Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Blount International Inc. (NYSE:BLT)

Q3 2013 Results Earnings Call

November 1, 2013 1:00 PM ET

Executives

Josh Collins - Chairman and CEO

David Willmott - President and COO

Calvin Jenness - Senior Vice President and CFO

David Dugan - Director, Corporate Communications and IR

Analysts

Steve Barger - KeyBanc Capital Markets

Robert Kosowsky - Sidoti

Larry De Maria - William Blair

David Manger - AMI Investment Management

Operator

Good morning or afternoon as the case may be for each of you. And welcome to the Blount International Incorporated teleconference with Mr. Josh Collins, Chairman and Chief Executive Officer; Mr. David Willmott, President and Chief Operating Officer; Mr. Calvin Jenness, Senior Vice President and Chief Financial Officer; and Mr. David Dugan, Director of Corporate Communications and Investor Relations.

My name is Andrew, and I will be your facilitator today. The conference will begin with a brief overview of the third quarter 2013 results and the company’s outlook for 2013, followed by a question-and-answer session. All lines have been placed on-mute to prevent any background noise. (Operator Instructions)

Once again this call is being recorded. At this time, I would like to turn the call to Mr. Dugan. Mr. Dugan, you may begin.

David Dugan

Thank you, Andrew, and good day, everyone. Before we 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, guidance ranges or other expectations for the future are forward-looking statements. Those statements involve risks and uncertainties that could cause actual results to differ materially.

Please refer to the cautionary statements detailed in this morning’s press release and our Form 8-K and other SEC filings. Additionally, we have supplemented our third quarter results news release with a presentation that can be found along with the news release on our website at www.blount.com.

At this time, Josh and Cal will give us an overview of the third quarter of 2013 along with our updated outlook for 2013.

Josh Collins

Thanks, David, and thank you all for joining us on today’s call. In the third quarter, our business results were mixed. FLAG business improved in North America, but it was overshadowed by continuing difficult economic conditions in other regions, specially, Asia and Europe, which includes Russia.

Our FRAG and concrete cutting and finishing businesses performed well in the quarter and both had increase sales compared to last year. Additionally, we generated significant cash in the quarter, which Cal will address in his comments.

Overall, our sales for the third quarter were down 1% compared to the third quarter of 2012. Our FLAG segment sales were down about 5% and FRAG segment sales were up nearly 7% compared to last years third quarter.

While Europe continues to be soft, FLAG weakness was primarily centric in Asia. Asian demand has been impacted by currency rates and commodity prices, which have reduced channel and end-user demand. North American FLAG sales were up about 2.5%.

Our September 30, 2013 on order position reflects the softer demand. Our total on order position of $148 million compares to nearly $200 million at December 31, 2012, and $173 million at June 30, 2013. FLAG orders at the end of the third quarter were $116 million representing approximately 80% of the total.

The FLAG order board was down about 31% from December 31, 2012 and declined by about 18% compared to the September 30, 2012 position, as we improved delivery of back ordered items accounting for nearly half of the decline.

The FRAG on order position increased $5.3 million from September 30, 2012 with ongoing improvement and the throughput of SpeeCo products in our Kansas City, Missouri distribution and assembly center slightly offsetting strong seasonal demand as a result of early order and pre-season programs for the attachments.

Our operating income for the quarter declined by $6.9 million compared to the third quarter 2012. The decline was primarily driven by $5.5 million of additional restructuring and impairment related expense compared to the prior year. Elevated SG&A expense and corporate and other accounted for the rest of the change, which Cal will discuss in a moment. The sales volume changes in the FLAG and FRAG segments had a nearly offsetting impact on profit.

I will now turn the call over to Cal who will cover some specifics related to the financial performance of the company and update the material weakness mentioned in early announcements. After that I will wrap up with our 2013 outlook.

Calvin Jenness

Thanks Josh. As a reminder, we posted a presentation to our website this morning in addition to our press release that outlines profit and cash flow drivers for the third quarter of 2013 compared to the third quarter of 2012 along with other operating metrics.

FLAG sales were down 5% versus a year ago and profit in the FLAG business declined little more than $3 million. Sales volumes decreased which was driven mostly by weakness in Asia along with continued European softness. Asian sales were down 17% compared to the third quarter of 2012 and European sales were up about 3%. North American sales for the segment were up 2.5%.

In addition to the volume we just mentioned we’ve seen a small reduction to average prices and some currency exchange rate headwind which combined for about $900,000 of the sales decline.

From a profit perspective, FLAG segment contribution to operating income in third quarter of 2013 declined by $3.4 million compared to the third quarter of 2012. The benefits of $1 million in lower steel cost and $1.3 million of reduced SG&A spending were more than offset by the impact of the lower sales volume, average pricing and a lower capacity utilization rate.

Specifically, lower volume had a $1.9 million unfavorable impact, increased logistics cost had a $1.2 million unfavorable impact, lower FLAG plant utilization yielded a negative variance of about $2.3 million, with FRAG utilization for Q3 2013 of 71%, which compared to 82% for the same quarter last year.

Lower average selling prices accounted for $600,000, offsetting these negative impacts were lower steel costs and reduced SG&A, I mentioned. Finally, exchange rates and acquisition related amortization accounted for the remainder of the change to operating income.

Turning to the FRAG business. Third-quarter 2013 sales lines were up compared to a year ago period, as we experienced increased sales in agricultural attachments, tractor parts and log splitter product lines. The increased volume represents the recovery from a weather-driven soft demand in the prior year.

Additionally, we experienced a slight improvement in average pricing. FRAG segment backlog decreased by $500,000 from December 31, 2012 and improved by $5.3 million from September 2012 levels on improved seasonal customer ordering patterns. At the same time, we have continued to improve the throughput of SpeeCo products in our Kansas City, Missouri distribution and assembly center compared to last year, which has reduced the backlog of last quarters and SpeeCo’s accessories in the year ago period.

The FRAG businesses, adjusted EBITDA was $8.9 million in the third quarter of 2013, compared to $5.2 million in the third quarter 2012. After depreciation expense, non-cash acquisition accounting charge and allocation of shared services, FRAG contribution by operating income was $4.4 million in the third quarter 2013.

The FRAG profit improvement was driven mostly by our improved logistics costs and increased sales volumes compared to the third quarter of 2012. Increased volumes added $1.2 million to profit and reduced logistics costs improved profit by approximately $2.5 million.

Finally, improved steel costs and average pricing were essentially offset by increased SG&A expenses, mostly driven by increased incentive compensation in the FRAG business. As a company, our adjusted EBITDA for the third quarter of 2013 was $34.9 million compared to $35.8 million in the year ago period.

Within the corporate and other category, SG&A spending was essentially unchanged excluding the positive impact from the termination of liability related to previously divested businesses in the third quarter of 2012 and expense in 2013 related to a corporate sponsored manufacturing project that was discontinued.

Our effective income tax rate was about 19% for the third quarter, driven primarily by the release of revenues related to tax issues under audit and settled in this quarter. Net debt was $405 million at the end of the third quarter, which is a decrease of $61.7 million from December 31, 2012.

Our total leverage ratio of debt-to-adjusted EBITDA was 3.5 times and the ratio of net debt to adjusted EBITDA was 3.1 times in the quarter, both down compared to the end of 2012 as a result of a strong free cash flow. Net debt decrease in the third quarter generated cash of $56.1 million. This compared to free cash generation of $6.1 million in the third quarter of 2012.

Cash from third quarter 2013 operations was higher than the year ago quarter by $45 million. Working capital benefit from strong account receivable collection and inventory reduction in the third quarter of 2013, compared to 2012. Our reduction in the net capital spending of $4.7 million, contributed to an improved free cash flow.

In the third quarter, we amended the provisions of the company's postretirement medical plan to certain former employees. This amendment resulted in the reevaluation of our long-term obligation and resulted in an $18 million reduction to our postretirement liabilities, which is reflected in our balance sheet for the period ended September 30, 2013.

In terms of the control issues, we disclosed in last year’s -- last quarter’s new release, we have made significant progress toward resolving these issues. We filed our Form 10-Q for the second quarter of 2013 earlier this week and we expect to file our Form 10-Q for the third quarter in the normal course.

The second quarter 2013 Form 10-Q we filed Monday, October 28, 2013, disclosed our conclusion that internal control over financial reporting and disclosure controls and procedures were not effective as of June 30, 2013. And it definitely discloses the same conclusion regarding internal control over financial reporting, disclosure controls and procedures, as of December 31, 2012 and March 31st of this year.

The company and our independent registered public accounting firm, PricewaterhouseCoopers LLP or PwC, re-evaluated our internal control over financial reporting after a routine inspection of PwC by the Public Company Accounting Oversight Board, which included a review by the PCAOB and PwC's independent audit of our 2012 financial statements and internal control over financial reporting.

We expected to file an amended 10-K for the year ended December 31, 2012 and an amended March 31, 2013 Form 10-Q, reflecting management’s conclusions or controls were not effective. At this point, we believe there is no material misstatement of our 2012 financial statements, although the 2012 Form 10-K and March 31, 2013 Form 10-Q, will be amended to reflected modified conclusions regarding internal control over financial reporting.

The company is in the process of remediating the identified deficiencies in financial reporting controls but we are unable at this time to estimate the completion date. As a reminder, none of the reevaluation of controls are accounting for intangible assets has impacted our conclusions about 2012 or 2013 revenue cash or profit.

That covers the specifics related to the third quarter. So at this time, I'd like to turn the call back over to Josh.

Josh Collins

Thanks, Cal. I will wrap up today’s call by outlining our outlook for 2013, then, we will open the lines for questions.

Our forward order board and order intake rates reflected continued softness in the FLAG business. We now expect sales to range between $905 million and $915 million and for operating income to range between $64 million and $70 million.

The sales projection assumes a decrease in FLAG segment sales for full year 2013 at 4% to 5% and growth in FLAG segment sales of 6% to 7% versus 2012 levels. At these sales levels, overall adjusted EBITDA should fall within the range of $127 million to $133 million.

We continue to expect free cash flow in 2013 to be in the $57 million to $63 million range, reflecting an improvement from our earlier outlook due to the management of our balance sheet.

Capital expenditures are expected to be in $33 million to $37 million dollar range, which is a reduced spending rate versus where we entered 2013. Net interest expense is expected to between $18 million and $19 million and the effect of income tax rate is expected to be between 32% and 35% in 2013.

With that, we’d like to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Steve Barger of KeyBanc Capital Markets. Please go ahead.

Steve Barger - KeyBanc Capital Markets

Hey, good morning guys.

Josh Collins

Good morning, Steve.

Calvin Jenness

Good morning, Steve.

Steve Barger - KeyBanc Capital Markets

First question, you unlock cash, which is great but will that reverse, if revenue increases or do you think that you can keep this out of working cap going forward?

Calvin Jenness

If the top line, if we get a big tailwind in -- over the next year, which we don’t expect a really fast rebound like that but if we did, we would have to expand the balance sheet obviously. That being said, the metrics themselves in terms of turns et cetera, we’re going to push -- continue to improve them.

I mean, the quarter is already strong -- seasonally a strong quarter for us. So it’s not like we expect that kind of cash flow obviously. But in terms of the metric themselves, we think we can hold that and in some cases, we can improve it.

Steve Barger - KeyBanc Capital Markets

To the segments, if FLAG is going to be down 5% full year, it suggest the quarter is going to be down high single or low double digit versus last year. Is it one region or product driving outsized negative impact? Is that all Asia or is it just across the board continuation of weakness that you’ve seen?

Josh Collins

Well, we expect the softness to continue in the regions that we’re seeing softness right now, so led by Asia and then Europe, including Russia. And as we said North America is a bright spot right now. We’re being real careful not to purposely or inadvertently draw and pull in orders from 2014. And we don’t have price increase going out that sort of inadvertently pulls it in. And we’re not going with any sort of programming.

Some of our distributors have targets for the full year that have -- in some cases possibly cause people to pull in orders from the future in order to get those discounts. We’re working really hard to make sure that we don’t do anything artificially.

So -- and last fourth quarter, inadvertently we had some of those programs in place on a year-over-year basis. Yes, it’s a little -- it's a little worse than we would expect it to be for the overall year for instance.

But in terms of product line, it’s a same sort of mix that we seen all year we think and geographically it’s consistent with what we just talked about in third quarter.

Steve Barger - KeyBanc Capital Markets

Got it. And if, let’s say, FLAG comes in down 10% in the quarter. Does that mean flat margin sequentially which would suggest a big step-up in FRAG margin or do you get improvement in FLAG on flat revenue?

Calvin Jenness

You’re talking about the quarter.

Steve Barger - KeyBanc Capital Markets

Sequentially, right.

Calvin Jenness

Okay. So its -- we have to go through with the implied pieces but we think sequentially it’s probably -- it's probably about the same type as well, same type of margin, on the FRAG side and on FLAG side, that where we’re going to be down a bit and if we’re down sequentially in revenue, it’s on likelihood, we’re going to have the negative leverage as well.

Steve Barger - KeyBanc Capital Markets

Right.

Calvin Jenness

I think that moves up to what the implied ranges indicate.

Steve Barger - KeyBanc Capital Markets

Got you. So bigger picture question, two years now our operating margin has been high single digit for the company. I know it’s too early to give a 2014 guidance but if revenue only stabilizes next year. Where do you think operating margin will come in. Can you reasonably get back to double digit or 11% just based on what you can see internally?

Calvin Jenness

Operating margin gets a little fuzzy but clouded because the amount of [air] we have in there. We’ve got a lot of sort of artificial amortization from the acquisitions. I will talk to you about the EBITDA margins.

Steve Barger - KeyBanc Capital Markets

Sure. Okay. That’s fine.

Calvin Jenness

And if we’re flat next year, which feels like, if you were to put a range out there and it’s early for us. So I’m not going to go with formal guidance for the next year but if you were to think about a range from -- on the top line in total from flat to up, it’s total GDP.

On the flat side, we’re going to -- we still will be fighting inflation if all costs were -- we’ll soon have some commodity prices but certainly on the labor side, labor rate side -- we'll have to offset those costs and we think we could do that partially because of the savings it will have through consolidating the two plants in Portland and shutting down the Milwaukee building.

Steve Barger - KeyBanc Capital Markets

Right.

Calvin Jenness

We put out that $6 million to $8 million in savings range there. And that helps quite a bit. All right. So that plus our continuous improvement program, we ought to be able to at least offset. We would be working hard to have improved profitability at flat revenue.

Steve Barger - KeyBanc Capital Markets

Got it. Okay. And last question and I’ll jump back in queue. You got back CapEx which I think is understandable given the environment but can you talk about R&D and what you can do to drive growth from new product development or new product introduction?

Josh Collins

Yeah. That’s a very good point. It’s one of our core focuses and throughout the organization, as focus is on, one, continuous improvement throughout the organization and all of our processes. Secondly, performance and execution, I think, where we’ve done an excellent job, the team has just done outstanding job over the last couple of quarters in resolving all the issues around SpeeCo, obviously, managing the balance sheet, service levels are outstanding.

And the third priority being product development and we are spending money in R&D. We are spending money in product development. We’ll not sacrifice the future. We’re cutting back where we can and try to be smart prudent as we can, but the important thing is developing those products and innovating for the long-term, that’s where we are in. So we’re actually, we are investing there and that’s throughout the organization, it’s in CCF, it’s in FRAG and it’s in FLAG. We’ll continue to spend. We’re going through budgeting right now for next year and we will continue to spend even if we see FLAG with topline.

Steve Barger - KeyBanc Capital Markets

Anything you can talk about in terms of whether its FLAG or FRAG or CCF, where you have something that might make it difference on a go-forward basis where you can bring something to market that you feel pretty good about right now.

Josh Collins

Yeah. I will speak fairly generally here on the FLAG side, on the big piece. We have monitored that we want to do always and continue to make best power chain in the world. And there are some innovations that we’re working on that we’re excited about. There is nothing coming out in the next quarter or too.

But a year to five quarters from now we have some -- we always have some new products coming out, but they are not things that they are upgrades that are very important to out end users. But they are not things that the people on this floor frankly will be that interested in distinguishing features.

But it’s important continuing upgrade and refresh that their product line. On the, but, over the next one to two years, we have some really interesting stuff coming out on the FLAG side.

On the FRAG side, we have a product roadmap that includes refreshment log splitter line. We got, those lines that’s gone in and so we will continue to go in on the wood side and then we’re putting the investment place. On the parts side if you ensure that we are in additional categories over the next year. And on the concrete cutting and finishing side, we’re working, already developed new type of saw that we think it would -- will be very interesting to professionals and concrete cutting.

Steve Barger - KeyBanc Capital Markets

Appreciate the detail. I’ll jump back in line. Thanks.

Josh Collins

Thanks, Steve.

Operator

The next question comes from Robert Kosowsky of Sidoti. Please go ahead.

Josh Collins

Hi, Rob

Robert Kosowsky - Sidoti

Good morning, guys. How are you doing?

Josh Collins

Good.

Calvin Jenness

Good.

Robert Kosowsky - Sidoti

Yeah. I was wondering if you can just drill into in terms of some nice margin expansion on FLAG despite pretty flattish revenue, it looks like utilization was down. So I was wondering if you cloud talk little bit about that. And also talk about in North America if the saw chain business was up or as lot of growth just kind of delayed spring selling season on the Lawn and Garden side?

David Willmott

The, I am sorry to say, piece here, Josh will give you, answer first part of the question. But North America, it was a late spring, but just talking to our distributors around the country. They are feeling pretty good about the year, for most part they are all going to be up. It was a late spring, also pretty late fall, meaning that the summer season lasted well, well into the fall and they are optimistic, they are not wildly optimistic, but for most part they are all up as our -- we with them, that’s pretty broad. You talk about margins?

Josh Collins

Really, Rob, was your question on FLAG margins.

Robert Kosowsky - Sidoti

Yeah. And also just finishing up just the saw chain, the saw chain volumes up in North America as well?

David Willmott

We don’t give out that level of detail but generally, I think, flat or slightly up, yeah.

Robert Kosowsky - Sidoti

Okay. And then the other question was just sequential margin expansion on FLAG and then also for FRAG, I guess, what you are talking about it?.

Josh Collins

The FRAG one had probably the best performance year over year, we look at that and want to meet the top margin of the quarter from 7 large, if not largely 12, so north of 10% on EBITDA margins.

You are really seeing the effects of better volume in the woods business, but we really are laughing, last year this time we were in the debt of trying to fix our situation in Kansas City, we saw a lot of airfreight and a lot of incremental cost there, although we didn’t bought back up for restructuring purposes.

So, good volume there, non-recurring cost, non-recurring -- non-recurring. So, that’s -- I think on the FLAG side, steel costs are still pretty favorable. There was last year, I think sequentially they were two mix move delivered better for us in the quarter, second quarter to third quarter, so probably helped us offset, at least diminish some impact of the lower capacity utilization.

Robert Kosowsky - Sidoti

Okay. So it’s predominantly mix you’d say there, mix little bit of steel that drove the margin expansion…

Josh Collins

Yeah.

Robert Kosowsky - Sidoti

…in utilization.

Josh Collins

On quarter-to-quarter, yeah, yeah.

Robert Kosowsky - Sidoti

Okay. Cool. Then other ones on the Asian weakness, I know Asia down like what 13% second quarter, so did Asia just decelerate more than your thought it would obviously the dollar guidance that was the implication and also the -- in the comment we talked about which countries are weak and kind of what you’re seeing from just kind of the -- at the sales level?

Josh Collins

Fairly broad based, we have -- in terms of geography throughout Asia, Southeast Asia. And we have high inventories at our distributors. We do not think to lose this year. We don’t have perfect information between the channel, but we have improved information. We’ve got high inventories. We also know that we probably, in sense, our distributors to take up more, we really don’t want to do that. We don’t think it make sense.

We’re servicing well enough that they don’t -- they don’t need to be ordering six or eight months in advance. So that’s actually more positive. So we’re working with them and really watching it. We think some of the driver there, we’d mention around -- around currency and around commodity prices but it goes back to some of the root cause and a meaningful amount of root cause of the weakness in Asia is weakness in exports to Europe.

So when we look at the overall demand picture, we look -- sound like a broken record here but we look at our direct end-user business in Europe, which is fairly broad based. We’re seeing recovery there and we’ve seen it for a relatively long period of time. Year-over-year, month-by-month, we recall it’s nine months more.

In our direct dealer business in the same countries in Europe, we’re seeing not a lot of recovery but we’re seeing recovery and we are seeing that for about half of much time. We also know that our distributors in Europe on the two step side where it appears to us that their inventory levels are approaching normalcy.

Robert Kosowsky - Sidoti

Okay.

Josh Collins

I don’t want to call the turn by any means and I’m sure you guys all read the story on the front page of the journal today around Europe and effectively the credit crunch. If you can run with lower inventories, you can run with lower inventories. It will be impudent to call a turn but it does appear that those inventory levels in general in Europe and our distributors are approaching normalcy.

Robert Kosowsky - Sidoti

Okay.

Josh Collins

We have not seen the turn there yet but that would be an important driver. And we would expect that the Asia lag -- lags and to some extent South America as well, though no support there but lags that European recovery and when that occurs is uncertain.

Robert Kosowsky - Sidoti

Okay. That’s all for then. You mentioned normalcy, does that mean that restockings already occurred in Europe or is it just the end of the destocking?

Josh Collins

I mean the end of destocking. So if you normally carry three months as a distributor and you overbought in the demand shutoff, your sell through shutoff and certainly if you had five months and you’re carrying too much inventory. And we wanted overtime reduce that and it appears that. Even my example there, you’re approaching the three months of inventory level that’s -- those are made of numbers but approaching normalcy.

Robert Kosowsky - Sidoti

Okay. That’s helpful. And then I guess finally, just on FRAG side, how are you feeling about the ag side of the business, the wood side of the business going into next year. Is this kind of pre-season sales program or you had some indications of how dealers are going to be stocking. Is there any kind of sentiment that might be not stocking as much just because of kind of lower corn prices and is there any material need to move an impact from Cabela's?

Josh Collins

Its not -- we’re not going to report the Cabela's numbers but it’s material to us. It’s meaningful to us for sure but we’re not talking about $10 million growth sales here. And -- but its good, that a real positive for us. It’s positive from a brand perspective, right. They do a lot of advertising.

And it’s interesting. It’s good for our dealers. Let’s just say next order of Cabela’s and we don’t have many of those. And it’s a limited line any way. So you get an argument that even that’s good because Cabela’s can advertise or heckle a lot more than our viewers.

So that’s a positive. Yearly older program was strong this year. We wrapped up, we feel good about -- it’s a good indication to the beginning of the year, end of this year, and beginning of next year. And it puts half of that and we feel pretty good about that. We feel great about the FRAG organization that farm, ranch and ag organization do work that the team has done there and to brain together those three or four different businesses, getting through the operating issues, speaker resolving all those, reestablishing strong relationships with our customer base, working on innovation, voice of customer innovation, new product development pipeline, we feel really very good about where we’re with FRAG.

Robert Kosowsky - Sidoti

Sounds good. And another last, I guess just a reframe, you have seen -- not seen any materially weakness on the ag side just because of the lower corn price. So it seems like it’s a sour deal you’re heading into next year from where you know today at least?

Josh Collins

Yes. Correct. No, we’re not but lower comprises overall, obviously bad.

Robert Kosowsky - Sidoti

Fair enough. Thank you very much.

Josh Collins

Yes.

Operator

The next question comes from Larry De Maria of William Blair. Please go ahead.

Josh Collins

Hi Larry.

Larry De Maria - William Blair

Good morning guys. I guess, you guys gave a lot of good detail and obviously FRAGs moving in the right direction and FLAG is obviously mixed component. It talks to embedded with backlog guidance et cetera. In any way, maybe you guys could tie together and how we start to think about framework for next year. Are we thinking more flattish FLAG, we get some growth there based on what we know now, and maybe better growth rates out of FRAG? Is there any specific numbers that you want to think about giving us for next year, the preliminary framework, think about all this stuff, because there is lot of moving parts obviously?

Josh Collins

Yeah, there are and I would say, Larry, we are working through budgeting right now as well as our long-term plan. And, yeah, I want to give formal guidance by any means but as I said, it feels like FLAG’s up GDP and meaning sort of. What it seems like right now is flat on the FLAG side and GDP on the FRAG side is upside around. Both of those can be downside around, both of those and the visibility we have, I mean we will continue to (inaudible) as you are.

On one side -- just take the FRAG for example, on one side you are looking at corn prices and you read that Ag stuff and you can get nervous because you got some gather, some research analyst print a big book which says winter is coming. I don’t know who that is, where is that, might be yields.

On the other hand, we feel good about the early order program and the products we are coming out and our customers and their strength, so you feel pretty good and if you stick a finger in the air at this point, it feels like we’ve got to be up a bit. On the FLAG side, the driver is going to be Europe and there is still an enormous amount of uncertainty there. We think cutting ought to be flat or better, and the question is going to be how much inventory can people take out in the system, have they taken everything out as they can, are we going to get sell-through?

As I said, we triangulate by looking at direct to dealer and direct to end user business and it makes you feel better. We know we still have too much inventory at the distributor level, but in terms of period you are approaching normalcy. So, to give you this, we are executing well. We feel we are in a process but again it’s got a lot of room for improvement. But, if we get a tailwind, we are going to be able to take some advantage of it.

Larry De Maria - William Blair

What percentage is GDP? Sorry -- 1% GDP number in Europe would imply flattish cutting?

Josh Collins

I’m sorry. I miss that.

Larry De Maria - William Blair

So, do you think that -- 1% GDP number in Western Europe would imply flattish cutting market? Is that based on the implication?

Josh Collins

I would say 1% GDP is probably flat at 2%. It’s going to be 1% plus or minus.

Larry De Maria - William Blair

Got it.

Josh Collins

And that’s our guess. We are highly correlated to GDP.

Larry De Maria - William Blair

Okay. And you didn’t mentioned corn but at the end of the day, how much of your exposure is really on the FRAG side to row crop, not really that much, right? I would think about corn.

Josh Collins

Yeah, absolutely. And that’s why I look around to be flipping before Rob, I mean that. Yeah, even though it is not a direct impact, it is not -- it’s very little exposure to row crop, a higher farm income is overall good, right. So, yeah, that’s not a great impact but you got to look at it.

Larry De Maria - William Blair

Okay. And then just -- they are concerning lately, it seems to be spiking up a little bit more especially it relates to financing in Brazil. What are you guys seeing in kind of real time and how you start to think about how Brazil is evolving? I know it’s been kind of I guess all of plus years, so, but, how do you get comfort around Brazil?

Josh Collins

Brazil is really good market for us. It has not been a great growth here, obviously in South America broadly, we are keeping an eye on it. I don’t think we have any insight that they will be helpful to the call here, but we are seeing all same stuff that you are reading in the papers.

Larry De Maria - William Blair

Okay. And then maybe just final question. I know you guys touched on it earlier, but steel prices that’s another kind of area is a concern, do you guys have an opportunity to trice for that steel for next year, when do we think about the next price increases or is steel’s, maybe market still touch and go getting where we are in a macro situation?

Josh Collins

Yeah, probably not on the pricing side, given the demand situation but that can change and we obviously evaluate that continually, steel prices.

Larry De Maria - William Blair

Okay. Thanks. Good luck. We will talk to you guys soon.

Josh Collins

Thank, Larry.

Operator

The next question comes from David Manger of AMI Investment Management. Please go ahead.

David Manger - AMI Investment Management

Hi, guys. Thanks for taking my call. With capital expenditures for the Chinese facility winding down, can you update us on your priorities for capital allocation going forward?

Josh Collins

Our priorities continue to be investing in the business as well on the capital side, or on the product development side and paying down debt at this point. And as we have continually said at some point if when we get to an appropriate level, which is somewhere around two times net debt to EBITDA, then we will certainly look very hard at instituting share buyback program and/or a small dividend. We are not the corporate finance on earth. We think it sends the right signal with a good discipline and would bring additional investors than to a start. Does that answer your question?

David Manger - AMI Investment Management

Yeah. That’s great. That’s all I had. Thank you.

Josh Collins

Thank you.

David Manger - AMI Investment Management

Thanks.

Operator

At this time, I would like to turn the conference back over to Josh Collins for any closing remarks.

Josh Collins

Thank you all for taking the time and we will talk to you all soon. Bye.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Blount's CEO Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts