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

Executives

Deborah K. Pawlowski - Director

Luis Manuel Ramírez - Chief Executive Officer, President, Director and Acting President of the Services Division

David L. Willis - Chief Financial Officer and Senior Vice President

Analysts

Joseph Bess - Roth Capital Partners, LLC, Research Division

Chase Jacobson - William Blair & Company L.L.C., Research Division

Joseph Mondillo - Sidoti & Company, LLC

John Henry Reilly - ACK Asset Management LLC

Global Power Equipment Group (GLPW) Q3 2013 Earnings Call November 8, 2013 10:00 AM ET

Operator

Greetings, and welcome to the Global Power Equipment Group's Third Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Deborah Pawlowski, Investor Relations for Global Power. Thank you. Ms. Pawlowski, you may begin.

Deborah K. Pawlowski

Thank you, operator, and good morning, everyone. We appreciate your time today for Global Power's Third Quarter 2013 Conference Call. On the call with me are Luis Ramírez, President and CEO; and David Willis, Chief Financial Officer.

Luis and David will be reviewing the results of the quarter and will also provide a review of the company's strategy and outlook.

If you do not have the slides that accompany our discussion, they can be found, along with the earnings release, on the company's website at www.globalpower.com.

The Safe Harbor statement is noted in full on Slide 2. As you may be aware, we may make some forward-looking statements during this discussion, as well as during the Q&A.

These statements apply to future events and are subject to risks and uncertainties, as well as other factors, which could cause actual results to differ materially from what was stated here today.

These risks and uncertainties and other factors are provided in the earnings release, as well as other documents filed by the company with the Securities and Exchange Commission. These documents can be found at the company's website or at sec.gov.

First, we'll have Luis cover -- do an overview of the third quarter 2013 business performance and results, and then David will delve deeper into the financial numbers and provide some 2013 guidance update.

Afterwards, Luis will close with an update on the status of our realignment activities and strategy for growth, a little bit on the market review and then introduce our 2014 outlook.

So with that, let me turn it over to Luis to begin.

Luis Manuel Ramírez

Thank you very much, Deb. So as we usually start, we'll start with the 2013 third quarter scorecard. While we're disappointed with revenues overall for the quarter, our product revenues remain on track with guidance, with most of the revenue coming from midstream oil and gas opportunities that's helped also to offset our OEM-driven demand.

Services revenues were down, impacted mostly by a weaker-than-expected nuclear market, something that we expect to see throughout this year and are also thinking, will it continue into next year. We finished the quarter with very strong performance from a cash perspective. And David will talk about that in a few minutes, but we continue to have a strong capital structure with ample liquidity support and working capital requirements.

Our operating margins were favorable on an adjusted basis, excluding acquisition costs, strategic investments and realignment expenses.

Our orders remained strong in the product side, and we'll talk more about that in a few minutes, but we saw some solid bookings' performance from both the organic and acquired businesses, something that bodes well for us as we go into next year.

Again, we remain conscious on the services market conditions, and we're going to continue to monitor the flow order rate that we see in the Nuclear segment as we go forward.

If we go to the next page, on Page 5, you can see that our acquisitions added $27.1 million of consolidated orders into the third quarter revenue.

We saw a continued demand from the electrical solutions' products, especially from the oil and gas segment, where we see a lot of infrastructure expansion going on here in North America in the pipeline side and in the infrastructure side to support the natural gas trend that we've been following. Auxiliary Products continue to be on track for the year. And as we said earlier, we continued to see strong performance there as we go into the end of the year for backlog.

Services revenues were at $55.4 million. Again, Nuclear Services were down as we saw some of the prospects move out into next year or were tabled or have been lost. We also saw approximately $12.3 million of revenue in the quarter from restart and new opportunities that we saw on the Nuclear side, and approximately about $13.9 million of that was for capital project work. We continue to monitor that performance as we go forward, and we'll talk more about that in a few minutes.

Now I'd like to pass it on to David.

David L. Willis

Thank you, Luis, and good morning, everyone. If you turn to Slide 7, you can see our Products Division's third quarter 2013 revenue at $55 million, broken out by geography and by end market. North America was very active during the quarter and represented 50% of Products revenue. The IBI acquisition, which closed in early July, enabled increased shipments of Koontz-Wagner's backlog by utilizing available capacity at IBI facilities, contributing to the higher proportion of North American project revenues in the quarter.

With respect to end markets, products supporting utility scale turbines accounted for 64% of Products revenue. As you know, we have done a lot of work to diversify our revenue sources and we've seen increased project activity in oil and gas and industrial applications compared with the trailing second quarter.

On Slide 8, our Services Division's third quarter 2013 revenue of $55 million is depicted by market and by contract structure mix. The majority of our Services revenue comes from work performed at domestic nuclear power plants. This was the first full quarter of contribution from the Hetsco acquisition, which closed on April 30. And as a result, you can see that our percent of total Services revenue, derived from the gas processing and industrial gas markets of about 7%, has increased over the second quarter levels when it was 4%. The contract structure mix in the quarter was similar to prior periods and is heavily weighted towards cost reimbursable work.

Please turn to Slide 9. Consolidated gross profit was $20.7 million, an increase of approximately $2.6 million from the third quarter of 2012, as contributions from the acquired businesses have more than offset reductions in the Nuclear Services business.

Consolidated gross margin of 18.8% was a 250 basis point improvement, as higher margin Products revenue accounted for half of consolidated revenues in the quarter. Products' gross profit was $13.3 million, up over 50%, and Products' gross margin was 24.3%, an improvement of 600 basis points.

Improved year-over-year margins on auxiliary products for utility scale turbines and higher-margin sales from the acquisitions drove the improvements.

Services' gross profit decreased by $1.8 million over the prior year on lower volume associated with reduced spending by domestic utilities for maintenance on nuclear power plants. Fewer capital projects in the quarter as compared with prior year also impacted margins. The Hetsco acquisition added 100 basis points to the Services Division's gross margin, which partially mitigated the other items previously discussed.

On Slide 10, you can see that our non-GAAP operating profit for the third quarter of 2013 was $5.2 million, which is up from last year's third quarter.

Consolidated operating expenses increased by $3.4 million to $19 million, driven by increased strategic investments and higher noncash amortization expenses associated with the acquisitions.

Incremental operating SG&A from the acquired businesses was mostly offset by cost containment in the base business. Excluding strategic investments, which consist of acquisition transaction costs, realignment expenses and other strategic investments for growth, third quarter operating margin improved to 4.7% this year from 4.5% of sales last year.

If you turn to Slide 11, we can provide some highlights on our balance sheet and cash flows. Cash used in operations during the third quarter was $8.5 million, down from $10.1 million of cash used last year. Increased working capital, ahead of what is expected to be a very strong fourth quarter of Products Division shipments, impacted cash from operations during the quarter.

Our cash balance was $32 million at September 30, down from approximately $40 million at the end of the trailing second quarter.

Capital expenditures in the quarter were $1.4 million, and we continued to anticipate CapEx on order of $6 million to $8 million for the year. We had $40 million of debt on our balance sheet on September 30, which was primarily used to fund the Hetsco and IBI acquisitions earlier this year.

Please turn to Slide 12. Consolidated backlog at September 30 was approximately $408 million, flat with the trailing second quarter level. Services Division backlog was $233.5 million at quarter end, which is down from June 30, primarily due to weakness in the Nuclear Services market.

As a reminder, Services Division backlog consists of maintenance work to be performed over the next 12 months, plus all contracted capital projects.

Products Division backlog at September 30 was $175 million, including about $15 million from IBI, which was acquired in July 2013. Excluding backlog from IBI, Products Division backlog increased $14 million, which is primarily related to increasing OEM projects moving forward. Products Division organic book-to-bill ratio was 1.2x for the quarter and 1.3x year-to-date.

On Slide 13, we provide our updated guidance for 2013. Weakness in the Nuclear Services end market has led us to adjust our full year consolidated revenue guidance to a range of $470 million to $490 million. The Products Division remains on track, and revenue expectations have been tightened to a range of $210 million to $220 million. Consolidated gross margin expectations are unchanged for the year, between 16% and 17% of total sales. We have reduced our expectations for operating expenses in 2013 to between $59 million and $61 million, excluding the 2 acquisitions. This includes approximately $3.7 million of strategic investments in personnel and professional fees.

Cost containment in the organic business has led to our reduced operating expense guidance for the year. The 2 acquisitions are now expected to add an additional $10 million to $12 million of SG&A in 2013, with approximately $4 million of that comprised of acquisition transaction and integration costs. This is down from previous expectations of $11 million to $13 million in the current year.

We're expecting that tax rate for 2013 to be approximately 35% to 40%, excluding a $4 million to $5 million income tax benefit anticipated to impact the fourth quarter.

With that, I'll turn it back to Luis to discuss the progress of our strategic realignment, growth initiatives and our preliminary outlook for 2014.

Luis Manuel Ramírez

Thanks, David. So as you know, our stated goal is to double revenue and operating margins in the next 3 to 5 years. Our strategy remains the same, to move from a product-based business to more of a solutions-oriented organization. And we continue to work on margin expansion through both simplification productivity and also organic and inorganic growth initiatives.

The last few months, we spent a lot of time doing resets in the organization. As you all know, we've announced recently a realignment of our business structure. And right now, we feel like we have the right leadership team realigned and engaged to work as we grow our business over the next 3 to 5 years. We've also implemented this year a lot of activity around leaning our cost structure and improving our productivity and performance, especially as we integrate the acquisitions into our portfolio for long-term growth. And we've also spent some time realigning some of our internal resources or back offices to really support a much leaner and better shared services structure going forward.

If you go to Page 15, you can see that the Global Power organization is now aligned around 4 major product and service areas. The first one is Electrical Solutions, run by Penny Sherrod-Campanizzi; the second one is Auxiliary Products, run by John Durkee; the third one, Nuclear Services, run by Neil Riddle; and the fourth one, Energy Services, run by Ted Sellers. The 4 P&Ls are now set up to perform market facing to their customer and then are supported by a streamlined and better aligned functional organization, as you can see on this page. We now have the team to go forward with our growth strategy.

On Page 17, you can see also that the realignment of the structure provides with a better view of our products and services and also better aligns with the way customers and shareholders think of our business. So we're very excited about being able to present our numbers going forward in this fashion and you should expect much more information around our markets that we serve going forward.

On Page 18, you can see that the market landscape that we're entering in 2014 is a little bit different than the one we left here in '13. In the U.S., the natural gas trend continues to be strong, really supported by strong and significant investments in the oil and gas segment, especially around pipeline infrastructure and new refinery opportunities that occurring around the Gulf Coast region. We're also seeing additional LNG projects advancing. In fact, we've even seen a stronger than normal demand for natural gas vehicles in a lot of the fleets that you're seeing around North America, which is driving infrastructure development, something that we're working a lot with in our Electrical Solutions business.

Western Europe, and most of you have read, is coming out of what's been a long, deep recession. Now we're seeing a better improvement number -- improving numbers in terms of the investments that are happening in some of the markets that we serve, with increasing opportunities in Eastern Europe, as you've all read. Russia is continuing to invest in its infrastructure as well.

On the emerging market side, we see continued demand for our products and services out of the Middle East region and North Africa. And you've seen some recent announcements of POWER-GEN still quite active in the Algeria area, but oil and gas still really thriving in the environment that we're in globally.

Asia seems to go -- has been in a slower recovery. And in fact, we've seen some signs of even a slowdown in China over the last few months. And we see that in terms of our pipelines there as well. But in general, the market has stabilized and we see more growth happening in 2014 than we saw in '13. And we also have seen some indication even here in the U.S. recently that North America is also starting to rebound. So we think that, that is a much better environment that we're entering in 2014 than when we left in '13.

For 2014, as we've talked about the outlook, we can expect that our consolidated revenues will range between $535 million and $575 million. We see product line growth and full year benefit of our 2013 acquisitions. Our Nuclear Services business remains flat due to the challenging market conditions, but we expect to continue to invest in services as we see and seek growth in other areas, in particular energy services and oil and gas and natural gas services as we've invested. We do expect to see a slight improvement in gross margin due to mix and some -- and also a benefit from some of the efforts that we've had in productivity and lean programs. And our operating expenses are expected to decline, as a percent of sales, with cost reductions offset by full year expenses for our 2013 acquired businesses. So overall, we think we are seeing an improving year and one from which we can continue to build our platform to grow and expand our margins.

On Page 20, you can see the time frame for the realignment and restructuring. We talked about this earlier in the year. We spent the first half of the year really tackling some of the bigger challenges in the organization to make sure that we're ready to implement these improvements. So far, we've reduced our cost structure. We've implemented lean and continued to establish the leadership team that we need to have to execute our long-term objectives. The plan for the rest of the year is to continue down this path and be in a position where we start 2014 strong and ready to go.

Now I'd like to open up for the questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Joe Bess with Roth Capital Partners.

Joseph Bess - Roth Capital Partners, LLC, Research Division

First, can we talk a little bit about services market? And can you quantify how much was delayed, deferred and lost and kind of break it out by those 3?

Luis Manuel Ramírez

Yes, Joe, let me give you -- so the range of our guidance takedown was directionally $50 million. I would say it really comes about 1/3, 1/3, 1/3. 1/3 of that, we had projects that were pushed to 2014, I would say these were not in backlog, but these were prospects we were chasing. Probably 1/3 of that was canceled by our customers or at least postponed indefinitely. And about 1/3 of that takedown was projects lost in this competitive pricing environment.

Joseph Bess - Roth Capital Partners, LLC, Research Division

Okay, got you. And then when we think about Koontz-Wagner and IBI, what is the capacity utilization right now when we think about how much you can get out of these facilities? And I know that a part of the acquisition was to get -- gain access to some extra footprint.

Luis Manuel Ramírez

It's a great question, Joe. Right now with the acquisition of IBI that we completed last quarter, we probably have 4 manufacturing sites, 3 of which are really more dedicated to the core electrical's enclosure business, and then the other one, that's over in Idaho, is really focusing on the generator end capture or closure business there. As we think about where we want to go with that business, we think that the Houston market continues to be one in which we think that building more capacity for the business is going to yield another spurt of top line and bottom line growth. So we've spent some time going over that, and our customers are really pushing us there. One of the limitations that we would have in the business is not so much capacity, but simply location. This is a business that needs to be locally and regionally located to the industry that it serves. As you know, these are huge buildings that are then transported across the normal roadways. And so having these facilities closer to the centers where we do the work is really key. So as we think about it, we don't think about it so much in terms of capacity, but we think of it more in terms of where we want to relocate and regionalize the business and do it in a way that when we scale it, we don't lose margin and we're able to leverage the infrastructure that we've built around the business. So right now, we are pretty bullish about that business and we are continuing to look for ways to expand where we do the work.

Joseph Bess - Roth Capital Partners, LLC, Research Division

Okay. And then -- and just a quick follow-up on that. How many locations do you think you really see as what your footprint could look like over the next couple of years given you think that you needed to be more regionally located?

Luis Manuel Ramírez

That really depends on where the market takes us. Right now, North America, I think -- I'd look at, again, the Houston or Gulf Coast market as the next place to go. If I think about it, maybe in 18 months to 24 months down the road, I think that the growth that we're also starting to see with Hetsco, our Electrical business, and even our Auxiliary business over in the Middle East is another area where I think we have installed base and we also have opportunities to expand. So I think we're going to play it as we see the market grow and our goal is to set up shop in places where we have a long-term perspective over time. So we're going to keep doing that.

Joseph Bess - Roth Capital Partners, LLC, Research Division

Okay, great. And then in terms of the turnaround, how much is left for you guys over the next year? And can you quantify the amount of cost you are looking to take out of the business with the realignment or restructuring?

David L. Willis

Well, Joe, let me take the latter part first. So in terms of our reduction of expenses in our core business, our updated guidance shows a takedown of directionally $3 million to $4 million from initial expectations. In terms of what we think, we're still looking at productivity initiatives, additional cost reductions where it makes sense so we can run the business more efficiently. So in terms of what that benefit could be in '14, we'll give more color on that when we give more detailed guidance at year end.

Joseph Bess - Roth Capital Partners, LLC, Research Division

Okay, great. That's what I was looking at. So the productivity initiatives would be incremental to the $3 million to $4 million that you guys are already discussing?

David L. Willis

That's correct.

Joseph Bess - Roth Capital Partners, LLC, Research Division

Okay, great. And then just last question, were you guys seeing an acquisition pipeline? And as we think about this 3- to 5-year outlook for doubling revenue, how much of that will be -- do you think will be coming from acquisitions versus organic growth?

Luis Manuel Ramírez

I mean, I think the rule of thumb for us has been, since we started this journey this journey, about 50-50. It really depends on what we see in the marketplace. The good news is that the organic growth that we're going to see from the acquisitions are coming in, in the last couple of years is really helping us to see a greater pipeline for our Products business. And I think as we grow, our natural gas services will start to see more of the same. So it really depends on the market conditions and really the capabilities that we're trying to get. I think acquisitions for just growth is not a good strategy. We like acquisitions when we get something competitive, a technology or a capability that we don't currently have. And so sometimes those come in large sizes or small sizes. It really depends on the market opportunity. But as we go through our playbook plans and as we go through that in the next few months, we're always looking for opportunities to find those inflection points and bring that new capability into the business.

Operator

Our next question comes from the line of Chase Jacobson with William Blair.

Chase Jacobson - William Blair & Company L.L.C., Research Division

Okay. So first, following up on the question about services. In terms of the projects that were lost, I know it's been a competitive pricing environment, what are you guys doing to make sure that you can maintain your share in that market?

Luis Manuel Ramírez

That's a great question, Chase. So one of the things that we did as we restructured services in the last couple of months is, we wanted to focus on rebuilding our commercial organization. So we recently hired a new services sales leader for the Nuclear Services business that has extensive experience with the customers that we serve in that space. We also implemented some new alignment around how we do our project management processes. Because we heard a lot from customers as I've been going out to see customers in that space in the last few months, one of the things that I've heard is they really need help on improving their own productivity. As you know, the biggest challenge a lot of these guys are having is that the energy demand is down or not growing at the same rate that their cost is growing. And particularly the nuclear sector, their costs are growing 5% to 6% a year annually when the energy demand in most of the regions is less than 1%. So we think that customers have really been responsive to that kind of work. And so one of the things that we're doing is we're strengthening the commercial organization to help to not only sell that, but to actually produce it with customers and we're also spending time on the execution side, making sure that we can find ways to help the customers save money. And that seems to be working fairly well right now. So we think that while we are not as bullish about the nuclear segment as we once were in terms of our long-term growth, there is a lot of opportunity in that segment to keep market share and regain market share, if you're willing to work with customers to help them improve their own productivity. And that's something that we're going to focus on going forward.

Chase Jacobson - William Blair & Company L.L.C., Research Division

Okay. That's helpful. The other question I have is that when we look at the pro forma revenue mix that you gave by product line and segment, can you give us any idea of how that would look in terms of gross profit mix? And then looking at couple of years out just directionally, any color on what this pie chart may look like in 2 or 3 years in terms of the mix?

David L. Willis

Let me, Chase -- let me take a stab, at least, at the gross margin. So the Auxiliary Products and the Electrical Solutions businesses those are Braden, CFI, Koontz-Wagner, IBI, all those have a fairly similar gross margin profile to what we've been reporting on a historical basis. The Nuclear Services is, again, the lion's share of our existing Services segment. Their historical gross margin range is in that 10% to 13%. It kind of varies a bit based on maintenance versus capital mix. The higher margin services is in Energy Services. That's our Hetsco acquisition, our aftermarket spare parts business. So that's going to -- that contribution is actually going to -- we expect to uplift our current Services Division gross margin. If we go out next year into this realigned, we envision that Energy Services would be a standalone reportable segment.

Chase Jacobson - William Blair & Company L.L.C., Research Division

Okay. And then just on how this maybe should look over the next couple of years. I mean, I guess -- the Energy Services, I mean, Electrical get much larger?

David L. Willis

Yes. I think -- as you think about our business and I'll take a look at more meaningful end markets and then I can bridge to how this might look. What I see happening in the next 2 to 3 years is that we're going to be expanding our end markets from being primarily a POWER-GEN business, which was what we were probably 2 years ago, to one that probably has maybe -- it's 40%, 50% POWER-GEN and the rest of it is coming from what I call natural gas, oil and gas business. And if you think about that mix then within this business segment, Energy Services would grow proportionally in terms of its natural gas ability to grow in that space. And Nuclear Services will grow to the market -- where the market rate is. So for us, I see Nuclear Services staying flat into next year and Energy Services seeing a growth spurt, especially through the Hetsco acquisition and some of the things that we're doing on the industrial side.

Luis Manuel Ramírez

I would just add into that, Luis, as well. I think depending on the pipeline proposal activity on Auxiliary Products business is picking up some momentum, which is encouraging as we've always said on these calls. That's great. That's encouraging. But until it's in backlog, it's not in backlog. But in terms of proposal activity, if that continues to build momentum throughout 2014, I'll also think you'd see our Auxiliary Products comprise a larger percentage of revenues a couple of years out, if we hit this significant cycle that's been expected for some time.

Chase Jacobson - William Blair & Company L.L.C., Research Division

Okay. And then last question, I don't mean to get too specific here, but when we look at the revenue and profit contribution from Hetsco, I expected the growth in this business to be a little bit stronger. And I think if you adjust the 2Q revenue for when you closed the deal, it was actually down sequentially. And that's using back of the envelope math, but was there something that got pushed out in the Hetsco business? Or they just come -- is it timing? Or is there something weaker than expected? Any color there would be helpful.

David L. Willis

I do think it's timing of prospects. On a much smaller scale than our Nuclear business, they had some back end-loaded prospects that had been pushed to 2014. Their pipeline, in terms of proposal, is pretty healthy. But it's the lion's share of that is for '14. So I think that's more timing than it is anything structural.

Operator

[Operator Instructions] Our next call -- I'm sorry, our next question comes from the line of Joe Mondillo with Sidoti & Company.

Joseph Mondillo - Sidoti & Company, LLC

I got a couple of questions on the order book that you saw in the Products Division. First off, if you could just give us a little more color on how the legacy gas power business is trending versus the oil and gas? I know, David, that you just sort of mentioned that it seems like the gas power business is picking up. But if you can just give a little color on sort of the growth rates and how those 2 separate businesses are trending, that would be helpful.

David L. Willis

Yes. So in the backlog -- the reported backlog, as of the end of the third quarter, had a nice increase in both the organic business and -- when we say organic, that's really our Braden CFI, the OEM turbine business. That had a solid build in the third quarter, primarily again on international projects, more concentrated in the Middle East than any other geography. The -- in terms of proposal activity, we're seeing the Middle East is active and we're also seeing North American proposals pick up a bit as well. In terms of the acquired businesses, that build in backlog is primarily driven from our IBI acquisition, which serves the same end markets as our Koontz-Wagner acquisition that closed in the third quarter of last year. They're a pretty balanced mix of both oil and gas infrastructure projects and POWER-GEN projects. What IBI did give us is distributed power applications we didn't previously have. So that's a nice little niche that is growing, and we've seen some good activity there.

Joseph Mondillo - Sidoti & Company, LLC

Okay. So the 50% growth in, I guess, orders for the quarter, is that sort of similar with the Braden business versus the new Electrical business? Or if you can give us an idea or quantify the growth rates there. And then also, you mentioned the U.S. is picking up in the gas powered and that's been the big cycle that some people have been looking for. What did you see in the quarter? And is there any sort of support that '14 and '15 are really coming or what do you guys seeing there?

David L. Willis

Yes. Let me give you a couple of numbers and then you can maybe do the math, if it's helpful. So the third quarter order split for our Products Division, organic orders were about $50 million, acquisitions about $14 million. Year-to-date basis, organic orders were directionally $120 million with our acquisitions comprising the balance of that. So I don't know if I got -- I don't have, in fact, second quarter details here to give you growth rates, but that should hopefully give you some perspective on where we're seeing activity both in the organic business and both acquired businesses.

Joseph Mondillo - Sidoti & Company, LLC

Sure. And then just the U.S. gas powered business, anything -- a big tell that you saw this quarter? Or what you're hearing? Or is it just sort of slight improvement? And what are you hearing on that market?

Luis Manuel Ramírez

I think what we're seeing is that the market has shifted to -- there seems to be a lot more activity from a couple of the OEMs in terms of proposals than what we've seen in typical -- in the last couple of years. And it does look like there's been a ramp up in terms of proposals and also bid processes that we're in. So that's starting to feel a little bit better than we said in the last few quarters. I would also say that the -- that there's an increased pressure now coming from the marketplace. As you guys know, the EPA rules that were implemented now and there's really a lot more serious discussion about retiring assets both in the nuclear and in the coal side. So I think that, that is becoming a reality now. One of the other things we were looking at long term would be an indication that things will start to move more. So we are seeing that. I can say that some of the OEMs are starting to pick up some wind, and they're looking at -- they're looking out '15 and '16 as well. So I can say that we're seeing more positive movement there. But as David mentioned earlier, nothing is for sure until you got it in the backlog. So we're going to stay optimistic but cautious until we have more of that business in the backlog.

Joseph Mondillo - Sidoti & Company, LLC

Sure. And then also staying on the Products' order book, your Products' gross margins have been fairly flattish or consistent over the last 2 years or so. Have you started seeing any sort of uptick in the profitability in the orders or the work that you're booking in that division?

Luis Manuel Ramírez

I would say not material, not material in any way yet. I think in past cycles, we've seen the OEM markets, in particular, when the supply chain gets constrained, you'll see margin start to uptick but it's later in the cycle of a recovery. Thus far, I think we're seeing the healthier proposal activity, but not to the point where the supply chain is necessarily commanding higher pricing.

David L. Willis

One thing we will say is that we had -- as I mentioned earlier in the year, we were -- we put some money into new product introductions for our Auxiliary business. And we spent some time here in the last couple of quarters redesigning some of our products to do some productivity, cost out and also improve the manufacturability of the products. And that's something we are doing. So while we're still not seeing an uptick driven by demand, we are trying to create our own tailwinds when it comes to productivity in the product lines that we make today. And we have put some money to that, and we'll be coming out with new designs for similar product lines early next year, which should help us to help expand some margin there as well.

Luis Manuel Ramírez

The only thing I'd say, Joe, in the third quarter, we did have healthier than previously reported margins, at least early in '13. And that's really mixed. As you know, most of our product stuff is fixed price. So in any given quarter, you'll have certain items that ship at higher margins than other products. So we did have a healthy mix in the third quarter, which we were pleased with.

Joseph Mondillo - Sidoti & Company, LLC

Okay, great. And then just -- lastly, the reorganization plan, just wondering if you could just give a big picture of where we are on that process. And is this going to be by year end, everything is going to be positioned? Or is this more so in the next 6 to 12 months, we're still going to be talking about getting things in place and working through the reorganization? Or where are we in terms of timing?

Luis Manuel Ramírez

Well, that's a great question. Look, as I mentioned earlier, our plan is to have all of our realignments and processes complete by the end of this calendar year. From an operational perspective, the team is in place, and we have really completed most of that work. And now we're just finishing the last touches as we get to the end of the year. So our plan is to make sure that we walk into '14 with no distractions coming from either the organizational design or anything else that we've been working on that isn't going to be part of our platform going forward. So that's the goal, and so far so good. I can tell you that the operating team is in place and that we're feeling good about that piece right now. We are going to continue to work, on an ongoing basis, continuous improvement plans, productivity improvements and things like that will be part of what you should expect to hear from us every year. So every year, we're going to talk about improvements in that space. Every year, we're going to talk about how we're improving shared services and things like that. But those won't be the kind of disruptive realignments that you have when you change out key people in the organization. It'll simply be continuous improvement plans.

Joseph Mondillo - Sidoti & Company, LLC

And, Luis, how fast do you think any top line synergies from this whole organization/reorganization is going to flow through? Is it going to be small improvements over year after year after year? Or do you think there's going to be significant upfront top line synergies?

Luis Manuel Ramírez

I think one of the things we were asked before about what we're doing on the Nuclear Services side, one of the things we're doing there, in addition to hiring a leader, is we're also setting up a key account strategy so we can manage accounts at a different level than just by the sites. And so I suspect that when you make changes like that, usually it takes about 12 to 24 months to start to see a real synergy develop over that time period. But what I will tell you is that the leaders that we brought in, they understand the value of collaboration across the customer base. So I think that I've already seen some marginal improvement in terms of how we're doing deals and things across the organization. But I think you'll see some real improvements as we get into the 12- to 24-month time frame.

Operator

Our next question comes from the line of John Reilly with ACK Assets.

John Henry Reilly - ACK Asset Management LLC

I just want to dive into the product side. Obviously, bookings are turning in a big way here, and I want to talk about what's your content now on some gas-fired new generation now that we've got -- I know IBI added to some of the traditional exposure that you had, what's your content there? And then also, this is the first time I've heard you talk about LNG. I don't know if that impacted any of the quarter, but what's the potential content with your product line on LNG also?

Luis Manuel Ramírez

It's interesting. It's coming indirectly, but from the Electrical Solutions side of the house. As they're building out this infrastructure for natural gas transportation, as you've read, one of the things that they're doing -- companies like Shell and other companies are actually building these LNG conversion plants in -- at various locations around the transportation infrastructure so they can use that to fuel these natural gas vehicles that are on the highway. And so one of the things -- projects that we're working on is we're building some of those electrical enclosures that support those type of designs that are happening around the U.S. right now. So that's been something that we've seen. These small LNG facilities are converting the gas in the facility. It's something that we're seeing more on. So it's something that's new for us. And while it fits well within our Electrical Solutions business, it could create other opportunities for us that we haven't even thought about. So it's something that we're going to be evaluating as we go into next year, what are some of these real, I'll say, infrastructure opportunities that we may be participating in through that business.

John Henry Reilly - ACK Asset Management LLC

Okay. And now the combined content potential, I know sometimes you have to bid separately with IBI with your existing. What's our opportunity as some of these new powers -- on this new power generation?

Luis Manuel Ramírez

So on the gas-fired turbine power plant, John, it's been pretty consistently and that's $3 million to $4 million, $3 million to $5 million per turbine. As you attached on, it's probably more the exception. We get the full scope of what we can provide on a given turbine. The OEMs are typically going to split the order up a bit. But in terms of if we add up everything that we could provide to all of our Products Division, it's been in that $3 million to $4 million, $3 million to $5 million range per turbine.

John Henry Reilly - ACK Asset Management LLC

Got it. And obviously, I know mix is helping you. You continued to outperform on the gross margin side, pretty low revenues on the product side and, obviously, now we're getting into the ramp of the product revenue. I know we're not expecting a step function until the bid environment gets better. What's our capacity -- earlier, someone was asking about capacity utilization, what's the potential on gross margin here?

David L. Willis

I think in the past cycles, we've seen for our Auxiliary Products and a very healthy market if we go back to late '07, '08, where the Middle East was very active. High 20s, low 30s was kind of the range of gross margin for our Braden and Koontz top lines. On the Electrical Solutions, it's probably a tighter range in the prior cycles, but that at least gives you kind of a go by. We've been much more at the trough end of the gross margin profile for really 3 of the last 4 years in our Products business.

John Henry Reilly - ACK Asset Management LLC

Got it. Okay. And then just last on the streamlining. Obviously, SG&A, you guys have really leaned up here the past couple of quarters, and I know we're going to get a lot of good leverage on this going forward. Should we think about it kind of holding the line here? And I'm thinking about not in '14, I'm thinking about if we had another $100 million of Product revenue here, is this -- is SG&A something that we can kind of hold the line here at this kind of...

Luis Manuel Ramírez

That's a great question. And that's, I mean, that's always the plan. And what we're trying to do this year, as I've said, we got into, this year, with a lot of the restructuring and kind of realignment and that gave us some lift. We also started to do a lot more lean and things like that. So the goal, I guess, I would say for the lean programs and the productivity programs that we've launched this year long term is that we create capacity through that and that's the capacity that we use for some of the growth that we're going to leverage. So that is the goal. And sometimes we have years where we have to make onetime investments and things like that. So that's one reason why we're also trying to stay more focused on EBITDA as a metric than just operating profit and make sure that we're driving that thinking process. So, John, that's absolutely the goal and if we have onetime things that happen, we'll always talk about that here. But we are trying to keep that leverage as we go in the next couple of years of growth cycle.

David L. Willis

Yes. I think Joe have asked earlier about some of the cost savings and one thing to keep in mind, Joe, while I think we've made some good progress there. As we roll out into 2014, we're going to have a full year of these acquisitions that were acquired in '13. So there's just run rate OpEx, increases by having those businesses into full year versus partial year.

John Henry Reilly - ACK Asset Management LLC

Now I know. I'm just even looking at this third quarter, exiting out some of the one-times. I mean, we're talking about $15.5 million of SG&A.

David L. Willis

Yes.

Operator

Mr. Ramírez, there are no further questions at this time. I'd like to turn the floor back over to you for closing comments.

Luis Manuel Ramírez

Well, thanks, everybody. And again, we look forward to meeting with you again and talking more about next year at the next cycle. Certainly, for us, we feel very strongly that we have a team, leadership team, energized right now to really deliver a great growth platform for our business going forward and we look forward to talking to all of you later on. Thanks very much for joining us today.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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: Global Power Equipment Group Management Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts