Zurn Elkay Water Solutions Corp (ZWS) 2009 Q1 法說會逐字稿

Good morning and welcome to the Rexnord first-quarter fiscal 2009 earning results conference call with Bob Hitt, Chief Executive Officer, and Todd Adams, Chief Financial Officer of Rexnord.

This call is being recorded and will be available on replay for a period of one week. Phone numbers for the replay can be found in the earnings release the Company filed on an 8-K with the SEC last week, which is also posted on the Company's Web site at www.Rexnord.com.

At this time, for opening remarks and introductions, I will turn the conference over to Mr. Todd Adams, Chief Financial Officer of Rexnord. Please go ahead, sir.

Good morning.

Before we get started, just a brief reminder that today's call may contain certain forward-looking statements that are subject to the Safe Harbor language contained in last week's press release as well as with our filings with the Securities and Exchange Commission. Additionally, I will remind everyone that we're in a quiet period, after filing an S-1 registration statement with the SEC regarding the Initial Public Offering of the stock of Rexnord Holdings, which is the ultimate parent of RBS Global and Rexnord LLC.

Today's call will provide an update on our overall performance across the Company as well as some further detail on the financial results. As a result of the quiet period, we will not take any questions at the end of the call.

Now, I will turn the call over to Bob Hitt, CEO of Rexnord.

Thanks, Todd. Good morning, everyone. Thank you for joining us on the call those today. Last week, we issued a press release outlining our first-quarter fiscal 2009 financial results, which I am hopeful everyone has had the opportunity to review.

First, a quick summary of our operating performance in the quarter -- first-quarter orders outpaced our sales growth by $41 million and we exited the quarter with a record backlog of $582 million, an increase of 8% from the end of March and up 21% from a year ago. First-quarter sales were a record $496.1 million, which represented an increase of 10.7% over the prior-year first quarter. Cost sales growth in the first quarter, which excludes currency and includes growth in existing and acquired businesses and adjustment divestitures, was just over 5%. First (inaudible) quarter sales growth, excluding currency and acquisitions and adjusted for divestitures, was approximately 5%.

Our adjusted EBITDA in the quarter was also a record of $95.7 million or 19.3% of sales. Finally, we reduced our net debt leverage to 4.8 times at the end of June compared to 5.98 times a year ago and 6.8 times less than two years ago at the time of the acquisition of the Company by Apollo. Both of our platforms performed well during the quarter, as we continue to successfully implement RBS and our acquisitions are contributing to our growth and profitability in line with our expectations.

Next, I will take a few minutes to walk you through the operating performance in each of the platforms as well as what we are seeing in some of the key end markets in each of our platforms in terms of demand and market growth. Starting with Power Transmission segment, sales growth in the quarter was 9.9%. Currency was favorable to the prior year by 450 basis points, and the divestiture of our noncore businesses at the end of last year adversely impacted growth in the quarter by 180 basis points. So, on a net basis for Power Transmission, this equates to 7.2% core sales growth in the quarter.

From a profitability perspective, the Power Transmission segment had a solid quarter. Adjusted EBITDA in the quarter was $67.3 million or 19.8% of sales, which compares to $59.2 million or 19.1% of sales last year. However, after adjusting the prior-year first quarter for the impact of the divestiture and the recovery of $2.5 million of insurance proceeds related to the Canal Street accident business interruptions we incurred in fiscal '07, adjusted EBITDA in the prior year was just under $57 million or 18.7%. So, we saw approximately 110 basis points of margin expansion year-over-year in the quarter on a like-for-like basis.

In terms of the overall businesses, in the first quarter, we continued to see solid demand across most of the end markets we serve in Power Transmission. As many of you know, just over 40% of total sales of Power Transmission are in the end markets of mining, energy, aerospace and cement, all of what continue to experience strong underlying growth fundamentals.

In general, our inquiry, quotation and order activity in the longer-cycle businesses continue to be strong throughout the first quarter. I will also add that we continue to see very good growth out of the international portion of our Power Transmission businesses, which today [compromises] approximately 40% of our total Power Transmission sales. We continue to see a relatively stable demand in Power Transmission in North America.

One other key element to mention in the Power Transmission segment is the health of the overall U.S. industrial distribution channel. Through May, U.S. industrial distributors have posted calendar year-to-date sales growth of 4.8% and inventory trends in the channel remain solid that 8.7 times, compared to 7.6 times at the end of the calendar year '07 and at just over 9 times a year ago.

So to summarize on Power Transmission, fundamentally the overall trends in the business and end markets are solid and we believe we are well positioned as we exit the first quarter to continue to post solid operating performance compared to the prior second quarter.

Now, I will turn my comments to the water management platform. Sales growth in the quarter was 12.4%. Currency was favorable to the prior year by 40 basis points with the majority of the sales growth in the quarter coming as a result of the acquisition of GA Industries.

From a profitability perspective, order management adjusted EBITDA in the quarter was $32.8 million or 21.1% of sales, which compares to $30.6 million or 22.1% of sales last year. The current year first-quarter margins of 21.1% include impact of the GA acquisition, which currently has margins lower than the balance of our water management businesses.

In terms of the overall water management businesses, it is probably helpful to start by breaking down the businesses in terms of how we think about our end markets. Of our total water management businesses, between 45% to 50% of the businesses is in the infrastructure and water wastewater treatment market. Approximately 35% of the businesses is in commercial construction market with the balance, or approximately 20% of the business, in residential construction.

In the first quarter, within the infrastructure and water, wastewater markets, we continued to see decent overall market conditions. The GA acquisition is performing well and we believe the end market of water and wastewater treatment that we assessed with the acquisition -- accessed with the acquisition -- offers solid long-term growth opportunities.

Within commercial construction, consistent with what we have been expecting, based on some of the architectural billing data as well as the McGraw-Hill data and forecast, the overall market will clearly be slowing a bit. Inside our businesses, overall we continue to see low single digit growth in the commercial construction market in the quarter, driven by sales growth of new products and our water conservation product lines.

Within the residential part of the business, depending on which source you choose to look at, all signs point to significant declines in the residential market of somewhere between 25% and 35% year-over-year. As you compare that to the portion of our business that serves the residential markets, we experienced declines between 15% and 20% in the quarter compared to the prior year, meaning we actually grew relative to the market.

To close on the water management business, overall we feel like we are well positioned to continue to post growth in the business despite some relatively tough market conditions in portions of the business. A couple of reasons -- almost half of our water manage business is focused on infrastructure and, as I mentioned, water and wastewater treatment markets which we believe have solid long-term growth fundamentals. Secondly, our overall product strategy and offering around high-efficiency and water conservation products, coupled with our distribution model in the specification niche of the business, is a competitive advantage for us, particularly in a slower economic environment.

The final comment I will make is that Rexnord, along with everyone else, has been and will be experiencing material cost inflation. Overall, we have been relatively successful in dealing with the inflationary pressures through selective price increases, driving productivity improvements and looking at ways to reduce material cost either through alternative materials or product design. We will continue to be very diligent and disciplined on our pricing philosophies, as well as our procurement processes, as raw materials such as copper, natural gas and oil continue to fluctuate. Over the course of the year, we continue to believe in our ability to recover material cost inflation.

So as we wrap up the first quarter, just a couple of final thoughts. Again, we're pleased with the start to the fiscal year. The solid order rates we saw in the first quarter provide us some optimism on the overall growth opportunity we have in the second quarter.

Secondly, the majority of the end markets we serve continue to do quite well. We think the rate of change on the residential market decline is slowing and over the balance of the year, we expect the adverse impact of that to moderate.

Internally, we see both businesses performing well. We start the second quarter well positioned in the respective segments to outperform competition.

Finally, we are pleased with the core growth in the quarter of 5%. It was consistent with what we have been expecting and the adjusted EBITDA margin expansion of 40 basis points in the quarter, compared to the prior-year first quarter, was also in line with our expectations.

With that, I will turn it over to Todd to provide some more in-depth financial information regarding our first-quarter performance. Todd?

Thanks, Bob. I will start by quickly going over a few details on the income statement.

As Bob mentioned, sales in the quarter were a record $496.1 million, which represents 10.7% growth over the prior-year first quarter. Gross profit in the first quarter was $161.9 million or 32.6% of sales as gross profit margins expanded 90 basis points compared to the prior-year first quarter.

SGA expense in the first quarter was $86.1 million or 17.4% of sales, which is effectively flat from the prior year as a percentage of sales.

Income from operations in the first quarter was $63.3 million or 12.8% of sales, compared to $59.1 million or 13.2% of sales in the first quarter of last year. However, the prior-year first quarter included an $8.1 million gain associated with the Canal Street accident which benefited the prior-year first quarter by approximately 180 basis points. Excluding this prior-year gain, our first-quarter income from operations as a percentage of sales increased 140 basis points from the prior year.

Interest expense in the first quarter was $44.5 million, which represents -- which compares to $49 million in -- which compares to $49 million in the prior-year first quarter and reflects primarily the benefit of lower LIBOR rates on the Company's term loan facilities compared to the prior year.

With respect to taxes in the quarter, our effective income tax rate for the first what was about 45% which is consistent with our expectations for fiscal 2009 as we communicated in our fourth-quarter earnings call. Our fiscal 2008 effective tax rate included the benefit of the tax deduction we recognized on the sale of our French subsidiary and that was really the primary reason for the lower year full rate of about 34%.

Finally, our net income in the quarter was $9.1 million, which compares to $2.4 million in the prior-year first quarter.

Quickly moving to adjusted EBITDA, our adjusted EBITDA in the first quarter was a record $95.7 million or 19.3% of sales, which compares to $87 million or 19.4% of sales in the prior-year first quarter. However, as Bob discussed, in the prior-year first quarter, we did record a $2.5 million benefit from the business interruption insurance proceeds received in that quarter that really related to the Canal Street accident business interruption we experienced in fiscal 2007. So when you adjust the prior-year first quarter to exclude that benefit, adjusted EBITDA was about $84.5 million, or 18.9% of sales.

Quickly running through the balance sheet and cash-flow statement, our cash balances as of the end of June were $151 million, an increase of just over $9 million from the end of March. From a trade working capital perspective, at the end of June, receivables were just over $304 million, inventories were about $374 million, and Accounts Payable were approximately $163 million, for a net trade working capital balance of about $516 million. The increase in trade working capital in the first quarter was primarily driven by the timing of shipments throughout the quarter as well as normal seasonal working capital fluctuations. Fundamentally, we continue to believe that trade working capital remains an opportunity for us throughout the year.

Cash flow from operations in the first quarter was $18.9 million, which compares to the prior-year first quarter of $33.5 million. Included in the prior-year first quarter was $10 million of insurance proceeds related to both the business interruption recoveries as well as property and casualty proceeds as a result of the Canal Street accident.

Capital spending in the first quarter was $11 million or 2.2% of sales respectively. I think consistent with what we have been communicating, we anticipate capital spending to be in the 2.5% to 2.9% of sales range for the full year.

Our total debt at the end of the second quarter was basically unchanged from March and totaled $2.024 billion. Our liquidity at the end of June remains strong as we had cash balances of $151 million and we had no borrowings outstanding on our $150 million revolving credit facility or our $100 million Accounts Receivable securitization facility. However, $29 million of the revolving credit facility is considered utilized from letters of credit. As of the end of the first quarter, we had $767 million of Term Loan B borrowings, $803 million of 9.5% senior unsecured notes, $150 million of 8.875 senior unsecured notes and $300 million on 11.75% senior subordinated notes and about $4 million just above the debt.

Finally, as Bob mentioned, we continue to delever. As the end of the first quarter, our leverage ratio was 5.2 times and 4.8 times on a net debt basis, both down [a tenth] from when we ended March and down from 6.8 times at the add time of the Apollo acquisition, which was less than two years ago.

So with that financial review, I will turn it back over to Bob.

Thank you, Todd. Just to remind everybody, as a result of the quiet period, (inaudible) will not be taking questions at the end of the call today but I would like to thank everyone for listening and for your attention on the call. We appreciate your interest in Rexnord and look forward to providing further updates when we announce our second-quarter results in the coming months. Again, thank you very much and have a good day.

That does conclude today's teleconference. We would like to thank everyone for their participation and we wish everyone a great day.