Sauer-Danfoss Management Discusses Q4 2012 Results - Earnings Call Transcript

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 |  About: Sauer-Danfoss Inc. (SHS)
by: SA Transcripts

Sauer-Danfoss (NYSE:SHS)

Q4 2012 Earnings Call

February 21, 2013 10:00 am ET

Executives

Eric Alstrom - Chief Executive Officer, President and Director

Jesper V. Christensen - Chief Financial Officer, Executive Vice President and Treasurer

Kenneth D. McCuskey - Chief Accounting Officer, Vice President and Secretary

Operator

Good morning. My name is Brandy and I will be your conference operator today. At this time, I would like to welcome everyone to the Sauer-Danfoss Fourth Quarter 2012 Earnings Release Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Eric Alstrom, President, CEO. Sir, you may begin your conference.

Eric Alstrom

Thank you. Good morning and good afternoon, ladies and gentlemen. Welcome to Sauer-Danfoss' conference call to review our fourth quarter 2012 results. Today I have with me Jesper Christensen, Executive Vice President and CFO of Sauer-Danfoss; and Ken McCuskey, Vice President and Chief Accounting Officer of our company. Jesper and I are taking the call from Shanghai today. We're here, as other officers of the company regularly visiting China, to ensure that our focused efforts to counter the difficult market situation are paying off, and they are.

Before I begin, I would like to inform you that this conference call contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those outlined in the mentioned forward-looking statements. The company's reports on file with the Securities and Exchange Commission provide a more detailed description of these risks and uncertainties.

As we have announced, the purpose of this call is to discuss our fourth quarter 2012 results, so we must limit our discussion and the questions we can answer to this important topic. It would not be appropriate for Jesper, Ken or myself to discuss Danfoss' November 28 announcement of their proposal to acquire the shares of Sauer-Danfoss they do not currently own, and we won't do so.

Our fourth quarter sales continue to reflect the weak global market for our products, as well as the inventory reduction by several of our customers. However, sales were up slightly in both the Americas and Asia-Pacific, while still depressed in Europe. At the same time, I'm very pleased we're able to report higher gross profit and operating margins, 2 full percentage points of improvement. This demonstrates the strong cost control culture we have throughout the organization, as well as our ability to flex our production to changes in demand.

Let me turn to comments on sales by market and by region, as well as the status of new orders we've received from our customers and our current backlog. Jesper will then review details of our overall financial results and I'll follow up with comments on our outlook for 2013. And after that, we'll be pleased to take questions from all of you.

Our sales for the fourth quarter declined 7% and excluding the impact on currency, sales declined 6% compared to the fourth quarter of 2011. Our sales in the Americas have been fairly leveled with prior year over the past 2 quarters, increasing 1% in the fourth quarter compared to last year's fourth quarter. On the positive side, sales into the ag and turf care markets were up 22% compared to last year's fourth quarter. This was driven by the turf care market, which is primarily a U.S. market, where sales were up significantly.

Strong sales in both the consumer and commercial sides of the business contributed to this, along with several new program wins going into production. Sales to ag customers were basically level with a year ago. Sales into the North American ag market remained strong, driven by historically high commodity prices. Sales into the South American ag market remained weak due to restrictive Argentinian trade laws. Offsetting the strength in the ag and turf market was a decline of 19% of sales into the construction and road building markets. Sales into the road building market remain at the 2009 crisis level due to lack of a strong U.S. road build and weak state budget positions.

Major OEM customers reducing their inventory levels have also impacted sales into these markets. Sales into the material handling and specialty vehicle markets were down 7% compared to last year. Although the aerial lift market fundamentals remained strong, sales into this market were weak this quarter as certain customers adjusted their inventory levels.

In Europe, our fourth quarter sales declined by 18% year-on-year, excluding the effects of currency. Sales declined in all 3 of our markets. Sales into the ag market were down 21% compared to the fourth quarter of 2011. Sales into the construction and road building markets were down 22%. Sales into the material handling and specialty vehicle markets were down 18%. Sales into all major markets in this segment, material handling, forestry and mining, were all down. The one exception was the marine market in Norway, which has shown some positive development. Overall, the European sovereign debt and banking crisis was still weighing heavily on the region's economy and, thus, negatively impacting our business as well.

In Asia-Pacific, sales were up 2% for the quarter, the first increase in sales recorded for over a year. Sales into the Chinese transit mixer market started to show some recovery. Sales into the construction markets outside of China also showed some growth, with export sales to North America helping.

If we take a look at our order book, fourth quarter orders were $378 million compared with last year's fourth quarter orders of $457 million. That's a decrease of 17% and down 16% excluding the impact of changes in currency translation rates. Total backlog at the end of the fourth quarter was down 11% compared to a year ago.

With that, I'd like to turn the call over to Jesper, so he can comment on the company's financial performance. Jesper, over to you.

Jesper V. Christensen

Thank you, Eric. As we've reported, we earned $20 million or $0.41 per share in the fourth quarter. While down from last year's net earnings, our operating income and income before taxes were both up from last year. Our operating margin for the quarter of 11.3% is up from last year's margin of 9.4%. This improvement is coming from both our manufacturing operations, where the gross market was also up over last year, and also from our operating expenses, which are down from last year.

As Eric noted, our global team has done an outstanding job of controlling our costs. In addition, we are benefiting from the savings beginning to be realized from our global procurement initiative and also from lower retrofit cost. This has allowed 3 of our 4 segments to report improved operating margins.

Our effective tax rate was very high, 43.7% for the quarter, compared to a very low 21.8% for last year's fourth quarter. This difference prevented us from reporting improved bottom line earnings this quarter over last year. We did have to provide for some valuation allowances against deferred tax assets in a few smaller countries we do business in and also had some minor year-end adjustments. Adjusting for these, our effective tax rate would have been around 35% for the quarter. This is still high, but we were also affected by a shift in earnings mix with earnings in higher tax countries being stronger in the fourth quarter than in the previous 3 quarters.

Last year's fourth quarter 2011 taxes were lower by $9.2 million from the reversal of the deferred tax asset valuation allowances. Cash flow from operations was $71 million for the quarter, down from last year's record cash flow of $91 million. Capital expenditures were $25 million for the quarter, down from last year's fourth quarter of $29 million. We generated $35 million of free cash flow in the fourth quarter and have generated $262 million for the full year. We have buildup $441 million of cash reflecting our strong cash flow over the past few years. This gives us a very solid base from which to drive our future growth plans.

And with that, I'd like to turn the call back over to Eric.

Eric Alstrom

Okay, thanks, Jesper. As I mentioned earlier, I'm very pleased with our operating performance. We are being able to produce improved operating margins and lower sales. As we look into the coming year, many of our markets remained weak and many of our customers are working through bringing excessive inventory levels down. They seem to be completing this. We're seeing some signs of our markets picking up in the Asia-Pacific region. And the European market seems to be stabilizing. Our efforts to expand into new markets in China and Asia-Pacific will also start to pay off and show results. And finally, many of our customers are forecasting modest sales growth for the coming year. So taking all of these into consideration, we believe our sales in 2013 will be essentially level with 2012.

Our outlook for 2013 is as follows: We expect our sales to be down 3% to up 7% for the full year; we expect our earnings to be in the range of $3.25 to $4.25 per share; finally, we expect our capital expenditures to be in the range of $65 million to $75 million for the full year of 2013.

So with that, I'd like to open up the conference call to any questions you may have. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Warren Ascenta [ph] with GLG partners.

Unknown Analyst

Given the company's strong free cash flow, as we've seen, what opportunities are there to either refi or repay the outstanding on the credit agreement to Danfoss that exists?

Jesper V. Christensen

Right. The loan we have with Danfoss is going on until 2015. But we do have an opportunity to pay it in September this year at some penalty.

Unknown Analyst

Given the math of that penalty versus current rates, what is the current interest rate on that loan as it stands?

Jesper V. Christensen

It's -- I think it's around 8% and 8.25% for -- there's a euro part and a U.S. dollar part. And I think there is a 4% penalty, if I recall right, to repay it and we likely would want to do that.

Unknown Analyst

You would -- okay, fine. So it is beneficial to repay the loan, that's the math you [indiscernible].

Jesper V. Christensen

Yes.

Kenneth D. McCuskey

And Ben, this is Ken McCuskey, I'll remind you that in September of this last year, September 2012, we had the opportunity to repay 10% of that loan and we did prepay it. So...

Operator

[Operator Instructions] There appear to be no further questions at this time.

Eric Alstrom

Okay. Well, if there are no further questions, then we'll conclude the call. And we'll thank everybody for calling in and that concludes this call. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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