Carlisle Companies Inc (CSL) 2005 Q1 法說會逐字稿

Good day everyone. And welcome to the Hawk Corporation's conference call. Today's conference is being recorded. There will be an opportunity for questions following the presentation. Instructions for asking a question will be given at that time. I will now turn it over to Mr. Ron Weinberg.

Good morning and thank you for joining us. The purpose of this call is to review our first quarter results. And conducting the call is myself, Ron Weinberg, and Joe Levanduski, Vice President and CFO, and Tom Gilbride, Vice President of finance. I'll begin and then they will join me in covering the financial aspects of our presentation and we will take Q. and A.

We released earning this morning before the market opened, and so we will review those financials and then open the call to questions. I want to remind you that the statements made during this conference call which are not historical facts may be considered forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied. For further information concerning issues that could materially affect financial performance related to forward-looking statements, please refer to Hawk's quarterly earnings releases and periodic filings with the SEC.

Well, in the release this morning we indicated sales for the first quarter which were up 19.6% against the prior year's quarter. All of our divisions experienced sales increases and we had good strong representations from our various markets. Construction, for example, was up 33%. That also includes some effect of mining equipment which is going through very strong conditions right now. We also had a growth in aerospace which had been soft for the last year or so. And it was up 20%. The truck market is strong as many of you know who follow that. That was up approximately 32%. The only real soft spot we experienced was agriculture which was down about 5%. We had a specialty category that was up very strongly and it benefits from military sales of brake pads to Humvees which is also strong.

Then if we look at our markets in a different way our powdered metal divisions also had some very strong segments. We sell heavily to the pump and motor business, and that was up 20%. That motor is not to be confused with our discontinued operation of motors. This, it's just a category that we sell powdered metal parts to. We also sell certain parts to the automotive second tier manufacturers and while we are not a prime seller to O. E.s this was a very strong segment for us in powdered metal.

The gross margin, while it was held steady was not up as much as we might have expected given our strong sales increase and Joe is going to cover that in more detail but a couple of the key points that I will address, is one is the fact that we are in the million of a plant move at friction and while friction's margin did increase, it didn't do nearly as much as I think we would have achieved if we weren't in between the plant move. So we are in effect. covering two overheads while we get ourselves moved. The other is one of our powdered metal plants located in Pennsylvania is an under performer. Its margins are lower than what we expect and what it's able to do.

And we have put in as the head of that division, just at the beginning of this year, the head of that plant, rather, is two plants there, Don Brown, who is the manager of our turnaround in Mexico. So we are highly confident that's going to show improvement over the next few quarters as he gets his feet on the ground and begins to make changes, basically operational kind of things. The net result of this was income from operations being up 15% to 6,565,000. And in a minute, Joe will also cover what that would have done on a pro forma basis without giving effect to some of the one time charges we have.

There's a couple of themes that I will share with you that represent what's going on behind the scenes in the business. First of all we've been very successful in driving sales hard. These are initiatives that we embarked on probably five or six quarters ago; some of them even longer than that. And our goal is to make ourselves less dependent completely on the economy. You always certainly benefit when the economy is better than when it's not.

What we are focused on is new business awards which have been very strong at friction and our after market business there, which those of you who follow us regularly know has been a strategic initiative of ours. We brought in a new business leader to head up after market late last year and building on what he is doing, plus the momentum there that part of our business was up 40%. And to distinguish, that's the aftermarket that we sell directly into the aftermarket. It does not include the part of the aftermarket where we go through an existing O.E.

At our precision components group this sales push has been reflecting itself in a lot of new business awards, it's been something along the line of $8 million of net new business awards in the first quarter of '05, however, this is the interesting part of this, these are new business awards, these are not sales yet, this is business that will kick in in the latter part of this year. So the results that HPCG had in the early part of this year without the benefit of that.

A couple other points. Tulsa, our move to of the plant is on schedule. It's moving along literally month by month as we transfer equipment out there and maintain production, several production cells are already running. I myself was out there a couple of weeks ago and it really is a showplace plant that's going to serve us as well for what we're doing now with the cost savings we've talked about, and it's going to give us an opportunity for expansion. It's roughly 100,000 feet bigger than the existing plant here that we are leaving.

So with that as a little bit of a backdrop I am going to turn this over to Joe Levanduski who will cover some further details.

Thank you, Ron. I would like to just visit the income statement first, and talk about revenues on down. Our revenues finished at 72.1 million versus 60.3 million, roughly 19.6% above last years results. This was a quarterly record for Hawk corporation.

All three operating segments reported double-digit growth with Wellman Products Group, our friction division, reporting 25.1% improvement, finishing at 44.4 million, versus 35.5 million in the first quarter of '04. Our powdered metals division, up nearly 11% at 22.8 million versus 20.6 and racing up approximately 17% at 4.9 million versus 4.2 million. Ron touched upon the individual markets that drove those results.

Construction, heavy truck up in the low 30% range, aerospace up approximately 20%, all three of those were stronger than our initial guidance that we put out in the market for full year winds up nicely with our guidance for the full year that started off very strong. Or ag market, down 5 percent, our full year guidance is for that market to be down flat to 2% down. So we are comfortable with where our markets are lining up with our full year guidance.

From a gross margin percentage, our friction segment finished at 28.4% versus 27% in the first quarter of '04. This related to the strong mix of products sold in that division, as well as fixed costs absorption improvements in the plants not impacted by the move of our facilities to Tulsa, Oklahoma. As Ron mentioned, the fact that we are in transition between the two facilities has dampened the impact of our gross margin pull-through as we transition the production from our Ohio facility that is being closed, to our new Tulsa, Oklahoma, facility. As that transition continues to move forward, we shall see that somewhat soften.

Our powdered metal division showed our gross margins down to 20.6% from 23.5% in the first quarter of '04. There were operational inefficiencies at one of our Pennsylvania facilities. We also have startup training costs associated with bringing some of our new technology equipment online that was for those who are familiar with Hawk, we've been talking about the new technology investment that we initiated about two years ago. We are still in the process of putting in and installing some of the new equipment and there are costs associated with getting that up and running.

There are also costs being associated with outsourcing production as a short term measure to meet customer demands. And certain of our tonnage ranges the demands for, from our customers are outpacing some of our production capabilities. So we are in the short term outsourcing some of the production while we invest in long-term capital expenditures to handle the bottlenecks.

On an operating income standpoint, on a GAAP basis we are up 15.8% to 6.6 million versus 5.7 million in the first quarter of '04. The 6.6 million represents a number that was slightly above the top end of our guidance range. The operating expenses included previously disclosed loan forgiveness cost of 1.1 million in the first quarter of '05, versus .7 million in the first quarter of '04. The total loan, which originated back in 1994, is now entirely forgiven. There will be no future costs associated with this action going forward.

Also included in operating expenses is restructuring costs associated with the relocation of our production to our new facility in Oklahoma of roughly $700,000 in the quarter ending March 31, '05. There were no such costs in the first quarter of '04. The project is on plan and is moving forward on schedule. Adjusting for these two unique programs, our operating income increased 31.3% to 8.4 million from 6.4 million in the first quarter of last year; operating margins as a percentage of net sales, improved 11.7% from 10.6% last year.

Earnings per share, as reported from continuing operations after income taxes, appears flat on a GAAP basis at $0.20 per share for each quarter respectively. Included in this number are restructuring costs which impacted us about $0.05 per share in the first quarter of '05. Again there is no impact on our first quarter of '04 results. The loan forgiveness impacted us about $0.08 per share first quarter '05, $0.05 per share in first quarter of '04. Adjusting for these two events, our EPS would have been reported at $0.33 per share in the first quarter of '05 versus $0.25 in the first quarter of '04.

Moving to our guidance section, second quarter revenue growth is expected to be 12 to 14% over second quarter of '04 levels; second quarter of '04 revenue was 63.4 million, putting a dollar range at roughly 71 to $72.5 million. We expect this result as the result of continuing momentum of our new product introductions in the global economic improvements of our observed markets.

Second quarter operating income, up approximately 3% from second quarter of '04, operating income of 6.1 million which will put our second quarter '05 number approximately 6.3 million. This includes 1.3 million of expected costs associated with our relocation project, versus approximately $200,000 in the second quarter of '04. Excluding these costs, operating income would increase 21% quarter to quarter.

Total restructuring costs associated with the relocation project remain in line with our previously disclosed estimates of 4 to $4.5 million. We are reaffirming our full year guidance, with net sales being up about 10 to 12% and operating income up, which includes the loan forgiveness and restructuring costs, up about 7 to 9%. Q1 actual results and Q2 expectations are encouraging, and while we are not sensing softness in the second half, we consider it prudent not to raise our full year's guidance at this time.

Turning to the balance sheet our working capital increased by 5.1 million from December 31, '04 levels, driven largely by the results of growth in revenue and production volumes. Our accounts receivable are up about 7.8 million from our December numbers, with DSO sitting at 70 days as of March 31, '05, versus 50.5 days at 12-1, 59.2 days at March 31 of '04. The inventory, up 4.1 million with inventory turning about 4.5 times, to approximately the same turn ratios in the December 31, '04 numbers and March 31, '04 numbers.

Our accounts payable increased $6 million with P.P.O. days purchased outstanding at 64 days as of March 31, '05, versus 55 days at the end of the year. Capital expenditures in the first quarter, of approximately $4.2 million. Included in this number is installment of -- one of the final installments of the new technology program and our powdered metal division, and we also had expenditures targeting product bottlenecks spurred by growth.

Long-term debt, up 4.8 million from December 31, '04 levels of 111.4 million, finishing at 3-31-05, at 116.2 million. This number is, was to support our working capital needs. It was also affected by the normal annual payments of the Company, of the Company's incentive compensation and 401-K. contribution payouts to employees in the first quarter.

Availability under our bank credit facility remains strong at approximately $22 million on a total facility of $30 million as of March 31, '05. With that I will turn it back to Ron for concluding remarks.

Okay. Well I think at this point we will open the call to questions.

[Caller Instructions]. The first question comes from Joe Giamichael of CJS Securities.

Good afternoon, gentlemen, congratulations on a very strong quarter. Given the growth in Q1, and the guidance you've given in Q2, I know you said you didn't think it was prudent to raise full year guidance, but are you seeing any indications that there is going to be any impending slowdown, do you have any things that you're looking at that don't look positive? Because it seems that to get to that number, you would have a pretty material slowdown.

I tell you, Joe, it's an interesting question. We see a dichotomy. The dichotomy is the financial community is poised, and senses kind of a slow down. I suspect half the people on this call will be watching Greenspan's remarks later from the open market committee. In the everyday business we are doing we do not see it. In other words, what we have done is not a signal of anything that we see. We all know some day there will be another cycle. Whenever it may be we don't know. We don't see anything right now in our weekly, monthly, quarterly dialogue with our customers.

Got it. Okay. I don't think you gave tax rate guidance. I know we came in around 51% for the quarter. I'm thinking about for the year in general, do you have any idea where you are coming up?

Yeah, our full year guidance, which I didn't touch upon, and we didn't touch upon in this press release but the full year guidance that we had out in the market was for the effective tax rate to be between 48 and 53% for the year; the first quarter effective tax rate was approximately 51%. So we are right kind of in that range and we anticipate being in that range for the full year. I hope that answers that question.

Definitely. And then I will ask one more and get back into queue. SG&A, just trying to look at it on a comparable basis, you came in about 10.1 plus the 1.1 for the loan forgiveness. Is there anything over the course of this year that you anticipate where that should be growing, or do you think you should see a trend more common to '04?

I think the trend is going to be a little more common to what we saw in '04. Clearly there were some compensation costs in the SG&A expenses in the first quarter. But as we look, our R&D expenditures, while up, expected to be up in '05 are not going to be significantly up in '05 so it will be more of a trend that you saw.

Do you think you should continue to see some leverage there?

Yes.

Great. I'll jump back into queue. I look forward to seeing you all at our summer conference.

Thanks. We look forward to being there.

The next question comes from Ben Papay, of KeyBanc Capital Mortgage.

An update on raw material front, it appears that raw material costs sequentially should be either flat to even possibly slightly down in the second quarter versus the first quarter. What exactly are you seeing on the raw material front, and any guidance for the second half of the year?

I think as relates to steel, which is a big raw material cost for us, we have seen flattening from where we were in '03 -- '04. I would think, though, on copper which is another big raw material that we do use we are seeing pressure, upward pressure on some pricing. So I mean I don't know that we expect that to continue through the year but right now it's, there has been some upward pressure.

Okay. And in your aerospace market and it's obviously much better than expected so far in the year, can you talk about the strength in this end market and does it look like it could continue going forward?

I think that we were present pleasantly surprised to be honest with you. I think what has happened is its been soft. We have a regular customer base. Air traffic has been pretty good. And we don't see any sign of it turning down. It's not overall weakness in the market. So we think it's going to stay pretty good.

Okay. And then any update on, any kind of guidance for working capital needs for all of '05, working capital increased 5 million in the quarter, partially due to strong sales and partially due to increased inventory for the plant relocation. Do you expect that to, working capital needs to keep going up for awhile and then trends down -- how do you -- ?

No, definitely not. We are watching that one very carefully because that should be about all they do. In other words, we really are on a focused initiative, which we do from time to time to keep that under control.

It's heavily inventory, while there is some increase in receivables and the days went up a little bit, that's not because of bad credit conditions. It's typically where we have more foreign business, we sometimes have to offer some longer terms and, of course, we have more business. But the inventory is the part of that we watch and we are watching that very carefully. I think you are going to assume it's not going to continue to drive upward like this.

Finally in your performance raising segment, if flat year-over-year operating income is that more of a mix issue or is something, what do you see going on there?

Yeah, primarily a mix issue. We did incorporate at the tail end of or during the 2004 year new product line. That does carry slightly lower margins but it has done, it has been extremely successful. So there is a bit of a mix issue on the top line that's impacting the margin.

Okay. Thank you.

Again, [Caller Instructions]. The next question is from Joe Giamichael of CJS Securities.

Just a bookkeeping question here. What was D. and A. in the quarter?

The depreciation and amortization, in the release, it was 2.8 or 2.9 million in the quarter, compared to 2.8 last year.

Got it.

We do expect with all of the technology capital expenditures that went in in '04 and those coming on line in '05 there will be a slight increase as we go through '05.

Got it. And what do you anticipate Capex to be for '05?

We are still expecting Capex to be in the 50 to $60 million range.

Thank you very much.

There are no further questions. Do you have any closing comments?

No, we don't. Thank you all for joining us. And we will talk to you from time to time and look forward to talking to you after the neck quarter.

Thanks.

That will conclude today's teleconference. You may disconnect at this time.