Carlisle Companies Inc (CSL) 2009 Q1 法說會逐字稿

Good day and welcome to the Hawk Corporation earnings conference call.

Today's conference is being recorded.

At this time for opening remarks and introductions, I'd like to turn the conference over to your host, Mr.

Ronald Weinberg.

Please go ahead.

Thank you.

Good morning, everyone, and thanks for joining us.

The purpose of this call, as you know, is to discuss our 2009 Q1 results.

Conducting the call today with me are Chris Disantis, the President and Chief Operating Officer of the Company; Joe Levanduski, Vice President and Chief Financial Officer; and Tom Gilbride, Vice President of Finance.

As you know, we released earnings today for the first quarter ended March 31.

During our call today, we will review the financials and give you an operating report on the business, and after that, we'll open the call to questions.

I would remind you that statements made during this conference 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 Hawk's quarterly earnings releases and periodic filings with the SEC.

Well, today in the earnings that we've released, I'm particularly pleased with the results considering the economy.

We all know how tough that has been, and to have profitable results, as we did, I think we're very pleased to be able to report.

I'm going to describe a little bit in the beginning here about the mood and the things we're working on in the Company and then turn this over to Chris and Joe.

Right now, we continue to operate with a very positive aggressiveness, which may stand in stark contrast to some of the gloom that's in the economy and some of the kinds of thinking that abounds.

And we believe if we continue on the current path that at some point when the economy does restore itself to something more normal, that we will be in a position to come back stronger than ever.

There's some reasons we think this way.

One is that we're a world leader in friction materials.

These are parts that wear, where there's a constant usage, a constant demand, and as a leader, we have an opportunity to use this particular time to get new business awards, and we are continuing to do that.

Now, these awards in this economy sometimes come with diminished revenue, so we don't really have as much to show for it as we would like to, but if we build customers, if we build applications, we'll be the beneficiaries of that going forward.

Secondly, we use our financial and our engineering strength as a calling card right now.

Many of our customers may have questions about others in the economy, and I think they respect and appreciate the fact that we're there for them.

They know we will continue to be there for them and will continue to have the resources, both engineering and financial, to be dedicated to the new applications that they might be working on.

Nevertheless, we have cut costs during the last, I would say, six months from the time that we began to see the downturn.

This takes us a little bit into last year.

We have been cost cutting, and we increased the pace of that during the first quarter of this year.

Some of the things we've done have been to reduce our workforce, freeze salaries -- salaries and raises, eliminate the discretionary contribution of our profit sharing to the 401K.

We continue the match, but we eliminated the discretionary portion.

We reduced IC.

Roughly, we have estimated and reported that approximately 17% of our workforce levels have been reduced during this period.

At the same time, we put our strong cash position to good advantage.

We've continued our stock buyback program.

We paid an important contribution to the pension plan to keep it from sinking as a result of the investment climate, and we believe this will recover, and it will enable us to reduce our pension costs going forward in the future compared to what it would've been otherwise.

And then, of course, we did pay our incentive comp that was due to employees earlier this year.

So that was an important use of our cash, primarily those things.

On a broader front, we continued development of key long-term initiatives.

One of those is global expansion, which we constantly talk about, and we have had our eyes on India for a number of years, and we continue to work on that.

We think it's an important economy, and we're going to increase the pace of our focus on it.

We continued development of our fuel cell technology.

It's a small part of our total revenue right now, but we think it's got enormous future.

We've got a very important partner in the form of United Technologies in that project, where, for those of you who don't recall, we manufacture fuel cell components for stationary fuel cells.

There's no question that alternative energy continues to get a larger and larger share of the national voice, and we think it's going to be a good direction for us.

Finally, our acquisition effort continues, and we've increased the pace of that dramatically in the last three or four months since we completed a divestiture of our racing businesses.

So with that as background, I'm going to turn this over to ChrisDisantis, who will talk about operations of the business.

Thank you, Ron.

This is an unusual climate, to say the least.

We have experienced a severe downturn in most of the end markets that we serve, and one positive that I'll mention before I get into the numbers is that these numbers reflect no significant market share loss to speak of.

The net sales for the first quarter of 2009 were $44.3 million, which was down $21.5 million, or 32.7%, from the prior-year period.

And the way that this breaks down is the vast majority of it is volume related; 32.5 out of the 32.7 decline from the prior year is volume related.

Foreign exchange didn't help.

That had a negative 2.6% impact, and we did have a modest pricing benefit offsetting that of 2.4%.

If you look at how each of the end markets break down, you'll see that the aircraft defense segment was up 10.8%.

This is one of the few bright spots in an otherwise gloomy sales picture.

Mining and construction, our largest segment, was down 49.8%.

The combination of tight credit markets, depressed commodity prices has driven low demand, both for maintenance and for new capital equipment replenishment in these sectors.

Agriculture was down 30.3%.

We're primarily feeling the impact of that in our international sales.

Heavy truck was down 36% on both OE production declines, as well as reduced overall freight activity.

The direct aftermarket business, under the names [Velvet Touch] and [Heart Performance], was down 24%.

I want to comment that this was particularly impacted by international sales into new markets, like Russia.

The domestic demand, however, is quite different for those brands.

They've held up very well, which I think evidences the strength of brand equity that we have in those products.

Sales from our foreign facilities were 27.9% in the first quarter.

That's a substantial and marked decline from 45% in prior year.

And the way that this breaks down, if you look at it in terms of the local currencies, sales in the Italy facility were down in euros 53%, primarily on declines in agriculture and the construction segments, and sales in RMB in China were down 64% primarily due to declines in mining and agriculture.

And, obviously, based on the data our -- overall, our international operations have been hit much harder than our domestic base.

Now, despite these sales declines, and Ron mentioned this, as well, we continue to score new business awards and take market share at a nice pace, so we're doing well with respect to what we can control, and I think that that's going to pay dividends nicely in 2010 and beyond.

The question that we know we're going to be asked in the Q&A portion of this call is have we hit the bottom in terms of this market decline, and I think I can say right now that for the first time, our forecast for demand did not show a continued deterioration.

However, they don't show a marked recovery either in terms of a V-shape if you look out in the next six to nine months.

So the most that we can really say right now on it is that we believe right now we're skimming along the bottom -- "right now" would be defined as May, not with respect to the first quarter.

We've been very proactive on cost reductions since the downturn started.

Back in October of 2008, we saw the changes on the horizon and started to size the resources of the Company relative to the demand in the marketplace.

So there have been ongoing reductions in force, both hourly and salary.

There have been a lot of new, very aggressive sourcing initiatives to try and reduce our material cost.

We've been very careful about both our variable and our discretionary spending, and we've taken some additional steps in the first quarter of this year.

The benefits of those additional steps, that reduction, is going to be realized throughout the balance of the year, and that's been reflected in the new guidance that we've issued.

And I think the key point to take away from cost reductions that we've made is that we've been able to successfully preserve the necessary resources to tackle the growth programs that the Company's been working on.

So we don't believe we've made a bad sacrifice or a bad trade-off there in terms of sacrificing our future.

Capital investments are going to continue.

They'll get a high level of scrutiny, as they usually do here, but to the extent that they quickly generate cash and they contribute to building a durable competitive advantage for the Company, those are the kinds of things we're going to continue to invest in.

And despite the climate and what a lot of other companies are doing, we take somewhat of a contrarian view that this can be a really good time to invest capital expenditures in the business, so we are looking at all the opportunities to do that.

A key goal for the Company is we have to find a way to stay operating cash positive.

We've got a nice cash position in the Company, and it's really intended for strategic purposes, be that acquisitions, stock buyback, and any major strategic moves.

It's not there to fund the ongoing losses of the Company.

So to facilitate that objective, we're being very careful about every dollar we spend, where we invest, and we continue to use progressive, continuous improvement totals, like TOC, lean, Six Sigma in our operations of our business.

And a final comment that I'll make is that in market uncertainty like this, we think one of the keys is to manage the business very, very tightly on a day-to-day basis.

So regardless of the help or hindrance from the waves of the end markets, we have to find a way to be consistently profitable and ultimately generate more wealth for the shareholders.

So with that, I'll turn it over to our CFO, Joe Levanduski.

Thanks, Chris.

As some of you are aware, we experienced problems when transmitting our 10-Q filing this morning.

We are filing an amended 10-Q today that will fix the problem and provide a correct version for your review.

Please refer to our press release in the meantime.

We apologize for any inconvenience that this transmission issue has created and the confusion that it's caused, and we will fix it in short order.

As Chris mentioned, we have taken steps to adjust our workforce based upon the current economic climate.

As such, labor reductions and the focus on cutting discretionary spending has offset, to a certain extent, the negative impact of reduced sales and production volumes.

These actions, combined with favorable product mix, resulted in our gross profit percentage increasing to 27.1% of net sales in the first quarter of 2009, compared to 26.4% in the first quarter of 2008.

Our selling, technical and administrative expenses declined by $2.2 million, or 22.7%, from the prior-year quarter, driven largely by a reduction in our variable incentive compensation program, which adjusts and accounts for roughly half of the decrease in the ST&A line.

Our expenses related to research and development activities remain consistent quarter to quarter.

We spent $1.2 million in the first quarter of 2009 versus $1.3 million in the same quarter last year, reflecting our commitment to invest in internal projects and to aggressively expand our technology focus.

We also incurred approximately $300,000 of separation expense associated with our workforce reduction actions that were taken during the quarter.

As a result, our income from operations that we reported was $4.4 million for the first quarter of 2009 versus $7.5 million in the first quarter of 2008.

As a percentage of net sales, first quarter '09 remains strong at 9.9% versus 11.4% in the first quarter of 2008 as a result of the product mix, cost management, and our incentive compensation reductions.

Our effective tax rate for the first quarter of 2009 is 37% versus 41% in last year's first quarter.

This was largely driven by a mix of our domestic and foreign earnings.

I also want to indicate that our effective tax rate guidance for the year is being reduced to 38.4% for the full year of 2009 versus our prior guidance that we had reported back in March.

Also, we have been mentioning our share -- our stock repurchase program.

As a result of that program, our average diluted shares that we finished at March 31, 2009 was approximately 9 million shares, 8 million 996, I think is the actual number, versus approximately 9.4 million shares at March 31, 2008.

The end result, as we had reported earlier, we reported income from -- a net income of 1.6 million, or 17% -- $0.17 per diluted share.

Turning to the balance sheet, as we discussed in our prior conference call and some of the comments that Ron made earlier, our first quarter cash spend is normally higher than other quarters due to our customary payments of our variable incentive compensation program, 401-K programs, and also our normal semiannual interest payment on our outstanding bonds, which was approximately $3.8 million paid in January.

Beyond these routine payments, the Company also made a special contribution to its domestic pension plans of approximately $3.9 million.

And the share repurchase program, we spent $4.6 million investing in that program during the quarter.

Our capital spending was also $2.9 million during the first quarter this year, as well, and all these things combined drew our cash and short-term investments down by $15.6 million to approximately $77.7 million at March 31, '09 versus $93.3 million at December 31.

Due to and in response to the lower sales and production volumes, our accounts receivable declined by $10.3 million from the December 31, '08 levels, and inventory also was reduced by $5.6 million during the same period of time.

However, our DSO actually improved to 42 days versus 52 days at December 31, 2008, and our average number of days of sales in inventory decreased to 74 days from -- to 52 days at the end of March.

Our current ratio improved, a 5-to-1 ratio as of March 31 compared to 3.4-to-1 at December 31, '08.

We've been mentioning the share repurchase program.

This has provided the opportunity to invest in our Company's stock.

We have a $15 million authorized program in place, and due to the terms of our indenture, we have approximately $13.2 million available under that program.

As of May 1, the Company has approximately $2.1 million available remaining under this program, and it is currently still active.

Since inception and through April 30 of this year, we have acquired approximately 842,000 shares at an average price of approximately $13.16, so it's been a very successful program for us.

As you can imagine, forecasting 2009 has not become any easier since our last conference call.

There still remains uncertainty in the global economic climate.

There's a question of the nature and the timing of the stimulus actions and the impact that these actions will have on our customers and additionally the impact on our sales volumes that inventory reductions in our market channels will have is not really clearly defined yet.

Given these dynamics, we have elected to revise our guidance to the market as follows.

Our revenues for 2009 is being lowered to a range of between 16 -- I'm sorry, $160 million to $180 million from the previous range of $180 million to $200 million, and income from operations, based on these top-line assumptions, is being adjusted to a range of $14 million to $18 million from the previous guidance of $16 million to $20 million.

We do anticipate that the second quarter will provide greater challenges than we've faced in the first quarter in terms of our earnings but are encouraged that the second half will yield stronger demand than the first half of 2009.

With that, I'll turn the call back to Ron Weinberg.

Okay.

Thanks, Joe.

And at this time, we are happy to take questions.

(Operator instructions)

And we'll take our first question from Eli Lustgarten.

Please go ahead.

Good morning.

Good morning, Eli.

How are you?

Not too bad.

Nice quarter, actually, in this kind of environment.

Thank you.

You bet.

Could you we talk a little bit about -- I mean you sort of gave some indication.

You're sort of indicating that your second quarter volume will probably be a little bit below the first quarter volume?

Is that what we're seeing?

The indication when you say "challenging" or "very similar to it" -- is that sort of the expectation?

We're not giving guidance, so we don't want to give into too much detail, but we're watching margins, in particular, is what we're watching.

Can you give us an idea of what's going on in, of course, markets being aerospace and defense held up.

Do you think that's possible for the year?

And the declines that we've seen in the first quarter in most of the other end markets, is it fair to assume that they'll continue at least through the first half of the year before they get better?

Yes, I mean our feeling is there's a combination of fundamental decline and inventory adjustments, and as Chris said, we've seen a leveling off.

In other words, we're not seeing continuing declines.

And we, I'd suspect like everyone else, are kind of trying to keep our finger on the pulse as to when the inventory component of these declines will burn off and you'll start seeing some upturns.

And then you couple that with when will stimulus money produce a different kind of economic climate.

So the answer to your question underneath all that, yes, we're assuming some improvement in H2.

Will defense hold up for most of the year, or the second quarter, or is that a business that's unpredictable at this point, aerospace and defense side?

We think it'll hang in there through the second quarter.

I don't know of any particular declines that we see there.

It's held up.

And your cash burn in the first quarter, or $50 million, do you have any guesstimate of what cash might look like by the end of the year?

Can you get back to the $90 million-plus level that you started the year?

No, we really hadn't tried to forecast that.

I mean to help you in putting it together, the things that we mentioned were very heavily one-time events, you know, things like IC and all that, and you could probably use our guidance and come up with some reasonable numbers yourself.

Where is CapEx going to be, and how much -- have you put all the money in the pension fund you expect to for the year, or are you going to put more in?

Yes, we -- from a CapEx guidance standpoint, we did not revise our guidance range.

It's currently at $8 million to $10 million.

We spent approximately $3 million in the first quarter, much of that driven by projects that were ongoing at the end of 2008.

So we still feel comfortable at the $8 million to $10 million CapEx guidance range.

And then the other question was with respect to pension.

We don't expect right now that we'll be making an additional, you know, funding into the pension beyond that--

[Inaudible - multiple speakers] international markets have been much softer across the board, and in contrast to US, is the statement about hitting bottom much a US comment, or are you seeing that in the European markets, too?

I mean Italy is [inaudible], but have you seen any change in China at this point that's coincident with what we're hearing about coming out of China at this point?

Yes, I could comment on the different economies.

We've seen -- I would say in terms of seeing the bottom, we believe that we've seen it in the various markets that we serve around the world.

However, I would describe for us the European bottom as being deeper than the bottom that we've seen here domestically.

In terms of our outlook for those markets, we would expect the Chinese market, in particular, to be one that comes back faster than the other segments that we serve.

Are you seeing any upturn in China yet?

You were down 60% in the quarter.

Has that improved at all, or is that just statistical, and the improvement we're seeing statistical and has yet reached the markets we serve?

I would say through now, meaning May, we haven't seen an improvement, but we haven't seen a deterioration there.

Yes.

But based on what's happening in those markets with respect to their stimulus spending and what we're hearing from talking to customers over there, our forecast is that that one will come back faster and stronger than either the European or the American market.

Thank you.

I'll let somebody else have some questions.

Thanks, Ely.

Thank you very much.

(Operator instructions)

We will go next to [Ivan Marcuse].

Please go ahead.

Hey, guys.

How're you doing?

Good, Ivan.

Hey, and how much were your raw materials -- your raw material unit costs up or down in this first quarter?

Raw material unit costs up or down in the first quarter?

Yes, I mean did you -- did you benefit -- basically what I'm going to get at, in your gross margins, did you benefit from a price/cost benefit, like were your prices up, were your raw materials down, and do you think going to second quarter, you're [inaudible - multiple speakers]?

Yes, I understand the question.

Right.

There's some benefit from it on the raw materials side, but based on how sharply the market declined, we're still -- even though it'd been successful in reducing inventory, it didn't happen fast enough or carrying bigger inventory positions of commodities that were bought at last year or end-of-2008 prices.

So there might be some of that, but it'd be hard for me to quantify because it phases in over time, you know what I mean?

Yes.

Do you think you'll be able to maintain this gross margin; 27% would be a reasonable run rate going throughout the year?

Oh, we don't provide guidance on the gross margin level.

Right.

We're doing everything we can to control costs and match things up with volume and also prepare ourselves for volume as it comes back to us, as well.

So it's a balancing act that we're trying to accommodate, and we're doing everything we can to maintain margins.

But as volumes came back, your gross margins would improve, correct?

I hope so.

Real quick, Ron, you were saying that you were looking at growing at India.

Is that going to be through an acquisition or a green field or a JV project, or have you looked at that?

We don't know the answer to that.

We know that we have business existing in India now.

We know what is obvious, that it's a very important, large, fast-growing economy, and so there are reasons for us to be there.

We're looking at all kinds of things, whether it be venture, green field, or acquisition.

Yes, we haven't decided on the model yet for how we're going to be there, but basic strategy of the Company with respect to globalization and being intimate with our customers is we have to go wherever our customers are, and more and more of our customers are setting up plants in India, and we think there's a good competitive advantage to being a local source of supply to them.

So we're going to follow them.

Great.

And then one last question.

How much -- of your COGS, how much is fixed versus variable?

Well, let me give you a measure we've talked about over the years, which is that $1 of sales should be able to bring through $0.30 of pull-down.

That varies widely in a given quarter or a given month, but it's kind of a useful beginning metric, if you will.

Okay, great.

Have a great rest of the quarter.

Thank you.

Okay, thank you.

Thank you very much, and there appears to be no additional questions at this time.

Mr.

Weinberg, I'll turn the conference back over to you for any additional or closing remarks.

Okay.

Well, thank you, everyone.

We appreciate your participation and are always happy to talk with you.

Thanks.

And this concludes today's conference call.

Thank you for your participation, and have a great day.