Baird 37th Industrial Conference to Feature 92 Companies: Senior Industrial Research Analyst Rob McCarthy Shares Outlook for Sector

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Baird's Equity Research will host its 37th Industrial Conference at the Four Seasons on November 6 and 7. One of the largest and longest running conferences dedicated to the industrial sector, Baird anticipates more than 1,200 to attend, including institutional and private equity investors, and 91 leading public companies to present during the two-day event.

Institutional investors view our conference as an excellent opportunity to interact with key industrial executives and get the latest information on what's happening in the industrial sector. The event also provides a forum for investors to immerse themselves in key issues affecting the economy and understand how companies are responding.

    Research Director Robert Venable says, "Institutional investors view our conference as an excellent opportunity to interact with key industrial executives and get the latest information on what's happening in the industrial sector. The event also provides a forum for investors to immerse themselves in key issues affecting the economy and understand how companies are responding."

Q&A with Senior Industrial Research Analyst Rob McCarthy

As a preview to the industrial conference, Baird spoke with senior industrial research analyst Robert McCarthy to get his outlook for the industrial sector.

Can you highlight some of the major factors affecting industrial companies?

Probably the biggest direct or indirect issue for industrial companies right now is the drop in new home construction and the potential impact on the rest of the economy. Business has been robust for most industrial companies. But now, we see some companies struggling with how to manage capacity at this point in the economic cycle. The impact of China and, to a lesser degree, India on global growth is also a focal point. High commodity prices and the competitive landscape are challenging these companies to manage rising costs versus customers' growing resistance to price increases.

Can you give me an example of how some of these companies are addressing these issues?

Caterpillar seems to have an excellent grasp of the changing global environment and is aggressively investing in and allocating resources to the developing world. We recently hosted a field trip to China that included a visit to Caterpillar's flagship operations there. We learned that Caterpillar's goal is to grow from $1 billion to $4 billion in Chinese sales by 2010. They are opening factories. They're making an acquisition. Their dealers are investing in expanded product support and an equipment rental network. They have even partnered with the Chinese government to help develop a remanufacturing industry.

Did you learn anything else from your recent trip to China?

We came back with an even deeper conviction that superior growth prospects remain beyond the Beijing Olympics in 2008. While much focus has been placed on the availability of necessary infrastructure in time for the Olympics, I'm convinced that a similar focus would have developed, with or without the Olympics There are tremendous opportunities for companies to benefit from China's industrialization and construction boom. But it is also clear that indigenous Chinese capital good manufacturers are a rising competitive threat to established capital goods manufacturers.

What can you tell us about the management of industrial companies today?

There is no question that the executive management of the companies I cover is deeper and more talented than it has ever been. Businesses are more disciplined on capital allocation, return on investment and maximizing shareholder returns. They are more international, and if they are not yet, they understand its importance. It is a global industry and the most talented management teams are turning their businesses into global enterprises. Management is also increasingly focused on technology. Machinery is getting smarter. For example, Deere no longer makes just tractors; they create mobile information platforms. Great mechanical features are no longer enough. Plus, management is responding to the changing workforce. Employers no longer have the luxury of seven-year apprenticeships. Today's workforce is increasingly comprised of electronically-savvy video game players. In 2006, Caterpillar introduced a new type of motor grader with joy stick controls instead of the traditional cluster of levers. In the past, the industry designed products for highly trained operators to use, but today there are fewer and fewer of these operators left. The successful companies recognize this trend and are adapting accordingly.

What about M&A in these markets?

The industrial companies I cover have carefully managed their capital. Their balance sheets are stronger today than they were at similar points in past economic cycles. Some have implemented share repurchases. We think others have the capacity and motivation to accelerate acquisition activity. An interesting question is whether the recent turmoil in credit markets and its impact on lending will affect the M&A environment, leveling the playing field for industrial acquirers by reducing competition from private equity firms.

Are there any other topics you think will be discussed at the conference?

We are expecting record turn out at our conference this year mainly because of the heightened uncertainty and anxiety caused by the turmoil in the housing market. Institutional investors will get to take the pulse of the economy and to assess the real impact on industry by talking directly with company managements. But there are other topics of interest as well. There is evidence that investment in energy (oil & gas, electrical power generation, wind energy and ethanol refining) and infrastructure markets appears to be accelerating. We also think the increased political and public attention focused on climate change and global warming will create both costs and strategic growth opportunities that many industrial companies are just now addressing. It is clear that companies are going to need to spend capital in order to become greener. But it is also clear that industrial companies will strategically benefit from these trends. Kaydon Corporation, one of our conference presenters, is one. They are a rapidly growing supplier of bearings to wind turbine manufacturers. Another, Eaton Corporation, is commercializing diesel-electric hybrid drive systems for on-highway trucks. Astec Industries is another. They recently introduced a product called Warm Mix Asphalt that, with the addition of a tiny amount of water, enables paving contractors to handle asphalt at lower temperatures, eliminating the release of the volatile organic compounds (VOC) that create the pollution inherent in paving with traditional hot mix asphalt.

About Rob McCarthy and Baird's Equity Research Team

Robert McCarthy is Baird's Senior Analyst covering diversified industrial and machinery. In the 2006 Forbes.com/StarMine Analyst Awards, Rob ranked No. 3 for his stock-picking skills in Machinery and was on the list for the third consecutive year. Rob has also been recognized by The Wall Street Journal and was named by Forbes as the fourth most accurate earnings estimator among all analysts covering any sector in 2005. Prior to joining Baird in 2001, Rob McCarthy was a senior industrial sell-side analyst at ABN AMRO Inc. for seven years, and before that was a senior capital goods analyst at Duff & Phelps Investment Research Co. He received a BS in Marketing from Miami University and an MBA from the University of Chicago Graduate School of Business.

In addition to Rob, Baird's senior industrial research staff includes Rich Eastman, Process Technology, Jon Langenfeld, Transportation Logistics, David Leiker, Auto and Truck Suppliers, Peter Lisnic, General Industrial and Building Products, David Manthey, Industrial Distribution, and Michael Schneider, Process Controls and Facilities Services. For a full list of the more than 500 companies covered by Baird, click here.

Baird was recently recognized for the quality of its investment research. Integrity Research rated Baird No. 1 in small cap research, and a Bespoke Investment Group (B.I.G.) survey found that Baird analysts' stock recommendations had the most impact on stock prices. In addition, Baird has been repeatedly well-represented on The Wall Street Journal's "Best on the Street" analyst survey rankings over the years. In the survey released earlier this year, based on 2006 performances, Baird was ranked No. 10 overall out of 85 research houses in terms of the total number of awards received. Seven Baird analysts also received 12 awards from StarMine earlier this year, ranking the firm third overall. Such results were based on 2006 data. StarMine is the most recognized firm in the industry for tracking earnings accuracy and stock picking results.

About Baird

Baird is an employee-owned, international wealth management, capital markets, private equity and asset management firm with offices in the United States, Europe and Asia. Established in 1919, Baird has nearly 2,200 associates serving the needs of individual, corporate, institutional and municipal clients. Baird oversees and manages client assets of nearly $74 billion. Committed to being a great place to work, Baird was recognized as one of the FORTUNE 100 Best Companies to Work For(R) in 2004, 2005, 2006 and 2007. Baird's principal operating subsidiaries are Robert W. Baird & Co. in the United States and Robert W. Baird Group Ltd. in Europe. Baird also has an operating subsidiary in Asia supporting Baird's private equity operations. For more information, please visit Baird's Web site at http://www.rwbaird.com.

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