Baldor Electric Co. Q1 2008 Earnings Call Transcript

Baldor Electric Co. (BEZ)

Q1 2008 Earnings Call

April 24, 2008 11:00 am ET

Executives

John McFarland - Chairman and Chief Executive Officer

Ron Tucker - President and COO

Analysts

Andrea Wirth - Robert W. Baird

Steve Sanders - Stephens, Incorporated

John Franzreb - Sidoti & Co.

Jason Feldman - UBS

Jon Braatz - Kansas City Capital

Scott Graham - Bear Stearns

Tom Lamb - Weybosset Research

Jim Foung - Gabelli

Bill Baldwin - Baldwin Anthony Securities

Mike Schneider - Robert W. Baird

Jon Braatz - Kansas City Capital

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to today's Baldor Electric Company's first quarter, 2008 earnings results conference call. At this time all participants are in a listen-only mode

(Operator Instructions.)

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

Tracy Long

Thank you. Good morning, everybody, and we thank you for joining us today to review our first quarter results. On the call today is John McFarland, our Chairman and CEO, and Ron Tucker, our President and COO. I just need to remind you that our comments today will include some forward-looking statements and our actual results could be materially different from those.

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

John McFarland

Thank you, Tracy. Good morning, everyone. Let me start my comments this morning by saying that we're pleased to report a solid quarter -- a solid first quarter with sales of $470,526,000, up 19% from the first quarter of 2007. The first quarter of 2008 contained a full three months of Reliance Electric, whereas 2007 contained only two months.

Net earnings for the quarter were $25,639,000, up 23% over last year. And earnings per share at $0.56 were up 11% over last year. Our operating margin improved to 14.2 in the quarter, compared to 13.2 a year ago, 14 in the second quarter last year, 14.1 in the third and fourth quarters. So, you can see that we're making steady improvement in our margin. We also feel that margin is sustainable and that we have many strategies throughout the Company to improve it further.

On March 31, we implemented a 4.5% price increase on motors to cover the increases we've seen in copper, steel, aluminum, and oil-based products. We will be closely monitoring the prices of these commodities in the second half of the year and may take additional price increases if these materials continue to escalate in price.

We were pleased to -- we are pleased to report that we were able to reduce our debt by $20 million during the first quarter. And our debt balance now stands at $1.36 billion. The first quarter is particularly a tough quarter for debt reduction because we have a $25 million bond interest payment that we make in the first and third quarters. We also have several large tax payments and we fund our profit sharing, which was almost $20 million this year.

We continue to believe we're on track to achieve our total debt reduction this year of $125 million, which will give us approximately $300 million in debt reduction in the first 23 months following the acquisition. This is one year ahead of our original goal.

Our daily incoming order rate of approximately 7.5% during the quarter helped build our backlog to $225 million, up from $200 million at the end of the year. Actual shipments were up 1% over last year, but remember that we're on a 13-week calendar and the first quarter of 2008 contained two fewer selling and manufacturing days than the first quarter of 2007.

Orders for motors remained good across the board with most strength in large motors. We still are working overtime to increase the amount of inventory we have in small motors and have begun to see some success during April. During the quarter, I visited most of our plants and I am especially pleased with the many productivity improvements and projects to improve productivity that are underway in the plants. We are implementing our Power Lean and Power Maintenance strategies at all Baldor plants where they have not been implemented. And later this year, we will begin implementing our flex-flow manufacturing process in some of the acquired motor plants.

We believe the implementation of flex-flow should allow us to decrease work in process and improve lead times. During the first quarter, we also made a successful conversion to [BUS], our computer system at Baldor, in our China plant. The China plant making Dodge products for the Chinese market has seen a lot of growth in the last several years and was badly in need of an effective computer system. We're also expanding this plant and expect to move in during the summer into a new building that's about twice the size.

Later in 2008, we will start limited motor production and be ramping up production over the next several years to serve the Asian markets. I'm also very pleased with the strength we've built in our two sales organizations. You'll remember that we created separate sales organizations to sell the Dodge products and to sell motors. We've made investments in both the motor and the Dodge sales organizations and we believe we're well positioned to outperform our competitors. It's my belief that you'll begin to see this more clearly as the year goes on. It's also my belief that we have the two best industrial sales forces in the United States and perhaps in the world.

There were also some disappointments during the quarter. Our smallest business, our generator business, had disappointing shipments during the quarter. Shipments were only $7 million. However, our incoming order rate was strong, up 60%. The strength in incoming orders has continued in April and shipments have improved. We don't expect any drag on sales in this area during the second quarter. We were also disappointed that our day sales outstanding, DSO, slipped a little bit in the quarter. The quality of our DSOs is better than the previous quarter and we'll focus throughout the balance of the year at reducing the number of days it takes us to collect our receivables.

We were also disappointed that we were unable to build more inventory in small motors during the first quarter. We've been expanding our output in the three small motor plants we have to handle the business from the Reliance plant closed in mid-year 2007. In addition to this our business for these motors has been stronger than expected and thus caused a depletion of our inventories. During April, our inventories have begun to increase. We believe this will allow us to capture some additional distributor business. Distributors generally are buying for-a-sale and if the motor is not in inventory they are forced to buy it elsewhere or rewind it.

Our international sales were up 6% during the quarter. We were also disappointed with this number. Our international business feels very strong. With the majority of this business being exports from the United States, it was also affected by the number of production days. During the quarter, our international sales represented 17% of the total company sales, which is an all-time record. We expect strength in this area going forward because we're much better organized with more sales people out calling on customers and we have a broader product line to offer those customers. In addition, the current value of the dollar gives us some benefit on the products we export from the United States.

Looking forward, we continue to receive positive feedback from our customers about the balance of the year. As we mentioned in our press release, we believe we'll have a sales increase during the second quarter in the low single digits. Order rates in April, currently support a little higher rate of growth than that.

And with that, I'd like to open it up to questions this morning. So, go ahead, operator, and open the line to questions.

Question-and-Answer Session

Operator

Thank you.

(Operator Instructions.)

And our first question will come from Andrea Wirth with Robert W. Baird.

Andrea Wirth - Robert W. Baird

Good morning, guys.

John McFarland

Hello, Andrea.

Andrea Wirth - Robert W. Baird

I just want to start off with your thoughts on the second quarter and the outlook for second half really. I guess, just comparing it to the order rates that you listed in the press release. Especially, it looks like the motors business up 10%. Just curious given that strong order rate this quarter and then the expectation of low single digit growth in the second quarter, is that essentially -- should we look at this maybe as a lot of that 10% growth is more kind of longer cycle, late -- or larger horsepower business that maybe ships in the second half, and therefore we should expect maybe better growth in the second half of the year? Or really, how should we kind of reconcile those two?

John McFarland

Okay. Well, thank you, Andrea. That's a good question. We did have good order growth in the first quarter. The strongest part of our business is the longest cycle products, such as large motors. And also, there was a pretty good growth in the large generator business. Those large motors do take a long time to produce and some of those orders are scheduled actually throughout 2009.

The order growth that we had in the first quarter helped us build the backlog from $200 million to $225 million. And also the 1% growth in the first quarter was affected by two fewer production days. We are expecting a good second quarter. The calendar helps us a little bit in the second quarter and so we do expect our orders -- our shipments to be up in the zero to 5% range.

We are not given to making wild forecast about future shipments and things like that. So right now, as I said in my comments, our incoming order rate probably supports a little bit more optimistic view, but we are reading the papers and listening to the TVs like everybody else and hearing all the stories about a weakening economy. And so at this point, we're willing to say we believe that we'll have a zero to 5% increase. Obviously, we are going to work to ship every order we've got.

Andrea Wirth - Robert W. Baird

Sure. And so, you're saying the calendar helps you. Is there actually a favorable selling days in the second quarter?

John McFarland

Well, the Easter holiday that was in March this year is in April -- was in April last year, so you get one more production day.

Andrea Wirth - Robert W. Baird

One more production day, okay. And then, I guess just looking at the distributor business, it's been weak now for about three quarters. I believe a quarter ago, you were assuming that that business would start to come back. It looks like it really still hasn't yet. Is that just a function of distributors really continuing to lower their inventory levels, or is that more just your ability to try to increase your own inventory so you can service those customers more?

John McFarland

I think there is a combination -- it's a combination of the two. I think, our distributors are generally cautious. They're reading all the negative stories about the economy that all of the rest of us read. And so I think they're generally cautious. But also I believe we're losing some orders because our inventories are too low. And our inventories in small motors have begun to grow in August. But --pardon? Sorry, in April. They've grown about 10%.

But our inventories today are about half of what they were a year ago. So we know that there are some -- when a distributor gets an order, if he doesn't have the product in stock, and they are very cautious with their inventories, then he comes to us and tries to buy it out of our stock. And if we don't have it, then he'll end up buying it somewhere else or he may end up rewinding it if he's in an electric motor repair shop.

So I think it's a combination of two things, back to your original question. Distributors are pretty cautious right now with inventories, number one. And number two, we're losing a few orders and I think we're losing customers, but we're losing a few orders. And I believe we'll get those back as soon as we get our inventories rebuilt, and that rebuilding has taken a good step forward in the month of April.

Andrea Wirth - Robert W. Baird

And then I guess just one last question. It looks like between the motors and the power transmission group it looks like power transmission to the distributors was actually a little bit weaker, down 4%. Just curious what the difference is between those two. I guess I look at power transmission as a little bit broader, maybe even a little bit more later cycle. I guess I would think that would still be a little bit stronger. So just looking for a reconciliation between the growth of the motors and power transmission at the distributor level.

John McFarland

I really don't have a reconciliation for that. The power transmission business is mostly distributor, its 80% distributor in our case. And the power transmission business and the motor business are a little bit out of sync. And I'll be honest with you, Andrea, I don't really -- I haven't really gotten my hands around why they're always out of sync a little bit, but they are out of sync. And so, I don't know why it was down four compared to two.

I don't believe, and I've talked to a lot of our sales people and they are all in town this week. I'll see them all tonight. I don't believe we're losing any business to competition. In fact, I think in the power transmission business we're very well positioned to gain some market share, but I can't answer as to why it's down four -- a little more than the motor business.

Andrea Wirth - Robert W. Baird

Okay, great. Thanks, guys.

John McFarland

Thank you.

Operator

And our next question will come from Stephens Incorporated’s, Steve Sanders.

Steve Sanders - Stephens, Incorporated

Good morning.

John McFarland

Hello, Steve.

Steve Sanders – Stephens, Incorporated

Thanks for the additional info in this release. I appreciate that.

John McFarland

You're welcome.

Steve Sanders - Stephens, Incorporated

I have just a general question on margins -- your level of confidence and your ability to hold margins given the tougher selling environment. And maybe specifically you could talk a little bit about the relative weakness of distributor and PT business versus OEM in motors and also work-in some commentary on the commodities side.

John McFarland

Okay. Well, first of all on the margin side, we have a number of initiatives ongoing that are a result of the acquisition. We're working to combine the motor business and we're working to implement best practices that were occurring in the Reliance Dodge plants and best practices that were occurring in the Baldor plants, in the plants where they were not. And so, we believe that will benefit margins.

Secondly, in the second quarter we would expect our top line to be better than the first quarter, so we'll get some benefits that you would get from the top line. So we think as the year goes along, we have the opportunity to realize more and more of those cost savings that we have planned. And in particular, in the second quarter, of course, we'll get a little bit better top line.

With respect to distributors, I'm not sure I quite understand your question. I think the distributors generally today are pretty cautious. I think in the motor business, we are losing a little bit of business because we don't have much inventory. I think in the power transmission market we've seen a little bit better orders from the distributors in the month of April than we saw in the first quarter.

Now, that may be a function of the seasonality. There is a little bit of seasonality in the power transmission market related to aggregate in some of these industries that we serve. But I think we're doing well with distributors. And other than losing a few orders because of a lack of inventory, I think we're well positioned to be the best supplier that a distributor can have of power transmission components and motors.

Steve Sanders - Stephens, Incorporated

Yeah, and I think, just a follow-up on that, I was thinking that, historically the PT business was higher margin than the motor business and the motor business is growing faster than the PT business. And then, a similar question on the OEM versus distributor side, I would think the distributor margins would be a little bit better than OEM and OEM is growing faster than distributor. So I think that the question was, if you see that shift, which has been occurring over the past couple of quarters, is that a challenge on the margin side, or are you making enough progress on synergies in manufacturing and other things that you don't look at that as a significant challenge?

John McFarland

You know, you're exactly right, Steve. I mean, the distributor business -- you're right. Those are a little bit of a headwin on the margins. But you can see over the last several quarters that we've still been able to improve the operating margin. And you can see it between the third and fourth quarter in '07 when sales actually decreased a little bit and our operating margin continued to climb a little bit. So the things you mentioned are headwins just because of a little bit of a mix change. But again, we've been able to increase the margin in spite of that.

Steve Sanders - Stephens, Incorporated

Okay. And then, on steel and copper, and I may have missed this, but do you feel like at least on the motor side you are effectively offsetting the increases at this point? I know you talked about potential for more increases later in the year, but as we look into the second quarter, do you think you can stay fairly neutral on this?

John McFarland

Yes, we do.

Steve Sanders - Stephens, Incorporated

Okay.

John McFarland

And our concern with materials is more second half based than second quarter based. And, so we got a couple of months to see what's going to happen with materials. Our biggest concern is with steel. And that is our biggest purchase. But our concerns are mostly second half based, not second quarter based.

Steve Sanders - Stephens, Incorporated

Okay. And then, two other quick questions and then I'll hop off. On the power transmission side, John, I think you said that you expect to see some payoff from the additional sales resources in that segment. I think you're going to increase some inventories in some of your international markets. Just a little more color, anecdotal evidence that you're getting that would suggest things are perking up there. And then the final question is just, can you come back to this high efficiency motor legislation that goes into effect I think it's in 2010? And talk a little bit about what you guys are doing today to capitalize on that before 2010, and if you could, quantify what you see is the opportunity there. Thanks.

John McFarland

Okay. Well, we've really invested in our power transmission sales organization, our Dodge sales organization. Whereas we had effectively about -- even though we had 100 and some odd sales people when they were Dodge and Reliance had 100 and some odd sales people, they split their time between motors and power transmission. And today, we have about 100 sales people who focus entirely on power transmission.

We have seen some orders that we've gotten that are from new customers that we feel like we would not have gotten had we not had this greater focus on those products. And so, I think we may be doing better than the numbers show and perhaps the whole business segment is off maybe a little bit more than our sales. But I think we've done the right thing and I'm totally convinced that the additional assets we have now, the additional people we have now in the power transmission market is going to yield better sales growth as time goes along. And you're right, that's where our best margins are and so that should help margins.

As far as the energy legislation, the President signed the Energy Bill on December 19. And it requires a large amount of our production to meet new energy standards. We today, can already meet virtually all of those requirements. And -- but over the next three years, we're going to be doing some integration of the Reliance motor product and the Baldor motor product. This integration will involve going through and looking at each individual design and determining which design provides the best and most cost effective performance, which design is two of the best for the best manufacturing cost, which design has the best -- the most automation in manufacturing, and so on. And as we do that, we'll be making the conversion.

Between now and then though, it is our goal to try to convince some people to adopt the standard ahead of time. And we believe that a number of people will. There are a lot of customers that we do business with who require an agency approval for their product of some type - UL or CS--CE, a variety--CSA, a variety of agency approvals that are required. And so we think that anybody who is developing a new product today for introduction anytime in the next three years should adopt the new standard of motors so that they don't have to go through the agency requirement a second time.

And so that's what we're doing is contacting our customers. We're providing them with information on the law, so that as they make decisions on new product development that they can choose to develop their products around the new motors. The new motors will be slightly larger, slightly more expensive. And so they need to have the dimensions and so forth in order to do that. And then submit to the agencies for approval those products with the new motors so they don't have to do it twice. And we believe we'll have some success. It's hard to say how much success, but we think we'll have some success in getting people to adopt the motors early.

Steve Sanders

Okay. Thanks very much.

John McFarland

Thank you, Steve.

Operator

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

John Franzreb - Sidoti & Co.

Good morning, guys.

Ron Tucker

Hello, John.

John McFarland

Hi, John.

John Franzreb - Sidoti & Co.

John, did I hear you correctly when you said that your small motor inventory is about half of what it was a year ago or half of what you would like it to be?

John McFarland

It's about half of what it was a year ago.

John Franzreb - Sidoti & Co.

Okay. So what would be the growth rate if you had captured that business? I guess the best way to assume is if it's lost business during the quarter, how much better would the top line look?

John McFarland

Well, it's hard to say and all our sales people are here. And I was having lunch with them yesterday and I was asking some of them that question. And I got a couple of different answers. But it's really difficult for me to say that it -- exactly how much more it would have been. All I can say is I'm certain, absolutely certain, that our growth rate with distributors would have been higher than it was.

I also can say that we suffer as a result of the lower inventory, we suffer some costs that we would not normally suffer and did some additional freight costs and expediting costs and things of that nature. And also of course, you are hit financially as inventories decline. There's a financial hit to that as well. But back to your original question, it's difficult to say exactly how much. But I am absolutely certain that we've lost some business because of that. I don't think we've lost customers, but we have lost specific orders.

John Franzreb - Sidoti & Co.

How long would it take you to restock to the appropriate levels for you?

John McFarland

Well, we want to be significantly in better shape by the end of this quarter. And in -- over the last three weeks, we've increased our inventory by about 10%. And that's on the back of that. We did that not because our order rates were slow. I mean, obviously, if order rates slowed up that would make it easy to restock. But in the last three weeks our order rates have continued to be strong. But we've been able to increase the output of the -- we have two plants that principally make these motors and we've been able to increase the outputs of both of those plants through a combination of a little bit -- some additional equipment and people and so forth, so that we get the daily rate up. And we've been working some Saturdays to increase the level of the inventories.

So, we've made good progress the last three weeks. By the end of this quarter, I would think we would make significant progress. I don't think we need to double our inventory. I think that we can operate more efficiently than we were a year ago. So I don't think we need to double our inventory, but I do think that if we had another 30,000 motors -- and we've added 15,000 in the last three weeks -- if we had another 30,000 -- another 15,000 on top of that, it would get us some additional business.

John Franzreb - Sidoti & Co.

Okay, great. Now, can you just help me understand, you put together a price of 4.5% at the end of March. You're only forecasting zero to 5% growth in the second quarter. What kind of volume expectations are built into that? I would've thought a lot of that price increase would readily go through rather quickly. Could you kind of reconcile those two things?

John McFarland

Well, obviously, there's always a little bit of pre-buying when you have a price increase. That's another reason our inventories are a little bit low. We have fully implemented the price increase. So the customers were very understanding of the need for the price increase. Our price increase was reasonable and justifiable, and so it has been fully implemented. And our order rates right now continue at levels pretty similar to the first quarter. And so, as I said in my opening comments, we might be a little conservative in our zero to -- our low single digit by growth rate, but that's what we're forecasting as of today.

John Franzreb - Sidoti & Co.

Okay, that's fine. And one last question. You mentioned some strategic initiatives you have in place to improve the margins. Can you kind of share with us some of the things you have in place?

John McFarland

There is a whole list of things. We continue to work on the consolidation of the purchasing groups -- the two purchasing groups on motors working well together. And we're continuing to find opportunities to improve our material costs in that area and we're going to continue to do that.

Obviously, some of that is offset by the higher cost of steel that we're experiencing, and copper. But we're also doing a number of -- we've got a lot of lean initiatives that are going into various plants. In fact, we're working on one in a plant near Fort Smith that looks like with the implementation we'll free up about 13 people to do other things. And so there's a lot of things like that going on in every plant. We're implementing our Power Maintenance strategy that is a Dodge Reliance strategy. We're implementing that in the Baldor plants, so that we have less down time related to maintenance issues and that sort of thing.

So there is a whole lot of things going on. We are doing some product integration, moving some products to -- where we've got two designs, moving to a single design, which gives us better -- allows us to operate with less inventory, allows us to have larger runs through the plant, and that sort of thing.

Anything you want to add to that, Ron?

Ron Tucker

No, I think that's a pretty complete list. I think there's a lot of other areas of -- the purchasing and the services area that we're looking at also that's been added to the list of other items in terms of not just materials that we're going through the purchasing. I think there's going to be some good opportunities there also.

John Franzreb - Sidoti & Co.

Great. Thanks a lot, guys.

John McFarland

Thanks, John.

Operator

And our next question will come from Jason Feldman with UBS.

Jason Feldman – UBS

Good morning.

John McFarland

Hi, Jason.

Jason Feldman – UBS

So back to the price increases. It sounds like -- so you had a 4.5% price increase this quarter on motors at the very beginning of the quarter. What about other products? Imagine the raw material pressure exists in the power transmission products, generators, and drives, as well.

John McFarland

Not so much in drives, but in -- there is the impact in generators and in the power transmission products. And we're evaluating what we should do there on pricing right now.

Jason Feldman - UBS

Okay. Have you gotten any push back on the price increases or are they pretty well being accepted by customers?

John McFarland

We always get some push back with price increases, but we've got a very effective sales organization, number one. Number two, we've got the facts to justify the need for the increase. And so, we have gotten no more push back I would say than we normally get. We are in a position in many of our product lines where we're working overtime to keep up with the demand. So we're very insistent that we get those price increases. We absolutely have to have them. Some of the products that we make are mounted on steel, and so the customers realize what's happening with steel prices right now and I would say they've been pretty understanding this time of the price increase.

Jason Feldman – UBS

Okay. I mean, obviously, we've all seen what the steel and copper prices look like and how much they've gone up. But particularly on the steel side, have you also had any issues with raw material availability in terms of getting the supplies that you need or was it really just, the prices are up and as long as you pay you can get what you need for production?

John McFarland

I think we will have a big problem if we refused to pay the increase.

Jason Feldman - UBS

Well, no. Obviously, but--.

John McFarland

No, we -- at this point, we've not -- I think steel supplies are tight. But at this point they have not - nobody and none of our suppliers have let us down on deliveries.

Jason Feldman – UBS

Okay. And then, last question. I mean, you've talked about how difficult it's been to kind of raise inventories back to where you need them to be and to meet certain production demands, but the growth rates have been fairly modest. If things were to reaccelerate, I mean, can you expand production; that would be necessary?

Because even with kind of low growth rates, it seems that -- and I'm not trying to mischaracterize this, but it seems like you're struggling a little bit to keep up with the volumes that you need to produce?

John McFarland

Yes. I think we can and we could if things did accelerate we could handle it. Remember that we closed the plant, and unprofitable Reliance small motor plant. And so, a good deal of our challenge has been to bring that production into our own production plants. And that's always challenging for several reasons. Number one, you hire a number of new people that you have to get trained and they're really not productive for -- until they work for six or nine months.

And secondly, we're bringing in some new designs. The core of the products are our existing designs, but there's always mechanical things that we have not done before that are involved in the design. So, a lot of our struggle has been that, number one, our business has been reasonably good, a little stronger than we anticipated. And secondly, we’ve been bringing in this production from the other plants.

We're in much better shape today than we were just a couple of months ago. And so, I believe we could handle an increase if we needed to. I mean, we are building inventory right now in bulk size motors. And so, I think we could handle an accelerated demand and I hope it occurs.

Jason Feldman – UBS

Okay. Thank you very much.

Operator

And our next question will come from Kansas City Capital’s, Jon Braatz.

Jon Braatz - Kansas City Capital

Good morning, John.

John McFarland

Good morning, John.

Jon Braatz - Kansas City Capital

Ron, Tracy. Going back more to the margin issue, I assume you're continuing to reiterate your guidance on the $30 million in cost savings--annualized cost savings by year-end?

John McFarland

Yes.

Jon Braatz - Kansas City Capital

Yes?

John McFarlandY

Yes, we agree with that.

Jon Braatz - Kansas City Capital

Now, if you would look at sort of your core business, I don't know how you can, and this may even be a difficult question to answer. But that $30 million in annualized cost savings that you expect, is that going to be potentially eroded away by -- a little bit by your base operations in terms of additional costs, raw material costs? Or, I guess on net can we -- will we see the full benefit of that or are we going to lose a little bit from the base business?

Ron Tucker

Well, Jon, you can't -- I'll try to answer your question. You can't take $30 million run rate and then add it on top of some number, because there is a lot of a different moving part.

Jon Braatz - Kansas City Capital

Right.

Ron Tucker

And one of the things--I think one of the things that Steve mentioned earlier in the call and something to remember is that, if you look at the--if you look at mix, you look at facts, the changes that the inventory may have, there's a lot of different factors that go in. So we're confident that we're going to achieve the $30 million annual run rate by the end of the year.

Jon Braatz - Kansas City Capital

Okay.

Ron Tucker

We've got the projects; we know about them, they're there. We're very confident.

Jon Braatz - Kansas City Capital

Okay.

Ron Tucker

It means and we also believe we can improve the margin throughout the year. You know what -- how incremental it is depends partly on material pricing and lots of different things. But to answer your question, we believe the $30 million, it will be there. Can you just take $30 million and add it on? No.

Jon Braatz - Kansas City Capital

No.

Ron Tucker

There's a lot of different moving parts here as you know.

Jon Braatz - Kansas City Capital

But on...

John McFarland

And we would expect, our strategy has always been and it continues to be that we feel like we have the right to recover material costs when they increase. The materials we buy are traded on a world market. We can't decide that we don't like the copper price on the LME and go buy it on the COMEX cheaper. So our materials, when they go up, we go to the customers and we ask for an increase. And we don't back down from those increases.

We don't believe that you can do that. I mean, if those increases are real and we can justify it, then we don't accept the orders at lower prices. So we would look to recover material increases and if that means that we have to have another price increase later in the year, I hope we don't, but if we do, we'll have it.

Jon Braatz - Kansas City Capital

Yeah. Okay. John, one other thing. Back in August of last year, when this product prices really hit, we saw your business tail off, I don't know, through -- from August to September. How would you characterize, let's say the first quarter? Obviously, we continue to see bad news from an economic standpoint. Do you see any difference in terms of what we saw back in August compared to where we are today?

John McFarland

Well, thinking of August, we had that one bad--we had that one month where we had a less than 1% growth in orders year-over-year. And I don't -- I really don't -- and it was mostly in the distributor side of the business. And so, I think it was probably distributors turning conservative with their inventories.

I would say today that, if I just read the newspapers and didn't look at our own orders, and I think that things were in a nosedive. And one of the reasons that we tried to provide more information in the press release that we just issued is to indicate that our business is not in a nosedive, nor do we expect it to be in one in the near term.

Our business is still pretty good. Our customers are still telling us they expect to have a good year. There are some tax incentives in place between now and the end of the year that should benefit our business, and I think things are still going okay. We've cost ourselves a few orders because we haven't produced enough motors, but we're correcting that. So I'm looking for--I'm quite optimistic about the second quarter.

Jon Braatz - Kansas City Capital

Okay. John, thank you very much.

John McFarland

Thank you, Jon.

Operator

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

Scott Graham - Bear Stearns

Hey. Good morning, John, Ron, and Tracy.

John McFarland

Good morning, Scott

Scott Graham - Bear Stearns

Could you give me an idea that--Grainger has gone into the power transmission business. And I was wondering did you guys benefit from that? Did you get any of that business?

John McFarland

No, we don't supply W.W. Grainger and we would look at them as more of a competitor than a potential customer I think, at least -- certainly in the motor business. I'm not as familiar with the PT business yet. But as far as I know, we have not sold any of our power transmission products to Grainger, nor would I expect us to.

Scott Graham - Bear Stearns

Okay. In terms of your sales force consolidations, obviously, you guys have been talking about the impact that this will ultimately have. And I was hoping you can give us some maybe more concrete examples of where opportunities are being created, where your quarter revenue that may be content of customer where you wouldn't have maybe a year ago. Just sort of maybe an opportunity for you to kind of talk about what you're seeing out there and the market's reaction to this merger?

John McFarland

I think that most of our power transmission business comes through distributors. And we've been able to work with distributors to obtain some pretty nice orders, several for example in the aggregate business. Our customers that were not buying from--were not buying the Dodge products from our distributors or anyone else. And we've been able to go in and get the orders on the $200,000 to $300,000 orders for Dodge products from those customers primarily because we have the people that can go out and focus, can call on them and focus on going after that business.

And the same--in the motor side of the business, it's slightly different what's happening in motors, because we're also having good success in motors. And in motors we're having this success because we have a more broad product line today. We've got--been able to get orders from customers where we could not quote the entire--a project, as an example. We could not quote the whole project because we didn't have motors above 1,000 horsepower.

Whereas, Reliance had motors above 1,000 horsepower, but they might not have known about the project or they didn't have competitive smaller motors. There's just a variety of things. And so on the motor side of the business, I think our success--and going forward our success will be--will come more from having a larger sales organization. We have about 300 people selling motors. And if you go back to the Reliance Dodge days, there were 130 people splitting their time between Dodge and motors.

So we've got essentially 300 people today versus 60 or 70 just a year and a half ago. And so I think on the motor side, it's going to come from the broader product line. Not having Reliance to compete with obviously helps as well. And on the Dodge side, I think it's from more focus, being able to go visit customers that--where we know there is business for us, we just haven't had the time to work on.

Scott Graham - Bear Stearns

That's helpful. Thanks a lot.

Ron Tucker

Thanks, Scott.

John McFarland

Thank you, Scott.

Operator

And our next question will come from Tom Lamb with Weybosset Research.

Tom Lamb - Weybosset Research

Thank you. Excuse me. Good morning, everyone.

John McFarland

Hi, Tom.

Tom Lamb - Weybosset Research

I had a question--a couple questions. The first is about the generators. Could you give us a little bit more information about what might have happened there and why sales were low and down so much from a year ago?

John McFarland

Yes. Actually, I'm kind of embarrassed by the generator shipments for the quarter of $7 million. This was a terrible quarter. And our incoming orders suffered. You know, we closed--we had two generator plants and we closed one of them last year. And we had a period where we suffered through some weak order cycles and I think that's really kind of hitting us now. But the generator business is certainly not as weak as it looked. The incoming order rate was really good in the second quarter and the first quarter. It has continued through April and I think the second quarter is going to be back more on a normal pace, which is like twice what we did in the first quarter.

Tom Lamb - Weybosset Research

Sure. Is it a sales force issue or was it just sort of a eye off the ball issue, I guess? I don't want to cast dispersions on anybody in particular.

John McFarland

Well, that's a tough question and I've got--we've got all of those people listening in on this call. So it would be interesting.

But you know, I think that it was primarily an issue of getting the shipments out the door. And we made some changes in the plant there to ensure that these things don't happen again.

Tom Lamb - Weybosset Research

Are these long cycle orders typically?

John McFarland

There are--there's a combination of both. The large generators that we make are mostly custom and they are fairly long cycle, meaning that the delivery time could be four months or five months. We also have though some short cycle. We have an inventory of generators, smaller ones. And most of our problems were related to the longer cycle generators. We just did not get them produced and shipped during the quarter.

Tom Lamb - Weybosset Research

Okay, great. The other question I had was a little bit--if you could give us some more granularity about the international business mix in the industries that your products might be going into -- for instance, in Latin America and Asia Pacific. Can you give us a breakdown?

You say you've got positive sales growth in mining, oil and gas, agriculture. Is that also the case in Latin America and Asia Pacific? And is the mix different in each of those regions?

John McFarland

There is a difference in mix. If you look at Europe, the majority of our business is in motion control, which would be electronically controlled motors for semiconductor manufacturing equipment for robotics, for medical equipment, and things like that. In Latin America, we sell motors for a variety of things in Central America. For example, we sell motors through distributors that are selling them to go on air compressors and pumps and all kinds of motor driven applications. But--whereas, in South America a lot of our business goes into the oil and gas and the mining market. We have an office in Chile and we have a sales person that lives in Venezuela. And there's a lot of heavy applications there and we're quite active in those applications.

And let me just say and I don't mean to get--to do a commercial here. We're very disappointed with the Columbian Free Trade Agreement that it failed. We are selling in Columbia. And we sell against people that manufacture their products in Mexico where they pay no duty into Columbia, and Brazil where they pay 4% while American products going to Columbia pay 10%. But, we're still able to overcome that on the back of our quality.

In Asia, we also sell a lot of motors into the mining industry and products into the mining industry. In particular, in China, the majority of our business is our Dodge products that go into the coal mining industry. Outside of China, in Singapore and Australia, we sell motors for many different types of applications -- packaging equipment, pumps, all kinds of just general applications.

Tom Lamb - Weybosset Research

Okay, great. That was really helpful. Thank you very much, and real positive. That's great. Thank you.

John McFarland

Thank you, Tom.

Operator

And our next question will come from Gabelli, Jim Foung.

Jim Foung – Gabelli

Hi. Good morning, everyone.

Ron Tucker

Hello, Jim.

John McFarland

Hi, Jim.

Jim Foung – Gabelli

John, I guess in your prepared remarks you also mentioned that the international business you are disappointed in. Could you talk about the things you're doing--initiatives to increase growth in that segment? And then related to that, are your margins or receipts better than the U.S.?

John McFarland

That's a good question, Jim. I was disappointed. We had a 6% sales increase internationally. And that was a little disappointing, because in the fourth quarter I think it was up 25%. So, I really think that we have some great opportunities internationally now. We have a really strong management group. Michael Cinquemani runs our international business and I think he's doing a very good job of getting all of the former Reliance Dodge organization and the Baldor organization together, getting them focused.

We've got three good regional managers -- one for Asia, one for Latin America, and one for Europe. And I just think that we're so well organized, we have such a large product offering now, that we should be doing better than 6%. And we have been doing better than 6%. So we were probably--we were definitely affected by the production days. A big part of this business is exported, so we were affected by the production days in the U.S. And we were probably affected some by our conversion in China to the Baldor computer system, which occurred during March.

So, I really believe our international business should grow faster. It's a strategy of ours to grow it faster. From a standpoint of profit, some international locations are more profitable and some are less profitable. But if you look at the overall profitability of the international business, it would be slightly less than the domestic business. We believe that it should be comparable.

Ron Tucker

I would also add, Jim, over as of you talked about these things we're doing to increase international. And one thing we're also in the process--I think you know what we are doing is beginning of motor manufacturing in China for the Asian market, which will be completed or be in process toward the end of this year.

Jim Foung – Gabelli

Okay. And so, production could begin in '09 for the Chinese market, then?

Ron Tucker

For the Asian market. Maybe a little toward the end of this year, but primarily '09.

Jim Foung – Gabelli

Okay. And can you bring the international business to 25% of total sales? I think that's what you were at one time, right?

John McFarland

No, it's never been 25%. It's been for Baldor and for Reliance Dodge prior – before it's been in the 14%, 15% range. It can be considerably more than the 17% that it currently is and we have internal goals that are--call for it to be a higher amount. Can it eventually be 25%? Absolutely. And as we begin to manufacture more of our products for those markets, in those markets, we'll be able to develop some competitive advantages there, much like we've done in the United States.

Today, we export products to China and to India. But we're limited to -- our ability to export is really kind of limited to our higher value products, niche products. Whereas I hope our strategy long-term would be to manufacture in China, to manufacture perhaps in India, probably in Europe, so that we can attack the standard market there with locally produced products. And then we have many of the same competitive advantages we have in the United States; better quality, faster delivery, more flexibility, that sort of thing.

Jim Foung – Gabelli

Okay, very good. And then, one last question. Can you just speak about the mix in your backlog?

I guess in relationship to margins. Is the mix better than what we've seen in the first quarter, so we can anticipate higher margin going out throughout the year as you ship out the backlog?

John McFarland

Well the mix is a little heavier in motors, so I mean but it's a pretty typical mix. It's a little heavier in motors because the sales growth in motors, as we indicated in the release, was a little bit better than it was in the power transmission products. Plus the motor--motors have a little bit longer cycle than most of the power transmission products. But I wouldn't think that the mix in the backlog will have any big effect on margins either in a positive or a negative way.

Jim Foung – Gabelli

Okay, great. Thank you.

John McFarland

Thank you.

Operator

And our next question will come from Bill Baldwin with Baldwin Anthony Securities.

Bill Baldwin - Baldwin Anthony Securities

Good morning.

John McFarland

Hello, Bill.

Tracy Long

Hey, Bill.

Bill Baldwin - Baldwin Anthony Securities

John, have you in the past given any color as to what the capacity of your Chinese motor manufacturing plant is going to be once it gets up and running as to what that might contribute over time to your top line?

John McFarland

No, we haven't, Bill. But I will tell you this, that today the Chinese market is the largest market for motors in the world. It's slightly larger than the United States market. So whereas the U.S. market is somewhere close to $3 billion I believe in size. Tracy?

Tracy Long

Almost four.

John McFarland

Almost $4 billion in size. The Chinese market is slightly larger than that. So we're going to start up gradually and build into that market. There are a lot of competitors there, but we believe--we've got a lot of competitors here. And we believe we can be competitive in the Chinese market producing our products there. We are producing them for that market and not for the U.S. We don't think that adding six weeks to our delivery, because you ship across the ocean and all those things would be smart. So we'll continue to invest here to supply our local customers a good competitive high quality product, but the market is large in China and we can capture a good amount of business there.

Bill Baldwin - Baldwin Anthony Securities

A couple of follow-on questions, John. Staying with China for a minute, do you have the ability to expand the capacity of your current plants once you get them up and running as that business grows? In other words, do you have additional land around your facility there that you can use for additional production capacity if it's needed over time?

John McFarland

I don't know the answer to that. Do you, Ron?

Ron Tucker

I'm not sure of that. But the current expansion is going to double what we have. So that should be sufficient for the near term. And it didn't seem--I'm not sure whether or not--I think there is some expansion room right around what we have now, but I'm not certain.

Bill Baldwin - Baldwin Anthony Securities

Okay.

John McFarland

And then, it's a big building.

Ron Tucker

Right.

John McFarland

That we're building. What's the size? Do you recall? 200,000, I think, isn't it? 200,000 square feet. It's a big building. I mean, we're going from 100 to 200. So it's a big addition.

Bill Baldwin - Baldwin Anthony Securities

Okay. Yeah, that's a lot of space and a whole lot of equipment.

Last question, John. With the dollar being where it is, are you seeing domestic customers shift some of their buying patterns from imports to domestic manufacturers?

John McFarland

It just burns me up every time I hear people talking about the weak dollar. The dollar is traded in a free market, so the value of the dollar is what people will pay for it. But, the value of the dollar is helping our business. And I think overall, it's hurting it in some ways and it's helping it in some ways. It hurts us from the standpoint, it drives up oil prices, it drives up copper prices, which, of course, affect us.

But it also helps our domestic customers be more competitive internationally, it helps us be more competitive internationally, and it helps--it causes foreign products to be less competitive. And, yes, I believe that we can see some business that we're getting that has been in the past going to foreign suppliers, particularly in some of the smaller motors.

Bill Baldwin - Baldwin Anthony Securities

Thank you very much.

John McFarland

Thank you, Bill.

Operator

Our next question is a follow-up question from Andrea Wirth.

Mike Schneider - Robert W. Baird

Good morning. It's actually Mike Schneider. How are you?

Ron Tucker

Hello, Mike.

John McFarland

Fine, Mike.

Mike Schneider - Robert W. Baird

I'd just like to follow-up on the run rate of savings. Can you give us a rough estimate of where you believe you are in Q1? And then--because by my estimate you're probably at about a $7.5 million run rate. And specifically, what gives you confidence you're going to ramp from that rate to nearly $30 million by year-end?

John McFarland

Well, no, we're not going to give you that number. I will tell you that we're quite confident that we're going to achieve our goals. You'll recall that originally when we made the acquisition, the original press release said we would achieve that $30 million run rate in three years. We later revised that to two years. We have those projects -- we just reviewed this the day before yesterday. We have those projects outlined. We know what we have to do. We have people working on them and we expect to achieve it by the end of the year.

Ron Tucker

And most of them, Mike, are already in place, in progress, and saving the--and getting some of the savings now. So it's not as if, these are all things that have yet to be implemented.

Mike Schneider - Robert W. Baird

Okay. So, are they primarily sourcing related, are they plant floor initiatives? Just any color on where the savings are going to flow?

Ron Tucker

All of the above. One of the things we talked about early on was, we believed there was going to be some savings and we've had--in terms of people. And we've continued to have our hiring phase on. And again, I think we've managed to move that down. In purchasing, I think we've seen the same as we expected. And as I said a little earlier, another area I think we just added to the list, there's a lot of combined service type expense spends that we do between both companies that we're now looking at, which I think has a good opportunity to yield quite a bit of savings.

John mentioned the Power Lean. We've just started that in a couple of the Baldor plants. And again, that's already shown it's really going to be a big benefit. So I think there is lot’s of things going on. Everything's been identified. There's some new things, new things come on the list every day. And we really haven't seen--I don't think we've seen anything other than one item that was not as much as we expected or more.

John McFarland

And let me just add one thing to that; and that is that, we didn't come up with this 30--the estimate was $30 million in synergies, which would imply cost savings and also profit opportunities from selling additional products. And in our $30 million goal, we only had $5 million in there that was related to revenue improvement and that was in the drives business. And it does not look like we're going to realize that as quickly as we expected. We still expect to realize it, but not as quickly as we expected. But we are going to offset that with the other things.

So when we talk about $30 million in synergies, we're really talking primarily about $30 million in savings. And I only say that because I read all these press releases where people talk about synergies and they're all based around unrealistic sales increases and things like that as a result of the combination.

We did not do that. We built ours around a pretty conservative model that was primarily based on savings.

Mike Schneider - Robert W. Baird

Okay. And then--thank you for that. And then, the PT business. I'm curious. You're a leader in that business and you said you were evaluating price increases in that business. Why wouldn't you have gone out with them already given what we see in the spot market for various commodities, and again, given your leadership position there?

John McFarland

Well, we had a price increase in the fourth quarter in the PT business. And so, that price increase was based--was to cover some cost increases we had experienced and some we anticipated. And we're always watching our costs versus selling prices and when we see the need to have a price increase, we'll have a price increase. But we've had a price increase in the PT business as recently as the beginning of the fourth quarter.

Mike Schneider - Robert W. Baird

Okay. Thank you, again.

John McFarland

Okay, Mike.

Operator

And our next question is a follow-up question from Jon Braatz.

Jon Braatz - Kansas City Capital

John, last year you did not own the power transmission business in January. Could Rockwell have maybe juiced the sales in January and such would have affected a little bit the negative 4% comparable sales gain that you saw in the power transmission business in the distributor segment? Could that have influenced it at all?

John McFarland

Yes, Rockwell did own it. The last month they owned it was in January. And I've not really done a real careful analysis of what happened in January. But I know that if we had been selling the business, the last month that we owned it we'd make sure that every single order that was shippable, and probably some that shouldn't be shipped were shipped. And I would--I expect that happened in the case of Rockwell. And in fact, I was reading their release that came out just a few days ago. And they made a mention of the strength last year in businesses that they no longer operate. So I would assume that that happened, yes.

Jon Braatz - Kansas City Capital

So probably true, but no way to quantify it, right?

John McFarland

Well, we could probably figure it out, but we've not--.

Jon Braatz - Kansas City Capital

Okay.

John McFarland

--Made the effort to do so.

Jon Braatz - Kansas City Capital

Okay.

John McFarland

But I do think it's probably true.

Jon Braatz - Kansas City Capital

All right. Thank you.

John McFarland

Thank you, Jon.

Operator

And at this time that appears to be all the time we have for questions. I would like to turn the conference back over to the speakers for any additional or closing remarks.

John McFarland

Okay. Well, thank you everyone, for joining us on the call this morning. Again, I think we're--we're very pleased with our progress in the first quarter and excited about the balance of the year. We continue to believe that we'll have a record year in sales and earnings in 2008, and that we'll be able to achieve our goals, the goals we set for ourselves this year.

At this point, we do not see signs that orders are going to turn negative. We monitor this very, very closely. And if they do turn negative, we're ready to adjust our business to a negative change. But we don't see that at this point. So with that, I'd just like to say thank you very much again for joining us on our call. And we appreciate the confidence you have in Baldor Electric Company.

Operator

That does conclude our teleconference for today. We'd like to thank everyone for your participation and have a wonderful day.

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