Carlisle Companies Inc (CSL) 2007 Q2 法說會逐字稿

Good day and welcome to the Hawk Corporation second-quarter earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would now like to turn the call over to Mr. Ronald Weinberg. Please go ahead, sir.

Thank you. Good morning, everybody and thank you for joining us. The purpose of this call, as I am sure you know, is to discuss our 2007 second-quarter results. On the call with me today is myself, Ron Weinberg, as well as a Joe Levanduski, Vice President and CFO of the Company and Tom Gilbride, Vice President of Finance.

We released our earnings today for the second quarter and during this call, we will review the financials and give you an operating report on the business and after that, we will open the call to questions.

As usual, I would like to remind you that statements made during this call, which are not historical facts, may be considered forward-looking statements. Forward-looking statements involve risk and uncertainties that could cause actual events or results 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 our quarterly earnings releases and periodic filings with the SEC.

Well, to begin, we were very pleased with the results. We think that we turned in a solid quarter and Joe will go over those results with you. The comparisons were very favorable in both the sales and the bottom-line results.

I am going to comment on where we find ourselves here because as we have transitioned from going through the issues that were represented by Tulsa, especially last year, the new plant in Tulsa, little by little, we are also making changes in what we are working on and by that I mean the challenges that we faced last year. We're working on operations at a level of getting shipments out on time, lowering the cost of expedited freight and things that were really very much built into the challenges of having a new plant.

What we are able to redirect our attention to now is what, I guess for want of a better word, I would call the next level of improving operations and that's sort of what's -- as an insight into the Company, that is what is going on now. We are very, very focused on a term called process capability. It is another way to define quality. It is another way to use the tools of Six Sigma and it is very important for where we are headed. Our goal is to be able to produce quality built in the first time and not to inspect it in.

And those are the kind of things that we are working on, as well as improving our lean manufacturing and that has got direct financial implications because it is as simple as getting the inputs into manufacturing whether it is secondary sourcing of any operations and what have as close to the production as possible. It will involve a continual just sort of step-by-step rationalization of our own processes so that we minimize the travel time of any given part and that is the essence of lean and that is what we are still working on. And so continual operations or opportunities for us.

Other things that are going on in the business internally are that we now are able to redirect our effort or enhance our effort I guess is a better word towards sales momentum. It is difficult to line up new customers and new projects when you are having trouble delivering the older ones like we were a few years ago. So now we really have opportunity and we have capability of serving customers as we grow and that is what we are seeking to do.

I will comment on Europe because as is happening in most industries, international business is very strong in Europe. Europe represents a strong aspect of what we are doing.

Let me talk for a minute about the tender offer, which we just put out an announcement yesterday about its completion. We made an offer for our outstanding bonds, a large portion of them, pursuant to the requirements of the indenture because we sold the precision components business earlier this year.

Of the total amount of $110 million of bonds that are outstanding, there were $22.9 million that were tendered. Now the actual offer was for approximately $85 million. We didn't have to tender for all the $110 million, but we purchased $22.9 million. So what that leaves us with is an enhanced capital structure because now we will have approximately $87.1 million in outstanding debt and we were pleased with this number. I think it is a number where we would like to have been and fortunately it turned out to be that way.

We have remaining cash on the books to pursue our acquisition program. At the end of June, the reporting period here, there were $93.5 million of cash on the books and then you can pro forma that by adjusting it of course for the purchase that we just made of the bonds.

Doing this has the effect of enhancing our interest savings because, on a net basis, we were paying 8.75% for the bonds -- interest on our bonds, but our return on the cash and cash equivalents was closer to the 5% range. So you can see there is a spread and on an annualized basis, that gives us an enhanced earnings of approximately $850,000. That is without regard to any further deployment of the cash that is outstanding if we were to make an acquisition.

Let me comment on that. Our acquisition program continues. As you will recall, we have targeted friction or friction-related businesses. So what that suggests is that we have identified properties and we are eliciting their interest and having discussions about an acquisition. We are getting positive response. There are companies that are interested in talking to us and we are going to pursue those. We have no guidance or indication of what will happen or exactly when, but we are in play. It is a program that I think let's say has got legs on it.

The other part of it is we are very pleased that as the debt markets have gone through some of the gyrations they have, we think that we have got cash at an attractive time to have cash and will play well into the pricing of the various things we look at.

A final comment in terms of what we look at going forward, we have reported before that we are going to be a component manufacturer for the fuel-cell business. This is new to us. We don't see substantial revenues from it this year, but it is an exciting project that has got a lot of excitement in terms of the future of alternative energy and so forth.

We have a customer that is an affiliate of United Technologies that we are working and producing parts with and there is a basis for our being in this business. The process of making components for fuel cells is separated plates and the like require some of the capabilities we have ironically enough as a friction manufacturer and that is pressing powdered metals and controlling the chemical content and the process very carefully. So it is something that is going to be an interesting future alternative for us and we will talk about it as time goes on.

Having said that as an introduction, I'm going to turn it over to Joe Levanduski who will go into more financial detail for you.

Thank you, Ron. I am pleased to report that Hawk set a new quarterly revenue record in the second quarter of 2007 finishing at $58.9 million or up 10.1% from $53.5 million in the second quarter of 2006. That broke the previous record that we set in the first quarter of 2007.

Both of our operating segments reported significant improvement on the revenue with our friction segment being up 10.2% to $55.3 million up from $50.2 million in the second quarter of the prior year. Our racing segment was up 9.1% to $3.6 million up from $3.3 million in the second quarter of '06.

We benefited from the pricing actions that we took in the second half of 2006 and we had strong performance in virtually all of our end markets with the exception in our heavy truck market.

Breaking things down by market segment, our aerospace and defense market was up 24.3%. Our specialty friction area was up 23.9%, agriculture was up 17.1%, construction and mining up 15.4%, so all of our four major segments were up significantly. The offset to that as mentioned was our heavy truck market, which was down 28.3% for the quarter. On a year-to-date basis, our heavy truck market is down 20.4%, so still modestly better than what we had expected as we walked into this year.

On a gross margin basis, we improved to $23.9 million -- I'm sorry -- 23.9% from 21.6% in the second quarter of 2006 owing to continued operational improvements at our Tulsa operation, higher volumes and the benefit of the pricing actions that I mentioned. A related offset is the higher incentive compensation variable expense that is tied to attainment of stronger operational results that impacted both our gross margins and our operating margins for the quarter.

On an operating income basis, our operating income increased 32.5% to $5.3 million up from $4 million in the previous second quarter of '06. Same factors benefiting the gross margins impacted the operating margin improvements. Also benefited from just the overall operating margin improvements. Our operating margins increased to 9% for the quarter and on a year-to-date basis. For the quarter, the Company had roughly $400,000 of legal costs associated with the SEC investigation.

Due to the significant cash position during the quarter, the Company reported interest income of $1.1 million offsetting the interest expense primarily on the bonds of $2.6 million for the quarter. Our effective tax rate is 46.9% for the second quarter after adjusting for a one-time event relating to our Canadian operation that is more fully explained in our 10-Q. The rate adjusted is 49.8%, which is our view for the balance of the 2007 year.

As a result of these factors, our income from continuing operations finished at $1.9 million versus $0.5 million in the second quarter of '06 or roughly $0.20 per share versus $0.05 a share last year. On a year-to-date basis, we are reporting $0.41 per share on a fully diluted basis versus a loss of $0.11 last year.

Our discontinued operations reported a modest $0.02 per share earnings. This is basically relating to the wind-down of our precision components group sale and just the post-sale activity that is slowly winding its way out of the system.

Turning to the balance sheet, our cash and marketable security position, as Ron mentioned earlier, finished at $93.5 million at the end of June versus $90 million at the end of March. The second quarter actually included two significant cash outflow events. The first relating to a $1 million payoff of the bank loan at our China facility and $2 million spent under our stock repurchase program. So beyond the reported growth from first quarter to second quarter of $3.5 million, we consumed $3 million on those two specific events.

The only debt that we will have on the books at June 30 is the $110 million bonds and a small level of capital leases. After the tender, the bonds will be reduced to $87.1 million. The Company repurchased roughly 189,000 shares under its stock repurchase program to date and the Company currently has available as of June 30 $20.7 million of borrowing capacity under its untapped bank facility.

The working capital, which is a source of positive news for us, has increased $1.1 million from the March 31 levels or less than 1% growth during that period of time while revenues continued at a record pace. Offsetting an increase in the accounts receivable, which is directly attributable to the volume improvements that we are experiencing during the quarter, is a $2 million reduction in inventory levels since March 31 going from $38.2 million of net inventory to $36.2 million at the end of June.

The lean operational initiatives are proving effective at lowering our inventory levels while improving our on-time delivery rates. Average days in inventory have dropped to 79 days from 91 days at the end of June of 2006. So we are very pleased with the results of our lean initiatives that are taking place at our operational levels.

Capital spending through June 30 is roughly $4.5 million, which is on track with our previous guidance expectation of $10 million on a full-year basis. The second-quarter capital spending actually includes $600,000 or approximately $600,000 relating to a land acquisition of property adjacent to our Italian facility as we plan for expansion of that operation in the latter part of '07 and early '08.

Turning to our outlook and our revised guidance range, we did increase our revenue range to between $224 million to $226 million, up from the original guidance range of $217 million to $222 million. This represents a 5.6% to 6.6% increase over the 2006 revenue results of $212 million.

Operating income range, we have increased from $11 million to $14 million -- from $11 million to $14 million, which was our original guidance to a new range of $14 million to $16 million. Comparing second half to first half and obviously what we are experiencing will be approximately $5.3 million of operating income for the balance of the year using the high end of our range. We see the normal patterns that we experienced historically.

While we are not tied to seasonality in our markets, we do see customarily softness in the third quarter owing to the normal European holiday schedule where the month of August has significantly less working days during that period of time. That affects our Italian operation significantly. In the fourth quarter, we normally see year-end holiday schedules and working capital actions that normally are taken by our customers at that point in time.

Including in our expectation for the second half of the year are continued expenses related to the SEC investigation. Although those expenses are difficult to gauge, we have taken a best guess at that range as well. The second-half top line will also be -- continue to be, from a year-to-year basis, will be impacted from the standpoint that we had retroactive pricing increases that benefited the second half of 2006. We will just have the normal pricing improvements that were part of those agreements affecting the second half of '07 and as well, combined with that is the fact that the heavy truck market will be softer in the second half of '07 versus the second half of '06.

With that, I will turn it back to Ron Weinberg for closing comments.

Okay. Thanks, Joe. Well, I think that Joe's detail highlights the point I made a few minutes ago that we consider a very solid quarter, that on all fronts, things are moving in the right direction now. Sales were positive; earnings were positive. Our working capital management efforts are starting to bear fruit. The tender is behind us and we came out with a number of bonds tendered that we are very pleased with and we have a strong amount of cash that it would be our goal through an acquisition to convert that into a growth of operating earnings. So with that, I would like to open the call to any questions.

(OPERATOR INSTRUCTIONS). Bob Labick, CJS Securities.

Good morning, guys. It's actually [Larry Sarnoff] sitting in for Bob.

Hey, Larry. How you doing?

Good, good. Can you just give a little more color on the SEC investigation? Do you have any timeline on when it might be concluded? I know it is hard to give an estimate on what your expenses will be, but can you kind of just give a ballpark number of what you are assuming?

No. I mean it is a thing that we can't comment on. As we have previously said, it doesn't relate to earnings or quality of earnings and we are cooperating with them and we have no timeline. It is their pace.

Okay. Implied in -- your guidance implies a pretty significant margin decline in the second half. Is that primarily related to the -- trucking is bad, but not quite as bad as originally thought. Can you add any color to that?

Well we see continued softness in the truck market. We started off the year significantly stronger than what we had anticipated. The first quarter was down roughly 8% quarter to quarter. Second quarter was down a little over 28% as I mentioned earlier. We expect and the consensus in the market is that the second quarter would be the trough, but we still expect to see continued softness.

When we walked into the year, we thought we were going to be closer to 40% down year over year. So we see -- we continue to sense a softness in the marketplace that will impact us. So there is a mix ratio that is going on here between our markets and the expectation compared to -- second half compared to the first half. But some of the activity and obviously the volume and change, which our second half to first half will be less of a revenue volume period to period comparative, has an impact on us.

When you are looking at the impact that those levels will have on our operations such as Italy for the month of August for an example, it really affects their third-quarter pull-through capabilities. So these are such things that we normally see and will have an impact on our second-quarter results.

Okay. Any more color on -- there was a pretty significant 200 point -- basis point decline in friction gross margin quarter to quarter (inaudible).

I'm sorry. What was the question?

What caused the -- there was about a 200 basis point decline in friction gross margins from the first quarter to the second quarter.

Once again, I think the truck market was much -- was not as significantly off as it was in the second quarter. That has an impact on some of our margin mix issues. A lot of it just related more to mix than anything. I think our margins of 24% for the second quarter are very strong. May not have been as strong as the first quarter, but they are very healthy margins and we are pleased with them.

Okay. And then just curious, for a bondholder, what would the economic rationale have been for actually selling the bonds back to the Company at a discount?

Well, it wasn't at a discount. It was at par. Our estimation was, as we saw the credit markets going through the turmoil that you are probably even more familiar with than we are with, we expected there would be a few people that just wanted liquidity, not necessarily a yield calculation that you or I could justify, but for whatever their own reasons. We don't know -- I mean they didn't call us to indicate, but this is what Jefferies, who helped us with the tender offer, indicated would probably happen and it did. When all is said and done frankly, it really turned out to be a number that we considered a very good one just in terms of our own balance sheet.

I agree. Absolutely. Okay, all right. Thanks a lot.

Joe Giamichael, Rodman & Renshaw.

Good morning, gentlemen. Congratulations. I want to kind of follow on what Larry was asking. Is this all a mix shift and margin deterioration issue or do you see some ramp in SG&A considering the sequential decline we saw from Q1 to Q2 in the expense?

Well, you have mixed two things. Are you asking about margin or SG&A?

I am trying to get to -- I'm trying to get a better understanding of the interplay between the two as it relates to the guidance you have given on an operating basis.

I think I would caution everyone not to read too much into the margin change versus Q1 because our margins are up versus last year. And I think a couple of things. Joe identified some of the factors and then in any 90 day period, you are going to get some variation in margin just whether it is product mix or particular expense hits and the world of accounting now is very precise. It has got a hair trigger on it and you can't just kind of smooth things like maybe people did 10 years ago. And so it will make for variation.

The other thing going on is that as we do better, we also have incentive compensation, which is spread broadly throughout the Company. So what is a variable cost on the downside, we want to make sure people benefit on the upside. There is some of that in there.

Got it. And then also sort of as it relates to that mix, can you remind us as it regards to your end markets where the higher margin opportunities come from?

The only thing that we have alluded to and obviously we don't talk margin by market sector for obvious reasons, but aerospace and defense is normally are stronger margin pull-through.

Okay. And that was something we saw more of in Q1, correct?

Well, I think if you look at the first half of the year, aerospace and defense has been very strong. The markets have been strong. Now whether that continues for the rest of the year, again we are looking at continued growth there, but maybe not at the same levels.

Got it. And just one last question and I will get out of the way. I wouldn't normally ask a company to comment on share price, but given the volatility that we saw yesterday on the heels of what should be news that's accretive to earnings, do you have any explanation or have you heard anything going on there?

No, we really don't. We don't know anything about it either.

Like you, I think everybody here thought it was positive news going out yesterday morning and so we were all pretty shocked by the market reaction. So yes, no one called us, so we really don't know what was driving it, but we were surprised.

Got it. All right. Thank you very much, gentlemen. Congratulations on the quarter.

Thank you.

Thank you, Joe.

Eli Lustgarten, Longbow.

Good morning, gentlemen. A quick question. One, currency -- I think you said 2.7%. How much of it contributed to earnings?

Can you ask that again, Eli?

Say it again. It wasn't coming through clearly, Eli.

Yes, you gave (inaudible) currency was like 2.7% of the sales gain in the first half of the year. Do you know -- is there an estimate of how much it helped earnings?

It's a similar number. That exchange rate -- when we convert -- the sales and pull-through is about the same when we look at the Italian and Chinese operation.

Okay. You assumed some more expenses for the investigations that are ongoing. Can you give us a magnitude and is that going to be reported -- I wonder if that's going to be reported in the friction line or --.

No, we are not going to break out an estimate like that.

Okay. And I guess -- you probably have a margin -- you reported just under 10% margins in friction for the last two quarters. Why was that number dropped that materially for the rest of the year, which has to be implied in your guidance?

I think it relates more to let's say guidance process than it does detail specifics. The pattern of our business, as you know from the things Joe said, was that we would typically start off strong and then somehow the last quarters would be a little bit disappointing. A lot of the factors we have talked about, whether it is the sort of seasonal shutdowns in Italy and the holidays here and all that stuff, and we really are just trying to watch the probability of making sure that we don't get surprised and so that is what it is all about.

I am not saying it is conservative and we know we are going to beat it, but we at least want to try and be a little bit on the safe side. So it is not like we know anything about margin that is going to collapse or anything of that sort.

I understand the volume coming off on a seasonal or shutdown or whatever you have, but I don't understand why the profitability has to really come down a lot in order to make it a dime, a quarter instead of $0.15 or $0.20 a quarter.

We don't have much more to say about it except the broad statements that we just made and there are factors giving some support to being cautious.

In performance automotive, do you expect that to stay negative all year or is that turning the corner?

Is he talking about racing?

Right. Performance racing.

Performance racing. Yes, we expect it to stay like it was. We don't see any major changes right now.

If we go out a year, does the tax rate come down a bit in 2008? If the performance racing turned positive in 2008, do you have any sense for what those sectors will do next year?

We haven't provided any guidance for the 2008 year. We will try to approach those topics when we get closer to the end of this year.

All right. Thank you.

Sir, there are no further questions at this segment.

Robert Labick, CJS Securities.

Hi. It's Larry again. I know you guys don't want to give quantitative guidance on looking out into '08, but just on the friction side, can you just maybe qualitatively discuss what factors might impact sales and margins in '08?

Well, qualitatively, of course, the economy of the world or the US can affect it. Right now, we see the rest of the world being very, very strong. I mean that is what they are now. We don't see any sudden change and '08 of course gets surprisingly close when you get this time of year, so that is a very important factor.

We see continued improvement in our operations, but as we do better, the incremental improvements get to be a little bit smaller. We had dramatic improvements as we moved into early '06 and the better we get, of course the smaller the improvements are, but that is going to be important and those are the important things. Joe, did you want to add something to that?

Yes, only in terms of the truck market because that is the area that is the softest in the '07 year. Based upon the market reports and estimates in terms of new truck builds, and I am talking specifically to the last seven and eight trucks, the expectation, because there is another emission standard change that is out there for the 2010 year, the expectation is that while there won't be a hockey stick return, '06 was obviously very strong in terms of new truck builds as people try to get in under the wire to the '07 emission standard change.

The expectation is the second quarter, third quarter will be the weakest of the trough and then it will start coming back. So '08 -- the expectation is new truck builds will increase significantly '08 to '07 and '09, the expectation is that it is going to be close to the '06 run rates in terms of new truck builds. So there should be positive improvements in terms of our expectation coming out of that market segment versus the '07 year.

Okay, great. Thanks a lot.

Sure, Larry.

Sir, there are no further questions at this time.

Okay. Thank you, everyone for joining the call and we are always happy to talk you in between. Thanks a lot.

This concludes the Hawk Corporation second-quarter earnings conference call. Thank you, everyone, for joining. You may now disconnect.