Enpro Inc (NPO) 2003 Q2 法說會逐字稿

Good day, and welcome to this EnPro Industries' Second Quarter Financial Results Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Don Washington. Please go ahead, sir.

Good afternoon, and welcome to EnPro Industries' Second Quarter 2003 Earnings Conference Call. Hosting the call today is our President and CEO, Ernie Schaub. Also standing by are Bill Dries, our CFO, and Rick Magee, our General Counsel, who are prepared to participate in the Q&A. In just a moment, Ernie will make his remarks, and then we'll open the lines for your questions. But, first, I'd like to remind you that you may hear statements during the course of this call that express a belief, expectation or intention, as well as those that are not historical fact. These statements are forward-looking and involve a number of risks and uncertainties that may cause actual events and results to differ material from such forward-looking statements. These risks and uncertainties are referenced in the Safe Harbor statement included in our press release and are described in more detail, along with other risk and uncertainties, in our filings with the SEC, including the Form 10-K for the year ended December 31, 2002 and the Form 10-Q for the quarter ended March 31, 2003. We do not undertake to update any forward-looking statement made on this conference call to reflect any change in management's expectations or any change in the assumptions or circumstances on which statements are based. You'll also hear a discussion of non-GAAP financial measures in this conference call. These measures are presented as an aid in understanding our results and should be used only in conjunction with our GAAP results. An explanation of these measures and reconciliation to our GAAP results is attached to our press release.

The release is available on our website, or it can be obtained by contacting the Company. I'll remind you that this call is being webcast on EnProIndustries.com, our website, and a replay will be available by telephone and on the website. Also, I wanted to let you know we've been invited to present at the Baird Small Cap Conference tomorrow afternoon in New York. We've accepted the invitation, and we'll post a copy of our presentation on our website tomorrow. We've set aside about an hour for the call. If your questions aren't answered in that time or if you have follow-up questions or if you would like a copy of the release, you may contact me after the call at 704-731-1527. And with that, I'll turn the call over to Ernie.

Thank you, Don, and good afternoon, everyone. Although it's clear our markets haven't improved over the last year, we're starting to see some positive developments. Because of the initiatives we implemented last year, our operations have met the challenges of the market without losing ground in the second quarter. Our asbestos claims management strategy continues to reduce the effect of asbestos claims on our cash flow, and we made a couple of management changes and took two small steps towards improving the mix of our businesses. We also benefited from external events in the second quarter that increased our share price and could have significant long-term benefit. The first of these two events is that our shares were added to the Russell 2000 when the index was rebalanced on July 1. The rebalancing created several days of high trading volume, as well as some new shareholders, whom we welcome. The second external event is that we also had encouraging news on the asbestos front as the U.S. Senate Judiciary Committee approved legislation to reform the way asbestos claims are handled in the United States. This bill is now being prepared to go before the entire Senate when the members return from their August recess in early September. More work will have to be done on the bill if it's to be successful, but it represents tremendous progress and the best opportunity ever to reform asbestos litigation. We continue to be hopeful that the full Senate can reach consensus on a bill which provides a fair solution to plaintiffs, defendant companies, and other affected parties. I'll have more to say about the legislation a little later.

Most importantly to our shareholders, of course, the price of our shares greatly improved during the second quarter. We realized that the potential asbestos litigation created part of the increase, but we like to think that the share price also reflects some credit for the things we've accomplished as a public company. We set clear goals for our performance before our spin-off from Goodrich, and we've made progress towards them in the face of difficult and unsettling conditions. Our financial results show that our operations continued to experience soft markets, as they have for the past year. Our efforts to reduce costs and improve efficiencies helped offset the effects of pricing pressures on lower volumes, as well as the less favorable product mix that we saw in this quarter. However, the improvement in the year-over-year comparison is a result of a number of other factors as well, including a stronger euro and a warranty charge that reduced costs in 2002. Sales were up about 4% in the quarter, primarily because of the effect of the stronger euro on the results of our European operations. Income from continued operations was $11.4m, or 56 cents a share, compared to a loss from continuing operations of $12.1m, or 60 cents a share, last year. All references I make this afternoon to earnings per share are on a diluted basis. For the first half of the year, sales were up 7%. Five percentage points of this gain came from the stronger euro. Continuing operations earned $17.5m, or 86 cents a share, in the first six months, compared to a loss of $12.3m, or 61 cents a share last year. As we noted in the earnings announcement, we provide supplemental non-GAAP information in order to give you what we believe is a more useful representation of the performance of our operations. Our press release contains a reconciliation of our non-GAAP and GAAP results.

Our non-GAAP as adjusted net income was $9.9m, or 48 cents a share, in the second quarter of 2003, compared to $8m, or 40 cents a share, a year ago. We're pleased to see a year-over-year improvement, but as I mentioned earlier, the improvement is largely because the euro was stronger, restructuring charges were lower, and a warranty claim reduced segments' profits last year. For the six months, our non-GAAP earnings were $16.6m in 2003, compared to $11.3m in 2002. On a diluted basis, that's 81 cents a share this year compared to 56 cents a share last year.

Looking at our segment results, sales in sealing products are 3% higher than the second quarter a year ago. The increase reflects not only the benefit of the stronger euro at Garlock Sealing Technologies, but also improvements in Stemco's performance in the heavy-duty truck market. This market has strengthened from where it was a year ago, and Stemco's also benefited from gains in market share and sales of recently introduced products. Sealing products' segment profits improved about 45%, and margins increased to 17.1% from 12.2%. Profits and margins were higher at Garlock because of significant cost reductions and a stronger euro this year and a warranty reserve that reduced profits last year. At Stemco, higher volume and better pricing led to increased profits, while Plastomer Technologies benefited from restructuring and cost-reduction programs put in place last year. In the Engineered Products segment, sales improved 4% compared to last year. The increase was driven by the stronger euro, which benefited the European sales of Glacier Garlock Bearings and France compressor products. Sales at Fairbanks Morse Engine were about the same as last year, but Quincy Compressor continues to face weak demand in the United States, where capacity utilization in the manufacturing sector is at a 20-year low. Segment profits and margins declined in the quarter at all Engineered Products operations, except Fairbanks Morris. In particular, lower volumes and our less profitable product mix weakened the results at GGB. Quincy and other operations in this segment also continued to feel the effect of weak markets and increases in cost, which lessened profitability.

Despite economic conditions, our operations continue to produce good cash flow. Operating activities provided $1.5m in cash for the first half of the year after a seasonal increase of $14.6m of working capital, net payments related to asbestos claims of $17.7m, and a contribution of $4m to the Company's pension plans. Looking at the remainder of the year, we expect to see a reduction in working capital, which historically declines in the second half of the year, and net payments related to asbestos claims being on track and coming in below last year's. On the other hand, capital spending will increase, and we'll continue to expect to exceed the $19m we spent last year. We believe our operations will provide more than sufficient cash flow to fund both net asbestos-related payments and the capital spending. We ended the quarter with a cash balance of almost $82m, the same amount we had at the start of the year. Our debt was about $175m at the end of the quarter, and our net debt-to-total capital ratio was 18.5%. To bring you up to date on the asbestos claims, as we expected, there was a significant rush of new claims in the first half of the year. Many came [as a] reaction to reform in Mississippi and West Virginia and in anticipation of reform in Texas and the possibility of federal legislation as well. We received about 20,000 new claims in the first six months of the year. That represents an increase of about 25% over the first half of 2002 and left us with about 140,000 open actions at the end of June. The cash outflow for asbestos-related claims and expenses, net of insurance proceeds, was $23.5m in the first half of the year and well below the first half of 2002. We remain on schedule to reduce our net cash outflows for asbestos-related payments below the $52m that we spent in 2002. The decrease in expected net cash outflows reflects the success of our efforts to reduce settlement commitments. In the first half of 2003, we committed about $40m for new settlements, giving us total commitments of about $92m at June 30. That's a 32% reduction from the same time last year. Our goal in 2003 is to match new commitments to the insurance recoverable under our cap level. The annual cap amount increases this quarter from $80-86m.

Our total remaining solvent insurance coverage was $860m at the end of June. Of that amount, $175m is recoverable from our insurance for claims paid but not yet reimbursed. Another $97m is due for settlements not yet paid. Deducting those two amounts from the solvent coverage leaves us with $588m for future settlements and expenses. Early in my remarks, I mentioned the potential for federal legislative reform. We've been active in support of the bill that passed the Senate Judiciary Committee last month, so we're pleased by the Committee's approval. We believe the bill could bring responsible and effective reform to a system that is clearly broken. Certain provisions in the current draft of the legislation still concern us, and the process toward a final bill may be long and difficult. However, we'll continue to work in support of efforts to ensure the final bill is fair, both to the people who are truly impaired, to defendant companies, and to other affected parties. Should the legislation not pass this year, we will continue to work for reform in various states. We will also continue to file the same strategy we've described and followed for the past year, and that is to reduce the effects of asbestos-related expenses on our results. Turning to other events, we continue to focus on our strategic goals in the quarter, the changes to our corporate staff, and the management of our bearings business reflect our commitments to an effective management team capable of meeting our goals [inaudible] and in the future. We'll always be prepared to make this kind of change when we believe it is in the best interest of the Company. I mentioned earlier that we took two small steps towards introducing the mix of our businesses -- towards strengthening the mix of our businesses.

First, we sold certain assets in our Plastomer Technology unit to exit our low-end product line. This product line contributed about a half of 1 percent to total sales last year and very little contribution to profits. The second step we took was the acquisition of assets that will extend GGB's line of filament-wound bearings and enable us to offer a lower-cost product and improve our profitability in that product line. Filament-wound bearings are used extensively in heavy industrial equipment, pneumatic and hydraulic cylinders, valves and actuators, and are acceptable replacements for metal bearings in many applications. We don't expect the material benefit from the acquisition this year, but it brings new technology and additional customers to our bearing business. Before we open the lines for questions, I'd like to reiterate that we are confident in our outlook for 2003. Even excluding the benefit of a stronger euro on 2003, we anticipate a modest increase in sales over 2002 as we benefit from new product introductions and expanded sales efforts. As a result of higher sales and the benefits of TCV, our lean manufacturing program, operating profits and margins should also improve over last year. Finally, we're on target to continue to reduce the difference between the amount we recover each year under our asbestos insurance and the amount we expend each year on asbestos payments and expenses. I also want to repeat Don's reminder that we'll be presenting tomorrow afternoon at the Baird Small Cap Conference in New York. With that, we'll open the lines for questions.

Thank you, sir. [Caller instructions.] We go first to [Ted Wheeler] [ph] with Buckingham Research.

Hi, good afternoon.

Hi, Ted.

Just on the pace of business, you mentioned no recovery really in sight. I just wonder if the activity levels you've seen in your more sensitive product lines have been pretty linear this year. You know, have there been some false starts, or has it just been pretty lackluster pretty straight through? And do you have any read on July?

Generally, we started the first quarter off going pretty well, and then at the end of March and April, concurrent with the Iraqi invasion, the Iraqi situation, we saw a fall-off in orders pretty much across the board. For about two months there, things were pretty slow, and they picked back up again in June. July has been fairly flat. July and August are a little slower for us, so August picks up a little bit because we have some automotive component, and it's a little slower year, especially, you know, not in the automotive component, but Europe is a little slower as well. So the second half of the year is a little -- in general, a little bit slower than we've seen, and that's the stops and starts that we see a little bit in our businesses. And from what I've heard, Ted, other people have seen pretty much the same thing, I think.

Great, thanks.

[Caller instructions]

We go next to [Macon Rudasow] [ph] with Keane Capital Management.

Hey, guys. How're you doing?

Good, thanks. How about you?

Good. I'm filling in for Peter today. I just wanted to comment a little bit. We've seen some of -- on the asbestos issue, we've seen a little -- you know, it's like red flag, green flag, red flag, green flag, red flag, green flag as far as all the pieces that are needed and [who] is going to be a long-term settlement. In your view, what do you feel you're learning the most from it as far as the likelihood of kind of the contingency plans among the group? I mean are -- what areas of the bill are the most concerning to you, so to speak, as well as which -- what are the positives and negatives of terms as you see them today, so to speak?

I'm not sure what you mean by red flag and green flag there, but as far as the bill is concerned, there is both positives and concern issues with it. Why don't I let Rick Magee, our General Counsel -- he's closer to the issue than I am, and Rick will give you a little bit better feel for some of the pros and cons that we've seen in the bill. Rick?

Thanks, Ernie. I think we have to step back a little bit and look at the big picture and then examine what's going on, what's happened in the Judiciary Committee and what's being said by some key players about it. You know, I think the most important thing that's happened here is the great improvement in the national dialog about the issue. There's absolutely no question that a substantial majority of the Senators, not only on the committee but the Senate -- in the entire Senate understand now that our current tort system is broken when it comes to dealing with asbestos and that it's a national problem that, you know, is begging for a solution. As a member of the Asbestos Alliance, we've been pushing for quite some time for legislative reform focused on fixing the two issues that we think need fixing the most, those being venue restrictions, making sure that people have to sue where they were exposed or where they live, and also medical [cuts][ph]. You're making sure that those people who are recovering are recovering because they are sick and they've been injured. A substantial majority, at least 14 of the Senators on the Judicial Committee, agreed to provisions that addressed those key areas, and so I think we have to be cognizant of the fact that both Republicans and Democrats recognize a need to fix some problems in the system that are broken, those being the real need for medical criteria of some kind. I think it's also important to note that with respect to the claims values, 14 of the Judiciary Committee members voted for a provision that establishes claim values for the 10 different designated asbestos diseases and agreed that the impairment, the [pleural plex][ph], the lesser impairment, those that don't affect somebody's everyday ability to function, got no payments pursuant to -- would get no payments pursuant to the bill except for monitoring to determine whether they eventually get sick. I think the important thing there is that there's enough consensus on the key issues that we can be confident that ultimately something will get done on a national level.

Now, will it be this bill? We don't know. There are some significant problems with this bill. The insurance industry's not happy. Labor is still not happy. People aren't coming together like Senator Hatch had hoped on this bill. People are still working on it, though. Just Friday in his closing remarks to the Senate, Senator Frist mentioned asbestos reform as one of the things he still hopes to get done this fall and is confident that a substantial number of people on both sides of the aisle want to get that fixed and want to get it fixed this fall. So we're not giving up. We're confident. We continue to talk to our Senators. Our employees continue to write letters. And so we're cautiously optimistic that something can still be done. With respect to the specifics about the bill, again, there are some real positives in it, positives being that there are established medical criteria that have to be met, positive that there are values to the claims established that determine what people will get, positives in that there's a dollar amount for each of the defendants determining what their history is and what their revenues are to pay into the fund. There are some negatives, too, though. One of these amendments added to the bill threatens the finality that the bill offers and threatens the certainty of the payments. The Republican Senators have pledged to try to do something about that on the floor of the Senate when it comes up. So there's also a negative in terms of some potential of what happens in the early years that there are not enough funds in the early years to pay all the claims that come about in the early years. So there's still some real work on the details of the bill needed, but the good news is the key players are still talking about fixing it, and the key Senators are set to try to get something done. Again, we don't know if it will happen this year, but if it doesn't happen this year, we think the groundwork's been laid for a national solution to come about in the next several years. Does that answer your questions?

[Caller instructions.]

There are no further questions at this time. I'd like to turn the call back over to the speakers for any additional closing comments.

Again, this is Don Washington. In closing, we thank you for your attention today to the call. If you have any follow-up questions or questions that we were not able to answer or that you were not able to get into the queue in time, please feel free to call me at 704-731-1527. Thank you.

That concludes today's conference call. Thank you for your participation. And now you my disconnect.