Executives
Jeff Tryka - Lambert, Edwards & Associates
Randy Hardin - President, Chief Executive Officer, Director
Roger Tannery - Chief Financial Officer
Ian Colin Edmonds - Chief Operating Officer, Executive Vice President, Director
Analysts
[Jay Kumar - MedSouth Investment Fund]
[Jamie Willin - Willin Management]
[Carlo Crusume]
Universal Power Group, Inc. (UPG) Q3 2008 Earnings Call November 11, 2008 11:30 AM ET
Operator
Welcome to the third quarter 2008 Universal Power Group earnings conference call. My name is Jerri and I’ll be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Jeff Tryka.
Jeff Tryka
Thank you for joining Universal Power Group’s third quarter 2008 conference call. I’m Jeff Tryka with Lambert Edwards, UPGs investor relations firm, and I have with me members of UPG’s management team including Randy Hardin, our President and CEO, Ian Edmonds, our Executive Vice President and Chief Operating Officer, and Roger Tannery, our Chief Financial Officer.
Before we begin, please note that we have arranged for a taped replay of this call accessible by phone. This replay will be available approximately one hour after the conclusion of the call and will remain available until November 18. This call is also being webcast live on the Internet. To access the webcast please go to UPG’s website and look under the Event Calendar in the Investor Relations page.
Before we get started, I’d like to remind everyone that the Safe Harbor statement included in the press release applies to today’s conference call as well. During the course of this call UPG will make projections or other forward-looking statements regarding future events or the company’s beliefs about its revenues and earnings for 2008. We wish to caution you that such statements are just predictions and involve risks and uncertainties, and actual results may differ materially. Factors which may affect actual results are detailed in the company’s filings with the SEC.
A quick word about today’s call. Randy Hardin will begin the call with a brief overview of the quarter, Roger Tannery will then discuss the financial results for the quarter, and then Randy will go over some specific business initiatives. We will conclude with a Q&A session at which time the operator will instruct you on how to enter the queue.
By the way, Randy is with us via remote telephone and we apologize in advance should we lose connection with him. If so, Ian Edmonds, our Executive Vice President and COO, will continue on Randy’s behalf. I’d now like to turn the call over to Randy Hardin.
Randy Hardin
During the quarter we focused on growth and diversification through higher penetration of new and existing customers, an expanded product line, a broader geographic reach and acquisitions such as the recently announced acquisition of Monarch Hunting Products which is expected to close in January of 2009. We believe UPG has made a lot of progress on all of these fronts since we became public and that this quarter was another one in the right direction.
As you are no doubt aware, the last several months have presented an uncertain business environment for the US and the rest of the world. It is times such as these which are a real test of the company’s strength and its management team. In addition to the difficult economic conditions affecting all businesses, we experienced volatile raw material costs for lead and copper as well as higher fuel prices. Though fuel prices seem to be improving, we expect this trend of volatile raw material costs to continue in the near future.
Along with our sales increase we were pleased to see an improvement in gross profit by 8.3% year-over-year. We’ve been successful in passing on raw material cost increases to some of our customers while at the same time balancing this with our need to maintain these customer relationships for the long term. We also saw more diversification of our revenue base into non-Brink’s customers.
As you may have noted in the press release, we are discontinuing providing formal guidance. We made this decision based on two factors.
First. We are faced with very uncertain economic times. While it’s challenging enough to predict the future with any degree of accuracy during normal times, it is especially difficult during times such as these. In addition, it would be irresponsible for us to run the business to meet short-term expectations when our focus is really long-term return for our shareholders.
Second. With the recent appointment of the investor relations firm of Lambert, Edwards & Associates we are making a commitment to communicate more regularly with shareholders. This communication may take the form of additional press releases but most likely will become more frequent contact between our management team and Wall Street such as in investor conferences or one-on-one meetings. We believe this increased communication will give our investors the information they need for their investment models.
On November 6, 2008 we issued a press release announcing a new agreement with Brink’s Home Security to continue providing them third-party logistics and supply chain services. This agreement extends UPG’s services for another two years with successive one-year renewal terms.
One more important highlight I’d like to cover in the quarter is in September we entered into an agreement for the purchase of the asset the Monarch Hunting Products. Subject to the satisfaction of certain conditions typical in such transactions, we expect the transaction to close in early January 2009. Monarch makes high quality hunting products specifically the high margin big ticket solar and battery powered game feeders, hunting blinds and other related accessories. This will expand UPG’s existing outdoor product line and let us cross sell products to sporting goods retailers.
We continue to explore and evaluate acquisition opportunities that present a good fit with our core business and allow us to leverage our key operating strengths.
With that I’d like to turn the call over to Roger to review the specific financial results.
Roger Tannery
I’ll start with the third quarter results. Revenues in the third quarter of 2008 rose 2.9% to $30.6 million compared to $29.8 million in the same quarter of 2007. Revenues from sources other than Brink’s Home Security rose 13.2% to $17.3 million from $15.3 million in the third quarter of 2007. Our concentration of revenues from Brink’s fell to 43.5% of total revenues in the third quarter of 2008, down from 48.5% in the third quarter of 2007.
The increase in revenue from non-Brink’s sources reflects our marketing efforts to both existing and new customer accounts as well as price increases implemented by UPG to offset higher cost of goods sold. Growth in the company’s higher margin battery revenues was driven mostly by price increases.
In the recent quarter revenues from Brink’s declined by 7.9% to $13.4 million. We believe this is due to the housing slowdown affecting the nation.
Third quarter gross profit increased to $4.6 million, up 8.3% compared to $4.2 million in the prior year period. Gross margin as a percentage of sales improved to 15.0% due to improvements in product mix and price increases.
Operating expenses in the third quarter including personnel and facilities costs associated with our growth initiatives as well as unplanned additional Sarbanes-Oxley compliance costs and noncash stock compensation rose 12.4% to $3.6 million from $3.2 million in 2007.
Operating income for the quarter was unchanged at approximately $1 million for both 2008 and 2007. As a percentage of net sales operating income was relatively unchanged at 3.3% in the third quarter of 2008 compared to the third quarter of 2007.
Interest expense was $236,000 compared to $225,000 in the same quarter of 2007. Interest income was nominal for the quarter compared to approximately $56,000 in the same quarter last year. The decrease in our interest income was due to cash being held in short-term investments during the third quarter of 2007.
Our effective tax rate was 47.5% in the third quarter of 2008 compared to 22.1% for the third quarter of 2007. The 2008 tax provision reflects management’s change in estimates of state taxes. The 2007 tax provision included an $89,000 refund in state taxes during the third quarter. Our effective rate for the nine months of 2008 was normalized at approximately 42%.
Net income declined to $0.4 million or $0.08 per share compared to net income of $0.7 million or $0.14 per share in the prior period. The decrease is primarily due to the decrease in interest income and increase in taxes that I mentioned earlier. Fully diluted shares outstanding were about 5 million for both periods.
Through the first nine months of 2008 sales increased 13.3% compared to the same period in 2007. Net earnings were $0.29 per diluted share for the first nine months of 2008 compared with net earnings per diluted share of $0.36 in the same period of 2007 [inaudible] primarily due to the decrease in interest income and the increase in state taxes previously mentioned.
Operating income for the first nine months was relatively unchanged at [inaudible] billion in 2008 [inaudible] capital was $21.5 million up from $21.2 million as of December 31, 2007. [Inaudible] look at [inaudible].
Operator
We may have lost Randy.
Randy Hardin
I’m on here now. I apologize. I’m in the mountains of Arkansas here so hopefully I can get through this.
I’d now like to update you guys on some of our specific initiatives.
First. Battery finder. We have completed cross reference expansion to include commonly used sealed lead acid applications. Further we are in discussions with several parties to license and custom integrate our battery finder into their systems. We will continue to keep everyone up-to-date on our progress with battery finder.
Second. Logistic centers. We expanded our Las Vegas logistics center to a larger facility to accommodate additional growth. We continue to evaluate other locations for the future. In light of the current economic landscape we are moving cautiously in evaluating additional locations at this time.
Lastly, we believe that growing our gross margins will continue to be challenging as prices for raw materials remain volatile but we are managing our gross margin through necessary price adjustments though this may become more difficult in the future given the weakness in the consumer market. Our plan is to continue to focus on developing high margin products and markets as well as diversifying our markets to minimize our exposure to the difficult residential housing market.
With our strong balance sheet and a line of credit sufficient for our growth needs, we are in a good position to grow market share as many of our competitors struggle.
As always we thank you for and appreciate your continued support. With that I’d like to open up the call to your questions.
Question-and-Answer Session
Operator
(Operator Instructions) Our first question comes from [Jay Kumar - MedSouth Investment Fund].
[Jay Kumar - MedSouth Investment Fund]
What percentage of the revenue that comes from Brink’s is residential?
Roger Tannery
We really don’t know the answer to that. We supply their installers primarily so we don’t necessarily know the type of application.
[Jay Kumar - MedSouth Investment Fund]
Do you see any slowdown in that going forward because of the slowdown in the [inaudible] market? Do you see any slowdown in this fourth quarter that might affect the earnings going forward?
Roger Tannery
We really don’t know what’s going to happen in the next quarter.
[Jay Kumar - MedSouth Investment Fund]
Has the commodity pricing affected your business?
Roger Tannery
Yes, in fact it does. Some of our products are particularly affected by lead and copper and a couple of other metals, and it’s been very volatile in the past several months.
[Jay Kumar - MedSouth Investment Fund]
Now that the market’s down about 50% to 60%, do you see that adding to your bottom line?
Roger Tanner
There’s a significant lag between the time that we see those changes in the commodities and by the time it gets converted into products for us and gets to us, there’s a significant lag time.
[Jay Kumar - MedSouth Investment Fund]
How much have you seen it go up in terms of expenses? I know copper went up quite a bit and lead went up quite a bit. How much did you see your expenses go up because of the growth there?
Roger Tannery
Are you talking about lead again?
[Jay Kumar - MedSouth Investment Fund]
Yes. How much of the expenses went up in your business because of the rise in the commodity prices?
Roger Tannery
It would affect not our operating expenses but it would affect our cost of goods. We have reflected that in our sales.
[Jay Kumar - MedSouth Investment Fund]
In this new acquisition, how much do you think that’ll add to the business, the Monarch business that you recently bought? What percentage is that going to add to the revenue?
Roger Tannery
It’s not a large amount. It’s approximately $1.5 million a year.
Operator
Our next question comes from [Jamie Willin - Willin Management].
[Jamie Willin - Willin Management]
On the Monarch side, obviously you’re just getting $1.5 million of additional revenues but you’re doing this acquisition because there must be some additional synergies to capitalize on, whether you’re going to use their relationships or yours or try to expand your product lines piggy-backing with them. Could you expand a little bit about what you’re intentions are here?
Randy Hardin
It’s a couple things. One, there’s a lot of synergy between what they’re doing in the United States and what we’re doing over in Asia. So on the cost side we’re hoping to lower their costs of some of the products that they’re currently manufacturing here. That’s one synergy.
The other synergy is they’re in some retail big box stores with their feeders and blinds that we would like to sell our other products to; batteries, 12-volt accessories. Likewise we have some big box retailers who have our products that are interested in again Monarch’s products. So there’s huge synergy not only on the cost side but also on the sales and marketing side. Again we have high expectations of growing that business beyond the $1.5 million in revenue at a much higher profit margin.
[Jamie Willin - Willin Management]
Are you starting that marketing right now or are you going to wait till January/February?
Randy Hardin
That’s one of the things I’m doing right now as we speak actually. We’ve got guys going to Asia with Monarch to visit not only their suppliers which could help us, for example solar panel suppliers, we’ve got guys leaving to go over there in the next week or two to meet with their suppliers and introduce them to our suppliers. On this side actually as we speak today we’re visiting people about their products.
[Jamie Willin - Willin Management]
The Brink’s agreement that you signed, is there any difference in terms between what the original agreement is and this? And you also said it’s renewable but at whose option is it renewable after the two-year term?
Randy Hardin
Roger and Ian, I’ll let you address that. I believe it’s renewable [inaudible] both ways, by both parties.
Ian Colin Edmonds
That is correct Randy. The contract is renewable by either party. If either one of us are happy to continue on, the party can renew.
Randy Hardin
Basically the terms of it remain the same. We’ve been very fortunate that we’ve been able to continue this agreement with them. I think this is our second or third renewal.
[Jamie Willin - Willin Management]
Your volumes are only down slightly with Brink’s. The earlier question was what percentage of that is residential but it must not be a huge percentage because if it was, their volumes would have been down significantly in the third quarter.
Roger Tannery
We just really don’t know the answer to that as to what their mix of business is.
Randy Hardin
Even if we did know, we really wouldn’t want to speak on behalf of Brink’s.
[Jamie Willin - Willin Management]
The normal seasonality of the fourth quarter of your business would be what type of quarter for you historically?
Randy Hardin
Historically third and fourth quarter are strong in terms of revenue as we pick up new products in big box stores who are looking to do specials toward the end of the year, Christmas specials. We typically close out the year strong in both third and fourth quarters in terms of revenue.
[Jamie Willin - Willin Management]
Your inventories are relatively stable. Do you have the opportunity to add product lines and are you thinking about adding any as you move forward?
Randy Hardin
We’re working on that right now. We’re always looking to add new product lines. Our best customer is our existing customer who’s trying to reduce vendors and increase products from existing vendors who do a good job. It’s a good thing that customers are coming to us and saying, “What about this? What about that? Could you pick that up for us?” We’re actually working on that as we speak.
[Jamie Willin - Willin Management]
Could you tell us what those areas that you’re contemplating going into are?
Randy Hardin
Some of it’s more chargers, more diversified charger line that’s a higher profit margin; universal type chargers; a greater expansion into inverters and just other 12-volt accessory products. All those things that fit right in with batteries; some new battery technology that we’ve gotten out t here. There’s a new product line that we just got into Costco that we’re excited about. It’s all power related and again it’s exciting about some of the things that we’ve got going in some major retailers.
[Jamie Willin - Willin Management]
Your tax rate moving forward was 42% or you expect 42% this year? Is that what you expect going forward?
Roger Tannery
I think that’s probably would be pretty good.
Operator
Our next question comes from [Carlo Crusume].
[Carlo Crusume]
Congrats on hiring a good investor relations firm. I think this is going to help the company show the tremendous growth that both of you have worked hard on going from $2.5 million to about $120 million run rate in a short period of time, which is phenomenal. Now we’ve got somebody to tell the story, which is good.
Because of all the cutbacks in different companies as far as laying off people in divisions, does this lend to opportunities for Universal Power in the logistics business to take over that arm for some other companies?
Randy Hardin
Most definitely. Again we were up here this week talking with some people who are a goal for a lot of big box companies is to have 1,000 vendors; they’re looking to cut them substantially. A lot of those vendors are cutting themselves because they’re laying off people and just not able to provide the same level of service for whatever reason, which has just created opportunity for us. We have good cash flow and we’re strong financially so we’re in a position to pick up the slack. So yes, is the answer to your question.
[Carlo Crusume]
Phenomenal growth story. Could get better then. Congratulations.
Operator
At this time there are no additional questions. I’d now like to turn the call over to your host, Randy Hardin.
Randy Hardin
With that this concludes our conference call today. Again thank you for your interest in Universal Power Group. We look forward to speaking with you at the next quarterly call. Thanks to all and you have a good day.
Operator
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.
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