales of Super-E motors continued to increase as a percent of overall motor sales.

We are completely ready for the implementation of the 2007 Energy Independence and Security Act at the end of December. Implementation will actually begin occurring at the end of the first quarter and will occur in several stages over the balance of the year. Implementation of this law we believe will have a very positive effect on sales, giving us additional revenue of between $120 million and $150 million in 2011.

Our international business was soft during the quarter. Shipments were soft during the quarter, and didn't reflect the strength of orders. Incoming order rates have been improving and are especially strong in China. Lead times for the products we manufacture in China are long, and we believe that recent strength in orders will begin to translate to invoices in the second quarter 2010.

2009 contained approximately $5.5 million of expense-related restructuring some of our manufacturing operations. These changes will help us to be more competitive and productive in manufacturing on a go-forward basis.

Taking a look at 2010, the first quarter of 2009 was our strongest quarter with sales of $403 million. For the first quarter of 2010, we are expecting sales to be in the range of $380 million to $400 million. We have seen some strong indications that our sales will begin to grow on a year-over-year basis, beginning late in the first quarter, or perhaps, early in the second quarter.

While sales were down during January, and are expected to be down in February, we do believe we will achieve a small sales increase in March. During the first five weeks of the year, incoming order rates are more than 20% ahead of shipping rates.

With all of the cost savings we have achieved, we are anxious to see the positive impact that year-over-year sales increases will have on earnings. Over the next few months, we will be wrapping up the motor integration that we've been working on for the past three years. We expect to achieve good long-term benefit from this integration.

The integration of the Reliance and Baldor product lines and manufacturing facilities will allow us to invest more in automation, acquire better tooling, produce less variety, stock fewer products, and better utilize our equipment, seeing productivity increases throughout our manufacturing plants. This is an ongoing process, but we expect the majority of this to be completed during the first half of the year.

We will continue to have a hiring freeze in place this year, and believe that we can produce 20% to 25% more output without adding people. Debt reduction continues to be our priority for free cash flow, and we expect to reduce our debt by a minimum of $75 million during 2010. While we still have significant debt, we are pleased we were able to navigate the deepest recession in more than 50 years without cutting our dividend, without cutting capital investments for our plants or for new products, without cutting investments in sales to secure new customers, and still being able to reduce our debt.

We have not seen any of our customers begin rebuilding inventories. In fact, in the fourth quarter, we saw some further inventory reduction. I recently met with several of our largest distributor customers, and they have all told me that their inventories are down considerably from one year ago, and that they are not yet willing to rebuild them.

When inventory building does begin, it should have a very positive impact on our business, since approximately half of our total business is done with distributors, who normally keep large inventories.

Over the past year, we have made some very positive management changes in our generator business. This is having a very positive impact on sales and earnings in this product group. Sales in the fourth quarter were up 48% year-over-year, and in January, sales were up 45%. We expect this business to show good double-digit growth throughout 2010.

Our power transmission business has begun to recover. The power transmission business was the first of our businesses to feel the impact of the recession and the first to begin recovering. Incoming orders in January were more than 20% better than January 2009. Shipments we expect to follow in the future.

We have begun to see a little bit of improvement in the motor business, but it does trail the power transmission business, just as it did going in to the recession. Most of the improvement has been in smaller motors. Our large motor business is not yet showing growth. We do expect our motor business to show faster growth in the next few months.

We are hearing from some customers that schedules their orders with us will be increased. We are also hearing from some suppliers that prices need to be increased, and we do face a higher copper price beginning in the second quarter. We do not expect material costs to have any negative impact on our first quarter results, but we are preparing to increase our prices during the second quarter.

In conclusion, we are glad 2009 is behind us. It was a tough fourth quarter and a tough year. So, good riddance to 2009. We do expect the many actions we took during 2009 to become more productive and to lower our cost by $115 million annually to have a very positive impact on our results as sales begin to recover over the coming year.

As a result of the investments we have made in new products, the investments we have made in new customers and additional salespeople to contact our customer, and productivity improvements, we expect an increase in sales and earnings during 2010.

With that, I will be glad to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Steve Sanders from Stephens Incorporated. Please proceed.

Steve Sanders - Stephens Incorporated

John, just a follow-up on January and February and what you are expecting over the next six weeks or so. So it sounds like you are behind kind of the midpoint of down 3% for the quarter thus far, but the orders are much better than the shipments. So, do the orders have to get significantly better over the next month or so, or if they just hold at their current rate, that would put you around the midpoint?

John McFarland

The orders are significantly better right now than shipments. In January, they were up about 20%. This week, it looks like they are going to be up that much as well. If we stay on that course, we will exceed probably the midpoint of our forecast.

Steve Sanders - Stephens Incorporated

Okay. Then, thinking about the incremental cost reduction benefits in '10 versus '09, it looks like you have got $25 plus million. If we see the selling environment gradually improve over 2010, are there expenses that would offset a portion of that $25 plus million benefit? In other words, do you have benefits or do you have other things that you cut, incentive comp that might come back and offset some of that?

John McFarland

Well, I think everybody around here would love to see incentive comp come back, but we would have some additional cost. We think that we can increase our output by about 20% without adding much of the cost back. If we were attempting to do more than that, we would certainly add some back, but for the most part, we think the 115 is gone.

Steve Sanders - Stephens Incorporated

Okay. On the price increases, we certainly heard from some of the competitors that they are moving in that direction as well. Do you think it will be significantly more difficult to get the price in this environment? Or do you feel like the industry is generally all moving in the same direction there?

John McFarland

Well, we don't price our product based on what the industry is doing, we price it based on what our inputs are. We are going to begin seeing on end of the second quarter and on end of the third some input increases, and we'll have to pass those on as they continue. We are working now to determine what course of action to take in the second quarter. We likely will have a price increase.

We have not yet set the amount, but I think that we have always been straight up with our customers about price increases, and we have always said, listen, we are not going to come ask for a price increase just because somebody else in the industry or because everybody else in the industry ask for a price increase.

We are going to ask for a price increase when we need it because the commodities we buy such as copper and aluminum, and these things are traded on the world market, and when they go up in price it's not like you can go buy your copper from somebody else and get a better deal.

When those input costs go up, we had to pass them through and so we've tried to be fair with people for many years and I think we have been, and nobody typically likes a price increase, but they generally understand it when we come to them with the facts.

Steve Sanders - Stephens Incorporated

Okay. Then just a last housekeeping question. There was a $1 million of other expense outside of the interest expense and the amortization. Can you just tell us what that was?

John McFarland

The other income, that was Canadian currency basically.

Steve Sanders - Stephens Incorporated

Okay. Got it. All right. Thanks very much.

Operator

Our next question comes from the line of Scott Graham from Ladenburg Thalmann. Please proceed.

Scott Graham - Ladenburg Thalmann

Some questions about the order trends in OEM motors. I know that that's a kind of the weak link right now, but I know, John, in particular, you are out there talking to customers all the time. I was just wondering what type of feedback you were hearing at that point?

John McFarland

Well, I'm generally hearing that people are more optimistic than they were even as recently as a month or two ago that most people are expecting a stronger second half than first half. Most people do say that they are seeing an increased quote activity, and then increased level of activity generally, some are seeing a little bit improvement in business.

I think our business is better in part because most of our customers are doing a little better also because of some of the efforts we made with new customers and things last year, but generally people are much more positive than they were as little as six, eight weeks ago.

Scott Graham - Ladenburg Thalmann

You include within that characterization, the OEM guys?

John McFarland

Well, yes. I would include the OEMs. In fact, probably the OEMs might be a little more optimistic than the distributors. Although the distributor sales on a year-over-year basis were better in the fourth quarter than the OEMs, but that's a function of the elimination of all of the inventory, that distributors really brought their inventories down and so their purchases from us more directly reflect the real demand.

Scott Graham - Ladenburg Thalmann

Okay. So now given the fourth quarter performance and even though the margin was up only a little, the fact is you had an issue with the one week fewer sales. I guess, Ron, I would wonder, how much do you think that impacted the margin in the quarter and with sales having declined in the last two quarters and margins going up in those last two quarters nevertheless, are we now in a year-over-year margin up mode would be your view?

Ron Tucker

Yes. We are in a year-over-year margin improvement. The extra week we had the prior year; it hurt us in terms of just reduced sales. I mean, if you do the math, that's 7%. They may not work out exactly to be that kind of math, but that's how the numbers work out, but we do expect year-over-year margin improvements.

John McFarland

Scott, I will just take a little exception with one thing you said. You said a little margin improvement, I think we got a lot of margin improvement when you consider we had a $120 million less in sales that we were able to get that on so.

Scott Graham - Ladenburg Thalmann

That's fair. I guess the last question would be this, if you look out over the second quarter, third quarter and you are looking at a price increase, again kind of tying back to how you go, are out there in talking to people, John and this kind of piggybacks off of a prior question, but clearly it's a difficult environment to get pricing. I'm just wondering have you started to talk up the fact that price increases are coming, and, if so, what has been the response?

John McFarland

No, we really have not been talking with our customers about price increases. We've been talking among ourselves with our sales organization about it, but I wouldn't expect to be able to go out. I wouldn't expect customers to say, oh, boy, we are going to have a price increase.

I mean, they'll oppose a price increase, but I believe that if we have a good enough relationship with our customers, and we have a good history with them or not, (BSNM) when it comes to these things and I believe that if we can justify a price increase because of increased materials, people will give it to us.

Scott Graham - Ladenburg Thalmann

Fair enough. Thanks very much.

Operator

Our next question comes from the line of Kristine Kubacki from Avondale Partners. Please proceed.

Kristine Kubacki - Avondale Partners

I want to ask a question about the margin in a little bit different way, as we're thinking about the first quarter. Where you have guided sales to for the first quarter and thinking about operating leverage, specifically how it compares to the second and third quarter in 2009 where sales would be at the low end of the range. How can we think about margins comparative to that or maybe what's different?

I mean, I would think now there is going to be more distributor mix, which would be a positive, but maybe raw materials are a negative. Can you help us think about how we should think about the margin in the first quarter and beyond?

John McFarland

We will see a year-over-year margin improvement. As you go back and you look at the second and third quarter, every quarter is a little bit different. The mix of business is different. The component input prices are different, et cetera. So, it's hard to make a comparison. We don't give guidance on margins, but we do expect an improved margin year-over-year.

Kristine Kubacki - Avondale Partners

Okay. Then, I guess on the debt reduction, kind of a similar question, $75 million for 2010, what are the swing factors there that would get you to reduce debt more than that and kind of I guess walk us through maybe where inventories, if you expect inventories to go lower than here or if they are going to ramp up as business ramps up?

John McFarland

I think we could probably pay more inventory if business was not as good as we expect it to be. We could pay down more debt, sorry, if business was worse than we expect. If business is better than we expect, then it's going to consume some cash that might ordinarily go for debt reduction. We feel pretty comfortable with the $75 million as a minimum amount based on what we anticipate for the year with respect to sales.

The other big swing factor is the accounts receivable. We did a better job this quarter. We improved sequentially by about four days. If we can continue that kind of improvement or some improvement throughout the year, that also will help us pay back some additional debt.

Kristine Kubacki - Avondale Partners

Okay. Fair enough. My question would be, you have mentioned real quickly about implementation of Super-E at the end of the first quarter. I was wondering if you could give us more details there. Does that mean that we could see a little bit of a bump in sales of the Super-E at the end of the first quarter as it still more back-loaded that we expected that that jump after December of this year?

John McFarland

Yes. We are going to begin implementing the energy build beginning at the end of the first quarter. Now, we will implement it at the end of the first quarter mostly internally. In other words, we're going to convert some stock products over to the new motors and we'll begin producing them and we’ll have some inventory to burn off. So I don't think it's going to have a top-line impact in the second quarter. I think it will begin to have a top-line impact in the third quarter, and it will be fairly gradually.

We're going to convert the slower moving items starting at the end of the first quarter, and by the time we work out of that inventory, it will probably be the beginning of the third quarter and so it will build as the year goes along. We will do the same thing at the end of the second quarter. We have another stage that we will take, and at the end of the third quarter, the final stage. So it will build before December, but probably not any meaningful way until the third quarter.

Kristine Kubacki - Avondale Partners

Okay. Fair enough. Thank you very much.

Operator

Our next question comes from the line of John Franzreb from Sidoti & Company. Please proceed.

John Franzreb - Sidoti & Company

John, can you correct me in that you said that the Reliance will be fully integrated by the first half of 2010, and, if so, are there any other restructuring costs related to the total purchase that we need to be thinking about in the year ahead?

John McFarland

We do expect pretty much to have the final integration on the motor side to be completed during the first half. There are some costs associated probably with that, and moving equipment, and just various things, and so there would probably be a little bit of that of costs, but assuming real material costs in that process, though.

John Franzreb - Sidoti & Company

Okay. As raw materials have kind of round tripped lately, can you kind of walk us through, how you actually go out and purchase some copper and your steel, and maybe the timing of that, and can you give us a little more color on what’s going on in the purchasing of the raw materials side and how locked in you are with certain prices?

John McFarland

Well no we're not going to give you any of that information. We don't provide, John, any information about what copper hedges we have, and at what price they are, and so forth. We do have a copper-hedging strategy that we employ, and copper prices currently, I think are around $3. They have been up around $3.30 in that area and were there for quite a long time.

So, the problem with hedges is especially when copper prices are going up, that the ones you bought in the past come off eventually and that's kind of where we are, some copper hedges is going to be rolling off, we are going to have to reassess them.

As far as steel goes, our steel prices are generally tied to indexes on scrap and other things and some of those indexes are showing, at least some people are estimating, and some indexes are showing some increase. So, we're evaluating all of those things right now with respect to pricing.

John Franzreb - Sidoti & Company

What kind of price increases should we be thinking about? What kind of magnitude are you thinking about internally, John? Maybe a range would be nice.

John McFarland

Well we really have not developed; I'm honestly telling you that we really have not developed at this point the price range. We are developing all of the cost data, and the anticipated costs and that sort of thing, and so before we get that, I would rather not try to put a range on it.

Operator

Our next question comes from the line of Mark Douglass from Longbow Research. Please proceed.

Mark Douglass - Longbow Research

Hi. Just a housekeeping, what was accounts payable in the quarter?

Tracy Long

Hang on one second.

John McFarland

We'll give you that Douglass just give us one second.

Tracy Long

The balance was 62 million.

Mark Douglass - Longbow Research

62?

Tracy Long

Yes.

Mark Douglass - Longbow Research

Can I talk about the generators, what's driving your year-over-year gains right now in the generators, considering a lot of competitors seem to be indicating that that market is still bottoming for them? What gives you confidence for your double-digit increases obviously the order rates, but what's really driving the order rates for you, market share gains, new product introduction?

John McFarland

Well, both of those things. We do have some new products in the generator business, but the primary driver is market share gains. We have picked up some additional distribution over the last year and we have also picked up some rather large orders that we have now in our backlog as a result of that and so, really, it's primarily market share gain.

Mark Douglass - Longbow Research

Then you say there are no real signs of restocking yet, so would that indicate that the distributors right now are just simply passing the sales right on through, and your order pickups are they added both to OEMs and distributors that the increasing rates, is it spread across the board?

John McFarland

I think we have more visibility into the distributor inventories than we do OEM inventories and OEMs, unlike distributors, distributors having inventory is a competitive advantage, whereas with OEMs it's less so. I just talked to some of our sales people yesterday about this, because I anticipated your question, and they are telling me they really haven't seen anybody adding back inventory at this point. So, we think it will happen. It definitely will happen. This happened every time there has been a recovery, and when it happens with half of our business being distributor, and they will be the ones that will primarily add the inventory. It will have a very positive impact on us.

In the meantime, we are being very careful to keep our inventories in good shape, so that when a distributor gets an opportunity and doesn't have the product in stock, they can come to us and get it quickly. So we're really watching. We met yesterday, we meet weekly on our inventories to be sure that we don't let our inventories get too low.

Mark Douglass - Longbow Research

Finally, as we think about the impact of the legislation on the industrial motors in general across the board, is the market large enough that when everybody comes online at the same time over the course of 2010, but then really has to sell everything in 2011 to the new standards, is the market large enough to impact the material supply chain, if you make a electrical steel, which is probably a little smaller than, I guess, say copper or other materials, but do you think that could influence and disrupt your supply chain when everybody has to do it at the same time.

John McFarland

Well we don't anticipate that. I mean, I think we have good solid relationships with our suppliers and we’ve talked to them about the impact that it will have on our purchases. I would assume they have talked to other suppliers as well. So, we don't anticipate a problem.

Operator

Our next question comes from the line of Eric Glover from Canaccord Adams. Please proceed.

Eric Glover - Canaccord Adams

Just wondering if you could talk about China, and what’s your outlook is for your growth in that market in 2010.

John McFarland

Yes, we're very positive on China. We did not have a strong fourth quarter in China from a shipment point of view, and we don't expect a real strong shipment first quarter in Asia-Pacific from a shipment point of view, but the income in order rates were very good and have been very good, good in the fourth quarter, they were very good in January.

The products that we make over there are large, they are expensive, they are a long lead time. We don't ship them until we collect the money. So deliveries typically are pretty long. So we would anticipate beginning in the second quarter to see some pretty strong growth out of the Chinese market.

Now, we have also begun in a limited way to manufacture some motors in China. We made the first ones in December. In the long-term we're quite optimistic about the opportunities we have selling motors in China and in Asia, made in China. We don't anticipate making motors in China for the US market, but that is not going to have any big immediate impact. It’s something that is going to build over the next several years.

Ron Tucker

I would add too, currently China is our most popular location.

Eric Glover - Canaccord Adams

Then I was just wondering, how would you assess your competitor's readiness to start shipping the new high-efficiency motors that comply with EPAC?

John McFarland

I don't really think that we can answer that, Eric to be honest with you, we work really hard here at Baldor to convince all of our salespeople and all of our management people to spend all of their time studying our customers, and not studying our competitors. So I really don't know where they stand on that.

I can tell you that we're ready to go and the engineering has been done, our manufacturing plants are ready and we're excited about the change that will occur beginning at the end of the first quarter and progressing through the year and then fully be in effect next year and we're ready for it.

Operator

Our next question comes from the line of Brian Meyer from Robert W. Baird. Please proceed.

Brian Meyer - Robert W. Baird

First, just again trying to figure out the comment here. You said that the incoming order rates, I think it was year to date are up 20% year-over-year, sorry not year-over-year, but versus the shipments. Is that the correct statement?

John McFarland

That's right. Incoming orders for the first five weeks exceed shipments by 25%.

Brian Meyer - Robert W. Baird

Okay and that is for the total company?

John McFarland

Or the total company.

Brian Meyer - Robert W. Baird

Then with the facility closures going on, I think you guys had guided for maybe $0.5 million in expenses this quarter. I'm just curious, what that number actually was and then what’s you’re anticipating going forward, if anything there.

John McFarland

It was right up this quarter at about $0.5 million.

Brian Meyer - Robert W. Baird

Okay.

John McFarland

Moving forward, there maybe as little bit of cost that shouldn't be anything as material.

Brian Meyer - Robert W. Baird

Then, as we roll forward here, the incremental margin on a sequential basis this quarter was 39%, which obviously hurt given that volumes were coming down, but the question is as volumes come back and start to improve, is it fair to assume you see that same kind of leverage on the way up?

John McFarland

You should see that same kind of leverage on the way up, again if we keep the cost up like we think we'll be able to, we should have a really good incremental margin on the way back up.

Brian Meyer - Robert W. Baird

Then just one final question, you mentioned that some of your customers are seeing on the OEM side that is, seeing some better quoting activity now. I'm curious has that begun to flow through for you guys as well, so you are seeing some better activity in the construction or later cycle mining markets for example?

John McFarland

We have begun to see some improvement in some markets that have been pretty soft for quite a long time and construction being one of those. The construction market has shown some increased order activity over the last quarter. We also saw some improvement in metal manufacturing equipment, metal fabrication equipment, railroad equipment. Our rental customers that primarily are buying generators from us have picked up their purchases. We have seen a slight improvement in HVAC and then just some general industrial machinery categories have shown a little bit of improvement.

Brian Meyer - Robert W. Baird

Then one final one year, we talked about the 4Q ‘09 versus 4Q ‘08 having one fewer sales week. Could you just remind us what the difference was sequentially in terms of number of days? The number of selling days 4Q versus 3Q?

John McFarland

4Q versus 3Q?

Brian Meyer - Robert W. Baird

Yes.

John McFarland

Five. It would have been five more, I guess I mean It would have been five days more.

Brian Meyer - Robert W. Baird

Okay. Got it. Those all I needed.

John McFarland

In 2008, five days more in 2008.

Operator

Our next question comes from the line of Bob Franklin from Prudential Financial.

Bob Franklin - Prudential Financial

If your order rates are running ahead of shipments and your distributors are not yet ready to start rebuilding their inventories, then that's all coming from the OEMs, is that right?

John McFarland

Primarily.

Tracy Long

Yes.

Bob Franklin - Prudential Financial

Okay. Is that typical of a recovery from a recession or is something different going on here?

John McFarland

Pretty typical, I would say.

Bob Franklin - Prudential Financial

Okay. In that case, do you have a sense based on historic numbers of how soon after the OEM start do the distributors start kicking in?

John McFarland

Not really. I mean that's a really tough question, Bob. As I said, I have spoken just recently with a number of distributors and they've all said essentially the same thing that they are seeing a little bit of improvement in business. They are not yet confident enough to put back inventories. Those inventories won't come back overnight but when they do come back, they’ll come back kind of as business comes back. They'll come back gradually. So many people drive their inventories today not from computer programs that say that if business picks up 2%, you need to pick your inventory up to certain amount. So, I would anticipate the inventories coming back, but probably gradually at first.

Bob Franklin - Prudential Financial

I'm thinking more like, if your products now are going into the end user OEM market and that stuff gets used for a while, then eventually the replacement parts kick in.

John McFarland

I think what has happened over the last couple of years is manufacturing companies, food processing companies, that various, types of people have used motors have shutdown lines, and they have borrowed parts off of the lines that were shutdown to keep the others running, and as business begins to pickup, and they start to add to capacity as opposed to subtract from capacity then that's when you’re going to see our distributor business really begin to pick up.

Just looking around in our community, we're in a very industrial town here in Fort Smith great place to live and work. Lot of industry here, and we’ve seen a definite pickup in the level of business activity. We’ve seen some of the larger companies go from running one shift every other week to running one shift every week, to now adding second shift, to take on additional business. So there is definitely something percolating out there that is eventually going to have a positive impact on us.

Operator

(Operator Instructions). Our next question comes from the line of (Rebecca Berry) from Digital Asset Management). Please proceed.

Unidentified Analyst

I was wondering if you guys could tell us what your backlog was at the end of the quarter, and kind of how that’s trended over the past couple of quarters?

John McFarland

It’s been pretty clear over the last couple of quarters. During the fourth quarter it fell by $5 million, which would translate to about 4% or something like that. During the month of January, we increased the backlog by about somewhere between $15 million and $20 million, so the backlog is grew in January, we will grow this week, and but declined slightly in the fourth quarter.

Unidentified Analyst

Okay. If you include January in there, you’re actually growing versus?

John McFarland

If we include January in the fourth quarter, the backlog would be up.

Unidentified Analyst

Also wondering if maybe you could comment on the $1.40 number that's out there for 2010 and given the current order rates that you are seeing, how that would maybe impact that on the positive or negative side.

John McFarland

Well, we really don't forecast earnings. We give some general guidelines, on sales, but we don't forecast our

earnings that's somebody else's number, but I'll just say that we're in a position where if we get a little bit of sales growth, we'll get some pretty good earnings growth. We have taken over $115 million worth of cost out of the business and we're ready to go and it's kind of like a thoroughbred in the gate. Just open the gate and we're off to the races. So, we're looking forward to a little bit of sales growth.

Unidentified Analyst

Are you expecting any abnormal seasonality in 2010, just because of coming out of a recession?

John McFarland

No, I'll just say that most of our customers are talking more positive on the back half of 2010 than they are on the front half of 2010, but I don't see any unusual seasonality.

Operator

Our next question comes from the line of Jon Braatz from Kansas City Capital. Please proceed.

Jon Braatz - Kansas City Capital

John as you prepare for the new energy efficiency mandate, obviously you have to make a lot assumptions about production inventory and so on as you go through the year, but what would happen at year end if you have inventory of the inefficient motors if you want to call left over, is there a market for those or would you have to write them off or what would happen there?

John McFarland

No, we are allowed to sell them. There are no restrictions on how long we could have them and we would be allowed to sell them. Now what we experienced when we went through this in 1997, there was an energy bill in 1997 that we went through was that we thought at that time that people would want to continue to buy the old motor, because it's a little less expensive.

So we weren't too concerned about the inventory and I'll tell you that it took us five or six years to get rid of some of the items that were old style, because people switch much faster than we thought to the new style.

So this time, we're going to take a little bit different approach to it and that's why we are going to start the conversion earlier in the year with certain items and we'll make the conversion in several steps prior to December.

The last part of the conversion will be the faster moving items that would be easier to get rid of, if you had some in inventory at the point of conversion, but we think that we saw with the customers they moved pretty fast to the new motor. We don't want to have excess inventory of the old stuff and we don't want our customers to have it either.

Jon Braatz - Kansas City Capital

Would you anticipate then that as you work through this conversion process or prepare for it, that you would see your inventories build a little bit, just as you prepare to stock the Super-Es?

John McFarland

Well, our inventory will build a little bit because just simply because the cost of the new motors is more than the old. So in dollars you are going to see some inventory build, but there will be some offsets to that because today we stock most of the Super-Es already and we stock a Standard-E. On a go-forward basis, we will not stock both. We will only stock the Super-E. So, we'll have a lot fewer items that we stock. We will build those, the ones that we do stock, we will build in larger volumes, so we'll have less changeover. So there will be some benefits in manufacturing as well, but the overall inventory will increase in dollars because of the higher price of these motors.

Jon Braatz - Kansas City Capital

Secondly, as you contemplate a potential price increase in the second quarter, do you think that price increase, if you do in fact put one through, would lag the cost increases a little bit or would you think it would be more concurrent with what you are seeing in the cost?

John McFarland

We would expect them to be concurrent.

Operator

Our next question comes from the line of Bill Baldwin from Baldwin Anthony Securities. Please proceed.

Bill Baldwin - Baldwin Anthony Securities

I am wondering if you could comment about how you feel about how the Bounty Hunt program went in 2009 and I think that's going to help us out a little bit in 2010?

John McFarland

I think it's already helping us out, Bill. We were pleased with the Bounty Hunt program and the results of it. We have extended it in some areas, where we think it would be beneficial this year to us. Overall, we've been pleased and we think that it's going to show some benefit to us in this current quarter.

Operator

Our next question comes the line of Alan Mitrani from Sylvan Lake. Please proceed.

Alan Mitrani - Sylvan Lake

Just to follow-up on the last question, did you continue the Bounty Hunt program into 2010 or is it over?

John McFarland

We continue the Bounty Hunt program into 2010 in certain areas. We didn't continue it as in the same form that it was in 2009, but in certain areas where we think there's some opportunity, we did continue it.

Alan Mitrani - Sylvan Lake

Where are you with the sales force integration in terms of putting everybody on commission? Has that progressed or is the economic downturn sort of held that off a little?

John McFarland

Well, the vast majority of our sales force is on straight commission, all of the motor generator and drive sales force. On the Dodge side we have met with all of the Dodge sales force, and we are putting in place a compensation structure that is more tied to performance or sales so that hopefully there's more incentive to get out and make that extra call, and when you do, and you'll be rewarded for it.

Ron Tucker

And that's effective this year.

Alan Mitrani - Sylvan Lake

Then lastly, regarding your capital structure, it seems like you haven't done much except for change the covenants, which give you a little relaxed room there, but it seems like your bonds, a good portion of debt are 2017 those are good. That the rest of the term long you're paying down as you go. Do you feel a need to hit the capital structure at all or to make any changes or extend out or to put out some more bonds just to be able to have more permanent capital?

John McFarland

No. We're pretty pleased with the direction we're headed right now. We have been paying down about $10 million a month on our debt for the last 35 months. We have paid down $347 million. So our focus right now is to continue on that track.

Alan Mitrani - Sylvan Lake

I mean, it seems like the first year or two, a lot of the pay down came from cash flow from operating cash flow and then the last year and a half sort of came from just shrinking or less called 15 months came from shrinking working capital inventories and receivables down and I am not sure the next year plus, it seems like you are lowering the target from the 100-plus million, and I guess that’s I'm just wondering is that simply because you need to rebuild your inventory and as business gets back up regarding this new energy efficiency bill and that's why you are not going to pay down as much debt?

John McFarland

Well, we did take a lot of money out of working capital, and used that for debt reduction, and as we said in the press release, we do expect a sales increase this year, not a sales decrease. So with the sales increase, we will require probably a little bit more capital, but $75 million is as we said in the press release, a minimum goal for debt reduction.

Operator

Our next question comes from the line of Matt Vittorioso from Barclays Capital. Please proceed.

Matt Vittorioso - Barclays Capital

Just a follow-up on that last question. Generally as things recover, do you have a target leverage that you are trying to get to and if things do pick up later in the year, when do you maybe start to look at acquisitions or would you look at acquisitions, what is your appetite for that?

John McFarland

Well, we would look at acquisitions. We made a small acquisition back in 2008. We would look at acquisitions right now. We are very particular about acquisitions. We're not going to buy us something that is sick. We're not going to buy us something that requires a lot of restructuring and that sort of thing. We want to buy something that would add to our product portfolio and something that's profitable and well managed and so, right now we are just very particular but boy we would be interested in a good one if it came along.

Ron Tucker

In terms of the leverage, longer term, something less than two times would be something we would be comfortable with.

Operator

Mr. McFarland, there are no further questions at this time. Please continue with your presentation or closing remarks.

John McFarland

Okay. Well thank you very much again for joining our call this morning. We're pleased to be able to report that we see some tangible signs that business is beginning to increase from the very depressed levels of 2009. We also feel very good about the position that we're in. We've done a lot over the past year to restructure our cost, reengineer our cost structure and we think that this is going to give us some competitive advantages and we have done it without taking away from our competitive advantages.

We haven't lost anything. The way we say it here is we have cut the fat and not the muscle. So we are quite excited about 2010 and glad 2009 is over. We appreciate the confidence that all of you have in Baldor Electric Company. We know that we have to earn it and so we appreciate your confidence. Thank you very much for joining us today.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everybody.

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Source: Baldor Electric Company Q4 2009 Earnings Call Transcript
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