Robbins & Myers, Inc. (RBN)

Q4 2008 Earnings Call

October 10, 2008 10:00 am ET

Executives

Peter Wallace – President & CEO

Christopher Hix – VP & CFO

Analysts

Kevin Maczka - BB&T Capital Markets

Jeff Hammond - KeyBanc Capital Markets

Mike Schneider - Robert W. Baird

Charlie Brady – BMO Capital Markets

Alan Mitrani - Sylvan Lake Asset Management

Analyst – Sandler Capital

Presentation

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2008 Robbins & Myers earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Peter Wallace, President and Chief Executive Officer of Robbins & Myers; you may proceed, sir.

Peter Wallace

Good morning. Again I am Peter Wallace, President and Chief Executive Officer of Robbins & Myers. Christopher Hix, our Chief Financial Officer of the company, is joining me on the call this morning.

We are pleased to provide a break from watching the equity markets fall apart on your computer screens and also provide an update on the fiscal fourth quarter performance for Robbins & Myers.

During the webcast we will provide an update on recent activities and performance in the fourth quarter and discuss the outlook for the new fiscal year. Following my initial comments, Christopher will take you through a more detailed review of our financial performance and then we will open the lines to address your specific concerns.

Slide one is our cautionary statement. You should understand this presentation will contain forward-looking statements. Actual events and results may differ from those described in this presentation due to significant changes in capital expenditures in our primary markets which include chemical processing and pharmaceutical, major changes in the price of oil and gas, changes in foreign currency exchange rates, and more.

We also refer to various non-GAAP measures such as earnings per share excluding special items as we feel they are helpful to investors in assessing our ongoing performance. Please refer to our slide titled Cautionary Statement concerning forward-looking information or additional comments.

On slide two we show some of the highlights for the year. I am pleased to report that each of our three platform businesses had top line growth in the fiscal year due in large part to the primary end markets we serve and our ability to deliver a solid value proposition in our product and service offering.

In addition each of our business groups continued to show improvement. Each business platform delivered higher operating margins in the year and we have continued to develop our sales management and key account relationships. We are focusing on those customers or target accounts that can move the needle; those that will make a real different in our future.

A key account management program will be instrumental in driving new product development, determining the engineering assistance we should provide and determining the overall cost structure we must have in order to provide customer value and decent return to our shareholders.

We have continued to improve our operations with the adoption of lean across the group. While the adoption and acceptance of change is never as fast as I would like, it is clear that our associates are embracing the concept and change is becoming a reality.

And we are able to bring on an additional four manufacturing sites onto a common ERP system. As mentioned earlier these generally do not go without issue and we were no exception. The good news, these are now largely behind us. We have systems that replace old legacy systems and should be in a better position for the upcoming months.

We were successful in releasing value from several manufacturing sites, selling business properties that were idle and were converted into cash. Our most recent and most certainly our future success depends on the management team. I am pleased to say that we have a first class management team that comes from a diverse background with a lot of collective experience.

We are working to bring out the best across the group. In addition we launched an executive development program this year in conjunction with a major university. This will help to refine some of the critical skills and thinking across the group and will enhance our ability to develop the future leaders of Robbins & Myers.

And finally we ended the year with a good pile of cash due to a focus on working capital with $123 million in cash at year end and only $30 million in debt; we are in a great position to take advantage of market opportunities.

Christopher will talk about this in more detail in a few minutes.

In summary the management team is driving a performance culture, one with direction and accountability.

Slide three shows the progression of sales revenue, profit margins and cash flow. Sales in fiscal year 2008 improved 13%, a good portion of the growth coming from foreign currency movement yet the underlying strength in our end markets produced solid real growth year-over-year.

We are especially proud of the improvements in the adjusted EBIT margin percentage. After stripping our restructuring expense and other one-off items such as real estate sales, we have continued to move the adjusted margins up from 7.4% in 2006 to 13.1% in 2007 and now, 15.6% in this last fiscal year.

Equally impressive is the growth in our cash from operations. The finance team has been rigorous concentrating on receivables during this past year. In prior years we delivered most of the cash in the last quarter of the year. This year has been better as we have delivered a more consistent stream of cash.

Cash from operating activities in this most recent period were up to $90 million.

Let’s now move on to slide four and we’ll take a closer look at the fourth quarter of our fiscal year. Great news, we achieved new record levels for sales, EBITDA and earnings per share. Cash flow was good. We delivered cash flow more consistently throughout the year as noted just a few minutes ago and we ended the year with higher backlog then the prior year; good news and bad.

The good news is that our backlog levels support growth in the first half of the new fiscal year. However higher levels of backlog may extend manufacturing lead times which is not always a good thing for our customers.

Our fluid management group has continued to perform well. We are capitalizing on strength in our end markets; most notably the energy sector. The fourth quarter orders for both Romaco and process solutions group show a decline year-over-year.

However the orders since the quarter close have been very strong in both of these business segments. These two groups rely on both project and repeat business so the orders tend to be lumpy in nature.

And during the quarter we also reviewed a number of acquisition targets. We have a process in place to review acquisition targets and quite frankly our disciplined approach has now allowed us to get into the final round.

Just recently we have had contact with a few other companies that look more promising. These are through relationships that support the long-term interests of both companies. We have also been able to divest a few other idle facilities; great news as we sell off assets and reinvest to profitably grow Robbins & Myers.

Moving on to slide five, you can see the progression in orders, sales and backlog. Orders were up 5% year-over-year in the fourth quarter or 4% excluding foreign currency and acquisition impacts. Sales were up 7% on a year-over-year basis or 3% excluding foreign currency and acquisitions.

Backlog is up $44 million from the prior year period. The strength in orders, sales and backlog all support our growth expectations for the first quarter of the new fiscal year.

On slide six you will see that the adjusted EBIT margins have continued to improve rising to 17.7% in the quarter. Diluted earnings per share have also improved significantly. We had benefits during the quarter from tax and land sales and after factoring in the $0.14 benefit from these actions and factoring in a $0.03 gain in the prior year fourth quarter from a property sale, the diluted earnings per share were up 42% from the prior year.

Cash flow is lower in the fourth quarter on a year-over-year basis but the real story is that we again delivered cash throughout the year. Last year the majority of cash came in the final months of the last quarter. This year we delivered cash more consistently throughout the year.

We are pleased with the progress and expect even better results in the next fiscal year. Cash flow from operating activities ended up 38% from the prior year at $90 million.

As you can see as we move on to slide seven, we have continued to move forward. The trailing four quarters of adjusted EBITDA which we define as EBITDA less restructuring costs, and the gains and losses from asset sales has continued to move upwards.

We are proud of this upward trend and of the $137 million in adjusted EBITDA delivered this last year. We had a strong close to the year with $44 million in adjusted EBITDA in this most recent quarter.

Moving on to slide eight, one word sort of sums up performance of our fluid management group in the fourth quarter; fantastic. Orders were extremely strong while orders for industrial products were up on a year-over-year basis the real strength in orders came from the energy markets. On a year-over-year basis orders were up a full 23% in the fourth quarter with very little impact from currency movement.

Sales were up 8% year-over-year which included 2% for currency. The strength in sales was more balanced with industrial pump sales increasing significantly. As mentioned in earlier updates we installed a new ERP system at our industrial pump facilities early in the year that resulted in some scheduling problems on the shop floor.

The good news, we were able to recover some ground in this most recent quarter. This group continues to have exceptional performance. EBIT margins improved 100 basis points to 29.5%. This was due to higher volume, a positive sales mix, and overall good management of pricing, purchasing and other key functions.

The higher performance was made in spite of taking a $2 million charge to reduce asset value of a product line that had higher development costs and while we are all focused on the financial storms around the world, you will recall that Hurricane Ike came through Houston in September.

While this is in the first quarter of the new year, it should be noted that we lost a week of production. The good news is that we did not suffer major damage. We were simply out of power. We have developed plans to make up this shortfall during the year.

Moving on to slide nine, we will discuss the performance of the process solutions group in the fourth quarter, organic orders were down 4% in the period with the falloff due to lower order rates in both Europe and Asia.

From my vantage point the market has held up nicely. The reality is that we lost a couple of large orders that we’d figured we would win. We have a strong value proposition and we are pricing to reflect the value we deliver to our customers.

Our competition won some of these projects and we feel they may regret filling up their shafts with lower margin business. Since the fiscal year ended, we have been successful booking some large and more attractive business in Europe and we have confidence the first quarter will show growth year-over-year.

Sales in the quarter were up 9% as we were able to work down some of the backlog. The Americas and Asia were up and Europe was weaker due to some supplier issues with raw materials as well as some start-up issues with a new ERP system causing some production scheduling delays.

As in the prior year we finished the year on a strong note. Adjusted EBIT margins were 12.8% in the quarter. In addition to the adjusted EBIT shown we also had a $1 million gain from the sale of an unused facility in Brazil. We believe our disciplined approach and project management will allow us to continue to improve margins in the future months.

The group has made a lot of progress with lean, yet we still have a few bottlenecks in the various operations. We are using focused [inaudible] events to move to our future state plan with a clear focus on lead time reduction and improvement in delivery reliability.

Moving on to slide 10 you will see that Romaco had a similar order situation as the process solutions group. Orders in the fourth quarter were down year-on-year yet sales were up 16%. The weakness in orders was driven by our packaging product lines while the processing product line showed improvement.

The outlook for orders remains positive, our business group reports that orders slipped from the fourth quarter into the new year. Those of you that have followed the company understand that Romaco orders can be lumpy in nature with the timing for orders and sales shifting due to customer approvals, factory acceptance tests that are dependant upon customers showing up with material to be tested, and so on.

While there have been some slippages in orders and sales we are not hearing of project cancellations or credit issues causing problems at this time. The business model continues to transition to one based more on engineering capabilities and engineering and application expertise, while we work with supply chain partners to assist in our manufacturing efforts.

The results have been promising with a very strong showing in the fourth quarter of $9 million in adjusted EBIT or close to 18%. This brings the full year operating margin to just below 10%.

Now as we move on to slide 11 you’ll see as we enter the new fiscal year you will find that we will continue to focus on some consistent initiatives from the prior year and also introduce some new areas of focus.

We have continued to make strides in the transformation of the company and have a larger group of employees that are embracing our corporate values including a spirit of continuous improvement. The lean implementation across all areas of the business is gaining traction.

The good news is that we have acceptance and we have a lot more to do that will make us a better company. As we continue to get on our game in the manufacturing side of the business we are now devoting more time working with key customers that can move the needle and make an improvement in our business results.

The key account program will drive our new product development program. We will work with strategic partners to identify their business or production issues and work jointly to improve their productivity.

With our very strong balance sheet and net cash position we are spending more time reviewing acquisition candidates. Our senior team has a good sense of what we want and we have a process in place.

We now have a few opportunities that we are pursuing more aggressively. And as we continue to make progress with our key initiatives we are also taking more time to develop our employees and future leaders.

During the year we launched a successful executive development program and will plan to carry this into the new fiscal year.

Please turn to slide 12, we are fortunate to be working in attractive end markets. The indicators we watch along with our current backlog suggests that growth will continue through the first half of the year. In spite of the turmoil in the financial markets, we are forecasting modest growth in the year ahead.

Our plans call for a modest increase in capital spending due in large part to increasing demand for our fluid management products. Even with oil prices coming down and now hovering between $80 and $90 a barrel, we are optimistic that our fluid management business units will continue to do well with their exposure in the energy sector.

While we have not seen an impact as of now, the credit markets may impact future project activity. We are in unchartered waters at this time yet we continue to be well positioned with our product offering and our end market position.

Now as we turn to slide 13 once again we had a terrific fiscal year. Diluted earnings per share of $2.52 were better then expected due to further improvements in the business model along with ongoing development and improvement in our functional skills.

In addition we also benefited from some special items including the sale of underutilized facilities and prior product line sales. We also had a much lower tax rate in the year due in large part to better business performance in our European locations.

We are now generating a significant profit from Europe and as a result we were able to benefit from tax valuation allowances associated with existing net operating losses. Christopher will provide further comments on our tax position benefits along with a view on our expected tax rate for the fiscal year 2009.

Stripping out the special items you will note that we had core diluted earnings per share of $2.17 which was well ahead of earlier expectations.

Our guidance for the new fiscal year is $2.40 to $2.55 which represents an increase from anywhere from 11% to 18% from the core diluted earnings per share of $2.17 in fiscal 2008.

For the first quarter we providing guidance of $0.45 to $0.50 which represents an increase of 15% to 28% over the core earnings per share of the first quarter in fiscal 2008.

Turning to slide 14 I’d like to summarize a few things, again our primary end markets including oil and gas exploration and recovery, fine chemical and pharmaceutical all remain healthy and should support future growth in spite of the financial issues we are all reading about.

Our cost structure has been reduced and we have a more committed and responsible organization. All businesses are now making positive contributions to the bottom line with all now posted double-digit operating profit margins.

There is still much more to be accomplished with our core businesses. Lean will continue to present new opportunities as everyone begins to embrace continuous improvement as a way of life. Shortened lead times will be a real plus as we look to gain market share.

As we have said before lean is a long journey. We have begun the journey but we are still in the early days with much more to improve. We are purposely ramping up our customer interface using key account management and other training tools.

We will continue to transition as an operating company that is customer focused and market driven. We have a strong balance sheet and will continue to seek out ways to properly deploy funds to profitably grow our business and increase shareholder value.

We are in a great position to pursue modest acquisitions and most importantly I feel that we have assembled a first class management team, a team that is fully capable of taking Robbins & Myers to a new level of performance. The management team understands their job, and is able and willing and wanting to create shareholder value.

I’d like to now turn the presentation over to Christopher so he can take you through a more detailed review of some of the financial performance and following that we’ll come back with some of your questions.

Christopher Hix

Thank you Peter, and please turn to slide 16. Last quarter we talked about the improved awareness of gross margins around Robbins & Myers as well as the key drivers that enable us to capture the benefits from operating leverage, namely, pricing, better contract and project management, lean production improvements, global sourcing, and heightened financial analysis and oversight.

The company again demonstrated these benefits in the fourth quarter growing gross margins year-over-year by 210 basis points to 37%. The company’s EBIT grew nicely as well from $36.3 million to $41.1 million.

Both periods presented include gains from the sale of properties that were freed up as we continue to simplify our business. Stripping out these special items, adjusted EBIT or operating profit increased 15% and adjusted EBIT or operating margins expanded 80 basis points to 17.7%.

We think that’s an all time record but for a company that’s over 100 years old, well; we’re never going to be certain about that.

The margin performance is especially satisfying given that we took a $2 million charge in this year’s fourth quarter to right-size an asset on FMG’s books as Peter described earlier.

Without that charge our year-over-year flow-through was 35%, right in the range of 30% plus that we expect from each of our businesses.

Earlier Peter mentioned that our $0.88 of EPS in the quarter included $0.02 from a property sale and $0.12 from NOLs, well let me take a minute to explain about those NOLs.

In the past when some of our legal entities, primarily in Germany and Italy were generating consistent losses, we could not recognize the tax benefit of those losses. That’s one of the primary reasons for our historically high effective tax rate.

Now that those entities are consistently demonstrating profitability, we were required to go back in time and recognize the benefit of those earlier losses producing the gain that we’ve reflected in the numbers.

Let’s turn to slide 17 so you can see the phasing of these NOLs and other items in our results throughout 2008. The sale gains amounted to $0.02 in the second quarter, $0.14 in the third quarter and of course that came from the release of the escrow from the 2006 sales of [Hop and Latice] product lines within Romaco. And then $0.02 in the fourth quarter.

So that’s a total of $0.18 for the year. The NOLs were not significant until the fourth quarter and for the entire year amounted to $0.17. So we earned $2.52 in 2008 on a GAAP basis but core earnings were actually the $2.17 Peter talked about earlier.

I should mention that we do not expect any EPS benefit from NOLs or property sales in 2009 and our tax rate excluding NOL effects is expected to remain in the mid-30s as we go from 2008 into 2009.

On slide 18 we provide an update of our working capital. Current assets excluding cash and current liabilities excluding debt both showed year-over-year increases reflecting the company’s growth. If you look at net working capital velocity as a function of sales, we ended the year at an impressive 10.5%; about the same level as last year.

But last year had considerable heroics in the fourth quarter whereas this year we demonstrated a nice progression throughout the year as also reflected in our cash flow performance on the next slide, slide 19.

On slide 19 you will note that we generated higher and more ratable cash flow in 2008 then we did in 2007. Working capital and cash flow awareness are becoming ingrained throughout our global enterprise and the skills to improve these critical areas are developing.

The practice of fourth quarter heroics is being replaced with a culture of continuous improvement. In 2009 our global finance and operating teams will continue to take the battle to receivables and inventory and we expect to make progress.

I’ll wrap up with slide 20 and a few comments about our capital structure, we have made tremendous progress over the past few years, building our capabilities, improving our operations and restarting our growth programs.

One of the results of our success is a company with significant cash balances and very little debt; that’s certainly a big change from just a few years ago.

In the current turbulent financial environment our balance sheet gives us a competitive advantage allowing us to continue our capital investments, to fund growth initiatives, and to pursue acquisitions. We’re entering fiscal 2009 with a strong and secure balance sheet.

That concludes my remarks.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Kevin Maczka - BB&T Capital Markets

Kevin Maczka - BB&T Capital Markets

I wanted to start first with the guidance, you gave an EPS guidance and I’m hoping you can give us more color about how you get there because it sounds like from your comments obviously with the economy and foreign exchange rates there are things that could cause that view to change as we go through time, but can you drill down maybe into the business units and talk about how we get to that guidance and maybe what a scenario would be that would cause you to either miss or exceed that guidance.

Peter Wallace

I’d say across all the various business units we’re still forecasting some positive real growth. We factor in price, price generally used to go ahead and counter any kind of inflationary costs which we both know are bouncing around right now. We’re seeing a little bit of a pullback in some of the commodities which might actually help us in some of our cost structure as we go forward.

But we are showing growth in each one of the business segments. We also are anticipating to pull back and ship some of the backlog that we’ve got in our business units now. So we’re forecasting sales to be a little bit stronger then orders as we get into this next fiscal year.

When you take a look at the various groups, energy continues to be very strong. Those that have been watching the price of oil is down at $90 the other day, and this morning it started up with a pull back once again around the $80 level. All of that can certainly have an impact on some of the drilling contractors and what kind of expenditures they’re planning to put in place.

Up to this point in time we’ve been spared from any kind of a pullback due to the nature of our product line. We’re generally involved with drilling rigs but more specifically involved with directional and horizontal drilling activities as it relates to some of the more difficult to find oil and gas recoveries.

So all of that continues to look very encouraging for us as seen by the very strong quarter increase on a year-over-year basis for the fluid management group. When we take a look at the other sector, I’d say the mixing portion of our process solutions group continues to look very encouraging. Order rates have been strong. We’re still forecasting some pretty good growth in there.

The activity in our other part of the business which is glass-lined reactors has been pretty strong. There have been a lot of very large projects, I have to report as I mentioned in my earlier comments that we have not won on all of those accounts. We’re trying to send some strong signals through the marketplace as to where we think pricing should be, so we lost a few of those orders.

The good news is that there are still other very good projects out there and we were able to capitalize and win on those other ones that were just recently [let] following our August close in the month of September. So we do have the confidence coming forward in this first quarter at least on the order front.

When we take a look at Romaco, similar situation. Since the year end closed we were fortunate we booked some very large orders coming in for a number of our product lines that gives us confidence again for the orders coming into this first quarter.

We’re still fairly bullish out there. I’d say we’re all getting a little bit skittish if you will. We come in in the morning, turn on the computer screens and you start to panic once again. At this point in time we haven’t seen our customers panic. We poll our customers on a regular basis. We take a look at projects, we take a look at any kind of cancellations or push outs and right now we’re encouraged.

Having said that, we’re all big boys, we read the marketplace and who knows what the world brings us beyond six months from now. The first six months looks to be encouraging though. I will say the one thing we have done, on the foreign currency rates, we’ve pulled back some of our initial thinking due to some of the changes principally with the dollar/euro exchange rate difference.

Our initial plans were established closer to our year end jumping off point, which is around $1.47 to the euro and we’ve pulled back from that and we’ve factored some of that into the guidance that we put out for you.

Kevin Maczka - BB&T Capital Markets

What was the EPS benefit in the quarter and for the full year?

Christopher Hix

For the full year on a translation basis I want to say that the benefit was about maybe $0.07 or so. For our company the, and that’s on a full year basis, for our company about every 1% of currency movement for the basket of currencies relative to the dollar that we deal with and that’s namely the euro, the pound Sterling, and the Canadian dollar, for every 1% its about a $0.01 effect on our earnings per share.

Kevin Maczka - BB&T Capital Markets

I think if I go back to last quarter’s conference call you talked a bit about some of the increased price competition in process solutions and you addressed that a bit this morning as well, I think you also mentioned in Asia there was a bit of a slowdown in large project bid activity, can you just comment on what you’re seeing there now?

Peter Wallace

I’d say that that trend is carried on a little bit and principally what that would be is very large projects in Asia that might generally tend to be supplied from our Western operations where they’re looking for higher quality then is generally found even from our facilities in Asia or competitive facilities in Asia.

I’d say those inquiries have still been a little bit lower. Countering that we’ve had some pretty good projects taking place in Europe so it just seems like things have moved around a little bit. Some of that might be Asia trying to digest some of the very large capital expenditures that were put in place over the course of the last couple of years. I’d say the comments that I had at the last quarter are probably similar in nature. I’m still a little bit concerned about where the future will be with chemical but it always tends to be maybe six months out because we tend to have enough activity that gives me confidence for the current six months.

Kevin Maczka - BB&T Capital Markets

With the cash position you’ve got now and still acquisition pricing apparently not to your liking, any thoughts about other uses of that cash, maybe a buyback at these levels?

Peter Wallace

We actually just had a Board meeting and we kicked around some of these. One, we’ve identified a few other acquisitions that could be very attractive for us and pricing appears to be more inline with what would be suitable for us.

So we might actually see some progress with some of these acquisitions. A lot of things to be factored in there and all of that but that would be one use of cash. Beyond that we are taking a look at our cash forecast and everything else and certainly with the equity valuations these days that is something that we’re talking more about, getting in a possibly taking a look at a stock buyback.

Nothing to announce now but that’s certainly something that we’re reviewing.

Operator

Your next question comes from the line of Jeff Hammond - KeyBanc Capital Markets

Jeff Hammond - KeyBanc Capital Markets

You talked specifically and I think qualitatively on this but in the energy business, if the order trends you saw in the fourth quarter continued into September and just as you reach out to the customers a little closer, what are they saying about a lot of the commentary from the EMP companies about CapEx cuts?

Peter Wallace

I just got some recent updates in the last couple of days and quite honestly no change from the direction we were heading in with this last quarter. So things continue to look extremely positive. Markets are jumping all over the place but our customers are still buying. Nobody is pushing things out so we again remain very bullish with all of that.

Jeff Hammond - KeyBanc Capital Markets

Any sense of how inventories are at your customers? I know from time to time there tend to be inventory adjustments.

Peter Wallace

I think a lot of the inventory adjustment that we cited maybe a couple of quarters ago I think that’s all worked out of our system or out of our customers’ system. Orders have recovered nicely. The one that was impacting us earlier was one of our large customers that did a lot of activity throughout Europe and Middle East and impacted some of our Belgium operations. All of those order rates have recovered nicely so things look like they’re back on track and inventory being managed or at least in line with what our customers are trying to attain.

Jeff Hammond - KeyBanc Capital Markets

Where are you pegging the euro/dollar exchange within your guidance?

Christopher Hix

As we indicated we initially had started off with the euro at 147 and we know that there’s been some weakening of that, subsequent to that, so the current guidance actually reflects the more recent FX rate for the euro so again that’s going to be more in the 135 t0 140 range.

Jeff Hammond - KeyBanc Capital Markets

Awhile back and certainly the stock price was a lot higher, one of your insiders filed an S3. I know they control the process more then you but any insight as to how they might be thinking, the same or differently about that. It would seem that given where the stock has gone that might be off the table.

Peter Wallace

This is not a process that we manage. I have had feedback and the feedback that I’ve got is that with the current valuations I don’t think you’re going to see anything being implemented against that S3 for some time. A lot of it really was a situation where they were going to try to advantage of some tax situations. I think the drop in valuation took care of the tax problem.

Jeff Hammond - KeyBanc Capital Markets

I think you said in your remarks visibility for the second half is cloudy just given the credit dynamics, etc. can you help me understand better how you’ve incorporated that or built that into your guidance.

Peter Wallace

Actually we have not factored too much of it into the guidance. Our customers continue to be strong. We have not had any indications of the major pullbacks. A lot of our goods go in with other large capital and those projects have been approved and running forward. So we’re not really picking up signals in our markets. We may be unique with the end market exposure that we’re got but everything we’re picking up is that for instance chemical where I’ve probably got some of my most concern; it still looks like 2009 is going to be a good year.

Beyond that, that’s where we just get a little more concerned as to what the future would bring beyond 2009.

Operator

Your next question comes from the line of Mike Schneider - Robert W. Baird

Mike Schneider - Robert W. Baird

Regarding the cash management, cash deployment if you look at the stock today you’re basically trading at 5x trailing EBITDA and you mentioned that M&A multiples are coming down but not as much as you would hope, can you buy a business today as high quality as yours for 5x EBITDA or less?

Peter Wallace

I don’t think we can. I don’t know if our valuations will necessarily stay at 5x though.

Mike Schneider - Robert W. Baird

What about turning this shareholder filing around and doing a one-time slug purchase from the family. That would seem to resolve both issues at once.

Peter Wallace

Yes, expect the family is probably looking for valuations higher then what we’re currently trading at.

Mike Schneider - Robert W. Baird

On the project side, specific to chemical, pharma, then energy, have you seen just in the last 30-45 days any projects of size that were cancelled, delayed or even paused as a result of the credit markets?

Peter Wallace

I just checked on this and the answer was no. We haven’t seen any pullback on that.

Mike Schneider - Robert W. Baird

Your assumptions in the guidance for energy are that rig counts roughly stay the same or even grow a bit in fiscal 2009 or are you assuming that you take share in a down market to grow?

Peter Wallace

One I’d say the forecast that people have had is that rig counts would slightly grow, again with oil bouncing around, all those things can be a little bit up in the air. But we’re not counting on huge growth in rig counts but what’s more important is the way that we operate with those rig counts, meaning when you get into drilling with directional and horizontal drilling, that is taking market share in the drilling activity world and that’s where we tend to play.

So even if drilling rig count is constant we should do better then others because of the trend that’s taking place underneath.

Mike Schneider - Robert W. Baird

In fluid management the backlog today is, call it two months of visibility at least on the dollar amount, but how far out do those orders actually stretch or do you ship that entire backlog this quarter?

Peter Wallace

We typically have very few orders that would go out a long time. We had one that we had mentioned a while back earlier in the year when we had tough year-on-year comparison and that was because the prior year a customer had placed in a multi million order, that’s very unusual for us.

At best we would have contracts with major customers who had call-offs against that contract so typically what you’re going to find is we will ship what we have on a regular basis.

Mike Schneider - Robert W. Baird

In fluid management again, the 15% growth this quarter, there’s some currency in there, I’m just curious are units actually still positive in fluid management or is that mainly price and currency driving the revenue growth?

Peter Wallace

My understanding is that we’re got real growth taking place in there.

Mike Schneider - Robert W. Baird

Just on industrial pumps now, you mentioned that the ERP system delayed shipments in prior quarters and you played some catch-up this quarter do you have any idea how much that actually benefited the quarter and what we should expect in Q1 once you normalize those shipping patterns?

Peter Wallace

I’d say it was probably the difference between Q3 and Q4, rough cut we might have had an extra $1 million or so shipped as a result of catching up in there.

Mike Schneider - Robert W. Baird

On the $2 million charge in fluid management, I guess I’m still unclear as to what actually the $2 million in expense was for and why this quarter versus spreading it out over the last three, any color would be helpful.

Christopher Hix

As you know we’ve reinvigorated a lot of the growth programs throughout the company over the last four years and they’re not all necessarily going to hit exactly the way you’d expect, so this charge relates to a specific product line that we’ve developed and there’s been some recent evidence that the commercialization is slower then what we would have expected. That caused us to take a fresh look at the carrying value of that asset and as a result of that analysis we chose to write the value of the asset down by $2 million.

Mike Schneider - Robert W. Baird

Strategically now as you look at your cost equation, the market’s telling us we’re in a recession or headed into one shortly, what have you done internally in terms of headcount, cost reduction initiatives, anything to prepare for at least what the market’s telling us is coming?

Peter Wallace

We’re obviously monitoring the whole environment quite actively right now. We’re taking a closer look at the leading indicators, we’re taking a look at the inquiry rates, we’re taking a look at the tracking of 12 month moving totals and averages and indexes that we tend to follow all of that to give us a little bit of a heads up warning as to when things are coming our way.

In addition to that, like everybody that’s been through these in the past, we’ve pulled together our contingency plans and we’ve pulled together plans for if volume is going to be [off] five percent, if volume is going to be [off] 10%, how do we still go ahead and deliver the profit expectations?

Good news is we do have a pretty experienced team. They’ve been through these cycles in the past so its not surprise, you get into times like this you go to your contingency file, you pull things out, you start getting ready. We’re doing all of that.

Operator

Your next question comes from the line of Charlie Brady – BMO Capital Markets

Charlie Brady – BMO Capital Markets

Could you talk a bit about CapEx going forward in 2009 and I guess really more specifically where you’re at on capacity right now and to what extent you might have to invest in more capacity whether its brick and mortar or just new machining over the next 12 months and given the current environment we’re in, has that thought process changed from where you were thinking a couple of months ago?

Peter Wallace

First off, we in our initial plan had CapEx going up modestly. This last year we spent close to $22-$23 million in CapEx. This upcoming year we had put in the plan about $25-$30 million. A fair chunk of that was really associated with our fluid management group where the continued strength that we’re experiencing with both industrial pumps as well as our energy business really requires us to bring in some critical equipment.

Having said all of that we do have an opportunity to pullback from that plan number based on how the year unfolds. So we’ll be a little bit cautious. We will not spend it. Day one we’ll see how everything comes together. Depending on how everything unfolds we can cut back and still make our plans and everything else.

The biggest part of the CapEx is in critical equipment. We’re also working with other suppliers in a big way so that alleviates some of the need to put in too much CapEx. As far as brick and mortar we don’t have any plans in place at this point to go ahead and put in brick and mortar. So its just equipment related.

Operator

Your next question comes from the line of Alan Mitrani - Sylvan Lake Asset Management

Alan Mitrani - Sylvan Lake Asset Management

Where’s your cash? What do you invest in?

Christopher Hix

Our cash is typically going to be in overnight deposits, government backed and repos and the highest quality commercial paper.

Alan Mitrani - Sylvan Lake Asset Management

Have you had any issues with liquidity at all yet?

Christopher Hix

None, and obviously we look at that every day.

Alan Mitrani - Sylvan Lake Asset Management

What about your bank line? I seem to remember that it expires sometime in the next six to 12 months?

Christopher Hix

No, that’s not correct. Actually we’re not even fully two years into our five year bank agreement.

Alan Mitrani - Sylvan Lake Asset Management

So you have plenty of time on the bank line?

Christopher Hix

That’s correct. We have over three years remaining.

Alan Mitrani - Sylvan Lake Asset Management

What about, most of us would have thought you would have made an acquisition a year or two ago, I guess whether its discipline or luck or just whatever it is getting you organized in terms of getting the company at the right spot where you want it in terms of lean and getting everybody on the same system, you seem to be in a fortunate position. Are you willing to go and lever the company at this point knowing that business is likely going to scale down? Maybe just give us a sense of what the new leverage thoughts are as opposed to what the old leverage thoughts were a year or two ago as you were fixing the company up.

Peter Wallace

I’d say that we went from a very low leverage three years ago to all of a sudden a year ago feeling pretty good about leverage to right now pulling in our horns quite a bit. You’ll find us willing to go out with a modest acquisitions. We certainly have cash to use and we’ve got the revolver that Christopher just mentioned, we’ve got $150 million on the revolver and we’ll probably stay within those confines for the immediate near-term.

Alan Mitrani - Sylvan Lake Asset Management

I realize you have your contingency plans, but you’re not in a hiring freeze yet are you?

Peter Wallace

We’re not in a hiring freeze although I’d say that the plans which continue to look very encouraging having us wanting to build out on our customer interface activities, application engineering, some of the new product development, and those will be some things that unfortunately as you get into these times we’ll take a good hard look just to make sure we’re doing the right types of things.

We don’t want to cut off the future pipeline of new products and yet we’re all smart business guys that have been around, we know that certain things can be delayed or deferred if necessary when you get into more difficult periods.

Alan Mitrani - Sylvan Lake Asset Management

Do you have any more one-off assets, physical plants, things like that that you’re thinking of selling this coming year and does your guidance incorporate any of these one-time items or is this just a pure operational guidance?

Christopher Hix

Actually in my comments I mentioned that we do not have any expectations for property sales or NOL benefits in either one of those two in 2009. Having said that there are going to be other opportunities as we continue to simplify the business longer term, but we don’t have anything that’s currently on the radar and nothing is included in the guidance.

Operator

Your final question comes from the line of Analyst – Sandler Capital

Analyst – Sandler Capital

On the process solutions group and the Romaco group, you said that you saw a pick up in September, I was hoping to get a little more color behind that, what you saw, what changed there, and what caused last quarter to be a little bit weaker and then what caused that pick up?

Peter Wallace

These are just more project related and whether or not you’re winning on the projects. We’re actively pursuing a number in each one of these businesses on a regular basis. We’ve put our odds up against winning. Some we feel better about then others. Q3 we ended up losing some on the process solution side, did not really have any real noteworthy ones we lost on Romaco.

Having said that we turned around and right after the year end we’ve got a lot of other projects coming up that we had in our pipeline and then those came on through. So a lot of it really is just pure timing on some of the project activity.

As I mentioned before from my vantage point, we still see a fair amount of activity, a lot of projects still being let, we’re not winning all of them. We’re trying to position and send signals and do everything else as we manage the business but there’s still a fair amount of project activity out there.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Peter Wallace

The financial markets will undoubtedly make this year a little bit more interesting and more challenging then prior periods. Again our management team is experienced, been through difficult times before and our team is really focused on delivering the business plan in spite of some of these obstacles.

Thank you for joining us and on behalf of both Christopher and myself and the entire team at Robbins & Myers, we appreciate your interest in our company and we look forward to providing an update on our first quarter performance which is now scheduled in early January.

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