Baldor Electric Company Q4 2007 Earnings Call Transcript

Baldor Electric Company (BEZ)

Q4 2007 Earnings Call

February 1, 2008 11:00 am ET

Executives

John McFarland - Chairman and Chief Executive Officer

Ron Tucker - President and Chief Operating Officer

Tracy Long - Vice President of Investor Relations

Analysts

Mike Schneider - Robert W. Baird

Matthew Dellacroix - BNP Paribas

Scott Graham - Bear Stearns

Steve Sanders - Stephens

John Franzreb - Sidoti and Company

John Feldman - UBS.

John Bratz - Kansas City Capital

Bob Sech - Lord Abbott.

Sarah Thompson - Lehman Brothers

Wilma Habibi - JP Morgan

Jennifer Chadwick - MetLine.

Operator

Ladies and Gentlemen, you are currently holding for today's Baldor Electric Fourth Quarter 2007 Conference Call. At this time, we are admitting additional participants and should be underway shortly. We would like to thank you for your patience and ask that you please continue to standby.

Presentation

Operator

Please standby.

Good day everyone and welcome to today's Baldor Electric Company's Fourth Quarter 2007 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

At this time, I would like to turn the conference over to Ms. Tracy Long, Baldor's Vice President of Investor Relations. Miss Long, please go ahead.

Tracy Long - Vice President of Investor Relations

Thank you. Good morning everybody, and thank you for joining us today. We hope you had the chance to review our press release which went out yesterday afternoon which had our fourth quarter and year-to-date 2007 results. With us today is John McFarland, our Chairman and CEO, and Ron Tucker, our President and COO.

Before we begin, let me remind everybody that some of the statements we make today may be forward-looking statements and those statements are not guarantees, and actual results could be materially different.

So with that, I will turn the call over to John McFarland.

John McFarland - Chairman and Chief Executive Officer

Okay, thank you Tracy. Good morning, everyone. Thank you for joining us this morning. We are pleased to report another solid quarter at Baldor and year at Baldor Electric. 2007 has been a transformational year for our company, and I am proud of all that has been accomplished by the Baldor Dodge Reliance team. Just a few comments about the fourth quarter. We are pleased to report a 30.4% growth margin and a 14.1% operating margin in the fourth quarter. This is better than we did in the third quarter when we had an operating margin of 14% on 24 million more in sales than the fourth quarter. I think that is a good indication that our success of combining the Baldor and Reliance Motor businesses is achieving the cost savings that we had planned. We are also pleased to report a further reduction in our debt during the quarter of $18 million and since the end of the quarter we have paid an additional $13 million during January. We expect to reduce our debt during 2008 by a minimum of $125 million. We also expect to get some help from lower interest rates.

Our strategy of having two dedicated sales organizations: One focused on Dodge power transmission products and one focused on motors, drives, and generators is starting to generate increased order growth with incoming order rates in January up by 7% on a daily basis. Incoming orders during January were up on a daily basis for all products, motors, power transmission products, drives, and generators. Sales of motors are good across to all sizes including the long cycle motors we now have. Small motors rebounded from a weakness in the third quarter. Some of the industries showing good growth are food processing, material handling, packaging, commercial HVACs, pumps, agricultural equipment, and oil field equipment. Motor production is at record levels and our inventory of small motors is too low but we are working to increase the output of our small motor plant during the quarter. We believe this will benefit sales. Our backlog of orders remain steady with the level of one year ago. Our income reorder rates are solid. We do not see any signs of a recession at this time. However, we recognize that the risk of recession does exist, and if we see a change in our income reorder rate which we watch very very closely, we will adjust quickly to the change. With the large motor business we have now and with the Dodge business, we feel we are much less vulnerable to a downturn, should one occur, than we have been in the past. Our confidence is high that we will generate record sales and earnings in 2008, and so with that, we will be glad to take any questions any of you might have.

Question and Answer Session

Operator

Thank you.

(Operator instructions).

And our first question will come from Mike Schneider with Robert W. Baird.

Mike Schneider

Thanks. Congratulations on a great year, guys.

Maybe we can talk first just about the synergy savings. You pointed out about the change in margins sequentially even on lower revenue. Do you have a sense of where you believe you achieved the run rate or where the run rate of integration, synergy is today, and are you still expecting to hit a $30 million run rate by the end of 2008?

John McFarland

Yes. We do still expect to get a $30 million run rate by the end of 2008, and we are making good progress towards that. All of the $30 million is clearly identified, and we have people working on every piece of that goal, and we are very confident that we will achieve that by the end of 2008.

Mike Schneider

Do you have any figures as to where you are today, in terms of the run rate?

John McFarland

Well we do but we do not make them public but I have to say that we are making good progress, and we think that each quarter we will be able to see a little bit more progress towards our goal.

Mike Schneider

Okay. Can you address pricing for a second. I know you are going out with a consolidated catalog, I believe, in is it March or May, can you give us a sense with the status and anxiety of the industrial markets right now. Have you seen any early signs that pricing will not be as effective in this coming year as it has been, or any change in your customer’s disposition as the price increases that they know are coming?

John McFarland

Yes, I will be glad to. The combined catalog that we have planned has been printed and is being distributed and will be effective on March 1, 2008. It will combine the Reliance Electric Motor product lines and the Baldor product lines into a single catalog, and it will equalize the pricing for those products where we will continue to carry two ratings, one Reliance-designed and one Baldor-designed and the prices will be equalized. That action will give us a very small amount of revenue through the pricing changes, not a large amount. We tried to make it pretty much neutral. We are evaluating the pricing situation quite carefully currently. We did see in the last month a spike up in some of the indexes that some of our key components are tied to, and we have made the decision to wait one more month and watch those indexes, and if those indexes show continued strength or any further increase, we will announce a price increase mid February, to be effective in March.

Mike Schneider

Okay, in the combined catalog, actually I did adjust prices up and down to try and meet a neutral point in pricing across the entire products because I guess I was under the impression that in effect you were raising prices at the highest common denominator among the two different product categories.

John McFarland

Well, there are about 10,000 items in the catalogue and of course they are not all motors. We did not really adjust the prices down on anything but the goal of the exercise was just to end at about neutral. In other words, we were not issuing a price increase with this action and of course with that many items, it is difficult to do but we will realize a little bit of revenue out of it but not 1% though.

Mike Schneider

Okay and then final question, I apologize, the January spike in orders is tempting but I am curious, do you sense at all that because distributors did not have any incentive as far as volume rebates go in December that there may have been a push out of orders into January or maybe by contrast that people know the new catalogue is coming March 1 that you have seen actually some pre-buying ahead of it? Just try and interpret if we should actually read anything into the January strength.

John McFarland

I do not sense that either one of those things happened. I do not think that the distributors behave any differently in January than they did in December and I am 99% sure that no one has prebought ahead of the catalogue. I think January was a pretty normal month. We did not go out and go aggressively after pre-buying in December. So I think January was just a pretty normal month.

Mike Schneider

Okay. Thank you again.

John McFarland

You are welcome.

Operator

And our next question will come from Matthew Dellacroix with BNP Paribas.

Matthew Dellacroix

Good morning and congratulations. My first question is on the power transmission product. I just think for the price increase you implemented at the end of the fourth quarter, it seems like post power volume was flat and my question is, did you experience any capacity and strength from Dodge product or did that just remained flat?

John McFarland

We did not experience any capacity constraints on Dodge products in the fourth quarter. The business was flat and as you say, we did have a price increase but we did not own the Dodge business last year in the fourth quarter. It was owned by Rockwell and Rockwell, I think they did everything they could do to make sure that every shipment that was possible was made last year, so I think the counts were a little bit difficult. The Dodge business seems to be operating at a reasonable level. The sales increases or the sales increases on Dodge right now are not as high as they are on motors but if we look back and we have done a lot of research on this recently going back to the 2001, 2002, 2003 time period, we too tried to see why the increases might be a little different on Dodge. It does look like the Dodge business is tracking a little bit higher right now and that seems to be a normal out-of-phase with motors. We are quite confident that the sales strategy that we have for Dodge is going to yield better sales growth in that area in the future.

Matthew Dellacroix

In your press release, you mention that you are prepared to react appropriately, should your business go down. Can you elaborate on that and what action would you take and should there be a recession materialize, do you expect like a similar strategy plan in margin deterioration to the prior downturn?

John McFarland

We have a lot of plans that we would enact if we encounter the recession and we do not really have a time to be very specific but I will tell you that today going in to our recession I think we would be in a much different situation than we were back in the 2001, 2002 and 2003 recession. First of all, I do not think that recession today would resemble from a timeline, the one that we went through beginning in the fourth quarter of 2000. For that recession, for at least for Baldor began to recover in the middle of 2001 just before the September 11 attacks and then when the attacks occurred things got worse. We would have reacted differently in early 2001 had we not seen a rebound in the business. Today, should business turn down I think we are in a better position to handle it. Number one, I believe our long cycle business is much stronger today with all of the large motors we make. We have a very good experience with large motors in the three plants we have that make those size motors and that backlog is pretty consistent with where it was a year ago. So, the incoming order rate is still strong. I think that is something that we do not have in the last recession. The Dodge business seems to be more recession-resistant than the Baldor motor business. That is something we did not have in the last recession and in the motor business we have moved all of the motor sales over to the Baldor concept which is a commission sales force and so more of our cost would be variable today than it would have been back in the last recession at least through the combined companies. So, we have a number of things, you know, we are not enacting them today because we have not seen any signs that our business is going to change in a big way near term but, you know, we are watching it carefully. We are reading all the things that we see in the press everyday and hear on the TV everyday and we are ready to react when we need to.

Matthew Dellacroix

That is great. Thank you and my last question will be about debt repayment. It seems like you increased your target for 2008 to at least 125 from 100 to 120 previously. Can you tell us what assumptions you changed to get to at least 125? Is it purely based on the LIBOR rate or like a decrease in your spreader on your previous agreements or is there anything else in terms of operating assumptions like sales and margins?

John McFarland

Overall, it is based on a variety that our business that is recently rated. It is based on our outlook for the year. So, it is a little tied into the rate reduction. The same we initially get. It is primarily tied to what we think our outlook is going to be in 2008.

Matthew Dellacroix

Okay. So you actually improved your outlook compared with the fourth quarter?

John McFarland

Yes.

Matthew Dellacroix

Okay. Thank you. That is all I have.

Operator

And our next question will come from Scott Graham with Bear Stearns.

Scott Graham

Good morning everybody. The questions I have are, first of all, I guess John from the press release and from your comments here, there seems to be a fair amount of optimism in your statement that you have not seen anything changed. It made me a bit curious, if you do not mind my saying John, because sales and distributors which is obviously a very important challenge for you were, you know, only up 1% and I am wondering of the 7% order intake in January, did that one maybe equalize with the 7% or are you still seeing distributors cautious at there?

John McFarland

I would say that the distributors are cautious Scott. That is a good question. I think the distributors are still cautious but there business is still good. And in fact I was in Atlanta last week and visited a large trade show that they were in there and had the chance to talk to some of our distributors there and they were very very positive. I think also in the small motor category we are a little short of inventory and I think as our inventories were in better shape we probably would see maybe a little bit higher growth rate in the distributor market. But overall we are confident. We have not seen anything that tells us our sales are about to turn down. Our motor business is good across the board from small ones to large ones and the generator business was showing some improvement in January. The deal with the Dodge business which, you know, those ideas have been following for the last couple of years, noticed that the Dodge business has been weak. The Dodge business was a good strong performer in January so we have seen, you know, just a good situation. I am that very pleased of where we are. I think also I got accused of overemphasizing this in the last call but the strategy that we have employed with respect to our sales organization. I believe that is going to be a really successful strategy and going to help our sales growth.

Scott Graham

I would agree with that last statement. Well, I guess I am still a little curious as to when you say that you are really comfortable with the level of business. I mean, you know, certainly estimates by both you and us out here have been coming down on the top line really for six months culminating in what we saw this quarter which I think it was pretty much people were looking, well I know certainly I was looking for it and so I think coupled with the fact that I think your comment was that the Dodge business was flat in the fourth quarter or maybe I misheard you. I guess I am still curious as to, you know, why you would say that, you know, maybe because it was at the case that maybe December being weak with the reason why January is better just more of a timing thing because there does seem to be a pretty noticeable slowdown at the factory level in the US economy and it is hitting your sale so I guess I am still curious as to, you know, your optimism and how, you know, upon what is it based?

John McFarland

Well the slow down I guess I have to look at the time period but there is no doubt that business in the fourth quarter was lower than it was in the first quarter of the year. But our sales year over year for comparable products were up 5.3% in the third quarter, were up 5.4% in the fourth quarter and thus far in the month of January they were up 7% on a daily basis; there is a difference in days this January versus last January so, you know, we have not seen any change in our order rates over the last seven months.

Scott Graham

Okay. Well that is fair; I would certainly agree with that statement. As far as the debt reduction target is concerned, it looks to me as if the debt reduction target is, you know, kind of in line with the, actually let me just, just give me a second here, yeah about in line with where net income is expected to be or at least where I expect it to be and I am wondering is not part of the synergy with these two companies going to give us some working capital sourcing dollars and lower capital spending dollars and I am pretty sure that that is what the thinking was going in so why would the debt reduction target not be, you know, $25 maybe more million dollars above roughly where your net income would come in in 2008

John McFarland

That is what we said Scott; that is why we said our minimal was 125.

And there is capital investment savings. I mean the two companies separately were investing 3% of sales. We are going to invest $40 million next year. We think that is a very good amount; I mean it gives us all the things we need and, you know, so there is some savings there but we have if you remember Scott we did revise our debt reduction forecast during the year and we hit our revised that is about $176 million. Going in we think it will be a minimum of a $125 million and that might be a number later on that we would revise.

Scott Graham

Okay. Great. I guess my last question would be along the lines of the merger itself and some of the opportunities you might be creating with your sales forces consolidated and what have you. I am wondering if you can maybe track through some of the examples that you are seeing out there that might start to roll through the top line in the months and quarters ahead that maybe you would not have seen as a standalone.

John McFarland

Yes. We are seeing some good opportunities as a result of the combined product line and where we see it is primarily we are combined. We have a product offering that will satisfy a customer. We are separately, neither one of us did before, and I can think of one very good example of that and that is a company up the Canada that we have sold about a million and a half dollars worth of motors to and we had quoted the job but we did not have the whole product line and so we quoted the part of the motors that, this was a motor situation, we quoted the motors that we could quote and had to no-quote the rest of them and Reliance was not involved in the quote at all and the equipment that is involved is manufactured in Europe and what would have likely come back to the US with European motors and so we went back after the acquisition, we went back and the addition of the Reliance product line allowed us to quote the entire job which we did. We have received the order and the order has been placed in the production in about a million-and-a-half dollar order. I think those kinds of opportunities…I think there is a number of those opportunities available to us.

Scott Graham

Okay, very good. Thanks for your time.

John McFarland

Thank you, Scott.

Operator

And our next question will come from Steve Sanders with Stephens.

Steve Sanders

Good morning.

John McFarland

Good morning, Steve.

Steve Sanders

The question on the international side that was particularly strong in the quarter, is that primarily o-yens and a week dollar or did you see your direct business pick up as well?

John McFarland

No…that was direct business that did not include business that we sell to US o-yens for example, that they in turn export. We have seen some nice orders for a matter of fact, just this week, we got notification that we will receive a $7 million order for a steel mill in Vietnam but that is through a domestic company and so we do not really count that in our numbers as an international sale. It does understate our international business by accounting that way but, you know, we are not always sure what are domestic alien customers are exporting. So that increase in sales was direct business.

With respect to the dollar, I think there are two things that work: One is that we have now completed a combination of the Dodge Reliance and Baldor sales force. We have rearranged the inventories. We have gotten some of the inventories out where the customers are supposed to, where the warehouses were, and I think that is beginning to have some impact on our success strictly in areas like Latin America and Asia. I am sure that the dollar is having an impact on our foreign sales as well. It is not easy for me to say how much but I will tell you that the dollar is also having an impact on our domestic sales and in fact, there are some interesting things happening dosmetically that will probably have more impact on our company than the international business. And that is, a lot of people are buying domestic products now that might have been buying foreign products in the past because of the change in the prices. In our sales at Baldor, we have been, for many years, buying a good portion of our cast iron components in Brazil. And I know normally, no offense if there is anybody on the phone that is in the boundary business, I don’t normally thinks that the boundary business has a US boundary business a real competitive industry but we are bring a lot of that production back and I think by the middle of the year, most of it will be back in the United States placed in South regions in the US that are now competitive than the Brazilian boundaries and is, you know, in part because of the change in the currency. We have also seen recently a little bit of tightening in the steel market and we think that that tightening in the steel market is because people are not buying as much imported steels so I think the dollar will have, perhaps more impact on us, in the United States but maybe it may not really internationally.

Steve Sanders

Okay, and then specific to China, I think the plan was to add some motor production there some time later this year towards the end of the year, can you give us an update on that?

John McFarland

Yes, it is still the plan. The building is not yet completed but under construction and well along the way and there is some equipment now on order in plans are in place to begin limited production and try up some motors in the last half of the year. Those motors will be produced in China for the Chinese market. Other than the warehouse last night and I hear forced mail-order shipping a container of load of motors to China from here and we will continue to supply motors in the China. especially types of motors that we make here. But we are really going after is the chance to go after the standard motor market in China and as we begin the ramp up production later in the year that will give us the opportunity to go after some of the standard business in China, complement those motors we make there with motors we make here, especially custom-designed motors that are not readily available over there.

Steve Sanders

Okay, and then a followup on your comment about the drives business did show some improvement this quarter but still, I think probably soft relative to what you would like to see so what is the plan going in to 2008 from the drive side that would lead to some better top line and hopefully a better margin?

John McFarland

Well, you kind of cut in and out there but I’ll try to…about your question, if I miss anything that you asked, let me know. The drives business in the fourth quarter was a little bit better, and I will be honest with you, I think it was a little bit better primarily because the top was a little better but we did make some changes in the drive business that we think will benefit us going forward. We have been building some momentum, strictly with our distributor customers and with a few OEMs on drives here in the US, and in January we saw a strong double-digit increase in the drives business. That was the month of January; I am not projecting that we are going to have a double-digit increase for the year, but it was quite encouraging what we saw because it was fairly broadbased.

Steve Sanders

Okay. That is helpful. Thank you.

John McFarland

Thank you.

Operator

And our next question will come from John Franzreb with Sidoti and Company.

John Franzreb

Good morning everybody.

John, Do you serve the same number in January? Can you provide some color as to how much of that business benefited due to strong growth in overseas, you sight the Asian market, European market. If we stripped it down into just North American kind of order growth rate, what does that kind of look like?

John McFarland

Well, I have to go back and look at that to get you the exact number but not a lot of it was from the international market. The international market has really picked up on a yearover-year basis but it was not probably as strong in January as it was in the fourth quarter. So the majority of the strength we are seeing really is in the North American market.

John Franzreb

All right. That is impressive. Can you give us a sense of what the large motor markets are doing based upon recent trends, has it been relatively strong, has that slowed, has it maintained good strength, kind of sense with the kind of growth rates you are experiencing right now in the large side of the market?

John McFarland

The large motor market is still good, and it is not growing year-over-year at the rate it was seven or eight months ago but it is still a double-digit growth rate. I would say that in the last four months to five months, the thing that has changed is that the growth rate on small motors and medium-sized motors has picked up. Right now, they are all good, and the large motor business continues to be strong, and based on what we see right now, what we are hearing from our large motor costumers, many of which are in the oil and gas business, that that is likely to continue.

John Franzreb

That is great. Last question, can you share with us what your next suit is on and your cost savings issues, what are you looking to implement next in that process.

John McFarland

Well, we have got a whole variety of things that we are implementing on a monthly basis. For example, this month or in the month of January, we have achieved some reasonable good savings in rent, for example, and by vacating some rented properties and things that we had no longer needed but there is just a whole variety of things that we are implementing on a monthly basis. We forecast publicly the $30 million in synergies. We have a plan. We have all those things identified, and it looks like we have a little more than $30 million identified, and we have people working on them, and they are in the process but we are not going to be very specific about what they are.

Two major projects that we are working on is getting the Chinese manufacturing on our system and also converting one of the (inaudible) motor plants to develop manufacturing system this year.

John Franzreb

What is your timeline of that?

John McFarland

It started the first half of the year and last half of the year for the motor plants and we are also putting in Mexico; Mexico is going out in midyear.

John Franzreb

Okay, great. Good quarter guys. Keep up the good work.

John McFarland

Thank you, John.

Operator

And moving on, our next question will come from John Feldman with UBS.

Jason Feldman

It is Jason. Good morning. Back to the order rates, it seems, what most people seem to be interested in today, how much visibility do you really have based on orders and backlog? Especially on the small motor side, my understanding is that we at times tend to be fairly short, does that really give you visibility into a good portion of the year or is it really just outlook for the first quarter? What does that kind of give you a sense of?

John McFarland

You are absolute right Jason on the small motor business and also on the Dodge business. A good portion of that is ship run from inventory and so in that case we pretty much ship today what we received today in orders but we do have a longer cycle products in our large generators and in the large motors that we make and right now if you look at our backlog and historically, we have never really track backlog too carefully at Baldor because it was such short cycle sale but as we look at our backlog today it is all amount to the dollar almost exactly where it was one year ago and it is a couple of hundred million dollars which is a pretty substantial backlog I think when you consider the mix of our business and so we are glad and pleased with where we are with respect to backlog.

Jason Feldman

Okay. You touched on, I think the prepared remarks some various costs in the city that you are watching closely, can you talk specifically which commodities are still causing trouble, I mean if the steel price has been running up lately, not much relief on copper, are these still the two major ones?

John McFarland

Iron and copper are the two largest purchases that we have with steel being the largest and the steel prices the index is that some of our steel pricing that is tied to have shown some strength recently. I think the January index was pretty strong and if the February index comes out as strong as the January index we will announce the price increase in March. Copper of course it stays kind of in the range of 310 to 330. I have not looked at it today. I do not know where it is now but it has been kind of comfortable but at a higher price and so we are concerned about the price of copper as well especially with the dollar perhaps falling in value but those are the two we are most concerned about. There are a number of other smaller things related to transportation cost and that sort of thing.

Jason Feldman

Okay. Also is it just price or are there any issues with the availability of important components or materials?

John McFarland

We have not had any issues with availability but we have seen a little bit of a tightening steel market but we have not really had any availability issues.

Jason Feldman

Okay. And then last question, there is not a lot of detail in the press release on the cash flow side but it looks to me that on declining revenues, working capital was to some degree or other use of cash. Is there anything unusual going on because it did not look like it was in the inventory side which I know you are trying to build up a little bit, was there anything strange there in the quarter?

John McFarland

No, the only thing, the only I can think of, Jason, but it was not strange, it was timing issue.

Jason Feldman

Okay. So it is really just the timing.

John McFarland

Yeah.

Jason Feldman

Got it. Okay.

John McFarland

Let me just comment on your comment about the inventory. We would like to have a little bit more inventory on small motors. We feel that we are missing, we are not losing any customers but if you were missing some sales on small motors and we would like to have a little bit more inventory there but if we look at the total inventory that we have, we have done a pretty good job this year of reducing that. I think it is about $20 million from the end of the first quarter and we think that there is still some opportunity to more efficiently utilize that inventory.

Jason Feldman

I would imagine the second you pulled it off that as you also focus more on certain international locations. I mean for example your domestic inventory may need to build up in some areas but overall more efficient but if you also need to keep the inventory of larger number of products in more different places. Is that going to be a significant offset?

John McFarland

No. I do not think so. I think what we would like to do is we have probably more raw material inventory than we think in the long term we need and Ron mentioned earlier that we are going to be putting one of the Reliance motor plants on to our computer system. We believe that will help us with respect to work and process inventory for example so what we really would like to do is to move a little bit of our raw and work in process in to finished and we would like to have a little more finished goods inventory. We like to have less raw and working process and we think we can achieve that. There is still some money that we can take out of inventories and we have some plans to do that.

Jason Feldman

Great. Thank you very much.

John McFarland

You are welcome.

Operator

And our next question will come from John Bratz with Kansas City Capital.

John Bratz

Good morning gentlemen.

John, you have mentioned earlier in your heard comments; you allude to it, about lower financing cost this year. I think if I understand correctly you have bought $800 million in your term debt that was priced at LIBOR plus 175 and is that interest rate going to be reset shortly based on the new LIBOR?

John McFarland

If you look at that John about $450 million was going to reset again in February.

John Bratz

In February.

John McFarland

In February. That is the part that we will get the business on in the shorter run.

John Bratz

Okay. What about the other 350?

John McFarland

The other 350 is lent for the swap. That is out there for a little while and then another hundred in a collar which that does float in a range from about 4 quarter to six and a half. So…

John Bratz

Okay.

John McFarland

As long as the rates, you know, are above 4 quarters or so then we are fine on that.

John Bratz

Okay. So that 450, I do not want to say it is a windfall about it is 450 reset. It is a nice little pickup in reduction in interest expense this year that probably you were thinking about in December.

John McFarland

It is a nice pickup. We actually, you know, it came to end of January. We actually took a 30-day on it and we will evaluate it again in a few weeks. (inaudible) and move it forward.

John Bratz

So you may consider walking it in and store for a longer period of time.

John McFarland

Sure, it could or we could, you know, we think about the rates.

John Bratz

Yeah, we know.

John McFarland

We could just continue to do a 30-day swap.

John Bratz

Okay.

John McFarland

30-day lock.

John Bratz

Okay. Okay. That is all I have. Thank you very much.

John McFarland

Thank you John.

Operator

And our next question will come from Bob Sech with Lord Abbott.

Bob Sech

Good morning.

If we can touch on a couple of other things. Can you elaborate a little bit further on the energy bill that you spelled out and how would your expectation looks like in terms to how that may unfold? Obviously, right now without a bill sort of an incentive to adopt higher efficiency motors with the cost savings from higher fuel cost but if you can just more specify what is actually in the bill and what is that people will need to have to begin to do?

John McFarland

Okay. Actually, there are two bills that affect motors. One that has been passed the energy bill that president signed on December 19 and then there are some incentives to use high-efficiency motors in the farm bill that is pending in the senate. But let me talk about in that one, you know, it is simply some financial incentives to change to high efficiency motors. If that one is passed, you know, whether it will be or not but if it is passed then there will be some financial incentives for people to switch to high efficiency motors and those would be affective pretty much immediately. The energy bill that the president signed will be effective December 19, 2010 and it will essentially move all of the E-pack rated motors up to what is called Nema premium. So in our terminology at Baldor that would move the E-pack motors up to Super E motors. That would yield about a 20% increase in price. It also includes a lot of motors that were not covered by the energy policy act 1992. Efficiencies were not specified and they are now covered and they have to meet E-pack. In 1997, when we went from non-E-pack motors to E-pack motors our price increased with about 10%. So at least half of our products will be increased in price beginning December 19, 2010 and the yield will be probably, you know, 12% or 13% somewhere in that range on that half of the products. Now there is some engineering investment to take place between now and then but that engineering investment has been planned to any way because we have a 3-year plan to convert or to combine the Reliance electric product line then the Baldor product lines so that we can achieve some further manufacturing efficiencies. We can achieve some further purchasing efficiencies and so on and this has put some deadlines I guess on that but has been planned anyway. So what we will do over the next three years is to twofold.

Our # 1 rule, we are ready to be focused on getting these two product lines put together and our manufacturing footprint laid out slightly different to realize the manufacturing efficiencies and some of the purchasing and design efficiencies that are available to us. In fact, we will be working with our customers, particularly those customers who are OEMs. I hope they will understand the change in the product we will supply them in 2010 by law. And we believe that a lot of the OEMs we do business with and a good example would be some of the commercial HVAC people where agency requirements exist for their product. In other words, that would have to get them approved by various agencies. But in any new products or redesigns or things of that nature, they will go ahead and adopt a new standard even if they introduce a product prior to 2010. So we believe this will help us increase the number of Super E high efficiency motors that we sell between now and then. In addition to that, we have a strong ear on the 25% increase once again. I think it’s the fourth year in a row that we’ve had that kind of increase on these motors. We are also taking that reputation we have and the strong preference we have for those products in the marketplace, and we’re adding that to some of the Dodge products. There are some good opportunities to make high-efficiency gear motors, and we are introducing this month a new product line of high-efficiency gear motors that we intend to go out and promote with the people that are buying the high-efficiency motors.

Bob Sech

Okay. And the Super E motors, what percent of sales are they today?

John McFarland

They’re less than 20% today and I sure have one additional comment on the Super E sales. We don’t provide specific information on the amount of our sales that are high-efficiency, except to say that they are less than 20%. And the reason we don’t is that there are a number of people that we compete with who do not have high-efficiency motors. Now, here we don’t do this and I’m going to tell you the strategy of why I guess. There are people who do not have high-efficiency motors, particularly foreign companies. And so, we don’t reveal the exact information so that we’re not to encourage them to happen. But the law now will require them to have them if they’re going to participate in the US market and it’s always possible that some people that do not have these motors today who will have to put tremendous investments into developing them may choose to just not do so, especially when you’ve got markets like the market in China growing as fast as it is. So, to answer your original question, less than 20%.

Bob Sech

Okay. Can you talk in terms of your order book. There are many differences in terms of what your experience is geographically either within the US or outside the US?

John McFarland

Well, the business is a little stronger outside the US, but from a geographic point of view inside the US, I would say business is pretty solid coast to coast. There are a few places where you get a whole special; in Texas, where you’ve got the oil industry, and then through the Midwest where you’ve got the agricultural business, some of those areas are growing probably a little faster than other areas, but geographically, it’s a pretty good situation outside the United States growing slightly faster.

Bob Sech

Okay, and as far that market you mentioned are there some others that you would point out and is there one that’s weaker than you might have thought?

John McFarland

Well, some of the others that would be good for us anyway our commercial HEAC, for example, is strong. I was really happy to see food processing and packaging appear back up near the top of the list and material handling which is primarily cranes and hoist and things of that nature. Some of the mining business, we’re seeing some pretty nice orders in the mining areas. I just received a very nice order last just a couple of days ago from a company out in Arizona that’s involved in copper mining, so mining business looks like it’s pretty solid at the moment.

Bob Sech

Okay. And in international sales represented how much in the quarter?

John McFarland

Well, some of the others that would be good for us anyway our commercial HEAC, for example, is strong. I was really happy to see food processing and packaging appear back up near the top of the list and material handling which is primarily cranes and hoist and things of that nature. Some of the mining business, we’re seeing some pretty nice orders in the mining areas. I just received a very nice order last just a couple of days ago from a company out in Arizona that’s involved in copper mining, so mining business looks like it’s pretty solid at the moment.

Bob Sech

Okay. And in international sales represented how much in the quarter?

John McFarland

Around 15%.

Bob Sech

15?

John McFarland

Yes sir.

Bob Sech

That is a total combined company?

John McFarland

Yes, that is direct sales to forward billings, right. Nothing countable we would sell in the U.S.; it would be exported, foreign.

Bob Sech

And do you have any sense how large that could be?

John McFarland

I think that it is...you know half of our business is OEM. And I think that most OEM that manufacture equipment, industrial equipment, most of the ones that I have been involved with export about 15% of their product, so you know you could go back and kind of figure out what that would be, but ...

Bob Sech

Now if you were sell an OEM who was producing outside the US. How does that get calculated?

John McFarland

It is counted as an international sale. So when we sell to an OEM for example in Mexico, it is considered an international sale and it would be in the 15%.

Bob Sech

Okay.

John McFarland

But if we sell to an OEM in the US who turns around and exports his product to Mexico it is considered a domestic sale. Though you know our true international business, you know I would guess is 20% to 25% of our total, but that is just a guess. I mean, I would be glad to figure that out. But that would probably be good for the next call.

Bob Sech

But your expectation is that number will likely grow from here? International...

John McFarland

Yeah, I think that today, company that try to export can have good success doing so. We are having good success exporting and I think other companies are as well, and some that probably are not trying to could have if they would try with the current currency where it is at. But once again I do not want to discount the other side of the currency issue and that is foreign companies exporting to the United States are not as competitive today as they were in the past.

Bob Sech

Okay, can you give us any visibility in terms of what is the outlook for your generator business as you look out 6 or 12 months and are you introducing any products that are new that will be affecting that outlook?

John McFarland

There is a lot from the product point of view in the generator business. There are a lot of things changing because of different emission standards that are being implemented, though we have a lot of engineering and design work going on that, you know, to keep the products qualified for the new emission rules and that sort of thing. We do not have any, what I would call new products that we are introducing. One of the things that limit some of our generator business is the availability of large engines. And one of the things that have recently happened, we have been given some additional large engines for 2008. These are the engines that go into generators that sell for $300 thousand to $600 thousand. And so we have been given a bigger allocation of those large engines. The generator business in the 4th quarter was up a little less than 1%, was down in the 3rd quarter. In January we had a good double digit increase in orders in the generator business. I think I am really confident that the generator business is going to have a good 2008.

Bob Sech

Are you suggesting though, if you had more large engines last year you would have had greater generator sales?

John McFarland

I think we would have, yes.

Bob Sech

So the situation you were not just quoting on some business because you did not have product?

John McFarland

Some sizes of engines, large engines, you know 2000 horsepower engines as an example. Some large engines are on allocation. Had we been allocated more large engines, I believe we could have sold them.

Bob Sech

And when you talk about wanting larger inventory of small motors, as you define them, what in terms of quantifying what that might be either in dollars or units? What sort of increase would you like to see?

John McFarland

Well, I mean in units I would like to see, you know, I would be very comfortable if we had another 20,000 units in stock. Our inventory is too small and too low in small motors and it is causing us to maybe lose an order every now and then and the orders we lose we generally would lose at the distributor level and so that is business we do not want to lose. I do not think we are losing any...

Bob Sech

And when you talk about wanting larger inventory of small motors, as you define them, what in terms of quantifying what that might be either in dollars or units? What sort of increase would you like to see?

John McFarland

Well, I mean in units I would like to see, you know, I would be very comfortable if we had another 20,000 units in stock. Our inventory is too small and too low in small motors and it is causing us to maybe lose an order every now and then and the orders we lose we generally would lose at the distributor level and so that is business we do not want to lose. I do not think we are losing any customers but I think there are a few orders we lose from time to time. I would be happy if we had another 20,000 units.

Bob Sech

What do you think that billion dollar increase in inventory would be, we can be all set in other ways with raw materials in the work in process?

John McFarland

I understand. But this is a situation where you have that the plants are running full out and they just cannot catch up with that shipment and or levels. The two plants that we make the small motors are running full out.

Bob Sech

Okay. So the only way you really catch up is if the orders were to soften and the margin somewhat...

John McFarland

We have plans in place to increase the output of those two plants.

Bob Sech

Okay. And that would be effective this year?

John McFarland

Yes.

Bob Sech

Okay are you running 24/7?

John McFarland

We run 24, we don’t ran, well that is a hard question to answer. We ran 24 hours a day in both plants on a 5 day a week schedule. We do have some weekend shifts and right now we are working every other Saturday in both plants. Three shifts every other Saturday. And so we are going to build a record number of small motors in the first quarter. We think there are some opportunities for us to increase our sales if we could build a few more. And we got some plans in place that would involve some equipment investments and things of that nature that would allow us to increase that output.

Bob Sech

Okay and just the last topic. Now that you have basically have integrated the business and had it for about a year, when you are looking at the last year and the quarterly results the earning that you reported each quarter had been in the low 50's do you expect to see some seasonality on a going forward basis and should we from this 4th quarter also begin to see sequential increase in both sales and earnings specially with the current orders and back log that you have?

John McFarland

There is not too much seasonality involved in our business. It is more the number of production days and the number of selling days in a quarter. The 4th quarter is the quarter where you have Thanksgiving and you have, you know, Christmas sometimes you have New Years in that quarter as well. This year we had New Years in the 1st quarter 2008. But there is really no seasonality, I mean; we are expecting some of the number of days. In the 1st quarter for example, we have more days of sales and more days of production than in the 4th quarter. As it is today we should have a better 1st quarter than we had 4th quarter.

Bob Sech

Okay and you commented earlier that the drive business was flat but it might have been because of the tough comp in the drive business. Is one of the 4 quarters this year a tougher than one of the others?

John McFarland

No, in the drive business.

Bob Sech

Generally though.

John McFarland

It showed a little bit of improvement in the 4th quarter, and I think that was partly due to easier comps. The comps get easier throughout the year. But in the drive, we are gaining some traction in the drive business. The January incoming order rate for drive is highest for any product line we had. The drive business, we made some changes in the drive business, we got some that seem to be taking hold

Bob Sech

Okay. But you do not have any particularly tough comp in any period in any other product categories as well?

John McFarland

No we don't, but I think when you look at our sales in 2008 when you start trying to think what they are I think you have to try and remember that for the first half of the year we owned the service business that we sold in June.

Bob Sech

Right.

John McFarland

And so, you know, as you look at the sales in the first half of the year there is about $6 million $7 million a month I believe...

Bob Sech

It was about $80 million business a year so about $40 million in the first half.

John McFarland

Yeah, so that's in last years first half , won't be in this years first half.

Bob Sech

Okay. And lastly from a market share stand point are you seeing anything that you can measure in any direction and in particular power transmission.

John McFarland

Not really right now, I don't think we are in the power transmission business. I think we are doing pretty well and we are going to have a chance to visit with a number of our power transmission customers here..

Bob Sech

Okay. And lastly from a market share stand point are you seeing anything that you can measure in any direction and in particular power transmission.

John McFarland

Not really right now, I don't think we are in the power transmission business. I think we are doing pretty well and we are going to have a chance to visit with a number of our power transmission customers here in the next few weeks. And I could probably answer that a month from now better than today. But I think we are doing well in the power transmission business over the past year. And I think it is normal in any situation like we have gone through in the past year when one company buys another, you know, the sale forces a lot of the people that work for the particularly for the acquired company, kind of wonder where they are going to end up, how things are going to work out for them. I guess I describe it, that they turn a little bit internal, a little more concerned with their own situation as oppose to external which would be, you know, working with customers trying to get new business. But I think we have overcome that in the 4th quarter we have got our sales organization layer out the way we want it. And I believe the effectiveness of it will improve as the year goes along.

Bob Sech

Okay, great thanks guys. Good luck

John McFarland

Thank you Bob.

Operator

Our next question will come from Sarah Thompson with Lehman Brothers.

Sarah Thompson

All of our questions have been answered, thank you.

Operator

Thank you.

Operator

Next we will hear from Wilma Habibi with JP Morgan.

Wilma Habibi

One question from me. I think you commented that the Dodge business would be affected less in an economic downturn. Can you put numbers to that? In the past cycle, how much would a Dodge bring us down relative to other business portfolios?

John McFarland

We had done some analysis of that, and in the last cycle the Dodge business shouldered the increase in sales and an improvement in earnings. The Dodge business is mostly done through distributors, and the Dodge business is out of phase with the motor business, and so we’ve modeled it several ways, gone back and looked at the performance of the Dodge business back in 2000, 2001, 2002 and the Dodge business showed sales growth before motors and the Dodge business, and I think is a test attributed to the good people that work in Dodge. The Dodge business, through the 2000, 2001, 2002 recession actually showed an improvement in earnings on core sales. But the sales recovered the motor sales recovered at Reliance. I hope that answers your question.

Wilma Habibi

Yeah, it does. It’s helpful. When you said you know lower sales, how much in a ballpark was it lower relative to other businesses?

John McFarland

Let’s see. The sales dropped … I’m not really sure we can answer that accurately right now, but the sales on the Dodge products dropped less than Motors, and over that period, the earnings actually improved a little bit. There had been a lot of things happening at Dodge to improve their last six or seven years, including the power-lean projects that we have at Dodge and they were in now until named throughout the company, not only at Dodge but implementing in the motor business as well. I’m sorry.

Wilma Habibi

That’s fine. That’s helpful. Thank you.

Operator

And our final question will come from Jennifer Chadwick with MetLine.

Jennifer Chadwick

Good morning. You said before that the drivers business performed better because of the easier comp versus the third quarter? Okay, can you compare the fourth quarter of 2007 to the third quarter of 2007 for me?

John McFarland

The drivers business performed in the fourth quarter of 2007 slightly better than the third quarter of 2007. Bear in mind the drivers business is only 6% of our total volume, so the performance of the drives business is certainly not going to determine whether or not we are successful, but we do feel that the drives business can perform better than it is, and it was slightly better in the fourth quarter than the third quarter and then started the year much better than the fourth quarter.

Jennifer Chadwick

Wonderful. Thanks so much for the color.

Operator

At this time, that’s all the time we have for questions in the cue. I’d like to turn the conference back over to Ms. Long for any closing or additional remarks.

John McFarland

Okay, well thank you very much for joining us during our conference call this morning. Again, we were generally pleased with the fourth quarter. I think that we are making good progress toward our goals. We are confident that we will be able to achieve them in 2008, and we are quite excited about the opportunities that we see going forward, so once again, thank you very much and we appreciate you being on the call this morning.

Operator

And this concludes our teleconference for today. We’d like to thank everyone for your participation, and have a wonderful day.

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