Gardner Denver, Inc. Q1 2008 Earnings Call Transcript

Gardner Denver, Inc. (GDI)

Q1 FY08 Earnings Call

April 24, 2008, 09:30 AM ET

Executives

Ross J. Centanni - Executive Chairman

Helen W. Cornell - EVP, Finance and CFO

Barry L. Pennypacker - President and CEO

Analysts

Amit Daryanani - RBC Capital Markets

Jeffrey D. Hammond - Keybanc Capital Markets

Kevin Maczka - BB&T Capital Markets

Scott R. Graham - Bear, Stearns & Co.

Michael A. Schneider - Robert W. Baird & Co.

Joseph Mondillo - Sidoti & Company, LLC

Presentation

Operator

Good day everyone, and welcome to the Gardner Denver Quarterly Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Ross Centanni, Executive Chairman of the Board of Directors. Please go ahead.

Ross J. Centanni - Executive Chairman

Thank you, William. Good morning everyone and welcome to Gardner Denver's first quarter 2008 conference call. Joining me this morning is Barry Pennypacker, our President and CEO; and Helen Cornell, our Executive Vice President of Finance and CFO of the company. We have some comments for the moment but first, I'd like to ask Helen to comment on some forward-looking statements.

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

Thank you, Ross. All of the statements made by Gardner Denver during this call other than historical facts are forward-looking statements made in reliance upon the Safe Harbor of the Private Securities Litigation Reform Act of 1995. As a general matter, forward-looking statements are those focused upon anticipated events or trends and assumptions, expectations and beliefs relating to matters that are not historical in nature. Such forward-looking statements are subject to uncertainties and factors relating to Gardner Denver's operations and business environment, all of which are difficult to predict and many of which are beyond the control of the company.

These uncertainties and factors could cause actual results to differ materially from those matters expressed in or implied by such forward-looking statements. Please refer to Gardner Denver's first quarter 2008 earnings press release issued on April 23, 2008 for further information regarding potential uncertainties and factors that could cause actual results to differ from anticipated results. Gardner Denver does not undertake or plan to update these forward-looking statements even though the company's situation may change. Therefore, you should not rely on these forward-looking statements as representing the company's or its management's views as of any date subsequent to today.

As a reminder, this call is being broadcast in listen-only mode through a live webcast. This free webcast will be available for replay up to 90 days following the call through the Investor Relations page on the Gardner Denver website, www.gardnerdenver.com, or on Thomson Street Events' site, www.earnings.com.

And now I'd like to turn the call back to Barry.

Barry L. Pennypacker - President and Chief Executive Officer

Thank you Helen and good morning everyone. I'd like to begin by saying how pleased we are with the company's results. Our employees have begun their lean journey and their enthusiasm is building. The benefits are just barely visible and our financial results at this point, but I feel good about the number and types of projects that we have started. In fact, before we discuss our quarter results, I'd like to take a few minutes to talk about some of the projects that were initiated in the first quarter.

In early March, I firstly kicked off a renewed lean effort at five of the company's largest facilities. This is a critical step for Gardner Denver and our lean journey. Each facility was at a different point and their implementation of lean and each has developed valuable projects for their business. I'd like to you give a few examples. Our facility that is very highly focused on engineered packages has reduced their process time, approach to manufacturing release by 75%, through value stream mapping.

We have trained suppliers in China, in kanban, with the plan to implement the process fully in the second quarter focusing on inventory reduction. In our European manufacturing facility, we have taken 6 separate assembly lines down to 1 and implemented single-piece flow. In our South American facility, we have implemented one-piece flow and take a lead time from 103 days to 11.5 days, while reducing work in process from 800 pieces to 100 pieces.

We have reduced the throughput time of one product line at European facility through Kaizen by 36%. The nature of these examples, we expect to reduce inventory and accelerate throughput, which correlates with lower lead time and ultimately a significant competitive advantage.

From the outside, looking in, you cannot see the benefit... the financial benefits of these projects yet, because they are in the early stage of their implementation. The other thing that you can't see from the outside, looking in, is the level of enthusiasm that we've created in our organization for lean. However, it is my expectation that you will begin to see the results, first in inventory reduction and later in operating margin expansion.

I have to announce much... how much to expect the financial benefits of these initiatives and it is difficult to measure. I'm quite confident that we'll see inventory turnover improvement this year, with the most significant improvement coming over the next 12 months. We will continue to see inventory reductions, inventory turnover improvements over the next few years until we achieve a targeted turnover of 7 to 8 times. Realistic this will take... realistically this will take several years to achieve and in fact every time we make an acquisition, the realization will be delayed further until we implement need in the acquired business.

From an operating margin perspective, I expect to see margin expansion as a result of reduced weight stream whether it's in terms of scrap, warranty, obsolescence, or inventory movement. The question is how much can we realize? Focusing on the less cyclical part of our business, Compressor and Vacuum Products, I think it is realistic to expect to achieve peak margins of between 14% to 15%, without requiring the level of production leverage we previously realized in 1998.

Compared with the results in the first quarter this will require an annual cost reduction or production leverage of $42 million from the operating margin level achieved in the first quarter. I look forward to providing more color on this ambitious goal in the future. Our current objective is to expand the number of lean concepts at each site, in other words, adding to the feature of the manager's tool box. We will accomplish this job by learning and training everyone in the organization. Stay tuned for more on this in future calls, these are exciting times for Gardner Denver's entire organization.

As you know, when I joined the company it was far away through the first quarter, on the fourth quarter conference call I shared that the first thing that struck me was the strength of the people at Gardner Denver. Since then I have continued to be impressed with the people. I am excited about the opportunities we see ahead of us. The second thing that struck me was the strong culture of execution that Ross and his team have built. The people of Gardner Denver continued to deliver on their promises.

For me the highlights of the first quarter all revolved around execution. Our plant in Shanghai [ph] which has long been discussed of an integration program that was completed at the end of last year delivered on its promises in the first quarter. The pieces are in place and now that plant is in continuous improvement with most [ph]. They have a long way to go but they are on track.

We continue to take advantage of the uptick in certain business process industries such as refining, power generation and environmental. We have high expectations for this business in 2008, and in the first quarter the team delivered including a very significant order for an engineered package at a new petrochemical plant in Saudi Arabia. We outperformed in production, so we are able to shift several packages earlier than originally planned, which provided incremental revenue realization in the first quarter. We see more opportunities like this in the pipeline as a result of the higher engineered package volume in the first quarter than we have previously have expected.

The same goes for product sold for medical OEM accounts. We have seen a nice increase in volume for certain health care habitations such as oxygen concentrators, nebulisers and wound therapy. Finally, inventory management throughout the company, my team will tell you that since I arrived, I have been pushing two things, lean and inventory. You can't see it in our balance sheet but after accounting for the FX impact, inventory was a source of cash in the first quarter, not a huge source of cash, mind you, but better than the use of cash. Even more impressive is every [ph] account for the higher volumes in the business; we still had that type of inventory performance.

Shift a little bit to the economy and what we see. On our cal in early February, we gave an outlook on the economy, a lot of media coverage has been generated since then, but our view hasn't changed. In fact since we have one quarter in the bag with a nice start... backlog that we believe even better... we feel even better about being able to deliver 2008 than we did in February, and this optimism is visible in our increased guidance.

Except for our oil and gas business, we still believe that global economic growth is slowing but we're not going negative. Related to our joint pump outlook, I think our revenue outlook for this product line will remain relatively stable for the balance of 2008. Overall demand in U.S. may continue to decline, I think decline will primarily be offset through increased international demand.

In North America, we're still cautiously optimistic. We expect the rate of growth to slow as the year progresses, but not to go negative in the end markets that we serve. Shifting to Europe, Germany appears to be holding at some [ph], Eastern Europe remains a bright start, UK is slowing, but it's still showing some growth, Europe overall will be slower growth this year, but better than U.S.

Shifting to Asia and Latin America, both regions remain extremely strong. Latin America is driven by the demand for products used in mining, the growth in Asia is not specific to a particular end market, we are seeing strength everywhere. It's becoming clear though, that the industrial economic environment is currently disconnected from that of financials, retail and anything related to residential housing. I don't think Gardner Denver has seen things much different than of our peers that are having diversified customer base and limited exposure to those sectors.

However, given our exposure to international industrial markets, we may be receiving more benefit from foreign currency exchange rates in some of our peers. So the question is, does that disconnect between diversified financials and the rest of the world going to continue? Frankly, I don't know and can't say for certain. For Gardner Denver, the first quarter trajectory was good, and we brought a great backlog into the second quarter. That gives us the visibility at least part way into the third quarter, so we feel really good about second... Q2 and Q3, and we're very cautiously optimistic about Q4.

Nevertheless, we are trying to be proactive, remain cognizant of the environment around us, we are being cautious in our sending commitments, given the level of uncertainty regarding the economic climate in the second half of the year.

That's the overview of the economic conditions that we see around the world and with that I'd like to turn the call to Ross Centanni, and he will give a little more color on the oil and gas environment.

Ross J. Centanni - Executive Chairman

Thank you, Barry. I just returned from the annual meeting in the Petroleum Equipment Suppliers Association, last week, and in general everybody was positive of the 210 days [ph], I have never heard one negative comment from anybody about the future of the business. In general thereby [ph] I think we have at least another five years of continued growth in oil and gas business.

I think if you look at oil and gas today, we have two different economy, here the U.S.... North America which is gas, and international which is oil. Price of oil is really given people incentive, particularly international coverage to drill oil to produce little more, obviously get the price down, but help their own economies.

In fact Saudi Arabia is expanding their production, they have two new fields they are moving into. Unlike the previous fields, these two new fields are can take a lot of fracing produce which means there is positive business for us in the future. Regarding United States I think the rig counts are going to remain flat. I don't think there's any reason for it to increase. On a good note though, the supply of natural gas is increased only for one reason, Barnett Shale around the four more [ph] Texas area. But there is a... some more shale, more selling shale up in Pennsylvania and West Virginia, that's going to be drilled, which may require new rigs, if not at least going to require new frac equipment.

Because we're selling frac equipment to Northeast for the first time in a long time. We are still expecting our petroleum pump business to be strong and I think things will be positive, much more positive than negative. We still need to see some orders, but on most part I think they are kind of come in with no problems at all.

On M&A front, things are active, more active than they've been in three years. The current credit market, makes things interesting because its probably to keep a lot of private equity concerns out. We think this will take long delayed financing, but it is probably going to cost a little bit more considering the market today, but there are lot of things out there, lot of things we are looking at, and hopefully something will happen in some time this year, but who knows given the market, but I am very positive on acquisition part.

Helen I am turning it over to you.

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

Thanks Ross. As previously stated we were very pleased with the results in the first quarter. To kind of summarize our first quarter performance, I'd say orders were stronger than we expected, all of our operating divisions reported orders in the first quarter that were higher than the same period previous year.

Year-over-year order growth was strongest in Asia followed by strength in Europe and then North America, but we did still see growth in North America, both compared to the first quarter of last year and also compared to the fourth quarter. So year-over-year and sequentially, we are still seeing growth in North America.

Our manufacturing team did an excellent job of executing on the higher volume of orders, which drove our increased revenues. Obviously currency was the healthiest in the quarter, and half of our revenue growth did come from the benefit of favorable changes in foreign currency.

Flow-through profitability on the incremental revenue was not as high as we would have historically expected, and this is primarily due to unfavorable mix in our reportable segments. Certainly, you don't get the flow-through on currency like you do on pure volume growth. And I would also point out that in particular the unfavorable mix impacted us in to a transfer and as the drilling pump shipments year-over-year declined that impacted the overall flow-through profitability for the company.

So, on the revenue growth of 12%, gross profit improved only 8%, that's demonstrating the impact of the unfavorable mix. But our team did an excellent job of holding, selling and administrative costs in check. They really just rose entirely due to FX. As you would look at it on a local currency basis year-over-year, selling and admin expenses were in fact down, and that's really demonstrating the benefit of previously completed inte4gration activities.

End result was the operating income grew 12% on a comparable mix from organic gross and FX that we had on the revenue line. And I think that regarding our guidance for Q2 and the remainder of the year, I think that we were pretty clear and what we were seeing in the press release that gave you a lot of detail, and we'll be able to respond to any follow up questions you have during the question-and-answer period.

Barry?

Barry L. Pennypacker - President and Chief Executive Officer

Okay. We have no further comments and William we turn it back to you.

Ross J. Centanni - Executive Chairman

Let's open up for questions, William.

Question And Answer

Operator

[Operator Instructions]. And we'll move to our first question from Amit Daryanani, RBC Capital.

Amit Daryanani - RBC Capital Markets

Thanks a lot. Congratulations on the quarter for one guys. When I look at the Fluid Transfer segment, orders are up 39%, could you just talk about how much of that was really driven by this one large natural gas loading up order that we got that's start ship in '09?

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

We did have, compared to... are you talking about Q1 versus Q1 on orders?

Ross J. Centanni - Executive Chairman

'07-'08?

Amit Daryanani - RBC Capital Markets

Yes.

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

Well we were actually up a little bit Q1 year-over-year in the petroleum equipment side of our business, so that did benefit us Q1 year-over-year. The loading arm probably contributed, roughly half the volume increase year-over-year and half coming out of the petroleum side of our business.

Amit Daryanani - RBC Capital Markets

All right. Isn't... typically when you look at sequential margin on the compressor side in Q1 that tends to be softer, I think that normally reflects the fact that Q1 has lower sales than Q4, this time it looks like, sequentially in Q1 sales are essentially flat on the compressor side, but the margin still turn it down a little bit, was that just a mix issue or was that something else that play there?

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

More than anything there was a little bit of restructuring that we talked about in the fourth quarter release that we completed in the first quarter. We have a disproportionate amount of stock-based compensation in the first quarter, than we do in then remaining quarters of the year. And then also we tend to recognize all of our LIFO income in the fourth quarter of the year. So that was a benefit in the fourth quarter that didn't recur in the first quarter.

Amit Daryanani - RBC Capital Markets

Got it that's helpful. And just a final question and then I'll hop off after that. It sounds like you are starting to focus obviously a lot more on the lean initiatives within the company by far that has obviously boost the asset velocity and margins. I guess my question is really, when you ask all these plant managers to embrace lean initiative from an incentive compensation perspective, could you just talk about what is incentive comp tied for them? And are we going to change that a line of what you want to focus... what you want them to focus today on?

Barry L. Pennypacker - President and Chief Executive Officer

Yes, this year, in particular, all of the operating management have a specific inventory turns, goal that they must achieve as part of their incentive comp. And as we continue to progress along the lean initiative road map their compensation will change accordingly. But this year there is in fact a specific inventory objective for each and every one of them.

Amit Daryanani - RBC Capital Markets

Thanks a lot.

Operator

We'll move to our next question from Jeff Hammond, Keybanc Capital Markets.

Jeffrey D. Hammond - Keybanc Capital Markets

Hi good morning.

Barry L. Pennypacker - President and Chief Executive Officer

Good morning.

Ross J. Centanni - Executive Chairman

Good morning, Jeff.

Jeffrey D. Hammond - Keybanc Capital Markets

I just want to focus a little bit on drilling pump, may be just in terms of the older trends intra quarter, what you saw relative to your expectations? And may be just give a little more granularity on what you are seeing in terms of international orders?

Ross J. Centanni - Executive Chairman

Well Jeff, let me say this, we are where we expected to be with drilling pumps. In fact we're a little stronger in the first quarter than we... in the first quarter than we expected. May be a little stronger second quarter, but basically what we've got in our numbers is a flat drilling pump business. But most of growth we are getting today, even though we've had some U.S. business, and we are so calling U.S. business. There is a lot of activity internationally.

As I said international market is strong; you know every national oil companies is... wants to drill. Saudi is going to start drilling and ask some Elk [ph] and drilling. Their... all of their easy oil is like a sponge it is done. As they drill through Iraq and has a frac now. But there is a lot [ph] out their and its just a question of when international oil companies get money to buy.

Jeffrey D. Hammond - Keybanc Capital Markets

Are you just starting to see these orders break three or how's the sales cycle shaping up?

Barry L. Pennypacker - President and Chief Executive Officer

Yeah we're starting see them break free. We're continuing to receive more face to face contact to explain the benefits of our drilling pumps, and we're very excited about the international opportunity. Like I tell you Jeff, it is important to understand that we are right at what we thought we are going be as far as drilling pumps are concerned.

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

And I would also say Jeff that, although it may take a while between the quotation and booking the order on the international side, once we book the orders, at the time between booking and shipment is not particularly any longer than it is on the domestic side. So when we get the order, we are able to convert them pretty quickly. Although we did in the first quarter with some backlog that's going to carry it over in to second quarter, but generally I'd say some things started to come in together for us in the first quarter.

Jeffrey D. Hammond - Keybanc Capital Markets

Okay, and then secondly on the loading arm business, you had really three nice orders here. And I just want to get a better sense of what you're seeing in that market in terms of quoting and bidding activity and how lumpy should we look at this business? Do you see a lot more in the pipelines, maybe little more color there?

Barry L. Pennypacker - President and Chief Executive Officer

We see it in the pipeline Jeff, and we continue to quote but as you said it is extremely lumpy. It's a matter of capital availability for moving these terminals and getting them built, but we are very active in this market. We have a technological advantage that other people don't and as these continue to become viable alternatives the quotes will turn into orders.

Ross J. Centanni - Executive Chairman

Jeff I'd say that was described in the marine loading arm business is like the petroleum business. Activities tied to price of oil and gas.

Jeffrey D. Hammond - Keybanc Capital Markets

Okay.

Ross J. Centanni - Executive Chairman

But right now, Brazil has found some huge oilfields offshore. They are trying to develop and building terminals. That's where we got the last things order from Brazil. And it's talking about building other terminals down in San Francisco and might give us another order for that. So it's... there's a lot of activity out there.

Jeffrey D. Hammond - Keybanc Capital Markets

Okay, that's good color. Thanks.

Operator

We'll move to our next question from Kevin Maczka, BB&T Capital Markets.

Kevin Maczka - BB&T Capital Markets

Good morning.

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

Good morning.

Kevin Maczka - BB&T Capital Markets

Just a question on Europe, it sounds like your macro view is may be a little bit more optimistic than some others that I have heard lately. And I just want to give some better sense on you visibility you have there. It's not like you are order to delivery cycle is not very long, but how much visibility do you have ahead of orders?

Barry L. Pennypacker - President and Chief Executive Officer

Well, it depends on the segment, but right now, we have backlog that continues to grow in the out quarters. I think our engineered packages are continuing to add significant amount of opportunity. Keep in mind our loading arms as we continue to grow that business will show up in the backlog in Europe. So right now we are very excited about the opportunities. We are not seeing what others are talking about.

Kevin Maczka - BB&T Capital Markets

All right. And just switching views over to commodities, can you give us some sense about what you are seeing there and may be what you are able to do about it as various commodities and purchase components cost increase for you?

Barry L. Pennypacker - President and Chief Executive Officer

Well, it's very simple, in the big engineered packages we have commodity indexes tied to pricing. We continue to have an outlook and analyze the different commodities indexes as we go on and we are able to get price. Keep in mind our ability to raise price is within our lead time which is very short. So we've had no issue with being able to recover any increases in commodity.

Ross J. Centanni - Executive Chairman

I think our commodity price increases behind us now. We had for the last couple of years by now its fairly stable.

Kevin Maczka - BB&T Capital Markets

Okay great and just --

Ross J. Centanni - Executive Chairman

We don't buy them like steel either.

Kevin Maczka - BB&T Capital Markets

Okay. If I could just ask one more Ross on capacity, I think you've said in the past that you are sold out in the near term on well steam pumps but can you just comment capacity in general across your segments?

Ross J. Centanni - Executive Chairman

Well Barry was just there [ph] yesterday let him comment on that.

Barry L. Pennypacker - President and Chief Executive Officer

Yeah when you look at our fluid transfer division, the after market portion of that business we continue to remain bullish on. We are in fact continuing to invest in capital equipment to increase our capacity. With regards to drilling pumps, we're in fine shape. We are able to carry some backlog into the second quarter from the first quarter, which will in fact be pushed through without any issue. When we look at the rest of the segments there are some issues that we are looking at, but in general when we look at this year from a capacity standpoint we don't see any bottle mix.

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

And one other comment that I would add to that is as we further implement lean initiatives, we free up internal capacity. So what you make is what you really need and you are not building any inventory. So I think that will be advantageous as well.

Ross J. Centanni - Executive Chairman

Let me say one thing too about this European business you asked Barry about. Some of our products out of our Finnish operations go to China and lot of the product we make there it also goes to Eastern Europe. So it's just not the Western European products, we have quite a big going into Russia as well.

Kevin Maczka - BB&T Capital Markets

All right great guys, congratulations.

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

Thank you.

Barry L. Pennypacker - President and Chief Executive Officer

Thank you.

Operator

We take our next question from Scott Graham, Bear Stearns.

Scott R. Graham - Bear, Stearns & Co.

Good morning that was a --

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

Hi, Scott.

Scott R. Graham - Bear, Stearns & Co.

A terrific quarter you guys really. I just... every time I think that we are all expecting you to start this account to economically this you are kind of pulling another rabbit out of the hat, and it typically is more than one, so congratulations. I wanted to talk very simply as you know Ross and Barry I'll introduce I always like to ask about some of the gross initiatives that you guys are working on because I am a big fan of how the portfolio is coming together and the opportunities that it is creating. So that would be my first question perhaps for Barry.

Second question is more for Ross and that would be, I know you've been talking about increasing optimism on acquisitions for a while. And with you now really focused almost exclusively on that, and obviously the oil business, but almost exclusively on acquisitions, could you may be give us an idea... if you didn't do anything in 2008 will that be really disappointing for you? So those are my questions.

Ross J. Centanni - Executive Chairman

Well let me answer that last one first. I will be extremely disappointed if we do something in 2008, Scott. Okay does that answer your question?

Scott R. Graham - Bear, Stearns & Co.

Yeah isn't it in the same you are looking in the same areas that you've been talking about all along, yes?

Ross J. Centanni - Executive Chairman

We are not diversifying the company with second time in [ph].

Scott R. Graham - Bear, Stearns & Co.

Okay.

Ross J. Centanni - Executive Chairman

I am going to buy things that are strategic in nature and to stay with the business. We understand the manufacturing, we understand the markets. But that's been the technology. We're not going to buy anything we don't understand.

Scott R. Graham - Bear, Stearns & Co.

Great, Barry on the gross line.

Barry L. Pennypacker - President and Chief Executive Officer

Yes. Let's talk a little about the growth opportunities and Helen and I had the pleasure of visiting all of our groups in the last 2.5 days and the growth opportunities are extremely exciting and I pretty much talk about them by group. When you look at the engineered packages part of our business, we see a significant opportunity and growth in the Liquid Ring Pump business, those packages are going into continued expansion of petrochemical plants.

Looking at, and also in... on the energy side, and they have some new product development that is underway that will be able to significantly increase the efficiency of some of these coal-fired plants around the world.

Moving on to Thomas probably one of the most exciting businesses we have from a growth standpoint. The opportunities that they are seeing in medical and environmental are extremely positive, and we are investing significantly in those. And with regards to our Fluid Transfer segment LNG arms as we talked about earlier, we continue to evolve that technology to get an advantage in the marketplace. And we continue to invest in that.

Our locomotive product that from a Compressor standpoint continues to give us exciting opportunities particularly outside of the North America. So that's some of the ones right off the top of our head Jeff but I can tell you that innovation at Gardner Denver not Jeff, Scott.

Scott R. Graham - Bear, Stearns & Co.

Okay, I've been called many things.

Barry L. Pennypacker - President and Chief Executive Officer

Innovation here is, is alive and well and we continue to invest.

Ross J. Centanni - Executive Chairman

And also let me add on, let me help Barry [indiscernible]. We are all working with him and continuing to try and develop a... use a well stimulation pump for drilling applications. There is going to be like way option for them so that can move their permits out on the highway. And we are going add a few product development things and the side channel [ph] is trying to improve efficiency and innovate [ph] it well.

Scott R. Graham - Bear, Stearns & Co.

Okay and I was just hoping on the medical, you gave some great granular there Barry just if we can go little bit farther on the medical and I say that because clearly you guys have just tipped the cover off the ball and in this business and really have taken a lot of share from your closest competitor. I am wondering is that what you are referring to the continuing displacement opportunity there or there are new things that Thomas is looking at right now.

Barry L. Pennypacker - President and Chief Executive Officer

There are continued share opportunities, but they are looking at new technologies for new applications, one of the most exciting ones I think is that we are developing and looking at a product for room therapy with some of our... with one of our strategic customers that will in fact require new product development that we are working on. That space Jeff Scott it's extremely exciting.

Scott R. Graham - Bear, Stearns & Co.

I will get you back for this.

Barry L. Pennypacker - President and Chief Executive Officer

I know I believe that I know that that payback is coming, I know that payback is coming but it is... there are applications out there some of which I just can't talk about over the public phone here.

Scott R. Graham - Bear, Stearns & Co.

That's fine congratulations on a good quarter.

Operator

[Operator Instructions]. We will move to our next question from Mike Schneider, Robert W. Baird.

Michael A. Schneider - Robert W. Baird & Co.

Good morning and congratulations as well.

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

Thank you.

Barry L. Pennypacker - President and Chief Executive Officer

Thank you Mike.

Michael A. Schneider - Robert W. Baird & Co.

First may be we can just focus on fluid transfer again. Can you give us a sense as what the mix looks like today in Q1 between well stimulation drilling and loading arms just so that we can understand, I guess we are too here from as well both in the mix and then at the implications for margins?

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

Are you talking about from a shipment perspective or from a booking perspective.

Michael A. Schneider - Robert W. Baird & Co.

Shipment and then I was going to ask about the bookings as well Helen.

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

Let's see, from a shipment perspective obviously we had a nice level of volume from out of the loading arm, that volume doesn't isn't projected to recurrent in that level of this point for the balance of the year. But I don't think with that we've seen a huge must be adjusted I don't think we've seen a huge change in the volume of shipments coming out of petroleum. We had a pretty good shipment months for the first quarter both from stimulation pump perspectives and obviously we saw increased activity and drilling production and after market part. So where we stand right now, I am not expecting drilling to fall off a lot from where it is now. We would say drilling would be rather flat, so looking to the future I think said what changes as you've got, roughly $20 million of a loading arm shipment that doesn't recur for the balance of in the quarter at this point for the balance of the year.

Michael A. Schneider - Robert W. Baird & Co.

Okay and then, looking forward again, with backlog down 25% organically and FT... are well stimulation backlog and drilling backlogs down a comparable amount or is that reflects primarily as the drilling backlog being down?

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

Well the problem in looking just at the backlog is the well stimulation pumps tend to come in pretty lumpy orders. So our key customers will come in and give us an order. So if we didn't get one in the first quarter, then it comes in April, then you tend to have some lumpiness. So as we said, I think in the previous conference call, we were sold out three of the first half we've already gotten those... the first half bookings last year, and then we shipped on them. So it's a little bit hard to comment on from that perspective.

But I would say in terms of where we would be down year-over-year most dramatically is going to be in the drilling pump side of our business. We don't have the luxury of looking at our backlog right now on drilling and saying where we're going to ship the following pumps for the balance of the year, like we had a year ago. We don't have that type of visibility. We're now looking more at the shipments that we think for making the back half this year, based on the level of enquiry and the order flow. So it's going to be more of a booking ship business than a backlog business now.

Barry L. Pennypacker - President and Chief Executive Officer

I think that's important Mike to understand is that, as we continue to expand our capacity and presence in the after market, that's a booking ship product within the next 20 days, or you don't get the order. So we're not going to see that backlog, but we are very bullish on what we are going to do in the after market as far as fluid adds are concerned this year.

Michael A. Schneider - Robert W. Baird & Co.

So... with I guess this at least to my margin question, which is I was shocked by the margin in FT being so high, is that reflective of the loading arm shipment benefiting margins or is there something else occurring because I would have thought with the mix shifting away from drilling, may be not yet this quarter, but as we go into the second half, that margins should be basically going from the high 20s to the low 20s. I'm just wondering if something has changed or there is a new element --?

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

I think that's fairly consistent with what we will be expecting, the loading arm gave a lot of flow-through profitability in the first quarter, because of that volume. So you have a lot of leverage on your SG&A level.

Michael A. Schneider - Robert W. Baird & Co.

Okay, okay. And then the size of the loading arm shipment this order this quarter is a comparable at $15 million to $20 million?

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

No, it's a little bit smaller than that, because the loading arms that we shipped in the fourth quarter and first quarter had CNG arms with them as well and I don't know that this one is quite as large.

Michael A. Schneider - Robert W. Baird & Co.

Okay, and just because I think you are the only supplier in this market. Can you give us some background as to how many of these are shipped even in a good year, if you ship too in the last 6 months, is this a some market that even in a good year will ship for?

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

First of all, we're not the only supplier in LNG arms, we're the only supplier in CNG arms, but there are some... we still have competitions for the LNG loading arms business out there.

Michael A. Schneider - Robert W. Baird & Co.

And roughly the number of unit shipped per year even in a robust market like this is roughly what?

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

I really don't know, I couldn't comment on that, it's a pretty lumpy business.

Michael A. Schneider - Robert W. Baird & Co.

Okay, and then pricing in FT, the business was up 3% organically in the quarter than scrubbing currency, is there still significant price embedded in that 3% growth number such that units are actually down?

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

Yes, that would be right. Obviously units are down. We've talked about that from a drilling pump perspective. So I would say yes, volumes down. We had a benefit of pricing and a benefit of currency.

Michael A. Schneider - Robert W. Baird & Co.

Okay, and I believe that's it. Thank you very much.

Operator

[Operator Instructions]. We move to our next question from Joe Mondillo, Sidoti & Company.

Joseph Mondillo - Sidoti & Company, LLC

Good morning guys.

Barry L. Pennypacker - President and Chief Executive Officer

Good morning, Joe.

Joseph Mondillo - Sidoti & Company, LLC

Just got a couple of real quick questions here. First off, what are your primary objectives for the use of cash in this year?

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

Well we'll be paying down debt, and then if with loss being extremely disappointed if we don't make an acquisition, hopefully we'll have cash available to fund acquisitions. And as you can see we purchased quite a bit of stock in the first quarter and we'll be using the buyback as kind of a trim mechanism for cash that we generate.

Joseph Mondillo - Sidoti & Company, LLC

Okay great. And then could you just talk about the tax rate. I know last quarter you projected a guidance of 30%, and you knew about the Germany tax rate and now its 28%. Could you just give little explanation on that whole?

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

I would say from the 30% to the 28%, the biggest drivers the facts that we're generating more profits and lower cost tax jurisdiction. So our profits... profit mix has changed a little bit and that's generally asset [ph].

Joseph Mondillo - Sidoti & Company, LLC

Okay, okay great thanks, thanks guys. Congratulations.

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

Thank you.

Barry L. Pennypacker - President and Chief Executive Officer

Thanks.

Operator

And we have no other questions at this time

Helen W. Cornell - Executive Vice President, Finance and Chief Financial Officer

Thank you very much for joining us today.

Ross J. Centanni - Executive Chairman

Thank you guys bye, bye.

Operator

And that concludes our conference for today. We thank you for your attendance and have a nice day.

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