Zurn Elkay Water Solutions Corp (ZWS) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Rexnord Corporation conference call to report the fiscal year 2007 first quarter results. Today's call is being recorded. With us today is Bob Hitt, CEO, and Tom Jansen, CFO. Please go ahead.

Thank you, operator. Well, we certainly apologize for the technical difficulties. We've worked through those now. Thank you for your patience. Without further ado, let's get to the business at hand, which is our first quarter ended July 2nd, 2006, and first quarter of our fiscal year ended March, 2007. Again, I'm Tom Jansen. Bob Hitt is with us, our CEO, as well as our Vice President, Controller and Treasurer, Todd Addax.

I refer you to Tuesday's earnings release for our view on forward-looking statements. The safe harbor statement in the earnings release also applies to the initial statements made by Bob and myself. It answers your questions related in any way to projections or other forward-looking statements on this call. We caution you that these statements are predictions and that actual results or events may differ materially. And finally, our business is subject to various risks and uncertainties, so please refer to the various risk factors outlined in our reports filed with the SEC.

A replay of this call will be available for a period of one week. The phone number for the replay can be found in the earnings release. And at this time, I'll turn the meeting over to Bob.

Thanks, Tom. First and foremost, we are certainly pleased to report that we started our fiscal 2007 by posting solid first quarter results. The comparisons that I'll make to the prior year I've restated to include Falk for the entire quarter.

Sales growth was 8.8%. EBITDA grew to 20.4% at $52 million, but as a percentage of sales, EBITDA increased from 16.3% to 18%. And we also prepaid $8.5 million of term debt in the first quarter, after paying $1.5 million in transaction-related expense.

Also very positive was our order growth, and in the quarter it was 15%, which was outstanding. We billed $41 million of backlog in the quarter, bringing out total backlog to $348 million. That's an increase of a little over $101 million, or 41%, compared to a year ago, and we really do see continued strength across multiple end markets, and I'll go through that in a little more detail here in a second.

Sales of the aerospace products also continue to post strong growth in the quarter. Sales increased 25% compared to the prior year's quarter, and new orders continue to exceed last year's record pace.

As you all know, we completed and closed on the sale of the company to Apollo Management during July. We are very pleased to be associated with Apollo and look forward to working together and continuing to have very good results.

Since the end of the quarter, we've also made a very small acquisition – that we did post in the results – in China, and that's, as I said, a pretty small one. It provides us additional capabilities and strategically positions us to serve both U.S. customers that are moving to China for the Chinese market as well as for the Chinese market itself as well. We've had many of our customers who have continued to go over there for the market itself – not to exploit that, but to be there for the market – that we need to support.

RBS continues to be strong. We continue to gain traction. During the quarter, we continued to focus on driving our quality delivery and productivity gains, as we always do. In fact, during the quarter, we did see about a 9% increase in productivity sales per employee over last year.

As I said, I refer back to the economic conditions in the industrial markets that we see certainly remain robust [technical difficulty] natural resources, energy and aerospace sectors are especially strong. Everyone does know about the ISM data as far as its activity and July being the 39th, I believe, consecutive month of increase.

Shipments of material handling type of equipment, as we are involved with quite heavily, is running almost 18% ahead of last year, driven by strong export demand. And that's not our shipments, by the way; it's for industry shipments that I'm referring to here. If you looking at mining oil field, gas field machinery, it's up 18% ahead of a year ago, and the second half of this year will remain strong according to their forecasts, with new orders through May up some 25%. And in the industry, order backlogs are up almost 65% from a year earlier levels.

[Inaudible] construction machinery almost 20% ahead of last year, and they continue to look forward to the positive impact of – we're on the way to recovery of non-residential construction [technical difficulty], and the increased public sector outlay to continue and strengthen export sales. Certainly, that will offset tremendously new home construction. In fact, we have more heavy-duty stuff, as everyone well knows, than we would be in the light duty, anyway.

After-market activity continues to be quite robust. The PTDA, which is the Power Transmission Distributor Association – I believe I reported when I was out on the road that the May numbers were close to 14% over the prior year and the June numbers were almost 11% above prior year, so even though there were strong numbers last year, they continue to post gains that also bodes well for us.

We do believe our growth of share gain and operational initiatives are a succeeding position in the company to consistently deliver superior results, and I will tell you, as we look through the remainder of the year, our opportunity is to continue to improve on that operational performance and [inaudible] on the backlog we have as well as the strong incoming order rates. We have been doing that, [technical difficulty] have the opportunity to continue that going forward.

And our priorities for the remainder of the fiscal year this year will continue to be on reducing our leverage by focusing on driving the growth, margin expansion and generating cash to reduce our debt.

So with that, I'm going to turn it back to Tom, and he can provide some additional information on the first quarter performance.

Thanks, Bob. Net sales in the quarter were $288.4 million, compared to $239.9 million last year, or $48.5 million over the prior year quarter. On a pro forma basis, however, sales last year were really $265.1 million of sales and organic growth of 8.8% in the first quarter. Q1 sales, by the way, were also at about 1%, or $3.5 million from our currency changes.

Sales growth combined with year-over-year cost reduction, including the synergies related to the Falk integration last year, drove gross profit higher this year. Growth margin in the quarter was 31.1%, a 140-BP improvement over last year's 29.7%. Our SG&A, although up in dollar terms, is relatively flat as a percent of sales compared to the prior year. In fact, down slightly in constant dollar terms.

As Bob pointed out, adjusted EBITDA grew 20.4% in the first quarter, more than two times the sales growth rate, to $52 million, as compared to $39.7 [million] last year and $43.2 million on a pro forma basis last year. Overall margin expanded by 170 BPs, from 16.3 last year to 18.0. We had no restructuring expense in the quarter. This is consistent with our comments on the prior call and on the road, that the restructuring that we undertook last year, primarily related to the integration of Falk, was complete as of our March, 2006 year end.

We did expense $16.6 million of sales transactions and expenses during the first quarter. These expenses consisted entirely of seller-related expenses in connection with the sale from Carlyle to Apollo, including investment banking fees, outside attorney fees and other third-party fees. The full impact of the sale transaction and related refinancing, which occurred on July 21st, 2006, will be reflected in our September quarter-end financial statement.

Interest expense for the quarter was $17.1 million, up $3.5 million from last year's quarter. That increase was evenly split between the impact of higher interest rates from a year ago and increased debt from the May 16th, 2005 financing of the Falk acquisition.

We have a relatively high tax provision for the quarter due to our reporting of the transaction expenses. A significant portion of those expenses we estimate may not be deductible for tax purposes. We're working ourselves through that, but mostly the high tax rate in turn created a net loss for the quarter.

Looking at the balance sheet, despite a $9.2 million increase in trade-working capital during the quarter, our trade-working capital performance actually improved during the quarter, from 22.6% of sales last year to 22.5% of sales in the current quarter. The growth in trade-working capital dollars was about 3.7%, which is less than our sales growth of 8.8% and substantially less than our order growth in the quarter of 13%. Our goal, once again, is to drive trade-working capital to under 19% of sales, and we consider that a primary opportunity for improvement going forward.

Capital spending was $8.8 million in the quarter, or just over 3% of sales, and our term debt at the end of the quarter was $745.2 million, reflecting a decrease of $8.8 million in the quarter, and again, that's net of the $1.5 million of transaction cash expenses that we paid in the quarter.

Obviously, our debt profile has changed with the July 21st acquisition of the company by Apollo. That acquisition is well financed with $485 million of 9.5% Senior Notes and $300 million of 11.75% Senior Subordinated Notes, $645.7 million of borrowings under the new Senior Secured credit facility, which included $150 million revolving credit line, and $475 million of equity contributions, comprised of $438 million in cash contributions from Apollo and $37 million of rollover equity by Management.

Those proceeds were used to pay existing equity holders for their ownership interest in the company and repay borrowings under our previous credit facility and the old [inaudible] Senior Subordinated Notes and transaction fees and expenses. As a result, our long-term debt increased to approximately $1.437 billion on July 21st, 2006.

At this point, I'll turn it back to Bob.

Thanks, Tom. I'll conclude our formal comments by first saying that we did meet our guidance for the first quarter, and we expect to do the same in the second, and that second-quarter result [inaudible] be above those that we posted last year in the second quarter.

With that, that does conclude the formal comments. Operator, we're ready to open up the conference call for questions.

Thank you. [Operator instructions] It appears we have no questions at this time.

We'll give it a couple of seconds more and see if anybody does. Okay. Again, I appreciate everybody's patience regarding the call and apologize for the technical difficulties we had, and I look forward to talking to you in the next quarter. Thank you.

This does conclude today's conference. You may disconnect at this time.