Enovis Corp (ENOV) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to the Colfax Corporation third-quarter earnings conference call. Today's call is being recorded. At this time, I'd like to turn the conference over to Mitzi Reynolds. Please go ahead, ma'am.

Thanks, Sicilia. Good morning, everyone. 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 would like to note that our preliminary financial results do not reflect any potential adjustments from the favorable asbestos ruling on October 14, 2009 for the Company's Warren Pumps subsidiary. We expect additional information related to this matter to become available prior to our filing of our third-quarter Form 10-Q with the SEC on or before November 16, 2009. Any adjustments that result from our evaluation of this information will be reflected in our financial statements included in our third-quarter Form 10-Q.

Our preliminary earnings release is available in the Investor section of our website, ColfaxCorp.com. We will be using a slide presentation to supplement today's call, which can also be 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 this call, we will 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 intent to update them except as required by law.

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 would like to turn it over to John. John?

Thank you, Mitzi. Good morning, everyone. I will begin with some of the quarter's more significant highlights and key performance measures. Then I will update you on our cost reduction initiatives, our end markets, and our 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 this morning, we are pleased with our third-quarter results, given the current economic environment. While results are down over tough comparables in last year's third quarter, we held margin and saw improvement in some markets. On a sequential basis, organic orders were up in most of our businesses from the second quarter, most notably Navy, up 55% and Power Gen, up 44%. Backlog also grew slightly from the end of the second quarter.

We're encouraged by our progress on our cost reduction initiatives. Our successful restructuring efforts are evident in our margins.

Now for a look at the specific results for the quarter versus prior year. Adjusted net income decreased 18% to $10 million or $0.23 a share. Sales were $128.5 million, down 12% excluding the negative impact of currency and acquisitions, and were down 16% in total.

The decline in sales was primarily due to lower sales in our general industrial business, which were partially offset by growth in Navy, up 79% and Power, up 17%. On a sequential basis, organic sales were comparable to the second quarter.

Adjusted operating income declined to $16.5 million and adjusted EBITDA decreased to $20.2 million. While volume declined, our gross profit margin increased 40 basis points to 35.9%, and we held our adjusted EBITDA margin flat at 15.7%, reflecting our success in realigning our cost base.

Orders for the quarter were $124.3 million, down 26% organically and 29% overall, driven by continued weakness in our general Industrial and Commercial Marine end markets. Our Navy business is doing very well and had organic growth of 59% in the quarter.

Cancellations were minimal in the quarter, about $500,000, related solely to the Commercial Marine market. Book-to-bill for the quarter was 0.97.

As noted earlier, we saw sequential improvement in our order book with organic orders up 15%, including strong increases in our Commercial Marine, Power Gen, Navy and general Industrial end markets. We are encouraged by the upward trend in orders from the second quarter to the third quarter. Historically, orders have tended to decline sequentially throughout the year.

It's also worth noting that the year-over-year order organic decline is decelerating. It was 38% last quarter versus 26% this quarter. Backlog was $298 million at the end of the quarter, up $6 million from the end of the second quarter. But we are seeing an increasing trend in push-outs of project deliveries.

We are encouraged by recent activity and stabilizing order trends but remain cautious on our outlook, given the uncertain economic environment. Accordingly, we will continue to streamline our operations and take out costs to align capacity with demand.

We have made significant progress on our cost reduction -- cost restructuring initiatives to date. This year, we closed one US facility during the first half of the year and will complete the closing and consolidation of a North Carolina facility by year end. We've reduced headcount by about 15%.

We expect to have cost savings of approximately $16 million in 2009 related to these actions and have recorded charges totaling about $11 million. We expect annualized savings of about $22 million from these initiatives. We are well-positioned to enhance profitability as our end markets rebound.

Now moving on to a more detailed look at each of our end markets. In Commercial Marine, organic sales decreased 9% for the quarter, but were up 13% year to date. Organic orders declined 27% and 48% for the quarter and nine months, respectively. We are pleased to report that cancellations were down substantially for the quarter and totaled $500,000. Based on the reduction in cancellations and a steady order book, sequential bookings were up 25%.

On a global industry basis, there are currently about 10,000 ships on order. 2008 was a record delivery year with nearly 3900 deliveries. Through the end of September, about 2500 ships have been delivered and based on industry estimates, we expect roughly 3,000 deliveries by year end.

While cancellations have declined, we may have more in the future as global trade recovers. We will continue to focus on aftermarket opportunities, high-spec marine and market opportunities related to changes in environmental regulations, such as the requirement to switch to low-sulfur diesel fuel and port, which goes in effect in Europe in January.

Moving on to Oil & Gas, sales on an organic basis were down 8% for the quarter and are up 4% year to date. Organic orders were down 49% for the quarter, primarily due to timing of a couple of large orders and are down 23% year to date. Conditions are improving in the Oil & Gas end market. Oil prices have recently held in the $70's and we're seeing a shift from containing costs to expansion and growth as projects start to come back online. We've seen a number of projects that were on hold now in the re-quoting process. However, customers are moving forward cautiously.

Industry experts expect oil demand to increase next year with growth in China, the Middle East, India, and Latin America, driven by the industrial, transport and petrochemical sectors. However, the pace and strength of the recovery remains unclear.

Turning now to Power Gen, organic sales in this market were up 17% for the quarter and are flat year to date. Organic orders were down 7% on the quarter and 14% for the nine months. Given the size and timing of projects in this end markets, results can be very lumpy. Organic orders were up sequentially 44% over the second quarter, driven by project orders, particularly in the Middle East.

The overall outlook for the Power Generation market for the near term 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. Iraq, Saudi Arabia and Kuwait have recently announced plans to significantly enhance their countries' power generation capabilities. In the developed economies, we expect efficiency improvements to drive demand.

Our next end market is global Navy, where we are seeing very positive trends, as the US and the rest of the world's navies are expanding. Organic sales were up 79% for the quarter and 46% year to date. Organic orders were up 59% in the third quarter and up 32% year to date. Sequentially, organic sales and orders were up 39% and 55%, respectively, over the second quarter.

Growth from the U.S. Navy is coming from several new build programs, including the Virginia Class submarine; CVN-78 Ford Class Aircraft Carrier; the DDG-1000 Zumwalt-Class destroyers, as well as new and modernized DDG-51 destroyers.

We're also working on a number of projects with other global navies, including several European nations as well as India. Last week we announced that our business unit in France will be providing oil pumps and other fluid handling systems for the Barracuda-Class nuclear submarines being built for the French Navy. We also announced the opening of a new defense center of excellence in Mumbai, India to assemble and test fluid handling systems for defense markets in the region. Based on current activity, we believe the long-term growth prospects for this market are promising.

Now for a look at our general industrial end market. On an organic basis, sales were down 34% for the quarter and 21% year to date while orders were down 33% and 35% for the same periods, respectively. Sales were down in most end markets for the quarter, especially in the machinery support, building products and chemicals submarkets. Sequentially, organic orders were up 15%, led by growth in distribution, chemical and pulp and paper. Activity level appears to have stabilized in the US, where we are beginning to see some positive OEM trends. In Europe, the general industrial markets remain weak but appear to be flattening out.

Turning to a geographic look at our sales for the quarter, about 43% of our sales came from Europe, 30% from the Americas and 27% from Asia and the Middle East. Organic sales were down in the US, Europe and Canada. They were up in Asia, while higher oil and gas and power generation revenue drove sales in the Middle East upward.

As noted earlier, we are pleased with our profit margins. Gross profit margin was up 40 basis points to 35.9% over last year's third quarter, and was up 140 basis points over this year's second quarter. Adjusted EBITDA margin was flat at 15.7% for the quarter and up nearly 200 basis points sequentially.

Adjusted net income margin was also flat for the quarter and up 120 basis points sequentially. Excluding the impact of currency, selling and general administration expenses was down about $4 million or 11% from the prior year.

Now for a look at the balance sheet, our financial condition remains strong. Our debt to adjusted EBITDA was about 1 times. At the end of the quarter, we had $51 million in cash and $136 million available under our revolver.

Working capital has improved. Excluding the impact of acquisitions and foreign currency, inventory is down about $6 million since year end. Receivables and payables both declined $16 million. Working capital improvement continues to be an area of focus for us.

Net cash flow from operations was $34 million for the first nine months of the year, which includes $13 million of asbestos-related cash outflows.

At the end of the quarter, the asbestos insurance receivable related to Imo claims was $35 million. The trial in our Imo insurance coverage litigation is scheduled to begin in December, and we hope to have resolution on this matter soon.

As noted earlier, we received a favorable ruling from the Delaware Chancery Court in October regarding our asbestos insurance for Warren Pumps. The court confirmed that we were entitled to the excess coverage and that the costs should be allocated using an all-sums allocation. The impact will be included in the financial statements and our 10-Q filing, which will be filed no later than November 16.

Turning now to an update on acquisitions. During the quarter, we purchased PD-Technik, a provider of marine aftermarket products and services located in Hamburg, Germany. PD-Technik has a long and successful history of offering high-quality sales and service to European ship owners. This acquisition broadens our served market as well as service capabilities. While small, this acquisition supports our marine aftermarket growth initiatives, and we expect it to have a modest positive contribution to both sales and profit this year.

Acquisitions remain a key component of our growth strategy. While the pipeline has improved since the beginning of the year, we're hopeful that there will be an increase in acquisition opportunities in the near future. We believe we are well positioned to take advantage of these opportunities, given our strong balance sheet.

In summary, we continue to execute our strategies in a challenging 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. We are pleased with the progress on our restructuring activities as evident in our margins.

We do expect continued economic pressure in the near term, so we will continue to take out costs. In the meantime, we're well-positioned to enhance profitability and our competitive position as conditions improve.

We have lowered our guidance range for sales and adjusted EPS for the year to conservatively reflect variable project timing and estimated mix. We expect organic sales to be down 8% to 10% and adjusted EPS to be in the range of $0.88 to $0.94.

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

(Operator Instructions). Jeff Hammond, KeyBanc.

Good morning, guys. Just wanted to, I guess a lot of moving pieces here. Some things feel better. Oil & Gas a little bit choppy. But just as you look into 2010, maybe versus three months ago, what are you feeling a lot better about? What are you still nervous about as you think about next year?

Well, I think that one of the biggest variables we face right now is just timing of shipments. And I think particularly in our project business, schedules are moving around, and I think that's reflected in the conservatism that we have built into the fourth quarter. While order trends seem to have stabilized, the timing of shipments clearly is I think a question mark for us right now.

Okay. But is there a likelihood that that kind of improves your visibility into 2010? Are they giving you indication that those shipments go, it's just a matter of time or --?

Yes, I mean, I think that's right, Jeff because, we certainly haven't seen any cancellations in any of our business other than Commercial Marine, and that number has come down substantially in the quarter. So I think it's not a situation where we are seeing order cancellations. It's more push-out and timing related. So the visibility is not as good as it was near term or as we head into the first quarter of next year.

Okay. And then shifting gears to the restructuring, as you look at this $22 million of annualized savings, how much would you characterize as temporary versus structural?

The $22 million is all permanent, but some of it would vary based on volume. I mean if the business grew again, we would have to bring some of it back. Structurally-related is a relatively small number. It's the closing of the facilities.

Okay. So we should think of this -- the incremental $6 million that you don't get this year, you start to flow through into '10?

Correct.

Yes. All of that -- for the most part, most of the headcount reduction will be completed by the end of the year. We do have some contract folks that will go out in the first quarter of next year. But, so that incremental fix should flow through starting 1/1/'10.

Okay, great. And then just finally on asbestos, you've just given the Delaware case resolution. How should we think about kind of cash outflow on an annual basis? I think you previously have been talking about $5 million to $7 million annually.

I would think that would come down slightly. We really need to get the litigation finished up in both cases to nail that down completely. But I would think the bias would be for it to be lower.

Okay, but difficult to quantify at this point?

Correct.

Okay, thanks.

Michael Schneider, Robert Baird & Co.

I'm wondering if you could just, again, on the project timing and your guidance for 4Q, John, is there a specific project because the reduction in revenue wasn't all that significant. Is it one specific shipment or a very limited number that caused the reduction?

Well, it's in a couple of different end markets. And I think it's more of a general tone than anything else. Our business is always, there always is a fair amount of delivery variability at the end of the quarter. It's one of the reasons we don't give quarterly guidance. But it just seems that that variability has increased. It's certainly increased in the third quarter. It appears to be the same in the fourth quarter. So I think it's a general tone across multiple end markets and not tied to any one specific order.

Okay. And the projects that are being re-quoted at this point that you've seen come off the shelf, can you give us a sense of what the price deflation, in general if you had to characterize it, what amount it is?

Yes, I think pricing -- the re-quoting process is more not, there was an existing accepted quote and we're going to re-price it. It was more that projects that were in process are now being brought back online. They were basically put on hold and are being brought back online, so that was kind of midstream engineering work being done on them at the point that the projects were stopped. So from a pricing perspective, while there's certainly more competition out there, the same number of folks going after to fewer jobs, I think pricing, while there's downward pressure, it's certainly not extreme.

Okay. And then as you look at leadtimes, can you give us a sense of your -- some of your more sophisticated engineering pump packages? To what degree have leadtimes shrunk? Are leadtimes down by 20%, are they down by 50%?

You mean in terms of our time between order taking and shipment, or --?

Yes.

Or leadtime requests by the customers?

No, your leadtimes.

Well, I think the leadtime on comparable projects are shorter this year, certainly, than they were last year. And that's primarily driven by our supply base leadtimes have come in. So I would say if you want an average, that's probably 10% to 20%, depending on the project. And that's really driven by leadtimes on drivers, motors, engines etc., and castings.

Do you sense that that has caused some delay in the orders as well because your customers know they can get the product on a more timely basis?

No, because on the project business, we are usually not driving the delivery schedule. We are a smaller part of the overall project. So our leadtime tends to be a lot less than some of the other components of the project. So I don't think leadtime has come into play at all there.

Okay. And final question just on Commercial Marine, sequentially, the orders were up very strong, but yet obviously year to date and for the quarter they are down hard year over year. Do you sense a distinct change in trend line here during Q3 in Commercial Marine? I know it's a very lumpy business. I'm trying not to get too excited about the growth this quarter sequentially.

Yes, I think you can break it down into a couple of pieces. I think the biggest driver of the order growth sequentially has been the reduction in the cancellations. I think the base business is relatively stable in Commercial Marine. So it really comes down to the cancellations were $9 million in the second quarter. They were $0.5 million in the third quarter.

Okay. Great point. Thank you.

Joe Mondillo, Sidoti & Company.

Good morning, guys. Just to build on that last question regarding Commercial Marine, how do you look at this business going forward in the big picture? What is the supply of ships out there? Is there a need for growth in the near-term future? Just maybe just a little detail on the big picture of that industry.

Sure. Well I think, obviously, the number of new contracts has come down at the shipyards, as reflected by, certainly, financing concerns and economic concerns that the ship owners have. There are still roughly 10,000 ships on order at the shipyards for delivery over the next several years. So, while this year at the yards, deliveries have come down from a peak of about 3800 to about roughly 3,000 this year, there should be some of that 10,000 left remaining that will ship over the next couple of years. The question is, is what's the, certainly, what's the pattern of that shipment and the amount per year?

I think the one thing to also note is that the total fleet size has actually remained relatively stable, only up about 1,000 ships so far through nine months this year versus the end of last year. As new ships have come on line, there's been a fair amount of ship removals so far this year, and I think that trend will continue. We've already exceeded through nine months of '09 the number of removals this year that we had all of last year.

So I think that the market will correct itself by taking some of the older ships out of the fleet, which will help to offset those new ships coming on, to remain a relatively stable number in the overall fleet.

Okay. And then how much aftermarket exposure do you have in that business as well as in your overall business?

The overall business is about 25% of total revenue is aftermarket. Commercial Marine is a little bit lower than the average because of the amount of for-market growth that we have had in Commercial Marine over the last several years. But our aftermarket business has been growing. We certainly installed a large number of pumps over the last five years in the Commercial Marine market. So our aftermarket base has grown pretty substantially.

I think the other thing, there are several trends, particularly related to environment concerns that the ship owners are needing to retrofit some pumps in the fleet related to both the low-sulfur diesel issue, but also limits on the amount of oil that can be expelled from the ship and bilge water. So we are looking at some incremental aftermarket in Commercial Marine, some opportunities there beyond just the increase in the installed base.

Okay. And then just turning to the Oil & Gas segment, you said conditions are improving there with some projects coming back slowly. Orders were down in the quarter. Are you seeing an increase in orders or inquiries in October? Or, what are you seeing there and just a little more detail there?

Sure. In the Oil & Gas market, it's a fairly lengthy gestation period from inquiry to order. So as projects start to come back online, it certainly takes some time for those to develop into an order. So, I think we've seen that, and this is sort of the first signs that that activity level is starting to pick up, but it hasn't materialized into an order as of yet.

We did have some fairly significant orders in the third quarter of last year, kind of big-project businesses that make that comparison, certainly quarter over quarter, relatively difficult. But I think somewhat from a trend line and from an activity perspective, we are starting to see some light in Oil & Gas.

Okay. And then just last question, just regarding acquisitions, just wondering if you could give a little more color on where you are seeing the greatest opportunity to acquire different types of companies. What kind of end markets are you looking at right now?

Sure. I'll answer in general because we certainly don't comment on acquisition activity that's in process. But in general, we are looking to continue to fill out our product offering, to grow geographically around the world and to also support our existing end markets. I think you look, we have a fairly broad end market base across a number of different sectors. So we would like to continue to grow in the existing businesses. Excuse me, with the existing customers that we already have, to become more important to those customers.

All right. Maybe I can just rephrase it. Once I -- what end market of yours do you think is the strongest right now of your current company?

Yes, I think, well the strongest end market from certainly from a growth perspective right now is Navy. After three years of pretty tough conditions in the Navy market, this year, we have had very strong order growth and also fairly strong revenue growth. And based on sort of our view of the new build programs not only in the US, but also within the global navies, that's a trend that should continue for the near term.

Okay. Thanks a lot, guys.

(Operator Instructions). Shannon O'Callaghan, Barclays Capital.

Good morning, guys. You know, putting aside the conservatism around the timing of what ships in 4Q, can you talk a little bit more about, you mentioned you were encouraged by the sequential uptick in orders in the third quarter. Do you feel like you have bottomed out from an orders standpoint here? Or is it timing or seasonality? Can you give a little more feel around that?

Sure. From a seasonality perspective, there tends to be sort of declining orders historically kind of starting at the beginning of the year is the larger quarters from an order perspective. And it tends to decline a little bit seasonally as you go through the year, with fourth quarter typically being a lower quarter in terms of orders. That's the normal seasonal pattern. So I don't think there was anything seasonally driven from third quarter to second quarter.

What we did see is some -- particularly in a couple of end markets, some pickup in activity level, which I would say the US is probably more stable than Europe in that regard. Europe, we are still I think kind of bouncing along the bottom. But, I think we have seen some stabilization in our US businesses.

I mean when you think across the businesses and the way you are seeing them track, what feels like it still gets worse from here? You pointed out a couple things that have gotten better sequentially, but in Oil & gas it was down, but you are saying that the gestation period is a little longer. So what feels like it has more on the downside and what feels like you have bottomed out?

Well, from a downside perspective, you have certainly got the variability, the lumpiness in some of our markets. So those project businesses tend to come in -- kind of come when they want to come, as opposed to from a smooth quarterly perspective. So you're going to continue to see some variability, particularly in Power Gen and Oil & Gas because that's our most sort of I would say project-sensitive business.

The general Industrial I would say, at least from what we have seen, seems to be kind of bottomed out and you may see some upside there. That certainly was the leading indicator business for us. It was the first market to go down last year. So I think naturally we would probably see that as one of the first markets to come back. So, I would say general Industrial probably has the most upside of any of the markets right now in terms of growth off the bottom.

Okay. And then just on the margin structure in the quarter a little bit, anything in those gross margins? You mentioned you were pleased with them. Is there any mix benefit in there?

And then SG&A I actually thought might go a little lower with some of the restructuring savings. Was there anything in there that was unusual that thought it might have gone down a little more sequentially?

I mean, certainly, nothing unusual from a mix perspective in the quarter. If you look at where we were able to make gross profit improvement from business to business was really related to cost -- was on the cost side.

I think on the SG&A we are continuing to take costs out in SG&A. We certainly picked up some of the incremental costs last year as part of being public, and that rolled into the numbers as the year went on. So we are still a little upside down on a comparison basis on SG&A. But we will continue to reduce expenses in that line as well.

Okay. All right. Thanks.

Having no further questions in queue, I would like to turn the conference back over to Mitzi Reynolds for any additional or closing remarks.

Okay. Thank you again for joining us today. We look forward to updating you next quarter.

And that does conclude today's conference, ladies and gentlemen. We appreciate everyone's participation today.