Circor International Inc (CIR) 2002 Q1 法說會逐字稿

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Good day everyone, and welcome to the Circor first quarter 2002 conference call. Today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn this call over to Mr. of . Mr. , please go ahead.

Thank you very much, . On this morning's call we'll have with us David Bloss, the Chairman and CEO; Ken Smith, our CFO; and Alan Carlsen, Executive Vice President Of Operations. And we'll be referring to 11 slides.

You can view these slides on Circor's Web site, www.circor.com, under the investor relations link.

And in accordance with the Safe Harbor regulations, we remind you that any forward-looking comments we will be making are subject to a series of risks that may make actual results differ materially from our expectations. And we advise you to read about these risks in our SEC filings.

And with that, let's turn the call over to Circor's Chairman and CEO, David Bloss.

Thanks, John, and good morning, everyone. As usual, let me begin with an overview of the first quarter's results.

As indicated in the press release, we posted lower results for the quarter, as domestic, general industrial, oil and gas, and aerospace markets remained sluggish.

Our results reflect the effect of this soft economy. In addition, the usually strong winter season for steam and power markets that we serve was milder, and also contributed to the revenue decline in two-one.

earnings decrease, primarily due to the lower revenue levels, our businesses have continually done a good job in managing their costs through a variety of actions.

And we have also benefited from previous plant consolidations that we implemented.

As a result, our operating margins . On a more positive note, incoming orders for the quarter were sequentially higher, over eight percent higher, and exceeded revenue as we continued to increase our backlogs.

Compared to last year, revenues for the quarter decreased nearly ten percent, only decreased six percent.

We continue to benefit from the on projects for large oil and gas activities, construction projects, as well as orders from The U.S. military, that both generally have scheduled deliveries in the second half of 2002, and early '03.

Orders for deliveries declined, though, by having a greater negative effect on our first quarter's revenue.

To that point, our backlogs at March-end are Circor's highest ever, at nearly $78 million, up 24 percent from last year, and up 13 percent sequentially.

Again, reflecting the significant spending on large international oil and gas and marine projects, we believe we are winning our share of the . will provide the details concerning our operating performance of each of our segments in a few minutes.

So let me say that we continue to be focused on raising returns, and we are well positioned for margin expansion when broader industrial investment and spending rebounds, which we continue to expect later this year.

Our balance sheet continued to strengthen as well during the quarter. We generated eight million dollars from operating activity this past quarter, and free cash flow was nearly two times net income.

Our businesses are continuing their focus on efficiently managing their use of cash. At this point, Ken Smith and Alan Carlsen will take you through a more detailed explanation of our financial results for the first quarter, beginning with Ken. And at the end of our remarks, we'll have time for any questions -- Ken.

Thank you, David.

To begin, let me state that all the P&L results reported in our earnings press release were based on the inclusion of special charges, and therefore represented full U.S. gap results. However, in these slides that we'll review this morning, the P&L data is presented excluding the non-recurring special charges reporting in our U.S. gap income statement.

This revised presentation result is consistent with how many of you have tracked Circor's results previously.

I also want to point out two other changes made to the P&L results on these slides. First, there's been a reclassification of a business unit. One of our smaller businesses in the petro-chemical products segment has been transferred to the instrumentation and thermal fluids controls product segment.

That business unit, SSI Equipment, based near Toronto, is now under the management of the instrumentation and thermal fluid control group.

And a growing portion of its products are being sold through many of the same distributors as our thermal fluid products. And its principal product line, , ends up in a wide variety of end markets.

Therefore, we decided to reclassify that business unit to the instrumentation and thermal fluid control segment to more accurately reflect how we are running the company. All of the 2001 segment data in these slides had been restated to conform with the three classification. SSI's annual revenue in 2001 was a little less than $8 million, with an operating margin approximating 17 percent.

The second change, as you all know, involved the accounting for goodwill amortization. That change beginning January 1, 2002. For Circor that meant good will amortization ceased with Q4 2001, and last year our amortization was $2.7 million dollars.

And in Q1 2001, it amounted to $600,000. So I decided to help comparability in the attached slides by removing goodwill amortization from the 2001 results, but there are footnotes on the slides that quantify that improvement.

Having said that, I will now speak about slide number three of our presentation. Regarding worldwide orders compared to the first quarter of 2001, we experienced a small decrease that has a two part explanation.

Although the two European companies we acquired last June added to this year's first quarter orders, those increases were overshadowed by the nearly ten percent order decrease in our other business units.

And, as David mentioned, the general industrial and oil and gas market softness really caught up to us this quarter. Sequentially, orders improved nicely, primarily benefiting from winning bids on large international oil and gas construction projects in our petro-chemical segment. As David noted, backlogs remain strong. The strongest for us was from the large oil and gas projects, followed by military orders.

And year over year the two acquisitions a smaller component of the backlog growth. And as noted earlier, looking back over the two and a half years of our Circor existence, we ended March 2002 with our highest backlog ever since the .

Regarding revenues, the decrease correlates to the order decrease from which I spoke, which more than offset the first quarter revenues from last June's two acquisitions.

Those European firms acquired last June added nearly $4 million dollars to our first quarter 2002 revenues. Regarding the operating margin, the results reflect the fact that our businesses have done a very good job at their cost structure, and therefore minimizing the significant impact of lower orders and increased costs this year for our insurance programs.

Our businesses reduced SG&A expenses, and they increased gross margin by over one percentage point compared to Q1 last year. vast consolidation plus actions reducing discretionary spending. Regarding earnings per share, the decrease this quarter stem from a mix of factors. Primarily the impact of the order volume decrease, and from the additional shares outstanding issued in the March 2001 offer.

Both overshadowing the effects of improvements in operating expense control, and reduced net interest and free cash flow, another good quarter. An equating free cash flow into a per share statistic, Q1's free cash flow was 0.44 cents per diluted share. Let's turn to slide number four. Regarding revenue, both segments decreased from one year ago.

In the case of instrumentation and thermal fluid control, acquisitions accounted for an eight percent rise. But as they say in retail, same store sales were down 11 percent, reflecting the broadening effect of the general industrial market slowdown in our other business units.

The decrease in our petro-chemical segment resulted from reduced rig counts and drilling, higher crude and gas small projects.

The segment operating margin improvement was a net result of a decrease in the instrumentation and thermal fluid control segment, and a large improvement in the petro-chemical segment, where pricing had improved on projects, and it's cost structure continued to improve. And will discuss each segment separately after I finish. Now turning to slide number five.

The decrease in the segment operating income was fueled by the short cycle order volume decline. And as I mentioned earlier, excellent cost controls in our business units mitigated the margin impact from the order decline. The special charges this quarter represent cost to close two small petro-chemical locations in North America, and consolidate into larger existing facilities. Cost primarily include lease terminations and net cash asset write-offs. I'm sorry, non-cash asset write-offs.

In our March 27th press release advising what the Q on results were expected to be, I had estimated that there would be additional monies accrued in the first quarter 2001 for the consolidation. Under the accounting rules, certain costs are recorded on a pay as you go basis, and therefore we'll be charged the special charges in the next two quarters. Net interest expense decreased this quarter, primarily due to more interest income from the larger amount of invested cash.

Income taxes are slightly favorable due to our reduced tax rate of 36 percent this quarter. So the full year 2002 Circor's effective tax rate to be 36 percent, a decrease of four percentage points from 2001.

Three percentage points of that decrease is due to the non-deductible goodwill amortization ending. and added one percent decrease this year will be due to the certain tax strategies we are implementing, particularly internationally.

And no, we are not moving to Bermuda.

And lastly, the diluted share increase on slide number five is due to the following equity offering last March 2001, when 1.6 million shares, new shared, were issued at a price of .13 and .25 cents. Circor's higher share price in 2002 compared to last year has put more stock options above water.

Turning to slide number six, cash flow, as I described it earlier, was very good. Our business units continued to reduce working capital, and, for example, in accounts receivable, will reduce by another day this quarter, reaching 63 days. And in trade payments, we're closer to matching the timing of vendor disbursement for the timing of customer collections.

For all of 2002, we are working very hard to achieve free cash flow between 1.5 and two times net income.

Slide number seven. The short term debt includes the first of five annual payments of principal on our senior notes beginning this coming October 2002, with each annual payment of $15 million. Even with the principal payment this coming fall, is very strong, and I believe sufficient to weather the economic slowdown we're currently experiencing, and any further economic decline should one occur.

It's quite evident that we have ample leverage for future acquisition. In fact, existing cash plus the unused revolver provides Circor with $130 million to fund the right acquisitions. And for the foreseeable future, our goal for using this cash is to invest in the acquisition, or acquisitions. And now our Executive Vice President Of Operations, Alan Carlsen, will describe the financial performance of each segment, starting with slide number eight.

Thanks, Ken. thermal fluid control segment, the general industrial slowdown will broadly effect our businesses this quarter.

Commercial aerospace and general industrial markets remained at low levels. Plus, the mild winter dampened the demand for our steam related products.

Regarding revenues, Ken mentioned earlier that acquisitions accounted for an increase of almost $4 million, which was offset by a ten percent decline in our other business units, and the lower demand that came from the end markets I just mentioned. And in spite of the first quarter order volume decline over last year, this segment's operating margin remained satisfactory due to a variety of actions to reduce expenses.

Looking ahead, we expect the general industrial markets to remain soft, and that we'll be able to sustain operating margins in the mid-teens.

Now, in slide number nine, regarding the petro-chemical segment performance, were down compared to last year, primarily as demand declined for replacements and small projects.

You will recall that oil and gas markets were rebounding strongly one year ago as crude oil and gas commodity prices were at very high levels, which drove higher drilling and processing activity.

Right now, however, we expect the near term demand for and small projects to continue at weak levels, given the current forecast for lower crude oil prices, and the present high inventory level.

The sequential improvement for orders is a result of continued strength of extending for large international projects. Our Italian business unit, , which manufactures the largest of our valves these projects enters quarter two of 2002 with its highest backlog since 1998.

And I want to point out that delivery lead times for our largest valves on these international projects are generally six to eight months.

So there is a large portion of backlog that is scheduled for shipment in the second half of this year. Also encouraging is the fact that the modestly pricing, the modest pricing improvement for these large orders that began last fall has been sustained thus far. Regarding the petro-chemical segments operating income, considering the fact that revenues fell 17 percent, and operating income rose, although modestly.

Our business unit leaders demonstrated their ability to reduce product costs, accelerate manufacturing , and streamline other internal processes to raise financial returns. And these leaders have additional cost objectives this year. This segment is still driving towards a ten percent operating margin by year's end. Let's now turn to slide number ten.

quarters of 2002, this slide shows some of our key end markets. An instrumentation on thermal fluid control, the positive markets for us continued to be analytical packages to and the military. In regard to general industrial markets using our valves and fittings, we expect the next few quarters to be soft. We're also suppliers to the power generation market, which we expect to be a bit softer after 2002, as producers, such as , has scaled back their sales projects for 2003 and 2004.

Within the petro-chemical segment, North American drilling activity is expected to be weak because of the forecast of lower prices of crude oil and natural gas, and the relatively high supply.

But we will benefit in the second half of 2002 from the scheduled deliveries for large orders in our current backlog. Yet while several of our markets are soft at the current time, we do not rely on predictions to manage our day to day business.

Our business unit leaders monitor their markets closely, and make appropriate adjustments to the production and spending levels as appropriate. And our financial results demonstrate their capability of effectively doing this. That ends our prepared remarks, and now we'll open this call to any questions you may have.

Thank you, Mr. Carlsen.

Our question-and-answer session will be conducted electronically today. If you do have a question, please star one on your touch tone phone now.

Once again, that is star one on your touch tone phone. We will take your questions in the order that we receive them, and we will take as many questions as time permits. We'll now take a moment to assemble our roster.

Our first question today will come from at .

Good morning, guys.

Hi, .

Maybe you could spend a minute on each segment and give us some greater specificity on which units are being hardest hit. It's my guess on the instrumentation side it's primarily . Is that true?

Well, we're seeing being hit by a couple of things, you're right, is being hit by the aerospace business.

As you know, their production schedules, although we haven't received actual cancellation of orders, we're seeing push-offs of the production schedules. And then on the general industrial side, and all the processing work that our valves and fittings go into, that whole product line is negatively affected by the general activity levels, which are low.

And the continuing decrease, focus on decreasing inventories by the end users and our distributors. So we don't see that changing very much in the second quarter.

And on the instrumentation side, there isn't enough strength on The U.S. Navy and some of the other military projects to offset the aerospace decline?

Well, the backlog continues to grow for those types of projects, but no, it's not enough to offset the effects of that as we saw in this first quarter.

And some of that recent Navy order growth is schedule for the second half shipments, .

OK. Then switching to the petro chem side, presumably it's being hardest hit?

That's correct. And during this first quarter, there wasn't a lot of the shipping activity at as compared to what we expect in the second half when their large backlog start to be shipped.

So the combination of the two will put us a little bit behind on the petro-chemical side mostly because we were expecting a little bit more activity out of the day to day short cycle business in this first quarter. Which really hasn't taken place.

So we've heard the same comments about the and short cycle business on a flow ?

Yeah.

Could you describe maybe through the quarter how it progressed, and if indeed the rise of crude to 26, 27 has helped at all?

We didn't see it change very much. We were hoping to see a steady improvement in the activity level, but it just flattened out and continued flat during the whole quarter.

And I don't think that changes in oil prices between 26 and 27 dollars are gonna effect anybody. It's gotta be a demand , and I think there's a lot of uncertainty in the oil markets today that's probably driving the psychology of the pricing up a little bit. And the people in the oil patch see through some of that, and usually don't react because they don't know how primitive those prices will be.

Right. And then just margins in the petro-chem side, obviously a great performance in 150 basis points on down revenue. Can you maybe just give us a general sense of how much of that is truly being driven by just the better pricing in the backlog, versus some of the restructuring actions you've taken last year, and even year to date?

I would say for that improvement maybe, which was maybe a third of that was, maybe a third of that was pricing. Majority being the cost improvement?

OK, and is this all coming out of the restructuring last year and really seeing further gains there? Or is this concentrated at ?

I would say it's certainly both locations, but given the scale, it's gonna be in terms of impact is greater from the improvement. And they've not only consolidations done the prior period, they've also taken a number of actions to increase foreign sourcing, and accelerate the shop, so therefore needing fewer resources.

, this is Dave. We just returned late last night, as you may know, from our annual shareholders meeting and board meeting, which was held in Oklahoma City.

And it was very successful. And it was a chance for us to show the board and the shareholders who chose to attend the improvements that we've made in that Oklahoma City facility. And they are very dramatic, and we're positioned very well for any improvement in order activity and shipment levels should see some very nice bottom line effects.

OK, then final question . The chemical market and the quick turn business there, we've some better indications that utilization figures out of the census bureau, and we've heard at least some promising comments some of your peers. What have you seen in that market, not necessarily of project activity, but just the daily orders?

Well, two weeks does not a trend make. And we have seen a slight bump off in activity levels, quotation levels. And we're hoping that continues. But I, we've instructed everybody to keep their heads down and remain very cost conscious, and don't expect a continuation of any kind of blips until we see a sustained improvement in the activity levels. And hopefully next quarter when we talk, I can give you that indication. I can't today.

OK, thank you.

You're welcome.

Before we move on to our next question, I'd just like to remind everyone if you do have a question or comment, please press one on your touch tone phone now. And our of has our next question.

Hi, good morning everyone.

Hi Jim, how are you?

Fine, I just wanted to, you know, kind of margins. I think, Ken, you talked about doing about ten percent operating margin of petro-chemicals by the fourth quarter, and ...

yes, exiting the fourth quarter.

OK, and also I understand pricing is firming up on the large international projects. because of the more of a large project business, the margins tend to be lower than the business. Are we seeing kind of a better margin from those projects now as a result of firmer pricing and just cost reductions you've done?

Yes. Just to take history of the remarks, we started to see international projects start to become more frequently bid for real beginning in the late Q4 of 2000. And the wins that we had last year were certainly much stronger than the prior two years of 1999 and 2000, which were relatively depressed for large construction projects worldwide, for us and our competitors.

And we were able to see pricing improvement on winning bids start to take effect late last summer. So because of the long lead time, six to eight months for deliveries, it'd be natural to expect some of that improvement to start to be coming in the first quarter. And we're hopeful that that pricing improvement can be sustained.

But it's notable compared to where the pricing was a year, a year and a half ago. But it's certainly not to the robust pricing environment, as I understand, existed back in 1997, 1998.

So I guess assuming pricing continues to hold up at current, at the levels that you anticipate, or current levels, as you move into 2003 we kind of, we use kind of a ten percent margin level as your first quarter level? You know, and of course you get the hopefully by that time you get some recovery in the business, right, that should help that as well?

Yes.

Good, good. OK, and then I guess in terms of the flow on the instrumentation business, the weakness in that segment, are we, so I guess next couple of quarters we should kind of look for some flattish revenues and improvement in the margin due to continue, the effect of your cost reduction actions?

I'd certainly say the order rates we expect uncertain times, we're unsure of that at this point, at least looking forward. And from a margin standpoint, we'd certainly like to improve on where we are, but we're in the high 16s depressed level, and we certainly hope to sustain that, and make whatever improvements we can.

OK. Thank you.

We'll now take a follow up question from at .

And maybe you can give us some more specifics on the special charges that are coming, and what they're aimed at?

Well, they're aimed at saving money over the mid- to long-term. We've got a small manufacturing operation in New England that we are going to consolidate into the Oklahoma facility. And then had a small warehousing operation in Ontario Province that we, likewise, are gonna consolidate and fold back into .

And we've got some assets that we no longer need, and therefore will be, have accrued off of that. As well to be any remaining lease obligations that we have once we vacate. And payback, fast paybacks on each of them, it'll benefit the petro-chemical segment, and when I talked about future special charges related to these two consolidations, they relate to severance costs that's, primarily severance cost that we'll incur.

Can you give us a sense of what your expectations are for annualized savings out of these restructuring actions that started in the fourth quarter?

Oh man, I'd say two, three hundred thousand dollars.

That's annualized?

Yes.

OK.

Over the cost of what we've incur.

Oh, OK. So that's the excess savings. OK. And then the actual actions themselves because you're gonna take charges in 2Q and 3Q, presumably there's movement going around through the third quarter?

movement?

Yeah, there's actually restructuring going on, and, and mergers going on?

Yeah. Yeah. The physical changes will, have started to, have started this, in April, and by the time both actions are fully implemented, finally finish up I'd say August and September.

You know, Mike, I might also add that these changes we're anticipating here and moving forward with will have a very positive impact on customer satisfaction and our ability to deliver products on time. And with a much higher level of customer awareness.

Great. And I guess the final question I have is on instrumentation. A weak winter for you, just given the mild weather conditions, does that mean that the sequential decline that generally occurs from the first quarter to the second quarter in instrumentation will not necessarily be as pronounced this time around?

Probably -- this is Dave, . I think you're focusing on the steam product line activity in that comment. And if I'm correct then you are ...

instrumentation segment overall.

Yeah, yeah. Right. And you are correct. Since we didn't have a very strong winter heating season, our volume wasn't as robust as we normally see seasonally.

So the decline sequentially that we normally see shouldn't be as dramatic as well. Plus, you have the effect of the large military projects, the, you know, the aircraft carrier work, and what have you, that we're on the ships in the marine applications for steam.

Those, you know, those should be positive to us in this second half. So, you know, we should, we're expecting that that steam product line to hang in there for us now going forward through the rest of the year.

I guess that given -- that being said, and the confidence in the petro-chem side, I'm curious why you didn't feel comfortable even just giving guidance for the second quarter?

Because of the effect of the database business. That's high margin business for us, and we just don't have clarity in our vision in our senses of where, direction of that market's going.

And we did not want to hold expectations out for, or give an estimate for the next quarter until we see some settling in on some direction here. And we haven't seen that yet, .

So, I, you know, I guess it's best to assume flatness until otherwise indicated in our results.

We're giving, again, the backlogs, the order patterns in this quarter, especially on some of the longer lead time, and The U.S. military applications.

The second quarter, assuming degradation, the quick business should be higher and by a material amount?

Well, only, well no, I think the first part of your statement alluded to the backlog of, and that's gonna be shipping the second half. We, I don't think we're gonna see a heck of a lot of that ship out the doors in the second quarter.

Yeah, I'm sorry if I said the second quarter. I meant the second half.

Oh, OK. Yeah. Then I confer with your statement as long as there's exception for our achieved.

Right. OK, thank you.

You're welcome.

We'll now go to another call, a question from of .

Hi, .

Hi. Yeah, I guess just as a follow up to your earnings outlook, have you made any changes for your outlook? I understand, I know forecast given the day to day nature of that short cycle business. But how about for the full year?

not updated our full year estimates since we provided the estimate during our first quarter earnings release. Since then we provided publicly a revision of the first quarter's results, which you are all aware of. And have not provided any updated guidance on the full year. And we will not be doing that until, as I indicated a minute ago, we see a clearer picture of where the markets are trending.

Well, what has changed, you know, from fourth quarter and today? Has the general industrial business kind of, has your thinking in that you know, gotten a little more worse? Or it's just taking longer to come back?

Yeah, I think the latter, Jim. I think it's taking longer to come back. We are expecting an uptake in the first quarter, slight uptake, modest.

But it didn't come in the general industrial chemical processing arena, and then the softness and the part of the oil and gas distribution side of the business. So that combined didn't meet our expectations. And that's why we came out with a revision in our estimate for the first quarter. we're aware of that.

Right. OK. And on a second issue, how big is your military business in total? I know you have U.S. Navy, but you're isn't that right? So you add all those up, how big is that military piece?

aerospace piece plus the marine piece, and then we have also some sensing devices operation, which is within our instrumentation business that was military oriented.

So I think if you add all of that up, you'd probably be around, and I'm guessing here, and I'll come back to you maybe in the next quarter, around $40 million to $50 million of sales in that arena.

OK, OK. And then just lastly, want to just give us some comments on acquisitions, what are you seeing out there? Your cash continues to build up, and ...

Yeah, I think we're in good shape.

balance sheet, I mean ...

We got, we have a great balance sheet, and we have a strong currency in our stock, if we chose to use it. So it's a, it's a nice position to be in. We're being very patient because we believe that the, eventually the pricing on some of these deals should start to come down from their historically high levels of 18 months ago.

And -- but it's taken a while for that all to happen, and we're being very careful about the types of acquisitions we're looking at, making sure that they fit nicely into our strategy, and we can achieve immediate results for our shareholders. So we're not feeling rushed to be aggressive and overly pursue acquisitions, if you know what I mean.

We're being patient, we, at any point in time, as I indicated before, we probably have four or five acquisitions that we're looking at in some fashion. And that continues today.

Historically you've been making acquisitions with cash with your . Does it make sense to do something on a larger scale using as the currency?

It could, yes. It could. I, obviously I, if we would even consider doing something with our stock, it would have to be a larger sized deal or it wouldn't warrant type of transaction. So yeah, we're looking at all sizes.

I, you know, we're looking at things that are quite substantial to quite small, as a matter of fact. Anywhere from, you know, 10 to 150 million , so ....

And what's, and would you take dilution if it makes sense, or are you more, you know, are you more looking at making sure every acquisition ?

Well, we'd like to think that we'd be able to do the deals that are strategically important to us. And that means that if it fits in well with our existing businesses, which translates into incremental profitability.

So the deals that we're looking at as an example today each one of them individually, if we were to get them at what we think the valuation should be, they'd all be initially.

OK, thank you very much Dave.

You're welcome.

And at this time there appear to be no further questions. Mr. Bloss, I'll turn this call back over to you for any additional comments or closing comments.

OK, thank you very much. Obviously, as we indicated in our comments, our future performance is gonna be influenced by economic conditions in our key end markets. And we're watching those very closely, and hopefully will see some improvement starting to hit our incoming order books.

And inasmuch as we've continually improved our cost structure, Circor will benefit from any improvement in these markets in the next several months on the bottom line.

part of our business in many of our markets, and the lag, the general economic upswing the backlogs that continue to increase, and that's a positive sign for us. And we're, we feel good about that. that backlog is scheduled to ship in the later half of this year, so the results should also mark an increase in activity in later on this year.

Also, Circor remains well positioned for the recovery with a strong balance sheet, solid and diversified market positions, and quite frankly, outstanding manufacturing facilities, as we just witnessed in our visit to Oklahoma City in the last couple of days.

So therefore we remain very positive about the company's intermediate and long term prospects. We thank you for being, for joining us on this conference call, and look forward to speaking with you all again. Thank you.

And that does conclude our conference today. We'd like to thank everyone for their participation and wish everyone a good weekend.

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