漢威聯合 (HON) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Norcross Safety Products LLC and Safety Products Holding, Inc. Third Quarter Financial Results Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session.

[OPERATOR INSTRUCTIONS.]

As a reminder, this conference is being recorded, Tuesday, the 15th day of November. Your speakers today are Mr. David Meyers and Mr. Bob Peterson. I would now like to turn the call over to Mr. Meyers. Please go ahead, sir.

Thank you, Operator. We would like to advise you that today's call will contain forward-looking statements. The forward-looking statements include but are not limited to statements regarding future events, plans, goals, objectives and expectations. The words anticipate, believe, estimate, expect, plan, intend, likely, will, should and similar expressions are intended to identify forward-looking statements. Our actual results could differ materially from those expressed or implied in the forward-looking statements.

On today's call, we will be discussing the results of both Norcross Safety Products, NSP, and the consolidated results of the parent, Safety Products Holding, Inc., together with NSP, the Company. We invite you to see the discussion of forward-looking statements contained in management's discussion and analysis of financial condition and results of operation section of NSP's 10K for the year ended December 31, 2004 as filed on March 25, 2005 and the NSP Holdings LLC's S4 as filed on March 28, 2005 for a more detailed discussion of certain factors that could cause our actual results to differ materially from those included in the forward-looking statements. In addition, a copy of our press release and a reconciliation of EBITDA can be found on our Web site at www.nspusa.com.

At this time, I'd like to turn it over to Bob Peterson for some introductory comments.

Thank you, David. We were very pleased with our performance in the third quarter of 2005. Sales were up 4.4% and totaled 120 million. More importantly, adjusted EBITDA increased both at NSP and the Company by approximately 7% and 10% respectively over the prior year and totaled approximately $17 million.

David will be commenting on the details supporting these numbers shortly, but before David begins, I would like to make a couple of brief comments on each segment starting with the general industrial segment. We continued to see broad based product sales strength in our general industrial segment in the third quarter 2005, driven by our product bundling efforts and the introduction of new products. In addition, we have seen an increase in orders and shipments related to the cleanup efforts in the Gulf Coast area. The primary increase has been in our respiratory and first aid product line and to a lesser extent, some of our other product lines.

However, these increases are being partially offset by lower year-on-year shipments to the government for both footwear and hand protection. Although the government indicates there is still demand for our products, delays at their facilities for chemical testing of the product and changes in the government procurement patterns has contributed to our shipments being lower than the prior year.

Also in the third quarter, we received NIASH (ph) approval for our new powered air-purifying respirator. This is a highly engineered product that sales for between $400 and $800 per unit, depending on its configuration. We introduced this product to continue to increase our penetration into the respiratory market. We launched this to the market in November and would expect to begin to see sales later in the fourth quarter.

In the fire service segment, sales and bookings continue to be strong as we continue to promote and market our head-to-toe ensemble. For the three months ended September 30, bookings increased a total of 24% over the same period a year ago. Total fire continues to place gear out on field tests and continues to win business based on the highly desired features and benefits of our product. One notable win in the third quarter was the city of Memphis, Tennessee.

The utility high voltage segment's bookings for the third quarter of 2005 were very strong, posting an increase of 24% when compared to the third quarter of 2004. This growth is across all major product lines combined with continued growth from our new product introductions. In addition, as in our general industrial segment, we have seen an increase in orders due to hurricane activity in the Gulf Coast region. Although it is hard to predict, we believe demand for our products should continue through the reconstruction period.

In summary, we have seen organic growth in each of our business segments throughout the third quarter. And as my final comment, I wanted to address Fibre-Metal. As you may have read in an earlier press release, we have acquired Fibre-Metal, a leading manufacturer and marketer of head protection products. We're very excited about this acquisition, as Fibre-Metal is a 100-year-old brand with strong product line that we can leverage into some of our market channels. In addition, we believe there's an opportunity to cross-sale North products into the Fibre-Metal distribution channel. Additionally, we believe there will be cost savings in combining these two businesses.

And with that, I'll turn it over to David for some detailed comments.

Thanks, Bob. As a result of the acquisition by Odyssey on July 19th of this year, the assets and liabilities were revalued as required by purchase accounting. As a result, the pre-acquisition financial statements are not comparable in certain respects. On today's call, we will be discussing the quarterly and year-to-date financial results of the predecessor pre-acquisition and successor post-acquisition on a combined basis for ease of comparability to the prior year.

For the third quarter, the company's net sales increased $5 million or 4.4% from 114.5 million to 119.5 million. 2.1 million was in the general industrial category, driven by strong organic growth and our international business' favorable exchange rates. Our fire service business grew 1.1 million or 5.5% and utility high voltage grew 13.2% or $1.8 million. As previously stated by Bob, both the general industrial and utility high voltage segments realized increased sales form the recent hurricane activity in the Southeastern United States.

For the year to date period, the company's net sales increased $28.2 million or 8.5% from 330.6 million to 358.8 million in 2005. In our general industrial category, net sales increased 15.3 million or 6.6% and our fire service sector net sales increased over $6 million or 11%. In our utility high voltage sector, net sales increased over 16% or $6.3 million.

The third quarter gross profit for the company decreased $1 million from 39.7 million to 38.7 million. Excluding the impact of non-recurring inventory purchase accounting adjustments of 3.3 million, gross profit increased 2.3 million or 5.6% and gross margin for the quarter increased from 34.7% in 2004 to 35.1% in 2005.

For the year-to-date period, the gross profit for the company increased 10.4 million from 118.5 million to 128.9 million. Once again, excluding the impact of non-recurring inventory purchase accounting charges of 3.3 million, gross profit increased 13.7 million and the gross margin for the year-to-date period increased from 35.8% to 36.8% in 2005.

The Company's third quarter operating expenses increased $23 million. Included in the 2005 operating expenses were 4.7 million of incremental amortization expense associated with purchase accounting and 16.4 million of management incentive compensation expense associated with the acquisition. Excluding these charges, operating expenses increased 1.9 million or 7.4%.

On a year-to-date basis, the company's operating expenses increased 29.5 million. Once again, included in the operating expenses were 4.7 of incremental amortization expense and 16.4 million of management incentive compensation expense. Excluding the above expenses, year-to-date operating expenses increased 9 million and as a percentage of net sales were 24.1% in 2004 and 24.4% in 2005.

The Company's income from operations decreased 24 million from 13 million in 2004 to a loss of 11 million in 2005. Excluding the 3.3 million of inventory purchase accounting charges, incremental amortization expense of 4.7 million and 16.4 million of management incentive compensation expense, operating income actually increased .4 million or over 3%.

Year-to-date income from operations increased 19.1 million from 39.4 million in '04 to 20.3 million in '05. Excluding the non-recurring charges we've previously discussed, income from operations increased 4.7 million or 11.7% and as a percentage of net sales, increased from 12.1% in 2004 to 12.5% in 2005.

The Company's third quarter interest expense increased 1.1 million from 9 million in 2004 to 10.1 million in 2005, primarily due to an increase in the interest expense associated with the pay in kind notes. Included in interest expense were non-cash charges associated with the pay in kind notes and preferred unit dividends of 3.4 million in 2004 and 5.1 million in 2005. Our cash interest expense increased from 5.1 to 5.2 million for the quarter.

On a year-to-date basis, interest expense increased 4.8 million. Once again, included in interest expense were non-cash charges associated with the pay in kind notes and preferred unit dividends of 10 million in 2004 and 14.2 million in 2005. Our cash interest expense remained constant for the year-to-date period at 15.5 million.

In the third quarter of 2005, the company incurred seller transaction costs of $4.7 million. These expenses were paid by the selling shareholders of NSP Holdings LLC. As a result of the above, NSP's third quarter net income decreased 19.9 million and the Company's third quarter net income decreased 28.3 million.

For the year-to-date period, NSP's net income decreased 16.3 million and the Company's year-to-date net income decreased $27.9 million. EBITDA is defined as net income plus net interest expense, income taxes and depreciation and amortization. Adjusted EBITDA is further adjusted for the strategic alternatives charge of .6 million and the loss on the sale of property planned equipment of .4 million in 2004 and 2005 charges consisting of inventory purchase accounting adjustments of 3.3 million, management incentive compensation expense and the Company's seller transaction expenses.

For the quarter, NSP's adjusted EBITDA increased 1.2 million or 7.4% and the Company's adjusted EBITDA increased 1.5 million or 9.7%. For the year-to-date period, NSP's adjusted EBITDA increased 4.4 million and the Company's adjusted EBITDA increased 4.9 million. The Company's adjusted EBITDA margin improved from 14.5% in 2004 to 14.8% in 2005.

At the end of the third quarter, the Company had networking capital of 122.8 million and cash of 4.2 million. The Company's cash sold from operations improved $11.7 million from 8.4 million in 2004 to 20.1 million in 2005. Capital expenditures increased from 4.3 million in 2004 to 5.7 million in 2005.

At the end of the third quarter NSP's net debt balance-- net debt being excluding cash and OID premium or discount-- was 236.5 million and the Company's net debt balance was 371.1 million. At the end of the third quarter, the Company's revolver facility was un-drawn and there was approximately 4.2 million of available cash.

As Bob stated, on November 1st of this year, we announced the completion of the acquisition of Fibre-Metal. The purchase price was $68 million plus expenses and this purchase price may be adjusted for a working capital adjustment. The transaction was financed with a tack on to the term loan of 65 million, a revolver draw and cash on hand.

At this time, I'd like to open it up, Operator, for any questions people may have.

Thank you.

[OPERATOR INSTRUCTIONS.]

Your first question comes from Phillip Baldicelli (ph).

Thank you. Just on Fibre-Metal, I was wondering if you could give us a little bit more color in terms of how much this will help you in terms of sales and if the margins in that company are in line above or below what Norcross on its own is doing on either an EBITDA or a gross basis?

Phil, this is David. We're going to be filing the Fibre-Metal financials as required shortly. Fibre-Metal, unfortunately, is a private company and a family owned company. It's been around for 100 years. But, they will be filed shortly. But, it is a very profitable business.

And just maybe to address quickly a couple of the markets they sell into, Phil, is they're very strong in the welding market, in the shipbuilding market, some niche markets that we don't have a lot of penetration into. And we feel that we can cross-sell our products into those markets while at the same time, given that they're not that large of a company, they don't have as strong a relationship with some of the larger distributors that we have and we feel that we can pull through some of their products into those relationships.

Okay, that sounds good. Will that be part of the Q, David, or is the-- will we see those after the Q as part of an 8K?

It'll be after the Q.

Okay, okay, that's fine. And then, going back to the hurricane, clearly, that's going to be a longer term cleanup process down there. Is there any chance of-- did you already have the New Orleans Fire contract or is there any chance of growing your utility high voltage with different people in the region down there? Can you give us some more color on anything you might be doing to gain share there?

Yes. I mean, clearly, we have distribution in those markets and probably the two businesses that have seen the greatest impact have both been general industrial and utility. It's always hard to really get a sense of how much is going into distribution where distribution is anticipating that that will be used in the cleanup efforts or where it's actually already been pulled through and they're using it as part of the cleanup and part of the reconstruction.

So, although there's been a surge, it's hard to predict how long that will be and how strong that will be going forward. Clearly, with all the rebuilding that needs to be done, we expect that we should continue to see some pull through on the utility side and then clearly, on the general industrial type products through the entire reconstruction period.

Okay. Any-- would you wish to quantify any of that or--?

--I'll tell you, it's-- I really can't predict. I think many people are trying to wrap their mind around how-- over what period of time that will occur and how large it will be. So, it's not something we've ever seen before, so I'm rue to predict what those dollars will be.

Okay, understood. And then, going to the government in the general industrial, the footwear and the gloves and, I guess, the change in the way or the change in their pattern of orders, has that cleared up? Is there any indication that that's going to become more stable as we go into '06?

On the footwear side, it should be. They have given us some indication that they will be-- I guess it's a pre-indication that they will be awarding or I should say letting a contract over the next quarter. What-- where the challenge is is they've tended to expand the spread between the minimum quantities and the maximum quantities of the contract. In other words, giving them significant flexibility even if we were to be successful and win a contract, what the actual volume levels we could expect.

And that seems to be a trend in the government purchasing in that one, they're less inclined to give out fixed long-term contracts, rather giving themselves more of a quarterly look to their needs. That impacts our ability for production, which makes it more difficult to bid the contracts profitably. But on the footwear side, we still expect that that should be meaningful in the '06 period. On the hand protection side, the government is still talking about what their needs are and when they will be letting a contract, so we don't have as much visibility on that side at all.

Okay. Great. I know raw materials are not a huge part of-- let me restate that. Raw materials costs in terms of chemicals and metals have been rising through the course of the year. How have you been able to offset those? Is it through productivity or just simply raising prices? And how is the market being receptive to price increases that you might be putting through?

Yes. Obviously, we have seen some increases in rubber and we've seen increases in resins, the PVC that goes into our footwear. And, as you know, with our diversity, there's not reliance in any one raw material. On the footwear side, we have generally been able to pass the price increases through and wherever we can in any of the other product lines, we generally have gotten some level of price increases.

Okay. And the market's been receptive?

Yes.

Okay. Well, I appreciate that and thank you very much.

Your next question come from Brian Goldman, Goldman Sachs.

Hey, guys. Great quarter. A couple questions. One, your gross margins increased-- gross margin percentage increased by 100 basis points I guess in the nine months year-over-year. And given that the growth in the utility and fire services segment's a little bit higher than the general industrial, I assume some of that is just mix shift of those segments. Can you, I guess, A, confirm that? And B, can you also talk about margins within each one of the segments?

Yeah, the utility high voltage, we've seen on a year-to-date basis, gross profit has increased significantly from 38.5 to over 40%. What you're seeing there is improved plant performance and favorable product mix, selling a higher proportion of utility lineman gloves, which has a terrific margin. We're also seeing increases in the general industrial category. Margins increased about 35 to over 36%. Once again, we're selling a lot of respiratory product, which has a higher margin.

Okay, that's helpful. And then, some of the expenses look like they're up a little bit, 30 basis points year-over-year. The same with distribution. Any particular reasons for that?

Well, I think on the operating expenses, you have a combination of higher foreign exchange rates, which over the year-to-date period has increased total operating expenses over 1.5 million, almost 1.7 million. And then, you have variable selling and distribution costs. We pay commissions to our salesmen and outside reps. And we have seen an increase in freight cost throughout all our sectors.

Okay. And then finally, you had mentioned your bookings are up, I guess, 24%, I think, in both utility and fire service, if I'm not mistaken. What kind of visibility does that give you into future sales?

Generally, neither of those businesses are total backlog business. It gives us a view a couple, two to three months out. So, it's not a long period of time, but it's longer than it is in the general industrial sector.

Okay, great. Thanks guys.

[OPERATOR INSTRUCTIONS.]

Mr. Meyers, there are no further questions at this time. I would now turn the call back over to you. Please continue with your presentation or closing remarks.

Okay. Well, I'd like to thank you all for joining us and we will talk to you after our year-end results. Thank you.

Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.