Fidelity Low Duration Bond Factor ETF
Q4 2008 Earnings Call Transcript

Published: 16 Mar 2009

[Operator:]

Good morning. My name is Cherice, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter and year end 2008 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. (Operator instructions). Thank you. I would now like to turn the call over to Ms. Kirsten Chapman. You may begin your conference.

[Kirsten Chapman:]

Thank you, Cherice. I would like to thank everyone for joining us today for the Flanders Corporation fourth quarter and year end 2008 results conference call. On the call today with us are Harry Smith, President and Chief Executive Officer, and John Oakley, Chief Financial Officer. If anyone has not yet received the earnings press release, please call Lippert / Heilshorn & Associates at 415-433-3777. We will be able to send you the release, we will also be able to add you to our distribution list or provide additional information about the company. There will be a telephone replay of this call available until March 20 and the dial in instructions are included in the press release. Before I turn the call over to management, let me remind you that this call will contain forward looking statements. Investors should be aware that any forward looking statements are based on assumptions and are subjects to risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company’s filings with the Securities and Exchange Commission. Flanders Corporation does not undertakes any obligation to publicly update or revise any forward looking information, whether as a result of new information, future events or otherwise. Before the company reviews its financials, I would review the definitions for some effects which are not in accordance with generally accepted accounting principles, commonly known as GAAP. EBITDA or EBITDA loss defined as earnings or loss before interest, tax, deposition and amortization and may provide usual measures of operations, I would also like to remind you about regulation FD restrictions. The company’s official spokespeople for the investments community are Harry Smith and John Oakley. It is now my pleasure to introduce to you Harry Smith, president and CEO. Please go ahead, Harry.

[Harry Smith:]

Thank you, Kirsten, and thank you all for joining us today. 2008 was an outstanding year of improvement. I have set extremely high goals for our team to continue to lead innovation in air filtration, while overhauling our operations to increase efficiencies and reduce costs. I'm proud to say we have accomplished that and more. As a result, on a lower revenue base, and including the impact of impairment charge we determined appropriate to the quarter during the fourth quarter, we improved our operating loss significantly by lowering approximately 6 million from 26.7 million in 2007 to 20.7 million in 2008. Most importantly, we entered 2009 as a more effective company. We are well prepared to manage challenges that the current economic situation may create. We are focused on profitable growth and we are positioned to deliver 2009 revenue growth of 8% to 13% over 2008 as well as additional productivity improvements that are expected to result in a profitable EBITDA positive year. So what did we do in 2008 that produced these financial improvements? This has been the theme of my conversations over the past year or so, I will provide a quick summary. We strengthened the management team, and at year-end, we added the final piece to the puzzle by adding an experienced CFO. I'm proud to introduce to you today John Oakley who would provide the detailed financial review in a moment to stop. In addition, we have augmented our research and development capabilities to drive new product productions as well as complex customized solutions for our commercial and industry customers. In total, we have assembled the resources to further our technological leadership to develop new solutions for new trends such as filters made from green material and to manage the leaner operations in a very difficult economy. To improve productivity in 2008, we focused on leveraging our strength and strengthening our weaknesses. We exited non-core businesses and optimized our plans and production. We reduced the total number of facilities from 28 to 13. Consolidation is progressing. We are completely out of debt, we expect our downsized Salt Lake City facility to be up and running shortly, and we expect Bartow to be within 30 days and we continue to evaluate opportunities in Dallas. In addition throughout the consolidation process, we began automating many of our facilities. Regarding procurement, during the year, we improved our payable situation significantly. Now instead of paying extra for credit, we are negotiating favorable terms. In fact, if a vendor does not meet his competitive pricing and quality or delivery agreements, the vendor faces a chargeback. This has been a real cost savings for us and we have implemented same procedures in our logistic section. As a result for the year, we shortened lead times to customers, we improved all time delivery to 99%, and we substantially reduced headcount from 2880 to 3100. This leaves us very well positioned operationally. So where do we stand today and where are we going? We have the largest domestic air filtration company with the broadest product line. We are unique in that we serve the entire gamut. We manufacture everything from a $0.99 fiber glass filter to multimillion dollar containment system, and participated in 60 filtration channels. Boxes and containment, custom air filters, HEPA clean rooms, heavy dampers campus, HVAC wholesale and retail with a niche in the low to midrange priced products. With this morality, we gained procurement, production and service energies, but also carries an extremely diverse customer base we're trying to trump. Follow cyclical companies and hospitals to hazmat facilities, including nuclear, for technology place such as biotech, electronics and semiconductors to government agencies such as the Department of Energy and the Department of Defense as well as the municipalities to our of his consumers including construction hardware and retail chains, in addition, our improved services maintaining and growing our customer list. We begin 2008 on a strong revenue trajectory. We have our annual sales trajectory have been impacted by several factors. First, the strategically chose to focus on our core business. We share our direct sales offices; this improves productivity but resulted in a hit to revenue. Additionally, over the year we lost several retail contracts that lead to improved customer service and delivery, we were able to establish and replace later in the year. Finally, we do believe that the cyclical nature of our commercial and industrial customers, especially capital intensive semiconductor and construction capital have reduce capital spending. No doubt the economic uncertainty during the quarter may have exasperated the situation causing the decision-makers to postpone capital expenditures until 2009. Commercial and industrial have been impacted by recession and orders are down this quarter. However, we are managing the situation to better service, research and development investment and customer offerings periods In 2009, we are already beginning see improvements. Our market demand for both sectors is driven by increases in air quality mandated by law as well as desire to reduce energy Cal's and improve sale and quality of life. Our channels are healthier than ever. In commercial and industrial, we're excited about opportunities in the customer I filtration region and our Globus division. Our Investment in research and development is paying off, it has reinvigorated operations and driven additional business, particularly from more high margin products like custom filters. Also we have some exciting progress relative to the (inaudible) project. As you know, in October 2008, we received a blanket about agreement subcontract relating to MOX, essentially placing us on the deep our food supply list. This day in 2009 we won our inaugural order for glove boxes. We believe we are seeking this contract is validation, capabilities and responses. In the retail businesses, notice our improved stores has won new customers. We're getting some of the big box and large hardware and do-it-yourself chains that the economy and the drop in say the money has significantly increased sales of insulation and I filtration needed today, consumers are parsing on the high-end seeking the basic products and moving down the price point are different operators and for filing this week five, the low to mid range products. We believe we are seeking this contract is validation by, capabilities and response. In the retail businesses, notice our improved stores has won new customers. We are hearing from the big box and large hardware and do it yourself chains that the economy and the drive to save money has significantly increased sales of insulation and air filtration. Today consumers are passing on the high end filters and seeking the basic products moving the price point, so, we’re away from the competitors and to a plainer sweet spot, the low to mid range products. Nonetheless, we are preparing on the task chains in developing our first high-end retail air filter. We will build brand reputation, so when consumers look to buy up, Flanders remains the first choice. Also we are furthering our strong product positioning. We have started energy efficiency and green trends in our talented engineering team is focused on the product development. Also our diverse products and customer base helps us moderate recessionary challenges. In fact, we think that this market can play into our hands as we will would be able to bring in from competitors and begin liquidity problems. I now look forward to turn the call over to the financial review. I would like to welcome our new CFO John Oakley. I'm privileged to have John on board. He had service as chief financial officer of public and private companies and brings extensive finance and operational experience to Flanders. We believe John will be a great asset as we focus on continuing improvement. After John discusses our financials, I will return to summarize, and open up the call for Q&A. John?

[John Oakley:]

I am excited to have joined the Flanders team. I did so because this team has implemented significant operational improvements and now has the company poised to grow the air filtration market. I look forward to working with this new management team to help lead Flanders accomplish the goals Harry had outlined. Today I will review our financial results for the fourth quarter of 2008, fully year 2008, and the balance sheet at year-end as well as provide our outlook for 2009. First, our quarterly financial review. Fourth quarter of 2008 revenue was 49.8 million compared with 57.8 million for the fourth quarter of 2007. During the fourth quarter, retail performed as expected and the decrease in sales reflects the impact from the sales of the direct sales offices and the commercial and industrial sales were impacted by the economy. Fourth quarter of 2008 cost of goods sold were 51.3 million including a 4.3 million write-down for obsolete and damaged inventory. This compares to the fourth quarter of 2007 cost of goods sold of 53.2 million which included a 3.1 million charge for inventory write-down. Operating expenses including goodwill impairment were 19.2 million including a 3.2 million charge of fixed asset impairments and a 2.4 million charge for goodwill impairment compared to 14.6 million in 2007. Including the 9.9 million in impairment charges, the fourth quarter 2008 net loss was 14.3 million or $0.55 per share. This compares to the fourth quarter of 2007 net loss of 4.3 million or $0.17 per share. Fourth-quarter 2000 EBITDA loss was 19.9 million compared to 6 million for the fourth quarter of 2007. For the year ended review, 2008 revenue was 217.3 million as compared to 244.9 million last year reflecting the factors previously reviewed. 2008 cost of goods sold were 190.9 million or 80% of revenue including the aforementioned write-downs. This compares to 213.2 million or 87% of revenue in 2007. Gross margin was 12% compared to 30% last year. We expect this to improve in 2009 based on the operational improvements made throughout 2008. 2008 operating expenses decreased to 47.3 million which included 3.2 million charge for fixed asset impairment and a 2.4 million charge for impairment of goodwill compared to 58.5 million in 2007 which included an 8.1 million in reserves for bad debt, a 2.5 million charge for loss unimpaired fixed assets, and 543,000 in impairment of goodwill. Net loss for 2008 was 12.1 million, including 19.9 million in impairment charges or $0.16 per share compared to 2007 net loss of 19.7 million including 14.2 million in impairments fourth $0.75 per share in 2007. 2008 EBITDA loss improved to 10.7 million to a negative – 2008 ENITDA loss improved 10.7 million to a negative 10.7 million from 18.5 million in 2007 – excuse me we improved by 8 million. Now I will go to review our balance sheet. Through our efforts to improve virtually every metric in our balance sheet in 2008, at December 31, 2008, we had cash and cash equivalents of 404,000 compared to 498,000 a year ago. We believe between cash from operations and access to cash we have the sufficient funds to run the business, particularly as in January 2009, we shed the last of our direct sales offices which used a disproportionate amount of cash to fund our operations. Working capital at year-end was 47.3 million compared to 50.2 million a year ago. We improved inventory turns from 4.8 to 4.0. Days sales outstanding or DSOs were five days as compared to 4.8 days at December 31, 2007. Over the course of the year we reduced net debt by 2.5%. While our covenants were not compliance at December 31, 2008. We’ve worked with our banks to obtain a waiver at December 31. We have also reset the covenants to levels we believe will be achieved will for the company. Now I will review the guidance. For 2009, given current market conditions, including impact from the MOX project, we expect revenue to increase throughout the year in a range of annual revenue to be between 235 million and 246 million representing growth of 30%. Combined with our cost improvements, we expect to be profitable and EBITDA positive. I will now turn the call back over to Harry.

[Harry Smith:]

Thanks John. With that, Kirsten, we will open up the session to Q&A.

[Operator:]

(Operator instructions). Your first question comes from Al Kaschalk with Wedbush Morgan.

[Harry Smith:]

Good morning, Al.

[Al Kaschalk:]

Good morning, Harry. Good morning, John. Welcome aboard.

[John Oakley:]

Thank you.

[Al Kaschalk:]

I was wondering just a real easy one do you have the split of revenue by segment for quarter or for year?

[Harry Smith:]

Yes, I can give you some 3000 foot numbers that are pretty close, Al. If you look at (inaudible) 220, you go and do about 90 in retail and the other piece in commercial and industrial.

[Al Kaschalk:]

And that type of percentage split 40/60, is that something we should think about for 2009 or given some of the dynamics going on, maybe a little bit more retail this year?

[Harry Smith:]

Well, you know, Linda and her group have just done an incredible job. I mean I think your market share and outlook and our sales price is incredibly healthy, and it goes back to what Kevin and his group have done at the service level. You know our retail numbers are phenomenal in the first quarter, that is the only word to use. We have actually kind of shifted the other way. You know John actually numbers has got his numbers excluding MOX, so if you go with those guidance numbers of 235, I think retail has the potential to go do well over $100 million this year. We are currently negotiating with some very large accounts, some business that we lost, that have actually saw us back out, but I think that we’ve moved more towards 50-50 this year from a revenue standpoint and that that market is doing really well for us.

[Al Kaschalk:]

Very good. On the debt covenants, can you – I assume it wasn’t a working capital or leverage issue on the covenant side, and what is the most restrictive covenant under the re-negotiated terms in 2009.

[John Oakley:]

Yes, that was a leverage issue, given the P&L performance and the resulting EBITDA performance. That continues to be the most restrictive covenant going forward but again we have set those levels to where we feel they will be achievable.

[Harry Smith:]

You know we have got a long relationship with B of A guys and we've we have had our moments, but we are in a position right now where we have got banks facing us aggressively among aggressively chasing is. Our relationship with the Bank of America though has been great and continues to be great.

[Al Kaschalk:]

Would you have to record a charge in the quarter for this renegotiation or?

[Harry Smith:]

No. No, we did not.

[John Oakley:]

No, we didn’t.

[Al Kaschalk:]

Okay. Next question I wanted to talk about is Bartow and maybe Harry you can give us a little color on the Dallas opportunity you are talking about? I think Bartow you have already started to ship product, you have it manufactured, do you think by the middle of April you can produce product there or is that going to be later?

[Harry Smith:]

No, they are producing some product there. I mean after the five we actually went with three different facilities which was incredibly inefficient. We had three roof lines, three sets of inventories, that is a pretty large operation for us, the new plant is very well laid out and wholly automated. So I think we will be up and running in entirety in April. Kevin and his group are doing a great job, I'll be there Friday, myself, but it is going to really help us from an efficiency and profitability standpoint once we get back at that facility. Dallas, we're just looking at some additional market opportunities there. We have had some opportunities, picked up some significant business in that market, and you know what you're doing is very optimistically approaching our business throughout and taking a look at it. One of the things that really helps us, we took our overhead down dramatically last year. We took out 15 roof lines, took out the defunct operations, glass operations, expanded wire operations, closed St. Petersburg, took headcount down by 700, and our first quarter sales, we are trying to potentially beat our ‘08 number, depending on how much March sales plays out, so our sales are very, very healthy right now. And part of that is predicated on 99% service level. We have totally re-infused research and development, with a just phenomenal group of people that’s running new products. In fact we've got some new products out in the market that are really helping us out. But we have got our overhead right down where we can price any piece of business in the industry and be profitable at it and one of the challenges for the company was to leverage the economies of scale and not chase a rabbit down the road on verticality. So what we're doing is leveraging our model, being creative, getting efficient, spending money on capitalization, and the days when a low liquidity player could go out and get a couple of pieces of (inaudible). The liquidity has dried up, is planned directly into our hand right now. This market is working for us. Before when we constantly had to compete with those liquidity players who could ship a plate a day and not ship a plate a month, that is going away quickly. And automation is definitely making the play for us as well. We have the capital to be to able to expand, to continue to automate the company, so you're going to continue to see us to better and better. What is amazing to me is I have got two thirds of the people on air filtration business who is competing with at some point, call them and see if we have some interest in looking at our operations. So the great thing about Flanders Corporation is (inaudible) we cover everything from the fiber glass filter to the multimillion dollar containment system. So if you go to market in this business in one channel you cannot and will not survive. If you've got to market in two channels, you will not and cannot survive. The advantages we have specifically now is that we do serve the retail customer and we also serve the wholesale and the mid range customer which allows us to blend a plan and moved the plan up and down when the market moves. The unique piece of the company is our purity piece is where we have traditionally have paid up deals with is very profitable for us. The challenge we had was taking the precision air, and I'm happy to say that January and February results are very positive at precision air. So we're very optimistic.

[Al Kaschalk:]

Great. And is the market opportunity that in Dallas in residential or C&I?

[Harry Smith:]

It would be residential.

[Al Kaschalk:]

Okay. Finally. If I had back or adjust for the on the gross margin side or gross profit side for the write off , I know you've got to talk a lot on a things moving around the but it still seems that the gross margin is a little bit lighter than – gross margin percentage is a lighter than –

[Harry Smith:]

You know what, you're right. We can spend (inaudible) fourth quarter, there's not a whole lot I can do. I can tell you, talk about January and February, January and February were in excess of 20%, better or at 20% in January and February. So what you're going to be taking into account is, I had overhead right pushing 300% when I took this company over. Our overhead rate today is 180% and I believe with the candidates we have in place, we can get down to 150% which again brings all the things in the play to make Flanders Corporation great and we're in the tweaking stage now. I would love to the analogy, I had a great big black hole. We know how to have a hole at all, so when I move 1, 2, 3 or 4% either on price increase or being efficient or taking procurement cost out, it shows up in the big way for us. And it showed up in January and February. I mean we had high hopes that March stays the same and we can get the first quarter out. I have got to get through this call before I can get to that one but January February were at or better than 20% gross margin.

[John Oakley:]

And Al just to put a little bit more color on the fourth quarter, we also saw some increase for sales as a percentage of mix to our lower margin product, so you did see some of that and that was the function of the overall economy as we did see some consumers go down towards the lower priced filters on the retail side, but Harry mentioned in, January and February, we saw them bounce back.

[Al Kaschalk:]

Okay. We really look forward to the Q1 results and thanks for the additional information in the press release today.

[Harry Smith:]

Yes, we're getting better. Thank you for the comment.

[Operator:]

Thank you. Your next question comes from Frank Magdlen with The Robins Group.

[Harry Smith:]

Frank, how are you?

[Frank Magdlen:]

I'm fine, how about yourself?

[Harry Smith:]

You know, I'm hanging in there, man.

[Frank Magdlen:]

You are?

[Harry Smith:]

Yes.

[Frank Magdlen:]

Okay. On the guidance, the 235 to 246, does that include any more MOX or does it include just the MOX has been announced?

[John Oakley:]

The upper end includes just the MOX that have been announced, no additional MOX.

[Harry Smith:]

Right. Frank (inaudible) had enough air pumped into it. We feel good about housing. We went to Salem last week with one of our best rep guys talking about some other opportunities on that project and we have got some big stuff in house with some really big numbers attached to it. But I've (inaudible) including bringing your purchase order in here, I am business as usual. So, we're focused on the core business which is your 335 number comes in. We have some huge opportunities around the works based on the reinvigoration of the company, not an absence sort of level new products that can really throw our number over the top. Again I don't have those orders yet either, so we're being cautiously optimistic in our guidance and feel really good about it.

[Frank Magdlen:]

Okay, and then with the sharing of direct sales offices, about how much revenue was booked through those officers in either 07 or 08?

[Harry Smith:]

Well, great question, Frank. The total revenues in 2007 were 31 million. Last year were 19 million roughly. Now they have about 35, 36% margin. We still retained the piece of that, that means those are now by people who have expertise in those specific operations, okay. Distribution and manufacturing are totally two different animals. So we probably lost 10, $11 million in top line revenue for this year that we have last year. Having said that, it was costing 3.5 million a year to carry them, so what we do was continue to shed it off, place people that are good at distribution, understand distribution, and we came back and focused strictly on building, making and developing air filters. So probably 11 – 10, 11, $12 million.

[Frank Magdlen:]

Okay. And then the operating expenses that you talk about, you brought them down. If you take out the goodwill and the fixed assets impairment, are you saying your SG&A expenses is down to 41.7 million?

[John Oakley:]

Yes. And we've also decreased our run rate about 14% through the year of 2008, but yes, you are right, you are right on the numbers.

[Frank Magdlen:]

Okay, so it is not above the gross profit line?

[John Oakley:]

Right.

[Frank Magdlen:]

All right, thank you.

[Harry Smith:]

All right. Thanks Frank.

[Operator:]

Thank you. Your next question comes from Bill Nasgovitz with Heartland Funds.

[Harry Smith:]

Hi, Bill. How are you? Bill?

[Operator:]

One moment.

[Bill Nasgovitz:]

… margin?

[Harry Smith:]

Hi, Bill.

[Bill Nasgovitz:]

Yes.

[Harry Smith:]

Hi, how are you?

[John Oakley:]

I think you’ve got to start over, Bill.

[Bill Nasgovitz:]

Can you hear me?

[Harry Smith:]

Yes, we got you now.

[Bill Nasgovitz:]

Okay. Well, we have heard this before, Harry, things looked so great, now January, February strong and improved gross margin, when are we going to make money this year? Are we going to have a profitable year, when do you think we're going to turn profitable as a company?

[Harry Smith:]

That's a great and fair question, Bill. We were profitable in the fourth quarter. If you back out the one time charges, operationally profitable. If you take out the inventory we wrote down from taking out 15 roof lines, if you taken out the goodwill that we had written off and getting it out of direct, if you take out the plant equipment, we ascribed to the change in the verticality strategy, if you take out the revaluation of inventory because we took overhead rate from 300% to 1.8%, and then we took a hard look at our reserves, we were operationally profitable in the fourth quarter. And January and February are safe enough to be really good for us. And I would love to give out my EBITDA numbers are January and February, I'm going to wait and see how more it plays out, but it is a very fair question. I understand it, I appreciate it and can tell you that right now things are good. I didn't like having to make the fourth quarter move as well, I took a hard look at where we're at and where we're heading and made a business decision to continue to try to bring the company back just to core competence which was lower some significant charges.

[Bill Nasgovitz:]

When are we going to be profitable?

[Harry Smith:]

We were profitable in the fourth quarter.

[Bill Nasgovitz:]

So you think this quarter is going to be profitable?

[Harry Smith:]

I know this quarter is going to be profitable.

[Bill Nasgovitz:]

And the year is going to be profitable?

[Harry Smith:]

Yes, sir. And we – it's been a battle, Bill, no doubt about it. But again we have made significant change in the operation, sales and marketing piece of the business, and I think you will like what you see this year.

[Bill Nasgovitz:]

Okay, thank you.

[Harry Smith:]

Thanks Bill.

[Operator:]

Thank you. Your next question comes from the line of Rick D'Auteuil with Columbia Management.

[Harry Smith:]

Hi, Rick. How are you?

[Rick D'Auteuil:]

Hi, Harry. It’s Rick D'Auteuil. Just wanted to drill down, you mentioned briefly MOX, the orders that you have already received, what is the timing of those shipments?

[Harry Smith:]

Well, we're looking at the engineering challenges right now, I'm asking for one of the MOX is pretty quick.

[John Oakley:]

It is still more likely than not most of the revenue from that would slide into the third quarter, just the very front of the third quarter. So we would see all the revenues in the third and fourth quarters.

[Rick D'Auteuil:]

Okay. So if you were to land incremental business, is that more likely 2010 business or could there still be room to ship more product this year?

[Harry Smith:]

I think there are certainly opportunities, I would love to ship a lot this year, but it is an engineering challenge, but I do think our guys are pretty close to getting to know their place is very significant.

[John Oakley:]

It is possible there will be more revenue in the fourth quarter this year related to MOX. Again as Harry outlined at the beginning of the call, we don’t have those POs yet, and given the time frame that this project has already taken, just to get to this point, we are going to take the POs when we can get them and continue to work very hard, so any incremental revenue, there is a possibility in the fourth quarter, but much better chance for 2010.

[Rick D'Auteuil:]

Okay. And when you see engineering challenges, is this – are you – is the stuff you have done before, I thought it was, and so what you mean by that I guess?

[Harry Smith:]

(inaudible) this project is fairly technical, and to some degree, some of the stuff is ancient than I think. So it is very complicated. It is right in our wheelhouse, we can do it, but when we got a 80,000 odd piece of stainless, you don’t want to cut it at one time. So, that’s the challenge. And there are lot of complications in this project just from the oversight perspective, the regulatory agencies and whatnot. We have done this work before. We know what we're doing here, but we keep going back through the different regulatory levels, those sorts of things. That is one of the reason this thing dragged out 7 years like it did to begin with, and quite frankly, we thought we were going to see some of the revenue from this PO earlier in the year than it looks like we're going to now, because they tend to come out with another layer, we have to review and they have to review. (inaudible) review. So we're just matching every one of their points and walking through and jumping over each hurdle they present to us, but that is what we mean by that is that it is very complicated from a review perspective on their side because of all the regulatory agencies, but we're confident we can meet their requirements, and that we will bring this project to fruition.

[Rick D'Auteuil:]

Okay, and then having heard just that answer is that – are you pricing it accordingly?

[Harry Smith:]

Yes, yes. (inaudible).

[Harry Smith:]

This stuff is extremely complicated. And again what makes us very unique in the manufacturing and in the non-cyclical side of our company but, yes, it takes tremendous know how, experience, equipment to be able to build this stuff and absolutely, we're going to be profitable on it.

[Rick D'Auteuil:]

Okay, last year you participated on a call with three – with two other potential competitors for this, for MOX. Are you aware of anybody else that has received an order like you have?

[Harry Smith:]

No.

[Rick D'Auteuil:]

Okay. Moving on the C&I business, it sounds like if anything that is the area that you have spoken most cautiously about. You are very upbeat on the retail side and MOX seems to be progressing. So C&I, what are you actually seeing there year-to-date? What are your customers telling you?

[Harry Smith:]

Well, that's piece does not concern me. It really as much as a residential piece, Rick. Obviously, I have plenty of concerns, but it is typically on the C&I side, you are dealing with HVAC technicians who understand that not changing out a filter creates an energy issue, and taking that out of the system creates a unit issue. So, we find there is a little bit of delay there just based on budgetary restrictions, but I think once the weather continues to turn, we will continue to see healthy sales there. We are not – haven’t fallen off a cliff by any way shape, means or form. We have an opportunity to beat our number for last year, which was 49.1 in the first quarter, you know, I know 100% that that is not going to happen but I don't think 50% either. We have an opportunity to do that. So we're seeing healthy sales probably where we like them to be based on everything we have done. No, but I don't think C&I is going to be issue for forwards.

[John Oakley:]

And to bridge earlier comments, and this is what Harry just said, we are seeing some delay in those orders that we would normally see, but you got to remember that a lot of this is clean rooms and those sorts of things. And they had to change out their filters and they will. They can just delay it to a point – delay it to some point and that is what we believe we are marching through now. We have seen some activity. We continue to see activity, but as in the fourth quarter we believe we saw some delays. And we think we will see that turn for us in the future, in the near future.

[Rick D'Auteuil:]

Do you think any – we have heard a lot of companies that are working through inventory, you think that is what the delays are? It is not that they are reducing their usage or increasing their length of time on a filter. It is that they are working out of inventory and watching their cash, and then when they get down to the bare minimum they will come back and order at the same rate they always have.

[Harry Smith:]

Well, I think everybody is really being smart about inventory right now, because inventory is cash. We are doing the same thing. So, I think your – I think all of our customers are taking a hard look at their operations, and I'm glad they are. So I think there is a mix of that and we have had a cold winter across the entire country. We need a little weather change to help us drive some filter sales, but our channels, which is what I want to talk about are extremely healthy. We have got the healthiest sales channels we have ever had in this organization. And we got the most opportunities on the table right now than we have ever had, and it goes back to again building a solid model, delivering with 99% on time delivery, developing new products, which is something that we were not doing, and having a great quality program in place. All those things we are doing right now Rick. So, I feel good about John has got this number excluding – the only thing that is in the MOX number right now is that $5.1 million what we got. So, we feel like there is a lot of opportunity over there. We felt like we needed to approach with caution.

[Rick D'Auteuil:]

Just, okay – going back to the retail business and so let us take the three big names, Lowe’s, Home Depot, and Wal-Mart. My sense having spoken to you several times is that we expect up business, and in some cases significantly up business in each of those. In Lowe’s you didn't even start at the beginning of last year. So you are lapping zeros on part of this year. So that should be a nice comparison. You know, Wal-Mart, you got penalized for poor delivery, and now they are starting to open their eyes again. And Home Depot, I think is treating you better too. So, I guess I am trying to just figure out how you are rolling up to the conservative revenue number that you are rolling up to with everything improving on retail with MOX contributing something that we did last year. How are we getting there?

[Harry Smith:]

Well, Rick, fair question, you know, I'm getting coaxed a little bit on that but, you know, things are great for us. In fact, we just put a total proposal back in front of Wal-Mart, which would be very big for us based on, you know, we lost that business under the past administration, and we have retained the glass business, but, you know, our sales channels are healthy. Our customers are happy. We have got great new products. In fact, we've got some products going into our higher-end segment that are doing really well for us that Linda and her group along with research and development, developed and, you know, our channels are incredibly healthy, just approaching the entire year very cautiously. You know, I told somebody this morning, I wish this is the first quarter call and not a fourth-quarter call, because I have seen January and February. Unfortunately, I haven't seen March. I have seen what we were doing in March, and our bookings are strong. Our downloads were strong. Our plants were busy, and we got new products coming out that are going to have phenomenal margin contribution to them but, in my age and wisdom, I'm just being very cautious about not giving out overzealous guidance that I will have to back out of as I go through the year. And I hope everybody can appreciate and understand that approach.

[Rick D'Auteuil:]

Okay, thanks for the comment.

[Harry Smith:]

Yes, Rick.

[Operator:]

Thank you. Your next question comes from Andrew Schiff with Zirkin-Cutler Investments.

[Harry Smith:]

Hi Andrew.

[Andrew Schiff:]

Hi, how are you doing?

[Harry Smith:]

Good.

[Andrew Schiff:]

Good morning, welcome aboard John.

[John Oakley:]

Thank you very much.

[Andrew Schiff:]

John you spoke very well, but a little quickly, so I kind of lost the cash aspect of your discussion. Could you go over that again?

[John Oakley:]

Sure. The whole balance sheet or just the cash?

[Andrew Schiff:]

I want to sort of work into that. So –

[John Oakley:]

Okay, at December 31st, we had $400,000 of cash compared to $498,000 a year ago, and with the cash we expect to generate from operations this year as well as our access to cash, we do believe that we will able to run our business with what we have available today. Sharing these direct sales offices is significant for the company. They did use a disproportionate amount of cash to fund their business. So that will have a significant impact.

[Andrew Schiff:]

Okay, and then so you've got $45.2 million working capital, could you further define working capital please?

[John Oakley:]

It is strictly current assets less current liabilities is the definition of that or you want some detail insight.

[Andrew Schiff:]

Well, I guess, I'm just wondering and if you touched on this on the previous conference call, I apologize, but you know you received and you could quantify how much you received in insurance proceeds over the last year? And you didn't rebuild a lot of those facilities, I think you have to rebuild a little bit, but I am just wondering where the cash is?

[John Oakley:]

Well, first we reduced net debt by 2.5%. We had $14.4 million in CapEx, and we did actually rebuild significant facilities, if you look at it. We also acquired some facilities in the year, and that was the primary usage of the cash. Not to mention, just the working capital needs in general.

[Andrew Schiff:]

Okay, is there any restriction on this cash because of the covenant violation?

[John Oakley:]

Say that again.

[Andrew Schiff:]

Are there any restrictions on the cash due to the covenant violation?

[Harry Smith:]

Well, we had a restriction on shall repurchase but not on cash usage. Now, if you take a look at the payables piece Andrews, we took a very challenged accounts payable in the company, and it really hurt our ability to negotiate and make commitments to our vendors, and we have taken it down, you know, well over $10 million to $12 million in the last 14, 15 months. So, our focus has been on one is automation, which I think you're going to see showing up very nicely. In fact, we have taken out 700 people in the organization, and most of that was due to updating and ordering and buying new automated equipment. And taken our payables down, so we can negotiate better. And I don't know what the exact percentages are on the procurement side, but we have taken out double-digit cost in our raw material space, and that is being basically predicated by meeting our commitments, and vendors understand that we have sustainability, which was a challenge for us. That is when most of your cash burn went from (inaudible) proceeds went to fix the payables situation and invest in automation.

[John Oakley:]

And to give you a little bit more color, the payables did decrease $8 million in the year. So, we spent a lot of effort working through the payable situation, and be able to produce some of the efficiencies Harry is talking about.

[Andrew Schiff:]

Okay, good luck guys. Keep it up.

[Harry Smith:]

Thank you so much Andrew.

[Operator:]

Thank you. Your next question comes from Michael Weiss with Joslynda Capital.

[John Oakley:]

Michael, Michael.

[Michael Weiss:]

A lot of mine had been answered, but one, can you comment on the competitive situation you were mentioning you know something about some competitors had liquidity issues. I'm just wondering, are you gaining market share or are you seeing some competitors having a backlog due to liquidity?

[Harry Smith:]

Yes, and that is a great question Michael. You know, what we did again, without going through the whole dialogue again, was that, I will continue to say if we ship 99% on time, be competitive and develop new products, the customers will beat a path to our door. We are doing that. Some of our smaller competitors who were low liquidity, what I would call just cheap price competitors are definitely having a struggle, and it is based on the fact that they haven’t invested in IT, and operational figures. They don't have the ability to develop an R&D, and do the things that it takes to run in the current economic market. So, yes, we're gaining market share. And yes, we have had been presented many opportunities to do acquisitions, and you know, I had this conversation about two weeks ago, when (inaudible) were on the phone, well, bite what you can take, and that'll be our strategy. Our strategy will be to continue to deleverage the company, and to continue to build working capital and invest in plant and equipment, where it will bring a return to the shareholders. Now, I think you will continue to see us gain additional market share, and I encourage everybody to go out and do your market checks. I think you will like what you see.

[Michael Weiss:]

The other question is. You said that you are currently the share repurchase program is on hold?

[Harry Smith:]

It is, I think BOA, who has worked with us very well wants to see a couple of clean quarters, which I do too. I think everybody does who has invested in this company. And I think it is a fair request. We're getting ready to give them a great quarter, provided March holds up for us, and things look well for us if we go into our busy season, and we will go back to Bank of America and have that conversation when the time is appropriate.

[Michael Weiss:]

I don’t think – would you be willing to give us what you think the target gross margin or operating margin is under the – once things are back to normal this year.

[Harry Smith:]

Things are – I will never say back to normal. We're totally rebuilt company Michael. I mean, this company is not in any way shape, form or factor what it was. And we put this new management team in place. You know, we have rebuilt our team, we rebuilt our operations, we rebuilt procurement, we rebuilt logistics. We rebuilt sales and marketing. We rebuilt R&D. We took out 15 (inaudible) and nearly 800 people. We got 15 different offices, a defunct media operations, we got out expanded metal operation. We got out of the glass business. We took a gregarious Salt Lake City operation, consolidated it down to DC. We closed truck haul services and moved it to Washington. This is not the same company. In fact, I tell people a lot of time, I would have been better off by a lot of means by starting by ground zero than having back into such an animal. But having said that, we are here today, and January and February were 20%. Our overhead rate is at 1.8%. I think John with his expertise and the team we have put in place could get us down probably to the 155, 160 range this year. And I think you can see gross margins at 21%, 22%, 23% this calendar year.

[Michael Weiss:]

Thank you.

[Harry Smith:]

Thanks Michael.

[Operator:]

Thank you. Your next question comes from Martin Schubert [ph] with European Finance Corporation [ph].

[Harry Smith:]

Hi Harry.

[Martin Schubert:]

Hi Harry. How are you?

[Harry Smith:]

Good. How are you?

[Martin Schubert:]

Good. I spot more enthusiasm in this conference call than I have seen in many, many quarters. Keep it up.

[Harry Smith:]

Thank you so much. I appreciate it.

[Martin Schubert:]

You know, I have been on many.

[Harry Smith:]

I am telling here, you know, I actually in a lot of sense, I talked to Robert this morning. And so desperately want to get to April where I can take Q1 out, but I have to get through this before I can get there Martin, but I appreciate your patient support, and I promise we will get things accounted.

[Martin Schubert:]

Very good, and let me ask one question that I mean most of my questions have been answered already, but one question, what are the contracts that you expect to come out of the MOX program going forward in volume?

[Harry Smith:]

Well, you know, there are some big project around the country and, you know, we're going to participate in all of those projects. In that, when you get in that arena, there are very few people that operate in that space. We are definitely in my opinion the very best and have the most capacity and capabilities to participate in that. And you know what a lot of people don't understand on this side Martin is we can do the glove boxes. We can do the containment, we can do the filters, and we can do the nuclear dampers. Now one thing that we're doing with our (inaudible), and I'm extremely excited about, it has got tremendous opportunity for growth, not only on a revenue side but EBITDA side, and we're going to work to get that facility up to NQA-1 standards. So, we will be one of the few NQA-1 ARM & HAMMER [ph] shops in the entire country. So that is a challenge that John and his team are working on now, but you know with the money that is floating around, which I think (inaudible) directly but I think we will be indirectly a participant on some of the DOD and DOE money in ’09 and ’10.

[Martin Schubert:]

How many competitors for the glove box contracts do you see on each of these contracts?

[Harry Smith:]

You know, when it comes to NQA-1 glove box, there really are few competitors. These things are very complex. It is a niche market. It is difficult to invest in the capital to be able to do this stuff. We got some competitors. You know, nobody that would overly concern me. Our biggest competitor is probably in France, and – but you know, there is some competition here domestically, but these are more or less smaller shops that I've seen but that is not their core niche.

[Martin Schubert:]

Right, and you have been there since the beginning. Let me ask you a delicate question, not to you but for others, the transparency of the stock, how are you going to get that fixed? As you know, the volume on the stock has gone down to 20,000 shares a day, if that, and sort of moved back and forth.

[John Oakley:]

Well, you know, Martin, one of the things that I haven't been doing is that overly promoting the stock. In fact I will tell you I haven't promoted the stock at all.

[Martin Schubert:]

Right.

[John Oakley:]

Now I had to get to a point that I could look at an investor and tell them, I would be able to give them a return. I am there today, and in fact (inaudible). He is doing a great job for us and (inaudible) going and start working on some new investor meetings, in which he will be lining up, say, I will be making the road show here shortly with a great story to tell you. What I did not do, would not do, and refuse to do was to go out and meet with anybody, and ask him to take a position with me until I knew I could give him an equitable return. And I can tell you today, I can give you an equitable return. So you will see the focus of my chair specifically changing to promoting the company on Wall Street, and with a lot of investor relations focus, and I think you'll see a significant change there again in 2009.

[Martin Schubert:]

Very good. Any numbers on guidance for the year?

[Harry Smith:]

Well, John has got me a 2.35 including the MOX project that we have announced now. That includes any new MOX orders that we get. You know, I'm fairly optimistic based on what I see that we can meet that number with some ease and you know, I'm going to hold off giving the EBITDA number right now. I would love to, based on what I saw in January and February, but I have not seen March yet. And what I don't want to do is to get on the first quarter call and have to – we're going to have a positive EBITDA in the quarter. I'm just not quite ready to give that number out yet.

[Martin Schubert:]

Well, Governor Bernanke [ph] was right last night, when he said that the recession ends at the end of ’09, then that should be very promising for the company?

[John Oakley:]

Our business is good, and you know, others to be as fortunate as Flanders Corporation is right now Martin. We truly have an opportunity to beat our first quarter last year on a revenue side, and I think a lot of what you see on the EBITDA side. So, life for us is good. Our plants were busy, the downloads were great. We got new products. Our channels are healthy. Things are good for us.

[Martin Schubert:]

That is great. Keep up the good work.

[Harry Smith:]

Thank you Martin.

[Operator:]

We have a follow-up question from Bill Nasgovitz.

[Harry Smith:]

Hi Bill.

[Operator:]

With Heartland Funds.

[Bill Nasgovitz:]

Okay, Harry taking about to bring a return to shareholders and you are talking about equitable return here. So on your mind and hey, you guys have accomplished a lot in terms of restructuring this company. I am not –

[Harry Smith:]

Bill, listen, I put $3.5 million in it myself. So, you know, I understand the frustration.

[Bill Nasgovitz:]

Well, we like that belief, but what is in your view, we've got $80 some million of stated equity here. What's the equitable return on equity in your view looking out next year or the year after?

[Harry Smith:]

Here is what I think we can do. I think we'll be at 2.35 this year. You know, I think we'll be better than 10% EBITDA, and I think you will see the model that we have in place now have good solid 8% to 10% top line growth with a max bottom line going forward. You know, it has been a total overall. You know I'm tired, I can’t tell you how damn tired I am. That's one of the reasons I went out and found John Oakley. It's because I was running out of breath a little bit, and I needed somebody with his expertise to come in and help me, but you know, we have been – we have rebuilt every piece of this corporation.

[Bill Nasgovitz:]

Harry, I’m not talking about you know, this quarter this year, just what in your mind is – you just picked up a range of percentage. What is an equitable return to shareholders on our shareholders equity in your mind, in the Board’s mind? What is an equitable return on that equity, which has been written down now a number of times, right?

[Harry Smith:]

These are business decisions made by me.

[Bill Nasgovitz:]

I understand that, but what's an equitable return. What's the percentage that you view as equitable to us, all the shareholders?

[John Oakley:]

Yes, that's a question that we are working toward right now frankly setting our targets as we go out 2 to 3 years, 5 years.

[Bill Nasgovitz:]

Well, I think you should certainly and share it with the shareholders.

[John Oakley:]

We will.

[Bill Nasgovitz:]

Because we are hearing a lot of stuff, and it would be nice to have now that we've gone through all those restructuring what the heck are we shooting for, because frankly if we don't hit it, maybe, you know, this big large domestic – largest domestic filtration company should be part of somebody else.

[John Oakley:]

That is very fair. I mean, you know, I understand the pressures and you know, we'll be out on the road here shortly and looking forward to –

[Bill Nasgovitz:]

I really don't care about that. Are we shooting for 5%, 10%. I think you first said.

[John Oakley:]

I think it's 10.

[Harry Smith:]

I think it's 10%. I mean you got to understand we're coming out of 2008. We are just now completing our filings and whatnot on the financial side. We sold just the last direct sales office in January, continued some transactions in February, rebuilding a couple of plants that burned down. So really just now we're getting the – you know, January and February were good months. We are really just now getting the company to where it is going to operate as it goes forward. So we are taking a look at that. You know, that's what –

[Bill Nasgovitz:]

Long-term we were possibly thinking about 10% return on equity is an equitable return for shareholders.

[John Oakley:]

I think that it is better than 10.

[Harry Smith:]

I did it but I think it's a bit premature for us on this call to throw out the speculation.

[Bill Nasgovitz:]

Okay, well perhaps in April. (inaudible).

[John Oakley:]

Let us hit the first quarter Bill. It is a fair request.

[Harry Smith:]

Absolutely.

[Bill Nasgovitz:]

All right, thank you.

[Harry Smith:]

Thanks Bill.

[Operator:]

Thank you. We also have a follow-up question from Frank Magdlen with The Robins Group.

[Harry Smith:]

Okay Frank.

[Frank Magdlen:]

Could you go over the CapEx for ’08, what it was, ‘09 what it will be and what will be used for and what is your maintenance CapEx?

[John Oakley:]

Yes. CapEx in 2008 was $14.4 million, approximately $6 million of that was maintenance. The CapEx in 2009 we're looking approximately it is in the range of $12 million. That's going to be primarily rebuilding the Bartow facility and then some – and then automation in the plants. We've got some new equipment to automate our plate lines, and then also in software cause we are implementing an ERP system right now. Actually it's an upgrade to the existing ERP system and that's where that CapEx would be primarily spent.

[Frank Magdlen:]

Going forward after ‘09 what would we expect is normal capital maintenance items or dollar amount?

[John Oakley:]

Yes. If you look at past ’09, we certainly – I believe that we will see the CapEx comeback down to the $8 million, $9 million range depending upon how the company growth and what we see, to add facility that sort of thing. If any at all, because we have no plans at this point but I would see slightly ahead of depreciation.

[Frank Magdlen:]

And depreciation for ’09.

[John Oakley:]

Depreciation for ‘09 was $6.5 million.

[Harry Smith:]

That number will come down Frank, based on the fourth quarter write-downs.

[Frank Magdlen:]

Okay, I'm sorry. The ’08 CapEx, I mean depreciation was what?

[Harry Smith:]

Depreciation for ‘08 was $6 million.

[Frank Magdlen:]

Okay.

[Harry Smith:]

And then that will come down for some of the write-downs but it will go back up because of the CapEx for computer equipment, which has depreciated over five years, and for ERP systems. So, we expect that to increase over the next couple of years, you know, approximately 6.5, 6-3/4 this year upwards over the next couple of years as we digest the significant CapEx we had made over the last two years, and will make this year, and then we'll see it come back, then we'll see it level out. And as I mentioned we’ll expect to see CapEx, you know, $8 million, $8.5 million perhaps and that will be primarily maintenance out, as far as I can see in 2010 and 2011.

[Frank Magdlen:]

All right, thank you.

[Harry Smith:]

Thanks Frank.

[Operator:]

Thank you. Your next question comes from Jamie Wilen with Wilen Management.

[Harry Smith:]

Hi Jamie, how’re you doing?

[Jamie Wilen:]

Pretty good. Just two quick questions. Shipping cost represents what percentage of your product cost and how would you expect them to be 2009 versus 2008?

[Harry Smith:]

That's a great question. I don't know if John has got the exact number, Jamie. But let me tell you one of the things we've done to impact that. You know, we had – we took out 15 locations last year, and we have what we call inter-company freight, which was an animal that we inherited and we cut that down dramatically where we will move in freight in between our plants. So that has been a significant reduction. Our improved financials have significantly improved our ability to negotiate, but I don't think we've got that number for you.

[Jamie Wilen:]

Yes. What was the inter-company number that is being eliminated?

[Harry Smith:]

It was – we probably eliminated about $400,000 a month in inter-company freight.

[Jamie Wilen:]

Okay, and secondly, as everybody is trying to reduce inventory as you are as well, but we really haven't made any great strides in inventory reduction. Where would you like to end 2009 inventory wise?

[Harry Smith:]

Well, Kevin has got some lofty goals on what he thinks he can turn inventory, and we've also got some unique programs we are putting in place due to our improved payables with our vendors, you know, having those guys carry out some JIT [ph] inventory force. If you allow me the luxury of giving you some more detailed stuff in April, but that is a fair request and we comeback for the first-quarter earnings call. We will be prepared to discuss them in detail.

[Jamie Wilen:]

Okay, then lastly pricing of your products versus the change in raw material costs. So how would you characterize those two costs.

[Harry Smith:]

We have lowered raw material cost dramatically and, you know, we've come under some price pressure from some of our competitors. They were running less than you know, admirable models right now. I mean what you can’t do is because you don't have market shares start from on terms and pricing out, which is what one of our bigger competitors did, who is definitely struggling with the air filtration piece, but you know, our customers are continuing to tell us, shipping at 99% on time, give us a quality product, you know give us good literature and help us drive sales, and we will support you. So, I am done with being the cheap guy in town. If you want to buy cheap air filters, then you are not, I am probably your best place. Now, what I do want to do is be competitive. You know, the difference between me and a lot of these other guys, because I am going to be in business when a lot of these other guys are not. So, what I have challenged the sales group is to be competitive, but you know, for me to invest in plant and equipment, research and development marketing literature so my customers can drive sales, I have got to make a little money. So, we are not chasing the price points all over the market, and I think you will see that in the first quarter.

[Jamie Wilen:]

Okay, and raw material costs how much have they declined, and what has been the biggest decline for you?

[Harry Smith:]

You know, it has just been across the board, actually stainless is going down significantly, and that impact has not showed up, but stainless is down about 35%, 38% in the last 30 days. You know, on our raw material side, I think it is better negotiating. You know, we are still consuming a fair amount of raw materials and from what, I have had a lot of discussions with a lot of our raw material suppliers, and we weren’t a few people that were consuming at a rate that we were consuming. I mean, keep in mind our Q1 number could very well be what our Q1 number was last year, and our largest consumption side, which was precision air is doing incredibly well. So – we have across the board cost reductions, anything from cardboard boxes to tape to polybags.

[John Oakley:]

And we are seeing that reduction somewhere between the 5% and 10% range on individual raw materials.

[Jamie Wilen:]

Okay, very good. Thanks fellows. Appreciate it.

[Harry Smith:]

Thank you Jamie.

[Operator:]

Thank you. There are no further questions. I would now like to turn the call over to Mr. Smith.

[Harry Smith:]

Thanks for everybody’s time today. I appreciate everyone taking the time to be with us. We are very optimistic on 2009, and looking forward to giving our first quarter earnings call and showing exactly what the team has done and accomplished in rebuilding Flanders Corporation. With that we will look forward to talking with everybody in late April. Thanks.

[Operator:]

Ladies and gentlemen thank you for joining today’s fourth quarter and year-end 2008 results conference call. Thank you for your participation. You may now disconnect.