派克漢尼汾 (PH) 2003 Q3 法說會逐字稿

Good afternoon and thank you all for holding. Welcome to the Denison International third-quarter 2003 earnings conference call. (OPERATOR INSTRUCTIONS). Before beginning today's call, the management and legal counsel of Denison International has asked me to remind you that certain statements they may make today could be considered forward-looking statements and that you should refer to the Company's SEC filings and press release for further information concerning forward-looking statements.

After today's call, David Weir, Denison's President and CEO, and Bruce Smith, Denison's Chief Financial Officer, will conduct a question-and-answer session. I would now like to turn the call over to this afternoon's conference leader Mr. Bruce Smith.

Good afternoon everyone. We are going to go over our usual agenda as we have in the past with David giving you some overview of the numbers. We will talk about some balance sheet and other items, and then David will take a look at our regions in more detail before we go to any questions you have.

So I will now turn it over to David.

Thank you very much, Bruce. Let me first apologize upfront for my rather raspy voice. I seem to have picked up the flu bug that is going around. If anything does not come out of it clearly, then just ask me as a question at the end.

So Q3 2003 we expected a fairly good quarter. The first quarter of the year was a record for the first quarter, and the second quarter was a record for the second quarter and actually the best ever. The third quarter was a record for the quarter. Sales at 43.4 million were up 11 percent over last year, 2 percent due to volume and the rest coming from foreign currency gains, primarily the Euro currencies.

The gross margin held pretty firm, 35.8. That's quite good in a tough market as we see. Earnings before tax 4.8 million were up 10 percent from last year. Net of 3.5 million, then to basic and diluted EPS of 35 cents a share for the quarter which compares to 31 cents in the same quarter last year, which is an increase of (inaudible) percent. That quarter builds on the other two quarters we have had.

So year-to-date sales revenue is 134 million, which is a 15 percent increase over last year. A gain. That 2 percent coming from volume and the rest coming from exchange rates. Gross margins have been holding firm at almost 36 percent. Earnings before tax, 15.2 million, 17.5 percent ahead of last year if we exclude the goodwill adjustment last year for the accounting change. The net for the year-to-date of 11 million gives us an EPS after nine months of $1.10 per share, which compares to 90 cents a share last year on a trading basis before the goodwill adjustment. That is an 22 percent improvement, and an improvement made despite bearing a 5 percent higher tax rate this year compared to last year.

Incoming orders in the quarter were up 9 percent, mainly due to the exchange rate movements. Backlog of orders is standing pretty firm at 31 million, a slight decrease from the end of Q2, but nothing unusual for the third quarter, but up front 28 million where it was at the Q3 last year. Inventories are stable.

Cash generation in the quarter was very solid. Cash net of borrowings increased 7.6 million to a total of over 55 million in cash now, which represents $5.65 or thereabouts per share. The cash generation year-to-date has also been stronger. It is (inaudible) over 16 million.

I think I will take a break here for a second and let Bruce help me out.

Just a couple of items. Looking at our P&L, I am sure you noticed the operating expenses are up. That is almost entirely the result of current. If you look at the percentage of SG&A to our sales, we are favorable for both (technical difficulty) -- the year-to-date. The only spending item year-to-date versus last year that is a difference is about $1 million of spending at the Rander acquisition that was only completed at the end of May last year.

Other expense is the recalculation of the intercompany loans based on the strengthening of the Euro, and it did spike right at the end of the quarter. As the Euro stays there, that item should not be there in the fourth quarter, but we will have to see how the currency moves.

Our tax rate, as David said, is 27 percent for the quarter and 27.8 percent year-to-date. That year-to-date number is up from last year's rate, but as a refresher, last year we did have some deferred tax assets we had to recognize in our German operations, and we don't have those same favorable tax items going through this year. Our dilution of shares, once again as it always has been, is small, about 82,000 shares, a 1/10 of 1 percent on the dilution side. We spent 1.6 million in capital for the quarter. We are up to just under 4 million for the full year. We do have the Wocomac (ph) expansion and a couple of other projects to finish up, and we are probably going to be in the 5 to 6 million range by the time we get to the end of the year in our cap, which is below our depreciation amortization.

So I will now turn it back to David for some geographic segment results.

Going around the different areas of the Company, in North America, we saw some weakness coming in the quarter. Shipments were 9 percent behind last year in both the U.S. and Canada where they are. It was due primarily to reduced demand from OEM customers in the drilling, mining, totaling sectors. These sectors have all run fairly strong for the last two years, but they are eased back a little bit in the quarter. I know a couple of the customers are adjusting their inventories, so I will have to see that one plays out.

We also had a bit of reduced military business in the quarter compared to last year, but that is really of no significance. The military business is very lumpy in the way it comes in. It doesn't run evenly through the year, and we still have very good expectations for the military business going forward.

On the other side of the table, the sales through distribution were up slightly in the quarter. The strength was coming from the oil producing areas of the country, both in the U.S. and Canada. We are still seeing weak markets in most industrial sectors. Distributor inventories remain flat at very low levels. We anticipate an increase in their inventories once they get the confidence of a real pickup in the market.

Year-to-date North America is down 1.7 percent, and the market was down about 5 percent. It is quite divided between our two channels to market. Distributors are up 9 percent. OEMs are down 12 percent, which is a reflection on their own business levels. Incoming orders in the third quarter were up 2.1 percent over last year. The U.S. is beginning to look like it's posting a slight positive trend.

If we look at Europe, the shipments were up 21 percent compared to the same period last year. 6.5 percent was volume -- a good volume increase -- and the rest was foreign exchange. Almost all the countries in Europe showed an increase, even without the benefit of the foreign exchange. The only exception being Calzoni where we are radio piston motors. They are down about 23 percent in volume. That reflects the weakness in the plastic industry of the capital equipment in both Europe and the U.S.

On the other side, Denmark, France and Italy all had very good quarters, all due to their own endeavors rather than any economic circumstances. Germany remained fairly flat, which is about where the market is. Year-to-date shipments in Europe are up 25 percent. That's a 5 percent volume increase, the rest in currency, and our profitability in Europe benefits very months in the weaker dollar. The reduced cost of importing U.S.-made products was the better translation into American dollars on the consolidated numbers.

Orders received in the quarter were up 4.6 percent over last year, but if you take the foreign exchange out, they are actually down about 8 percent. Generally although the European business is very profitable, we (inaudible) out 10 percent on sales after taxes. The economic news, nonetheless, is still quite cautious.

Asia had an excellent quarter with shipments up 16 percent, and that is an 11 percent volume growth. All countries were up in both sales, revenue and profits. China showed the biggest increase in sales revenue, up 23 percent over last year and more importantly up 14 percent sequentially over Q2. It does now look quite positive that the company is battling from the SARS epidemic and is regaining the momentum that it had the first of last year. And Japan was up 6 percent over the previous (technical difficulty)-- 3 percent year-to-date and shows some signs of a modest recovery. Year-to-date were up 10 percent in Asia, which 3.5 percent in volume, and incoming orders look very positive indeed, particularly China up 43 percent, which is a 37 percent volume increase, so we should have a good fourth quarter out of Asia.

To sum up overall, we are saying that there is strength in the market in the currency in Europe, offset some of the weaknesses in North America. Asia appears to be coming back quite nicely. Very good cash generation during the period and overall a pretty solid performance despite generally still quite weak end markets.

So with that, I will open it up for questions.

(OPERATOR INSTRUCTIONS). Rick Dontal, Columbia Management.

Just a couple guys, thanks. Anything new on the acquisition pipeline? What does that look like these days?

We've got something we are working on in China. It is a relatively modest size but nothing to actually announce at this point.

Is the issue pricing, or there just isn't much out there where the sellers are coming to the table?

A little of both. The market has picked up a little bit, prices have picked up a little bit, and people are being content where they are.

Okay. If you look across the distribution area, what do inventories -- are they still very, very clean? Anything going on with the distribution network building inventory?

The distribution inventory has been fairly stable for the last three quarters at very low historical levels. These are as low as inventories have been, and they just reflect -- the distributors are also having difficulty of issues with their own businesses, and they are conserving their cash flow.

One of the things I think we will see, and we have seen this before historically, is when the business cycle picks up, typically we will get more orders in and then the factory delivery times extend a little bit. At that point, you will then see the distributors come in and increase their own inventories to cover themselves against the increased delivery times. I think that will be one of the first signs of confidence coming back will be distributor inventory levels coming up from their present-day low levels.

Okay. Thank you.

James Fong (ph), Gabelli & Co.

I guess the weakness in North America, was that a surprise, and how do you read that on the OEM side so that we can see those end markets you mentioned?

Some of it was military, and that is never a surprise because it is always very lumpy. The typical pieces of business come in quite large chunks, and they are quite impossible to predict. Sometimes you know you've got the business, but you cannot predict the timing of the. We had a group (technical difficulty)-- for the military last year rather than a back (inaudible) this year if you like.

On the OEMs, it was the manufacturing of some of the biggest pieces of capital equipment that we serve, and they have been going quite strong for a couple of years. I think it may have built up a little bit too much inventory, and they are scaling it back. So it is too early to call on that one, but I think they will come up a bit. In the fourth quarter, they will probably come up a bit from the third quarter level. But I don't see a dramatic move in either direction.

So more of just a catching up with some of the inventory that --?

I think so because they have been ordering -- if you look at historical levels, they have been ordering quite well for the last two years, and they tend to take on a bit too much inventory and then have to slim it down a bit, so it usually takes a quarter or so.

(inaudible) suggestion that the economic recovery is beginning around this timing and so forth, it seems that they are running against that general thought.

Very possibly. They do serve quite specific markets, and (inaudible) they don't seem to be the world's best inventory managers, these guys, so it seems to be a regular occurrence every couple of years.

So you're not worried about that too much then?

(inaudible).

Another question. I guess if the dollar starts to strengthen again, what are you doing trying to protect that in terms of your European profits as you see if the reverse happened?

In terms of cash actually changing hands between their companies, we offer relatively good balance of European businesses buying close to the same amount of money off the American businesses. The American builds off the European, so we are reasonably well hedged on the cash transactions. What we are not able to hedge is the translation rates. If the dollar gets stronger, foreign currencies will lose less dollars on our written report.

At the moment, the dollar has given up most of the strength that it gained over the last five years. Currency rates are almost the same now as they were four and five years ago. Actually the dollar is still slightly stronger, but it's almost at the same level. It is not actually giving anything to us; it is giving back what was previously taken away. My own view is I don't think you'll see the dollar strengthened tremendously because that will not happen until you get a much stronger economy and much better employment figures.

Okay. I guess the last thing is your cash is building up very quickly. What are your plans for your cash?

I always said we prefer to invest it in the business. We are in good shape in the machinery and equipment, so we probably don't need to use too much better. That is a good question. I think we have to look at some of the options open to us on the cash.

Almost more than 5 to share in cash? I mean --.

More than 550. (inaudible)

In three years, that is going to be as much as the stock price.

I would rather have the cash than have the debt.

You did not buy back any stock in the quarter. That is really --.

That is another use, but, of course, the price was pretty good in the quarter.

Right. Okay. So you are building that up more for acquisitions and stuff.

Well, we are still active in buying back stock. Obviously there is a price level. We felt the stock was at a higher level than we wanted to pay for it.

Okay. Great quarter. So your outlook has not changed too much. You are still looking at $1.45 for the year. I mean that is (inaudible), right?

I think we should fall pretty closely in line with what we said right at the beginning of the year. Sales should be about 180 or very close to it. We are at $1.10 now at three quarters. We made 35 cents in the fourth quarter last year, and we made 35 cents in Q3 this year, and I think we should do a little bit better than that in the fourth quarter. So that puts us pretty much in our 145 to 150 type of range that we have said all long.

Any better clarity of what you think '04 might be for you?

Too early for any numbers, but if you look at the bigger picture, hopefully this recovery in North American economy is going to turn up in 2004. Asia (inaudible) really seemed to have jumped back to a good level of running -- their shipments were good, but their order intake was very good. So it looks like they are picking up momentum, so that should be better next year. If the exchange rate holds at the current level, we would have a little bit of gain on the first half compared to the current year. I think continued progress is what I would be looking for, Jim, and we have product (inaudible), which should come through.

Thank you.

(OPERATOR INSTRUCTIONS). At this time, there appear to be no further questions. I will turn the conference back over to you, Mr. Weir, just for closing remarks.

Thanks very much. It is always nice to report a good quarter, and we will speak to everybody next year.

That does conclude our teleconference for today. We would like to thank you all for your participation. You may now all disconnect.