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

Steinway Musical Instruments, Inc. (NYSE:LVB)

Q1 2008 Earnings Call

May 9, 2008 8:30 am ET

Executives

Dana Messina - CEO

Dennis Hanson - CFO

Donna Lucente – Corporate Controller

Analysts

Arnold Ursaner - CJS Securities

[Larry Patsurick] - UBS

Lance James – Voyageur Asset Management

Unidentified Analyst – Columbia Management

Mimi Noel - Sidoti & Company

Operator

Good morning ladies and gentlemen and welcome to the first quarter 2008 earnings release conference call for Steinway Musical Instruments. (Operator Instructions) Yesterday the company issued a press release disclosing financial results for the quarter ended March 31, 2008. If you have not received a copy you may download it from the News section of the company’s website at www.steinwaymusical.com. Today’s call will begin with a reading of the Safe Harbor Statement which will be followed by remarks by Dana Messina, Chief Executive Officer. Mr. Messina will be joined by Dennis Hanson, Chief Financial Officer and Donna Lucente, Corporate Controller for the question and answer session.

Today’s call contains forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements represent the company’s present expectations or beliefs concerning future events. The company cautions that such statements are necessarily based on certain assumptions which are subject to risks and uncertainties which could cause actual results to differ materially from those indicated today. These risk factors include the following: changes in general economic conditions; recent geopolitical events; increased competition; work stoppages and slowdowns; impact of dealer consolidations on orders; ability of new workers to meet desired production levels; exchange rate fluctuations; variations in the mix of products sold; market acceptance of new product and distribution strategies; ability of suppliers to meet demand; concentration of credit risk; fluctuations in effective tax rates resulting from shifts in sources of income and the ability to successfully integrate and operate acquired businesses.

Further information on these risk factors is included in the company’s filings with the Securities and Exchange Commission. Today’s presentation will include EBITDA as well as other adjusted financial measurements. All of which are considered to be non-GAAP terms. These measures present operating results on a basis excluding certain non comparable items. Reconciliations of these measures to the most comparable GAAP terms are available on the company’s website www.steinwaymusical.com.

Now I would like to turn the conference over to Mr. Dana Messina, your host for today’s presentation. Mr. Messina, please go ahead.

Dana Messina

Thanks everyone for being here. This is our first quarter conference call update. I’m here with Dennis Hanson and Donna Lucente. Overall our results for the quarter were pretty good and generally in line with our expectations. For the quarter we had basic earnings of $0.23 a share. That was up from $0.17 in 2007. Our sales for the quarter were $94 million, up about 1%. Gross profit was $27 million which was even with last year. And our gross margin percentage was also even at 29.1%.

Our operating expenses were down slightly. Our adjusted EBITDA was nearly $8 million or up 12%. Our capital expenditures were $1.1 million for the quarter which was an increase of about $200,000 over last year. Our balance sheet continues to remain in good shape. In March we purchased nearly $6 million of bonds during the quarter at a price in the mid $80s. At the end of April we had about $30 million in cash and nothing outstanding on our bank revolver. Our inventory during the quarter was down about $3 million.

Some piano highlights, piano sales were $55 million, up 3%. As we expected the US piano market was difficult and overseas markets held up well. Overall Steinway Grand units were down 13%. They were up 3% overseas but down 21% domestically. US consumer demand was soft but institutional sales have been holding up well. Our mid-priced pianos did very well. They were up 18% overall, up 43% overseas and up 6% domestically. Piano gross margin was 34.5%. That was down slightly from the 36% last year.

Compared to Q1 last year we sold more mid-priced pianos which reduced our overall gross margin. Our margins on Boston Pianos were also squeezed by the weak dollar.

Band highlights, band sales were $39.5 million, down $1 million from last year. This was the one area that did not meet our expectations. We had a significant amount of orders that our OEM suppliers were unable to deliver in the student instrument segment. Units produced at our Elkhart Brass Plant are now running at about 120 per day which was our target. They were up 20% from last quarter so we are pleased with the progress there.

Band gross margins were 21.6%, up from 20.2% last year. The improved margin is primarily a result of increased sales of professional instruments. In addition to the $400,000 we added back to EBITDA for severance costs, we also incurred an additional $1 million in costs due to the plant consolidations which were not added back to EBITDA which I know some of you do add back in your calculations.

The outlook, band we expect an additional $1 million in costs primarily in the second quarter as a result of plant consolidation. Our business is not greatly affected by the general economy so with our Elkhart plant back on track we should see overall sales and margin improvement throughout the remainder of the year. The piano business the economic climate in the US seems to be getting worse. We believe the domestic business will be challenging throughout the rest of the year. We have taken our daily rate of production down by 10% compared to last year and reduced the number of plant production days. And we may make further reductions in the second half of the year if the need arises. We expect our overseas operations to remain strong and have another good year.

Steinway Hall update, we explained in March that we had reached an agreement in principal to sell a majority interest in the Steinway Building and would keep our existing retail space. We expected at the time that the sale would have occurred by the end of April, however due to problems in the credit markets the purchaser did not close by the contractual deadline. We are no longer actively engaged in a sale process for the building. We are now focused on managing the building as it is presently occupied.

And with that I will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Arnold Ursaner - CJS Securities

Arnold Ursaner - CJS Securities

Regarding the band side you mentioned a couple of times you obviously have some back orders and some delivery issues for student and sometimes shipments and timing of shipments from when they arrive can impact a quarter. I know you don’t run or manage your business or focus on quarters per se but did those shipments arrive after the quarter and should we expect a nice pick up in Q2 as these products get sold?

Dana Messina

Well we had about $8.5 million in orders that we should have shipped had the product been there. The product is trickling in now so it’s not all here yet. We expect to get it all so we should see a nice pick up throughout the rest of the year because the orders have been strong. We’ve just had difficulty getting all the supply we need from Asia and it’s starting to come in.

Arnold Ursaner - CJS Securities

And you mentioned your inventories were down. I looked in the Q and your finished good inventory Q1 versus Q4 had a very sizable jump; $91 million versus $82 million. Can you – and I know even in December you had commented you thought your inventories were higher than desired.

Dana Messina

You have two things going on so there’s some seasonality to the inventory and when you take out the currency gains in the inventory, X the currency the inventory went down. So you know, a big part of our inventory is offshore so it gets affected by the currency moves.

Arnold Ursaner - CJS Securities

And you mentioned in piano, I assume its domestic production you’re going to take down by 10% on the daily basis.

Dana Messina

Correct.

Arnold Ursaner - CJS Securities

And do you also plan to shut the facility and if so, one or two weeks in the current quarter?

Dana Messina

I think our plan through the second quarter is to do one week a month.

Arnold Ursaner - CJS Securities

So you might shut it for three weeks in total in Q2?

Dana Messina

Correct.

Arnold Ursaner - CJS Securities

And typically that runs you about a $0.50 million of profitability when you do that?

Dana Messina

About $350,000 to $500,000.

Arnold Ursaner - CJS Securities

And if you take a week a month for Q2 you normally shut in the summer anyways, will you also plan to do that as well?

Dana Messina

Yes.

Arnold Ursaner - CJS Securities

On both domestic and international Grand Piano sales, domestic down 21% sounds about as tough a quarter as I can recall and international had been growing much faster than 3%, can you kind of walk us through your views on both of those please?

Dana Messina

Well domestically you had a tough comp to begin with so in a prior year we had a Limited Edition Piano that we introduced in January which we didn’t have in 2008 so even if we thought the year in the United States was going to be fine, you would normally see a drop-off in any year when we don’t have a Limited Edition. So that’s part of it. Sales at our own retail stores were okay. Sales at wholesale in the United States were weak. It’s a combination of just a general weakness in the economy and our dealers doing everything possible to reduce their inventories. So there’s some of that.

On the international side, its just different parts of Europe are doing different things. Russia, our sales were up more than 100%. China I think our sales were up 35%. Germany and France our sales were down. The United Kingdom they were up slightly. Japan they were up slightly. So business overall was pretty good. We’ve had to up production in our foreign operations by about 10% so we had more orders offshore than we could deliver. It seems pretty strong over there.

Arnold Ursaner - CJS Securities

Dennis on tax rate you were 40.7 in the quarter, included 2.5% related to an uncertain tax provision, given the uncertainty of the tax revision, what sort of help or comment would you have about full-year tax rate guidance?

Dennis Hanson

I’ll have Donna expand on it just so you can understand it, but the absence of FIN 48 stuff, which is the uncertain tax positions were about 38% and that’s a good rate, but I’ll have Donna add to it.

Donna Lucente

I thinks that’s about good consistent with the information that we gave you at the end of the year absent anything strange and we can’t really tell what’s going to happen with FIN 48, 38% to 40% is a good rate to use.

Operator

Your next question comes from the line of [Larry Patsurick] - UBS

[Larry Patsurick] - UBS

Can you give us the Steinway sales dollars for both worldwide, international and domestic? I think you reported the unit volumes, but interested to see how mix affected your average price sold.

Dana Messina

You want foreign piano and domestic piano top line?

[Larry Patsurick] - UBS

Steinway top line.

Dana Messina

The piano division domestic was $30.4 million.

Donna Lucente

And overseas is $28.5 million.

[Larry Patsurick] - UBS

What’s the year-over-year change in sales for Steinway Grand’s?

Dana Messina

I don’t have that in front of me.

Dennis Hanson

We can give you total dollars. Are you looking for strictly Grand’s?

[Larry Patsurick] - UBS

What I’m just looking for the Steinway – Steinway units were down in the US market and I’m just looking at mix shift to see how the sales, domestic sales has performed and international sales as well.

Dana Messina

The domestic was, the overseas business top line was up 17.1% in dollars and the domestic business was down 7.8%. So the domestic business went from 33 to 30.4 and the overseas business went from 24.3 to 28.5.

Operator

Your next question comes from the line of Lance James – Voyageur Asset Management

Lance James – Voyageur Asset Management

I had a quick question and I’m sorry if you may have already discussed this, just with regard to your comment in the press release about the stronger euro having a significant negative impact coming up in sales into the Asian market on the Steinway pianos, can you give us kind of some scope on the implications there, what significant means?

Dana Messina

Well we don’t have any good numbers for you other than its just our, the feeling of our managers that the strong euro has made the product very expensive in Japan and they expect to see some decline so they think 5% or 10% decline in some of those markets could occur if these currencies stay as strong as they have been.

Lance James – Voyageur Asset Management

And is that a situation you’ve faced in the current quarter or is it more anticipation that the currencies will move even further in a negative direction?

Dana Messina

No, its – we saw it this quarter.

Operator

Your next question comes from the line of Unidentified Analyst – Columbia Management

Unidentified Analyst – Columbia Management

On the piano slowdown, I guess there are two things going on domestically. One as you mentioned earlier you’re lapping Limited Edition sale last year, didn’t have it this year. Is there a way to breakout the impact of that versus the apples to apples kind of slowdown here and then compare that slowdown to other economically challenging times in – where do we stand? Is this worse, about as expected versus what you’ve seen in past cycles?

Dana Messina

I would say its not – we’ve seen worse cycles. This is, it’s not great but I also wouldn’t describe it as being terribly bad. These’s no sense of panic here. It’s just a typical business downturn for us in the States. There have been ones in 1990 that were worse. In 2001 was definitely a challenge; 2001, 2002 was far more challenging than this.

Unidentified Analyst – Columbia Management

What was the impact on the Limited Edition --?

Dana Messina

In 2001, 2002 I think we saw just an overall decline in Steinway Grand’s at maybe 19% in our business.

Unidentified Analyst – Columbia Management

And this quarter domestically was 21% --

Dana Messina

That’s – more of that has to do with the Limited Edition so overall we were – our top line was down 7.8% which is not that bad for a non-Limited Edition year.

Unidentified Analyst – Columbia Management

So what – I don’t know if you can do this Dana but that 21%, if you adjust for the Limited Edition is it minus 10% or what is it?

Dana Messina

It’s hard to say. We were down 100 Steinway Grand’s in the quarter and we had just about 100 Limited Editions in 2007 that were ready and shipped in the first quarter. But those Limited Editions replaced some of our normal piano sales and that’s the hard part to get – give you a fix on. People definitely took them as soon as we had them and we saw a decline in some of the quarter’s going out once we shipped a lot of the Limited Editions in the first quarter 2007. It was a little choppy.

Unidentified Analyst – Columbia Management

So as we look into Q2 what would be the impact of that Limited Edition in Q2?

Dana Messina

It will be less.

Unidentified Analyst – Columbia Management

We talked about production, US being challenging, production being down 10% and I guess I’m trying to work the math, if we’re shutting down a week a month doesn’t that look more like 25%, where am I off there?

Dana Messina

Well we didn’t have a lot of those shutdowns in the first quarter. We don’t have any planned for the fourth quarter.

Unidentified Analyst – Columbia Management

If you’re saying 10% for the year, but 25% in Q2?

Dana Messina

Yes.

Operator

Your next question comes from the line of Mimi Noel - Sidoti & Company

Mimi Noel - Sidoti & Company

Dana if you wouldn’t mind would you elaborate a little bit more on those OEM issues you in the first quarter and give me an idea that they won’t be a problem at any time in the near future.

Dana Messina

Well I can never predict what the Chinese are going to do but we have relationships with them. We have very strict tolerance standards and quality standards for the product we get from them and if the product quality isn’t where we like it, we don’t accept the instruments. They were not able to get the quality and the volume of instruments that we wanted. We’re starting to see instruments – in April we started to get shipments of instruments from them that met our standards. If that continues we won’t have a problem. But no guarantee that they’re going to be able to do that. Right now we’re hopeful and we think they will but it’s an OEM relationship so we don’t control them as much as we’d like.

Mimi Noel - Sidoti & Company

Did you need to find an alternate source or sources or you just rectified the problem with the arrangement that you already had?

Dana Messina

We have many sources of supply over there because we’re a big customer for all of the plants in [Haysha] because we’re such large percentage of the worldwide market so we have contracts with a number – it’s just, it’s very difficult to always get them to produce at the quality levels we need. That’s really more the issue.

Mimi Noel - Sidoti & Company

On the real estate side of things, should I interpret your comment, your update to mean that you’re no longer entertaining offers at this point.

Dana Messina

That would be a good interpretation.

Operator

Your next question is a follow-up from the line of Arnold Ursaner - CJS Securities

Arnold Ursaner - CJS Securities

Going back to Elkhart for a minute, the 120-day production level at Elkhart, you had had very, very sizable backlogs, are you accomplishing the 120 a day with continued overtime and when do you see that sort of normalizing?

Dana Messina

We’re doing 120 without much overtime so we have the plant running on a pretty productive basis. We’re pleased about that. The new workers are doing well. They’ve been trained. They’re done the learning curve. The quality of the instruments is good. The customers like them and we’re shipping them as fast as we produce them.

Arnold Ursaner - CJS Securities

Okay and again you mentioned a unit decline of 18% in the first quarter, obviously impacted by the issues related to the student deliveries.

Dana Messina

Correct.

Arnold Ursaner - CJS Securities

What was the sort of the breakdown between professional and student in Q1 generally?

Dana Messina

I think professional was up like 20%.

Arnold Ursaner - CJS Securities

So if units were down 18% its --

Dana Messina

It was all student. At the end of April we had $8.5 million of student instruments which is a lot of units that we had orders ready to ship but we didn’t have the product from Asia. So you can kind of sense it would have been a very nice quarter for band had the suppliers come through.

Arnold Ursaner - CJS Securities

On raw materials obviously your product is handmade, you use some exotic materials, generally are you seeing any noteworthy problems on the raw material side that are catching your eye?

Dana Messina

They’re going up fast. Instead of one price increase a year, we’re normally doing two now.

Arnold Ursaner - CJS Securities

In the sale price of the products you’re selling.

Dana Messina

Right.

Arnold Ursaner - CJS Securities

And just general comment if you can on retail traffic, I know you generally don’t like to speak about months within a quarter, but given the magnitude of the shortfall you had in Q1 in domestic piano, can you give us any feel for how the quarter played out and whether April has shown any improvement beyond that?

Dana Messina

It’s a little difficult for us because our own retail stores, the traffic was actually fairly strong and our own retail stores business was better than it was for our dealers. Part of the decline is our dealers managing inventories a little bit tighter than we’d like. The traffic hasn’t been bad. Its just it seems to take longer to close a deal and people are just pushing these purchases off but we still see a lot of interest Steinway and the stores seem relatively busy.

Arnold Ursaner - CJS Securities

And in your prepared remarks regarding band you indicated you have confidence that you will have improved sales results for 2008, is it improved versus the trends in Q1 or are you specifically indicating you expect higher sales for 2008?

Dana Messina

We expect higher sales for 2008.

Arnold Ursaner - CJS Securities

And going back to Rick’s question, the 10% production change you have, is that on a daily basis?

Dennis Hanson

Yes that’s a daily base rate. So on top of that you have the [dailies] taken out. I think that might have been part of the confusion.

Arnold Ursaner - CJS Securities

So in the current quarter if you’re operating 10% below on a daily basis, plus three weeks that you’re going to be out, Q2 production rates are going to be materially down. I just want to be clear; it is 10% on a daily basis.

Dennis Hanson

I believe that’s accurate.

Dana Messina

We’re making eight a day instead of nine a day and then we’re going to operate three or four production days less.

Arnold Ursaner - CJS Securities

I thought your New York facility could do 11 a day.

Dana Messina

It can. But we’ve brought it down to eight.

Arnold Ursaner - CJS Securities

Actually it’s 12 or 13 a day right?

Dana Messina

Right. We’re going to get this inventory in line.

Operator

Your next question is a follow-up from the line of [Larry Patsurick] – UBS

[Larry Patsurick] - UBS

Could you just give us some order backlog data on Steinway pianos, both domestic and international and where it stands at the end of March versus March ’07?

Dana Messina

We don’t track backlog data for Steinway.

Operator

Your next question is a follow-up from the line of Unidentified Analyst – Columbia Management

Unidentified Analyst – Columbia Management

Just to dig into the China problem a little deeper, I guess once I think like in your operation and Elkhart, once you get it right it seems to stay right to the extent that you’re not changing OEM suppliers over there, what would push something off track? Is there just a big turnover in employees so they’re always coming up the learning curve or once they’re making quality instruments, why does it come off track?

Dana Messina

It tends to come off track when we change a model. If we – like many consumer businesses you’re always trying to come up with something new and exciting for the consumer and we had a new student trumpet that we brought to a show that we new and exciting and we took a lot of orders on it and we got 100 of them from our Asian supplier and said this is great, we need 25,000 and the 25,000 started coming in and they didn’t look like the 100 they sent us. And so you start over again because they’ve got to get people either trained right or they’ve got to get the fixtures and equipment right for doing 25,000 which might have been different than the way they did 100. That’s typically what happens. And so we have to send people over there to inspect these instruments one at a time and when they don’t pass inspection they don’t get shipped over to us. We have our own guys there looking at them and just nothing was passing inspection.

Unidentified Analyst – Columbia Management

As a parent of children that have done school instruments if the school year comes up and I can’t get a trumpet from Steinway in the period one or two or three week period that I need to do it to have something for the school year starting, don’t I switch to an alternative instrument and aren’t those orders gone? What happens, or is this --?

Dana Messina

You’re right, but right now we anticipate having all of these Asian instruments in before the school season but we have had orders far in excess for this one particular trumpet, we’ve had orders far in excess of even what our OEMs can produce and so we’ve gone to substituting with other trumpets that we make in a similar price range. But we are starting to get production flow from Asia. We just didn’t have it in the first quarter. They started coming in in April. We have to have them before the end of August if they’re going to make the school season and right now it looks like we’ll be in pretty good shape for that.

Operator

Mr. Messina, there appear to be no further questions at this time sir.

Dana Messina

Great and we look forward to speaking to you in the second quarter.

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: Steinway Musical Instruments, Inc. F1Q08 (Qtr End 03/31/08) Earnings Call Transcript
This Transcript
All Transcripts