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

Gardner Denver Inc. (NYSE:GDI)

Q2 2012 Earnings Conference Call

July 20, 2012 08:30 AM ET

Executives

Michael M. Larsen - Interim CEO and CFO

Vikram Kini - VP, Head of Investor Relations and Financial Planning & Analysis

Analysts

Brian Konigsberg - Vertical Research Partners

Michael Halloran - Robert W. Baird & Co.

Jeffrey Hammond - Keybanc Capital Markets, Inc.

Clifford Ransom - Ransom Research

Joshua Pokrzywinski - MKM Partners

Michael Wherley - Janney Montgomery Scott LLC

Joseph Mondillo - Sidoti & Company

Jamie Sullivan - RBC Capital Markets

Nicholas Prendergast - BB&T Capital Markets

Julian Mitchell - Credit Suisse

Operator

Greetings and welcome to the Gardner Denver Second Quarter 2012 Financial Results Conference. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this call is being recorded.

It is now my pleasure to introduce your host, Michael Larsen, Interim CEO and CFO. Thank you, Mr. Larsen. You may begin.

Michael M. Larsen

Thank you, Rob and good morning everyone. Thank you for joining us. We issued our second quarter financial results last evening and a copy of the release is available on our website at gardnerdenver.com.

I’m joined this morning by Vic Kini, Gardner Denver Vice President, Head of Investor Relations and Financial Planning and Analysis. Before we get into the details of our second quarter results, I’m going to ask Vic to work some information regarding forward-looking statements. Vic?

Vikram Kini

Thank you, Michael and good morning everyone. As a reminder, any statements made by Gardner Denver during this call other than historical facts are forward-looking statements made in reliance upon the Safe Harbor of the Private Securities Litigation Reform Act of 1995.

As a general matter, forward-looking statements are those focused upon anticipated events or trends and assumptions, expectations, and beliefs relating to matters that are not historical in nature. Such forward-looking statements are subject to uncertainties and factors related to Gardner Denver’s operations and business environment, all of which are difficult to predict and many of which are beyond the control of the company.

These uncertainties and factors could cause actual results to differ materially from those matters expressed in or implied by such forward-looking statements. Please refer to Gardner Denver's second quarter 2012 earnings press release issued on July 20, 2012 for further information regarding potential uncertainties and factors that could cause actual results to differ from anticipated results.

Gardner Denver does not undertake or plan to update these forward-looking statements, even though the company’s situation may change. Therefore, you should not rely on these forward-looking statements as representing the company's or its management's view as of any date subsequent to today.

As a reminder, this call is being broadcast in listen-only mode through a live webcast. This free webcast will be available for replay up to 90 days, following the call through the Investor Relations page on the Gardner Denver website, at gardnerdenver.com or the Thomson StreetEvents site at earnings.com.

And now I’d like to turn the meeting over to Michael.

Michael M. Larsen

Thanks, Vic. Last night we announced second quarter results that exceeded our expectations in terms of diluted earnings per share. In a more challenging macro environment, the Gardner Denver team delivered margin expansion and a 19% increase in diluted earnings per share exceeding the second quarter guidance communicated on April 18, 2012.

Revenues in the second quarter with $613 million were essentially flat versus the same period last year as the Robuschi acquisition added 4% and currency was a 4% headwind. Operating income for the second quarter was $108 million compared to $99.2 million, an increase of 9% versus the prior-year, reflecting the positive impact of the recent Robuschi acquisition and the impact of operational excellence initiatives.

Operating margin in the quarter was 17.6%, a 140 basis points improvement over the second quarter of 2011. Net income was up 12% to $75.3 million and diluted earnings per share of $1.51 were up 19% of the last year’s second quarter and included unfavorable charges of $0.02 resulting in adjusted EPS of $1.53.

The more challenging macro environment and expected down cycle in Pressure Pumping contributed to a 17% decline in orders to $526 million. The Robuschi acquisition added 4% and currency was a 4% headwind to orders. Cancellations were about $40 million split evenly between the two segments. The book-to-bill ratio in the quarter was 0.86 and our backlog is $654 million as we entered the second half. Cash flow improved sequentially to $66 million, up 36% over the first quarter.

Turning our attention to the individual segments starting with the Engineered Products Group, revenues were $283 million essentially flat as positive revenue growth in our petroleum industrial pump business and our latest cycle project business Nash was offset by declines in Thomas and Emco Wheaton loading arms. EPG operating income increased 4% to $67.2 million and operating margins improved to 23.7%, up 80 basis points from last years second quarter.

On orders, EPG orders in the second quarter declined by 36% to $200 million, driven principally by significantly lower demand in the petroleum and industrial pump business, which was down approximately 60% as well as weakness in Thomas and Emco Wheaton, both down approximately 20%.These declines were partially offset by high single-digit order growth in our later cycle project business Nash, driven by strength in chemicals and oil and gas globally.

Cancellations in our OEM Pressure Pump business were only $4.7 million in the quarter, bringing the total to less than $7 million for the year. After working closely with our key customers over the last months, we now have a grounded view of the backlog for the second half of 2012.

The Pressure Pump team in Tulsa is doing an excellent job dealing with a challenging and very dynamic situation as they continue to execute our aftermarket strategy and pursue orders internationally as well as staying focused on the things that are within our control such as cost, staffing, insourcing and reducing working capital and an effort to mitigate the impact of the downturn. And it certainly helps to have someone with Duane Morgan’s experience and customer relationships on your team when going through a cycle like this one. I’m very pleased that Duane has decided to return to Gardner Denver and I will discuss that in more detail later.

Turning to the Industrial Products Group, IPG had revenues of $330 million, slight increase of 0.6% as the positive contribution from the Robuschi acquisition and strengthened Asia Pacific were offset by weakness globally. Principally in Europe and to some extend China as well as headwind from foreign exchange.

Robuschi added 8% of foreign currency and organic growth reduced sales by 5% and 2% respectively. The IPG team had a very good quarter in terms of margin expansion as operating income increased 19% to $40.8 million and the operating margins were 12.4%, up 190 basis points over last years second quarter making this our second best quarter for IPG margins since 2008.

Robuschi team had a solid second quarter delivering on their revenue and profitability commitments with $25.1 million in revenue and operating margins inline with budget, slightly above 20%. In addition, the team is on pace to free up approximately 30,000 square feet of factory floor space to make room for production from higher cost manufacturing facilities as we embark on our European restructuring efforts, which I will discuss in more detail shortly.

I comment both Brian Cunkelman and the Robuschi team for the commitment to integrating the Robuschi business into the IPG infrastructure while still delivering high quality earnings.

In the second quarter market conditions in the Industrial Products Group became more challenging as the global macroeconomic slow down impacted orders for our products, particularly in Europe and China. Orders in the second quarter were up 1% to $326 million as Robuschi contributed 7% offset by foreign exchange impact of 5% and a 1% organic decline.

By regions, orders in the Americas were about flat relative to a strong second quarter 2011. Europe was down in the mid single-digits and China was down approximately 10%, partially offset by strength in Asia Pacific.

In an effort to mitigate the impact of slowing demand, we’re intensifying our focus on market expansion. As discussed previously, the largest opportunities are the restructuring of our European operations and strategic sourcing. And we remain totally committed to executing at least two important margin expansion initiatives. And we have the resources to get it done.

Let me give you a little more detail on both initiatives. First, the European restructuring plants are nearing completion and the completion of these plants has taken longer than expected due to the complexity of our manufacturing footprint in Europe. In addition, we want to execute the restructuring effectively and manage the risks in a prudent manner that is warranted for an undertaking as large as this.

With that said, we anticipate that we will be in a position to provide you with a more detailed financial framework for European restructuring including project costs, savings, number of sites, staffing, etcetera as well as the associated timing within the first half of the third quarter.

Another critical initiative associated with our 14 x 14 strategy is strategic sourcing from lower cost countries. We’ve strengthened our sourcing team this year and detailed plans have been executed that we expect will deliver the savings that we need to get to 14 x 14. We anticipate that quantifiable results will sharpen our financials in the later part of 2012 and then more so in 2013.

Turning our attention to capital deployment, our balance sheet is strong and our cash flow and financing facilities provide us with ample liquidity to execute on our previously discussed capital deployment strategy. We generated $66 million of cash flow from operating activities in the second quarter and spend $50 million in CapEx to complete previously approved capacity expansions and reduce costs on the shop floor.

On M&A, as previously discussed, in the current acquisition environment though – where evaluation multiples appear rich and given our current trading levels our preference is to opportunistically buyback the stock. And in the second quarter we repurchased 1.7 million shares competing the authorization approved by the Board of Directors in November 2011. This repurchase will impact diluted earnings per shares favorably by approximately $0.09 in the second half of 2012 and approximately $0.18 on an annualized basis.

In terms of capital allocation, our strategy going forward has not changed either. Given our financial strength and strong cash generation, we expect to continue to repurchase our stock opportunistically as well as pursue strategic acquisitions at attractive valuations. We anticipate that we will utilize the current 1.6 million share repurchase authorization from the Board of Directors in the second half of 2012, but have not included that in our guidance.

Turning to our outlook for the balance of 2012, we obviously see the same macroeconomic and foreign exchange trends as everyone else. U.S. manufacturing conditions appeared to be showing signs of softening and globally Europe and China are slowing as reflected in our second quarter order rates. In terms of our outlook and guidance for the second half we do not expect an improvement in our short cycle businesses, particularly in IPG and Thomas in the second half.

Assuming that these businesses essentially maintain 2Q run rate is unfavorable to diluted earnings per share by approximately $0.35 versus our April guidance. We’re not adjusting guidance as a result of the Pressure Pumping. Even though conditions in North America are becoming more challenging, especially in the fourth quarter where we feel we built an appropriate contingency in the April guidance that we gave you.

The headwind from foreign exchange as the U.S. dollar appreciates; it’s approximately $0.05 and will be partially offset by approximately $0.10 of favorability from the already completed stock buyback. As a result, we’re lowering total year expectations and now anticipate that adjusted diluted earnings per share for 2012 will be approximately 530 to 550, down $0.30 from the mid-point of our previous guidance.

We estimate that in a seasonally weak third quarter, adjusted diluted earnings per share will be in the range of $1.15 to $1.25 and the full-year guidance excludes profit improvement and other items totaling $0.40 for the year and $0.03 for the third quarter, resulting in guidance on a GAAP basis of 490 to 510 for the year and $1.12 to a $1.22 for the third quarter of 2012.

At this point, I would like to pass it back over to Vic to give you little more detail on the financials. Vic?

Vikram Kini

Thanks, Michael. First, we continue to execute well on cost controls in the second quarter as SG&A declined 2% year-over-year to $103 million or 15.8% of revenue, down 40 basis points from the same period in 2011.

In the quarter, foreign exchange impact was unfavorable by approximately $0.07 on a year-over-year basis and $0.03 versus our April guidance. Our guidance for the balance of 2012 assumes current exchange rates, which on a year-over-year basis creates about $0.07 of earnings headwind for the balance of the year, five of which is in the third quarter of 2012.

Our effective tax rate in the second quarter was slightly better than our previous guidance at 28%, and while the rate can fluctuate on a quarterly basis, we expect our tax rate to remain in the 28% range for the balance of 2012. On the balance sheet, operating working capital defined as the net of inventory receivables and payables and accrued liabilities, was 17% of sales in the second quarter, up slightly from the first quarter of this year.

Working capital improvement, especially inventory, remains a top priority and we expect to see solid cash generation going forward. At the end of 2Q 2012 we had approximately $225 million of cash on hand and total debt was $500 million, resulting in debt-to-capital ratio of 28%, giving us plenty of flexibility in terms of capital deployment. Depreciation and amortization was $15 million for the quarter and we expect $65 million for the full-year.

With that, I would like to turn it back over to Michael.

Michael M. Larsen

Thanks, Vic. Finally, I would like to comment briefly on the press release issued on Monday July 16th announcing the resignation of our former President and CEO, as well as my appointment as Interim CEO. Specifically I would like to touch on three things. One, affirm Gardner Denver’s commitment to the current strategy and the execution of the associated plans including European restructuring.

Two, affirm our commitment to the Gardner Denver Way and the principles of Leans that has served us so well. Three, talk about what we’re going to stabilize the management team in the short-term and keep our talented employees focused as we move forward.

Let me first say that we’ve broad consensus on the strategic direction of Gardner Denver and the five strategic imperatives that have served the Company so well over the last four years. We remain focused on organic growth, building out the aftermarket, developing innovative products, selective acquisitions and margin expansion. Our strategy is now going to change. On the contrary, we’re going to put even more emphasis on things like building out the aftermarket business and our innovation pipeline.

Our strategy has been and will continue to be supported by the Gardner Denver Way, a business system and culture that is now well ingrained in our operations and our talented employees. It centers on innovation, always looking for a better way of doing things and acting with velocity in all of our processes, whether it’s on the shop floor or in the back office.

Over the years, the Company has trained countless employees on the Gardner Denver Way and Lean principles with a direct focus on driving more efficiency within the business as a means of better serving our customers and ultimately our shareholders. Our commitment to the Gardner Denver Way and Lean is complete. We will not go backwards, instead of taking further actions to develop our Lean expertise, extending Lean into the back office and improving our execution of Lean principles broadly.

Operationally supported by the principles of the Gardner Denver Way, the Gardner Denver team has made great progress over the last four years, as evidenced by our track record on margin expansion, record results in 2011, and a strong start to 2012. With the implementation of Lean across North American and Asia Pacific operations, essentially complete earlier in the year, we shifted our focus to the opportunity in our European IPG operations.

I’ve been intimately involved in developing these plans, and I believe that it’s an absolute necessity to reduce costs in Europe in order to compete successfully. And that hasn’t changed since the announcement on Monday. With Brian Cunkelman’s strong ownership and leadership on the ground in Europe, I’m confident that we will deliver on this important project at the same pace as previously planned and ultimately achieve and exceed our 14% operating margin target in IPG.

The execution of this strategy and the associated plans require great talent and culture. We’ve also made a lot of progress in building a high performance culture. We deployed clear goals and objectives for our teams, we’ve detailed operating rhythms, clear metrics and accountability and we’re always focused on continuous improvement.

With that said, when there is change and cultural transformation of this magnitude, there will be management turnover. Some of it is good, as employees who don’t buy into the new direction of the Company, leave for other opportunities and some of it is unwanted. It is the latter. Unwanted turnover at the senior levels, and middle managed ranks that I as Interim CEO and my leadership team have focused on stabilizing.

And while I’m confident that we have the leaders and teams in place today to execute the plans that are in front of us, we need to stabilize and focus the teams and continue to strengthen our bench by attract and retaining and developing top talent.

Duane Morgan knows how to do that. And bringing him back to lead EPG is going to go a long way in terms of reducing unwanted turnover and energizing the teams to deliver on their commitments in the second half and beyond. In addition, with the return of Duane starting Monday, we just added more than 30 years of energy experience, seven of then with Gardner Denver as well as deep relationships with our largest energy customers, which will serve us well as we navigate the current cycle in our Pressure Pumping business and continue to focus on delivering profitable growth in EPG.

As Interim CEO, my clear goal is to stabilize the team and focus and energize our talented employees globally as we continue to move this Company forward by executing a strategy that has a track record of delivering cash and earnings growth.

Finally, I would like to thank the Board of Directors for their confidence in my abilities and their continued support as they’ve committed to help during this transition. I’m honored to lead a talented Gardner Denver team as Interim CEO and I’m confident in the future.

That concludes our prepared remarks and I would like to open it up for questions. Rob?

Question-and-Answer Session

Thank you. We’ll now be conducting the question-and-answer session. (Operator instructions) Thank you. Our first question is from the line of Brian Konigsberg with Vertical Research. Please proceed with your question.

Brian Konigsberg - Vertical Research Partners

Yes. Hi, good morning.

Michael M. Larsen

Good morning, Brian.

Brian Konigsberg - Vertical Research Partners

Hey, just want to start at on the – on Pressure Pumping, it sounds like cancellations have actually been fairly modest to-date. Just the conversations from your customers and the dynamics that you’re seeing on the ground, do you anticipate that to accelerate into the second half of the year or do you feel as though the customers really have a grasp on supply and demand in the market?

Michael M. Larsen

What I would say is that we have a backlog now in Pressure Pumping that gives us confidence in our forecast for the second half of the year. At the same time, I will tell you that conditions are certainly not improving in Pressure Pumping. As a matter of fact, our previous guidance which include a significant decline in the second half of the year is still valid. And if anything we’re also seeing that the aftermarket is becoming more challenging.

So, what I would say our view on Pressure Pumping that we expect on the last call that for the next 12 to 18 months in North America there is ample supply of the equipment is still valid. Now that said, you’re right, we did a – the team did a great job working with our customers and kept the cancellations to a fairly modest level. We’re also seeing some pick up in demand internationally. So I think we’re developing – continue to develop our view of a very dynamic situation, but like I said we were – we’re not expecting any type of improvement here in the short-term.

Brian Konigsberg - Vertical Research Partners

Right. And then just on the aftermarket, it seems like that will become a much bigger focus for yourself and your competitors. Do you anticipate that there is going to be, I guess, substantial incremental pricing pressure in that business, maybe just give us a sense how you expect that to play out?

Michael M. Larsen

Well, the way I’d answer that is when you’ve a market that grows as quickly as Pressure Pumping has over the last, say, two years and you’ve significant amount of capacity being added over the same time period when things slow down it would be reasonable to expect that the competitive pressures increase.

With that said, if you look at our customer base, which is concentrated on a fairly short list of large customers who value a reliable aftermarket fluid end that is safe, that lasts, that is backed by the warranty from a record overall company, there really are not that many alternatives. So I think that to some extent will offset or mitigate some of the pressure that you’d expect to see on price, but clearly the dynamics here in the aftermarket are challenging.

Brian Konigsberg - Vertical Research Partners

Okay. Thank you very much.

Michael M. Larsen

You’re welcome.

Operator

Thank you. Our next question is from Michael Halloran of Robert W. Baird. Please state your question.

Michael Halloran - Robert W. Baird & Co.

Good morning, guys.

Michael M. Larsen

Hi, Mike.

Michael Halloran - Robert W. Baird & Co.

So, just continuing on the aftermarket comment that you made, things were softening a little bit there even, could you maybe parse that out a little bit more finely, is it the amount of capacity created by the original equipment side and the fact that there is fluid ends available there and there is more supply there, is it the transitions from nat gas towards oil rigs and the dislocation that happens there or are you seeing activity levels slowing on a broad basis, which is also impacting it, so maybe just little bit more finer detail there, please?

Michael M. Larsen

Yeah, I’d say first and foremost, it’s probably the first thing you mentioned, which is excess equipment pumps as well as aftermarket fluid ends in the market. I think the transition from gas to oil is largely complete, it’s our view. So I wouldn’t say that is a contributing factor going forward, it’s really excess supply that are causing this lull here and that we expect that will continue in the next 12 to 18 months.

I think the other thing; you’ll see a reduction in CapEx budgets from our large customers. So that tends to favor the repairs activity in the aftermarket and that’s where our investments in a facility – world class facility for repairs in Fort Worth are expected to give us a significant amount of benefit as we go forward.

Michael Halloran - Robert W. Baird & Co.

And then, any commentary on how the drill pump trends for you guys are in the quarter, any signs of changing dynamics on that side of the business?

Michael M. Larsen

Yeah, I think if you look at drilling pumps, we clearly saw a slow down in orders here in the second quarter. Total P&IP was down about 60%, which also excludes drilling pumps.

So, we’ve got a strong backlog here that gets us through the next six months with – the majority of which is with a longstanding terrific customer that historically hasn’t cancelled orders, and we certainly don’t expect that. But I’ll tell you that we also don’t expect a significant increase in drilling pump orders in the near-future.

Now, all that said, a lot of this depends really on what your assumptions are for commodity prices, your assumptions for crude oil and natural gas, natural gas moving higher recently could bring this cycle – down cycles stabilize it sooner. It depends on your assumptions for rig count, and I think in general we’d have to say that things are slowing and the outlook for 2013 is not as optimistic as six months ago.

Michael Halloran - Robert W. Baird & Co.

It sounds good. And then, on the IPG margin side, the margin progression there was – it seems certainly faster than your expectations that you laid out in the most recent couple of quarters, maybe you could talk about some of the drivers you’re seeing in the quarter, whether some of the headcount or facility reductions are starting to impact sourcing, whatever it is, starting to impact your margin lines sooner than expected and maybe just thoughts on the progression from here?

Michael M. Larsen

Yeah, I’d say the main contributor was really the Robuschi business, delivering on what they thought they’d be able to do, which is operating margins that are in the low 20’s. So, clearly we benefited from the first full quarter of Robuschi operating on what I’d say almost all cylinders. That certainly helped.

Other than that, very good cost control. I think if you look at our SG&A, down 3% year-over-year is a pretty good accomplishment. And those are things, obviously Robuschi and SG&A that’s going to continue to benefit it here over the next couple of quarters.

So I think in terms of our expectations for the year, IPG margins, we previously said, flat at about 12%, I’d say that’s still the case. I’d also say that it could be a little bit better than that, a lot of it really hinges on what happens as we start restructuring here in the second half and how do we keep everybody focused and not allow for activity to drop-off. But you’re right, overall, good quarter and good performance by the IPG team on margin expansion.

Michael Halloran - Robert W. Baird & Co.

I appreciate the time.

Michael M. Larsen

Thank you.

Operator

Thank you. Our next question is from Jeff Hammond of Keybanc Capital Markets. Please proceed with your question.

Jeffrey Hammond - Keybanc Capital Markets, Inc.

Michael, just on the European restructuring, can you just update us, I think you talked about closing eight plants globally, can you just update us on what’s new to checking on in terms of progress on the European restructuring and what else you need to do to really finalize that and start moving forward on all of those actions?

Michael M. Larsen

Sure. Let me start by the eight plants that we announced or closed in the second quarter. Those are not directly associated with the larger European restructuring plants. We basically closed, I wouldn’t say enough plants, but six facilities in North America as well as two in Europe, and we also saw good progress on staffing levels, down 3%. So we’ll continue to reach the footprint and reduce our number of facilities globally. We still have about 40 larger manufacturing plants globally. And a big chunk of that is what we’re going to address with our European restructuring plans.

So, we’ve been working on this for the last six months, I’d say, and the business is taking a little bit longer than expected that we’ve a complicated structure in Europe. We said before, we’ve about ten facilities – manufacturing facilities in IPG Europe alone. We’ve a significant level of staffing. And we’re now to the point where we’re comfortable that we’ve identified the key risks, we’ve contingency plans in place and we’re ready to move forward.

What’s remaining is the final review and approval by our board and fluids will take place at the upcoming board meeting, and following that we anticipate that we’ll be in a position to – in that press release to give you a framework for the European restructuring. And by that, I mean the timing around the costs and the anticipated savings, some details around the number of sites, probably not the specific sites, but the number of sites as well as headcount and what it will do to our margins, frankly, in IPG globally and how we believe that this would take us beyond the 14% by 2014 that we previously committed to.

Jeffrey Hammond - Keybanc Capital Markets, Inc.

Okay. Did you say you’re going to do – you’ll do a press release once it’s approved by the board or you’ll do that with the next call?

Michael M. Larsen

We’ll do that once it’s approved by the board. That’s our current plan.

Jeffrey Hammond - Keybanc Capital Markets, Inc.

Okay. Okay, perfect. Just back on the fluid end side, are you seeing pricing pressure and then also can you just give us an update on what’s going on with Altoona?

Michael M. Larsen

Yeah. I mean, like I said, the environment is definitely becoming more competitive, okay? And I think when you look at the capacity that’s been added, it will be fair to assume that there is pressure on price.

Now with that said, if you’ve a – if you look at our customer base, the chances are that they’ll stick to recordable larger manufacturers of fluid ends, of which there are not that many versus buying a fluid end from a third-party. So, yes, there is going to be an increased pressure here on fluid ends, okay?

In terms of Altoona, that plant is progressing and I’d say at a – obviously at a different schedule. I mean, Altoona I think is the case of a facility that was really served two purposes. One, to mitigate the risk of having our entire production in one facility in Tulsa, Oklahoma which if you think about the risk of a natural disaster in Tulsa and the impact that would have on our customers and obviously on our shareholders, that was a significant risk that we wanted to mitigate with the second site.

Altoona was the number one request from our customers that were operating in the Marcellus Shale and increasingly in the Utica Shale in Ohio. So, based on that, we’re ramping up the facility at – although at a slower pace than previously anticipated. And I think that this is a – in the long-term, still going to be a good investment for us, but the time horizon here in terms of payback has increased, okay? But I’d say those are kind of the key updates on Altoona.

Jeffrey Hammond - Keybanc Capital Markets, Inc.

Okay. And then final question, you mentioned kind of extend the course on the five-point strategy in the Gardner Denver Way in the European restructuring. Just on capital allocation is it safe to assume, with the CEO change and some of the dynamics there that we’re going to continue to be more focused on buyback or is there still an acquisition pipeline to address?

Michael M. Larsen

I would say that in the short-term here we have a 1.6 million authorization from the Board. We anticipate that we will utilize that authorization here in the second half. If you look at the math behind the – what you get from the buyback versus an acquisition that what are still, what I would describe as elevated, high expectations on behalf of sellers. It just makes a lot more sense for us to buyback the stock at this point.

Now at the same time I would also say if you look back over the last couple of years and beyond that, what's created all other value here has been in acquiring good companies and then going back integrating them and applying the Gardner Denver Way, applying the Lean principles and expanding margins. So we can't lose sight of that and my preferred capital allocation has always been the one that’s disciplined and balanced. So I like the idea of buyback and smaller acquisitions that we can integrate and expand margins and grow earnings as a result.

Jeffrey Hammond - Keybanc Capital Markets, Inc.

Okay. Thanks so much.

Michael M. Larsen

You’re welcome.

Operator

Our next question is from Cliff Ransom with Ransom Research. Please proceed with your question.

Clifford Ransom - Ransom Research

Good morning, Michael. Thank you for the detail you’re giving us today. Can you talk to us a little bit about what the two or three primary mandates that you’ll give your – whoever you select to be the executives search firm to pursue the CEO replacement job?

Michael M. Larsen

Well, I personally will not be obviously communicating those requirements to the search firm, I mean, the Board will be – is overseeing the search. A search has been launched for internal and external candidates. And I think the requirements are basically everything that you will expect from a CEO that can run a business of our size and complexity. I will tell you Cliff that clearly in my mind, and in our mind we have to continue to maintain state of course on the implementation of lean across the enterprise. So somebody with lean and operational experience would clearly allow us to do that, okay.

Clifford Ransom - Ransom Research

Okay. And let me ask you a different question; I want to go back to the impact of the pressure market. If we look back on past cycles, actually my memory is that you did not have anywhere near the aftermarket capabilities that you do today. Should we view that as an ameliorating factor against the historical swings in that business?

Michael M. Larsen

Absolutely. Yes, that’s correct. I mean, I think – and that’s true really across the business, across all Gardner Denver as we head into a slower growth environment, not just in Pressure Pumping but also in Europe and in Thomas, and we have a much better aftermarket business than we had in the last cycle. So clearly those earnings tend to be less cyclical and they tend to be higher margin. So that will mitigate some of the impact here as we move forward, absolutely.

Clifford Ransom - Ransom Research

In your European restructuring, one of my understandings was in the U.S. restructuring and the U.S. distribution thinking, if you wanted to get closer to your end users, I’ve been hearing that in Europe or it’s the other way around that you feel that you have perhaps too much OE exposure and not enough debts in distribution. Am I hearing the right things or the wrong things, in other words, can you just bring us up to date on that subject?

Michael M. Larsen

Yeah. I mean, I think what you’re talking about is the, the One GDI initiative that was discussed on the previous earnings call and clearly there is a lot of opportunity in terms of optimizing how we go to market in Europe, okay. And if you look at the complexity that’s been created by the acquisitions over time and what that means in terms of how we approach customers really as separate businesses with different brand names and different product lines, and there is an opportunity to simplify our distribution in the eyes of the customer as well as internally probably reduce cost as a result of that.

I will tell you this Cliff that, the priority right now in my mind is to finalize, get final approval on the restructuring trends of the manufacturing footprint. And while the front desk of the business is a very important part of our business in Europe again the priority in my mind is to first get our manufacturing footprint right and then make sure that we fully understand all the implications of optimizing distribution in Europe. We understand the timeline, the payback as well as the risks and we know how to mitigate them, similar to the plan that we've developed for the manufacturing footprint.

Clifford Ransom - Ransom Research

All right. And my last question, I’ll get back in queue is; can you help out those non-petroleum engineers of us which is frankly most of my peers who follow this company, what’s the significance if any, when we look at the rig count shift from gas to oil which has been very steady over the last 12 months? My understanding is there’s also been a fairly significant shift to liquids and gas as opposed to one or the other. To what extent does that impact your business?

Michael M. Larsen

Well we’re really – our pumps are agnostic okay. So whether it is dry gas, wet gas or crude you’re still fracking rock, and in order to do that, the best way to do that is a Gardner Denver frac pump. And so for us, the shift between those three things is not really that significant.

Clifford Ransom - Ransom Research

So when I look at the fact that we’re now shooting three, four, ten stages as opposed to one or two in the old days and the fact that we were fracking for oil and we’re fracking for liquids as well as gas, that’s a plus for you that didn’t exist in the last cycle?

Michael M. Larsen

And I would say that, it really – that is, in making the assumptions that you’re making, that is correct, okay. I think you really have to look at it by well, by shale formation, by rig; but you’re absolutely right.

Clifford Ransom - Ransom Research

Okay. And then my last question is, when you said you had began to see a step up in international orders, is that penetrating for the first time, some of those big patents that you’ve talked about in the past that has not been prosecuted, Middle East, Poland, China et cetera or is it – it was an expansion of fracking in general?

Michael M. Larsen

I would say that what we saw in the quarter was, and in the backlog that pumps that we’re destined for North America was shifted internationally, particularly into Asia Pacific.

Clifford Ransom - Ransom Research

Okay. Thanks very much.

Michael M. Larsen

You’re welcome.

Operator

Thank you. Our next question is from Josh Pokrzywinski with MKM. Please proceed with your question.

Joshua Pokrzywinski - MKM Partners

Hi. Good morning, Michael.

Michael M. Larsen

Hi, Josh.

Joshua Pokrzywinski - MKM Partners

I just wanted to dig in a little bit on the order intake and backlog trajectory in EPG. How do you anticipate the backlog, I guess, realization or backlog burn trending through the rest of the year and at any point do you expect, book to this quarters or I guess, do you expect orders to match revenue at any point. So are we going to have backlog support here through this Pressure Pumping downturn or are we going to see at some point $200 million revenue quarter consistent with this quarter’s order intake?

Michael M. Larsen

Yeah. I mean, I think what you will see – first we have a backlog that supports our case for the next six months which is typical. At this point, if you look at our backlog versus what we need to do in the second half that is consistent with prior quarters, okay. Now, I also will tell you that you saw a significant decline in our backlog in EPG this quarter and I expect that to continue as we go through the year and it really depends on when we see, some of that will be offset by our Nash Liquid Ring Pump business, that is seeing good demand from chemicals and oil and gas. In North America and Europe really, good progress in that business. That will offset it partially but orders are really expected to go down here in the second half, primarily driven by the same trends we saw in the second quarter which is the cycle in Pressure Pumping and the decline in orders in drilling pumps.

Joshua Pokrzywinski - MKM Partners

Okay, that’s helpful. And I kept just thinking about the second quarter, was there any interest or mandate internally to try to fulfill some of those orders outstanding, let’s say they set out too long and customers get the idea to maybe cancel and moving into the back half. So did you rush to meet orders in the second quarter?

Michael M. Larsen

No. Not at all. I’d say this was a very normal quarter and frankly with all the Sarbanes-Oxley and Accounting Rules there’s not much that you can do or really want to do to influence the outcome in terms of revenue recognition.

Joshua Pokrzywinski - MKM Partners

Okay. And then, just one final point, I remember on the last call you mentioned trying to hold margins in IPG relatively flat year-on-year for the whole year, clearly running above that as this point. Is it still safe to say that that’s kind of the outlook or should we expect that to go higher when you update us formally here in the coming weeks?

Michael M. Larsen

Yeah. What I would say – what I would agree that we, we’ll try and update you here when we file the restructuring plans. My view, like I said is that, I would not chase the assumption for total IPG margins for the year. We said on the last call that we anticipate they will be flat this year at 12%. Now I’d also tell you that has a little bit of contingency in it, okay. And that’s really as a result of the restructuring initiatives that we're going to begin here in the second half and that may have an impact on our productivity and may impact our margins in a negative way. So, I’d say good progress in the quarter. We have a plan that takes us above the 12% but there’s also – it’s prudent to be a little cautious here as we embark on the restructuring.

Joshua Pokrzywinski - MKM Partners

Understood. And if I could just sneak one more in; any comment or feel out there from the field as we into July in Europe, any signs of stabilization or still – still too early to call when the bottom maybe there.

Michael M. Larsen

I would say it’s a little early, I’ll also tell you, if you look back at our orders in the second quarter really in April right out of the gate we saw weakness in orders in April and then it stabilized at a lower level in May and June. And July it’s a little too soon to call but, our assumption is like we said in our guidance that the current 2Q order trends remain the same for the balance of the year and I think that’s a pretty good assumption. Now keep in mind that in the third quarter you’ll have typical seasonality in IPG particularly in Europe due to the vacation period in August. We did not have that seasonality last year, so the comps are little challenging here in the third quarter.

Joshua Pokrzywinski - MKM Partners

Understood. I appreciate the color there. Thank you.

Michael M. Larsen

Okay.

Operator

Our next question is from the line of Mike Wherley of Janney Montgomery Scott. Please proceed with your question.

Michael Wherley - Janney Montgomery Scott LLC

Good morning guys. I just wanted to dig in just a little bit more into the guidance change. You mentioned that Thomas and Emco orders were down 20% and you also mentioned China was down 10% in IPG, I believe. Can you tell you, kind of how much of the guidance delta related to those two factors, the guidance, the change that you made?

Michael M. Larsen

Yeah, I mean, basically the short cycle weakness that we described IPG Europe, IPG China as well as our Thomas business is a $0.35 reduction versus the previous guidance. In addition to that you have $0.05 of headwind from foreign exchange given the euro at these levels. And then you have about $0.10 of benefit from fewer outstanding shares. And that’s based on the buyback that’s already been completed in the first half, okay.

Michael Wherley - Janney Montgomery Scott LLC

Okay. And of those areas that have changed, which was the biggest surprise, was it like China being down that much a bigger surprise than Europe in general?

Michael M. Larsen

I would say that we had assumed a moderate growth rate in these businesses really for the balance of the year. Now it looks to be less than that. I would say IPG Europe and China was not a big surprise. I think probably more so Thomas and the weakness in medical and the caution from our customers was the bigger, new development in the quarter.

Michael Wherley - Janney Montgomery Scott LLC

Okay. That helps a lot. And then, on the European restructuring, I mean, can you give us any framework as to how long you think that will take to actually implement or is that just going to have to wait till after the Board Meeting?

Michael M. Larsen

Yeah, I think it’s – I think what we’ve said the first was true that, we think this is a two to three year type project.

Michael Wherley - Janney Montgomery Scott LLC

Okay.

Michael M. Larsen

I also think in terms of guidance and payback, we wouldn’t expect any benefits in 2012, it’s really 2013 and beyond where you’ll see cost reductions and margin expansion as a result of the plan.

Michael Wherley - Janney Montgomery Scott LLC

Okay. And then last of all, I don’t think I can really get off the call without asking what the payables were?

Michael M. Larsen

$198 million.

Michael Wherley - Janney Montgomery Scott LLC

Thank you, guys. Have a good day.

Michael M. Larsen

You’re welcome.

Operator

Our next question is coming from the line of Joe Mondillo of Sidoti & Company. Please proceed with your question.

Joseph Mondillo - Sidoti & Company

Good morning, Michael.

Michael M. Larsen

Hi, Joe.

Joseph Mondillo - Sidoti & Company

I guess, one thing that I just want to touch on that really hasn’t been focused a lot on is just the organic nature of the business that you are seeing in Europe. First off, you mentioned that Europe was down mid single-digits in the second quarter. Is that including currency?

Michael M. Larsen

That is including currency, yes.

Joseph Mondillo - Sidoti & Company

Okay. So, your volume was still up in the second quarter. What are you expecting in Europe, I guess, ex-currency in the second half of this year?

Michael M. Larsen

Yeah, we’re really expecting a similar run rate to what we had in the second quarter, but the comparisons are going to get a little more challenging particularly in the third quarter, okay. So, I think that’s how I would answer your question. So, the growth rate will come down here in the second half of the year.

Joseph Mondillo - Sidoti & Company

Okay. So, on a year-over-year perspective we’re looking at like mid single-digits in the second quarter and then potentially what flat to down in the second half of the year?

Michael M. Larsen

Flat to down mid single-digits, yes.

Joseph Mondillo - Sidoti & Company

Okay. And just referring to the directional, I guess activity that you’re seeing over there, are things – the macro data makes it seem like things are accelerating on the downside but a lot of companies are sort of saying mix different things. What sort are you guys seeing?

Michael M. Larsen

We really – I’d say that the trends are not deteriorating based on what we see right now. Like I said in April, it was really when we saw the weakness. We had a strong – if you take a step back, when you look at our order rates in the first quarter I’d say that we were somewhat surprised by how strong they were, given all the macroeconomic data. That really caught up here in the second quarter. We started to see at a time in April and May and really in June things stabilize at a lower level. So that’s how I’d describe the trends for Europe in particular.

Joseph Mondillo - Sidoti & Company

Okay, great. And then, just on the PRT business, you said you mentioned that customers are starting to say that the switch between gas and oil is starting to sort of stabilize or sort of end there, we haven’t seen the gas rig counts stop declining now, I guess my bigger question is at what price of natural gas does – is your customers sort of saying that drilling will recommence on the natural gas side, do we need to get the $5 or sort of where do we need to get to that side of the drilling start rebounding?

Michael M. Larsen

That’s a great question, Joe. I think conventional wisdom would say if you get somewhere near 350 on natural gas you’ll see some of these wells pick back up again, but again, I mean this is a very different cycle, there is excess supply of both natural gas and crude oil in the U.S. right now. So I’m not sure these drills really are that helpful today.

Joseph Mondillo - Sidoti & Company

Okay, all right. Great, thank you.

Operator

Our next question is from Jamie Sullivan of RBC Capital Markets. Please proceed with your question.

Jamie Sullivan - RBC Capital Markets

Hi, good morning.

Michael M. Larsen

Hi, Jamie.

Jamie Sullivan - RBC Capital Markets

Michael, can you just remind us what the exposure of Europe is in IPG and EPG now with Robuschi in the mix?

Michael M. Larsen

Well, what I can tell you is that if you look at our revenues, total Gardner Denver about 31% of our revenues last year came from Europe. That is heavily weighted towards IPG, about half of the IPG business, if not a little bit more than that with Robuschi now is in Europe.

In terms of head count, about half of our employees are in Europe, and with those two data points put together you can – it’s not hard to understand from a profitability standpoint it is less than the revenue, okay? So, 30% of our revenue is roughly in Europe, significantly less than that in terms of our profitability.

Jamie Sullivan - RBC Capital Markets

Okay, that’s helpful. And then, in your outlook you gave us some good detail on what you’re assuming for growth, is there some contingency built in there if the macro does get a little bit weaker from here?

Michael M. Larsen

Just like we did in April and in prior quarters we do built in contingency. We’re running to a bigger number internally, obviously. And I think the guidance we’re giving today is no different. I mean it’s – today this will turn today as our best view based on what we know today. And then, like we always say we try to be prudent and build in some level of contingency, yes.

Jamie Sullivan - RBC Capital Markets

Okay, thanks. And then on – just to clarify your commentary on the buyback, did you say you expect a fully exhaust the authorized shares or did you just expect to continue to buyback?

Michael M. Larsen

What I’d say is that we’re going to have a discussion here at the upcoming board meeting and that will include the view of the buyback. My view is that if you look at the current environment from an M&A standpoint, our organic growth initiatives are essentially funded, we generate a lot of cash, we’ve a strong balance sheet, I think the buyback is compelling and we intent to repurchase the 1.6 million share too in the second half.

Jamie Sullivan - RBC Capital Markets

Okay. Great, thank you very much.

Michael M. Larsen

All right, thank you.

Operator

Thank you. Our next question is from Kevin Maczka of BB&T. Please proceed with your question.

Nicholas Prendergast - BB&T Capital Markets

Hi, good morning. This is actually Kevin’s associate, Nick standing in for Kevin this morning. How are you?

Michael M. Larsen

Good. How are you?

Nicholas Prendergast - BB&T Capital Markets

Doing well. Just one more question on the buyback, pretty much all of my other questions have been answered already, but I guess in this press release you said you repurchased about 1.7 million shares, can you maybe just give us little bit detail on the timing of that and the average share price?

Michael M. Larsen

The average share price is somewhere around $63. And it was more heavily weighted towards the beginning of the quarter.

Nicholas Prendergast - BB&T Capital Markets

So, front-end loaded, all right. It looks like I guess you repurchased 1.7, this quarter you’ve 1.6 remaining for the second half, if we assume that burn rate obviously all be gobbled up in Q3; is it possible when your board meeting comes up that you maybe re-up that number?

Michael M. Larsen

That’s a possibility, yes.

Nicholas Prendergast - BB&T Capital Markets

Okay. And I guess it looks like your board meeting might be a catalyst for the shares here, what’s the date of your board meeting?

Michael M. Larsen

We don’t disclose that externally.

Nicholas Prendergast - BB&T Capital Markets

Okay.

Michael M. Larsen

But it’s safe to say that it’s in the near future.

Nicholas Prendergast - BB&T Capital Markets

Got it, okay.

Michael M. Larsen

Okay.

Nicholas Prendergast - BB&T Capital Markets

All right. Well, thank you very much.

Michael M. Larsen

Thanks.

Operator

Thank you. Our next question is from Julian Mitchell with Credit Suisse. Please proceed with your question.

Julian Mitchell - Credit Suisse

Just had a question – lot of my questions have already been answered as well. Just high level kind of on the IPG side, does it include Robuschi in your mix. Just wonder if you can give kind of any top down kind of color on the year? Just kind of, where do you think Europe – where you think Europe sales are for the year, North America and then just may be Asia, not sure if you will dig into that, but …?

Michael M. Larsen

Well, I think the best way to answer that is if you take a look at what we’ve done here in the first half and then extrapolate that to the second half based on the 2Q run rate that we told you is what we’re using for our guidance. I think you will see that year-over-year its going to be relatively flat to may be slightly down year in terms of revenues. I think the – more on the down side would be Europe, probably a down year. China potentially offset by Asia Pacific to some extend, we haven’t talked a lot about that. I think you will also have to factor and North America I would say fairly stable to up slightly. And then don’t forget that we’ve about more than 60% of our sales are from outside of the U.S. So you do have headwind here in terms of foreign exchange rates as the dollar appreciates and as we translate those revenues and earnings back to the U.S. that becomes a headwind. So, I don’t know if that’s helpful.

Julian Mitchell - Credit Suisse

That is, and then I guess just on the EPG side, just didn’t know if, I mean, just kind of high level color just kind of on the year, just for ’12, it sounds like P&IP will definitely be down. Nash may be okay first quarter, but it seems like weak in the second quarter, may be weak kind of in the back half and then – excuse me, Thomas and then Nash seems to be picking up and Emco seems okay. So just to know any high level color just to …

Michael M. Larsen

Yeah. That’s about right. I think you had Nash in there twice, but what I would say, Nash really – was very encouraged by the quoting activity and, I will give you a data point here in the second quarter, the inquiries from customers that team is working on, were up 30% versus the first quarter. So, I would say Nash given the longer cycle, later cycle nature of that business, we’re encouraged by strong demand in chemicals and in oil and gas.

So Nash will have a good year P&IP, we talked about Thomas off to a good start early in the year and now declining and Emco Wheaton really is more of the project type business. For the year we don’t expect significant growth out of Emco Wheaton, but they’ve taken some big orders for delivery in 2013. That would help offset some of the other pressures that we may have in 2013.

Julian Mitchell - Credit Suisse

Okay, thanks. And then just on the Nash business, how long it generate kind of a lead times kind of orders to kind of recognize it?

Michael M. Larsen

It really depends, but they tend to be a little further out, I would say 6 to 12 months. And on the really big projects it could be longer than that.

Julian Mitchell - Credit Suisse

Great. Thanks a lot guys.

Michael M. Larsen

All right. Thank you.

Operator

Thank you. We have come to the end of our allotted time for today’s question-and-answer session. I would now like to turn the floor back to management for closing comments.

Michael M. Larsen

Okay, great. Thanks, Rob and thanks everybody for dialing in, and both myself and Vic are going to be around today. If you have questions, please give us a call. Thanks.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time and 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: Gardner Denver's CEO Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts