May 4, 2009
Executives
Stephen E. MacAdam - President and Chief Executive Officer William Dries - Senior Vice President and Chief Financial Officer Don Washington - Director, Investor Relations and Corporate Communications
Analysts
Joseph Mondillo - Sidoti & Co. Gary Farber - C.L.
King & Associates Todd Vencil - Davenport & Co. Gregory Macosko - Lord Abbett Rob Young - William Smith & Co.
Operator
Good morning. My name is Tim, and I will be your conference operator today.
At this time I would like to welcome everyone for the EnPro Industries first quarter 2009 results conference call. (Operator Instructions).
Mr. Washington, you may begin your conference.
Don Washington
Good morning everyone and welcome to EnPro Industry’s quarterly earnings conference call. Steve MacAdam, our President and CEO, and Bill Dries, our Senior Vice President and CFO, are here to review the events of the first quarter of 2009 and our financial results for the quarter.
They will also discuss current conditions in our markets and how those affect our expectations for the remainder of this year. Following their comments, as usual, we’ll open the line for a question-and-answer session.
In addition to Steve and Bill, Rick Magee, our General Counsel, is also here if there are any questions directed for him. Before Steve and Bill make their prepared remarks I’d like to remind you that you may hear statements during the course of this call that express the belief, expectation, or intention, as well as those that are not historical facts.
These statements are forward looking and involve a number of risk and uncertainties that may cause actual results and events to differ materially from such forward-looking statements. These risks and uncertainties are referenced in the Safe Harbor statement included in our press release and are described in more detail along with other risks and uncertainties in our filings with the SEC including the Form 10-K for the year ended December 31st, 2008.
We do not undertake to update any forward-looking statements made on this conference call to reflect any changes in management’s expectations or any change in assumptions or circumstances on which such statements are based. This call is also being webcast on enproindustries.com and a replay of the call will be available on the website later today.
If your questions are not answered on the call or if you have any followup questions, you can contact me later at (704) 731-1527, and now, I will turn the call over to Steve.
Stephen E. MacAdam
Good morning everyone. Thanks for joining us today.
I hope you have all had a chance to review our first quarter results; clearly they were disappointing. Many of our end markets deteriorated very quickly through the quarter, which resulted in sharply falling volumes, which in turn put pressure on profits and margins.
The deterioration was not only because of reduced primary demand, but also because of substantial de-stocking of inventories by our customers. We are operating in a difficult environment, but we are comfortable on our direction and we are enthusiastic about our future.
Our near-term objective is to deal with this environment in a realistic and decisive manner that strikes a balance between the need to control cost and the opportunity to invest for the future. Controlling cost is critical and we are addressing the issue head-on.
We’ve reduced employment levels by approximately 8% from the end of last year and by nearly 10% from the peak in the middle of 2008. We’ve shortened work weeks, frozen salaries, and reduced discretionary spending.
We continue to monitor conditions closely and we are prepared to take additional steps should we determinate if they are necessary. We are fortunate to have a group of very experienced and capable managers who are driving our efforts to control and reduce our cost and we are fortunate to already have the benefit of the productivity and efficiency programs that we’ve implemented over the past several years and that are continuing.
Although we are aggressively reducing and controlling cost, we are also prepared to invest where appropriate to assure we can take advantage of opportunities to grow. In the current economy, we expect to encounter many opportunities to use our leading market positions and healthy balance sheet to create an even stronger company.
In this vein we continue to support product development and marketing programs that allow us to gain share and to seek acquisitions that provide us entry into new markets and new technologies. Bill will provide a full review of our first quarter results, but in summary, they reflect the same kinds of conditions that we’ve seen across the board among industrial companies.
With few exceptions our industrial markets are weak and overall our sales were down 24% compared to the first quarter of last year. The engineered products segment, which was mostly impacted by the downturn particularly at GGB which dealt with very weak demand for both automotive and industrial bearings from OEM markets, recorded a loss in the quarter.
Our sealing products segment was better, but was also impacted by significant decline in volume. This segment benefited from the high proportion of its sales that go into the aftermarket applications, which tend to be more profitable and less dependent on general economic conditions.
This segment’s nuclear power generation markets and certain products of its upstream oil and gas market were stable in the quarter. The engine products and services segment continues to be a bright spot.
Fairbanks Morse Engine is executing very well and is turning in strong profits. The predictable backlog of Navy work, consistent aftermarket demand, and the business’s operating performance make it a strong and stable contributor to our results.
As a result of the drop in volumes especially in the engineered product segment we reported an operating loss of about $5.5 million in the quarter and income tax benefit more than offset the loss which led to a net income of $0.16 a share in the quarter. Bill will explain these circumstances that led to the tax benefit.
On a non-GAAP basis our earnings before asbestos related expenses and other selected items were $0.29 per share. As I mentioned, our near-term focus is on controlling our cost, maximizing our operating efficiencies, and tightly managing our cash.
In addition to reducing labor costs, we have initiated projects to improve pricing and sourcing practices and to reduce working capital. We also continue to support product development and marketing efforts so we can gain market share in a weaker economy.
Acquisitions remain an important part of our growth strategy, although our pace is slow. We remain conservative in our approach to managing our balance sheet, but we are actively pursuing attractively priced opportunities such as the one we closed earlier this year when we acquired a small sealing business in the UK.
This is a great tuck-in deal for Garlock and the kind of small acquisitions we’ve been able to do very well over the past few years. The year has gotten off to a slow start, but we are confident we are dealing effectively with the realities of the current market.
We have the financial help to continue to strengthen our competitive position and to look for opportunities to support renewed growth, and we have the commitment in focus of our managers and employees as we look our way through this recession. I will talk more about our outlook at the end call, but now I’ll turn the call over to Bill, for his discussion of our financial performance.
William Dries
The weak market conditions that we began to encounter late in 2008 continued into the first quarter of 2009, and as Steve mentioned, our sales dropped 24% from the first quarter of last year to $216 million. Six points of the drop came from unfavorable foreign exchange rates.
On the positive side, acquisitions made a 2% contribution. Gross margins were 33.7% in the first quarter of this year, almost 3 full points below last year.
The decline in volume in the engineered products segment drove the change. Both the sealing products and engine products and services segments recorded an increase in gross profit margins.
Total SG&A spending was down from the first quarter of last year although as a percent of sales it increased by 6% points to 29.1%. As Steve indicated, we are paying peculiar attention to these expenses and have taken steps to control and reduce spending.
Many of these actions were implemented in stages over the course of the first quarter. We will see their full benefit later in the year when we realize about $2.5 million of the benefit in the first quarter.
On the other hand, we’ve made a conscious decision in a number of cases and maintained spending for sales and marketing and for product development in order to support our goals for gaining market share and to ensure that we are in a strong position when markets begin to recover. After expenses we reported an operating loss of $5.5 million compared to income of $24.7 million last year.
Our tax benefit in the quarter was $11.7 million which exceeded our pre-tax loss of $8.5 million. Our tax rate reflected the benefit of structural and organizational changes we put in place late last year and we will continue to benefit from them going forward.
It also reflected losses incurred in higher tax jurisdictions primarily in the United States and earnings generated in lower tax jurisdictions. Tax rate on our adjusted earnings amounted to 27% in the first quarter, lower than our historical rate of 35% to 37%.
Our tax rate is likely to be volatile throughout 2009 depending on our results. Beyond this year we believe the rate will be more normal and somewhat less volatile.
Of course, the actual rate will depend on a lot of factors including the level and mix of our domestic and foreign earnings. Interest expense was $3.1 million and reflects the new accounting rule for recording interest on convertible debt.
Last year’s expense has been restated to make it comparable. As we mentioned in our last earnings call, the new rule will result in an additional $5 million of non-cash interest expense this year.
After the tax benefit, our net earnings in the first quarter were $3.2 million, which translated to $0.16 per share; that compares to $0.58 a share in the first quarter of 2008. Before asbestos-related expenses and other selected items we earned $0.29 per share in the first quarter compared to $1.04 in the first quarter of last year.
The most significant factor in the decline is lower segment earnings. Operating activity generated cash of about $0.5 million in the quarter compared to $9.4 million in the first quarter of 2008.
EBITDA adjusted for asbestos-related expenses and other selected items were $22 million compared to $48.5 million a year ago. On the other hand, working capital increased by only $8 million this year, significantly less than $23 million increase in the first quarter last year due to the decline in activity level.
As we pointed out before, working capital is at its lowest level at year end. So increases are typical in the first part of the year.
It’s also worth noting that a fair portion of the increase came from Fairbanks Morse where sales volumes have increased and the unit has a strong backlog of orders. Total payments for asbestos settlements and expenses were about $13 million in the quarter compared to about $21 million last year.
Insurance received also declined and net outflows for asbestos were about the same in both quarters. During the first quarter, we spent about $10 million to pay off the last of our industrial revenue bonds that we issued back in 1993.
With the repayment of those bonds, the convertible debentures are only remaining debt outstanding. I should point out here that the new accounting rules I referred to before also resulted in a significant reduction in the carrying value of the convertible debt on our balance sheet.
In terms of available liquidity we have an untapped revolving credit facility of $75 million and at the end of March we had $56 million of cash on hand. Thus between our available liquidity of more than $130 million and our conservative de-leverage balance sheet, we believe that we have ample resources to continue to weather the current economic uncertainties as well as take advantage of attractively priced investment opportunities that may come our way.
Before I go through our segment results, I want to point out that we’ve changed the way we charge certain corporate expenses related to our operating segments to more accurately reflect the direct expenses incurred on their behalf. The 2008 segment results and corporate expenses reported in our earnings release have been adjusted to reflect this change.
Looking at the sealing products segment, sales were down 21% or $27 million, 5% points of the decline attributable to weaker foreign exchange rates. Segment EBITDA was down about $7.5 million and EBITDA margins were down 230 basis points or 17.4%.
Within the segment, aside from certain portions of the upstream oil and gas market and the nuclear power generation market, Garlock markets softened and sales, profits, and profit margins declined. The experience was the same at Stemco where the core heavy-duty truck market is very weak.
New trailer builds are on pace to be down 65% in 2009 compared to 2007, and truck ton miles are on pace to be down 11% in that same period. These numbers are at historical lows and well below the peaks we experienced in the middle of this decade.
In the segment’s two smaller units, sales at Garlock Rubber Technologies declined, although the impact on profitability was tempered due to material cost reductions and improved productivity. Plastomer Technologies reported a loss as the business dealt with effects of the plant consolidation and soft conditions in key markets.
The effects of the economic slowdown are most evident in the results of the engineered product segment. Sales there dropped 34% or $45 million with the largest portion of the decrease coming at GGB Bearing Technology.
Foreign exchange reduced sales by about 7%. Our acquisitions made a contribution of about 3%.
Segment EBITDA dropped to $4 million from about $27 million in the first quarter of 2008 and EBITDA margins for only 4.5%. As I indicated GGB sales were up substantially.
In fact they were only slightly more than half of what they were last year and the first quarter. Its core automotive and industrial markets are primarily driven by OEM activity which has declined significantly as the economy has slowed.
In addition to its OEM exposure, GGB has relatively high fixed cost particularly in its European operations, which account for the majority of its sales. As a result, the large volume decline had a significant impact on its operating results and the business recorded a loss for the first quarter.
Sales were also down in Quincy Compressor and Compressor Products International and both of these businesses reported lower profits and margins as a result of declining volumes and in the case of CPI restructuring cost. In both of the engineered products and sealing products segments we’ve seen customers delay spending as they have used up existing inventories.
Obviously this de-stocking won’t continue indefinitely and we believe it has largely run its course. In the engine products and services segment sales were up about 20% compared to the first quarter of 2008.
While Fairbanks Morse shipped the same number of engines as last year the value of the engines and associated equipment was higher in 2009, and aftermarket sales increased as well. These improvements led to a strong increase in EBITDA and EBITDA margins.
Before I turn the call back to Steve, I’d like to cover the evaluation of goodwill that we mentioned in our earnings release. Like many other companies we are currently working to determine if goodwill has been impaired by the significant downturns we’ve seen in key markets.
In our case, the evaluation relates to about a $110 million of goodwill at GGB and Plastomer Technologies. As our segment results indicate, these businesses have encountered difficult times and the near-term outlooks have deteriorated significantly.
We cannot determine the exact amount of any potential impairment at the current time, but we expect to complete the evaluation in the second quarter. If an impartment charge is necessary, it would be recorded in our second quarter results and would be non-cash in nature.
There are two important points I’d like to make on this issue. One, nearly all of the goodwill dates back to the acquisition of the Glacier Bearings business in 2001 prior to our spin-off from Goodrich.
Two, we have not changed our view on the health or viability of these businesses. We continue to believe that they are fundamentally sound, well positioned in their markets, and ultimately capable of generating strong returns over the long-term.
With that, I’ll turn the call back over to Steve.
Stephen E. MacAdam
The first quarter was clearly a challenge, but as you are well aware we are not alone. Nearly all parts of our economy are struggling and many companies have encountered similar or even worst conditions.
Nevertheless, our goals for EnPro and its future have not changed. We will continue to meet the challenge quickly and decisively and we will remain focused on what we believe is a very bright future.
A month into the second quarter conditions are very similar to those we experienced in the first quarter. We don’t see any evidence of further deterioration in our markets, which is an encouraging time, and as Bill indicated, customers should begin to stabilize the inventories and volume should pick up even if the improvement is slight.
Although it’s too early to say, if this has begun in any meaningful way it could provide some benefit to our results later in the year. Industry forecasts for 2009 indicate economic activity will remain significantly below last year’s level.
In some of our markets, that is likely to mean a decline of 30% or more and in many cases the decline is greater than we anticipated in February when we last updated you on our outlook. The consensus of the forecasts across the industries that we serve suggests that overall activity in our markets will be 18% to 20% below the full year of 2008.
We have already adjusted our cost for these conditions, and we will take additional steps if necessary and if future conditions warrant. The benefits of lower employment levels, shorter work weeks, salary freezes, and cuts in discretionary spending, should become increasingly apparent over the course of the rest of the year.
In addition, we are beginning to benefit from a sourcing initiative we have implemented to control material costs and from other productivity improvements we have put in place. Since our February earnings call we have also modified our restructuring plans and now expect to spend about $5 million on restructuring this year.
By the end of 2009, restructuring combined with our other cost reduction initiatives should enable us to be realizing approximately $30 million in annualized savings. In closing, we are very confident that we are dealing effectively with the current climate.
Our balance sheet gives us the flexibility to take selective advantage of opportunities that may arise, and we are maintaining a strong presence in the marketplace to ensure that we remain market leaders in all of our businesses. Aftermarket activity should continue to provide a relatively stable level of sales at attractive margins.
Although customers may delay or postpone new investment activities, they are likely to continue maintaining and repairing their facilities and equipments. We have clear priorities, we are controlling cost effectively, and we are pursuing opportunities to improve the products we offer and to expand the markets we serve.
Our team of employees is dedicated to our success, and we are confident we will remain healthy in this downturn and emerge from it strong and ready to continue our growth. Thanks for your attention.
I’ll now open the lines for your questions.
Operator
(Operator Instructions). Your first question comes from Joseph Mondillo - Sidoti & Co.
Joseph Mondillo - Sidoti & Co.
First, I just want to start on the restructuring; could you just go into a little more detail on how much restructuring was realized in the first quarter, how much you expect to realize going forward such as the second quarter and further, and you mentioned it’s going to be saving about $30 million annually by year-end, is that correct?
Stephen E. MacAdam
Yes, that’s not only as the result Joe, just a restructuring; that’s basically all inclusive of the cost reduction efforts that we put in place, and the reason the restructuring is lower than what we said in the last call, the restructuring number frankly, is that we have decided to not implement as aggressive steps in France as we were originally anticipating because the cost of negotiating social plans in France proved to be prohibitive. So we are going with an alternative approach that won’t require as much restructuring expense.
William Dries
We’ve total restructuring charges of about $2 million in the first quarter, and as Steve mentioned in his report, we currently estimate something in the neighborhood of $5 million, and the balance of that will be pretty well spread throughout the balance of the year pretty evenly.
Joseph Mondillo - Sidoti & Co.
You’re expecting to realize $30 million by year-end; so most of that will be realized in 2010 or can we expect some to be realized in 2009 as well?
William Dries
Certainly, yes; and many of the actions have been implemented and will continue to be implemented; the $30 million is an annualized run rate.
Joseph Mondillo - Sidoti & Co.
In regards to pension expenses which you talked about on the call, the last call; could you give some detail on how that affected the quarter and how that’s going to be affecting going forward?
William Dries
On the last call we had indicated that we had anticipated our pension expense for the year would about triple. Our pension expense last year was in the neighborhood of $5 million or thereabouts, and we were expecting it to be closer to the $15 million this year, and that’s about what we saw in the first quarter; our total pension expense for the quarter was a little over $4 million and that compared about $1.5 million last year.
Joseph Mondillo - Sidoti & Co.
So, you still expect $15 million for the year?
William Dries
Yes.
Joseph Mondillo - Sidoti & Co.
Steve, maybe you could talk about the engine business, just trying to get a little more visibility on what you guys are seeing; I know it’s a lumpy business quarter to quarter, but maybe you can talk about what you are seeing for this year as a whole, and I know it’s a long-term business, so I don’t know if you can talk about 2010 at all there too?
Stephen E. MacAdam
As we’ve indicated before in the call, the backlog there is pretty long; we don’t have a ton of visibility into 2010, but we’ve got good visibility through 2009. Our backlog has remained relatively flat from where it was at the end of the year.
So, we haven’t seen any decrease there so far. The aftermarket and service portion of that business is healthy and the new engine shipment schedule this year should be fairly consistent with last year in total.
So, we anticipate year-over-year improvements in Fairbanks from last year.
Joseph Mondillo - Sidoti & Co.
Do you have the backlog number at year-end ’08 compared to year-end ’07; do you happen to have that; for the engine business?
Stephen E. MacAdam
The total backlog was about flat at the end of the year, was about $260 million, and the engine business was about $170 million of that; so, it’s about two-thirds of the total company backlog and that’s up about 7% or 8% from the end of the year, to now.
Joseph Mondillo - Sidoti & Co.
What about year-end ’07; do you have that?
Stephen E. MacAdam
No, I don’t have that readily available. My recollection is that it’s in that neighborhood though, and maybe a little lower; we are not looking at that now Joe.
You can follow up with Don if you want and he can provide that.
Operator
Your next question comes from Gary Farber - C.L. King & Associates.
Gary Farber - CL King & Associates
I just had a couple of questions. On this inventory de-stocking, are you saying that it has run its course or would you expect it to continue for another quarter or two?
Stephen E. MacAdam
No. I think Gary, our sense obviously varies across the different end-use segments, but our sense is it has pretty much run its course.
In fact we’ve actually seen in some pockets around the world some reordering levels that we did not experience in Q1.
Gary Farber - CL King & Associates
Can you say in what areas, what type of end markets?
Stephen E. MacAdam
We’ve seen some auto business return in Brazil and in Europe where orders were very, very slow in Q1 into GGB, that would be the one I would mention; and we’ve also seen the aftermarket in the trailer business for seals out of Stemco has stabilized as well and we don’t continue to see that declining now. Again I don’t want to indicate that we are anticipating some kind of sharp rebound in volumes, that’s not the case, but we have seen at least some glimmer of hope that the rate of decline is decreasing; we flattened out in some cases and in some cases actually seen reordering that we haven’t experienced for three or four months.
So, that’s why we feel like it has more or less run its course.
Gary Farber - CL King & Associates
In Europe, I don’t know if you give it out in the Q at all, but is it possible to quantify year-over-year revenue for your company as a whole; how much revenue was down in Europe?
Stephen E. MacAdam
I don’t have the number at hand. Obviously GGB is primarily European, it derives about two-thirds of its sales from Europe and its total revenues are down half of what they were a year ago, but I don’t have the European-America split.
Gary Farber - CL King & Associates
Using like say a baseball analogy, can you talk about what inning you are in if you think of the downturn there in Europe and just broadly for your businesses?
Stephen E. MacAdam
You are speaking specifically of Europe, Gary?
Gary Farber - CL King & Associates
Yes.
Stephen E. MacAdam
It’s tough to say. As you know, we had six straight months of sequential greater than 2% GDP decline right on top of each other in Europe.
So Europe went down very, very dramatically. So if you put a gun to my head, I’d say we are probably in the fourth inning may be; Bill, what’s your view?
William Dries
I think I’d play it safe; I think that’s probably a pretty good assessment.
Gary Farber - CL King & Associates
Then lastly just on the trucking business, you are saying that it’s still weak. I know it seemed like for a while it was just sort of riding the bottom; is it getting weaker than the bottom or still riding the bottom?
Stephen E. MacAdam
I think it’s still riding the bottom. It did weaken a little bit in Q1 particularly the trailer bill.
The aftermarket continues to be obviously more stable and revenue miles are forecast to be down about 11% from two years ago, from ’07. Those are not our forecasts, those are public forecasts, but our OEM businesses is down substantially out of Stemco, but as you know the lion share of that business is aftermarket for us anyway.
Our market share in aftermarket is much higher than OEM.
Gary Farber - CL King & Associates
So, you would say on OEM the trucking, it may have been a little bit worse in the previous bottom, but not that much worse; is that a fair way to look at it?
Stephen E. MacAdam
You mean than where we were. Trucking at its bottom was a historical low and we have now broken that.
Gary Farber - CL King & Associates
Okay, and that’s on the OEM side or the aftermarket side?
Stephen E. MacAdam
The OEM side.
Gary Farber - CL King & Associates
So you have sort of reached a second leg down on the trucking market, you are saying?
Stephen E. MacAdam
Yes, I mean just to give you a feel; I don’t have all the numbers right in front of me. So don’t hold to me it to, but in general perspective when the new trailers and these are trailers and not trucks; trailers is in the lion share of what we sell into.
New trailers that were built at the peak of this cycle which is probably 2006, there were over 250,000 built, and the industry forecasters are basically saying this year it’s going to about 70,000 built. I would say a mid-cycle number would look more like 160,000 to 180,000 or in that neighborhood.
We are well less than half even a mid-cycle number. So, we are pretty comfortable that’s the bottom.
Gary Farber - C.L. King & Associates
Then just lastly on this $30 million savings program, that’s savings that will come out of both the cost of goods sold and SG&A or our side?
Stephen E. MacAdam
That’s correct.
Gary Farber - CL King & Associates
And that’s what you can think about for fiscal ’10 as far being the opportunity really?
Stephen E. MacAdam
The ingoing run rate, I would say.
Operator
Your next question comes from Todd Vencil - Davenport & Co.
Todd Vencil - Davenport & Co.
When you think about your margins, you didn’t mention it; so it’s probably okay, but how is your price cost relationship in the quarter, is that kind of where you want it to be? I mean not in terms of your fixed cost, but in terms of your input.
Stephen E. MacAdam
Yes. In terms of the input we look pretty much okay.
We may have been slightly negative, but I don’t think it was meaningful. Obviously the downward leveraging at a volume would cost us significantly, but in terms of the input and our pricing, there was not a significant difference; so, I think we pretty well kept pace.
Todd Vencil - Davenport & Co.
So, is it fair to say that pretty much all the incline you are seeing in the margins, either year-over-year and where the normalize level ought to be, was just due to that under loading you picked off?
Stephen E. MacAdam
Yes. No question about it.
Todd Vencil - Davenport & Co.
Of that $30 million that you are going to save, how much of that comes back when things pick up again or do you got to keep all those savings?
Stephen E. MacAdam
A fair bit of that savings obviously is direct labor cost. So, you shouldn’t be thinking about it that that stays out when volumes return.
William Dries
It’s probably three quarters of that number, Todd, are headcount related, and as Steve said, a good chunk of that is our direct labor. So, as volumes start to return we’d presumably be bringing those people back.
Todd Vencil - Davenport & Co.
So, maybe you are bringing in the other quarter maybe $7.5 million is sort of structural from the restructure?
Stephen E. MacAdam
Yes, but again those would be more SG&A costs and engineering costs and stuff like that, but we would probably bring back at some point. Obviously we are operating a lot of pretty strong markets in early ’08 and ’07.
Todd Vencil - Davenport & Co.
Final question from me; thinking about opportunity, I should say, you mentioned that and you have been mentioning it; can you give us a little color on how you’d think the opportunity set out there that you are looking at for acquisitions or growth; is it changing, is it improving, what are the opportunities you look like it for in, what should we expect from you guys in terms of timing on any actions; if you can even think about that?
Stephen E. MacAdam
Yes, I would say we feel opportunities increasing. We have continued to maintain our program of building the pipeline and trying to identify strategic acquisitions.
We’ve been quite successful. We have a bunch that is lined up in the pipeline and the challenge to us now is managing the timing of those.
Many of those as we’ve said before are not active processes to sell there where we are essentially the only person and they are talking to the target, and so many time they can be deferred without us risking losing it or risking having someone else’s volume. So, we are trying to manage that; we don’t want to fundamentally affect our pretty nice liquidity position today until we do feel and see a little bit more visibility into the future.
So, we’re being a little bit cautious. We are exploring alternative ways to do deals and continue to grow.
You may have seen the recent press release we had with a Brazilian brake friction company for commercial trucks called Duroline. We’ve entered a partnership with them to be their exclusive agent selling that product in North America; we are very excited about that, but that’s an example of a growth lever that we pulled with our Stemco business that not hugely capital intensive on our part.
So, we are starting to explore other alternatives, I would say to continue to grow without our traditional straight acquisition in order to preserve capital. So I think the expectation should be throughout the year that we would continue to moderately invest in small tuck-in deals that make sense strategically, but I don’t think you will see us doing anything that fundamentally changes our strong liquidity position.
Bill, would you add anything to that summary.
William Dries
No, I don’t think. That’s a good summary.
Operator
Your next question is from Gregory Macosko - Lord Abbett.
Gregory Macosko - Lord Abbett
Could you just talk about your asbestos situation, the number was I guess basically flat. How do you stand with the insurance companies and what should our expectations be on a longer term basis, running through to the future?
Stephen E. MacAdam
Rick Magee, the General Counsel or the person responsible in our company for asbestos, is actually here with us to help us with the asbestos questions. So, I am going to let him comment on that and then I may jump in at the end.
So, Rick why don’t you take a stab at that?
Richard L. Magee
Several quarters ago we began disclosing in our quarterly reports the remaining insurance a year in which we expect to correct it. So not only do we lay out our total remaining insurance, but we lay out a math of how we expect to collect that remaining insurance over the next decade, and so that’s pretty clear.
Our insurance arrangements are in place, there are no disputes about the amounts. We feel good about our insurance carriers and keep our eye on that and their ability to pay.
So, the insurance side we feel like we have got a pretty good handle on it, but as you see from those numbers that’s a declining number and we’ll collect significantly less insurance this year than we did last year, about the same amount next year, and then there is another decline as we run through the remaining insurance. So, our challenge is to continue as we have the lower the total cost for asbestos so that we can try to keep pace with our net outflows and not have a significant up-tick there.
We will probably experience some years when we have an up-tick where the insurance falls off significantly, but our goal is to continue to have the outflows that you’ve been seeing over the last several years to be fairly stable over time and not to have a dramatic increase in the net outflows for asbestos. It’s a challenge and it’s uncertain out there.
We’re in the courtroom a lot, but we are confident that things are going.
Operator
Your next question is from Rob Young - William Smith & Co.
Rob Young - William Smith & Co.
Just a quick question regarding the possible incremental impacts of auto manufacturers going bankrupt; is that going to have a significant impact or is basically the incremental change fairly neutral?
Stephen E. MacAdam
Likely, I think it’s fairly neutral Rob. We supply obviously to tier 1, tier 2 level suppliers, not directly to the ordering folks.
Everybody has been well aware of the stress in the supply chain. We’ve been able to manage our receivables accordingly and appropriately as I think everybody in this supply chain has, and quite frankly, I think that the industry has already curtailed so much capacity, I don’t think the bankruptcy process will really materially impact, it might in a few spotted areas if both GM and Chrysler file, and we may have some bad debts out there, but in terms of actual ongoing volumes, it doesn’t, but even there it’s not a huge number, we’ve looked at that and I don’t think our exposure is dramatic.
Rob Young - William Smith & Co.
So would it be fair to say that from an auto perspective, the volume in that particular application or that particular end market is basically a bottoming phase right now?
Stephen E. MacAdam
I don’t think there is any question about it; I think it has to be. Obviously, as you know, everybody who plays in any industrial space knows there was a ton of inventory washed out of that supply chain from October through the end of the first quarter.
Basically, the plant shut down, it took a hugely extended downtime. Many of the European auto plants were down for the entire month of December and then into January.
So I think that industry has been very focused on trying to lean out that supply change. So, yes, I think we are in a bottoming phase there as well, that’s my sense.
Now, I am not an auto expert by any stretch and keep in mind auto sales is only 8% of our total company sale of which almost all goes through GGB; that’s why GGB has been so affected by this dramatic downturn.
Rob Young - William Smith & Co.
I noticed you talked about some possible lower level acquisitions that don’t seem to be as capital intensive; can you talk a little bit about the specific markets that you maybe going into, the markets that you may see throughout the rest of this year as well as going into 2010?
Stephen E. MacAdam
From an acquisition perspective?
Rob Young - William Smith & Co.
Yes.
Stephen E. MacAdam
We still have goals of trying to grow the sealing products segment. Garlock has a wonderful worldwide footprint and strong brand name and is really the leading static seal company in the world and is recognized as such.
We would like to grow in India; we would like to grow in the UK and in Europe. There is a bunch of add-on product lines and technologies that we’ve got our eye on in that business.
Stemco is another business that we’ve got that we like I mentioned with the friction company that we just did the alliance. We did as you know the Kaiser acquisition, Kaiser Engineering, about a year ago for king pins for commercial vehicles, and that acquisition is going extremely well and fit in.
So that’s another area we would like to grow, and we still feel very positive about our compressor products international business and growing that; we are one of the leading players in the aftermarket there, and although in the near term. There is not as much demand for energy as the worldwide economy slows down, we still think that natural gas excavation and exploration and transmission and whatnot is a good market for us to be in.
So, those are the areas where we are particularly focused?
Rob Young - William Smith & Co.
So, are you recognizing that the spread between what you are willing to pay and what the seller is willing to sell, that spread for the M&A market, is that kind of contracting and hopefully will improve throughout the rest of this year; is that what you are feeling?
Stephen E. MacAdam
Yes.
Operator
That concludes today’s Q&A session. I’ll now turn the call back over to Mr.
Washington.
Don Washington
We thank you all for joining us today, and as I said earlier, if you have any further questions or your questions did not get answered, please call me at (704) 731-1527.
Operator
This concludes today’s conference call. You may now disconnect.