Blount International's (BLT) CEO Josh Collins on Q2 2014 Results - Earnings Call Transcript

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 |  About: Blount International Inc (BLT)
by: SA Transcripts

Blount International Inc. (NYSE:BLT)

Q2 2014 Earnings Conference Call

August 6, 2014 1:00 PM ET

Executives

David Dugan – Director-Corporate Communications and Investor Relations

Joshua L. Collins – Chairman and Chief Executive Officer

David A. Willmott – President and Chief Operating Officer

Calvin E. Jenness – Senior Vice President and Chief Financial Officer

Analysts

Steve Barger – KeyBanc Capital Markets

Robert Kosowsky – Sidoti & Co. LLC

Nimesh Kshatriya – William Blair & Co. LLC

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 second quarter of 2014 results and the company’s outlook for 2014 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. 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 our press release and our Form 8-K and SEC filings.

Additionally, we have supplemented our second 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 second quarter of 2014 along with our outlook for 2014.

Josh Collins

Thanks, David and thank you all for joining us on today’s call. To begin, we performed well during the second quarter and we continue to see demand increase in our key markets. For sales in the second quarter of 2014 increased compared to the second quarter of 2013. Our FLAG segment sales up more than 6% and FRAG segment sales up more than 7%.

Our sales in Europe and Russia continue to strengthen, with 8% overall growth. Our sales in North America were up more than 15%. however, our sales in Asia were down more than 9%. We’re encouraged by the continued improvement in most of our markets that we remain cautiously optimistic about the remainder of the year.

Our on order position reflects the stabilizing demand, total on order position of $181 million at the end of June, compares to $173 million on June 30 of last year. FLAG quarters were $161 million, representing approximately 89% of the total. FLAG quarters increased 3% compared to June 30 last year. FRAG on order position increased by nearly 17%, or $2.8 million from June 30 of last year, due to improved demand for SpeeCo log splitters and wood attachments.

Our operating income for the quarter increased by $3.1 million, compared to the second quarter of 2013, the profit improvement was primarily driven by higher unit sales volume, lower product costs, which were partially offset by slightly lower average selling prices, increased average steel costs, higher SG&A expenses and facility closure and restructuring.

I will now turn the call over to Cal to cover the specifics related to the financial performance of the company. After that, I will wrap with our 2014 outlook and other news.

Calvin Jenness

Thanks, Josh. As a reminder, we posted a presentation to our website this morning. In addition to our press release, we have outlined profit and cash flow drivers for the second quarter of 2014, compared to the second quarter of 2013, along with other operating metrics. Our FLAG business generated solid profit improvement in the second quarter of 2014 and sales have surpassed to the second quarter of last year.

Sales volumes increased about $11 million in the segment and generated $4.6 million of incremental profit. Recently, sales in Europe and Russia increased by 7.9% and sales in North America increased by 15.3%, reflecting additional recovery in demand. Sales in Asia declined 9.5%, reflecting soft market demand due to weak economic conditions and continue above average inventory levels in the distribution channel.

FLAG sales were not affected by current fluctuation in the quarter. however, average pricing declined by $1.6 million, as competitive price reductions were taken in select markets. From a profit perspective, second quarter 2014 FLAG segment adjusted EBITDA improved by $2.9 million, compared to the second quarter of 2013.

The main drivers will improve sales volumes in the course of our least efficient forestry product plant in Carlton, Oregon, as well as improved plant utilization rates. Our FLAG plants ran around 91% utilization in the second quarter of 2014, compared to about 76% last year. Finally, FX improved earnings by about $500,000 that was more than offset by average pricing reduction.

Turning to the FRAG business, second quarter 2014 sales volumes increased versus a year ago, mostly driven by strong growth in large quarter sales and increased unit sales of tractor attachments. Decreased unit sales in the segment parts and accessories were partially offset with the volume increase.

The FRAG business’s adjusted EBITDA was $6.8 million in the second quarter of 2014, compared to $6.4 million in the second quarter of 2013. The FRAG EBITDA increase was due to improved sales volumes and average pricing, partially offset by a higher cost in the FRAG segment mainly in the areas of manufacturing and assembly.

The sales mix in the second quarter of 2014 also included relatively lower margin projects compared to 2013. Net expense for corporate and other, which includes the concrete cutting and finishing business, increased by $700,000 mostly as a result of $0.5 million of expense related to the closure of our blade plant in Mexico and higher incentive compensation expense. Adjusted EBITDA in total for the second quarter 2014 was $34.8 million, compared to $32 million in the year-ago period, primarily as a result of the improved cost profile in the FLAG business.

Our effective income tax rate was about 32% for the second quarter of this year. Net debt was about $385 million at the end of the second quarter, which is a decrease of approximately $10 million from December 31, 2013. Our ratio of net debt to adjust EBITDA was 3.0 times at the end of the second quarter of 2014, which reflects lower net debt and increased adjusted EBITDA compared to last year.

Net debt decreased in the second quarter as we generated free cash of $19.7 million, compared to $15.9 million in 2013. Our second quarter of 2014 free cash flow reflects improved cash from operations, driven by improved operating results along with the reduction of working capital compared to last year. Working capital benefited from our continued control of inventory levels, compared to the same quarter of a year ago. Capital spending increased $1.6 million, compared with the second quarter of 2013.

That covers the specifics related to the second quarter of 2014. So now, I would like to turn the call back over to Josh.

Joshua L. Collins

Thanks, Cal. I’ll wrap up today’s call by touching on our outlook for 2014 and other recent news, and then we’ll open the line for questions. Our forward order of books and order intake rates continue to improve compared to last year and reflect improved demand for both our FLAG and FRAG products.

As a result of the sales demand and the generally improved cost profile in the FLAG business, we are raising our 2014 outlook upward for both sales and adjusted EBITDA. We expect sales to range between $935 million and $960 million and operating income to range between $81 million and $86 million.

Our sales projection assumes some increase in FLAG segment sales of 3% to 6%, and growth in FRAG segment sales of 6% to 8%, both versus 2013 levels. We expect adjusted EBITDA to fall within the $135 million to $140 million range. We continue to expect free cash flow in 2014 to be between $32 million and $38 million that’s approximately $38 million to $42 million of capital expenditures. Net interest expense is expected to be approximately $18 million in 2014 and the effective income tax rate from continuing operations is expected to be between 33% and 36% in 2014.

Today, we also announced that our board of directors has authorized the share repurchase program of up to $75 million of Blount common stock to be completed by December 31, 2016. With the continued strength of our balance sheet and our confidence in our long-term future, we believe the share repurchase program is a good use of our capital of retaining sufficient capacity, continue making long-term investments in our business.

We’ve mentioned on these calls several times over the past few years, that when our leverage got to an appropriate level we would institute a share repurchase program, and/or dividend. We are now three times that leverage and expect that we will be approaching 2.5 times to 2.6 times by year-end without the share repurchase program. Our balance sheet is strong and it is the right time to begin returning capital to our shareholders.

It's a balanced program that will provide us flexibility to maintain a target capital structure of 2.5 times to 3 times, while returning capital to our shareholders.

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

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (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.

Joshua L. Collins

Good morning, Steve.

Calvin E. Jenness

Good morning.

Steve Barger – KeyBanc Capital Markets

Nice to see some growth in the quarter. And it's a pretty encouraging commentary, but is it fair to say that you think most of your end markets are past profit this point?

Calvin E. Jenness

It depends on the region. I mean, we're still not seeing a recovery in Asia, I think we said that we expect to see the recovery by year end, but we’ve not seen yet, but we feel good about recovery and sort of the pace of the recovery in the Europe. It feels like it's broad and not to some kind of a headcount balance, if you will. And North America, U.S. continue to be stable.

Steve Barger – KeyBanc Capital Markets

As you talk to the distributors or dealers in Asia, does it feel like the end market's firming up and they're still working through inventory, or is it the end market still weak itself?

Calvin E. Jenness

I think a little of both. Definitely gotten ahead of themselves on inventory. But the end markets are not strong. I think continuing stability in Europe will benefit that greatly.

Steve Barger – KeyBanc Capital Markets

Okay. On net, though, it sounds like growth is going to continue. So, if that's the case, would you expect that you've probably seen a free cash flow trough, as well?

Calvin E. Jenness

Free cash flow has been exceptional over the last year. We’re right around $80 million for the last year, free cash flow available for debt repayment or otherwise after tax, and just expense, and CapEx et cetera. It comes in different times of year obviously and we don’t expect that sort of level as we laid out $35 million, $40 million per year and with growth – it comes from growth of working capital, so otherwise we are managing working capital pretty well. We are talking about use capital for capital expenditures, but we do have ongoing lease around CapEx.

So I think we laid out, we are talking about $40 million to $50 million at year end, free cash flow over the next few years, and we’ll give you an update next quarter, we’ll probably tighten up the range and depending on the pace of CapEx and then growth on the capital side there maybe a little bit upside around our free cash flow number.

Steve Barger – KeyBanc Capital Markets

Great. Okay. And as you’ve modeled out your expectations going forward beyond this year, I’m wondering about operating income sensitivity. If end markets continue to firm up and you can grow revenue at – just call it a mid-single-digit rate, do you expect you can grow EBIT at two times that rate, or better than that, given your leaner cost structure?

Calvin E. Jenness

It will be better than that rate, we have not moved off of our – our point of view generally around the next, now four years or four and a half years through our strategic planning horizon is consistent. We’re going through review of that outlook right now, but I think it’s going to be fairly consistent. We’re outperforming that right now, but it’s a – that’s a five-year plan, and remember it’s not five-year budget. But in those expectations we are expecting greater than GDP top line growth rates, and operating margins will grow or I should say operating profit will outpace that level, I don’t have the math right in front of me, but I think it twice that rate, but it’s greater than the rate.

Steve Barger – KeyBanc Capital Markets

Got it. Okay. And last question and I'll get back in the line. Really good to see a buyback authorization. It looks like it runs for about ten quarters. Do you view that as an opportunistic way to return capital, or is that more of a firm commitment in terms of executing the entire $75 million during that time period?

Calvin E. Jenness

We are not going to go into details on taxes, we don’t think that make sense, we’re evaluating bunch of different things I can say that and we’d expect that we – it's not going to be all at once. Let’s put that way, that doesn’t make sense. It’ll be over a period of time we are opportunistic about it, but and we – you could accelerate it. I do want to say, I mentioned leverage, our target capital structure is, point of view of running right now, it’s two and a half to three times that leverage. There could be a point during in the next two or three years that, we feel makes sense to go up a little higher than that up to say three and a half times, or is that we kept low in that even, but we feel that’s sort of an optimal capital structure given the outlook and given the nature of our business.

So we may, in terms it makes sense to accelerate that a little bit. Our current thinking is that, the pace of the $30 million, a little over $30 million a year and that’s prudent and balanced use of capital during that called the interim.

Steve Barger – KeyBanc Capital Markets

Got it. And since you brought it up, you said you're evaluating a bunch of different options. What are – is acquisitions part of that still? Or what other avenues to return capital do you view as most favorable right now?

Calvin E. Jenness

I’m specifically talking about the tactics of that one, actually I keep to execute on share repurchase and we are evaluating all of those, but once again we’re not going to talk to people about how we are going to actually execute. In terms of acquisitions, we continue to look at things that make sense, we have plenty of opportunity internally to grow the business and to improve our margins and we really haven’t focused on that at this point.

Steve Barger – KeyBanc Capital Markets

Great. Good. I'll get back in the line. Thanks.

Calvin E. Jenness

Thanks, Steve.

Operator

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

Robert Kosowsky – Sidoti & Co. LLC

Good morning, guys. How are you doing?

Calvin E. Jenness

Hey, Rob.

Robert Kosowsky – Sidoti & Co. LLC

I was wondering on FRAG, you had very good FRAG sales. Can you bucket into how much was strong log splitter sales following the pretty harsh winter we had last year versus what you’re seeing on the farm economy?

Joshua L. Collins

Yes. On the farm side, I think we're doing okay there on our sales, the late spring as you know, I mean we are not as much tied to the big ag commodity prices as most the big ag is right. The late spring if you will, though long, harsh winter, both has helped log splitter sales, which have been outstanding. And we are keeping an eye on, demand continues. The question is that going to pull any from the fall selling season and we'll see. But certainly we’re not seeing it yet around order intake.

But the flip side of that is that in the late spring and that's a long early spring that can hurt part sales. So a real bit of a mix there all the way around. Yes. I think we're seeing some impact – some around attachments, some of the impact of the big ag is seeing around commodity prices, but nothing like they are seeing and I think we're really agile within that. We've got further opportunities around the top side of our attachment business and we'll continue to work on that and as we've laid out in the past, we think long-term, we think that overall it’s a mid-teens EBTIDA business, the overall performance in ag business.

We continue to work on that, but in terms of the demand side, that log sales are really good, parts was – had a difficult first half of the year so far and attachments coming between.

Robert Kosowsky – Sidoti & Co. LLC

Okay. That's helpful. And then on FLAG, I was just curious if you could maybe bridge the sequential margin decline that we saw there? Because utilization was up versus what we saw in the first quarter, but the margins came down. And I'm wondering if there was any one-time things in there, or product mix that went against you? If – any kind of color you can give on the margin profile in FLAG?

Joshua L. Collins

Yes. It's a pretty good question and let me break it down a little bit without – I don't want to go into too much detail. Within FLAG, FLAG had a lot of stuff in historical FLAG in some of for business. Power equipment and micro equipment parts and there's Cox – our direct end-user business and PBL employee business. And on a sequential basis, you're talking about say 200 basis points differential and you call it close to $4 million and on the EBITDA contribution side, roughly half of that is due to seasonality, well, is due to Cox and PBL business and part of that is seasonality and part of it was planned slowdown that we fully expected due to an implementation of SAP and Cox which was successful and we implemented SAP and PBL beginning of the year in the Cox during the second quarter.

And so we purposely slow down that business, which is often driven by catalog and mailing et cetera. We wanted that business to slow down to handle that implementation – would we feel good about those with implementations that’s approximately half of the sequential decline and the other half being an each flag, actually some of that, while year-over-year we didn't have an impact on FX, it gives you all that probably half was left due to FX quarter-to-quarter, it’s not something we are talking about here.

And then there was some other well more than the other million, I could give you $2 million to $3 million that we ought to be able to do absorb that included things like the annual wage increases occurred in the beginning of the second quarter and we increased our accrual to our incentive compensation that grew in the second quarter and made up due to the performance. So we didn’t go back and adjust first quarter to that.

So if you’re looking quarter-to-quarter, that’s piece of it, those two pieces combined really make up for the difference there. But I will also say, because I think the point to your question is, are you going to be able to – what margins can we do going forward in FLAG, and do you feel like, it was 91% if you tap down in center. So this has been – we’re incredibly proud of our team, the work we’ve done over the past years. We’re starting a little bit of about nine months ago, when we consolidated in the Milwaukie facility into, not only Portland metro here, but also a little bit Canada and Fuzhou and Curitiba. And it’s an extraordinary amount of work, and qualifying all the equipment and moving the vast majority of the capacity, also are giving people speed, training people and bringing the capacity levels and making – ensuring that our quality remains at the top of the industry.

And what we’ve gotten the savings that we expected; we still have a lot of room for improvement and we have a couple of piece of equipment that went down that in May and June that very different cost that we expected to having better results if they haven’t done for – two, three equipment going down that back up now. And so without going into the details that it doesn’t make sense. We think we’ve got upside to get back to level to, and then historical supply chain, the chain of our business that we expect.

Robert Kosowsky – Sidoti & Co. LLC

Okay, that’s very helpful. and then finally, just I think Cal mentioned some competitive price reductions, and I was wondering which market those are in?

Joshua L. Collins

We’ve been going through exactly with the mark in SAR, but people were talking about tactical measures that once again, we’re talking year-over-year. I can’t think of anything in the quarter that was…

Calvin E. Jenness

Incremental, I mean that we’ve started at the beginning of the year.

Joshua L. Collins

Yes. this stuff that we’ve really started in the last year and beginning of this year. And so we’re just laughing at, we think we have been talking about for a while that we got a little ahead of ourselves and sort of ahead of the market. In terms of pricing in some areas we tactically pulled back, and you’ve seen a little bit of the impact there. We do think that at this point, it feels like, we should be able to get the kind of price increases historically over the last decade if you want that we can see. We want to talk about those on these calls, we’ve included those commercial issues, but we don’t want people to think that this is going to be a trend that’s sort of ongoing year-over-year.

Robert Kosowsky – Sidoti & Co. LLC

Okay, that’s helpful and good luck in the back half of the year.

Joshua L. Collins

Thank you.

Operator

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

Nimesh Kshatriya – William Blair & Co. LLC

Hey, guys. This is Nimesh jumping in for Larry.

Joshua L. Collins

Hey, Nimesh.

Nimesh Kshatriya – William Blair & Co. LLC

So you guys sounded positive on Europe, and obviously, the growth rates have been pretty strong there. But it’s trillion on Russia in particular, especially with the geopolitical issues and the sanctions in the region, and I know that’s historically been a very volatile region. I think in the recession, sales went from $20 million to pretty much nil in the short period of the time. I know they have come down already and the comps are easier. I think last year was only 2% of sales, or $19 million off of $26 million in 2012, but just trying to gauge your level of comfort and confidence in the second half just in the Russia piece.

Joshua L. Collins

Russians that you want to take questions here, we’re up year-over-year and you’re right we did close to $20 million last year. So we’re up for first half of the year, Ukraine, it’s not big market, a couple million dollars probably last year for us. There off, there were kind of chunky sales last year. so right now, we’re still selling and doing okay there. So I think there’s anything that we’ve noticed yet that that’s in the soft base right now, so that has been our impact so far, but obviously cautious about it.

David A. Willmott

We have been looking forward. but first and foremost, we have a team in our branch in Russia, and the Russian professionals and their – it’s a great team, and they’re doing great job for us. And we don’t see any issue around the well being of that team. We have some inventory in Russia and it’s a small amount in order to service the market. And so we don’t think we have any particular work there, and as Cal said, we’re actually doing well this year and continuing to reach out in Russia, a grand small force I don’t know, you call it being any particular issues at this point.

Nimesh Kshatriya – William Blair & Co. LLC

Okay, good to hear. And on the tax rate, I don’t know if you called out any specific reason on why you guys lowered the guidance and it came in a little low in the quarter, is there any discrete items driving that or mix?

David A. Willmott

On the tax rate?

Nimesh Kshatriya – William Blair & Co. LLC

Yes.

David A. Willmott

Yes. There is probably, I don’t know we have been significant there, but there is obviously anytime we come up with a point, do you want something you got to adjust for it. So I don’t know if anything dramatic.

Nimesh Kshatriya – William Blair & Co. LLC

Higher domestic engine, higher...

Joshua L. Collins

Yes. maybe the mix between – you are between U.S. and the foreign, so I don’t think if there is anything significant in the quarter.

Nimesh Kshatriya – William Blair & Co. LLC

Okay. And I know this is asked before on the free cash flow, but just trying to understand the guidance you lower CapEx, you raise your EBITDA, the tax rate is lower, and so all of that is just going to be offset by increased working capital, which will then run off a little bit next year to drive to that $40 million to $50 million range. I know you’re going to give more color presumably on the fourth quarter call, but just trying to understand the optics behind the guidance?

Joshua L. Collins

Yes. We’ve been it’s we initially put back guidance; we’ve done Pentruder sales $3 million. so we already kind of have a lean quarter a little bit due to that range. We obviously are outperforming our initial expectations, but we think our cost and quality are capital expenditures, probably a little bit lower than we anticipated. So that kind of makes up to the difference and Pentruder, we are seeing some growth. There will be like with a little bit of growth around working capital.

So it’s a lot of variables obviously, I think it’s a limited number, but there are a lot of variables. We could be a little conservative on that – on the cash flow piece and we’ll be able to be much more accurate I think in the quarter.

Nimesh Kshatriya – William Blair & Co. LLC

Okay. That make sense. And then, seasonality in the third quarter, I know there's some moving pieces around FRAG, and if you've seen some pull forward of demand from the traditionally stronger fall season. But just trying to model out the rest of the year, would you expect higher EBITDA in the third quarter, similar to prior years? First quarter?

Calvin E. Jenness

Once again, I think you identify the right variables. We obviously raised around from 135 to 140, the assumption there, the important assumption there that with the high end of the range. That second half looks like first half is too early to – we think directionally we’ve made this move, but it’s too early to tell exactly. There is some risk around the big splitter – huge winter big splitter sales in the first half. We'll see with that around splitter sales in second half our outlook assumes that there will be some slowdown.

So that’s going to be a big variable. And then the other drill is probably biggest one is we’ve got decent visibility out for few months and on flex side of the business and we can look like in three quarters, all indications appear pretty good right now, more the wildcard seen in Asia. So we feel like this is a pretty balanced and prudent estimate for forecast for 2014.

Nimesh Kshatriya – William Blair & Co. LLC

Okay. And then, just back to Asia, you said there could be some improvement at year end, not seeing anything yet. But how long has the destocking process gone? I know in Europe it was a year or longer before things started to turn up. Just trying to understand where we are in that process. Just have better visibility that the press next year could be better?

Calvin E. Jenness

Yes, we do have some visibility. We don’t have perfect visibility because we’ve really good relationship with our distributors in Asia and the dealer network in Asia is very complex. It’s not just – it’s was really driven multi and use demand right, but then stocking levels at dealers and what amounts to 50,000 plus dealers across Asia, maybe more. And we don’t (indiscernible) view into those levels. So the best estimates that we have from looking it that our stocking, distribution stocking levels and their sell through. And information given from the field is that we’ve had to see some year-over-year growth at year-end.

Nimesh Kshatriya – William Blair & Co. LLC

Okay. Yes. That make sense. And then finally, on the capacity utilization, I know it's up to 91% from 88% in FLAG sequentially. Are you seeing higher utilization in the China facility, as well? Or is it pretty much all Portland?

Calvin E. Jenness

No, it’s everywhere.

Joshua L. Collins

Yes.

Nimesh Kshatriya – William Blair & Co. LLC

Excellent, well that’s all I have. Thanks, guys.

Joshua L. Collins

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Josh Collins, Chief Executive Officer for any closing remarks.

Joshua L. Collins

All right. Thank you all for your time and we will see you in three months. And that’s it.

Operator

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

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