Circor International Inc (CIR) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to CIRCOR International's First Quarter 2011 Financial Results Conference Call. Today's call will be recorded. At this time, all participants have been placed on a listen only mode. There will be an opportunity for questions and comments after the prepared remarks.

I will now turn the call over to Mr. David Calusdian of Sharon Merrill for opening remarks and introductions. Please go ahead, sir.

Thank you, and good morning, everyone. On the call today is Bill Higgins the Company's Chairman and CEO, and Fred Burditt the Company's CFO. The slides we will be referring to today are available on CIRCOR's website at www.circor.com on the investors relation's 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 a full discussion of these factors the Company advises you to review CIRCOR's Forms 10-K and another SEC filings, including the 2010 and 2011 quarterly reports on Form 10-Q.

The Company's filings are available on its website at www.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 5, 2011. 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, adjusted operating margins and adjusted EPS. These metrics exclude any pretax special charges, as well as asbestos and bankruptcy charges related to the Company's Leslie Controls subsidiary.

Direct conciliation of CIRCOR's non-GAAP adjusted operating income, adjusted net income, adjusted EPS and free cash flow to a 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, and good morning, everyone. We started off the year with a solid quarter reporting top and bottom line financial results that came in at the high end of our guidance range. Our revenues of $203.4 million grew by 39% year-over-year and non-GAAP earnings excluding Leslie asbestos and bankruptcy charges increased by 58% to $0.49 per share.

Across the board, markets are improving within our Energy Flow Technologies and Aerospace businesses. On a consolidated basis, CIRCOR bookings grew 30% from last year. We are particularly pleased with our energy bookings, which were up 72%.

I would like to comment on several highlights before I turn the call over to Fred for the financials. As we reported last week, first, we have closed the last chapter in our efforts to permanently resolve Leslie Controls asbestos liability by funding the 524g trust with Leslie emerging from bankruptcy, and this is a tremendous accomplishment for CIRCOR, for our shareholders, and our employees.

Second, a few days ago we entered into a new five-year unsecured credit agreement that provides a $300 million revolving line of credit, a $110 million over our previous revolver. Giving us better terms and greater financial flexibility to executive our global growth strategy.

Finally, I want to announce the Energy Products Group President, Paul Coppinger will be leaving the Company, effective May 13, 2011. Paul led the segment for a period of plant consolidations and lien implementations, and we thank him for his service to CIRCOR. We have a search underway for the leader of CIRCOR Energy, who we expect will drive the group's transition to accelerate in global growth, both organically and through acquisitions.

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

Thanks Bill. If you would please turn to slide four, I will begin with Consolidated Financial Results.

Revenues for the first quarter increased 39% to $203.4 million compared with the first quarter of 2010, and were up 5% sequentially. The year-over-year increases due to organic growth of 32%, 5% from acquisitions and 2% favorable foreign exchange impact. Adjusted operating income in the upper right chart was $13.8 million, up 89% from the first quarter of last year and up 6% sequentially. Energy and Flow Technology were especially positive on a year-over-year basis.

Our net income for the quarter was $7.9 million or $0.45 per diluted share, compared to net income of $5.7 million or $0.33 per diluted share in Q1 of 2010. First quarter 2011 net income included pretax Leslie bankruptcy asbestos charges of $1 million, compared to $600 million of asbestos recoveries in 2010.

Our adjusted earnings per diluted share, which excludes Leslie's asbestos and bankruptcy charges, increased 58% to $0.49 for the first quarter of 2011 from $0.31 in the first quarter of last year.

Now I will turn to the segment performance, beginning with Energy on slide five. The energy segment bookings increased 72% year-over-year, but were down 6% sequentially. The year-over-year growth was from strength in large international projects, which is recovering from the lower order intake we experienced last year. Ending backlog of $203.1 million and were up 50% year-over-year and 13% sequentially.

Energy revenues of $99.2 million increased 72% year-over-year and 10% sequentially. Year-over-year growth was 65% organic across the segment, including large international projects and short-cycle North American business. In addition, we had a 4% increase in acquisitions and a favorable FX impact of 3%.

The segments adjusted operating margin was 6.4% compared to -- with 3.5% in the first quarter of 2010, and 6.7% sequentially. Improvement from last year was primarily driven from the significant volume and productivity, partially offset by pricing levels on large international projects booked in early 2010, including some breakeven as we discussed last quarter.

Now turning to aerospace on slide six. Within our Aerospace segment, bookings were down 6% year-over-year, but grew up through 7% sequentially from the fourth quarter. The year-over-year decrease was primarily due to the timing of military landing gear orders, partially offset by positive impacts of acquisitions. We ended the quarter with segment backlog of $135.3 million, an increase of 12% year-over-year.

Revenues of $32.1 million were up 18% year-over-year driven by growth from acquisitions of 14% and 4% organic. Adjusted operating margins were 11.6% down year-over-year from 13.2% and sequentially from 14.1% from the fourth quarter of 2010.

The year-over-year margin decline was primarily the result of acquisitions including integration activities. The sequential decline was from lower volume and associated leverage.

Now, lets turn to Flow Technologies on slide seven, which had a very strong quarter. Bookings were up 9% year-over-year and 24% sequentially. The increase in bookings both year-over-year and sequentially were primarily related to improving markets across most of our businesses, with the exception of refining and maritime.

We ended the first quarter of segment backlog of $80.7 million up 9% from last year and 5% sequentially. Revenues of $72.1 million increased 18% year-over-year and 5% sequentially. Revenues improved from last year due to organic growth of 15%, mostly from semiconductor strength and a steady recovery in our industrial businesses. Also 2% from acquisitions and a 1% positive foreign exchange impact.

The segment's adjusted operating margins were 13.7% up strongly compared with 10.2% in the first quarter of 2010 and 12.5% in Q4. The year-over-year increase resulted primarily from higher volumes and productivity. Sequentially, volumes again helped up and the timing of some strategic growth investments moved out of Q1 to the remainder of the year.

Slide eight shows highlights from our P&L, some of which we already discussed. Q1 included a $1 million pretax expense of Leslie bankruptcy charges. We expect to incur minimal wrap-up legal expenses related to Leslie bankruptcy in Q2, as Leslie has emerged from bankruptcy.

Corporate expenses were up $1.6 million year-over-year to $6.2 million due to higher incentive costs, share-based compensation professional fees. We anticipate the Q1 expenses levels to remain about this level the rest of the year.

The adjusted effective tax rate in the first quarter, which excludes the impact of asbestos was 28.7 million -- excuse me, 28.7% versus our guidance of 30% primarily a mix of global income.

Now turning to slide nine. During the quarter, we generated $0.9 million in free cash flow compared with the use of $7 million in Q1 of 2010. This improvement was due to higher income and working capital improvements. The cash in our balance sheet and our available new credit facility provide us with the flexibility even with the funding of Leslie bankruptcy trust of $75 million to invest in organic and acquisition growth for the future.

Now, let me turn the call back to Bill for a view of our end markets.

Thanks, Fred. Please turn to slide ten, where I will cover our market assumptions and starting with energy and large international projects. During the first quarter of 2011 we had a particularly strong quarter for orders similar to Q4 in large international projects. It is a positive sign, there is still uncertainty regarding the situation in the Middle East and North Africa.

And by nature this market is unpredictable, it tends to be lumpy and/or late in the economic cycle. We are more disciplined regarding pricing in large projects, which is still challenging but did improve marginally in the first quarter from the fourth quarter of last year.

In North American short cycle business, activities remain at healthy levels driven by positive rig counts and high oil prices. The market for pipeline equipment, which is driven by capital spend and is slightly improving as we have seen an increase in order activity as well.

Turning to aerospace, we believe the commercial aerospace markets will see modest year-over-year improvement through 2011. While commercial OEM production is steady we are watching for softness in the aftermarket demand on the commercial side because of increasing fuel costs.

On a positive note, however, even the Business Jet segment is finally showing signs of improvement. In general, we expect the early part of this year will mark the bottom of the aerospace cycle and will gradually improve from there.

The defense side of aerospace -- defense markets continue to have uncertainty for 2011 due to limited budgets and the winding down of military activities in Iraq and Afghanistan. And we continue to watch for the effects of government budget cuts. Specifically, we are seeing softness in demand for Chinook landing gear aftermarket spare parts.

Moving to Flow Technologies end markets. In HVAC and steam related markets, demand for MRO and energy efficiency driven upgrades is stable. However, we do continue to see a lack of new construction related spending in North America.

Within the industrial and process-end markets we believe most will continue to improve during 2011. We expect the semiconductor equipment market to remain strong, and that is driven by capital investment and LED manufacturing.

In power generation markets, international demand, particularly in China, India emerging markets remain strong. Developed economies of North America and Europe continue to benefit on MRO and efficiency upgrades.

Petrochemical refining end markets continue to be weak. Again, this is a late cycle end market where demand for downstream energy type products will be later in the recovery. Despite this we do see -- and we do seek opportunities and seek niche opportunities for growth, and maintenance business there remains stable.

Turning to Maritime business, which provides products specifically designed for US and international Navy applications. In the near-term we do not anticipate growth, and there is limited visibility due to the uncertainty of defense spending.

This brings us to our expectations going forward. If you would please turn to slide 11, I will review our guidance for our second quarter of 2011. For the second quarter, we expect revenues in the range of $200 million to $207 million, and adjusted earnings per diluted share in the range of $0.42 to $0.52. This assumes higher interest expenses and a tax rate of 31%.

As we indicate in our guidance we expect that Q2 will be similar to Q1, however as the markets in general continue to improve and, in particular, as we work through the lower margin backlog in our energy projects business, we expect both our top and bottom line performance in the second half of the year to improve over the first half.

In addition, we continue to drive our global growth strategy where we're focused on both organic and acquisition growth, investing in high growth regions of the world, developing and launching new products, improving our operations with lean in our service to our customers. And with the Leslie asbestos resolution finally behind us and our enhanced borrowing capacity, we are committed to executing this strategy.

With that, lets go to your questions.

(Operator Instructions)

Thank you. Our first question is from Mr. Brady of BMO Capital Markets. Please proceed with your question.

Hello, thanks, morning guys.

Morning.

With regard to the Energy segment and the backlog and the pricing, kind of embedded in that, are the orders that you are putting into backlog today, is the pricing on those orders better than the historical backlog -- the pricing that is in the backlog historically?

Yes. When you say historically, yes, we have been replacing our backlog with better margins than what we have been taking out.

Analyst: Okay. So, then how much farther do we have to go until we work through the lower margin backlog?

Well, as we said, as we -- same as we talked last quarter, Charlie, we don't expect to see that really improve, significantly, until the second half -- the later half of the year.

Okay. And by that time in ought to have, pretty much washed out and we'll start seeing the results of the better margin backlog you are booking today?

Yes. The margins are improving in our order rates, but again it is a margin slow improvement, so it will just build over time, we expect.

The bookings we are booking today we'll deliver in three quarters, roughly.

Right. Any impact on the Energy segments as far as shipments going into Libya North Africa?

No.

As far as not being able to ship into those markets?

I think we have found, maybe, one instance -- one minor instance where we had something that wouldn't go. But there is no -- we are not going to see any effect.

Okay. On the Aerospace business, can you breakout the margin impact from the acquisition integration costs?

I am sorry, you mean the margin change?

Well, you had -- if I understood you correctly you had a margin impact from integration expense. Correct?

Yes, we had the margin impact of the new acquisitions, primarily the margin's change was primarily due to the new acquisition, and their margins are lower than the fleet average for really two main reasons. One is, the integration activity we are doing now, and the other is that they actually had a fairly low quarter in revenues which we will see a rebound in that in Q2.

Okay. Is there a way to -- specifically to the integration activities, because presumably that is going to stop at some point, can you quantify what the headwind to margins in Q1 were from that?

Again, it was more on a year-over-year basis, but there certainly is -- there was not a lot of accretion from that acquisition in Q1.

And those integration activities ought to, pretty much, conclude at what point?

Those will improve over the remainder of the year this year. So, by the time we get to the second half of this year, that will again, improve.

Okay, thanks.

Thank you, our next question comes from the line of Mr. Maczka of BB&T Capital Markets. Please proceed with your question.

Hi, good morning.

Morning.

Bill, I guess, I am still a little confused on the Q2 guidance. The revenues are in line with what you just delivered for Q1 but earnings, especially at the low end were suggest a sequential decrease. But, it sounds like you just said that negative impact from Castle on the Aerospace unit will be less severe in Q2.

And I thought we were working through most of that breakeven Energy business in backlogging Q1 and less of it in Q2. And just in the context then of the cyclical recovery in some of your other businesses I would think Q2 would be better than Q1? Can you just say a little bit more about that?

Let me add a little bit more color, and then Fred can add to my comment. I think there is a couple dynamics -- Aerospace will get better in Q2 as we just indicated. Particularly as we get through the second half of the year as we get the acquisition integration behind us.

And, also, as I think about Aerospace being at the low point of the cycle, the commercial side will help recover the risk of the down side from the military aftermarket.

The Flow Technologies Group had some investment in Q1 that didn't happen. So, the profitability improvement that we saw sequentially isn't going to continue at the sort of rate it is. We will probably step back a little bit as we make some investments that we intended to make in Q1. So, those almost, sort of, trade off of each other. Through the rest of the year we expect both of them to improve.

I don't know if, Fred, you want to add anything?

Well, there is only one other factor that is affecting Q2 in the Flow Group, which had a -- as we said, a very strong Q1. They have a mixed change in Q2, unfavorable Q1, there is one particular large project that is shipping that has got a lower margin than, sort of, their run rate. That was the other major thing that, sort of, keeps Q2 where Q1 was, from an overall perspective.

Okay. So, Fred, just building on that in Flow -- so we had a very good quarter, top line in margin in Flow in Q1. You are going to make some additional investments in Q2, you are going to have a less favorable mix.

So this 13.7% operating margin will be less than that in Q2, but might it be higher than that in the back half as the cyclical recovery continues there?

Yes, we would expect the Flow Group again to improve in Q3 and Q4 versus what they are going to show in Q2.

The other way to think about it is you look back over the last few quarters with Flow Tech, they had a strong Q3 last year. You know, it is not a linear stair step there as we go from quarter to quarter, and expect that to continue. They had a great performance in Q1, but we don't expect that performance to continue in Q2. But in the long run we expect the business to improve.

Got it. And, Bill, you made the comment about Aerospace, seeing the bottom of the cycle, perhaps, here in the first half. And in Flow that is a collection of business that should, mostly be in cyclical recovery right now or at least stable. So, should be thinking about sequential revenue improvement in those two units as we go throughout the year. I know you don't quantify that, but is that the way, directionally, we ought to be thinking about this quarterly progression?

Yes, let me add a little bit more color to that. Maybe that takes us a little bit more longer term. But there is a couple of pieces in both of those businesses that we haven't, that we won't see any recovery at all yet, because they are a later cycle.

So, even though it is a mix of businesses, we have businesses within that are later cycle. There is virtually no new construction spending driven investment in energy systems and new power plants and steam related products in the US. There is a little bit in Europe. So, that is the later cycle activity we expect. Eventually, we will recover here.

And then in Aerospace, while I commented on Business Jet, that used to be a high single digit percentage of our Aerospace revenues if you go back in time, that basically went away. We don't expect to see that really materialize this year, but we are a little more optimistic that we will see that grow into 2012 from a revenue standpoint. So, as bookings get better in 2011 we should see revenues in 2012.

So on a longer-term perspective, there is still more opportunity for the economic cycle to contribute to the end markets that we serve. To position us better for, really, beyond 2011.

And then, finally, it sounds like Energy should still be under some pressure in Q2 and maybe margins aren't much different there in Q2. Is it reasonable to think about those going back to double digits in the second half where it sounds like things could be significantly better with the strong orders that you have had and this pricing dynamic that is getting much better?

That is a reasonable assumption to make. We are going to be cautious until we show the results but that is a reasonable assumption to make.

Okay, thank you.

(Operator Instructions)

Our next question comes from the line of Mr. Summerville with Key Banc. Please proceed with your question.

Morning, a couple of questions. First, can you comment a little bit more around the circumstances regarding some of the management turnover? You have had, Bill -- you lost in the last couple of weeks the head of your Aerospace business and now the head of your Energy business. And will those changes or this transition, kind of impact your M&A trajectory as you think about those businesses?

Let me handle the change first, and then I will comment on M&A. They are two very different situations. The Aerospace one, as we have across all CIRCOR's spent a lot of time building management depth. And Chris went on to a bigger position. We are very fortunate we have a strong team there. And we had an individual Michael Dill who, seasoned veteran, ready to go step into those shoes. So, we are not going to miss a beat in Aerospace.

In Energy, it is a little bit different story. It is our largest segment. We have gratitude for what Paul has done for us in the past. And if you look back historically the evolution and the phases we have come through of the cycle and building the team and the lean environment, we are really excited that now we have the opportunity to find someone to take it to the next level.

The next level is really building a global growth engine that we believe we have in front of us. So, I don't think it is going to affect our trajectory of the business and the strategy.

M&A question is a little bit different. We primarily run the M&A activities out of the corporate office and we have AJ Sharma, head of Business Development, somewhere out in the world, right now, traveling around. So, we have a full court press on our M&A activity.

And then if we look at the margin performance in Energy in Q1, 6.4% operating margin. If we can use the word normalize to just describe what the margin would have looked like if you back out that zero profitability business?

Yes, if we backed out that zero profitability business we would be, I would say, we would be close to double digits in the Energy Group.

Yes, sorry?

Go ahead, Matt.

I was just going to ask, with regards to the semi-conductor piece of Flow. First, how big is a percent of revenue is that for CIRCOR today?

And as I recall, and perhaps I am not remembering correctly, it sounded like you expected some moderation in that business; another strong quarter out of semi-conductor. What 's sort of the go-forward view there, as we try to work all these different variable into your product base?

You are correct, the industry in general had expected a little bit of a slow down -- not a slow down but kind of a flattish lull in the growth of equipment demand, and we didn't see that. So it is a smaller part of CIRCOR, it is more of a -- we use it as a lead indicator of the earliest cycle business we probably have or one of the earliest cycle businesses.

And then, last, can you comment -- if you look at the pricing you are booking now in the longer cycle energy business -- the International Project business, how much has pricing improved off the bottom, and what are you seeing in terms of pricing on the short cycle side as well?

Well, I will answer the second one first. In pricing and short cycle as we announced before we did put a price increase in, in Q1. It is holding relatively well, so pricing seems to be -- it is been in the past and continues to be rational.

In the Large Project business we have seen, again, off the bottom we have seen, what we call, marginal improvement. So, we have seen a couple hundred basis point improvement in the pricing in that market.

Thanks, Fred.

At this time, we have reached the end of the Q&A session. I will now turn the conference over -- back to you Mr. Bill Higgins for any closing or additional remarks.

I would like to thank all of you for joining us on this call this morning. We look forward to speaking with you on our next call. Thank you, and have a good day.

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