Enerpac Tool Group Corp (EPAC) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Actuant Corporation second quarter earnings results conference call. During the presentation, all participants will be in listen-only mode. Afterward, there will be conduct a question-and-answer session. At that time, if you have a question, press the 1, followed by 4 on your telephone. We are conducting an e-meeting to coincide with the audio conference. If you would like to view the presentation online, please log on to www.themeetingcenter.com and go to join us as participants and enter meeting number 242-218-446. Searching up today’s comments represent forward-looking statements made pursuant to the prevision of the Private Securities Litigation Reform Act of 1995. Management cautions that these projections are based on occurrence and estimates of future performance and are highly dependent on a variety of factors, which could cause actual results to differ from these estimates.

Actuates results are also subject to general economic conditions variation in demand from customer, the impact on the economy of terrorist attacks and threats of war, the length of the current recession in the company's market, continued market acceptance of the company's new product introductions. The successful integration of business unit acquisitions and related restructuring, operating margin risk due to competitive pricing and operating efficiency, supply chain risks, material and labor cost increases, foreign currency fluctuations and interest rate risks. Due to the company's registration statements filed with the Securities and Exchange Commission for further information regarding the factors. As reminder if you wish to view the presentation online please log on to www.themeetingcenter,.com and enter meeting number 242-218-446. As a reminder, this conference is being recorded Wednesday, Mar. 19, 2003. I would now like to turn the conference over to Bob Arzbaecher, President and Chief Executive Officer for Actuant Corporation. Please go ahead, sir.

Thank you. Good morning and we appreciate your participation on the call. We will spend 20 minutes on prepared remarks and open up for questions. Andy is going to start up by going through second quarter financials and I am going to come back and give you some update on few of our markets, modest restructuring we are doing and progress of the Kopp integration and conclude with a view of the balance of the rest of the year. Now I will turn it over to Andy to go through the numbers.

Thanks Bob, good morning everyone. To summarize results for second quarter, sales were about $142m, 31% ahead of last year, primarily due to acquisition of Kopp in September, increased demand from number of our markets and favorable currency translation. If we exclude the Kopp acquisition, our year-over-year sales were up 8% during the quarter. Currency rate changes comprise 6% of the 8% growth with remaining 2% being [Inaudible]. EBITDA for the quarter was $20.6m, or 14.5% of sales. This is about a 7% improvement over last year. As was the case in the first quarter, most of the margin reduction year-over-year is due to impact of adding Kopp to the mix. I will address that in more detail later in my comments.

Our diluted EPS for the quarter was up 32% to $.58 per share compared to $.44 last year. Cash flow for the quarter was very strong. We reduced our debt by $14m. A few weeks back we announced that we had successfully settled infringement lawsuit against [Lipard] subsidiary of Drew Industries, included in second quarter results is small settlement gain in non-operating income representing lump-sum pay-out offset by some related legal fees. This was worth about 2 cents in the quarter. However, we had similar item last year of 4 cent gain on insurance last year. So these two items pretty much washed out. We step back and look at the quarter and we were satisfied with the results. We grew our EPS by 32%, we had very strong cash flow and paid off $14m in debt. We settled Lipard suit in favorable way and we grew core sales in deteriorating environment. Finally as Bob is going to elaborate on, we made a lot of progress in Kopp integration activities, as well. Our year-over-year sales growth was stronger in the second quarter than in the first in all of our markets, with the exception of RV. In that case, RV was primarily down due to loss of some business last year to Lipard via the patent infringement.

But we are nervous about the economy today and the issues in the Middle East. We are happy about the EPS improvement in our second quarter. We are now half way through our fiscal year and year-over-year EPS is up 24%, excluding two one-time items we had in the first quarter. This is at high end of our goal of increasing diluted EPS year-over-year by 15-25%. I am going to provide little bit of color on second quarter results by segment starting off first with sales. Within our Tools and Supplies segment, sales for the quarter were up 45%. Excluding Kopp and currency, sales increased about 1%. This is sequential improvement over the first quarter. Two of our supply sales were down 1%, excluding Kopp and currency. Within two of our suppliers [EnerPac] sales similar to last quarter rough and low single digits due to growth in Asia and Europe, including shipments under the viaduct bridge, which you see on the slide here. North America was weaker sequentially due to poor February.

Gardner Bender sales excluding top were down 1% from the prior year, which is the best year-over-year performance we have seen in the last six quarters. Our retail was flat and wholesale distribution and OEM sales were negative territory due to the continue softness in commercial construction. Turning to our retail [DIY] business in Europe, our Kopp sales for the quarter were again higher than the prior year. Given the overall weak conditions in the Germany economy, we are pleased with this top line performance. As we mentioned on last quarters call, Kopp's second half is not as strong as first half due to seasonality, so we can expect lower revenue in the next two quarters relative to the first two. Now turning to Engineered Solutions. Sales in this segment were up 12% over the prior year, or 4% excluding the currency impact. Engineered Solutions sales have increased now year-over-year in each of the last six consecutive quarters. One of the reasons sales growth was less than the 14% growth we reported last quarter --. MISSING TEXT WILL BE PROVIDED BY CCBN.

-- we are in the process of building a number of production lines that are come into use over the next 12 months. Our D&A, depreciation and amortization for the quarter, was $3.8m, compared to $3.1m last year, with increase primarily from the Kopp acquisition. For the full year we believe we are still in line or on track to spend about $10m on capital expenditures. Lastly, before turning it over to Bob just to quickly review our debt composition. Debt at end of February included $12m under our $100m revolver, where $12m was drawn $58m in term loan, $109 in high-yield bond and $13m in European term loans. Our leverage as measured by debt to EBITDA was 2.2 times, senior leverage below one turn, which provide us with flexibility going forward. Total borrowing availability under existing revolver was about $80m. With that, I will turn it back to Bob.

Thank you, Andy. When we reflect on the quarter, we were certainly pleased, with how acquaint performed particularly in had what is becoming a difficult economy. We had 32% EPS growth, Andy just went through, 2% core sales growth quarterly trends improving in all businesses with exception of RV, and very strong cash flow. Today I want to update you on a couple other items and a few of our markets that are more substantial markets. Starting with convertible tops. We are seeing some new convertible tops platforms turning into revenue. Our year-to-date sales in convertibles are up 10% excluding currency, including 20% increase in second quarter. When you look from unit point of view, our sales were up 45% from last year, driven large by the Volkswagen Beetle and Audi a-4, both of this program are coming into delivery in the US and causing that ramp-up. The future continues to look very bright. When we were at the Geneva auto show last month, we saw a lot of new convertibles.

It was very similar to the January investors conference we had it in Detroit, where the proportion of convertibles exhibited at these shows far outweighed 3% of the market they currently hold. We continue to have a full plate of programs we are designing and quoting, some of which we will announce within this fiscal year. It is previously disclosed that we reached settlement with the RV litigation with Lipard, this settlement pays actual royalty over the life of the patent and allows Lipard use on non-exclusive basis for some of the Power Gear and Dewalt patent. We are very happy with the settlement and believe it was in the best interest of all parties involved, including customers that we did not prolong the litigation and the uncertainty associated with the litigation.

Due to our confidentiality agreement between the parties, I can't give you a whole lot more data than that. We had reasonable quarter in the RV market, with second quarter sales and profit slightly better than we expected going into the quarter. However, a number of customers move to four-day work weeks in late February this is continued in March. We previously given you guidance in the RV segment of $80-85m for the fiscal year and looks like sales will be low end of that range. However I want to remind you, RV is only 14% of the total Actuant platform. Now, I will like to give you an update on Kopp. It has been six months since we acquired the business in Germany. I want to discuss some of our success of integration acquisition in the Actuant. We been graphically implementing the Actuant LEAD process at Kopp.

This will come at no surprise [Inaudible] the President, was one of the early adoptors of Kizon and [Inaudible] for quiet power back in 1998. LEAD stands for lean enterprise across discipline, our internal operating improvement program. A couple of examples that we have used at Kopp, hard statistics are as follows. We have done 25 five-S events and used aggressively 80/20 [Inaudible] program and had a major reduction in SKUs, which we are stock keeping unit that we sell. We used Kizon Institute and they implemented program we call Train the Trainers. We now have 15 Kopp managers that can lead Kizan and five-S events going forward. Lastly, we are aggressively pursuing con-bond signals and one piece flow manufacturing the number of areas internally and starting to use con-bond with our suppliers. All of these LEAD processes are starting to paying off in working capital.

We have seen $3m reduction in inventory in first six months we owned Kopp, and $1m increase in paid payables. Our target is $5m of working capital or adoption at Kopp in 2003 is now on track. Productivity is also improving. Sales are higher and headcount is down about 100 people from a year ago. This will improve further as we consolidate operations. We announced closure of [Engelstock], Germany plant reducing 50 employees in April. We will be moving this work to two other Kopp facilities, but are not projecting any increase in headcount to accomplish this. In addition to this reduction, 50 other employees accepted our voluntary termination program, 30 of which are already gone and additional 20 between now and June. So the message here is Kopp integration is in full swing and is on track and the whole Kopp acquisition has been a great success for Actuant in the first six months.

As Andy commented earlier in his remarks, we did see the economy slow during the second quarter as it progressed. In February and continuing in March, we saw noticeable slow down particularly in RV and EnerPac. Over the last 45 days we had developed contingency plans by business to implement in case there was a slow down in the economy. We decided to implement certain aspects of the plan in the second quarter, the costs are already been included in our reported results and total few hundred thousand dollars. The process of implementing the other pieces of this restructuring activity, which includes closing a Mexican plant, the additional head count reductions in other business, we expect the cost to be recognized in the income statement in the third and fourth quarter. We estimate such restructuring will be in the $2-3m range in EBITDA with splits per quarter that are still moving around at this time.

Offsetting part of these restructuring will be anticipated $1.1m foreign currency gain upon the final liquidation of the Mexican facility, that will probably happen in the fourth quarter. Although we want to inform you of these restructuring, they are pretty minor in terms of total Actuant platform and combining the currency gain, restructuring charges and restructuring savings associated with those charges, all this has been factored into full year fiscal 2003 numbers that I am about to give you. This leads to guidance for remainder of the year. We are staying with our previous guidance of 545 to 575 in sales. EBITDA of $90-95m, and EPS of $2.75-3.00. Given the restruction I just went thru and the slowing economy, we think the lower half of EPS range is probably more realistic than the top half. We still feel comfortable with the $40m free cash flow forecast for the year, which would yield year-end debt level at about $170m, these does not including any future acquisitions. When you look at the third quarter specifically, we are forecasting sales between $140-145m.

EBITDA of $24-25m, and diluted EPS of 77-83 cents. Because we are not sure of the exact timing of the restructuring I just mentioned, third quarter does not include the cost of this restructuring. You will have to factor that in yourself. So, in summary, the quarter was quite positive. The short-term outlook is obviously murky. But we are very pleased with the first half, with EPS up 24% excluding one-time items in the first quarter. This is in line with our goal of 15-25% for the year. The restructuring actions are modest and I think our proactive move by us to deliver the back end of the year and stay within the original EPS guidance of $2.75-3.00. Overall, we think we are doing lots of great things, we are growing sales organically and we are looking for small bolt-on acquisitions and focused on cost reduction in the soft economy and we are driving the cash flow very hard. Monica, I like to turn it over to you for questions.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1, followed by 4 on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration then please, press the 1, followed by 3. If you are using speakerphone, lift the handset before entering your request. One moment please for the first question our first question comes from Deane Dray with Goldman Sachs. Please proceed with your question.

Good morning Bob and Andy. I would like to start with [Winebago] yesterday in the news and the lower guidance. Was there anything there that was a surprise to you and how does that reflect on the RV industry in terms of where are they on inventory in the dealer chain?

I did listen to the call yesterday on Winebago, I don’t think there are any surprises to me Winebago is not a customer of ours, but they are obviously very good barometer in the industry. What they are doing is going to four-day work weeks in the next six week period of time. They were looking at some recent data in March that said they might accelerate and go back to five-day weeks earlier than that. That is consistent with what we have heard from a number of other customers going to four-day work weeks. That is typical for the RV industry to do that. The time of the year you are at right now is the big shipment time to the dealers in the RV industry. The dealers then sell lot of there units in spring and early summer as people are taking vacations. So, there wasn't anything a big surprise there. Your question about inventories at the dealer level, Winebago was saying they are comfortable and they are not inflated. They built up a little more production and have some units in the lots versus the dealer network, which they were working through. But, that is in line with what statistical surveys have said, the inventory at the dealer level is pretty reasonable right now.

Okay. And then, just some clarification on the guidance. How will we know what sort of pace you are taking on the restructuring with regard to this $2-3m? Is it just your best guess kind of blended across the two? Will you make an announcement as to where that stands?

I don’t think that Deane. Our total restructuring cost we are estimating are $2-3m. Looking at that and just on a pretax basis, that is worth 10 to 15 cents per share, offsetting that we would have 5 cent offset for foreign currency gain. The wild card here is what quarter that foreign currency gain falls into. Obviously we are looking to accelerate that. We think realistically it will be the fourth quarter, like Bob commented on. If I would provide it that it is split the way I look at it, it is probably 50/50, you know, with the $2-3m, 50% in the first half, 50% in the fourth quarter, I would probably lean a little bit heavier in the third quarter than the fourth quarter in terms of the restructuring.

The Mexican thing is related to actually liquidating the legal entity in Mexico. We are just starting that process right now. We are little uncertain on the timing. I think to be conservative, you should assume that the nickel coming back in income is in the fourth quarter. It is non-cash item, not going to have a major impact.

Okay. And then, just to get a sense of what are the implied guidance on the fourth quarter, is if you take the high end of the sales range that you have given today at $145m, that seems to imply a fairly at the low end of the fourth quarter, your obvious quarter, of something closer to $120m. Is that right? And does that -- what are you assuming there, what kind of scenario in the economy?

You have taken the low end of the sales range and I think we are probably at the medium end of the sales range. I think one of the reasons if we wanted to tighten the sales range, probably we would have tightened around the top, not the bottom. I think fourth quarter will be similar to the third, $140-145m, in the neighborhood.

Thank you.

The next question comes from the line of Wendy Caplan with Wachovia Securities. Please proceed with your question.

Thank you. Good morning. Bob, can you talk a bit about this restructuring that you are going through in terms of where we would expect to see it? And whether there should be more beyond this year if you know are there more wiggle room here in terms of more opportunities?

I will be happy to talk about that. Let's start with the fact that I don't consider this wile we describe it as restructuring, this is the type of stuff we are not excluding from earnings estimates. Because this is going to continue, when we see cost down opportunities, we pounce on them. And in this economy, I think you do need to have some contingency planning in place. We do and we figured some of the pieces. If we take the Mexican facility, for example, we moved a lot of that product from China or to China from Mexico. We are in the process of saying there is no reason to have a small Mexico facility. That is probably a half of this restructuring alone. That would fall under the Engineered Solutions platform, if you want to look on the actual segment data where it falls in. But, there will be additional restructuring. But I think you got to put it in context though these are explainable reasons why we are at lower end of the range, not the higher end of the range. I am not excluding them as some kind of one-time item. This is ordinary course business type restructuring.

Okay. And you recently named Mark Goldstein head of Tools and Supplies segment. Can you talk about some of the opportunities that you and Mark and others have identified at EnerPac that could improve margins?

Yeah, we are pretty early in the process, Wendy. Where we see some opportunity is really in the back room area of the Tools and Supplies business. That is logistics and shipping product, what warehouse you ship out of. In finance and in HR, in IT, these are the areas that I think we will focus on. I don't think we will score on the front end of the channel; they are really different sales forces and different targeted markets. There are some overlap, but a lot of correlation there. So, I think that is where you will see some of the synergies. The other fact and you follow the company through Mark's tenure with us, he is a good cost driver. He has done remarkable things to help Gardner Bender improve efficiency of both the balance sheet and the income statement. And I see him bringing the same disciplines to total Tools and Supplies entity.

Okay. Finally, could you comment on the cash flow of cost in the quarter?

Wendy the cash flow was positive at top. First quarter we had use of cost because we had built up receivables by $7m. We picked some of that back up but not all of it. But we are definitely positive for the quarter.

Okay. Thanks very much.

Okay Wendy. Monica?

The next question comes from the line of Scott Graham with Bear Stearns. Please proceed with your question.

Hi Scott.

Mr. Graham your line is open. Please proceed with your question.

Can you hear me now? I thought you heard me before too. Could you kind of lay out how RV revenues would ordinarily run through the P&L by quarter? I mean percent of sales basis, it is my suspicion here that most of your RV sales are now behind you for the year. Or am I mistaken?

That is not true. Actually if you look at last year; half the revenue came in second quarter. Last year wasn't a good example, though.

I think the answer is it is not that it is behind us. You are at a point where we are about $40m through the halfway point and we are saying we will get to about $80-82m. You have the big spring season. The OEMs are putting the units in the dealers as close to the point where the dealer can ship as possible. A lot of RVs are purchased from the dealer on spec. What I mean by that is if you go to the dealer and the dealer will have four or five floor models showing different options and then the customer will then buy an RV from the factory with certain of those items included in his own unit and then it gets delivered 6 to 8 weeks later. I think the second -- we are about halfway. Second quarter is usually our strongest. Again, with the exception of those two lost customers, if you take that out, we saw that fact again in this second quarter, even against a very hard comps last year. Then, third quarter is usually pretty good and fourth quarter can be sometimes weaker because you are getting into the next model year.

Okay. Sort of like 20%, 30%, 30%, 20% kind of?

Something like that. Maybe the 30 and 20 in the back end, maybe like 27 or 23 kind of thing, more than quite as spiky as you had.

Fine. Other question is about some of these sales trends in European Truck, which I think continue to defied gravity. Could you maybe give us an idea of where you are expecting you key and truck see in second half?

I would agree with your comment. They have defied gravity. There are a couple of fundamental reasons. The first is the used truck market in Europe is quiet strong still because the trucks are getting consumed into the eastern block where you can't get a good Russian truck. The Russian fleet basically buys along the Western fleet to upgrade. The other phenomenon still exist is a major move toward the sleeper campers, sleeper coaches in the truck market in Europe. It was only three years ago that you could drive a truck across these borders. When they opened that up, you saw some of the same trends as the US, where the drivers were more long-haul drivers than short-term. You have a big upgrade in sleeper things. The third factor which is just affecting Actuant. Is we are not very strong in some of the German makers. Mercedes and Maan are not big customers for us, we are in with Volvo, [Inaudible], and Doff and Scania. These people are actually getting some market share from Daimler Chrysler and from Maan. We are getting enriched by the mix of the sales to our customers.

Good enough. Thanks a lot. Nice quarter.

Thanks.

Ladies and gentlemen, as reminder, to register a question, press 1, 4. The next question comes from the line of Robert McCarthy with Robert Baird and Company. Please proceed with your question.

Good morning, guys. RV, with what you are saying in terms of granted your comments on seasonality et cetera, but what you are saying about full year outlook and the way the markets changed since the beginning of the year, I get the sense your pick-up in terms of market share has actually been a bit better than you were expecting at the outset of the year? Is that accurate?

Well, I would say -- I don't know if that is officially accurate from the beginning of the year. I would say we had a good second quarter in terms of shipment and we did win new business from Dieman and Monaco that will go into production in the second half. At the beginning of the year we had one of the fourth river plants that has been announced it is going to Lipard, also. It was one out of four major plants. I wouldn't say we've beaded, I would say that the second quarter was a good second quarter. That is a function of what is getting our delivery and performance back on track and starting to focus on new technology, lighter slides we will bring in to the market.

Relative to you comment about a the staggered if you will loss of business to Lipard, I was going to ask if second quarter reflected fully the lost business, but based on what you said, Bob, sounds like not quite?

There was probably 200,000 of the forest river peace that was not fully in the quarter.

All right. In terms of year-over-year comparisons, up in the first quarter, down now in the second, what happens to the year-over-year rate of change in this business? In other words, really what I am asking is what is the basis of comparison looked like last year? Are they percentage declines going to get bigger?

You will see that coming in the third quarter, in particular because Keystone was winding down during the third quarter of last year. We still have that revenue in it. Things were robust in the third quarter, as well of last year. The way I look at it, it wouldn't surprise me that we are down 20% or so in RV sales in the third quarter relative to last year and I think the fourth quarter will be still negative [Inaudible] around the 15% range or so.

Yeah, just to imbrues little more, what we are saying is RV sales is similar to the earlier question, somewhere around 20m plus or minus a million in each of the third and fourth quarter and last year we did about 23 and 23. So, that was a year ratio for yourself.

Thanks. And then, there has been, of course, we talked a lot especially over the last two or three quarters about profitability in the business. Couple of quarters ago, Bob characterized it as unsatisfactory, I know you made some progress, but can you talk about whether it's what you wanted to see to this point? How much more progress can be gained in the environment you are looking at in the second half?

I think the second quarter, itself; I think Bill Blackmore and the team down there were above satisfactory for me. We do still have continuing ramp in third and fourth quarter of improving that margin. We told you guys we think we can get back to upper teens territory, again. We are still focused on doing that. We made a good deposit on that in this quarter. I think we have reasonable visibility on how we get the rest of the way there in EBITDA margin. Some is a function of sourcing, some is a function of pulling, getting more efficiency out of the factory itself.

Okay. Let me follow-up couple of small things. Number one, the royalty stream that is going to be generated will be reported where, as another Income item?

No, I think it will be considered operating; because it really offsets sales that were lost.

Can you talk a bit about whatever the issues were in the quarter with Milwaukee Cylinder and clearly you think they will go away? I understand the latching business and the start-up of US production for the SSR will help profitability in Engineered Solutions in the second half, but the Milwaukee Cylinder thing is out of the blue.

Sales were up in cylinder this quarter and last quarter, profit margin was down a hair in cylinder. EBITDA was down a hair versus where we were at last year. Our medical cost down there in particular, we had catch-up adjustment this quarter that impacted margins. The amount we are talking about slinging year-over-year was less than $100,000, not a big number.

Based on what you said catch-up, that is why it is confined to second quarter?

We believe so, yes. You are talking about a business that generates $.5m of EBITDA on a quarterly basis. So, you got to put that in context. This is the tail of the dog.

I know, headline business, Bob. Thanks.

Ladies and gentlemen, as reminder, to register a question, press 1, 4. One moment, please for the next question. The next question comes from the line of Josh Lipam (ph) with Prudential Financial Securities. Please proceed.

Just a housekeeping question what’s the balance on the receivable facility at end of the quarter?

$24m, Josh.

Thanks.

We have a follow-up question from Robert McCarthy with Robert Baird and Company. Please proceed with your question.

I wasn't going to let you get away that easily. Our restructuring charge, number one, I would assume that your own internal range is not as wide as $2-3m. You rounded it to keep even numbers. In other words, seems like a broad range.

That's fair.

In the release, you talk about facilities closures, plural. Is that you have Mexico, now Englestock would not be included in this, is there something else you are not prepared to disclose?

We can talk about it. It is minor facility with in Gardner Bender, we are in the process of consolidating their five distribution centers into our existing network of Gardner Bender. We are closing the last one this quarter, which is in California and that will be the last one. Fewer than 10 employees.

That's it. Thanks.

Mr. Arzbaecher there are no further questions at this time. I will now turn the call back to you.

Thank you very much. I appreciate your participation on today's call and your support of Actuant. We will continue to be very excited about our ability to create shareholder value for you. Andy and I will be here all day today and tomorrow to answer any questions you might have. Thank you and goodbye.

Ladies and gentlemen, that does conclude the conference call for today. Thank you for your participation. Please disconnect your line.