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Robbins & Myers, Inc. (NYSE:RBN)

F1Q09 Earnings Call

January 8, 2008 10:00 am ET


Peter Wallace – President and Chief Executive Officer

Christopher Hix – Vice President and Chief Financial Officer


Kevin Maczka - BB&T Capital Markets

Tom Brinkmann - BMO Capital Markets

Jeffrey Hammond - KeyBanc Capital Markets

[John Moore] - Robert W. Baird

John Franzreb - Sidoti & Company

Bo McKenzie - [Lafayette Capital]


Good day, ladies and gentlemen, and welcome to the Q1 2009 Robbins & Myers earnings conference call. My name is [Keisha] and I will be your operator for today. (Operator Instructions)

I would now like to turn the call over to Peter Wallace, President and CEO. Please proceed, sir.

Peter Wallace

Thank you and good morning. Again, I'm Peter Wallace, President and CEO of Robbins & Myers. Chris Hix, our Chief Financial Officer for the company, is joining me on the call this morning. We are pleased to provide an update on our fiscal 2009 first quarter performance.

During this webcast we will report on the financial results for the September through November time period, discuss the business environment and future prospects, provide segment-level information and comments relative to primary markets, and communicate our primary objectives for the coming year.

Following my initial comments, Chris will take you through a detailed review of our financial performance, working capital changes, and changes in our balance sheet. We will open the phone lines to address your specific questions following our prepared comments.

Slides are also available online at the R&M website if you're not following on this online presentation.

Take your attention to Slide 1, which is our cautionary statement, which should be noted in these more challenging economic times. You should understand this presentation will contain forward-looking statements. Actual events and results may differ from those described in this presentation due to significant changes in capital expenditures in our primary markets, including chemical processing and pharmaceutical, major changes in the price of oil and gas, changes in foreign currency exchange rates and more.

We also refer to various non-GAAP measures, such as earnings per share excluding special items, as we feel they are helpful to investors in assessing our ongoing performance.

Please refer to our slide entitled Cautionary Statement Concerning Forward-Looking Information for additional comments.

Now advance to Slide 2, where we'll have a few comments on the first quarter. We had a very healthy Q1, with sales and orders up on an organic basis. Profitability was very strong, with an EBIT margin of 14.8% or 140 basis points ahead of the same period a year ago, and cash flow showed a marked improvement over the prior year period.

During the quarter, we purchased slightly more than 2 million shares for $39 million and we feel these were made at attractive prices. On Tuesday of this week we announced that we have increased our dividend to $0.04 per share for the quarter, up about 7% from earlier period. In spite of the share repurchase program and dividend payments, we continue to be underleveraged with a net cash position.

The only negative in the quarter was that we began to experience some slowdown in order rates at the end of the quarter, and we have seen a slowdown in quotation and inquiry activity at some of our units as well. However, we have continued to see strength in demand for our energy related products. Like the other companies you most likely follow, we are watching the markets closely to determine the best way to respond to changing market demand. We will discuss this a bit more in a few minutes.

At the end, you should have confidence that we are a much-improved business that can weather some headwinds and make the most of the challenging market environment.

Turning to Slide 3, you will note reported orders were down in the quarter due to the strengthening U.S. dollar, but were up 4% on a constant currency basis. Sales were up 3% in the quarter or 6% organically, and in spite of fairly strong headwinds from currency, our backlog grew $10 million on a year-over-year basis. A healthy backlog should support shipments in the near term.

Please turn to Slide 4. Profit margins in the quarter were strong. We improved 140 basis points to 14.8%, driven by strength in our Fluid Management Group. Process Solutions saw a slight drop in profitability, but was close to double-digit for the quarter. And Romaco went to a loss position in the period driven by lower sales volume. We will discuss the segment details in a few minutes.

Diluted earnings per share for the quarter improved to $0.50, up from $0.40 in the prior year period. Cash flow in the first quarter has historically been negative in the first quarter as the units release payments to vendors and make the year end bonus payments. This year was a much better situation as we were able to hold cash flow neutral from year end levels, which is about a $6 million improvement from the prior year. It is clear that improved functional disciplines and tighter controls are paying dividends.

As you can see now on Slide 5, we have continued to make progress. The trailing four quarters of adjusted EBITDA, which we define as EBIT less restructuring costs and the gains and losses on asset sales, has continued to move upwards. We are proud to report $141 million in adjusted EBITDA delivered in the trailing four quarters. The first quarter of 2009 fiscal year had EBITDA of $30 million, which represents a 14% year-on-year improvement.

Moving on the Slide 6, we should note that the worldwide financial crisis is beginning to impact our industrial businesses. Order rates, inquiry levels, and quotation activity have slowed in the last two months. During the quarter, the Fluid Management Group was up due to strength in energy markets, but experienced weakness in the municipal and industrial markets. Orders for Process Solutions were positive in the quarter, but were driven by some larger projects in Europe. Beyond these larger projects, the underlying activity has declined in both chemical and pharma markets. And Romaco has had lower demand, seen in both the incoming order rates and the shipments.

Many of the large chemical companies have announced plans to reduce their work force, close or idle facilities, and these changes will ultimately have an impact on projects that may have been planned, but can still be cancelled. We do feel there is no exposure with our current backlog of business, but the project activity will be lower in the back half of the year.

Our business managers in the pharma and packaging side of the business remain somewhat optimistic that many projects will still be funded; however, the weakness in booked orders in the first quarter is of concern. We are tracking these projects and will be prepared to adjust plans if the weakness continues.

Municipal spending has also been off, although we have seen a stronger level of customer quotations during the last month. All in all, we are now facing what other companies have faced. With so many industries struggling or having credit issues for such a long period of time, it has finally caught up to us.

A very bright spot is the continuing performance of our Fluid Management Group and, in particular, the energy part of the business. We will have more on this in just a minute.

As a leader in many of our primary markets, we are well positioned to go after new business. We are in great financial position and will be able to pursue incremental business as opportunities arise. The markets seem to change week to week, and we will be even more diligent in adapting to the challenging environment.

Turing to Slide 7, you will see that we are implementing some contingency plans to shore up profit levels in lieu of the softer demand. Our managers are experienced and have been through market cycles before. We will do the obvious, such as curtail hiring, review capital spend plans, and work to minimize overtime costs. There are normally some expenditures that can be deemed discretionary, and we will take a very hard view on these investments. We will also work with our supplier partners to find ways to reduce costs, and we will take advantage of the lower commodity prices in steel and energy to control our overall cost situation.

Beyond the first level cost reductions, we are also evaluating our structure to make sure we have the optimum footprint to serve our customers. There may be opportunities for future facility consolidations.

However, I also want to mention that we have an extremely strong balance sheet that will allow us to continue funding smart projects that will drive future growth. We will work to protect profitability, but we'll also continue to fund strategic investments that will allow us to come out of the cycle stronger than others.

Now on Slide 8 you will see that the Fluid Management Group had another great quarter. Orders were up 2%, but were up 8% excluding the currency impact. This strong year-over-year performance was driven by demand for energy products, while the industrial and municipal markets were somewhat lower.

Sales were up 14% or 18% organically. It should be noted that while drill rig activity has come down a bit due to the lower oil and gas prices, one of our key product lines is used primarily in horizontal and directional drilling, and this particularly rig activity has fared much better than vertical drilling. We've also had further success with some of our key accounts and have been able to take some market share with key players in the industry.

Profit levels were fantastic with an EBIT margin of 30% in the quarter, a full 450 basis points ahead of the prior year period. This performance was driven by a favorable mix, higher volume, and price management programs.

We are a leader in the industry, and we'll try to use our position to capture new market share.

Moving on the Slide 9, you will see that orders for Process Solutions were down 4.7%, driven by the effect of the stronger dollar, principally against the euro. Excluding the currency impact, orders were actually up 6% in the period. The order strength was driven by major European orders in the chemical sector.

As mentioned earlier, we are watching the order and project activity closely. We have seen a reduction in inquiries, but there remain some large projects that appear to be still active.

Sales in the quarter were up 2% or 4% organically. We continue to have good backlog levels that have supported the sales increase.

EBIT margins declined in the quarter due in large part to a change in mix. Our Asian businesses have seen an increase in alloy vessels versus glass-lined vessels, and this contributes to the profit change. In addition, some of the units had excess inventory, resulting in higher steel cost relative to current pricing.

We have taken action on several fronts to address the more difficult period expected in the second half of the year. The business remains focused on delivering profit levels in spite of slower demand.

Moving on to Slide 10, Romaco was the disappointment for the quarter. During the fiscal 2008, we demonstrated that this group can deliver reasonable profit levels, but we were caught with lower than anticipated shipments in the first quarter. Orders were off 21%, driven by the strengthening U.S. dollar. The business is mostly conducted in euros and on this basis the order rate was off 8% - better, but nothing to be feeling great about.

On a similar note, sales were off 23% or 17% organically. The lower sales were the primary driver for the business showing a loss in the most recent period.

During the quarter we incurred a $500,000 expense to restructure our sales organization in the U.K., and this should be recovered with savings throughout the balance of the fiscal year.

We are actively pursuing major project work that has been identified as the variable contribution margin for this business is now very attractive. While we do this, we are also moving forward with actions to reduce our costs should the weaker demand experienced in the first quarter continue throughout the year.

On Slide 11 I have identified the primary areas of management focus for fiscal 2009. You will note they have not changed much from the prior year and we feel the consistency of our message is a real strength.

We continue to make strides with the implement of lean, but those that follow the lean journey understand that this process never ends. There are many opportunities for us to remove waste, improve cycle time, and react faster to changing customer requirements.

Key account management will become a cornerstone of our business. We will differentiate ourselves with more than products. We will strategically align ourselves with the major players in the market that can make a difference.

Each of our businesses have introduced new products. We are becoming much better at identifying those projects that should receive funding. Our customers expect us to continue delivering a solution that will allow them to improve productivity with their operations and acquisitions will hopefully be a part of our growth. We have a balance sheet that supports acquisitions and even though this may be a difficult time to close deals, we are pursuing some possibilities at this time.

With the changing market, we are looking at all aspects of our cost structure, organization structure and more. Overall, we are running with our strategy in place by responding to the market challenges in a prudent manner.

Slide 12 summarizes some of the comments that I have already made throughout the presentation. We have a healthy backlog that will serve us well in the short term, but feel the second half will come under more pressure until liquidity and confidence is restored across the world markets.

We have planned on currency to be at the rates as of the end of our first quarter - at the end of November to be specific. Our earlier guidance for the year indicated that our capital spend would be approximately $25 to $30 million, and with a lower expected demand, we will most likely scale this back to something closer to $20 million.

As you will see on Slide 13, we are providing new guidance for the fiscal year, now guiding to $1.80 to $2.00 per share for the year. This contrasts to $2.52 in the prior year or $2.17 after adjusting for one-off and special items.

For the second quarter we are forecasting diluted earnings per share of $0.40 to $0.50. It should be noted that the forecast accounts for the approximate 2 million shares purchased to date, but does not factor additional purchases during the remainder of the year.

Moving to Slide 14, I would like to make some summary comments. We are continuing with our successful programs around lean implementation and key account management programs. We have made progress, but there remains much more to be accomplished. Our balance sheet is in terrific shape and will support both organic and strategic growth initiatives. We have remained attractively positioned, with leadership positions serving primary markets in energy, chemical and pharma, and we have assembled a capable and experienced management team that will work to create long-term shareholder value.

With these opening comments, I will now turn the presentation over to Chris so that he can walk you through some of the financial highlights. Chris?

Christopher Hix

Well, thanks, Pete. If everyone will turn to Slide 16, I can begin my prepared remarks.

Orders decreased and sales increased on a nominal year-over-year basis in the first quarter, and once you strip away the significant impact from currency translation changes - something we will discuss in more detail in a moment - you can see that orders and sales both increased modestly in the first quarter.

Enterprise organic growth was led by improvements in our FMG and PSG businesses, offset a bit by a decrease in our Romaco business.

Backlog grew during the first quarter as orders exceeded sales in each segment. Compared with the prior year, backlog is $9 million higher. Excluding the impact of currency, backlog would be $34 million higher than the prior year and would also have been sequentially higher than last year's fourth quarter.

During the first quarter we also made strides in gross margins with positive momentum from 2008 extending into the new fiscal year. You will recall our discussions over the past few quarters regarding pricing, improved operational execution, and sharpened analysis and control. The company again demonstrated the benefits from these actions in its first quarter, along with favorable mix, expanding gross margins year-over-year by 200 basis points to 38.2%.

We were able to leverage these improvements in sales and gross margins into greater profitability, increasing EBIT margins 140 basis points to 14.8%. If you strip away the currency effects, the flow through on our organic growth was about 30%, consistent with general expectations of 30% to 40% across our businesses.

EPS grew $0.10 year-over-year to $0.50 in the first quarter, benefiting from higher operating performance and about $0.01 from a lower tax rate and another $0.01 from reduced interest expense as a result of the repayment of $70 million of senior notes in May of 2008. We did not receive any share repurchase benefits to EPS in Q1 due to the late timing of the purchases in the quarter.

Let's turn to Slide 17 to further discuss recent currency changes. The three charts across the top of the slide represent the amount of U.S. dollars that could be purchased with a euro, a British pound and a Canadian dollar from September 2007 through the end of our first quarter, November 30, 2008. These three currencies are our principal non-U.S. operating currencies. For our 2009 plan and guidance, we used the exchange rates as of the end of fiscal 2008, that is, at the end of August. These rates are reflected on the charts as a red dotted line.

After setting these rates, the currencies experienced significant devaluations with respect to the U.S. dollar, 14% to 16%. The result was lower translated sales and profits in Q1 from our nonU.S. entities. It's important to note that every 10% change in exchange rates relative to the U.S. dollar with our current mix and level of business is expected to create an annual $0.12 EPS impact. For the remainder of the year we have assumed the end of November exchange rates. With the euro recently strengthening against the U.S. dollar, perhaps the currency impacts will moderate.

If you turn to Slide 18, you will see that current assets decreased year-over-year from $285 million to $264 million and current liabilities decreased from $174 million to $154 million, both significantly impacted by currency exchange rates. We can remove the bias from currency and look more closely at core performance by examining the ratio of net working capital to annualized quarterly sales. Under this measure, we improved from 16% in the prior year to 15.4% this year, driven largely by improved customer collections activity, offset a bit by increased inventories and lower payables.

Given the changing economic picture, the improvements we've made in cash flow management over the past two years should serve us well in a more uncertain environment.

Please turn to Slide 19. Earlier Pete mentioned that we managed to keep cash flow from operations neutral in the first quarter of this year versus consuming $6 million of cash in the first quarter of last year. That enabled us to end the quarter with $74 million of cash, which also reflects the $39 million that we invested during the quarter in share repurchases. We also ended the quarter with very little debt, principally $30 million of senior notes due in May of 2010. Our senior credit facility remains undrawn and is available until December 2011.

In short, our balance sheet is strong and Robbins & Myers is positioned to weather choppy economic conditions.

That concludes my remarks. Pete, back to you.

Peter Wallace

Operator, I think we're now ready to open the phone lines for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Kevin Maczka - BB&T Capital Markets.

Kevin Maczka - BB&T Capital Markets

I just want to ask my first question on the guidance. Pete, you mentioned that visibility is kind of a week-to-week thing anymore, so I'm just wondering, as you look out to this $1.80 to $2.00 for the full year, can you give a little more color on how you arrived at that, kind of what's baked in there, maybe what a scenario would be to make the high or low end of that, if it assumes that trends kind of continue at the pace they are now or do you really need something to improve going forward to hit those numbers?

Peter Wallace

Actually, the forecast would suggest that we're expecting a slower demand, slower revenue in the second half versus the first half. And this is really impacting us mostly at this point in time from the industrial markets, industrial mixers or chemical operations for municipalities and things of that sort, some lower demand or activity in quotations and inquiries in the chemical sector pretty much across the world. Asia continues to be fairly strong, but Europe and North America are slowing down. So we factored in all of these types of activities into our analysis.

We've done a very deep review with our operations; we've taken a look at all of their views. They have a number of projects that have been identified and, to be honest, we've taken a management view and curtailed those aspirations a little bit as well. So admittedly we might be a little bit conservative, but I think we're being prudent given some of the recent activities across the marketplace.

Within the energy sector, which has held up very well throughout this whole period, we've also been somewhat cautious in our outlook there as well, expecting that ultimately lower gas and oil prices will translate into some reduction in demand, and we factor that into our guidance as well.

So to answer your question, to go ahead and reach above the guidance that we've just now put out, if we were to have conditions remain as they have been for the first quarter, I mean, we would certainly do much better than what we have suggested for the full year guidance now.

Kevin Maczka - BB&T Capital Markets

And then in the energy business, can you just remind us what the aftermarket mix is there and also what percentage of that business is more tied to things like new rig builds versus the ongoing production at existing rigs?

Peter Wallace

Just to refresh everybody, first off, we generally have a mix that would be in favor of oil versus gas. We are involved in both the exploration activity, which is driven by both gas and oil drilling activity. That activity is focused most in the North American marketplace and gas drilling activity is the larger portion of overall exploration activity.

That's a key part of our business and you might find something closer to about 30% of our energy segment activity tied in with exploration. The balance would be more on the recovery side, for the [inaudible] pump activity for all the products around the wellhead and so on and so forth.


Your next question comes from Tom Brinkmann - BMO Capital Markets.

Tom Brinkmann - BMO Capital Markets

I just wanted to know about the order trends you've seen. Have they sort of accelerated recently or have they stabilized by segment, you know, in December and early January?

Christopher Hix

I'd say November was a weak month for us. September and October came across fairly well. I think in the press release we had signaled that some larger European projects supported our Process Solutions business for the first quarter. We saw demand drop off in November. I'd say in December some of that weakness has carried on.

On a year-over-year comparison, it's always difficult because we tend to have some major projects that will come and go, but the part that we're really reflecting in our guidance would be more along the lines of the inquiry activity, the projects that have been identified, and just some of the recent announcements from some of the major companies, principally in the chemical sector.

Tom Brinkmann - BMO Capital Markets

And speaking of the chemical sector, especially the PSG segment, over what timeframe do you expect those large chemical orders to be recognized and about how much of the quarter orders did they account for?

Christopher Hix

I'd say the projects - these were multimillion dollar projects; you're looking at projects that will be in the area of $5 million - these would typically be recognized either throughout the course of the fiscal year or, with projects that are over $1 million in size, we will recognize purchase accounting, you know, percentage of completion. So we will recognize some benefit throughout the course of the fiscal year in any event.

Tom Brinkmann - BMO Capital Markets

And those margins would you expect to be high or low relative to the segment average?

Christopher Hix

Actually, the margins on those projects should be fairly attractive. We had indicated in earlier conference calls that the competition had heated up a bit in Europe, principally in the area of our glass-lined reactor business, and we had lost some orders. Basically, they did not meet our profit margin requirements. These other orders that have come in, the ones that we've booked in the first quarter, were ones that did meet our requirements and therefore should be fairly attractive for us.

Tom Brinkmann - BMO Capital Markets

Do you expect any additional restructuring charges in Romaco in 2009 or any other segments for that matter?

Christopher Hix

Nothing that we will be calling out. We tend to do a little bit of tweaking here and there. We just take those as expenses throughout the course of the year. The one item that was noted was the closure of our U.K. sales center, which we think will be a plus for us. We've been able to work out some agreements with some other distributors that serve the primary markets with us, and it should actually help us with our sales and reduce some of the ongoing costs, really put it into more of a variable cost, so we pay it - sales expense - as we book the orders.

Tom Brinkmann - BMO Capital Markets

You talked about how you're still seeing some strength in energy, and I'm wondering about FMG. For the overall industry, have you seen a push out of capital spending from energy customers in response to the decline in oil and gas prices? You guys maybe have just seen a benefit, I guess, sort of some strength within that?

Christopher Hix

Actually, we've not seen any push out at this point in time. We all read the papers. We take a look at the changing forecast for some of the major players in the industry, the contractors and so on and so forth. There's been suggestions that capital will be cut tremendously. We have not really seen any of that.

Again, we're favorably positioned, one, with our leadership position, and two, with the specific niche markets that we're playing in, specifically the horizontal and directional drilling activity which would support a lot of our power section sales. And then as a leader, as demand sort of slackens up, we now have the opportunity to go after other business, and we've been able to capture some share of market. So it's all worked out fairly well for us.

But we've not really seen any impact with push outs in the energy space. In the industrial area, we've just seen slower demand, principally coming from municipal spend as well as some of the industrial area, which would come back to primarily chemical markets.

Tom Brinkmann - BMO Capital Markets

You talked about the driver of the nice margins at FMG, and I think you said the order of those were mix, volume and price management programs. Are those I guess in order of the biggest effects and is the level sustainable that you have in margins?

Christopher Hix

I'd say that we're up at very frothy levels when you get up to 30%. In the past we've signaled that you should expect this business to range anywhere from 20% to 25%. With some of the work and the consolidation and all the good work that the team has done, we can raise that up. But at 30%, we're really up at the high end of what I would expect in any one quarter going forward.

We've had good activity principally in the exploration side of the business. Power sections have done well; we're a leader in the industry. And we've got some new products in the market that really allow us to improve profitability and efficiency for our customers. They've been well accepted. All that is driving some of the success.

So I'd say in the future, I think to be prudent what we're doing in our planning is we're forecasting a little bit less profitability than what we experienced in the first quarter.


Your next question comes from Jeffrey Hammond - KeyBanc Capital Markets.

Jeffrey Hammond - KeyBanc Capital Markets

I just wanted to hit the share repurchase. Obviously, you guys got pretty aggressive this quarter and certainly the stock seems to be a little bit below your average price. And you certainly have capacity on the balance sheet. So how are you thinking about the reminder of your share repurchase authorization?

Peter Wallace

Quite honestly, at this price level, we're interested, however, we do have several other possible uses for cash coming up, and given the uncertain market environment out there, we want to be very conservative with our cash position. So we have the authorization from the Board to go ahead and purchase up to another 1 million shares. We'll probably go slow on that and see how some of the other strategic acquisition discussions pan out. Depending on how that goes, we may or may not enter in the market for the remaining 1 million shares.

Jeffrey Hammond - KeyBanc Capital Markets

And then just shifting over to Romaco, I mean, you guys have made a lot of changes to that business. It seemed to have been making nice progress and turning the corner in terms of profitability, and now it's kind of turned on a dime here. I'm just wondering how are you thinking about this business strategically in terms of it being a core or non-core asset.

Christopher Hix

First off, just on the performance, while we're disappointed with the loss position for the first quarter, if you take a look at the volume decline a year-over-year basis, you'll find that the drop through contribution, that actually held fairly well. So I think the cost structure that we've got within the business will serve us well. We obviously have some things to do if the markets continue to be at this lower level, but I think we've done a lot of good things and shed ourselves from some of the other parts of the business that were really underperforming and draining the company in the past. So I think we've got a much-improved business.

As to the long-term future, we remain with our same comments there. We're out there to continue to improve the business. We'll remain flexible with our strategic options in the future. But our point at this point is just going out and making the business more valuable for us.

Jeffrey Hammond - KeyBanc Capital Markets

Would you expect the magnitude of the revenue declines to hold at this level, get worse, not be as bad going forward? I mean, do you make money in this business in fiscal '09?

Peter Wallace

If the revenue were to stay at these levels, we'd have to do some further cutbacks in some of our cost structure.

When I take a look at the communications coming from our business units, our feet on the street if you will, the pharma sector continues to remain healthier than maybe the food sector, where we've seen capital expenditures being cut or canceled in food, which is a very, very small portion of our activity.

In the pharma sector, most of the word coming back is the projects have been delayed. We're hopeful that these are just delays so that we still have good viable projects; they've got justification for the funding to go forward, some of the liquidity issues that may be curtailing some of the actual orders to be placed at this point in time frees up in the second half of the year. All those things would give us some confidence that we're at the low point and we should see some strengthening as the year develops.

Jeffrey Hammond - KeyBanc Capital Markets

And then a couple of housekeeping items. How should we think about corporate expense for the year and tax rate?

Christopher Hix

On the tax rate, I think what we experienced in the first quarter; it's our view that we should be able to maintain it right close to that for the remainder of the year. So I think that's a good going forward assumption.

And, sorry, what was the other part of that?

Jeffrey Hammond - KeyBanc Capital Markets

Corporate expenses.

Christopher Hix

The corporate expense line, that tends to bounce around a little bit, and I think if you look at this quarter and the last few quarters, that gives you sort of an average that you can utilize going forward.


Your next question comes from [John Moore] - Robert W. Baird.

John Moore - Robert W. Baird

Just within the energy business, it sounds like the power section's product line primarily drove the performance this quarter. I was wondering about the drilling pumps. Did you guys see noticeably weaker volumes in your drilling pumps this quarter versus the fourth quarter?

Peter Wallace

No, actually we had strength across all of our energy products. We had a little bit of an improvement with the power section mix, which drives up the profitability, but I'd say energy across the board was very strong.

John Moore - Robert W. Baird

And then last quarter you stated your guidance was roughly based on the expectation that rig counts would be roughly flat in '09. I guess can you just talk, Peter, a little bit about your expectation for rig counts in 2009 today?

Peter Wallace

I'd say based on everything that we're all picking up and where the commodity prices are today, both gas and oil, we suspect that the rig count will come down. We think that the directional and horizontal will continue to fare better than the vertical activity, but everything that we're picking up of late would suggest that even the sectors that we participate in will be under some pressure. And that's pretty much baked into our forecast there, John.

John Moore - Robert W. Baird

And then just quickly on Process, can you give us an idea or I guess discuss a little bit more about what level of operating margin you think is sustainable in this business in a recession just given the improvements you've made here in the last few years?

Peter Wallace

Well, we've been trying to restructure the business so that throughout the course of the business cycle we'd be in the area of 10% to 15%. Obviously, we fell a little bit short of that this last quarter. We have some further work to be done and the group is taking on those in the way of their contingency plans and actions as we speak.

So we do plan to go ahead and get in there and manage the business aggressively and, quite honestly, I'd be disappointed if it's not double-digit, if it's not close to those kinds of levels as we go throughout the course of the year.


Your next question comes from John Franzreb - Sidoti & Company.

John Franzreb - Sidoti & Company

Peter, you touched a little bit on the pricing environment in Process. You said you walked away from some jobs previously and got some good jobs now in the backlog. Can you kind of review with the pricing what the competitive landscape is in Fluid and Romaco?

Peter Wallace

Both of the areas, well, first off, on Process we've done the good work that you mentioned. We've been able to get our pricing up. We've got a better discipline in there. We understand more of our overall cost structure, so we're being smarter when we go in and we take jobs.

In Process as well as Fluid Management, we're seeing some reduction in some of the key commodity areas. For us, the key commodities would be either purchased machine parts, it would be castings, and it would be some of the other commodities such as gas and energy costs as we get into some of our furnaces for the glass-lined reactor business. We're seeing some reduction in those which should help us. The key question always is just how much of that can we hold onto and how much goes back into the market. We're confident that we'll continue to hold and margin should stay up quite nicely.

Within Fluid Management, the same issues. Right before the industry hit the skids, if you will, we went out with price increases. Those increases remain out there, so we've not had any need to really go back and pull them back. We're taking a hard look continuously at whether or not we're losing business because of our price increases throughout the course of the year, and at this point in time, that does not appear to be the case. So we're holding with that and hopefully we're going to take advantage of some lower commodity costs throughout the course of the year.

John Franzreb - Sidoti & Company

Now, regarding your spend for the year, you've pulled it back rather meaningfully. Can you talk about what projects you've deferred or canceled, give us a little color there?

Peter Wallace

Some of these would be really around the Fluid Management area, which would be a key area. In the past we've signaled that we were starting to run out of capacity in our planning for 2009 and 2010, and we've brought in some equipment. And in fact, we did bring in some equipment that was critical to even our current demand.

But as we take a look at our forecast going out into the future years, there's some things that we can push back a little bit without jeopardizing any of our planning for 2009 and really going into 2010.

We're fortunate we don't have a situation where we have to make a lot of these capital cuts. We're really doing it more in response to the market conditions that we're now forecasting.

John Franzreb - Sidoti & Company

You also seem to have signaled that acquisitions are still on the table. Can you just talk a little bit about that?

Peter Wallace

Yes. We're cautious, like a lot of people; we take a look at it. And everyone's trying to wonder how do you value businesses, even the markets valuing Robbins & Myers today. It's sort of strange, the period that we're in. We don't want to go out and pay very high multiples for other businesses when we're trading at a very low multiple ourselves.

And yet having said that, there are certain opportunities that come. We have relationships that have been established and things have progressed. And we've got ways to value things, either with more creative means in the terms and conditions, things with buyouts or earn outs as we take a look at some opportunities. So we think we can go ahead and protect the shareholder value as we take a look at some of these acquisitions.

The ones that we're looking at at this point in time would be focused more in either the Fluid Management or the Process Solutions end of the business.

John Franzreb - Sidoti & Company

Are they still the revenue range you were talking about in previous quarters?

Peter Wallace

The revenue range would be less than $100 million apiece; probably about half of that would be something that we'd be looking at. So no one acquisition, really huge.

John Franzreb - Sidoti & Company

You said your 2009 forecast also reflects the impact from your contingency plans. Can you quantify how much of that impact is embedded in our 2009 forecast?

Christopher Hix

You know, at this point the contingency plans that we've reflected are the first-level contingency plans, which is a fair amount of deferred spending. We quantified the CapEx deferral that we've done. And so the cost of effecting those, as well as the benefits, are embedded in the numbers. As we look at a second phase contingency and we evaluate stronger actions, there may be additional amounts that we can quantify in subsequent calls.

John Franzreb - Sidoti & Company

What would trigger the second phase contingency, Chris, what kind of environment?

Christopher Hix

As Pete mentioned in his comments there, if you get continued low orders and shipment levels, say what we experienced in November and a little bit in December, if that were to continue, you were to have no improvement that would trigger us to look more strongly at the second phase contingency plans.


Your next question comes from Bo McKenzie - Lafayette Capital.

Bo McKenzie - Lafayette Capital

I know it's kind of hard to tell yet from the mud motor side of the business with Moyno pumps, but with the growth that we've seen in things like the Haynesville, where the reaches are long, the wells are expensive, have you guys gotten a feel for what the replacement cycle on that end of the business might look like now versus the more conventional use of mud motors in the shorter directional reaches and whether or not what appears to be a decent amount of capital still going after some of these bigger productivity resource plays will provide a much softer landing than what we might have seen in prior cycles in a downturn?

Peter Wallace

If we were to take a look at the longer-reach areas, I think a lot of the areas that will impact us would be more on some of the wear prevention items. We get into some of the tube rotators and we get into some of the other wearing parts between the tube and the rod, that'll be a big impact.

When we get into the pumps themselves, as we get into deeper areas we get into higher temperature applications, and that'll cause a shorter life. And that will obviously work in our favor.

Bo McKenzie - Lafayette Capital

By that you mean like wearing the [stater], I would guess, down at a faster rate?

Peter Wallace

Yes. Yes. You get more degradation. In fact, that's quite honestly the limitation of using a PC pump as we get into the deeper wells. So we actually have a number of products that are out on test right now that would allow us to go ahead and get into deeper applications, higher temperature applications, which would open up a whole new market for us.

But as we get into those longer reach or we get into those deeper applications, as the temperatures go up we would see the life of the PC pumps going down, which would obviously work in our favor.

Bo McKenzie - Lafayette Capital

And without getting too specific, as you start to look at the market pulling back and opportunities arising for growing the companies given your balance sheet and stuff - I apologize; I had calls coming in while your call was going on - but can you see things within the energy business that are complementary to your positions that you guys have built up either using the PCP as artificial lift or as a mud motor that make a lot of sense here or no?

Peter Wallace

Yes, actually there are. We're taking a look at adjacent opportunities around the power section and around the whole down hole well activity that we're involved with. In fact, that's probably where we're seeing more of the opportunities coming across in the way of acquisitions.

We're being a little bit conservative just with the change in the commodity pricing and the valuations that people had, at least the expectations they had, maybe six months or a year ago, so that presents a new bit in the conversations that we have. But we remain fairly optimistic that we'll be able to close in on some of these deals that would allow us to expand our activity in that part of the business.

And we're not adverse to that, Bo. You know, we're willing to go ahead and make some further investments in the energy space.

Bo McKenzie - Lafayette Capital

I know that, if you look at the kind of drilling versus completion cycle out there, that people drill wells, then they complete wells, and that when the recount is falling that frequently, there are large inventories of wells that have yet to be completed that are sitting out there waiting to be completed. Can you guys see that within the PCP side as opposed to the drilling motor side of the Moyno line, that there's a backlog of wells waiting out there or has the collapse of oil prices just put those things a bit permanently on hold right now?

Peter Wallace

I think what you're seeing is just a deferral of this. We're picking up reports from NOV and others where they're starting to curtail some of their activity, some of the drill rig activity is being canceled and things like that. So I don't think there's a big pent-up demand. I think people are just cautionary. They're taking a look at the oil pricing. When you get oil back up above $50 a barrel or when you see gas coming up above $6, I think those things will start to trigger the renewed interest in some of the activity.


(Operator Instructions) Your next question comes from Kevin Maczka - BB&T Capital Markets.

Kevin Maczka - BB&T Capital Markets

Pete, I just wanted to clarify your revenue comments. You talked about the quotation activity being down and expecting to see even more pressure in the back half of '09. Just to clarify, are you expecting Q1 to be the high water mark for revenues this year based on what you know right now?

Peter Wallace

I'd say Q1 would probably be a good indicator for the balance of the year.

Kevin Maczka - BB&T Capital Markets

And then separately, on the Process Solutions business, if you can just help us understand how what you're seeing right now compares to past cycles and downturns that you've experienced. Is there something going on, either with your cross-selling or your key account focus, something that might help you not experience double-digit declines like you've seen in past downturns?

Peter Wallace

I don't think there's been a material change in there, Kevin. The cycle, I mean, we're focused more on pharma and chemical. Chemical tends to go through long drawn-out cycles, both up and down. We've had a few good years of a nice run. I think a lot of the world demand and the investments in Asia and things of that sort will determine just where this whole situation goes.

Pharma might come back a little bit differently, so it's one of those things we're still trying to get the feelers out just to figure out just where the projects are.

Obviously, in these points in time we do focus more and more on aftermarket, so we're going to be pursuing that very aggressively. So hopefully the mix will work in our favor and you'll have a more limited impact on the overall profitability as the year progresses.


We have no further questions in queue. I would now like to turn the call back over to Peter Wallace for closing remarks.

Peter Wallace

Very good. Thank you, Keisha, and thanks everyone for being on the call today. The financial markets will undoubtedly make this year more interesting and more challenging than the prior year periods; however, I think our management team is experienced. It's been through difficult times before, and we're focused on delivering the shareholder value.

Thanks again for your interest in the company. We look forward to providing an update on our second quarter performance, which is now scheduled for the end of March.

Have a good day.


Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Robbins & Myers, Inc. F1Q09 (Qtr End 11/30/08) Earnings Call Transcript

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