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Blount International, Inc. (NYSE:BLT)

Q2 2010 Earnings Call Transcript

August 9, 2010 1:00 pm ET

Executives

Josh Collins – Chairman, President and CEO

Calvin Jenness – SVP and CFO

Analysts

Andy White – Longbow Research

Jeff Gates – Gates Capital Management

Alan Robinson – Royal Bank of Canada

Dax Vlassis – Gates Capital Management

Tyson Bauer – Wealth Monitors, Inc.

Jeff Matthews – Ram Partners

Operator

Good morning or afternoon, as the case may be for each of you; and welcome to the Blount International, Inc. teleconference, with Chairman and Chief Executive Officer, Mr. Josh Collins; and Mr. Calvin Jenness, Senior Vice President and Chief Financial Officer. My name is Andrea, and I will be your facilitator today.

The conference will begin with a brief overview of the second quarter 2010 results and the company's outlook for the remainder of 2010, followed by a question-and-answer session. All lines have been placed on mute to prevent any background noise. (Operator Instructions)

At this time, I would like to turn the call over to Mr. Jenness. Mr. Jenness, you may now begin.

Calvin Jenness

Thank you, Andrea; and good day, everyone. This call is being broadcast live on the internet and recorded for future transmission and use by Blount and third parties. Participants on the call, including the Q&A session, agree that their likeness and remarks may be stored and used as part of the earnings call.

Before Josh and I summarize the company's performance, I would like to remind everyone that the statements made in the course of the conference call regarding the company's or management's intentions, hopes, beliefs, guidance ranges, or other expectations for the future are forward-looking statements, as defined by the Securities Litigation Reform Act of 1995. Those statements involve risks and uncertainties that could cause actual results to differ materially.

Now, I would like to turn the call over to Josh Collins, our Chairman and CEO.

Josh Collins

Thanks, Cal; and thank you all for joining us on today's call. First, I will take a few moments to discuss the highlights of the second quarter. After that, Cal will cover some financial details. I will then conclude our prepared remarks by outlining our revised forecast for 2010, discussing some of the significant recent events related to Blount.

We are pleased with the results of our performance over the second quarter. There continue to be a number of positive signs within our business as we progress through the year. Order intake continues to increase, indicating a solid demand for the last half of 2010, and we continue to achieve solid operating margins as a result of the volume leverage on our manufacturing plants. The second quarter of 2010 marked the third consecutive quarter of sequential sales growth for our company, and the highest revenue and operating income levels since the record third quarter of 2008. Sales were up over 30% in the second quarter of 2010 compared to last year's second quarter. Second quarter operating margins continued to show strength at over 50% of sales as we achieved good cost performance, plant efficiencies, and lower steel costs year over year. Additionally, we generated over $20 million of free cash flow.

Customer orders continued to show strength, with orders on hand increasing over 50% from both June 2009 and December 2009 levels. Back orders now only $6.9 million below the record level at the end of June 2008. As a result, we are optimistic about sales growth over the remainder of 2010. Overall, our solid operating performance and cash generation has led to net debt leverage of 1.9 times.

This morning, we successfully completed the amendment of our senior credit facility. This was a significant achievement, as it provides us with our desired operating flexibility, and reduces our overall cost of borrowing.

Cal will now cover some specifics related to the financial performance of the company. Cal?

Calvin Jenness

Thanks, Josh. Overall, the second quarter trended better than we anticipated this year, and we have continued to refine our forecast for the balance of 2010 accordingly.

Second quarter 2010 operating margin was 15.3% of sales, or $22.7 million of operating income. This represents an increase of $10.8 million from last year's second quarter. EBITDA, as defined by our senior credit agreement, was $30.1 million in this year's second quarter, and $110.1 million for the trailing 12 months ended June 30, 2010. Second quarter 2010 EBITDA was $12.5 million above the second quarter of 2009, a reflection of EBITDA margin of 20.2%. Overall leverage was 2.6 times EBITDA, and our net leverage ratio was 1.9 times EBITDA.

Our core business, the Outdoor Products segment, increased sales by $34.7 million or 31.5% from the second quarter of 2009. The year-over-year growth in the second quarter was driven by $35.2 million of higher unit volumes compared to 2009, offset slightly by lower average prices due to currency trends and customer mix. Second-quarter sales for the original equipment manufacturer channel improved, and as result, average pricing slightly went up.

In comparison to a relatively weak second quarter of 2009, segment international sales gained approximately 41% in the second quarter of 2010, and domestic sales also improved, increasing nearly 14%. Domestic sales in general were driven by continued sell-through of products, as well as associated restocking through the supply chain.

Sales were up significantly in both replacement and OEM channels in the second quarter of 2010 as compared to 2009. Replacement channels were up 29%, with sales gaining the most in Europe and South Asia, consistent with international sales growth trends. OEM sales growth out of first quarter of 2010 strength in the U.S., South Asia, and Europe, and were up year over year by 39%, as end-user demand has picked up for those customers. Sales at concrete cutting products were up about 34% from the second quarter of 2009, as market conditions continue to improve.

Segment order backlog has shown significant improvement and is 54% higher than the second quarter of 2009, and 17% higher than the end of the first quarter of 2010. To meet the increase in demand, we have increased our manufacturing capacity utilization rates to 92%, compared to about 87% in this year's first quarter, and around 60% in last year's second quarter. Order intake patterns have led us to increase our full-year 2010 revenue forecast.

Second quarter contribution to operating income from the outdoor products segment was $28.2 million, a contribution margin of 19.5% of sales. The contribution margin in the second quarter of 2009 was much lower at 12.8%. Improved volumes, related leverage-driven manufacturing efficiencies, and relatively moderate steel costs all contributed to the improvement in outdoor products contribution margin.

Year-over-year steel costs resulted in $1.8 million in improved contribution in the second quarter of 2010. This rate is lower than that experienced in the first quarter of 2010 and points to a leveling iron and steel costs for the second half of 2010.

Compared to second quarter of 2009, the benefit of higher volumes and lower steel costs was slightly offset by second quarter of 2010 FX rates, which were approximately $1.8 million worse than in 2009. Consistent with recent quarters, the sales benefit of ForEx was more than offset by higher production costs related to the stronger Brazilian and Canadian currencies.

Our gear components business had sales of $4.2 million, an 8% increase from the second quarter of 2009, primarily due to better unit volumes. The second quarter of 2010 net expense for corporate and other of $5.4 million was approximately $3.4 million higher than the second quarter of 2009. Drivers of the change include the elimination of our property sales gain and severance and plant closure costs from last year, as well as an increase in current year compensation expense, primary attributable to improved profitability of the company during 2010.

The effective income tax rate of 36.2% for the second quarter of 2010 was in line with our guidance, although higher than last year's 25% rate. The 2009 tax rate was driven lower due to lower taxes on our foreign operations, resulting from increased deductions for tax purposes, which are not recognized as expenses for book purposes. We expect our effective tax rate for the full year will range between 37% and 40%.

Outstanding debt was $280.4 million and cash on hand was $72.8 million at June 30, 2010. The company's net debt position decreased $20.1 million during the second quarter of 2010, and has declined $50.4 million since June 30 of 2009. We continue to use our free cash flow to reduce debt, as well as define our strategic programs, a new project development, continuous improvement, and potential acquisitions with a tight strategic fit.

We generated $20.3 million of free cash flow in the second quarter. This compares to $25.0 million of free cash generation the second quarter of 2009. Second-quarter 2010 free cash flow was lower than last year due to higher capital spending, and the non-recurring nature of proceeds received last year from the sale of property in Belgium. We define free cash flow as cash flow from operating activities, less net capital expenditures.

Capital spending in the second quarter of 2010 was $5 million, compared to $3.6 million in the second quarter of 2009. The increased level of capital spending reflects the resumption of a more normal capital spending pattern compared to that adopted during the economic downturn of 2009. We expect capital spending levels to increase over the remainder of 2010, and to range between $22 million and $27 million for the year.

As Josh mentioned earlier, we have closed on the new $425 million senior credit facility led by GE capital markets. That facility includes a $75 million revolver, and a $75 million term loan A, both with interest at LIBOR plus 350 basis points. And a $275 million term loan B, with interest at LIBOR plus 400 basis points, with a 1.5% LIBOR floor on the loan. The new senior credit facility will allow us to compare important goals. The new term loan A and revolver mature in 2015, and term loan B will mature in 2016.

We use a portion of proceeds to redeem the $175 million of senior subordinated 8.78% notes at par value, in accordance with their terms. The amended and restated senior credit facility provides additional borrowings capacity, and allow us to do acquisitions in a manner consistent with the strategy we outlined in last quarter's call.

I believe I have covered the specifics related to the second quarter of this year. So at this time, I would like to turn the call back over to Josh for some observations on (inaudible) our future remarks.

Josh Collins

Thanks, Cal. With the continued strong order intake, we expect to see year-over-year sales growth in the second half of 2010, although at a lower rate than we experienced in the first six months. We now expect sales to range between $580 million and $600 million, which is up $30 million from our previous projection. The primary driver is the growth in order intake in (inaudible) position at the end of June 30, 2010. Orders and customer demand are being driven by improving business conditions globally, particularly in developing economies. Additionally, we are seeing customers restock to meet both near-term and end-user demand, as well as returning to more normal stock levels.

Year-over-year sales growth in the last half of the year is expected in the 8% to 16% range. Full-year sales growth is expected in the 15% to 19% range. Most of the sales growth is expected to be from organic volume improvement driven by end-user demand.

Operating income is projected in the $87 million to $90 million range, which is 55% to 60% higher than 2009. While operating margins are expected to improve with favorable volumes, we will continue to have margin pressure from foreign exchange rates, with slightly higher fuel costs. For the full year, we expect changes in foreign exchange rates will reduce operating income between $6 million and $7 million. We expect our full-year net interest expense to range between $25 million and $27 million, reflecting the recently-completed refinancing. On a pro forma basis, however, our amended facility would have saved us over $7 million pretax in cash interest. Full year free cash flow was estimated to be between $37 million and $43 million in 2010, and is somewhat dependent on the working capital investments required to support the expected sales growth.

Since our last call, our senior leadership team has begun executing the strategic programs I previously outlined. More specifically, we have launched programs in the continuous improvement area, we continue to work toward commercialization of significant new products, and we have evaluated several potential acquisitions. Our higher SG&A expense is reflective of our strategic programs.

As discussed earlier, we believe that we are positioned to achieve significant growth over the next several years, and have as our goal, a 100% increase in EBITDA from $90 million in 2009 to $180 million by the year 2014. We intend to use only internally generated free cash flow for growth and profit improvement investments to reach these goals.

The GECC-led refinancing will provide the working capital to manage through the potential choppiness of certain components of our strategy, as well as provide the flexibility to reduce debt as cash flow generation permits. We have spent considerable resources developing new products. We are excited about the market response to our recently-introduced power sharp chain sharpening system. Through the end of the second quarter of 2010, power sharp combined sales and orders on hand were $2.7 million. Additionally, we continue to invest in the next round of new products, which we expect to commercialize during 2010 and 2011.

With respect to acquisitions, we continue to regularly review multiple potential acquisitions, all of the good tight sets our core competencies. We expect to acquire two or three businesses over the next 18 months, with aggregate enterprise value of at least $150 million. Most of the businesses we are looking at range from $25 million to $100 million in individual enterprise value, and would provide multiple value creation opportunities.

Overall, we are excited about the business prospects over the remainder of 2010, and look to move significantly toward doubling EBITDA from 2009 levels in the years to come.

At this time, I will open up the line for any questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions) Our first question comes from Mark Rupe of Longbow Research. Please go ahead.

Andy White – Longbow Research

Hey, guys. This is Andy White in for Mark Rupe. You know, first off, I just want to congratulate you on the great quarter. But you know, first off, it you could give us a little bit of idea perhaps on the backlogs, how much of that is represented by restocking activity?

Josh Collins

Well, we do not have perfect visibility into that, but I will say that if you look at the order intake from the first six months of the year, it feels to us that, you know, from looking at the order intake patterns, that largely the restocking has occurred.

Andy White – Longbow Research

Okay.

Josh Collins

And if we ought to be able to maintain this sort of level of sales that we are seeing, so you saw that be backlog build and obviously sales and shipments have built as well, but it feels like this shipment level is pretty sustainable, and that the majority, we don’t have perfect visibility, but at least the majority of the restocking has occurred.

Andy White – Longbow Research

Okay, great. If you could talk a little bit about your sort of acquisition strategy, you know, maybe you can give us a little color on the areas of potential focus as far as, you know, product type, or you know, geographic interest, you know, whether it would be in a distribution channel interest. And Josh, also, you know, as far as, you know, the multiples that you are seeing out in the marketplace, if you could give us, you know, a little bit of commentary surrounding that as well.

Josh Collins

We spoke a little bit about this last time around, I am happy to do it again. We have a very active pipeline today. We are finding many situations that we think are good opportunities for us with that "tight strategic set", and what that means for us, as I have said in the past, is that by how we define tight strategic set is the ability, a situation that allows us the ability to leverage our core competencies, whether that is on the design and engineering setting system side, on the manufacturing of small metaphorics and high volume off the returning edge, or with the global sales and distribution network that we have.

Probably the most leverageable of those competencies is the global sales and distribution network, and we have seen many situations that we look at and we say, you know, similar customer base, but fairly localized distribution, and here is a suite of products that we could put through to our existing sales and distribution network. There are other situations that, you know, that really we could bring synergies around the cost side or around manufacturing as an example, and we are seeing some of them as well.

In terms of geography, you know, two-thirds of our business is outside of North America, and it is probably close to that in terms of the opportunities that we are seeing, maybe a little bit more in the U.S. than outside, maybe 50-50 or thereabouts from a number of yields and overall dollar amounts.

Andy White – Longbow Research

Okay, all right.

Josh Collins

We would expect to see, you know, over the next 18 months, as we said, two to three excavations and they are probably both inside and outside the U.S.

Andy White – Longbow Research

Great. And then, if I could ask one more, as far as your steel prices go, you know, I know we have seen steel prices moderate. If we do see, you know, in the event that steel trends up again, maybe you could just give us a little bit of idea of, you know, what your thoughts on how you might attack pricing, you know, in the event that you would do see still, you know, turn around, would you be prepared to put your price or how would you sort of approach that?

Josh Collins

In select markets, in select products, we think that probably makes sense. And in other channels, it probably does not make sense. But over time, you know, the whole value chain will, you know, in all likelihood, yield the impact of higher steel pricing, if that is sustained. I mean, as you said, it has been bouncing around up and down. It does not have a large year-over-year impact for us, you know, year to date, but at times, it is not really bad or other times, it is not pretty good.

Andy White – Longbow Research

Sure.

Josh Collins

So it really is going to depend. I do not see the state of the world where we are going to hedge steel prices. We can't figure out how to do it in a way that makes sense for us, and you know, we will continue to look at it, but we, you know, I do not see it at this point. But overall, if there is a long-term trend toward higher steel prices, then I think everybody in the value chain will be affected.

Andy White – Longbow Research

Great. Well, thanks again, guys; and again, great quarter.

Josh Collins

Thank you.

Operator

Thank you. Our next question comes from Dax Vlassis of Gates Capital Management. Please go ahead.

Jeff Gates – Gates Capital Management

Hi, it is actually Jeff Gates. Just a couple of quick ones. First, what was stock comp for the second quarter, and what do you expect it to be for the year?

Calvin Jenness

Stock comp, Jeff?

Jeff Gates – Gates Capital Management

Yes.

Calvin Jenness

It was about $1 million for the quarter.

Jeff Gates – Gates Capital Management

Okay.

Calvin Jenness

So it is going to be about $3.5 million this year, maybe $3.6 million.

Jeff Gates – Gates Capital Management

Okay. I thought it was higher than that the first quarter.

Calvin Jenness

No. It was higher than last year in the first quarter.

Jeff Gates – Gates Capital Management

Okay. Secondly, can you confirm, as I understood what you said that there is no LIBOR floor in the revolver or the term loan A?

Calvin Jenness

That is correct.

Jeff Gates – Gates Capital Management

Okay. And, are you required to swap any of the term loan into fixed?

Calvin Jenness

Yes. I think the way the agreement is 35% right now.

Jeff Gates – Gates Capital Management

35% of the term loan B is swapped?

Calvin Jenness

Right.

Jeff Gates – Gates Capital Management

But nothing on the term loan A?

Calvin Jenness

I think it is both.

Josh Collins

It is 35% of the overall.

Calvin Jenness

Yes.

Jeff Gates – Gates Capital Management

Okay. So what is the all-in cost of the term loan, including the swap?

Calvin Jenness

Well, it was just over 5%.

Jeff Gates – Gates Capital Management

Okay.

Calvin Jenness

That impact of the swap that we had, Jeff; so we have had to come up with that.

Jeff Gates – Gates Capital Management

Okay. Thank you.

Josh Collins

That is it, Jeff?

Jeff Gates – Gates Capital Management

That is it.

Operator

Our next question is from Alan Robinson of Royal Bank of Canada. Please go ahead.

Alan Robinson – Royal Bank of Canada

Good morning and congratulations on your results.

Josh Collins

Thank you.

Alan Robinson – Royal Bank of Canada

I was wondering if you could provide a little more commentary on your capacity utilization, 92% I think you referenced in the current quarter. Where do you go from here, what is your sweet spot, are we going to be expecting, you know, more capital spending to help that ratio, or does that depend on your acquisitions? Perhaps you can just provide a little bit of color around that particular topic, thank you.

Calvin Jenness

The acquisitions, in all likelihood, will not help. In some of the corners, it may. We are pretty tight right now, and you know, the capital spend for this business to grow at sort of industry rates is $25 million a year. We would expect to continue to see that. You know, we show this bigger than 2009, it takes a while for that to rattle through and then it takes a while for it to get ramped back up. So we are probably a little bit behind.

However, with our continuous improvement efforts and other efforts around the supply chain, we think we will be able to free up some capacity without capital spend over the next, you know, zero to 18 months. It takes time for those efforts come through. However, if you are planning five years out, as we are, for capacity, you know, we are going to need another 50 million to 60 million feet of capacity on the chain side and an equivalent amount of directionally odd on the bar side, and as I have said in the past, in all likelihood, we will expand in China/Southeast Asia in the near term and then, we will look very hard at Eastern Europe for a facility that can service Europe and Russia. That is a little further out.

Alan Robinson – Royal Bank of Canada

Okay, that is interesting. So about 60 million on both chain and bar over five years. So that again is about 25 million?

Calvin Jenness

I am sorry. 50 million to 60 million feet of capacity, which, you know, round number is $1 for the capacity, including, you know, it is very round numbers, but let us call it five years.

Alan Robinson – Royal Bank of Canada

Okay, understood. And then, did you provide any guidance for your CapEx for this year?

Calvin Jenness

Yes. $22 million to $27 million for the year.

Alan Robinson – Royal Bank of Canada

Okay, thanks. And then, finally, you referred to your expectations for interest cost this year. Given the lower floating rates for your renegotiated debt structure, you know, it seems that your target for the year is pretty well double what we have seen in the first six months, and I would have expected lower interest rate. Could you just set me right there on what I am saying wrong?

Calvin Jenness

We have got the bonds, right now, we notified the trustees, the bonds are not going to be actually regained for another 30 to 45 days here. And we are carrying that interest a little bit, we carried it throughout July, we will carry it through most of September too.

Alan Robinson – Royal Bank of Canada

Okay, so we can expect to see a little bit lower in 2011 in terms of interest costs?

Calvin Jenness

Yes. Let us say we are, yes. On an apples to apples basis, cash interests, you know, $280 million of debt, we are at about, correct me if I am wrong here, but about 7.7% interest rate cash interest, there is some amortization of expenses, these deals, they are about, on an ongoing cash basis, 7.7% versus 5.0% basically through the new facility. There will be some costs to fixing a third of that interest rate. So, we will see what that is on five points, whatever.

Alan Robinson – Royal Bank of Canada

Okay, got it.

Calvin Jenness

5.0% versus 7.7%, it is $7 million plus differential and real pretax interest expense.

Alan Robinson – Royal Bank of Canada

Got it.

Calvin Jenness

This is a good refinancing.

Alan Robinson – Royal Bank of Canada

And then, just finally, you referred to order strength from the emerging markets customers. Could you just remind us approximately what proportion of yourselves do think go to emerging market customers in general?

Josh Collins

I guess the exact number depends on which is the market and where, but about a third.

Alan Robinson – Royal Bank of Canada

About a third? All right. Great, thank you.

Josh Collins

But something about that is right.

Operator

(Operator Instructions) We have a follow-up from Dax Vlassis' line. Please go ahead.

Dax Vlassis – Gates Capital Management

Hey, it is Dax. I was just wondering, you know, as far as the deals that seem that you have in the pipeline, I mean, it is a really low cost of capital, it is a good financing, we like that. But, you know, just looking out at the acquisition prices, you know, how sensitive are you to enterprise the little multiples versus EPS accretive, because we don't really care that much about EPS accretion, we care about, you know, over-paying for enterprise the little multiples on these businesses. Can you sort of give us some financial metrics that you consider when you are looking at some of these, and where the multiples are in this sector, because it seems like your stock price, the enterprise multiple for the business of Blount is pretty cheap here, so I am just wondering what you are seeing out there that is better than the stock of Blount right now?

Josh Collins

First of all, I agree with you on all fronts. We care about enterprise value accretion, about EPS, non-cash stuff. But we look at every multiple we can think of. What we are really focused on is, can we create value at the enterprise level that is going through to the shareholders on a risk-adjusted basis that is attractive?

Last quarter, we said that our model was $150 million enterprise value of deals and our acquisitions, two to three of them, making that up, and that our assumption or model is that we get acquired about seven-times EBITDA, which in another tough course isn't really even a multiple that is particularly relevant, but rather a levered pretax cash flow. So incorporating the cash for CapEx et cetera, that is required to run that business in the box that you are buying. And I will tell you that it would be very difficult for us to convince ourselves around here that it makes sense to acquire a business that was dilutive, along with measures. Or put another way, I believe that any business that we buy is going to be accretive along those lines, meaning the free cash flow from the business versus where we trade.

And therefore, in our mind, of course not knowing exactly how the market, you know, what metrics are actually driving the market, and it is a combination probably, but we think these are the most relevant multiples are, you know, EBITDA minus CapEx, or EBITDAE or EBITDA minus negative CapEx or something like that, and we are finding situations that are accretive along those measurements. You know, and they may have some non-cash amortization for a short period that makes EPS look not good, but you know, that is short term, and frankly, we think that our investors will see through that. So, does that answer your question?

Dax Vlassis – Gates Capital Management

That answers it. Thanks, Josh. Thanks, Cal.

Josh Collins

Okay.

Operator

Our next question is from Tyson Bauer of Wealth Monitors, Inc. Please go ahead.

Tyson Bauer – Wealth Monitors, Inc.

Good afternoon, gentlemen; and good quarter.

Josh Collins

Thanks, Tyson.

Tyson Bauer – Wealth Monitors, Inc.

A couple of quick questions. You mentioned SG&A was slightly elevated due to some strategic activities or non-day-to-day activities. Can you break that down, dollar amount?

Josh Collins

Well, Cal is working on the dollar amount there; I will tell you, this falls into a couple of different categories. As you know, if you are working on an acquisition, the activities around – the expense around those and the costs around those activities or expense as incurred or rather capitalized as they used to be, is a small amount in there for that, including some third-party work. There are third-party professional services, expenses, related to our continuous improvement efforts, our supply chain reorganization efforts and a couple of other strategic initiatives like that. We think the payback on those will be exceptional, but you know, it takes time. And the amount in total there?

Calvin Jenness

Yes, the total, it is just over $1 million in this quarter. That was above last year and above the first quarter.

Tyson Bauer – Wealth Monitors, Inc.

Okay. Josh, obviously giving Q2 results the backlog that you have gotten there and a lot of that being end-user demand rolling over and going forward as opposed to maybe one time restocking. Does that embolden you to take steps for that expansion in Southeast Asia, and has that moved that schedule up or accelerated that schedule now?

Josh Collins

It hasn't accelerated it. It is just we are going as hard as we could anyway to get it planned, even, you know, starting in January or February or really starting in February or March I think, so it hasn't really accelerated, I would like to be able to accelerate it, but we can't. It makes it all the more important. But once again, we are planning to pass few levels, five years out plus. And even in January, you knew that 2008 was a bubble at some level, you knew that 2009 was de-stocking at some level, you knew 2010 was you know, when it came back and how strong, you didn't know, but you can work out five years, I mean, we have got 30 years of historical demand, and I am not to be a chartist, but you can look at where the bonds have gone and unless something changes, like we have stopped using wood, we are going to start cutting it down with magic wands, the demand is going to be there. So we have to be planning.

Now on the short-term side, the near-term efforts of, you know, hiring, adding shifts, those are, you know, that is different. And we do have more confidence around that, given the last three or four months of order intakes and where we feel the market is going, and those are very difficult decisions to make, because you know, it costs a lot to reverse them. But in terms of long-term planning, nothing has really changed in our viewpoint. We are going through the analysis of do we stand in Suzhou, do we look elsewhere in Southeast Asia, do we read the same articles and the same analyses that everybody does around wage rates in China, you know, that you are not floating. And then, looking at Eastern Europe and where it would make sense and when it makes sense and how much. So yes, the demand over the next five years, you know, it is going to continue.

Tyson Bauer – Wealth Monitors, Inc.

Okay. And last question from me in regards to that expansion plan in that geography, what is your sense as far as what you are trying to achieve as far as a net margin impact, is this really protecting market share and trying to expand that, or is that to lower cost basis and get a better contribution margin?

Josh Collins

Well, it is to meet demand if we just keep share, and of course, we are not going to be satisfied with that, we are going to try to gain share as well. But in doing that, where do you add capacity, and you know, we could add capacity in North America, Canada, U.S., I suppose, but it feels to us, as we said the last time around that the right answer for a global manufacturing footprint is to try to have capacity where our customers are, both on the OEM side, and the end user side. And when we look at our customer footprint today, and where we think the customer footprint will be five years from now and 10 years from now, we think it makes sense to access Southeast Asia and Eastern Europe. You know, of course, we also notice that the labor rates are quite a bit lower there, and that is important, and it is important from a competitive standpoint as well as from a margin standpoint. So yes, I mean it is definitely in there, but it is not the only driving factor.

Tyson Bauer – Wealth Monitors, Inc.

Okay. Thanks a lot, gentlemen.

Josh Collins

Thank you.

Operator

Our next question is from Jeff Matthews of Ram Partners. Please go ahead.

Jeff Matthews – Ram Partners

You know, just kind of following up on the last issue of capacity, there was an interesting article on today's Wall Street Journal about difficulties some companies having to find skilled labor in the U.S., partly as a result of people not willing to look for work and partly as a result of the fall out of the crisis. Wondering what you are seeing there.

Josh Collins

Well, we are hiring, and we are hiring in North America. We are finding good people. As we have said in the past, on the tool and die side as an example, we have an apprenticeship and we build a lot of our skilled labor. The average tenure of employment in this facility in Portland is 17 years, and we have got 17 years to – you know, you are building a lot of those capabilities in the labor force itself. So yes, some of the specific skills are maybe not available readily in the market, but through apprenticeship, can be built.

Jeff Matthews – Ram Partners

Okay, thank you.

Operator

(Operator Instructions) Gentlemen, we are showing no further questions. Do you have any closing remarks for today?

Josh Collins

No. Once again, thank you for taking the time. We feel very good about the rest of the year and the prospects of the company going forward.

Operator

This conference has concluded. Thank you for attending today's presentation. You may now disconnect.

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Source: Blount International, Inc. Q2 2010 Earnings Call Transcript
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