Stamford Industrial Group, Inc. Q3 2008 Earnings Call Transcript

Stamford Industrial Group, Inc. (STMF)

Q3 2008 Earnings Call

November 10, 2008 4:30 pm ET

Executives

Al Weggeman - President and CEO

Jon LaBarre - CFO

Analysts

Ed Einboden - William Smith

Tom Martin

David Weinberg

Presentation

Operator

Good afternoon ladies and gentlemen and thank you for waiting. Welcome to Stamford Industrial Group's results for the third quarter and nine months, that's ended on September 30, 2008 conference call. All lines have been placed on listen-only mode, and the floor will be open for your question and comments following presentation.

Before our host Mr. Weggeman begins the conference, Helen Mangas will be stating the required Regulation FD statement.

Helen Mangas

In accordance to Regulation FD or Fair Disclosure, we will be webcasting this conference call. Any redistribution, retransmission, or rebroadcast of this call in any way without the expressed written consent of Stamford Industrial Group is strictly prohibited. Please note that on this call, certain information presented contains forward-looking statements, within the meaning of Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectation, and are subject to risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, expected, estimated, or projected.

The following factors among others could cause actual results to differ materially from those described in the forward-looking statements. Our ability to secure necessary financing, our ability to implement our acquisition growth strategy, and integrate, and successfully manage any businesses that we acquire, our ability to continue to grow revenues in our operating divisions, our ability to use our net operating loss carry forward, reductions to our deferred tax assets or recognition of such assets. Changes in the company's relationship with customers, changes in demand for counterweights or the growth of the construction industry, the price of steel, changes in our relationship with our unionized employees, the current economic downturn and its effect on the credit and capital markets as well as the industries and customers that utilize our products, decline in the business of customers and other risks and uncertainties that are set forth in the company’s 2007 annual report on Form 10-K, and most recent Forms 10-Q and 8-K filed with the Securities and Exchange Commission.

The content of this conference call contains time sensitive information that is accurate only at this initial broadcast. The company undertakes no obligation to make any revision to the statements contained in our remarks, what [updates] since reflect the events, or circumstances occurring after the conference call.

I would now like to turn the call over to Mr. Al Weggeman, CEO of Stamford Industrial Group.

Al Weggeman

Good afternoon and welcome to Stamford Industrial Group’s November 10, 2008 investor conference call. This is Al Weggeman, President and CEO of Stamford Industrial Group. And with me today is Jon LaBarre, Chief Financial Officer of Stamford Industrial Group. Today we will comment on our third quarter and September 2008 year-to-date financial results, our business outlook, and 2008 full year financial guidance.

We’re pleased with the financial results for both the third quarter 2008 and September year-to-date. Our third quarter 2008 revenue was approximately $42 million, representing an approximately 47% increase over the same period last year, and relatively flat versus the prior quarter. Net income in the third quarter was approximately $4.4 million, resulting diluted earning per share, before non-cash benefits and expenses of $0.12.

Diluted earnings per share before non-cash benefits and expenses for September 2000 year-to-date are $0.30, exceeding our previously provided earnings per share before non-cash benefits and expenses guidance range of $0.23 to $0.27. Please see our earnings press release issued on November 10th, 2008 for reconciliation of diluted earnings per share before non-cash benefit and expenses, to the most directly comparable GAAP financial measure.

We continue to benefit from the availability and usage of our approximately $115 million of NOLs which helped to drive strong cash flow generation. In the third quarter, we generated approximately $3.7 million of operating cash flow and repaid approximately $3.5 million of debt. We experienced modest sales growth across all of our end-market and product statements for most of third quarter, as compared to the prior year same quarter.

Our strongest growth continues to come from our crane OEM segment, driven by continued demand in our customer’s end markets. Global growth in energy, petrochem, bridge and highway, and utility projects remained a strong growth catalyst in the segment. Given the ongoing weakness in demand and excess inventory levels in the aerial work platform segment, we are not surprised by the quarter-over-quarter slowdown we experienced in that segment in the third quarter. With continued public announcements from market leading aerial work platform manufactures regarding weakening conditions in the end markets, we believe that fourth quarter sales will continue to reflect slowing sales.

We continue to take a more conservative view of that market going forward, and we believe that we are adequately reflected the change in market conditions in our earning guidance for the full year 2008. However, with continued volatility and uncertainty in customer demand these markets have, become part of the forecast. And therefore, our projections are subject to a higher degree of variability.

Due to the anticipated slowing economy and tightening financial markets, we expect to aggressively manage our cost structure, working capital, and cash flow generation in the fourth quarter. Discretionary expenses have been cut to a minimum, manufacturing overtime has been reduced to essential levels only, and inventories being ordered only as required for firm orders. Although we have budged $300,000 of capital expenditures in the fourth quarter, the targeted spending level is zero. We believe that these actions are prudent and necessary to take in order for SIG to remain competitive, especially in light of the current deteriorating economic conditions and uncertain outlook for 2009.

Conversely we believe that this is an ideal environment for us solidifying current customer relationships, as well as opportunistically taking market share from less capable and underfunded competitors, that do not adequately meet customers' needs.

In terms of our guidance for the rest of 2008, based on year-to-date results through September, current market visibility and customer bill forecast, we are raising our full year 2008 revenue range of approximately $135 million to $145 million, from the previous provided range of $130 million to $140 million. Additionally, on year-to-date results through September, we are raising our guidance for full year 2008 diluted earnings per share before non-cash benefit and expenses, to a range of approximately $0.29 to $0.32 per share from the previous range of $0.23 to $0.27 per share. Please refer to our earnings press release issued November 10th, 2008 for a reconciliation of the projected 2008 diluted earnings per share to the diluted earnings per share before non-cash benefits and expenses.

For the fourth quarter of 2008, working capital is expected to be reduced by $6 million to $8 million, and we anticipate reducing debt by $4 million to $5 million of the same period. These numbers exclude the impact of any potential acquisitions implemented as part of our acquisition strategy.

With respect to 2009, we are in the process of developing our annual operating plan. The uncertain domestic and global macroeconomic environments, slowing demand in aerial work platform market, and uncertain dynamics of future steel costs and scrap prices will weigh into our thought process, as we develop this plan. We expect to share our guidance for 2009 with you, early in the first quarter of 2009.

While we recognize that there will some short term debt associated with the economic downturn and credit markets instability, in the long term, we remain excited about our business model. In particular, we believe that United States maybe the beneficiary of significant spending to fix our ailing infrastructure and the supporting effort to create fuller employment. If this trend materializes, we believe it will bode very well for the infrastructure customers that normally sell our counterweight and weldment components.

With respect to our acquisition plan, we continue to see a solid flow of acquisition targets, from both investment banks and internally generated proprietary deals. In the first nine months of 2008, we reviewed approximately 70 acquisition candidates, of which several progressed to more advanced discussions. The target companies that we assess, range in EBITDA, from $5 million on the small end, up to $25 million on the high end. The target companies, are in a variety of industries, including aerospace components, steel components, electrical distribution and control, oil and gas processing equipment, and another niche engineered component markets.

In general, we observe deal multiples drop to a range five to seven times EBITDA, down from their more recent historical levels of six to eight times EBITDA. While, the credit markets remain challenging, we believe deal financing remains available.

As mentioned on our previous calls, Concord entered into negotiations to replace its collective marketing agreement, covering appropriately 100 employees, at Concord's Warren, Ohio facility. SIG Acquisition Corp. originally inherited this contract as part of the Concord Steel acquisition in October 2006. The contract expired on October 31st, 2008, at which point we agreed to extent the contract for 60 days in a good faith effort, to try and resolve a number of key issues. Some of these issues are economic in nature and reflect Concord's nature as [uncompetitive], in an increasingly cost competitive environment, and slowing economy. Other issues of importance to Concord are centered on work policies, that'd allow to operate the Warren, Ohio manufacturing facility, in a manner that results in improved labor efficiency and productivity. As a result of the differences and views and these issues, the parties were unable to come to conclusion at the end of the 60-day extension period.

In order to protect Concord’s assets from damage, and ensure uninterrupted supply of product to it’s customers, Concord made the very difficult decision to temporarily not have the Warren, Ohio workers return to work, until the contract security issues are appropriately resolved. Concord plans to continue to work hard with the union on creating a more balanced and workable labor agreement.

I will now turn the discussion over to Jon LaBarre, CFO of Stamford Industrial Group.

Jon LaBarre

Thank you, Al, good afternoon. The company’s consolidated revenue was $41.5 million, an increase of 47.2% or $13.3 million for the third quarter ended September 30th, 2008, compared to $28.2 million for the third quarter ended September 30th, 2007.

The increase in revenue was primarily due to increased demand of our products from existing customers, resulting in higher sales volume, increased spending in commercial and industrial construction and infrastructure building end markets, price increases to customers, and an increase in average scrap selling prices.

Consolidated gross profit margin was $9.1 million or 21.9% for the third quarter ended September 30th, 2008, compared to $5.1 million or 18.1% for the third quarter ended September 30th, 2007. Our gross profit margin percentage increased due to favorable product mix, lower scrap material rates, higher scrap sales price, higher sale volume and price increases to customers, partially offset by higher costs of material and increased direct labor costs associated with the ramp-up of Essington, PA manufacturing facility.

The company’s consolidated operating expenses were 8.7% of revenue, or $3.6 million for the third quarter ended September 30th, 2008, compared to 12.1% or $3.4 million for the third quarter ended September 30th, 2007. The increase in operating expenses reflects an increase in employment related expenses of $0.2 million, marketing expenses of 0.1 million, transaction costs of 0.1 million, related party stock based compensation of 0.2 million, and depreciation expense of $0.1 million. These increases were offset by a decrease in stock-based compensation expense of $0.5 million.

During the quarter, the company released half of its deferred tax valuation allowance or $0.9 million and anticipate releasing the remaining $0.9 million in the fourth quarter of 2008. Beginning in 2009, the deferred tax assets will begin to be decreased based on taxable income, with the corresponding increase in tax expense.

Net income for the third quarter ended September 30th, 2008 was $4.4 million or $0.09 per diluted share, versus $0.6 million or $0.01 per diluted in the third quarter, last year. Diluted earnings per share before non-cash benefits and expenses for the third quarter ended September 30th, 2008 was $0.12 per share.

The company’s consolidated revenue on a year-to-date basis was $116.3 million, an increase of 37.8% or $31.9 million for the nine months ended September 30th, 2008; compared to $84.4 million for the nine months ended September 30th, 2007.

The increase in revenue was primarily due to increased demand of our products from existing customers, resulting in higher sales volume, increased spending in commercial and industrial construction and infrastructure building end markets, price increases to customers and an increase in average scrap selling prices.

Consolidated gross profit margin was $25.7 million or 22.1% of sales for the nine months ended September 30, 2008 as compared to $14.8 million or 17.5% of sales for the nine months ended September 30th, 2007. The 26.3% increase in gross margin percentage was due to favorable product mix, lower scrap material rates, higher sales volume and price increases to customers, partially offset by higher cost to raw material and an increase in direct labor costs associated with the ramp up of Essington, PA manufacturing facility.

The company’s consolidated operating expenses were 10.0% of revenue or $11.6 million for the nine months ended September 30th, 2008 compared to 11.3% or $9.5 million for the nine months ended September 30th, 2007. The change in dollars, reflects the decrease in stock based compensation expense of $1.4 million, as a result of the stock option modifications affected in the fourth quarter 2007, offset by an increase in employment related expenses of $0.8 million, transaction cost of $0.6 million, legal expenses of $0.5 million, marketing expenses of $0.5 million, related party stock based compensation of $0.3 million, depreciation expense of $0.3 million, lease expense of $0.1 million and general overhead of $0.4 million.

Net income for the nine months ended September 30th, 2008 was $42.5 million or $0.88 per diluted share, versus $2.7 million or $0.06 per diluted share for the nine months ended September 30th, 2007. Diluted earnings per share before non-cash benefits and expenses for the nine months ended September 30th, 2008, was $0.30 per share compared to guidance for the full year 2008 of $0.23 to $0.27.

In regards to the balance sheet, our working capital was up $9.5 million from the beginning of the year, funded mainly by cash from operations, accounts receivable increases outpaced our increases in inventory, and accounts payables at our customers' prices and price actions taken in the later months of the third quarter. The company anticipates working capital to decrease significantly, as sales decreases are expected based upon estimated customer volumes in the fourth quarter 2008. The decrease in working capital needs to generate significant cash flow, of which the company expects to pay down debt.

Total debt was $26.3 million at September 30th, 2008 compared to $30.8 million at December 31st, 2007. The decrease in debt is due to payments on long term debt of $3.0 million, and payments on the company's line of credit facility of $3.0 million, offset by additional borrowings from the company, underlying a credit facility of $1.5 million, to purchase fixed assets from working capital.

Our leverage ratio continues to improve due to lower debt and increased profits. For the nine months ended September 30th, 2008, the company's leverage ratio was 1.4 times, compared to a bank credit facility requirement of 2.8 times. For the nine months ended September 30th, 2007, the company's leverage ratio was 3.0 times, compared to the bank's requirements of 3.3 times. The company’s leverage ratio is calculated as total debt less related party holding of $2.5 million to EBITDA on a trailing 12 month basis. The company's interest rate was 5.0% as of September 30th, 2008 and is expected to drop significantly in the fourth quarter, as a result of the improved leverage ratio and recent reductions in the LIBOR and Federal prime rates.

The company’s revised anticipated full year 2008 financial performance (inaudible), revenues of approximately $130 million to $140 million to $135 million to $145 million, representing approximately 23% to 32% increase in growth from 2007, with fully diluted earnings per share of approximately $0.86 to $0.89.

Fully diluted earnings per share before non-cash benefits and expenses of approximately $0.29 to $0.32, which excludes non-cash benefits and expenses are approximately $27.6 million or $0.57 per share.

Working capital is expected to be reduced by $6 million to $8 million in the fourth quarter of 2008, and we anticipate reducing debt by $4 million to $5 million in the same period. Capital expenditures for the full year 2008 are expected to be approximately $0.9 million.

Al Weggeman

Great. Thank you, Jon. I'd now like to open the discussion to any questions.

Question-and-Answer Session

Operator

Certainly. The floor is open for questions. (Operator Instructions). First question comes from Ed Einboden.

Ed Einboden - William Smith

That Ed Einboden from William Smith. Great job everybody.

Al Weggeman

Good afternoon Ed.

Ed Einboden - William Smith

Great job everybody. Just couple of questions. I was kind of hoping to see what you guys could add some color as to the overall credit environment and how you've seen that affect business and your competitors, and I guess what kind of relationship that you are holding with your customers to really see how that’s affecting their business before, and adding some visibility, I guess.

Al Weggeman

It’s a good question. I think, as you look at each of the end markets that we are in, it’s probably different answer to it. But if you were to look, as an example, take the crane market segment where funding credit typically drives construction work on a long cycle basis, so typically a project for years out. They receive financing.

I think the one item of note that came up recently as an example would be [I feel] Las Vegas there is project called the Echelon Hotel, and I think due to credit or financing that was postponed. So, you see some of that coming through. But, I think again, in the crane segment, it’s pretty much a longer environment, so the impact is probably less.

As you come down to shorter cycle businesses like the aerial work platform business, you tend to see credit used by the channel as they acquires equipment whereas as the customers are funding growth in their business to credit. So, some of that has started to bleed through a little bit on the customer side and I think they have articulated that pretty well in their conference calls and earning calls.

From our standpoint, and Jon to speak more of a credit risk if there is any, but we tend to follow very closely on our side and the receivables side and tend to look very closely at our customer base to understand their credit situation to make sure that we don’t get caught on that part of the equation.

From a deal standpoint, I think the credit markets, they are still tight, but again, I think financing is available. And as we have continued to look at a variety of deals and had discussions with different institutions as a part of that process, we remain comfortable that there is financing available.

Ed Einboden - William Smith

Okay, great. And I guess, you spoke and alluded to an outlook that could be optimistic in infrastructure and roads and buildings here in the United States. Looks like South Korea, Japan and China have even had talks about distributing a significant level of funding to their infrastructure as well. Does that bolster your outlook over the coming years or are you kind of looking sort of near term, and that kind of offset that?

Al Weggeman

Yes, it is probably more difficult at this point to factor in that type of spend only because it is still in the discussion phases. And I think with the new presidency coming in, there has been numbers throwing out, and I think it has ranged from maybe 100 billion to 200 billion of new spend for infrastructure-type projects, bridge rebuilding, roadwork et cetera. And that was certainly, I think, bodes well for our crane builders, aerial work platform companies et cetera.

So, I think if the new administration determines that fuller employment is a high priority and that reenergizing the economy is a high priority, I think that is a good probability that will happen. I think no one really knows from a crystal ball standpoint exactly what will happen. But I think if somewhere around the second half of next year that starts to get implemented, I think that would be a reasonable timeframe to start looking at. But I agree with you, I think it's exciting to hear that there is discussion towards that spending that would be great for our business.

Ed Einboden - William Smith

And then I guess just lastly when your competitors had come out or there was quite a larger place that states into the talking about flowing back the production in order to more stabilize what's out there in a channel and pricing. Can you talk about how you view that decision and how that affects your business?

Al Weggeman

I am sorry. Could you repeat that a little bit? I wasn't sure what the question was?

Ed Einboden - William Smith

Sure, sure. I guess, (inaudible) came out and mentioned that they are reducing some production in order to coming short-term and I was just wondering how you guys do that, as it’s affecting your business and the overall environment being just supporting pricing or does that just kind of help the industry itself in getting some inventory out of the channel?

Al Weggeman

Yeah, I think it would help the industry certainly because it would stabilize the steel pricing and even the scrap markets to have someone come out and start working towards a better supply-demand balancing. And so, your comment is right that is, if you look at the historical capacity in the mills, I believe it was somewhere around 90% and the most recent date that came out I believe [the motor] took that down to almost 70% and are either taking down supplier closing, I believe the number is somewhere around 14 mills. So, yeah, from our standpoint, I think that would be good if it would stabilize steel pricing and allow for I think a better pricing structure and more predictable business environment.

Ed Einboden - William Smith

Okay, great. And great job on the quarter guys.

Al Weggeman

Okay. Thank you.

Operator

Our next question comes from Tom Martin. Tom, please state your question.

Tom Martin

Hey Al. How are you?

Al Weggeman

Good, Tom. How are you?

Tom Martin

I am well. It looks like you guys have really good control over the business now in a really tough environment and alike, and hope that you’ll find a really good acquisition here shortly, given that prices have come down so somewhat. But I did want to talk to you about a really topic and that looks like the lifting of the stock. And so, I figured as a shareholder, this is probably a pretty good time to do it.

I did just a little bit of work the last couple of weeks on those companies that were listed. And I do want you guys to understand that at this point our revenue at Stamford is larger than [technical spin] of all of all the companies slate on the NASDAQ. There are about 3,000 companies on the NASDAQ. And our revenue is larger than like 1500 above. And then on the AMEX we’re larger than like 70% of all the companies on the AMAC. And on the pink sheet, it’s really hard for us as the shareholders to have a stock that’s on the pink sheet. I looked at that today, I believe, but there are like 900,800 companies on the pink sheets.

We’re larger on revenues at every company set for 50 of those approximately 10,000 companies on the pink sheet. And of those 50 a large number of those the companies did have to file bankruptcy and got knocked down. So, if you really knock it down, they’re very few companies on the pink sheet that are anywhere close to the size of like our company. And I just think that you did spend a lot of scrap [component] to be in there.

I know it’s a difficult time for our stock trading and alike. But for Stamford to still be on the pink sheet, we just really way outclass almost any company in there. And I hope you guys are really focused on this, and try to come up with the solution that will work with the company and with its shareholders.

I think it’s fair to the business. You’re doing a very good job. If you can get some acquisitions here, it would be really wonderful.

Al Weggeman

Okay. Thanks Tom. I appreciate that. And to comment on it, it is a high priority for us and it remains very visible to us. And I think as I’ve commented before, the balancing act of timing of that really is in the context of whether deal is on the table, let’s say, in a shorter term period. Really, I was trying to balance between do we do this in the context of a deal, do we do it without that. But the point is very well taken and it does remain on our radar as a priority. And actually, I appreciate that data by the way. That’s helpful enough.

Tom Martin

Yeah, okay. All right. Well, thank you so much.

Al Weggeman

Thanks Tom.

Tom Martin

Okay.

Operator

The next question comes from David Weinberg. David, state your question.

David Weinberg

Hi guys. Nice job in the quarter in a tough environment. Just wondering, as far as the work stoppage, could you just tell us what kind of financial savings you estimate that that will have as we move forward?

Al Weggeman

We are still in the process of having those discussions along with different terms and items within potential new contracts. But at this time, it will be premature to really share that information. I think the only comment that I would make is we are working hard to try and get resolution on it. At this point, we believe that in the business we have all the resources necessary to continue to operate the business to our guidance with the assets that we have.

David Weinberg

Okay. That’s great. Nice job.

Al Weggeman

Thank you.

Operator

At this point, in the room, we have no further questions.

Al Weggeman

Great, well. Again, I would like to thank everyone for their participation in this afternoon’s call. And also, again, I sincerely thank Paul and his team, as well as the conference team for their contribution. Thank you.

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Comments

[lfc1994:]

Great company that is managed well and doing everything right, right down to stockpiling inventory in the chance of major hold-ups in the negotiations with labor for the Warren, Ohio facility. The problem is a tree falls in the woods but because its so under-followed nobody hears a sound. They need to make a major acquisition (since they held off for SO long in doing so and now are in the catbird seat in terms of negotiating terms with a target) and then list on the NASDAQ so that people notice just how well managed they are!

2008 Dec 08 02:30 PM