Enpro Inc (NPO) 2005 Q2 法說會逐字稿

Good day and welcome to this EnPro Industries second-quarter 2005 financial results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Don Washington. Please go ahead, sir.

Good morning, everyone, and welcome to EnPro Industries' quarterly earnings conference call. This morning on the call, Ernie Schaub, our President and CEO, will discuss our earnings for the second quarter of 2005 and our outlook for the remainder of the year. Bill Dries, our CFO, with Rick Magee, our General Counsel, are also present and prepared to participate in the Q&A session. Ernie will make his remarks in just a moment, and then we'll open the lines for your questions. But first I would 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 materially from such forward-looking statements. These risk and uncertainties are referenced in the Safe Harbor statement included in our press release, and are described in more detail along with other risks and uncertainties in our filings with the SEC, including the Form 10-K for the year ended December 31, 2004, and the Form 10-Q for the quarter ended March 31, 2005. We do not undertake to update any forward-looking statements made on this conference call to reflect any change in management's expectations or any changes in assumption or circumstances on which such statements are based.

The call this morning is being webcast on EnProIndustries.com, and the replay will be available by telephone and on the website. The telephone replay dial-in information is available on our earnings release, and you can access the Web replay simply by going to the investor relations section of our website. If your questions aren't answered on the call or if you have follow-up questions, you can contact me after the call at 704-731-1527. With that, I'll turn the call over to Ernie.

Thanks, Don. Good morning everyone and thanks for joining us today. I'm pleased to report that the second quarter of 2005 is the best quarter we have reported since our spinoff from Goodrich. All of our operations reported improved performance over the second quarter of 2004. Sales increased in our sealing products and engineered product segments, and profits were also higher in those segments. Profit margins were higher in all three of our segments, and for the first time we reported segment profit margins over 15%. As we've said before, one of our objectives is to consistently generate segment margins in this range.

Sales in the quarter were $219 million compared to about $216 million last year. That comparison, however, includes the effect of about $5 million in sales last year from divested businesses that were not repeated this year. To make up for those lost sales, as well as lower sales of diesel engines this year, our remaining operations generated a meaningful increase over the levels of a year ago. Segment profits were up almost 20% because of a number of factors, including the completion of the restructuring projects that reduced our earnings in 2004, stronger volumes I mentioned earlier, and the benefits of better pricing as raw material costs have moderated somewhat.

Moving to the bottom line, we reported $21.1 million on $0.99 a share in net income for the second quarter, compared to $8.4 million and $0.40 a share in the second quarter last year. This year we benefited from a cash distribution from a trust associated with a business divested a number of years ago, but the performance of our operations was also an important part of the year-over-year improvement. A scheduled actuarial review completed in the second quarter determined that the trust, which secures benefit payments for a group of former employees of the divested business, had assets in excess of its potential obligations. Under the terms of the trust, we are entitled to the excess assets. As a result, we received $11 million in cash which is recorded as other income in our income statement.

Items we consider significant to understanding our performance increased earnings by about $8 million or $0.37 a share in the second quarter. The largest of these was a distribution from the trust I just mentioned, which accounted for $6.9 million or $0.32 a share of the total of these items. Without them, we would have reported $0.62 a share in net income for the quarter rather than the $0.99. In the second quarter of 2004, significant items, including charges related to restructuring activities and losses on the sale of the automotive tool and die businesses, reduced our net income by $4 million or $0.19 a share. A summary of these significant items and their effect on net income in both periods is attached to our earnings release.

Now let's look at the segment results. In the sealing products segment, sales increased by 6% over last year, as all the operations in the segment reported improvements. Total sales in the segment were $101.7 million compared to $96.3 million a year ago. Stemco made the largest contribution to the increase in sales, as sales grew there by 11% over last year thanks to continued strength in heavy-duty truck markets. The original equipment market for Class A trucks and trailers has remained strong for several quarters, and Stemco's sales reflect this.

Garlock sales increased by about 2%. Favorable foreign exchange contributed to the increase, but Garlock also benefited from stronger mining markets, increased activity in gas turbine and nuclear power generation markets, and improvement to oil and gas markets. However, Garlock sales into the steel industry decreased, as steel production dropped somewhat below the levels of a year ago. Sales at Garlock Rubber Technologies and Plastomer Technologies, the other operations in the segments, also increased as those businesses benefited from stronger markets.

Profits in the sealing products segment increased by $1.9 million or 11% over the level of a year ago. As segments profits increased, segment margins also improved, reaching 18.4% of 100 basis point improvement over last year. At Stemco, profits improved by 14% over her last year and profit margins were higher as well, thanks to higher volumes generated by the Class A truck market also the benefit of price increases implemented last year.

Garlock's profits were up about 5%, and profit margins increased as well. Garlock experienced favorable conditions in several of its markets and also benefited from the rationalization of low-margin product lines and cost-reduction efforts. Plastomer Technologies and Garlock Rubber Technologies also reported increases in profits and profit margins over the second quarter of 2004. At about $89 million, sales in the engineered products segments were essentially flat with a year ago. However, the automotive tool and die businesses that we sold in mid 2004 contributed $5.4 million to the segment sales last year. Increased sales at the remaining operations in the segment offset the lost sales to keep this year-over-year comparison flat.

Sales were up by 5% at both Quincy and GGB. Favorable foreign exchange benefited the GGB sales, but they also benefited from GGB's broad base of industrial markets in North America, including aerospace, material handling, trucking, and construction markets, and from some price increases implemented last year. GGB's European operations also reported higher sales, but European economies remained somewhat soft, and the increase reflects really the strength of the euro. Higher volumes from industrial markets and better pricing led to increased sales at Quincy.

France Compressor Products reported a 22% increase in sales. A portion of the increase came from favorable foreign exchange, but France Compressor also benefited from activity in oil and gas markets and better pricing. The unit is also beginning to see a pickup in orders for new products based on new materials introduced to the market this year. The engineered product segments profits improved by $3.8 million or 47% compared to last year, and the margins rose 13.4% -- rose to 13.4% from 9.1%. Although most of the increase is the result of the restructuring expenses that reduced results last year by $2.3 million, all of the operations in the segment reported improved profits compared to last year. The divested tool and die businesses broke even in 2004, so they didn't contribute to the segments profits at all last year.

France Compressor Products recorded a significant improvement in products, as its product mix grew more profitable and as it benefited from better pricing. It also benefited from lower restructuring costs which reduced results in the second quarter of last year. Quincy Compressor's profits were up about 10% compared to last year, as a result primarily of better pricing. At GGB, profits improved by 6% as a result of the more profitable product mix in North America and better pricing in all regions. However, the performance of GGB's European operations declined somewhat, as higher sales into automotive markets weaken the profitability of the profit mix and as raw material costs increase.

Now let's look at the engine products and services segment. This segment has had a bumpy ride over the past few quarters, but we believe the worst is behind us. However, the segment's performance is subject to the effect of engine shipments on sales and margins, so it may continue to have its ups and downs. Sales in the segment were down 7% or $2.2 million because of fewer engines were shipped in the second quarter of 2005 than in the second quarter of 2004. Profits, however, were almost the same as last year, but as engine sales declined, the segment's margins improved to 10.3% from 9.9% as the product mix favored the more profitable aftermarket and service businesses. The segment's margin in the second quarter are its best in at least the past 14 quarters.

We entered the first half with an unrestricted cash balance of just under $70 million compared to $108 million at the end of the first half of 2004. However, we also had a restricted cash balance of $44 million at the end of 2005 -- June of 2005 -- compared to only $3 million a year ago. The reduction in unrestricted cash and the increase in restricted cash reflects collateral for appeal bonds we were required to post in connection with a verdict against Garlock in an asbestos case in California. We remain optimistic that the verdict will be overturned on appeal, but the appeal process could take several years.

Working capital increased by about $30 million in the first half of the year compared to an increase of about $16 million in the first half of last year. Seasonal demands by our customers, especially in the sealing markets, typically result in an increase in working capital in the first half of the year. However, we also typically see a decline in the second half of the year as seasonal activity diminishes. We expect the same pattern will occur in 2005.

Net cash flows for asbestos claims and expenses were about $24 million in the first half of 2005, or just less than half of the net outflows for the first half of the year. Although the asbestos expenses were higher this year because of increased defense costs, net cash outflows have declined because of the collection of $22 million in past due insurance reimbursements in the first quarter this year. The collection should contribute to lower net cash outflows for claims and expenses in 2005 when compared to 2004. Looking at capital spending, we see that the first half of year was just under $13 million or slightly less than it was in the first half of 2004. We continue, however, to expect capital spending this year to be at a level similar to that of last year.

Looking for a moment at the situation surrounding asbestos claims, we were very encouraged when the Senate Judiciary Committee approved the FAIR Act in late May. It was a step toward resolving asbestos claims in an equitable and efficient fashion for plaintiffs and defendants alike. We were very encouraged by Senator Frist's comments on Friday that he intends to seek passage of the bill this fall, and we continue to support it as it is currently written.

New asbestos claims against Garlock continue to be filed at the lowest level since the early 1990s. In the first six months of 2005, the number of new claims filed was 30% less than the number filed in the first half of 2004, and the number of open claims at the quarter-end dropped by about 10% compared to the end of the first quarter this year. We believe several factors contributed to the declines, including state reforms that discouraged claims by the unimpaired and that have increased claims dismissals, the success of our settlement strategy and the reduced number of people exposed to asbestos.

Now that we have reviewed what has occurred in the recent past, let's try to take a look at the future. We continue to search for acquisition opportunities that will strengthen operations in our sealing products and engineered product segments, and that will support our goals for growth and profitability. Our current expectation is to finance any acquisitions from our own balance sheet. However, as we have matured as a company, capital markets are somewhat more open to us. So going into these markets could be an option for us if an attractive opportunity were to arise.

Our improved access to capital markets also gives us an opportunity to explore alternatives for our TIDES security. As you know, these securities are convertible into Goodrich common shares. We hold call options on Goodrich shares as a hedge against the possibility of conversion, but the options expire in about 1.5 years. As a result, we have begun to consider the possibility of refinancing these securities. Of course, one of the many factors that goes into our deliberations is the potential for federal asbestos reform and the effect it could have on our company and the valuation of our shares.

Now let's look at our expectations for operations for the remainder of the year. The first six months of 2005 got us off to a very good start. We fully expect the momentum that we gained in the first half of the year to continue in the second half of the year. Although we are beginning to see some softness in certain markets, our markets overall are relatively stable and our operations are performing well in them. As a result, we expect sales in our sealing products and engineered product segments to increase over 2004, as the conditions prevalent in the first half of 2005 continue into the second half of the year. We also expect profits and profit margins in those segments to remain higher than those reported in 2004. Our expectation for increased profits and margins in these segments compared to 2004 reflects lower restructuring charges in the engineered product segments, as well as increased demand from our sealing products and engineered products markets and better pricing for certain products.

In our engine products and service segments, we expect sales in 2005 to be lower than they were in 2004, as Fairbanks Morse Engine ships fewer engines in support of U.S. Navy shipbuilding programs. However, profit margins in the second half should be higher than they were in 2004, when Fairbanks Morse recorded a large loss provision on several contracts and was just above breakeven for the year.

In summary, we expect total sales in 2005 to increase over 2004, although higher sales in the sealing products and engineered product segments will be somewhat offset by lower sales in the engine products and services segment. Our segment profits and profit margins should also increase due to better market, improved operating performance, better pricing, and lower restructuring costs. We expect these factors to increase our net income in 2005 compared to 2004, excluding the effect of restructuring and other significant items in both periods.

With that, I again thank you for your attention and we'll now open the lines up for your questions.

(OPERATOR INSTRUCTIONS). John Keeley from Keeley Asset Management.

I wanted to ask if I can get some indication of how much asbestos-related expenses that you would put through the P&L in the third and fourth quarters? I noted it's higher this year by almost $3 million in the first six months.

Okay, John. This is Ernie; I'm going to turn the question over to Rick, but I believe Rick is going to tell you -- Rick, expenses are up because of the trial situation? Rick will give you the details.

Yes. The year-over-year comparison, the reason for the increased expense is because of increased fees. As you'll remember, our trial activity picked up considerably in the third and fourth quarter of last year. We're still paying those bills. In the first quarter of this year, trial activity has continued at a high rate. So it's legal fees and expenses is the --.

That is the primary reason?

The primary reason. I think, Bill, what's the best (indiscernible)? It will be roughly comparable in the second half as what we saw in the first half?

Yes.

John, did you hear Bill's comment? He said things would be roughly comparable in the second half as what we saw in the first half?

So you are going to put about 16 million through the P&L this year in 2005?

That's in the ballpark, yes.

(OPERATOR INSTRUCTIONS) It appears we have no further questions at this time. I'd like to turn the call back over to management for any additional or closing remarks.

Well, thank you very much for attending. And again, if any of you have questions that you weren't able to get through, please call me at 704-731-1527. Thank you very much.

This does conclude today's conference. We thank you for your participation, and you may disconnect at this time.