Blount International, Inc. Q3 2008 Earnings Call Transcript

Nov.18.08 | About: Blount International (BLT)

Blount International, Inc. (NYSE:BLT)

Q3 2008 Earnings Call Transcript

November 5, 2008, 1:00 pm ET

Executives

Calvin Jenness – SVP and CFO

James Osterman – Chairman & CEO

Analysts

Mark Rupe – Longbow Research

Curt Woodworth – JP Morgan

Operator

Good morning and welcome to the Blount International Incorporated teleconference with Chairman and Chief Executive Officer, Mr. James Osterman, and Mr. Calvin Jenness, Senior Vice President and Chief Financial Officer. My name is Andrew and I will be your facilitator today. The conference will begin with a brief overview of the third quarter, followed by a question-and-answer session. (Operator instructions) This conference is being recorded. At this time, I would like to turn the call over to Mr. Jenness. Mr. Jenness, you may begin.

Calvin Jenness

Thank you. And good morning, everyone. This call is being broadcast live on the Internet and recorded for future transmission and use by Blount and third-parties. Participants in the call, including the Q&A session, agree that their likeness and remarks may be stored and used as part of the earnings call.

Before Jim and I summarize the company's performance, I would like to remind everyone that the statements made in the course of this conference call regarding the company's or management's intentions, hopes, beliefs or expectations for the future are forward-looking statements as defined in the Securities Litigation Reform Act of 1995. Those statements involve risks and uncertainties that could cause actual results to differ materially.

Now I'd like to turn the call over to Jim Osterman, our Chairman and CEO.

James Osterman

Thanks, Cal. Good morning, everyone, and thanks for joining us to review the results of the third quarter of 2008. We are very pleased by our financial performance in the third quarter. We achieved record levels of sales and operating income, as demand for our saw chain products reached unprecedented levels. Unit volume growth was the largest contributor to the record-setting performance, as storm activity in the United States contributed to a 27% increase in domestic sales from last year’s third quarter, excluding the effects of the Carlton acquisition.

International sales were up as well from last year by 20% on a comparable basis. Given these financial results, we have increased our full year financial outlook. Our comparable sales order backlog was 11% above the level at the end of the third quarter of last year, an indication that we should see additional year-over-year growth in the fourth quarter.

Additionally, the recent appreciation in the US dollar will be beneficial from a profit standpoint for the company in the fourth quarter. However, despite these positive indicators, we are somewhat cautious as we approach 2009, given the probability of the worldwide recession as well as the effects of the stronger US dollar on international customer orders.

Let me now cover a few of the third quarter operating highlights for our core business, the Outdoor Products segment. The Outdoor Products segment accounted for 95% of the company’s sales in the third quarter. Segment sales were $166 million and were $44 million above last year’s third quarter. Approximately one-third of the increase reflects sales from the Carlton acquisition. Comparable year-over-year sales were up 23.1% in the third quarter. The majority of the sales increase was volume related, and foreign currency fluctuations along with higher selling prices also had a positive impact.

Base unit volume sales was achieved primarily through the growth of woodcutting product sales and both domestic and international markets. Segment domestic sales were up 29.5 from last year’s third quarter, excluding the effects of Carlton sales. This is an improvement from the first half of 2008 when domestic sales declined year-over-year by 2.6%. The storm activity in the US Gulf Coast was a contributor to the change in trend as customer inventories were somewhat light.

International sales growth was 23.3% in the third quarter, excluding Carlton, and reflects volume gains, the benefit on sales of a weaker US dollar, and pricing actions we had taken earlier this year. Currency translation contributed approximately $2.8 million to the top line in comparison to last year’s third quarter. Excluding the effects of the Carlton acquisition, sales to OEMs were up 18% as compared to last year’s third quarter. Comparable sales to the replacement market increased by 25% from the third quarter 2007.

Sales of concrete cutting equipment were down about 2.6 from last year’s third quarter and through nine months are off about 5% from last year, as weaker demand in the domestic market continued. Segment order backlog was $98.7 million at quarter-end or down about 20% from the record level outstanding at the end of the second quarter. Comparable segment order backlog, excluding the Carlton business, was 10% higher than last year as of quarter-end.

Contribution to operating income from the October product segment was $34.1 million, a record level. Segment margin of 20.5% of sales, an increase from last year’s third quarter level of 19.4% and the 17% operating margin recorded in the first half of 2008. The improvement in margin can be attributed to the benefit of unit volume increases and associated leverage on our manufacturing facilities and overhead expenses. The impact of our selling price actions this year helped to offset the effect of higher raw material cost and an unfavorable foreign currency fluctuation.

The raw material increase is predominantly for steel, as suppliers have increased prices to us throughout the year. In the third quarter, we estimate that the impact of higher steel cost and the segment contribution was a negative $1.1 million with the nine-month total being $2.2 million. We expect the year-over-year impact of higher steel cost will increase further in the fourth quarter, as the higher priced raw materials roll through our inventory.

Foreign currency rate changes also contributed to negative impact year-over-year segment contribution. In the third quarter, foreign currency fluctuations reduced year-over-year segment contribution by approximately $2.8 million. The majority of this impact was the result of the Brazilian real that was approximately 17% stronger in this year’s third quarter as compared to last year.

The recent strengthening of the US dollar against most currencies should result in a benefit to this year’s fourth quarter segment contribution although, as I mentioned earlier, it can put pressure on our international customers.

Now I’d like to turn the call back to Cal Jenness for some further financial highlights before answering any questions. Cal?

Calvin Jenness

Thanks, Jim. First, let me cover a few profit and loss items outside of the Outdoor Products segment before I turn to our balance sheet. In the third quarter, our gear business had sales of $8.8 million, a 13.5% improvement from last year’s third quarter. Most of this revenue increase is attributed to price increases. The price increases were put in place to offset higher raw material costs and resulted in a slight improvement in profitability from this business as compared to last year’s third quarter.

The reported loss from other and corporate of $4.1 million was approximately $1 million higher than the third quarter of 2007. And the majority of this increase relates to an adjustment to incentive compensation in conjunction with improved full year financial outlook. Outstanding debt at the end of the quarter was $332.1 million, and we had cash on hand of $53.6 million. The company’s net debt position improved by $19.1 million during the third quarter.

We have classified our borrowings on the revolving credit facility as a current liability due to the scheduled maturity of the facility in August of 2009. We are considering what alternatives are available at the time of maturity and expect to address this matter in the first half of next year.

EBITDA as defined by our credit agreement was $37.0 million in the third quarter, and last 12 months EBITDA was $117.1 million. This yielded a total debt-to-EBITDA leverage ratio of 2.88 times and a net leverage ratio of 2.4 times. In the third quarter, we generated $20.4 million from operating investment activities from continuing operations, including capital spending approximately $9 million. This compares to a $3.4 million in last year’s third quarter.

The improvement in cash flow was primarily due to better operating results and a better management inventories in 2008 as well as higher pension funding costs that occurred in the third quarter of 2007. This year’s third quarter capital spending from continuing operations was about $2 million higher than last year. Year-to-date capital spending is $17.7 million, and that is $3.9 million higher than last year. We expect to spend about $7 million for capital projects in this year’s fourth quarter.

As Jim mentioned, we have increased our financial guidance for the full year. This revision reflects a strong performance we enjoyed in the third quarter as well as the expectation of modest year-over-year sales increases in the fourth quarter.

Our current view for 2008 is that sales will range between $610 million and $615 million. For the fourth quarter, comparable sales were estimated to be flat to up 5% from last year, excluding Carlton. The slowdown in sales growth rate for the first nine months of 14% reflects a stronger US dollar as well as absence of US storm activity in the fourth quarter.

We estimate that full year operating income will range between $86 million and $88 million. In the fourth quarter, operating income should benefit from strong US dollar, though it will be negatively impacted by higher steel costs. Jim had quoted this number before that for the quarter we were negative $1.1 million – I think I heard 9.2. It’s actually $2.2 million that we’ve been negative year-to-date on steel costs, if that wasn’t clear, $2.2 million. That number is going to grow in the fourth quarter will be higher as our inventory rolls through, our steel inventory rolls through. The full year operating income forecast includes approximately $3 million in non-recurring non-cash charges related to the Carlton acquisition.

We expect full year net interest expense to be approximately $26 million, and our income tax rate on continuing operations to be approximately $36 million – 36%, thank you. Cash flow available for debt repayment is estimated to be between $33 million and 37 million in 2008, excluding the funds to acquire Carlton.

I think I’ve covered all the financial highlights for the third quarter of 2008. So, at this time, I’d like to open up the line for any questions.

Question-and-Answer Session

Operator

(Operator instructions) The first question is from Mark Rupe of Longbow Research. Please go ahead.

Mark Rupe – Longbow Research

Jim, Cal, congratulations on the quarter.

James Osterman

Thanks Mark.

Mark Rupe – Longbow Research

As it relates to performance internationally, I know international was up, I believe, 20%. Can you add any anecdotes on some of Europe versus Latin America versus Asia Pacific, and how may be they trended through the quarter?

James Osterman

Go ahead.

Calvin Jenness

Well, all of the – we had just excellent results in all of the areas. We had very, very strong sales in Russia. South Asia Pacific was up substantially, and Latin America was also up. So, very strong performance really on a global basis.

Mark Rupe – Longbow Research

Okay. And then you cited in the release and spoke briefly about the caution or cautiousness of some of your customers. Is that on a broad basis, or is there a geographic component or product component to that?

James Osterman

No, it’s really on a geographic basis. I mean, there is quite a shock to all of them with the current strengthening of the dollar so rapidly. Areas that were particularly hit hard are down in South Asia, Australia is an example, and other countries, Latin America as well.

Mark Rupe – Longbow Research

Okay. And then just lastly, when you back out the Carlton sales or look at Carlton just by itself, did it slow during the quarter, the growth rate there?

Calvin Jenness

It’s still pretty strong. It’s – no, it hasn’t slowed, Mark.

Mark Rupe – Longbow Research

Okay, perfect. Thank you, guys.

Operator

The next question comes from Curt Woodworth of JP Morgan. Please go ahead.

Curt Woodworth – JP Morgan

Hi, good afternoon.

James Osterman

Hi, Curt.

Calvin Jenness

Hi, Curt.

Curt Woodworth – JP Morgan

Cal, if you look at kind of the embedded guidance for the fourth quarter equates to operating income at the mid-point around $90 million, and today it was roughly, call it, 150. So, that comes out to about 12.6% margin, which is down about 350 basis points year-on-year. Can you help me understand what the moving pieces are and why you would see that type of slowdown when you’ve been seeing the opposite of that thus far this year?

Calvin Jenness

The biggest new news, Curt, is the steel cost. I alluded to that before. I think year-to-date we’re negative on the P&L $2.2 million in the Outdoor Products segment. It’s a little bit higher when you put in gear. But that equivalent number probably goes to $3.5 million to $4.5 million in the fourth quarter as a negative drain year-over-year.

Curt Woodworth – JP Morgan

So that’s an incremental head of about, call it, 1.5 in 4Q?

Calvin Jenness

Yes, 1.5 overall is probably part of that. I mean, I think also our cost performance in the third quarter was very, very strong. As you know, we get – on the upside, we get a real leverage when the production volumes are high. So that probably – with the kind of growth that we saw in the third quarter and our production levels were as high as that on the sales side. That probably gave us real good average -- leveraging effect overall on that. Those are probably the big things that won’t reoccur in the quarter. Currency should – as I mentioned, currency should help us out, but I mean that number is moving all over the place, as we speak here today, where it’s going to end up for the quarter on average. It should be a positive, but it’s – don’t know at this time.

Curt Woodworth – JP Morgan

All right. In terms of thinking about the OEM volumes being up 18%, which is a pretty strong number in the context of globally what’s going on in the economy, I mean, do you feel – how would you kind of size the outperformance there in terms of we had probably some inventory re-stockings, definitely some benefit from the hurricane activity, and then just obviously overall market growth? Can you segment that at all?

James Osterman

The huge activity in the third quarter was all hurricane-related. Until that time, they had been lagging, but the hurricane brought on probably the largest September that we can – September, October that we can recall. It will moderate and go back normal growth levels after that.

Curt Woodworth – JP Morgan

Okay. And in terms of unit volume expectations for 2009, in terms of thinking about the after-market performance and how that will look in a potentially slower economic environment, do you think the after-market business could still grow even in spite of the potential recession?

James Osterman

We’re actually working the problem right now. We are going through zone by zone, putting our budgets together. And I think it’s just too early for us to talk about that.

Curt Woodworth – JP Morgan

Okay. And in terms of the steel costs hurting you by $4 million and the costs have come down pretty significantly recently, would you expect to be able to recoup most of that in 2009?

James Osterman

Well, let me just say that our costs have not come down. The steel companies have done a pretty good job of closing mills and holding the prices on high carbon specialty steel. We do expect costs to come down in 2009, but we haven’t seen that yet.

Curt Woodworth – JP Morgan

Do you have any price agreements already in place for 2009?

James Osterman

No, we don’t.

Curt Woodworth – JP Morgan

No, okay. All right, great. Thanks so much.

James Osterman

Thanks, Curt.

Operator

(Operator instructions) We show no further questions at this time. I would like to turn the conference back over to Cal Jenness for any closing remarks.

Calvin Jenness

Well, thanks for your continued interest in Blount and everybody have a good day.

James Osterman

Thanks a lot for listening in. Thank you.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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