Carlisle Companies Inc (CSL) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Hawk Corporation Earnings Conference Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr.

Ronald Weinberg.

Please go ahead, sir.

Thank you.

Good morning, everyone, and thanks for joining us.

The purpose of this call is to discuss our 2009 second quarter and six-month year-to-date financial financials.

Conducting the call are myself, Ron Weinberg, Chris DiSantis, President and Chief Operating Officer of the Company, and Tom Gilbride, Vice President of Finance.

As you know, we released earnings today for the second quarter that ended June 30.

And during our call we will review financials, give you an operating report on the business, and then after that, as usual, we will open the call to questions.

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 risks 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 the financial performance related to forward-looking statements, please review to Hawk's quarterly earnings releases and periodic filings with the SEC.

Let me begin with some overall comments and then I will turn this over to Chris.

We reported numbers that we consider soft.

There was a slight loss on the bottom line and I can't say we are pleased with that.

We don't like to manage to a loss.

But be that as it may, what I would like to do before we go into more detail on that is reiterate our long-term strategy for you.

And while I talk about this regularly, I think it is important, number one, because companies don't change strategies.

Strategy is something you put in place and as it is a good one you continue to work with and it forms a particularly important guidepost at uncertain times like this.

Hawk is a world leader in what we do.

We have a niche, we are a leader in friction, friction-related materials, and we really are recognized, even though we are not a giant for the yoke of many other global companies like we are, we are recognized in our marketplace and are respected there.

We focus on what I call high attribute markets, really, in large part meaning non-passenger cars, and there is a large variety of them.

They will come up in the course of this conversation, and those of you who follow the Company know very well what the variety is.

We find ourselves, as you all, of course, know, in probably the most difficult economic times since the depression in the 1930s, and we have responded accordingly.

We have cut costs -- some of that will come up in more detail when Chris and Tom talk in just a minute -- cutting headcount, cutting incentive comp, cutting benefits.

And, as a result of those kind of things, our ST&A was reduced almost 28% in the first half.

And nevertheless, and this is very important, because we are a very cash-oriented Company, in the last quarter our cash rose by $1 million in Q2.

Now, our mode going forward, while we defend ourselves, if you will, for the economy, our mode going forward tends to be one of very strong, positive assertion in our marketplace and confidence and optimism about what we are doing.

Because, as you know, we go into this with a very strong balance sheet.

We have something like $77 million, almost $78 million in cash that we just reported, and it gives us a lot of strength to use in the marketplace.

We continue our relentless focus on the friction business.

That is who we are and we like to tell our customers we are the best in the world at it.

How do we achieve growth?

There are a wide variety of markets that we serve -- aerospace, construction, our after-market performance, and that wide array of markets gives us a tremendous portfolio growth opportunity.

So, when we look around internally into what we work on, our problem is not finding something that will lead to growth, but really reminding ourselves that we have to focus and achieve certain things.

We can't do everything at once.

In addition, there is geography.

It's a broad world out there and while we market all over, there are many countries that are huge markets, where we have several sales people that are penetrating those markets and doing very well.

But they are large, and there is a lot of opportunity, and the world is growing, in many cases, faster than the US is.

And, as a result of these things, we are getting new business awards.

Chris will touch more on that.

Another point is we continue to work on acquisitions.

We have been patient with it, but as I mentioned before, we have assembled a team that is heavily focused on under Joe Levanduski's direction, and we have a number of very interesting candidates.

Nothing to announce yet, nothing that is teed up right away, but we are working on it, and we continue to have confidence that we will find something that fits our field to buy.

Other areas that we work on, while by far our primary focus is friction, there are two natural outgrowths that have happened that really are very interesting opportunities for us.

One is our alternative energy business, in which we make components for fuel cells.

As we have talked about and disclose our big customer now is United Technologies.

These are stationary fuel cells that could be for retail stores, they could be for remote locations.

As a matter of fact, they have a very high profile installation going in now, which we are a part of, going into the new replacement for the World Trade Centers, the Freedom Tower.

These will be primary energy, which is alternative energy.

Uses hydrogen in some form, and the output is electricity.

Some heat, which is in many cases recycled for efficiency, and just pure water.

And in today's climate, while the numbers are very small, we started releasing it as a product line that we give information on.

We think the opportunities really could be very big.

And, as I 'm sure you know, there is a lot of state support and government support for alternative energies both to the providers or manufacturers.

We in fact got a state grant from Ohio a couple of years ago to buy equipment.

And users are getting subsidies and grants and tax credits in many states.

So, we think there is a real market there.

We'll see.

The next one is carbon development, where we have taken our natural interest in carbon as it is used in friction materials, develop what we believe are less expensive, more rapidly made materials that we can put a lot of attributes to, and it gives us a new product.

We are starting to sell some of them and it's one of those areas, stay tuned, it could have very interesting opportunities for us.

One final point I will cover before I turn this over, is we have had a development on the SEC front in the sense that we have received notice of their intentions in this regard, and this is very well covered in our release.

I won't comment on the details of it, except they do plan further action.

But we look at this as one step closer to resolution.

We have cooperated with them along the way.

We will be pleased to get this resolved at some point.

And, as I said, it is all referenced in the Q and in our release.

At this point, I want to turn this over to Chris, who will go into more financial and business details for you.

Thanks, Ron.

I am going to go through our sales numbers and then provide some commentary.

In the second quarter, we saw a more severe decline in sales than what we saw in the first quarter.

Net sales for the first quarter were $39.1 million, which was down $32.7 million, or 45.5% from the prior period.

The way that that broke down was volume accounted for 46% of it, foreign exchange 1.7%.

This was offset by a modest pricing benefit of 2.2%

If you look at the comparatives in the different segments, what you would see is that Aircraft and Defense was down 18.6%.

That was largely a result of declining unit volumes in Aircraft associated with the downturn in the market.

The Defense segment actually improved in the quarter.

Mining and Construction, which is our largest segment, was the hardest hit, down 63.1%.

Agriculture was down 49.9%, Heavy Truck down 42.8%, and Direct Aftermarket, which is our Velvet Touch and High Performance brands, were down 25.8%.

Most of that on the Direct Aftermarket side, however, was on the Velvet Touch side, which serves the industrial aftermarket.

Our Hawk Performance brand, which are disc brake pads for fleet, street and race applications, actually held up very well despite the economy.

Sales from farm facilities represented 24.6% of our total sales in the second quarter, and that is a large decline compared to 45.4% in the prior year.

The domestic operations have been holding up better overall than the international operations largely due to their diversity in terms of the various end markets that they serve.

On the international side ,there is substantial sales concentration, particularly in our facilities in Italy and China, in construction, mining and agriculture, where we have seen some of the biggest declines.

Specifically, sales in our Italian facility in euros were down 68.3%, and sales in China in R&B were down 66.8%.

Now, despite the large sales declines, I think it is important to note that we have not had any meaningful loss of business.

Quite the opposite.

We have continued to be able to take market share during this decline, and we closed on a lot of new business awards that have created a lot of good momentum in the Company.

However, this has been overshadowed in the numbers that you see by the fact that all the primary customers are simply buying much, much less of the same products that we sold to them last year just as a result of what is happening in the world economy.

We have been very proactive on the cost reduction side.

This goes all the way back to the fall of 2008, when we started to make adjustments.

So far, we have reduced our global workforce by 26%.

Now, we don't expect that we are going to have to reduce any further, and an important point to make with that is we believe that this adjustment in the workforce, that it still preserves the critical resources that we need to staff new growth programs, like what Ron talked about on the fuel cell components and the carbon composites business.

It also allows us to continue to keep the resources we need and make the investments that are necessary in R&D, which is the lifeblood of our organization.

We have also made these adjustments in such a way that we have specifically preserved additional capacity in the Company so that when the market does return in terms of its demand, we are able to respond quickly to our customers and be able to capitalize them.

A couple of comments on India.

It is a market that we are very excited about, and right now we are in the process of evaluating whether in 2010 we are going to establish a sales presence and/or a physical manufacturing presence in that country to serve our customers.

That is where a lot of our customers are moving to.

In last quarter's call, we emphasized that it was very important to manage the business very tightly and to continue to find a way to generate cash going forward.

And we were able to do that in the second quarter by managing working capital effectively despite the decline in business and the need to continue to invest capital.

In the continuance of the share buyback program, we were able to continue to increase our cash position.

Overall, I would say that we are cautiously optimistic.

We believe the second quarter does represent a bottom for us and a big part of the demand reduction that we have seen so far has been inventory reduction on behalf of our customers.

And we are seeing some sign that this has begun to work its way through their system.

If we look at our overall backlog, we look at the forecast that we see from all of our major customers, they all show some improvement through the balance of the year, and that data is reflected in our guidance.

And now, with that, I'll turn it over to our VP of Finance, Tom Gilbride.

Thanks, Chris.

As Chris had indicated, second quarter was really a volume story.

If we look at second quarter sales at $39.1 million, that is a decrease of 45.5% from the 71.8 from the year-ago period.

Volume represent 101% of that decline.

So, really, that was the factor affecting most of the second quarter for us.

The last time we had volumes of that level, you would have to go back to the fourth quarter of 2005.

So, it really was a pretty big issue for us as we went through the second quarter.

Our foreign operations, as Chris had indicated, were impacted more than the domestic operations, and primarily the global slowdown, the markets that those operations serve, were hit harder.

And those primarily were construction and mining and agriculture.

Again, the product mix at those locations is different than the US operations in that aircraft and defense markets are served primarily by the US operations.

As we look at our cost of sales, we went from 78.5% -- or, we went to 78.5% in the second quarter of '09 compared to 70.6% of sales in '08.

The biggest impact here is, again, the volume decline and the effect of the production of volumes running through the facilities.

There was significant under-utilization of capacity during the second quarter of '09.

The benefit -- we had a benefit in the second quarter in that we reduced employment levels by an additional 7.1% from the March 31 period.

If we look from -- going back from December of '08, production employment levels are down by 26%.

Going down to the gross profit line, we reported $8.4 million in the second quarter of '09 compared to $21.1 million in the second quarter of '08.

Again, volume was really the big driver here.

We did get a slight benefit in the quarter due to product mix.

Ron had indicated briefly on the ST&A, we were able to reduce ST&A $3.4 million, going from $10.4 million last year to $7 million this year.

Primary drivers in that ST&A decrease were our variable incentive compensation.

As we pay that across-the-board to our employee group based on profitability, we have significantly reduced incentive comp during the quarter as well as through the six-month period.

We also announced a salary reduction last quarter.

That really took effect in the second quarter of '09, so we did see a 7.1% reduction in salary as we compared December 31, '08 to June 30 of '09.

We also looked at all other nondiscretionary or all discretionary spending.

Sales and marketing, we have seen significant declines in sales and marketing as the business has slowed down.

As a result, our income from operations, we reported income from operations at $1.2 million, compared to $9.4 million in the same period of '08.

One of the things I would like to talk about is the income taxes.

We are seeing a fluctuation in our rates due to the mix of domestic income compared to international losses through the period.

We now expect our full rate to be 39.9%.

That compares to a 35% rate, statutory rate, and a 37% rate based on where we thought we would be after our first quarter results.

So, there is a slight increase in our income tax rate as we look through the balance of the year.

Net income, as Chris had indicated, we lost $0.5 million in the second quarter compared to income of $5 million in the second quarter of '08.

Looking briefly at the balance sheet, both Chris and Ron indicated cash increased $1 million during the quarter.

We were able to increase cash despite a capital expenditure program of $2 million during the quarter, and we finished up our stock repurchase program during the quarter, spending $6.6 million during the quarter for the repurchase of stock.

Our receivables were down $11.8 million.

DSOs improved, however, from 52 days at the end of the year to 45 days.

Our receivables remain of very good quality.

I think all of you know our customer base, we are very comfortable with that base, and we continue to work with customers, making sure we see no deterioration in our receivable levels.

Inventories, we reduced by $11.1 million.

One of the things we are proud of here is that we were able to reduce our inventory in spite of significantly lower sales volumes during the period.

Property plant and equipment, we have spent, as I indicated, $2 million for PP&E during the second quarter, and through the six-month period we have spent $4.8 million.

That compares to $6 million in 2008.

Accounts payable we reduced by $16.7 million.

The factor there is really the volume decline, our usage of inventory during the period versus purchases of inventory as we have gone through the six months.

There has been no change in our senior notes.

Again, for everybody, those are due November 2014.

We do have a call feature in November of 2009.

During the quarter, we did release -- we did put out a press release regarding our bank facility.

As you are aware, we put in place a new credit facility with Key Bank.

That facility is a three-year facility going through June 2012.

It remains a $30 million facility.

At June 30 there are no borrowings under that facility.

Moving on to the business outlook, we really -- we have not changed our guidance.

We feel comfortable with the guidance that was out there at the end of the first quarter.

We expect sales for the full year 2009 to come in between $160 million and $180 million.

That means the second half of 2009 we should see sales of $76.6 million to $96.6 million, compared to the $83.4 million that we achieved in the first half.

We did indicate in prior calls that we felt the second quarter was going to be the toughest quarter for us.

We still feel that way and we expect those sales guidance numbers to be pretty firm.

Operating income for 2009, we estimated between $14 million and $18 million.

That guidance is still out there.

So, in the second half we expect that we will be able to do $8.3 million to $12.3 million, and that compares with the $5.7 million that we achieved in the first half.

We expect these numbers to be achieved as we expect there to be improvement in the global economic conditions as we move through the second half of 2009.

And to latch onto what Chris has indicated, we do expect to see some benefit from some of these new business awards that we received in 2008, as well as 2009.

We will continue to emphasize cost reductions that includes wages, incentive comp, and any discretionary expenses that we see that can be reduced as we go through the year..

Our capital expenditures for 2009 we expect to be between $8 million and $10 million, and again, that is no change from our prior guidance.

And with that, I will turn it back over to Ron.

Thanks, Tom.

And at this point we are happy to take questions from any of you.

Thank you, Mr.

Weingarten -- Mr.

Weinberg, excuse me.

(Operator Instructions) We go first to Eli Lustgarten with Longbow Securities.

Hi, Eli.

One clarification or so.

You have, is it 8.2 million shares outstanding at this point on a fully diluted basis.

I know you are losing money.

Will that number stay at that level when you start to make money, or is there an option piece that would add back something to that?

There would be an option piece that gets added.

So, if you look at -- if you look at the six months, because we made money, you can sort of see that there is a 200,000 shares that --

Even with the buyback you got -- 8.5 is the number we should be using, or 8.6, or something like that?

No.

Yes, that's probably -- no, it is actually, if you take the second quarter number and add the 200,000 to that.

Because we were buying shares back.

That's what I said, it would be 8.4, 8.5, something like that.

If he was looking at the total number of shares, he would use the treasury stock method.

What he would be looking at is the outstanding shares at the end of the second quarter, because we were buying during the quarter and then add the option shares.

So, it would be another couple hundred to what we --

You came in at 8174 again in the quarter.

I know this is a little point, but it's probably 8.4 or something like that, is that what you're saying?

Yes, yes.

I'm just trying to get to the model, or something like that.

Now, when you look at -- you have a pretty wide range for volume coming back, and I am wondering if you can be somewhat specific in where you are going to see the lift from this $39 million or $40 million volume range?

I mean, you even have the case where it can go down a little bit.

But can you be somewhat specific of how much is new business and how much is coming from where?

Because, as I say, we know that Truck isn't going up, we know Construction is going up, we know Farm is being cut, we know Mining is being cut.

So, I have trouble figuring out where the increment is coming.

Can you be somewhat specific of how much is new business and how much is coming back from what sector?

Let me give you some insights into that, Eli.

First of all, when we talk about a new business award, oftentimes that is business where we will have won the application, and it might be four months, six months, eight months later before we get it.

So, by and large, what we are expecting is not -- it is not the NBAs you hear us refer to.

But what we believe and see is that the quantities had fallen so much.

I mean, stop to think about some of the decreases you have seen in our business and other industrial companies, 30%, 40%, 50%.

And even the world economies in their worst cases aren't that bad.

And so what that is telling us is there really is a lot of inventory reduction.

And so where we expect to see this is just across-the-board stuff, not necessarily implying big end-market usage, but the same reverse multiplier that you see that cause these kind of decreases when an economy may be down 3%, 4%, 5%.

We think is going to creep back in all over the place as people have given line items of inventory that runs out, and we'll see it.

And so -- and when I see creep back in, we are not expecting a sudden boom, where we can't meet demand, but we think that is where it is coming from.

How much of the second half volume is from these new awards that you have gotten over the last year?

Can you quantify that at all?

The $2 million, $5 million --

(Inaudible) quantify.

What I can tell you, let me give you the nature of it, because we haven't tried to break it out.

And, frankly, it gets kind of fungible through the rest of our business.

But you will recall that at the end of last year we were very busy, we were talking about new awards, NBAs, and we built on an addition to our Medina, Ohio complex, I think it was 40,000 square feet.

We put that in place very fast.

We had it up and running, and then, of course, the recession came along, so the capacity was kind of easy to do -- you know, we weren't stressing it.

But we did get new products or new applications.

And at this point we were getting them, but the volume -- unit volume is not so big that it really makes a difference.

So, that business is there, and that's the kind of stuff that I am talking about when I say it will begin to reemerge as the year goes on.

It is hard for us to quantify for ourselves.

We don't know, but it is out there.

And how much of the volume decline in the quarter was due to your own inventory reduction that was going on as opposed to what we talk about at the customer base?

Your own inventories from year-end are down substantially.

That wouldn't have affected our volume.

We did not ship because of inventory.

That would have affected our production.

Yes.

I guess I'm asking, because one of the big impacts in the quarter was the utilization of the plan, and I am just wondering how much did you try to take out of your own inventory in the plan, in the [production sense that are impacting the margins]?

It is a very active initiative, to try and reduce the inventories.

Try to and generate cash.

We are managing the business very tightly.

Most of that decline was completely intentional on behalf of the Company.

We specifically reduced what we were carrying in terms of raw materials and how much was in process and what we had in finished goods to generate the cash.

The key is that we have to do it in such a way that we reserve the spring capacity to be able to respond to the market quickly when it comes back.

Because you could reduce inventory down to zero, but I can guarantee you, the orders start flowing in, you are going to have a lot of upset customers.

I guess what I am looking for is the margins basically went from 10% -- you know, the operating margin went from 10% to 3% effectively volume decline.

Now, we're not talking about a huge increase in volume potentially at the low end (inaudible) get the margins basically more than doubled or tripled.

Was that all due to the high utilization and you're stopping taking inventory out at your own system, or why (inaudible) --

Yes.

Well, there are a couple of things.

I mean, one, I don't expect you are going to see the same level of inventory reduction in the balance of the year that you saw through the first six months.

I mean, it is only so far that you can go with that before it gets too risky.

You're talking as corporate?

Yes, on a consolidated basis.

So, there is not going to be that kind of effect left in the balance of the year.

And absolutely it affects margins and absorption, that kind of thing.

When you start taking that much inventory out of the system that fast, then basically you are throttling back all the facilities around the world, and that is going to have an effect on the business.

And on the cost side of the equation, there should be a benefit in the second half of the year, because a lot of the cost reduction that we have been doing has been phased in over the last six, eight months into the business.

And we expect that there is going to be some benefit from that in the balance of the year.

Is it fair to model that the improvement from the second quarter one to the low end of your margin gain is the improvement of your own operating rate internally for lack of inventory, and anything above that is volume increase?

I guess you could say that.

There is always the question of mix, too, which has a big effect on the business.

I guess you could say that.

One final question.

Have you seen anything that will improve the operating rates in Italy at this point?

I mean, you have had a 60-odd percent reduction in volume in that part of the world.

Has that thing stabilized?

Are we looking at the second half, international sales percent of going back towards more normal, or is it going to stay at 25%?

Can you give us some color on what's going on there?

We are seeing it definitely improve in the second half of the year, but not coming back to anything like 2008 levels.

We are seeing modest improvement across-the-board in all the segments that our international operations serve.

All right.

Thank you.

(Operator Instructions) We go now to [Sahid Sadik] with [Gabelli] & Company.

Hi.

Good morning.

A couple of questions.

First, you touched on your debt a little bit, and you said it's callable, I think, starting in a few months.

The question I have is, do you have any intention to actually call or a part of it in the near future?

No.

The call is at a premium, so we don't have intention of doing that right now.

So, you will most likely just let it retire naturally?

Yes.

Now, in the past we have bought some in the open market, but we see no reason to pay a premium to retire it.

Sure.

Now on the (inaudible) notice, is it or is it not related to the other inquiries that the Company was facing back in '06?

I'm sorry, the --

The (inaudible) notice for the CFO.

Is that separate from the -- or is that for the same issues that the Company was being investigated at some point, I guess back in '06, the SEC and DOJ had talked to you guys.

Are these the same issue or are these separate issues?

No, this is the same issue and this is the next step in that process.

Okay, so it is the same issue.

And just one final question.

Back in '06, I mean, what exactly happened?

Because I am just trying to get familiar with the background.

What prompted the SEC, or do you dare to get involved?

Was there a specific transaction that occurred, or was there any other reason they got involved?

Yes, there were transactions, and this is referred to in our Q that we just filed.

It gives you the background.

It was related to purchase of our stock by an outside investor, and you can read it in the Q.

Right, I did, but is there -- can you be more specific or is that all you can share with us?

I mean, everything we know is in there, and it's an ongoing investigation.

We wouldn't comment further on it.

But that really is a good description of it.

Okay.

Thank you so much.

(Operator Instructions) We go next to Gregg Hillman with First Wilshire Securities Management.

Yes, good morning.

Could you please talk about carbon composites, what you think the market size ultimately will develop into?

Yes, let me give you some background -- go ahead.

And then, also, on that basically when will it become immaterial to your Company?

And, also, if you sold the division, that activity, what do you think the value is of the intellectual property?

You mean of the carbon business?

Yeah, and your carbon composite research, yes.

Well, let me give you the background on it and take it as far as I can.

First of all, as background, we make friction materials and we make them out of a variety of materials.

In-house we make them out of -- we call it paper, of cellulose.

We make them out of steel, we make it out of organic resin materials, so forth.

And one of the areas that we do some work in the past but haven't done a lot, we have outsourced some of the raw materials, is carbon.

And traditionally, carbon is made in a very expensive and time-consuming process called vapor deposition, where you deposit vapors on fibers step-by-step, and it literally takes months and months.

It is very expensive.

So, we have worked on ways to improve that process and have a faster, less expensive way to do it, which we think can make a material that also has better characteristics for friction and other applications.

We gave it an internal project name, kind of a skunk works, or we called it vector works a the time, and we have spent several years doing research.

And we are now getting products that are market-ready, and some of them are, of course, in friction.

Some of them form a substrate or basis for further enhancement for friction that we would sell the substrate.

And then others are other markets completely, wherever the characteristics of this carbon are important.

It can withstand very, very high temperatures that would melt metals.

It can be strong, it is light.

And so we are seeing other places that it is being used Inside of furnace applications for industrial furnaces.

We are seeing it as having applicability, and I am told bolts for solar heaters that can withstand the heat.

And so right now I can't give you a quantified answer to your -- what you're asking, like, how big is the market, except to say that it can be very big and we don't know.

We can't speculate on how much of it we will penetrate or what it will mean.

But the friction side alone could be very big, and some of these other areas really could develop very nicely.

We do believe we have the capability of producing a material less expensively than what the current state-of-the-art is.

So, stay tuned and we will be, of course, talking more about it as it happens.

I have no idea what the IP itself is worth.

I mean, that really is probably the back-end result of what the market will tell us the products are worth.

Okay.

Thank you.

(Operator Instructions) And, Mr.

Weinberg, there are no questions in the queue at the moment, sir.

I will turn the conference back to you for additional or closing remarks.

Okay.

Well, thank you, everyone, for joining us.

As you know, we are always happy to talk to you directly if you have follow-on questions.

Thanks.

Ladies and gentlemen, that does conclude today's conference.

Once again we thank you for your participation.