Hardinge's (HDNG) CEO Richard Simons on Q4 2015 Results - Earnings Call Transcript

| About: Hardinge, Inc. (HDNG)

Hardinge, Inc. (NASDAQ:HDNG)

Q4 2015 Earnings Call

February 11, 2016 11:00 AM ET

Executives

Deborah Pawlowski - IR, Kei Advisors LLC

Richard Simons - President and Chief Executive Officer

Douglas Malone - VP and Chief Financial Officer

Operator

Good day, ladies and gentlemen, and welcome to the Hardinge Incorporated Fourth Quarter 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to introduce your host for today’s conference Ms. Deborah Pawlowski, Investor Relations. Ma’am, you may begin.

Deborah Pawlowski

Thank you, Kelley, and good morning, everyone. Thank you for joining us here today. We certainly appreciate your time as well as your interest in Hardinge. Here with me are Rick Simons, our President and CEO; and Doug Malone, Vice President and CFO. Rick will be discussing the results for the fourth quarter full year 2015, and will also be reviewing company’s initiatives and progress in our markets and with our observations.

You should have a copy of the financial results that were released this morning before the market opened. And if not, you can access them at the company's website, www.hardinge.com. You should also have the slides that will accompany our discussion here today, and you can find them on the website as well.

So as you look at the slide deck, if you turn to slide two, you will find our Safe Harbor statement. As you're aware, we may make forward-looking statements during the formal discussion, as well as during the Q&A. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ from what is stated on today's call. These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission. You can find those documents on our website or at www.sec.gov.

Also, as you are aware, on August 24, 2015, we issued a press release announcing that the board of directors and management are exploring strategic alternatives to enhance shareholder value with the assistance of BMO Capital Markets as our financial advisor. Given that the review process is still underway, Rick and Doug will not be able to discuss the process and alternatives or provide any updates regarding where we are in this process. The options that are being – we will discuss either options being evaluated or the timing of these events. As a result, we would ask that any questions on today's call be focused on our operations and the financial results.

So with that, let me turn it over to Rick. Rick?

Richard Simons

Thank you, Deb, and good morning, everyone, thanks for joining us this morning. As usual, I’m going to go through the slide deck that Deb referred to and provide some comments. Then at the end Doug and I will be available to answer any of your questions. I will be commenting on what we feel is a very strong quarter with very good financial results and I’ll go through it slide by slide and explain that.

I wanted to first off make a comment, many of you know that we do have operations in Taiwan and have a significant facility there. In the earthquake that happened last week, fortunately did not affect our operations. We do have some people that live in the area that was affected but thankfully no one was harmed or their homes were okay and our building is okay and everything is okay and accounted for.

During the quarter our restructuring did progress well, the actions that we had hoped to be able to take and finish by the end of the year were finished by the end of the year and we did have a small benefit from that and I’ll talk about that later but obviously more to come going forward.

With that, let’s turn to slide three and it shows our quarterly sales and annual sales. And you can see that fourth quarter sales were down about 7% from a very strong fourth quarter of last year. Now, FX translation – currency translation, translating our foreign operations into U.S. dollars has had a negative impact on our sales numbers and our order numbers, I’ll try to call that out as we go on. But although the reported numbers are 7% down if you exclude those impact, they were down about – it was impacted $2.6 million so we’re down about 4%.

If you look at it by region, again fourth quarter of last year, very strong in Asia at $33 million. We had a lot of expensive grinding machines that were shipped in that quarter last year, so down slightly in this year. Europe, again a lot of the FX effect is in Europe but realistically Europe and North American sales were fairly comparable to last year.

Fourth quarter sales are up measurably from the trailing third quarter and as you can see from the slide it’s driven mostly by strong performance in North America and Europe. Full year sales show up 5% from the $3.12 million to $3.15 million, only 1% but again significant FX translation impacts of $11.4 million and if you exclude that sales were actually up 5% year-on-year.

So if we go to slide four, we had very strong gross margins of 31%, up over last year even on slightly lower sales and really product mix with high margin configured grinding machines and certainly the leveraging of fixed manufacturing and engineering costs having improved their relationship. I think the most significant thing is that it shows that we are capable of getting 30% plus gross margins with the right sales levels and obviously with the right product mix which we believe is a typical product mix for us in better times.

We did have a small impact of about 0.3 point impact positive from the restructuring activities with the cost reductions that we did implement in September.

If I go to slide five, the operating margin improved significantly and that’s really obviously driven first by the gross margin percentage increasing as well as holding SG&A expenses flat and actually excluding some professional fees related to the strategic initiatives, our SG&A expenses were below last year. I will say also within our numbers, there are – still is some investment in the Voumard product line, if you remember we acquired that product line at the end of 2014, hired some engineers and also spent the year really moving the manufacturing from the people we acquired the product line from, where it was up in Northern Germany and moving it to St. Gallen, Switzerland, so we did incur about a $1.5 million worth of expense without any related revenues at this point in time but I’ll talk later about our activity level with the Voumard product line.

As you look at the operating margin on the right hand side, you see we did have an improvement from 2014, but still at a fairly low level and again driven some up because of the cost that I just talked about. I think what we feel very comfortable with though is that we have a cost structure now that will generate returns even better than what we saw in 2011 through 2013 on comparable sales levels going forward.

If we go to page six, obviously EBITDA results correspond with the operating income. We report this because it’s an important measure for us for cash flow and obviously it’s included in our incentive comp programs as well. But I think the cash flow is important because if you look at our cash flow statement in the press release you see that we generated $27 million of cash from operating activities this year. And actually if you subtract out the CapEx [indiscernible] about $4 million free cash flow with $23 million was generated from operations this year and it is what we concentrate our efforts on.

I think also again, on the EBITDA margin percentage perspective showing with the right product mix and with restructuring benefits which haven’t really factored into these numbers yet, we’ll start to see those more significantly in 2016 that at the good market conditions, higher sales level and with more aggressive new product introduction getting EBITDA margins and double digits is certainly still a reasonable goal long-term.

Page seven is really the net income that falls through everything else we’ve talked about. Certainly we have very little interest expense, we have some still financing relative to the acquisition of Forkardt term financing but outside of that, very little debt on the balance sheet, so the operating income falls pretty much down to the pretax level and then taxes are always dependent upon the different jurisdictions where we make money or in some cases lose money in different jurisdictions.

If we go to slide eight, order levels, certainly the order levels do reflect weak industrial environment, I’m reading now, people are talking about an industrial recession. And certainly we are feeling that or we’re seeing that in the markets. China, lots being written about China and I’m sure you’ll have some questions about China. And overall, our industry data is down I would say double digits as we hear from different sources. The good news is we’ve been able to hold up our sales and order levels in China by targeting specific industries, targeting specific customers, working with our very flexible engineering and manufacturing organizations that meet the demands of the sectors that are looking for machine tools still, and so basically obviously we’re gaining market share there in a very difficult market but realistically, we think we can continue to do that as we go forward.

Europe is down in the quarter for us, there is a strong pipeline of quote activity in Europe, especially in our grinding area and specifically Voumard has been – is a good hit. We actually shipped our first machine in the fourth quarter and now I think a lot of customers are waiting to see us build those machines and see that they’re viable, we actually showed at EMO, I think I talked about that in the last call. But in Europe, with that pipeline and especially grinding orders we’re feeling fairly good about Europe.

North America has been seriously damaged by oil and gas. I’ve mentioned before, not a great amount of our sales goes directly to the oil and gas industry, but on the other hand, those job shops that we’re doing business for oil and gas are now hungry looking for other work and certainly taking some work away from our traditional job shops. AMT our trade association did publish full year order numbers and in United States the industry orders were down by 17%. If you look at our numbers we’re not down by anything close to that and that actually illustrates for us the advantage of our ATA part of our business where the more steady business it isn’t affected quite so much as the capital goods side, allowed us to have a fairly stable 2015 in the U.S. markets.

We do obviously acknowledge, we’ve had three quarters in a row of orders below $80 million and I’ll talk a little bit about 2016. It’s tough for us to forecast, I really don’t feel comfortable giving out specific forecast for 2016. There are so much uncertainty and volatility in each of the geographic regions, really even with Europe which sounds a little bit better than the other two. You do have some of the political issues going on that are holding back business.

So very difficult to predict 2016 but right now obviously we’re entering the year and if you go to the next page, slide nine, we’re entering the year with backlog – comparable to the backlog that we had at the end of 2014. Actually if you adjusted that for currency translation, our backlog is a little bit higher than what it was at the same time last year. So we feel good about going into the year with that backlog, our run rate of our ATA business and our repair parts business continues seeing fairly steady. And so the first half of the year with orders in grinding and even turning and milling will really tell how the year will unfold.

Page 10, a little update on the restructuring activities. We did make – we actually did what was necessary to be able to book the expense in the fourth quarter and it was basically a closing of a facility in our ATA sector in Germany and consolidating facilities. The tasks that we’ve incurred to date have been the typical severance and agreements we have with the employees that have been let go from that operation. We will still have some charges in the first half of this year as we then vacate the building and the charge is associated with vacating that building will hit us in the first half of this year, certainly we anticipate that all being completed by the end of the first half, probably in the first quarter.

Once fully implemented which realistically the actions have been – have taken place. Full year impact of about $4.5 million in cost savings as a result of both German reduction as well as the reduction in U.S. operations that we did in the third and fourth quarter. We’ll continue to work – continue our efforts to identify additional opportunities and we’ll keep you posted if we are going to start with anything in addition to what these things have done.

Page 11 does talk about the overall market. This is the Oxford Economics forecast and I always preface this by saying that the economists are always wrong, but they always have a good reason why they were. But I think the overall trends are important and it’s important to look at the slide as well. If you look at 2015, you see the market that we’re been dealing with, those are I won’t say actual numbers but they are forecast that were done in October so they had the benefit of three quarters worth of the year when they put their numbers down for 2015. But you do see in each of the markets a decline from 2014 and actually if you note, all of those markets are lower than they were in 2011 and 2012 so this has been a fairly steady drop in overall industry for – since 2012. And on the other hand they start showing the growth and we do still believe that will happen, I mean our industry is cyclical, it does go through these cycles, we’ll have two or three years of down and then things will start up. I don’t think the numbers that they put in here are unrealistic in terms of the growth and really most of that is because of the drivers and the machine tool consumption we talk about below.

China in my opinion is a good example, even though the industry is down there are still people buying machine, looking for productivity improvements, looking for ways to cut labor out of their cost, looking for cost reduction and so they do that through buying machine tools. And although we do see these things down – slanting downward, I think our U.S. director of sales does the best, even if they’re trending down there is still a lot of machine tools being sold and our job is to go out and find those niches of it and gain some market share in top markets, which we have proven that we can do over time.

So page 12, just kind of a summary of what I’ve just said, limited visibility, we still feel we’re doing the right thing to gain that market share, doing the right things to get orders and will continue to do that. We are happy that we were finished with the restructuring so that now we can start to see those benefits falling to the bottom line. And obviously as Deb said, we won’t comment on the strategic process but it’s ongoing at this point in time.

So with that, Kelley, let me turn it over to you and we’ll open up the lines for questions.

Question-and-Answer Session

Thank you. [Operator Instructions] And I’m showing no questions at this time.

Richard Simons

Okay, thank you, Kelley. And again thank you all for joining us and I hope you have a very good afternoon.

Deborah Pawlowski

Kelley, I just saw that – never mind, we’ll call him back.

Operator

Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.

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