Circor International Inc (CIR) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to CIRCOR International first-quarter 2013 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 to Dennis Walsh for opening remarks. Thank you, sir. Please go ahead.

Thank you and good morning, everyone. On the call today is Scott Buckhout, CIRCOR's President and CEO; Wayne Robbins, CIRCOR's Chief Operating Officer; and Fred Burditt, the Company's Chief Financial Officer.

The slides we will be referring to today are available on CIRCOR's website at www.CIRCOR.com, on the Webcast and Presentations section of the Investors link.

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 Form 10-K for 2012 and other SEC filings. 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 2, 2013. While CIRCOR may choose to update these forward-looking statements at a later date, the Company specifically disclaims any duty to do so.

On today's call, management will often refer to adjusted operating income, adjusted operating margin, adjusted EPS and free cash flow. These metrics exclude any pretax special charges, repositioning inventory reserves, intangible impairment, as well as historical asbestos and bankruptcy charges related to the company's Leslie Controls subsidiary. A reconciliation of CIRCOR's non-GAAP adjusted operating income, adjusted net income, adjusted EPS and free cash flow to the comparable GAAP measures are available in financial table of the earnings press release on CIRCOR's website.

I will now turn the call over to Mr. Buckhout.

Thank you, Dennis, and hello, everyone. It is my pleasure to be here today as a CIRCOR's President and CEO. I'd like to take this opportunity to briefly introduce myself and to share with you my excitement about joining the CIRCOR team and the opportunities that lie ahead.

Most recently, I served as President of United Technologies' $7 billion Fire & Security division. Fire & Security sold highly-engineered products and systems into many of the same markets as CIRCOR, oil and gas and power generation, to name a couple. Before that, I served in other roles at UTC, including President of the Global Fire Products business and President of the Systems & Firefighting business based in Europe. I also spent six years at Honeywell, running their Friction Materials Americas business and their Friction Materials and Consumer Products businesses in Europe.

In my new role as CEO at CIRCOR, I will be focused on driving earnings per share and cash flow by delivering results in three areas, margin expansion growth, both organic and through acquisitions, and improved working capital.

I'd like to share some of my initial thoughts and impressions after three weeks on the ground, but before I do that, let me turn the call over to Fred to discuss our Q1 results.

Thanks, Scott, and good morning, everyone. Please go to slide three, and I will touch on the consolidated results; then give you more color by segment and markets.

We had a solid start to the year, achieving both revenue and adjusted EPS at the high end of our guidance. Revenue for the first quarter was $205.4 million. As expected, this was 4% down from Q1 of 2012, primarily due to softer short-cycle energy volume, which declined in line with the North American production and rig counts, and larger national projects, where some shipments shifted to the second quarter.

Backlog of $457.3 million was up 6% year-over-year and 2% sequentially from the fourth quarter. Adjusted operating income was $14.5 million, up 6% in the first quarter of last year, and AOI margins expanded to 7.1% compared with 6.4% in the same quarter last year.

Net income for the quarter was $7.9 million or $0.45 per diluted share compared with net income of $8.6 million or $0.49 per diluted share for the same quarter last year. Excluding repositioning charges, we achieved adjusted EPS of $0.52 for the quarter, an increase of 6% from the first quarter of 2012.

Please turn to slide four for our Q1 repositioning-related charges, which are associated with the activities in Brazil, California and India. These actions include consolidating facilities, shifting expenses to low-cost regions and exiting certain nonstrategic product lines.

During the quarter, we incurred $1.6 million in repositioning charges, which was primarily cash. On a year-over-year basis, these projects have already contributed approximately $1 million of savings, primarily from Brazil. We expect to realize annualized savings of approximately $7 million from these actions in the second half of 2013.

Now I'll turn to segment performance, beginning with Energy on slide five. Energy bookings were down 19% year-over-year as a result of lower North American short-cycle orders and large international projects. North America short-cycle business was negatively impacted by the 10% year-over-year rig count reduction. In addition, last year's first quarter had unusually high bookings.

International project quoting remains healthy. However, actual releases of contracts were pushed out. We do anticipate, though, Q2 will be stronger, which has been confirmed so far in the first month of the quarter. In Brazil, we received our first large oil and gas valve order since entering that market a couple years ago.

Our ending Energy backlog of $217.8 million was up 12% year-over-year, primarily due to higher order levels within our large international projects business, especially in the Middle East.

Energy revenues of $96.7 million for Q1 decreased 11% year-over-year due to factors I mentioned earlier. In addition, unfavorable foreign currency fluctuations reduced revenues by 1%.

The segment's adjusted operating margin was 11.1%, up from 8.2% in the first quarter of 2012. This increase was primarily driven by improved large international project pricing, partially offset by lower volume and associated leverage.

Now let's move to slide six and Flow Technologies. Year-over-year segment bookings were up 2%, primarily driven by sampling and instrumentation orders, partially offset by lower HVAC orders. Revenue came in at $71.4 million, up 7% year-over-year from higher power generation, instrumentation and sampling demand, partially offset by 1% unfavorable foreign currency fluctuations.

Flow's first-quarter adjusted operating margins were strong at 12.7% and up from 11% last year, primarily due to higher volume and associated leverage.

Now, Aerospace on slide seven. Bookings were up 5% year-over-year, due primarily to higher landing gear orders led by the A330. Ending backlog of $162.7 million was up 1% year-over-year. Revenues of $37.3 million were up 2% from the prior year, primarily due to a decline in landing gear shipments associated with the exit of the unprofitable overhaul product line as part of the repositioning actions.

Aerospace margins in Q1 were 3.5% compared with 10.8% in Q1 of 2012 and 3.5% in Q4 of 2012. Year-over-year margins were affected by approximately 500 basis points as a result of development and startup expenses on new programs, including the A350, 330 and Blackhawk. In addition, we had unfavorable mix related to a favorable engineering project from last year. We anticipate margin improvement on Blackhawk and A330 during the second half of this year as they reach full production, and we will get full benefit of the repositioning.

The Aerospace business is a major focus of our margin improvement initiatives. We're consolidating two of our California landing gear facilities and exiting some small, nonstrategic product lines.

Slide eight includes highlights from our consolidated P&L. Corporate, general and administrative expenses for the first quarter of 2013 were $6.6 million compared with $6.9 million for the same period in 2012. The tax rate was 31.2%, lower than our anticipated 36% rate, due to a shift of Brazil repositioning expenses from Q1 to Q2. The adjusted effective tax rate in the quarter without repositioning charges was 30.3%, slightly lower than our anticipated rate of 31%.

Looking ahead, we anticipate our second-quarter tax rate to be approximately 31%. Excluding repositioning charges, the rate is anticipated to be 29.5%. For the full year 2013, we expect our tax rate to be approximately [31%] (corrected by company after the call), and excluding repositioning charges, it will be 31%.

Now turning to slide nine. During the first quarter, we generated a positive $1.1 million in free cash flow, $8.2 million more than the first quarter of 2012, primarily due to improved working capital.

Now let me give you an update on the markets we serve, so please turn to slide 10. Let's start with oil and gas markets that impact our Energy segment as well as more than 25% of our Flow segment. We continue to see rig counts essentially flat from Q2 in North America. However, this is still at good levels. We are cautious, but currently believe rig counts may improve in the second half of the year.

To minimize the impact of rig counts, we continue to expand our relationships with international distribution outlets, especially in the oil and gas hotspots of the Middle East, Southeast Asia, Brazil.

At our large international projects business, we are seeing strong offshore project activity. The oil price environment is providing support for a wave of new offshore projects and productivity in the Middle East is improving. There is some delay, however, in project finalization, but we do expect Q2 to improve.

Our pipeline business, which is primarily driven by capital spending, is up in North America, with international product markets flat. There is an increased opportunity in pipeline integrity due to aging infrastructure and spills, particularly in North America.

Now let's move on to the Flow Technologies segment, which also derives a significant amount of revenue from the energy-related markets. Flow Technologies accounts for about 35% of our business and serves oil and gas, power generation, process and other markets. I'll focus my remarks on the oil and gas and power generation markets. The commentary on smaller markets is on slide 10.

In the oil and gas market, offshore platforms continue to provide good growth opportunities, especially internationally. We plan to grow share in this market through our ability to deliver products with exotic materials and with short lead times. The long-term outlook for the power generation market is positive and is a key target market for us. New construction in emerging markets presents CIRCOR with excellent near-term and long-term growth potential.

While the power generation market in India still remains somewhat slow, we expect policy actions in 2013 to drive growth. Although growth in China has also slowed, the region is still investing heavily in large power projects. In Europe, new power investments are primarily coming from Russia and Eastern Europe.

We are also participating on an increasing basis in the MRO business in North America, with significant growth opportunities, both efficiency upgrades and for the conversion to natural gas power plants.

Finally, let's move to our Aerospace segment, which makes up about 17% of our business and primarily serves the commercial and military aerospace end markets. On the commercial side, production from OEMs, such as Boeing and Airbus, continue to be strong and commercial traffic is up. On the flip side, commercial aftermarket orders are soft due to maintenance deferrals and aircraft cannibalization. The business jet market remains flat.

On the military side, there continues to be uncertainty related to defense budgets. However, our business is well-positioned through 2013 as the Blackhawk program ramp-up offsets weakness in military spares.

And now for our guidance for the second quarter of 2013. We expect revenues to be in the range of $214 million to $220 million. During the second quarter, we expect to incur pretax repositioning-related charges of between $4.2 million and $4.8 million. Excluding those charges, we anticipate adjusted earnings to be in the range of $0.64 to $0.70 per diluted share. This guidance assumes that exchange rates remain at the present level.

I will now turn the call over to Scott for some final thoughts.

Thank you, Fred. I'd like to close out the call by discussing what appealed to me about CIRCOR before I joined the Company and what I now see as some of the key opportunities going forward.

The principal reason I was attracted to the Company is its significant earnings growth potential. To reach this potential, we are going to capitalize on several key strengths. First, we have a broad range of premier brands in the energy and aerospace markets around the world. Second, we have a diverse product line of highly-engineered products. Many of our product lines have leading positions in their respective niche markets.

Third, we sell into strong end markets with good long-term growth potential, energy, both oil and gas and power generation and aerospace. In addition, we have an early presence in several important emerging markets, including India, China and Brazil. Finally, we have a strong, continuous improvement culture, particularly in our factories.

Those key strengths attracted me to CIRCOR. Now that I've been here a few weeks, let me share my initial impressions of the Company. Looking first at our top-line opportunities, we plan to place a higher priority on organic growth. As I mentioned, our products are a key strength of the Company, and there are certainly pockets of excellence in our new product development efforts across the Company. Having said that, I see an opportunity to improve the rigor and discipline around new product development to become a more innovative, customer-focused Company.

In addition, we also have an opportunity to enhance CIRCOR's marketing function and expand our presence in higher-growth parts of our industry. Accelerating our organic growth through thoughtful go-to-market initiatives will be a high priority for us.

Acquisitions will remain an important component of our growth strategy. Going forward, we will be refocusing the organization on in-market acquisitions, businesses we already understand very well, where we can generate a double-digit return on invested capital. We have a strong balance sheet and serve excellent end markets with many opportunities for consolidation.

Finally, one of the most striking observations after arriving at CIRCOR is the complexity of our business. As everyone knows, complexity drives cost. We have more than our share of complexity. We have a lot of P&Ls, factories, SKUs, suppliers and ERP systems, to name some of the more apparent opportunities. We also have an opportunity to streamline our sourcing and supply-chain organization, which is somewhat fragmented and managed locally in most parts of our business.

Simplifying CIRCOR and aligning the business with our customers and channels will be a top priority for us. All of this won't be accomplished overnight, but we look forward to reporting our progress to you in the quarters ahead. I'm excited about the strong foundation that is in place at CIRCOR and even more so by the opportunities in front of us.

With that, Fred, Wayne and I are available to take your questions.

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

Thanks. Good morning. Fred, can we go back to your comment about seeing a little bit better trends into Q2 in Energy on the large project side? I know we have been talking for some time about good quotation activity there, and it seems like pushouts have kind of become the norm. Can you just say little bit more about what you're seeing there specifically that is better?

This is Wayne. Yes, we are seeing some delays in the project activity. But as Fred mentioned, April was a very strong order entry for us, and May looks like it is also shaping up. So we are seeing some more releases than what we've had in the past two quarters, actually.

And kind of as the name implies, are these longer-term projects that would not ship in 2013, or are these things that would show up on the revenue line in the back half?

Most of these would be shipped into 2014 at this point.

'14, okay. And then a question on Aero margins. Again, Fred, you said that is one of the key focuses here in terms of the margin expansion initiatives. We had the same 3.5% margin in Q1 that we had in Q4. And back in Q4, you had called out a couple of big buckets that were really pressuring it -- the new program spending, which is mostly still there, and all the repositioning and culling and other things.

So as we get out to the second half, should we think that is 500 or so basis points from the repositioning and the culling goes away, and much of the new program spending does as well, because two of the three new programs are starting to shift? I'm just wondering how we should think about back half-margins in Aero.

In the back half, there is really two ways I think you should look at it. One is the repositioning project will be in -- again, we've got the full run rate of $3.5 million of savings. And that will take care of most of the issues we've had with the Sylmar facility, as we've closed those -- put those two together, the California sites together. So that will address that piece that I talked about last year; it cost us maybe 300 basis points last year on a full-year basis.

And then on the new product side, yes, we will see -- it has been a significant drag on us. We talked about it was 400 or so basis points in Q4, and it was similar, actually a little bit higher, in new one. And some of that will go down. We still have the A350, which is the biggest program. But we will have -- we would have some improvement in the second half in those two, and as we get to full run rate, obviously, we will let you know more as we close out Q2.

Okay, so we ought to see those margins, just from the things that are already in place and the programs that already starting to ship, we ought to see them substantially better in the back half. But still there is the pressure from the A350, so maybe we are not all the way back to double digits, like we were in the first quarter of last year.

At this point, correct.

Okay, thank you.

And just one (inaudible) -- I think I misspoke in my comments a few minutes ago. The full year tax rate is 31%. I think I might have said 36%. So I just want to make sure that's clear. My mistake. I apologize.

Got it. Thank you.

John Franzreb, Sidoti & Company.

Welcome aboard, Scott. Hi, Fred and Wayne. I actually want to talk a little bit about the short-cycle energy. It seems to me that you are saying that business is starting to stabilize and you have expectations of a turnaround. Is that based on what you are hearing from customer inventory levels, or is that more of a macro view from the benefits of getting more international distributors involved in the mix?

John, I don't know -- let's make sure we characterized it correctly. We think right now that the short-cycle environment, the rig count is going to stay relatively stable to where it is today. We did mention that we have -- we are cautious that there may be some uptick in the second half, but we are not -- I would say we are not planning on that. That was more things we've been hearing, but we don't have that factually.

So I think if you're thinking about us the rest of the year right now, basically, we think the market will be relatively stable to where it was in Q1.

Okay, that's fine. Are you thinking about that on just North America or are you thinking about that globally?

That was a North American comment (multiple speakers).

Okay, fine. So you've talked about adding international distributors to the short-cycle business. It is -- how big of a -- how big of an opportunity is this for you?

This is Wayne. I think long-term, this is an opportunity, but obviously, we are still developing some of those relationships. So the impact on, say, Q2, we don't anticipate anything that you would see significant over the next couple quarters on that effort. That's a longer-term process.

Okay, fair enough. And on the power side of the business, you called out some opportunities, mostly in Russia and in China. What is it like domestically for you in PowerGen?

This is Wayne again. The North America power is especially focused on the MRO business. We see an opportunity for upgrades, as well as replacing and some environmental improvement. And that is where we are focusing our efforts. There is some project business, but it is not -- that's not the main focus for us in North America.

Okay, and one last question, for Scott maybe. Scott, when you look at the product portfolio, it's pretty diversified, an awful lot of end markets. You mentioned that M&A activity is something you are going to refocus on. Any markets you find most appealing, and do you think there is any opportunities maybe for consolidation of some of the product lines that you have?

As far as the strategy goes, I like the end markets. I like energy broadly where we play. I like Aerospace where we play. I think we'll see better than GDP growth over the long term here with these markets. So I wouldn't anticipate any changes from those broad markets.

We do have, I'd say, mix profitability among the different product lines in CIRCOR, and that is something we are certainly going to look at. I couldn't tell you exactly where that is going to end up, whether it is internal cost initiatives or pricing or maybe there is businesses that perhaps don't want to be in. But we are still looking at that. We are early days on assessing that at this stage.

Actually, one more question. You mentioned different ERP systems. Are you actually thinking about putting the firm on one common system?

It is an option. We have a tremendous number of ERP systems. We will certainly be reducing the number of ERP systems. But as with anything, there is a return on capital here that we have to watch and we have to make sure we are spending wisely.

So it will definitely be simpler, there will definitely be fewer systems. Going to one system, I don't know if the payback for that is going to make sense. But it is certainly where we would like to look -- directionally, it is where we would go.

Great. Best of luck, Scott.

Thank you.

Nathan Jones, Stifel.

Morning, guys. Scott, I know you have only been there a few weeks, so I'm not going to ask you what your kind of long-term margin targets and that kind of thing are. But is there a time frame where you think you might be able to share with us some longer-term margin goals and revenue growth goals for the next two or three years?

I would think by around the end of this year we ought to be able to shed a little bit more clarity and light on what our targets are and what our goals are. So I think in the six- to eight-month time frame we should have a better feel for what we think we can do there.

Okay, fair enough. Question on Energy. There is a mention of destock in the channel. Can you talk about where you think distributors are in terms of that, whether the destocking is finished and when we might see a pickup in demand just from the absence of destocking?

We saw a lot of destocking in Q4 and it continued in Q1. We feel it is relatively stable now going into Q2.

Okay. Energy orders down 19% year-over-year. Can you split the decline in orders out between the short-cycle business, the pipeline business and the international business?

Well, we don't break it out that clearly, obviously, to you, Nathan. But it is pretty well-balanced between the short-cycle and the projects business, that decline.

Not in the pipeline business then?

There is some -- I included that in the pipeline piece, so (multiple speakers).

Okay, fair enough.

It was broad, but --

In Aerospace, can you talk about what opportunities there are out there for new platform wins or increased content on current platforms -- opportunities out there to win new business?

As you know, there is no big program out there, big new program. I guess the Neo, there is some. But there is nothing that, again, like an A350 that we are working on today. But we do think there is opportunities to replace other companies, as we've done with the Blackhawk. We think there is certainly in some of -- we've gotten some new wins on some of the business jets that are coming in the future. So there is -- I would say there is -- we are working on a lot of smaller programs that should help us with growth, but there is no major program, as you know.

Okay. And on the military spares side of it, that business has been depressed for a while now. Have we lapped the declines in that or is that business still declining?

This is Fred again. I think generally speaking, it has declined. We don't have any -- in the spares there, we don't have any major [leg] to drop it from here.

Okay. That's it for me. Thanks very much.

Joe Radigan, KeyBanc Capital Markets.

Thank you. Good morning, guys. Can you quantify the project shipments in Energy that pushed from 1Q into Q2?

It was in the range of $5 million or $6 million.

Okay. And then what percentage of your backlog in Energy is shippable in 2013? And as you look at the project mix in that backlog, in terms of what is scheduled to ship for the balance of the year, how does that look in comparison to maybe what has been flowing through the last couple quarters?

Most of the backlog in the Energy is in the projects business, as usual, obviously by definition. We should have quite a strong second quarter, very strong, actually, probably maybe the highest shipping quarter based on the project backlog we have for the rest of the year.

Okay. And then in terms of what you are quoting now, is -- how competitive is the pricing environment? If you -- maybe to frame it up, are the project margins you are seeing today, are they accretive to where segment margins are currently? I know it is a long-cycle business and it takes a while for that to flow through, but what does the quoting activity look like marginalized today versus kind of what is in the backlog?

This is Wayne. I'd say that the pricing is stable if you look at, say, what we experienced in last year, which was a significant increase over 2011. And we are managing price very carefully and selectively going after projects that best match our margins.

Okay, and then maybe sticking with pricing on the short-cycle side -- and this will be my last question -- has it gotten more competitive as you've seen volumes come down in that business? I think you got a 3% to 5% price increase at the end of the first quarter last year. What does pricing look like in that business, and are there any plans in place for any future pricing action this year?

Right now, we see price still stable, and of course, we are always looking at opportunities to improve that pricing going forward.

Okay, great. Thank you very much, guys.

(Operator Instructions) Charlie Brady, BMO Capital Markets.

Thanks. Good morning, guys. I got on the call late. Did you guys say how much commercial aftermarket was down?

We didn't. It is not a big part of our Aerospace segment, so it was not a significant material change for us. But we are just talking about the market itself is still depressed.

Okay, and Scott, I just want to go back to your closing comments on your sort of big-picture look at CIRCOR. I guess I was a little surprised by the complexity commentary. CIRCOR, in my mind, has always been a company that had been embracing lean for a good number of years. And I guess as you look at that, are you not seeing that embedded in the Company to as great an extent as it should be?

And I guess can you look -- when you talk about new product development, can you give us a sense of -- does that sound like more spending on R&D is going up, and kind of where is R&D today, where do you see that going?

I know it is a little early days to you to maybe get into that, but I'm just trying to get a sense of strategically, as you're moving towards the new product development, that sounds to me like maybe higher costs. If you're trying to reduce complexity by ramping up lean, maybe that incurs more costs. I'm trying to get a sense of what we can expect going forward until things get a little bit better.

Sure. A good question. As far as the embracing of lean, where you see that very clearly displayed in CIRCOR is in the factories. I haven't been to all the factories. I've got a lot of places to visit, as you can imagine. But I've been to four or five already, and you will see a lot of lean principles either already firmly in place with well-run factories, or they are somewhere in the evolution of what you would expect from a lean perspective.

The complexity I am referring to is the structure of CIRCOR -- so, many P&L, 20 plus P&L's, many ERP systems, 20-plus ERP systems. So we do have a lean culture, particularly in the factories. But the structure with respect to suppliers and SKUs and business groups is complex. And of course, that drives some of the cost of how we run the business.

With respect to R&D, the specific numbers, Fred, maybe you can jump in and comment on that. R&D is up, particularly in Aerospace, as you would guess. And yes, you could expect that we are going to spend more in R&D going forward, to answer your question very directly. But Fred, do you want to comment on that?

I can elaborate a little bit. R&D is up, Charlie. In the power group, we have a brand-new product line we redesigned and are producing in India and are shipping around the world, and that is beginning to get traction. As Scott said, the Aero programs are getting traction. And in the Energy group, they've moved some of their new product development to India and our Center for Excellence there. And they are working on some new programs also.

Thanks very much.

Thank you. We showing no further questions at this time. I would like to turn the floor back over to Mr. Buckhout for closing comments.

Thank you for joining us this morning. I've enjoyed speaking with many of you already, and I look forward to meeting many more of you in the coming weeks and months. Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.