Circor International Inc (CIR) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the CIRCOR International first quarter 2010 financial results conference call. Today's call will be recorded. At this time all participants have been placed in a listen-only mode. There will be an opportunity for questions and comments after the prepared remarks. I will now turn the call over the Mr. David Calusdian from Sharon Merrill Associates for opening remarks and introductions. Please go ahead, sir.

Thank you and good afternoon, everyone. Welcome to CIRCOR International's first quarter 2010 conference call. On the call today is Bill Higgins, the Company's Chairman and CEO; Fred Burditt, the Company's CFO. The slides we'll be referring today are available on CIRCOR's website at www.CIRCOR.com on the investor relations page. Please turn to slide two.

Today's discussion contains forward-looking statements that identify future expectations. These expectations are subject to known and unknown risks, uncertainties and other factors. For full discussion of these factors the Company advises you to review CIRCOR's 2009 Form 10-K and other SEC filings. All of the Company's filings are available on its website at CIRCOR.com. Actual results could differ materially from those anticipated or implied by today's remarks. Any forward-looking statements only represent the Company's views as of today, May 10, 2010. While CIRCOR may choose to update these forward-looking statements at a later date, the Company specifically disclaims any duty to do so.

In today's call management will often refer to adjusted operating income and adjusted operating margin. These metrics exclude any pre-tax special charges as well as pre-tax charges associated with the asbestos affecting the Company's Leslie Controls subsidiary. The reconciliation of CIRCOR's adjusted non-GAAP operating income and net income to the comparable GAAP measures are available in the financial tables of the earnings press release on CIRCOR's website.

I will now turn the call over to CIRCOR's Chairman and Chief Executive Officer, Bill Higgins.

Thank you, David. Good afternoon, everyone. Please turn to slide three. During the first quarter we continued to execute our growth and productivity initiatives, performed well from a financial perspective and reported good year-over-year bookings growth across all three operating segments.

Let's take a look at our Q1 financial results from a high level. Revenue for the quarter came in at $146.3 million, and our EPS was $0.33. We did not have any special charges in the quarter, and our revenue is slightly below our guidance range due to lower-than-expected large energy project shipments in the quarter, including delayed shipments that moved into the second quarter. The $0.33 was significantly higher than our guidance range of $0.10 to $0.15 for the first quarter because we recorded an asbestos recovery this quarter of approximately $650,000 versus our guidance of $4 million for asbestos charges. Had asbestos been what we had anticipated, we would have been within our EPS guidance range.

Total bookings were up 32% year-over-year and down 6% sequentially. The double-digit year-over-year bookings growth was reflected across each of our three reporting segments. Our total backlog at the end of the first quarter was $330.4 million, up 11% from the first quarter a year ago and up 4% sequentially from the fourth quarter.

In summary, we are encouraged by what the booking trends indicate. We're seeing some positive signs in our in markets which I'll be discussing after Fred's financial review, and we continue to invest in our strategic initiatives for growth and productivity. As sales rebound, our cost reduction efforts and ongoing continuous improvement initiatives will position us to drive profitability improvement across the organization.

So with that, let me turn the call over to Fred.

Thanks, Bill. Please turn to slide four and I'll begin with our consolidated financial results. Consolidated revenues for the first quarter of 2010 were down 17% from the first quarter of '09 and down 7% sequentially. The year-over-year decline consisted of a 25% organic reduction offset by a positive 6% contribution from acquisitions and a 2% foreign exchange benefit. On the earnings side operating income in Q1 of 2010 was $7.9 million compared to $14.8 million in the first quarter of last year.

In the fourth quarter of '09 we recorded an operating loss of $32.5 million, which, as you remember, included a $39.8 million noncash pre-tax asbestos charge. Consolidated adjusted operating income decreased 67% from the first quarter of 2009 to $7.3 million and was down 12% from the fourth quarter of '09. The primary drivers of the year-over-year decline were lower overall volume and associated operating leverage, unfavorable pricing in large international energy products, orders and the dilution effect of acquisitions. These factors were partially offset by cost reductions and process improvement efficiencies.

Regarding asbestos for this quarter, as Bill said, we recorded recovery of approximately $650,000 for the first quarter of 2010 compared to an $8.3 million charge in Q1 2009. The variance was caused by lower indemnity costs as a result of fewer new cases and lower average cost per settled claim as well as an insurance recovery adjustment related to a dispute with one insurance carrier. To elaborate, in the first quarter of 2009 we recorded a $2 million expense as we provided for a dispute with one of our carriers. In the first quarter of this year we settled this dispute, recording a recovery of $3.7 million.

Now let's turn to our segment performance beginning with Energy on slide five. Our Energy segment delivered strong year-over-year bookings growth related to increased strength in the short cycle business, in line with the rebound in rig counts we have seen in the past few quarters. The sequential decrease in bookings was due to reductions in large international project orders and pipeline solutions, which tend to be lumpy, partially offset by gains in the short cycle.

Backlog at the end of the first quarter was 6% higher than the same period last year and up 2% sequentially. Energy revenues decreased by 35% to $57.7 million for the first quarter, ending in April 4, compared to $89.3 million in last year's first quarter. The year-over-year decrease included broad-based organic declines equating to 47%, slightly offset by growth from acquisitions of 9% and favorable foreign currency adjustments of 3%. The segment's adjusted operating margins were 3.5%, down from 18.1% in the first quarter of '09 but slightly up from 3% in Q4 of '09. This segment's AOI continued to be affected by a number of factors, including organic revenue declines across the segment coupled with the associated loss operating leverage, unfavorable pricing in large international projects, the dilutive impact of pipeline engineering acquisition as well as delays of large international shipments which we expect to make up in the second quarter. We still plan on returning to double-digit margins as we enter Q3 in this segment.

Now turning to Aerospace on slide six, within our Aerospace segment we reported robust year-over-year and sequential bookings growth. The sequential growth was due to military orders, both helicopter and other defense, although year-over-year growth also benefited from the favorable effect of acquisitions. In the first quarter we landed strategic orders for Airbus as well as orders for the Joint Strike Fighter program.

We ended the first quarter with segment backlog up 12% from the first year of '09 and up 5% sequentially. Revenues were down 4% year-over-year as growth from acquisitions of 8% and favorable FX adjustments of 1% were more than offset by a broad-based organic decline of 13%. The segment's adjusted operating margin was 13.2%, down year-over-year from 15.4% and down versus 14.7% in the final quarter of 2009. This sequential decrease in margins, in line with our expectations, was due to reduced volume and associated leverage, the dilutive impact of acquisitions and R&D investments supporting our future programs.

Now let's move to the Flow Technologies segment on slide seven. Flow Technologies saw strong year-over-year bookings due to greater demand across most of our end markets, except for commercial construction, chemical and refining. The slight sequential bookings decline was due primarily to a large U.S. Navy order booked during the fourth quarter of 2009 and weakness in chemicals and refining. We ended the first quarter with segment backlog up 18% versus the first quarter of 2009 and up 9% versus the fourth quarter of 2009.

The quarter-over-quarter growth was primarily driven by a large U.S. Navy order during the fourth quarter of 2009 which is not expected to ship until 2011. Revenues increased by 6% year-over-year due to organic growth of 3% and favorable foreign currency adjustments of 3%. The segment's adjusted operating margin was 10.2% compared with 11.6% in the first quarter of 2009 and 11.7% in Q4 '09. The year-over-year and sequential declines were due primarily to unfavorable product mix, partially offset by productivity gains.

If you turn to slide eight you can see our P&L highlights. We've already touched on key issues, including segment results, asbestos charges and special charges. In addition to these items, I would also point out that net interest expense was higher due to our new credit facility we began within the middle of last summer. Our adjusted EPS, which excludes special charges, came in at $0.33 for the quarter compared with $0.57 last year and a loss of $1.20 in Q4 of 2009. Q4 2009 adjusted EPS was $0.32, however, after removing special charges and the impact of the non-cash pre-tax asbestos provision of $39.8 million taken in the fourth quarter of 2009.

As noted on slide nine, we believe our balance sheet remains strong. Free cash flow was a use of $7 million, slightly better than Q1 2009, which was a use of $8 million on lower net income. Our total debt was $7.5 million versus $23.6 million at the end of the first quarter of 2009, and we reduced our debt to equity ratio to 2% from 7% during that time.

So with that, let me turn the call back over to Bill, who will review our end market assumptions and provide our outlook.

Thank you, Fred; please turn to slide 10. Let's start with our large international energy projects. Quoting activity here remains active in the Middle East and Asia for large engineered valve projects. However, as we've mentioned before, pricing remains under pressure due to overcapacity. We're hoping that this pressure will begin to ease as more projects are released in the next few quarters. At this point, though, we continue to have limited visibility in what is a lumpy market. Longer-term, we are more bullish, however, about the demand for large energy projects around the world.

Regarding our short cycle business, while rig counts are still off from their peak, they are stabilizing at a much higher level than last year. I mentioned on last quarter's call that distributors had started to order products to fill in gaps in the channel, and that is continuing.

Turning to the pipeline markets, we began to see a rebound in bookings late in the fourth quarter, and quotation levels continue to be good throughout the first quarter. It's unclear what impact the Gulf oil crisis will have, but we will be watching it closely.

In Aerospace, as we have mentioned before, this is a late cycle business in terms of the economy. It seems to be better than we had anticipated. We are seeing the beginnings of a rebound on the commercial side of the Aerospace business as passenger traffic is up. In fact, February was the third consecutive month of year-over-year increases in departure rates. Air cargo traffic is also slowly coming back, typically a leading indicator. And, while the business jet aviation market was hit pretty hard, it's still pretty slow today.

The positive news or the most positive news that we've seen in the market is that both Boeing and Airbus have announced increases in production later in the year.

On the military side, demand continues to be steady for us. We're seeing higher demand for spares and repairs on the Chinook helicopter which is heavily used in Afghanistan. We expect overall military demand to remain flat and are watching for any longer-term changes in defense budget allocations.

Moving on to the HVAC and steam-related markets, there's little evidence of new construction in North America and, as a result, capital spending-driven project business remains weak. However, we are seeing steady business in MRO activity as customers opt to repair and upgrade systems instead of making new investments. And longer-term, we are encouraged by opportunities for us to grow in emerging markets, especially in Asia and South America.

After the industrial and process markets stabilized in the fourth quarter, we saw demand grow in Q1, particularly in Europe. Equipment manufacturers such as textile machine makers are driving much of this growth, exporting from Europe and benefiting from Asia demand. The maintenance and repair side of this market remains steady as well. Semiconductor activity continues to be robust, driven by capacity expansion and LED production in Asia.

In the power generation markets we saw demand begin to pick up toward the end of the fourth quarter and continue to see healthy orders in Q1 with strength coming from overseas markets. In the chemical and refining end markets we continue to see weakness due to the global overcapacity situation in refining. We are booking some small projects, although there's little in terms of new activity. Leading indicators are beginning to look a little more positive, but, since we are a late cycle business, it will be sometime before demand strengthens.

We expect our Navy maritime business, which was strong in 2009, will be stable throughout 2010. Oversees defense projects continue to appear firm. So this brings us to our expectations going forward. Our recent bookings and trends at many of our markets give us reason for improving optimism about the remainder of 2010. In energy, our short cycle energy business has stabilized and although our large international project business still faces a headwind of excess capacity and pricing pressure, the project end markets seem to be more optimistic. In Flow Technology, we believe most of our end markets bottomed in the second quarter of 2009 with the exception of commercial construction, chemical and refining.

In Aerospace the outlook is even better than appeared during our last conference call. We have begun to see positive signs on the commercial side and expect that shipments in this segment will be flat year-over-year in 2009 sales growth getting stronger in 2011.

With that said, please turn to slide 11 to review our guidance for the second quarter of 2010. We expect revenues for the second quarter in the range of $170 million to $180 million and earnings excluding special charges but including asbestos charges to be in the range of $0.28 to $0.38 per diluted share. This assumes a tax rate of 28%.

So before you go to questions or before we open up for questions, I'd like to say a few words about our progress in executing on our key strategic initiatives. During the quarter I traveled extensively to our facilities and around the world, visiting about a dozen plants in the US, Europe and India. As I traveled I was impressed by our teams' ability to advance our organic initiatives, our growth initiatives, as well as continuing to drive operational performance improvements through our lean manufacturing and our people and talent development initiatives. During my trip to India I met with our new and growing team there as well as a few customers. And I can tell you we're making great progress expanding our operations. In India, I believe we have significant opportunities for lower-cost sourcing, manufacturing and growth.

Across CIRCOR we've made progress in focusing our product development and growth on higher-margin engineered systems and subsystems. For example, in Aerospace we won two strategic orders, one to supply a complete suite of integrated speed sensing and control solutions for the Airbus A340 XWB -- as you recall, we won landing gear actuation systems on that new aircraft -- and a second win supplying pneumatic power modules on the Joint Strike Fighter. These are both good wins on great platforms for the long-term.

So during the quarter we completed the consolidation of two aerospace facilities, resulting in a world-class lean operation. As we said on our prior call, our ability to consolidate facilities and do it well is a result of our ongoing lean efforts to improve our operations.

As our sales volumes rebound we believe that the lean cost structure enables us to drive further profitability gains across the organization.

So with that, Fred and I are available to take your questions.

(Operator instructions) Kevin Maczka, BB&T Capital Markets.

Bill, a couple of questions, but I guess my first one, the better revenue guidance sequentially in Q2 -- how much of that is a cyclical or seasonal upturn versus projects that were just pushed out from Q1 into Q2?

Very little bit that would be seasonal. It's projects and then other short cycle business wins.

Can you quantify the delayed projects?

Delayed projects were just $3 million to $4 million. They just sort of went (inaudible) below our guidance.

I think in the past you had made a comment about expecting a flattish year in the Energy segment, and I'm just wondering, starting with a 35% hole in Q1, is that still your view? And do you still see double-digit operating margins in that unit in the second half?

We definitely are still anticipating getting into double-digit margins as we enter the third quarter. I don't know if we've given much full-year look, but certainly with the increase in the short cycle business that's good news for the full year on the energy group.

Along those lines we have seen some projections recently that maybe rigs may peak in Q2 and decline in the second half. I'm just wondering generally, in your crystal ball, do you share that view? And what would that mean to your energy business if that's what's really been driving the strength in orders here in Q1?

We have seen the strength in orders in Q1 going into Q2, and I was in Houston at the OTC, the offshore conference last week and talked to a number of reps and feet on the street, so to speak and I heard both sides of that argument. Some people think it's going to run longer and other people think it will probably peak and stabilize and rigs stabilize and possibly decline a little bit at the end of the year. So I think it's too early to make that call.

Finally, Bill, if your big energy competitor was involved in some way in this incident in the Gulf, do you see any market share opportunity that may come out of that? I'm sure it's early to tell, but do you have any sense for that at all?

I don't, at this point. Like I said in my notes earlier, we'll continue to watch that. We don't manufacture the specific devices that were involved, but we do have business in the subsea area. So we'll see how that plays out.

Charlie Brady, BMO Capital Markets.

Again, with respect to the delayed energy orders in Q1 and just going into Q2, can you give us any sense of a margin impact on the (inaudible)? Obviously, it was a negative on Q1. But would having that lump slip into Q2 make any kind of meaningful impact on the margin in Q2 than you otherwise might have had?

No, Charlie. It had more of a revenue impact than it did a margin impact. They actually did pretty well, relatively close on the margin side for the quarter compared to our guidance. So it's not a huge -- just a little bit of leverage on it.

Okay. And then, again, with the short cycle business and selling in the distributor market in the restocking there, are we still in a phase where we're just restocking the shelves to meet incoming demand, sort of get an order, place an order, or has it been any pickup beyond that?

I think we've seen pickup beyond filling in what we've described before as the gaps on the shelves, so there's some product that we're short of to larger size orders that are flowing through to the final demand. There's a pickup in real demand.

On the Joint Strike Fighter orders, when would shipments on that begin?

That will not be this year. That will be -- it could be the end of the year, but next year.

Matt Summerville, KeyBanc Capital Markets.

This is actually Joe Radigan stepping in for Matt tonight. Can you talk about the composition of your backlog, what it looks like for the next couple quarters on a relative basis in terms of pricing and margin, kind of layering into that any impact you see from raw material costs?

Well, just to talk about the backlog by different segments, certainly the Energy segment has got -- the longer projects are pretty consistent with what we've seen sequentially from a whole year ago. There's still some pricing pressure in that backlog. On the short cycle, it's a good strong business, pretty normal pricing, from what we see so far.

Another way to think of it would be, the project business will have a little bit more margin pressure on gross margin in the backlog.

Obviously, on the Aerospace side a lot of that backlog is -- we have much longer lead times on the Joint Strike Fighter/Airbus. Although we didn't get a lot of orders on that, we've gotten to win. A lot of those get shipped later. In the Flow Technologies group, the Navy business that we booked mostly last year is mostly this year and next year when it comes to backlog, and the rest is fairly normal.

So those last two groups are going to be relatively stable going forward.

Last quarter, I think you were concerned that you might see some pricing pressure in the short cycle business, but it sounded at that time like you hadn't seen it yet. So has that started to emerge now, then, or is that still a concern going forward at all?

No, not like the project business, no. It has not been as evident and pretty rational, behaved market. I think what we talked about in the past was that we had price increases in previous years, a couple of years ago, that some of those came off. But there isn't a discernable trend right now.

And then in the project business, I know you commented on unfavorable pricing. Has it degraded further compared to the last couple of quarters, or is it just, we are still flat with the last couple of quarters but we've been seeing unfavorable for a little while now?

The longer projects that were booked last year had more price degradation in them. Things seem to be a little better, maybe at least stable, at this point. We're hoping that, as activity picks up, the pricing will get better.

John Franzreb, Sidoti & Company.

Could you talk a little bit about the chemical refining markets and flow and when you expect to turn in that business?

We've seen a little bit. There has a little bit of, how would I say it, sort of small project activity in Europe. There's a big refining project that a lot of people are talking about in the Middle East. But the overcapacity in refining is still a headwind and there's more capacity coming online. Sort we're not expecting to see a pickup there any time soon. But as I said, there's some smaller projects, and we're getting a little bit of business here and there but no large projects.

And the variance in the asbestos charges, it's two consecutive quarters of that now. Should we be thinking that your hit ratio is better? Can you update us on some of the thoughts about the asbestos charges on a quarter to quarter basis?

The volatility continues to be mostly driven by I'll call them one-time events. I hate to say it that way, but for example, this quarter, if you take away the insurance recovery, we were about $3 million, $3 million-plus for the quarter. So, no, not at the $4 million, but it wasn't like this big variance that we ran compared to that. And if you think about the fourth quarter, obviously, we took that one charge.

So we still have been using the $4 million in our guidance. We realize that's a relatively conservative number, but that's why we disclose it so you guys know exactly where we said. But we still think, on average, that's a pretty good number to just think forward about.

(Operator instructions) Jamie Sullivan, RBC Capital Markets.

On the Flow segment I think you mentioned there was a little bit of an impact on the margins from mix. Can you talk a little bit more about that?

Yes. That's primarily our longer cycle, late cycle business, big projects in the refining and petrochemical area, mostly in what we call some of our sampling businesses.

And those were a larger portion of the mix, or those are -- ?

Those are our lower portion as they tend to be pretty good, fairly good margin business (multiple speakers) as it relates to our average.

Okay, all right. And you also talked about some strength in Europe. Can you talk about what's driving that, and just your thinking for that region, given some of the recent events?

Yes. The strength that we've seen in Europe started with the export of mostly German but other equipment manufacturers to demand in largely Asia but also the rest of the world, the emerging markets. We've seen a little bit more activity in the European countries for some of the basic industrial applications that we provide product into, a little bit better than it had been. We're cautious there, but there's a little bit of uptick. And we've seen, as I mentioned, a couple of very small improvements or upgrades on some small refinery projects in Europe.

Now, the second part of your question, with the fluctuation in the euro and the swings and the wild ride in the markets in the last week -- we're just going to have to watch that and see how that plays out in Europe.

On the large project side, in energy, what is your current outlook there on when some of the projects are scheduled for a decision? Is it on the board right now? Are you expecting decisions, are you hearing the decisions are expected to be made over the next quarter or two; just your thoughts there?

Yes. We expect this quarter to be a little bit better than last quarter. It's improving so far from a bookings standpoint, and the activity -- having just been over there, activity feels pretty robust. Again, it's a lumpy -- that project business is a lumpy business. We're a late cycle company, so it's hard to call a precise time. But it feels like it's getting a little bit better. Certainly, the price of oil has supported the oil-driven activity. And I think, on the short cycle, we are seeing some of that, too, more driven by oil than gas. But it feels a little bit more optimistic than it has in prior quarters.

You also talked about the quoting activity remains robust. Is that backfilling for some of these delayed decisions? Or are you talking about some of the delayed projects that are being re-quoted?

I would describe it a little different. These are projects, many of them, which have been on the drawing board, many of which we've been working on, doing the engineering work, our customers have been working on, that seem to be closer to fruition.

On the asbestos side, what's the cash portion of that expense? How should we think about that?

For this quarter?

For this quarter and going forward, I guess, on the $4 million run rate, if that's how it comes in.

I would say the cash expense is slightly higher than the P&L side because of the backlog of cases. So it's going to be slightly above the -- call it the P&L side of it.

Marty Pollack, NWQ Investment Management.

I wonder if you could just elaborate -- on the Energy side, are you expecting recovering margins towards double-digit? I just wonder if you can clarify where that would be in terms of the mix of where you get the best margin leverage that would allow you -- is it the pipeline side, the short cycle, long cycle? Because it seems that you were suggesting the project delay in Q1, that it was not really a margin loss there. So if you would just clarify a bit more of that operating leverage moving forward towards the third or fourth quarter, when you're expecting the better margins here.

If you look over some history, our margins in our businesses have swung back and forth, depending on the volumes that we've had. At times, our large project businesses are more profitable, at times our short cycle is more profitable. But as it relates to this year, the improvement in the margins is primarily coming from a little bit of volume because we're getting a little bit of that, but mostly from all of the quality of earnings cost reductions we are putting in place last year which are still -- a lot of those costs, higher costs, are still in our inventory. So most of it's coming from productivity, from things we've been doing in the business as we come into the second half of the year.

Yes. A good example is in the second half of the year we accelerated the moves to production in our low-cost plant in China. We made some pretty significant moves there, and we had talked about those taking a couple quarters to wind through.

There are no further questions in queue. I'd like to turn the call back over to Mr. Bill Higgins for closing or additional remarks.

I'd like to thank all of you for your interest in CIRCOR and joining us this afternoon for this call and we look forward to updating you after our next quarter call on our progress. Thank you, everybody.

And that concludes our conference call. Thank you for joining us today.