Enovis Corp (ENOV) 2009 Q2 法說會逐字稿

Good day, and welcome to the Colfax Corporation second quarter earnings results conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mitzi Reynolds. Please go ahead, ma'am.

Thanks, Lori.

Good morning, everyone, and thanks for joining us today. My name is Mitzi Reynolds, and I'm the VP of Investor Relations. On the call today, we have John Young, our President and CEO, and Scott Faison, our Chief Financial Officer.

I'd like to point out that our earnings release is available in the Investor section of our website, ColfaxCorp.com. We will also be using a slide presentation to supplement today's call, which can be also found on the Investor section of our website.

Both the audio of this call and the slide presentation will be archived on the website later today and will be available until our next quarterly call.

During the call we'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in our SEC filings. Actual results might differ materially from any forward-looking statements that we might make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them except as required by law.

During the presentation, we will describe certain of the more significant factors that impacted our year-over-year performance. Please refer to the accompanying slide presentation in the MD&A section of our Second Quarter Form 10-Q, filed this morning, for details regarding additional factors that impacted our year-over-year performance.

With respect to any non-GAAP financial measures during the call today, the accompanying information required by SEC Regulation G relating to those measures can be found in our earnings press release under the Investor section of the Colfax website.

Now I'd like to turn it over to John.

Good morning, everyone. I'll begin with some of the second quarter's more significant highlights and key performance measures. Then I'll update you on our cost reduction initiatives, our end markets and outlook. Finally, I will review the financial results, and then we will open it up for a question-and-answer session.

As we announced in the press release issued this morning, we had lower results in the second quarter versus prior year due to reduced OEM demand and push-out of project deliveries. Adjusted net income decreased to $8.5 million, or $0.20 per share, from $13.9 million, or $0.32 per share, in the second quarter of 2008, including negative currency effects of $0.04 per share as the US dollar strengthened against the euro and Swedish kroner.

Sales were $129.2 million, down 10% excluding the negative impact of currency and were down 20% in total. The decline in sales was driven by volume decline in the OEM-based general industrial and power generation end markets, principally in Europe, as well as customer-requested project delivery extensions. The decline in power gen was related to project time. In addition, we had several navy and marine projects shift from the second quarter to the fourth quarter and into 2010. We've often said our business is lumpy, and this quarter was a prime example. While our backlog provides visibility in our projects, the timing often moves around, which is one of the reasons we do not provide quarterly guidance.

Adjusted operating income declined to $14.3 million, and the margin declined 350 basis points, to 11.1%. This decrease was driven by lower volume and a resulting lower fixed cost absorption as well as some mix shift. Adjusted EBITDA dropped to $17.8 million, and the margin declined 320 basis points, to 13.8%. Currency translation was a significant drag on both adjusted operating profit and EBITDA, reducing both by approximately $2.5 million.

Orders for the quarter were $104 million, down 38% organically and 45% overall, compared to an all-time bookings high of $198 million in the second quarter of 2008. Orders are net of commercial marine cancellations, which were about $9 million in the second quarter. The sequential organic order decline from the first quarter was 17%.

We ended the quarter with backlog of $292 million, down $13 million, or about 4%, from the end of the first quarter. This was a roughly 9% organic decline. Our backlog at the end of the second quarter was equivalent to our backlog at the beginning of 2008.

Our order rates continued to be affected by weak global business conditions and were down across the board. The biggest declines were in commercial marine and general industrial, down 54% and 44%, excluding currency impacts.

We're continuing to implement our restructuring plans throughout the organization. Major actions since the beginning of the year include head count reductions of contract and full-time workers and implementation of furlough programs in Germany, closing of our facility in Aberdeen, North Carolina, and the planned closing of our plant in Sanford, North Carolina, which was announced earlier today.

We reduced head count by about 250 associates, or 12%, including the full-time equivalents related to the furlough program. The government-sponsored furlough program allows us to reduce hours and pay without eliminating jobs. The program was put in place during the second quarter for about 628 workers, or nearly 30% of our total workforce. There has been a learning curve, as expected, operating on a reduced schedule, but we anticipate leveraging the full benefits of this program in the second half of the year.

In addition, we are streamlining our organizational structure and have reduced the number of general managers from four to three. We've eliminated the divisional overhead associated with our Asia business unit and have integrated the manufacturing facilities into our operating structure to better align our organization with our end markets and manufacturing capabilities.

We expect about $13 million in savings in 2009, including savings resulting from the furlough program.

We will remain agile and continue to reduce costs and align capacity with the demands of our global customer base. We'll be implementing additional restructuring initiatives, including additional permanent head count reductions, based on market conditions. We believe these actions will position us to enhance profitability as our end markets recover.

Now, moving on to a more detailed look at each of our end markets, in commercial marine, organic sales grew 7% for the quarter and are up 24% year to date. Organic orders declined 54% and 56% for the quarter and six months, respectively. Orders for the quarter of $19 million are net of about $9 million of cancellations. We will likely have additional cancellations this year, but we see the rate slowing in the second half of the year.

While commercial marine orders have dropped, we have a backlog that extends into 2010. On a global industry basis, there are currently about 10,000 ships on order. 2008 was a record delivery year, with 3,700 deliveries. Through the end of June this year, about 1,200 ships have been delivered, and, based on industry estimates, we expect roughly 3,000 deliveries by year end.

Moving on to oil and gas, sales on an organic basis were up 1% for the quarter and up 10% year to date. Organic orders were down 16% for the quarter and down 4% year to date. Oil prices have increased since the first quarter. We are beginning to see customers move from the sidelines and place new orders. During the quarter we also saw several major projects that had been stopped come back online, including ones in Canada and in the Middle East.

Turning now to power gen, organic sales in this market were down 25% for the quarter and down 6% year to date. Organic orders were down 25% in the second quarter and 18% for the six months. The decline in sales and order were primarily related to project timing, as we saw a higher percentage of packages both book and ship in the second quarter of 2008. We anticipate higher project sales and bookings in the second half of the year.

The overall outlook for the power gen market for 2009 remains stable based on current expected deliveries. Longer term, we expect activity in Asia and the Middle East to continue to remain strong as economic growth and fundamental undersupply continues to drive significant investment in energy infrastructure projects. Both Iraq and Saudi Arabia have recently announced plans to significantly enhance their countries' power generation capabilities. In the developed economies, we expect efficiency improvements to continue to drive demand.

In global navy, organic sales were up 26% for the quarter and 29% year to date. Organic orders were down 24% in the second quarter but up 21% year to date. Our navy business can be particularly lumpy, and we had an exceptionally large order book in the second quarter of 2008, which skewed the comparison. We continue to see positive trends in the navy market and anticipate an up year both from an order and revenue perspective.

We're currently working on several new shipbuilding contracts for the US Navy, including the Virginia-class submarine program, CVN-78 [G] Ford-class aircraft carrier, the DDG-1000 Zumwalt-class destroyers, and the 10th LPD-17-class San Antonio amphibious vehicle. We're also working on projects with several global navies, including European navies and the Indian navy. Based on current activity, we believe that the long-term growth prospects for the navy market are positive.

Now for a look at our general industrial end market, which encompasses several different end market segments. On an organic basis, sales were down 23% for the quarter and 13% year to date, while orders were down 44% and 36% for the same periods, respectively. Sales were down in most end market segments, especially in the chemical, building products and machinery support submarkets as well as our distribution channel.

The chemical market has been particularly hard hit in Europe and in the United States. Activity level appears to have stabilized in the US, where we're beginning to see some positive OEM trends. In Europe, however, the general industrial markets remain weak but appears to be flattening out. Longer term, we believe continued infrastructure development throughout the world will drive capital expenditures and our sales in the general industrial market.

Turning to a geographic look at our sales for the quarter, about 45% of our sales came from Europe, 32% came from the Americas, 23% from Asia and the Middle East. Organic sales were down in the US, Europe and Canada. They were up in Asia, driven by marine sales, while higher oil and gas sales drove revenue in Latin America and the Middle East upward. Orders were down across all geographic regions.

Gross profit margin for the quarter decreased 70 basis points, to 34.5%, primarily due to lower volume and lower absorption. Our aggressive cost reduction efforts helped to minimize the margin impact of lower revenues and unfavorable product and market mix in the quarter.

Excluding the impact of currency, selling, general and administrative expense was about flat compared to the second quarter of 2008, as we were able to offset incremental public company costs and some legacy legal expenses in the second quarter of 2009 of about $2 million, with cost savings elsewhere in the organization.

Now for a look at the balance sheet. Our financial condition remains strong. Our debt to adjusted EBITDA is about 1 time. At the end of the quarter we had about $38 million in cash and about $130 million available under our revolver.

Net cash flow from operations was about $18 million for the first six months of the year. Asbestos was a cash outflow of approximately $5 million, which is net of funds received for reimbursement of [pass] costs. At the end of the quarter, the asbestos insurance receivable was $35 million. We anticipate that the trial in our insurance coverage litigation will begin in October of this year, and we hope to have resolution on this matter by the end of this year.

For the year, claims and the costs to resolve claims continue to track along earlier projections, which is an annual liability in defense-related costs of about $5 million to $7 million. As a reminder, we have booked an asbestos insurance asset and asbestos liability on our balance sheet. The amount is based on estimated claims over the next 15 years. The estimated liability remains unchanged at about $350 million, and we have an insurance coverage in excess of $1 billion.

In summary, we continue to execute our strategies in a difficult economic environment. Our main priorities are to reinvest in our business, pursue acquisitions and maintain our healthy financial condition while reducing costs and driving cash flow. On the acquisition front, the pipeline has improved since the beginning of the year. Acquisitions continue to be a key component of our growth strategy. We're hopeful that there will be an increase in opportunities as the year unfolds, and we believe we are well positioned to take advantage of these opportunities, given our strong balance sheet position.

We expect continued economic pressure in the near term. However, our backlog remains solid, and we are quoting on many projects. We're taking the necessary restructuring actions, which will enhance our cost structure when conditions improve. We believe we are well positioned to weather these uncertain conditions with our strong balance sheet and liquidity.

Given the current environment, we remain cautious on our outlook and feel it's prudent to take our guidance down for the year. We're now expecting organic sales to decline in the range of 6% to 8% and adjusted earnings per share to be in the range of $0.93 to $1.00 for 2009.

With that, I'll open it up to the floor for Q&A.

Thank you.

(Operator instructions).

We'll go first to Kevin Maczka, with BB&T Capital Markets. Please go ahead.

Good morning, everyone.

Hi, Kevin.

John, I guess first I'd just like to touch on the guidance. If you did $0.44 in the first half, your guidance assumes or implies that you'll do better than that in the second half. And I'm just wondering, given the order rates and the things that you're seeing, what is it specifically that makes you think you'll do more in the second half than the first? Is it this $13 million of cost savings that's going to kick in in the second half?

Well, I think the answer is twofold. First is from a revenue perspective we have a fairly normal seasonal pattern to our business, and the fourth quarter is definitely our highest revenue quarter of the year. So the incremental revenue in the fourth quarter I think will be part of that earnings increase. And the second would be from a margin perspective. We certainly will see the impact of the cost reductions, and our margin in the second half of the year should improve over the first half.

Okay, so you're still expecting a normal or seminormal seasonal progression this year, even though orders and revenues in the first half have tailed off.

Yes. Yes, that seasonal pattern is really predicated on customer delivery schedules. And it was a little bit accentuated because we did have some things move from the second quarter to the fourth quarter, which had an impact on the top line in the second quarter, as well. But, yes, that seasonal pattern does hold and has held for the 14 years I've been associated with this business.

Okay, and --

Historically, the fourth quarter is always the largest. I'm not sure we'll see the same comparison in the fourth quarter to the first quarter this year that we have in the past, but we still expect the fourth quarter to follow that same seasonal pattern.

Okay. And the $13 million in cost savings, how much of that have you realized already in the first half and therefore how much is coming in the second half?

We've realized approximately $2 million in the second quarter.

Okay. Thank you. I'll get back in queue.

Okay.

We'll go next to Jeff Hammond, with KeyBanc Capital Markets. Please go ahead, sir.

Hi. Good morning, guys.

Hi, Jeff.

Could you just talk about just demand progression through the quarter, things get better, get worse, what's the trend been into July, and maybe just speak to the distributor channel in general industrial, where we stand on inventory destocking?

Right. Well, we don't give out monthly orders, but I'll give you the trends in general. Certainly, the earlier part of the second quarter was weaker than the second part. We did see some strengthening, particularly on the OEM side, as the quarter went on, and that trend line appears to be continuing in July, and (inaudible) certainly some indication that particularly in the US there may be some light at the end of the tunnel. I would say Europe is more of a flattening out at this point on the OEM side as opposed to really seeing any growth.

As far as distribution goes, we don't have a tremendous amount of stocking distributors out there. Most of our distribution channel is really buy and resell or even drop ship, so there's not a lot of inventory in the channel. So we really haven't seen destocking from a distributor perspective. What we have seen is an inventory reduction by our OEM customers. In fact, that's really what impacted us pretty substantially in the second quarter from an OEM perspective as certain OEM customers basically really took no volume in the second quarter as they reduced inventories.

Okay, that's good color. And then oil and gas, you said some projects seem to be coming back online that were shelved. Does that -- is that -- did that show up in your order book in the second quarter or is that more on the come into the second half?

Most of it's on the come. We did obviously book some oil and gas. We did have some pretty good project orders in the quarter, some which have been in process for as long as three years. So that was encouraging. I think more of it is really on the come. I think activity level, particularly in Canada, which had been virtually dead for a couple of quarters, has started to resurface. And the other geographic area we see some opportunity is with Latin America. Particularly among the sovereign oil companies in Latin America activity level appears to be -- appears to be picking up.

Okay, great. And then, finally, you mentioned some stuff moving from 2Q to 4Q. What's the risk, if any, that that project or those projects keep getting pushed to the right?

Well, there's always risk. I mean, we always have movement quarter to quarter. I feel like we've been fairly prudent in our guidance number to accommodate for that, any potential movement out, so at this point I think we're certainly feeling reasonably comfortable about that.

Okay. Thanks.

Our next question is from Mike Schneider, with Robert W. Baird. Please go ahead, sir.

Good morning, all.

Hi, Mike.

Yes, can you hear me?

Yes.

Good morning. I just wanted to dig deeper into the project awards. Obviously, there's projects, as you mentioned, that have been in the works in some cases three years. What does the actual new project pipeline look like, though, in terms of those under development? Are you seeing, I guess, encouraging signs in that regard, or is it just that we're shipping things that have been pent up now for six or nine months?

No, it's more on the book side, where we certainly have a large number of projects right now under quote, and the length of time from the initial quote to order has lengthened out fairly dramatically, more often than not as these projects have been mothballed by the -- particularly in the oil side. So what we're seeing is that projects that had really been put on the back burner have now started to resurface, and with that comes requoting. Certainly there are some large projects in the Middle East that would fall into that category, as well as in Canada. So it's more that the projects are now what I would call gone from sort of a yellow light to a green light from the Company's perspective.

Okay, and on that requoting, can you give us a sense of what project pricing is down, and is that one of the reasons, as well, you've reduced the guidance that some of the embedded margins in the backlog or new projects are declining?

Yes, we haven't seen projects that are in backlog retrade, so what we -- obviously, there's pricing pressure on new projects, but we feel that we can balance our costs, our raw material costs, against it, and so margins from a -- on a project basis should hold reasonably well. There's obviously a lot of competition out there. But I think the more the volume decline year over year has the impact on margin, as opposed to really any pricing loss.

And, I mean, to echo that, I mean, we're not going to reduce our margin targets on the projects right now.

Okay. And then, in the guidance, the organic growth reduced by, I think, 4 points at the midpoint, which is about $24 million. Is there a specific end market that really contributes most of that decline?

Yes, it's principally in general industrial, and we saw a pretty good slug of that in the second quarter. I think that more than anything is our shorter cycle business. And we had a fairly dramatic shift in that market between the first quarter and the second quarter in book-to-bill business. And so I think as we look out into the balance of the year, given the run rate we were on in the second quarter, we felt it best to take down the back half of the year, just given the uncertainty in general industrial.

And in Europe, as well.

Yes. That's more of a European impact than in the US.

Okay. And then, your comments on Latin America, I apologize if I missed this, but is this more crude related in Latin America, mining? What is the renewed activity there?

Yes, principally crude oil. We do see a little bit of a mining-related business, but it's really crude oil that's driving the activity in Latin America.

Okay. Thank you again.

Sure.

(Operator instructions).

We'll go next to Ryan McLean, with Janney Montgomery Scott. Please go ahead.

Good morning.

Hey, Ryan. How are you?

All right. Just I guess on the restructuring savings, I just wanted to talk about that real quick, how much of that is furlough related that will eventually come back, and is there an expiration date associated with it, or is it just until business conditions return to some sort of (inaudible)?

Well, the furlough program is a two-year program that will go through 2009 and through 2010. It doesn't expire until 2011. Furlough right now is a significant component of the total savings. It's certainly not all of the savings. So, Scott, if you wanted to elaborate that a little bit more.

Yes, in the second quarter that was about $1.5 million of the savings that we achieved in the quarter.

All right. Thank you. And, switching gears to global navy, I'm just curious, how long does your order book extend out to, like what kind of visibility is there longer term?

Well, these projects go out multiple years, particularly when you get what's called a multiyear buy for a class of ships. So it could extend out three to four years, in some cases, on a program.

So basically you'll be working with an OEM. They're going to -- the government says, "All right, we're going to order four ships," and they'll work with you and you'll be their supplier for that entire program as opposed to them saying, "We're going to produce one ship this year. Can you please produce that?"

Correct.

Okay. Thank you. And then the other thing, I just -- you guys talk a lot about using VOC. And it's easier to understand this process when you're selling into OEM. But I'm curious how you do this -- in the general industrial segment, where you're selling through distributors, how is it that you go out and understand what their customers ultimately want?

Right. Well, when we sell through the distribution in the general industrial market, it tends to be working with smaller OEM customers or on project-related business, and so we have our direct sales organization supporting those distributors either with our field sales group or with our product management support and engineering support people at the factories. And there's generally a pretty direct connection between Colfax associates and the ultimate end customer, even when the sale is through distribution. We don't really have any product that's off the shelf, where distribution holds inventory, gets a phone call and takes an order. So in almost all circumstances there's at least some touch between a Colfax associate and the end customer.

All right. Thank you. That's helpful. And, finally, speaking of general industrial, are there any signs of life in that segment? I mean, you mentioned some of the end markets that are not doing well, but is there anything that maybe has started to come back a little bit?

Yes. Yes, I think we've seen that in the US. The trend lines were pretty -- were obviously down fairly heavily in the earlier part of the second quarter. We did see some pickup in the later part of the second quarter, and that trend line appears to be holding in July. But that's more of a US phenomena. I would say in Europe it's been -- it's flattened out at that reduced level. From a segment category, we've seen it in multiple OEM accounts in the US, covering a number of different segments in general industrial, so it really hasn't been centered on any one segment.

I'd like to add, too, the summer is a variable time period for us in orders, so it's a little difficult to draw inferences from the order rates that we were seeing in this part of the year.

Okay. Thank you.

We'll go next to Shannon O'Callaghan, with Barclays Capital. Please go ahead, sir.

Good morning, guys.

Hi, Shannon.

Just, you talked about some stabilization in the US and Europe's still weak. I mean, we're heading into probably a period of accelerating organic declines after this quarter. How comfortable do you feel in what you're seeing out there, I mean, in terms of this degree of stabilization? When would you expect your organic declines to kind of bottom out based on what you're seeing out there right now?

Well, I think part of the stabilization from a revenue perspective is the backlog that we have. So that's why I think we're comfortable within the range that we have out there from a revenue perspective. The OEM business I think will fill in. There'll be some book-and-bill business that'll start to fill in in the back half of the year. But that's really a moderate, certainly a moderate part of the sales.

I think the one thing we will see, we should see is, from a comparison point of view on orders, the third quarter last year was certainly still at a very high level. We came off of a record in the second quarter of '08, which was almost $190 million. We did $180 million in the first quarter and just under $175 million in the third quarter, so we had three record quarters. The fourth quarter it dropped off pretty substantially, so from a comparative point of view you should see by the fourth quarter of this year, if trend lines continue, certainly a more normalized comparison.

Okay. And how about, you mentioned sounding a little more encouraged on the acquisition environment, I mean, what have you guys -- how are you working the pipeline? What have you been sort of waiting for? Is this going to become sort of a more meaningful part of what we hear from you guys in the next six, 12 months?

Sure. I mean, we built our business through acquisition, and that has always been one of our key growth initiatives as a company. And so I think the biggest sort of detriment over the last year, year and a half from an acquisition perspective has been, I think, a disconnect in the market between seller expectations and buyer expectations. And so the number of potential candidates in the pipeline had dropped pretty substantially.

I think one indication for us has been that we're certainly starting to see intermediary activity picking up that is one source of deal flow for us, not certainly all of our source of deal flow. Most of our transactions historically have been self-generated. But certainly I think we hope to be able to talk at more length about acquisitions over the next several quarters.

Okay. Thanks.

And with no other questions in queue, I would like to turn the conference back over to Ms. Reynolds for any additional or closing comments.

Mitzi Reynolds. Okay, thank you.

Thanks, everyone, for joining us today. We look forward to updating you next quarter.

That does conclude today's conference call. Thank you for your participation.