Blount International Inc., Q1 2010 Earnings Call Transcript

| About: Blount International (BLT)

Blount International Inc. (NYSE:BLT)

Q1 2010 Earnings Call

May 4, 2010, 01:00 pm ET


Josh Collins - President and CEO

Calvin Jenness - SVP and CFO


Eileen Gamboa - Post Advisory

Alan Robinson - Royal Bank of Canada


Good morning or afternoon as the case may be for each of you. And welcome to the Blount International Incorporated teleconference, with President and Chief Executive Officer, Mr. Josh Collins, and Mr. Calvin Jenness, Senior Vice President and Chief Financial Officer. My name is Maureen and I will be your facilitator today.

The conference will begin with a brief overview of the first quarter 2010 results and the company's updated 2010 outlook, followed by a question-and-answer session. All lines have been placed on mute to prevent any background noise. (Operator Instructions).

At this time, I would like to turn the call over to Mr. Jenness. Mr. Jenness, you may begin.

Calvin Jenness

Thank you, Maureen, and good day, everyone. This call is being broadcast live on the internet and recorded for future transmission and used by Blount and third parties. Participants on the call, including the Q&A session, agree that their likeness and remarks may be stored and used as part of their earnings call.

Before Josh and I 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 as defined by the Securities Litigation Reform Act of 1995. Those statements involve risks and uncertainties that could cause actual results to differ materially.

Now, I'd like to turn the call over to Josh Collins, our CEO.

Josh Collins

Thanks Cal, thanks for all of you for joining us today. First, I'll spend a few minutes discussing the highlights of the first quarter. Then, I'll have Cal cover some of the financial details. Then, I will conclude our prepared remarks by covering our revised outlook for 2010 and some overall observations about our strategic directions.

The performance over this past quarter has been encouraging on a number of fronts. Order intake have increased significantly. We are achieving good operating leverage on our manufacturing facilities, with the increased volume. We have seen the return of customers and markets that have experienced significant volume decline during the 2009 economic recession.

Consistent with the pattern, we experienced in the last half of 2009, we continued to see strong sales and profit, with overall operating income reaching the highest level since the third quarter 2008. Sales were up over 17% in the first quarter of 2010 compared to last year's first quarter.

The first quarter operating margins were solid at nearly 16% of sales, as we achieved good cost performance for plant efficiencies and lower steel costs year-over-year.

Additionally, we generated positive free cash flow and paid down debt in the first quarter, which is traditionally a quarter in which the company borrows cash rather than generating cash. Customer orders have continued to improve, as this year has progressed. We have seen backlog increase to the highest level since September 2008. Backlog has increased each month in the first quarter 2010.

This trend has increased our optimism with regard to the sustainability of the business recovery that began in the second half of 2009. Our rejuvenated new products efforts began contributing in the first quarter, as we recorded the first sales of our new PowerSharp Chain Sharpening System and continued to see sales growth as -PowerGrid Chain we introduced in 2009.

Exciting to see our investment in new products begin to pay-off, we are encouraged by the order patterns we've seen for these new products to-date.

Cash flow in the first quarter of 2010 was strong relative to the first quarter last year and better than our typical first quarter experience in general. We generated positive free cash flow of $2.5 million, and further reduced debt in the quarter.

Our financial leverage is well within our comfort range at this point, less than 2.5 times net debt to EBITDA. All in, we're definitely encouraged by our first quarter results.

Cal will now cover some of the specifics related to the financial performance of the company. Cal?

Calvin Jenness

Thanks, Josh. Overall, we turned in solid financial results from the first quarter of 2010. Our first quarter gross profit margin was in line with fourth quarter of 2009, as our production facilities with better utilized and more efficient with increased volumes.

First quarter 2010, operating income was $21.8 million, representing an operating margin of 15.9% of sales and an increase of $14.2 million from last year's first quarter. EBITDA, as defined by our senior credit agreement, was $28.8 million, a more than $10 million improvement over the first quarter of 2009, and $97.6 million for the trailing 12 months ended March 31st, 2010.

Overall, leverage was 2.9 times EBITDA and our net leverage ratio was 2.4 times EBITDA. Our EBITDA margin was 21.1% of sales for the first quarter. Our core business, the outdoor products segment, has quarterly sales of $133.1 million, up 19.5% from the first quarter of 2009. The $21.7 million increase year-over-year increase in the first quarter sales was primarily the result of higher unit volumes.

Sales volumes were up $24.8 million in the first quarter of 2010 compared to 2009. Currency exchange rates added another $1.6 million to 2010 first quarter sales, while a reduction in average pricing reduced sales by approximately $4.7 million. The reduction in average pricing was primarily driven by an increase in sales volumes to original equipment manufacturers, and higher volume customers, as well as a shift in product mix to slightly lower priced products.

In comparison to a weak, relatively weak first quarter of 2009, segment international sales gained approximately 33% in the first quarter of 2010. However, domestic sales declined by 8%. Demand in the U.S. continues to lag that of international markets.

Additionally, the timing of our seasonal programs in the U.S. to assist distributors in stocking for the spring and user selling cycle tended to create some softness in the first quarter of this year compared to the first quarter of 2009.

Internationally, we have seen market rebound in Eastern Europe, Asia and South America. Consistent with the fourth quarter of 2009, these markets have accounted for most of the year-over-year international growth. Improved business conditions have helped increase sales, particularly for those markets that were hard hit by the credit crisis of 2009.

Sales for the replacement channel in the first quarter were up 19% and OEM sales were up 21%, both compared to the first quarter of 2009. Replacement Channel sales gained the most in Europe, Asia, and South America, consistent with the overall trend in international growth.

OEM sales rebounded in the U.S., Asia, and Europe, as these markets improved to present recent quarters. Sales of concrete-cutting products were up about 14% from the first quarter of 2009, which is a first year-over-year growth we have experienced since the first quarter of 2008.

Segment order backlog was $103.3 million at the end of the first quarter of 2010, up from $81.4 million at the end of the first quarter of 2009. Additionally, order intake has improved significantly in the most recent quarter, and backlog has risen from the $78.1 million level at the end of calendar 2009.

We are encouraged by the recent order intake and factor that into our revised full-year 2010 revenue outlook that Josh will discuss later. First quarter contribution to operating income from the outdoor products segment was $27.8 million from contribution margin of 20.9% of sales. The contribution margin in the first quarter of 2009 was much lower at 14.8%.

Improved volumes and related manufacturing efficiencies have driven the outdoor products contribution margin higher. In the first quarter, our manufacturing facilities operated at nearly 87% utilization rate, providing good cost leverage. We also saw a moderation in steel costs flow through our income statements in the first quarter of 2010, representing a $4.2 million of year-over-year cost savings.

Compared to the first quarter of 2009, the benefit of higher volumes and lower steel costs were slightly offset by first quarter FX rates that were approximately $1.6 million worse than 2009. The Euro area of currency exchange rates added most of the approximate 1.5% FX gained an outdoor product sales compared to the first quarter of 2009.

However, the sales benefit was more than offset by higher production costs related to the stronger Brazilian and Canadian currency. Our OEM sales outside the outdoor product segment comes from our gear and components business, which had sales of $3.6 million, a 30% decline from the first quarter of 2009, and nearly all related to lower unit volumes.

Despite the fall-off in sales, our gear components business continued to generate a profit in the first quarter. We believe this business and its end market are now finally below their cyclical bottom. Order rate and backlog are improving and our management team at gear products has done an excellent job navigating through this environment.

The first quarter 2010 net expense for corporate and other up $6 million was approximately $2.9 million lower than the first quarter of 2009. The primary driver of lower net expense was $5 million of plant closure and severance costs incurred in the first quarter of 2009 that was not repeated in 2010.

Partially the offsetting the elimination of both costs was an increase in compensation expenses, primarily attributable to improved profitability of the company in 2010. The effective income tax rate of 42.4% in the first quarter of 2010 was higher than last year. The primary driver of the higher rate was a $1.7 million non-cash charge related to the recently enacted law altering the tax treatment of the Medicare Part D prescription drug subsidy partially offset by the positive effect of settling our IRS Audit and related release to reserve for some of our uncertain tax positions.

We expect our effective tax rate for the year to range between 35% and 38%, including these one-time events. Outstanding debt was $282.2 million and cash on hand was $54.5 million as of March 31st, 2010. The company's net debt position decreased $3.1 million during the first quarter of 2010 and has declined $52.9 million since March 31st, 2009, as we have used free cash flow primarily for the purpose of reducing debt.

We generated $2.5 million of free cash flow in the first quarter. This compares to $12.1 million use of cash in the first quarter of 2009. First quarter 2010 free cash flow was significantly improved over the prior year, primarily due to increased sales and profitability. We defined free cash flow, as cash flow from operating activities, less net capital expenditures.

Capital spending in the first quarter of 2010 was $3.7 million compared to $4.9 million in the first quarter of 2009. The reduced level of capital spending is a result of the slower posture taken in 2009, which has influenced early 2010 spending patterns. We expect capital spending levels to increase over the remainder of the 2010, and to range between $22 million and $27 million in total.

I believe that covers the specifics related to the first quarter of 2010. So now, I would like to turn the call back over to Josh for some observations on our outlook and concluding remarks.

Josh Collins

Thanks, Cal. For the balance of 2010, we expect that our business will continue to improve. We've increased our projection for full-year sales. We expect the range between $550 million and $570 million, which is up from a range of $530 million to $550 million from previously provided last quarter.

Full-year sales growth is expected in the 10% to 14% range, with most of the growth occurring in the first half of the year, and the bulk of the sales growth is expected to be from organic volume improvement aided by new product sales.

Operating income is projected to be in the $80 million to $85 million range, which is a range 43% to 52% higher than 2009. While operating margins should improve with favorable volume leverage on our manufacturing facilities, we expect to see FX foreign exchange headwind in the $7 million to $8 million range. We also expect to experience increases in steel costs going forward in the second half of the year that will result in year-over-year cost pressures and give back much of the steel related cost improvement that we recorded in the first quarter.

We expect our full-year net interest expense to range between $25 million and $27 million, slightly higher than 2009 due to the higher rates associated with our December 2009 credit agreement extension. Full-year free cash flow is estimated to be between $37 million and $43 million in 2010 and is somewhat dependent on the working capital investment required to support the expected sales growth.

As we mentioned in our last quarterly call, our senior leadership team has been conducting a strategic review of the business. We now completed that review and have begun implementing the initiatives associated with this corporate strategy. We believe that we are positions to achieve significant growth over the next several years, with the goal of doubling EBITDA from 2009 levels to $180 million by year 2014, using only internally generated free cash flow for growth investments.

Areas of potential growth include organic growth within our existing product lines, new products introduced in our existing and adjacent product markets, and acquisitions with a tight strategic fit. We have spent comfortable resources developing new products over the past two years.

During 2010 and going forward, we will redouble that effort in order to ensure a strong pipeline of new products with an attractive value proposition to our end users. PowerSharp and PowerGrid are our first two products to be launched through this effort.

With respect to acquisitions, we are currently reviewing and will continue to review regularly multiple potential acquisitions, all with a good, tight industrial fit. Nothing is imminent, but we believe we will likely acquire two to three businesses over the next 18 months. Most of these businesses, we are looking at are in the enterprise value range of $25 million to $75 million, and will provide multiple value creation opportunities.

Overall, we are encouraged by our first quarter performance, as well as the opportunity to see available over the next several years.

At this time, I will open up the line for any questions.

Question-and-Answer Session

(Operator Instructions). We have a question from Eileen Gamboa, Post Advisory. Please go ahead.

Eileen Gamboa - Post Advisory

I was wondering for your bond that it will become callable, what year, when do you intend to refinance that, given the strength of the market?

Calvin Jenness

Well, you're right. There becomes then callable the premium goes down this August. They are due in August 2012. So, as Josh mentioned, we've completed our strategy review. Next step is figure out what we're going to do from a financing standpoint and we will do in a two quarters but we don't feel we are under pressure right now, but between now and 18 months from now, I would say.

Josh Collins

And we're in a good situation right now, Eileen. There's no usage that's burning for us. Secondly, the markets are in good shape, and we would expect we're going to do something, sooner than later we're not going to allude to when we will do that, but there is nothing eminent and we are working on that now.


(Operator Instructions). The next question is Alan Robinson, Royal Bank of Canada. Please go ahead, sir.

Alan Robinson - Royal Bank of Canada

Just a point of clarification. You mentioned, you intend to pursue two or three acquisitions over the next 18 months. The $25 million to $75 million tag you referenced, is that in aggregate or is that for each opportunity?

Josh Collins

No, I'm afraid I wasn't clear enough there. Let me clarify that. We are pursuing or analyzing a lot of opportunities and if I had to handicap then I would say within next 18 months, we'll probably get two to three of them done. When that's one out of 10 things we look at, something like that, one out of five, we triage pretty well, but there are a lot of reasons obviously these things go away, including value, fit, what we see and diligence, et cetera.

But, you know, if you had to handicap, I don't know but I'm just sort of guessing that it feels like a lot of them have pretty decent fits and I would guess that probably get two to three of them done over the next 18 months. Each one of those acquisition opportunities that we're looking at, you know, of a half a dozen to a dozen that you're looking at in any period of time, most of them are in the $25 million to $75 million range each.

So, call it middle of the road, $50 million, and maybe three of them, $150 million worth of acquisitions over the next 18 months. Maybe it's $100 million over the next 18 months. We're not trying to, this doesn't drive strategy, but we do think that there are some really good strategic fits. And as we're looking at either buy versus build decisions or looking at ways to leverage our assets, resources, and capabilities, you know, we think this is a good way to achieve some accretive growth for our shareholders.

Alan Robinson - Royal Bank of Canada

And then, are you focusing on domestic or international or all of the above?

Josh Collins

All of the above, I mean, we're currently two-thirds outside the U.S. and I would guess that the acquisition strategy is about the same.

Alan Robinson - Royal Bank of Canada

And then, could you just provide a little commentary on the state of the domestic markets. You referenced a slight decline year-on-year. How do you view that going forward? Are there specific projects you have in mind or new products that may be able to reverse that, or could you just give us some commentary there?

Josh Collins

It's really market driven and I don't, I think we're following the market very closely there. We are, in all lines of our business, trying to develop new products that do have a meaningful and attractive value proposition or end users and including here domestically, we want to make sure that we have a product line on the chain of our side that fits the casual users.

Frankly, we probably don't have the best, most appropriate product for some of the casual users who are looking for a different sort of, we are really looking for a value brand. So, we are working on that, but in terms of the year-over-year decline, or slight decline, really that's market and I will say that it does feel that that is, that the domestic markets are firming very slowly and as Cal said, and we've stated, the majority of growth has come from outside the U.S. The growth is coming from outside the U.S., but it does feel that that will firm through the rest of the year.


(Operator Instructions). Having no further questions, this concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Josh Collins

Well, thank you all for joining us. My sense is from both the attendance and lack of questions, people are busy with other things, and we appreciate it and we will talk to you at our next meet. Bye.


The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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