Blount International Inc. Q1 2008 Earnings Call Transcript

Blount International Inc. (BLT)

Q1 2008 Earnings Call

April 30, 2008 13:00 pm ET

Executives

Calvin Jenness - SVP & CFO

James Osterman - Chairman & CEO

Analysts

Curt Woodworth - J.P. Morgan

Bob Franklin - Prudential Equity Group

Dax Vlassis - Gates Capital Management

Alan Robinson - RBC Capital Markets

Presentation

Operator

Good morning, and welcome to the Blount International, Incorporated teleconference with Chairman and Chief Executive Officer, Mr. James Osterman, and Mr. Calvin Jenness, Senior Vice President and Chief Financial Officer. My name is Mary Ann, and I will be your conference facilitator today.

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

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

Calvin Jenness

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

Before Jim and I summarize the company's performance, I would like to remind everyone that the statements made in the course of this conference call regarding the company's or management's intentions, hopes, beliefs or expectations for the future are forward-looking statements as defined in the Securities Litigation Reform Act of 1995. Those statements involve risks and uncertainties that could cause actual results to differ materially.

Now I'd like to turn the call back over to Jim Osterman, our Chairman and CEO.

James Osterman

Good morning, and thank you for joining us to review the results of the first quarter 2008. We got off to a good start for the year with solid results in the first quarter. Our sales increase from last year was north of 12% and we generated incremental profit despite continuation of the foreign currency pressures we've experienced in recent years.

The benefit from lower debt balance and lower interest rates also contributed to the 33% increase from last year's income from continuing operations. The Outdoor Products segment sales increased by nearly 14% from last year's first quarter. We experienced sales growth in all major markets with international sales up 17% and domestic sales up 7% from the first quarter of last year.

The increase in the domestic sales was somewhat surprising given the general weakness and demand we were expecting. Part of the increase can be attributed to a very weak performance in the first quarter of 2007 when domestic sales were down by 17% from the previous year.

International sales accounted for 70% of the segment's first quarter, compared to 68% last year. Sales in our largest market, Europe, were up 16% from last year as we continued to benefit from a stronger euro. Additionally, we gained some new distribution in Europe that resulted in pipeline fill.

Sales to OEMs were down in this year's first quarter by 5% from last year, as Asian and US chainsaw manufacturers experienced a decline in shipments. Sales for the replacement market were up 21% from the first quarter of 2007. Sales of concrete cutting equipment were flat year-over-year as the weaker demand in the United States resulted in a decline in domestic sales and offset strength in the international market.

Segment sales backlog was good at quarter end with 83.4 million in orders on hand. This represents the highest level of backlog since mid 2005. The contribution to operating income from the Outdoor Products segment was $21.7 million, up from last year's first quarter of 21.1. The improvement in segment contribution is the result of strong unit volume growth partially offset by approximately $2.7 million in negative foreign currency movement.

Additionally, in the first quarter, we also began to experience increased commodity pressure with steel cost increases of approximately $450,000 compared to the first quarter of last year. This increase was not unexpected and we have implemented additional selling price increases in certain channels effective May 1st.

Although we feel confident that the strong international demand for our products will continue in the near-term, improving segment operating margins will continue to be challenging, given the commodity and currency pressures we face, as well as high energy costs.

Now, I'd like to turn the call back to Cal, our CFO, for additional financial highlights. Cal?

Calvin Jenness

Thanks, Jim. Let me cover a few profit and loss items outside of the Outdoor Products segment. In the first quarter, we had other sales of $7 million, compared to $7.4 million last year's first quarter. This sale decline reflects a unit volume decline in our gear components business.

The loss from other and corporate increased by about $200,000 from last year's first quarter. The increase in part was due to about $600,000 in non-recurring severance expense that related to the consolidation of certain functions in our Portland offices. Also included in the loss was $1.8 million in stock compensation expense, which was about equal to last year's first quarter.

The first quarter stock compensation expense represents approximately 50% of the estimated full year expense of $3.5 million. Loss from discontinued operations was $53,000 in this year's first quarter, compared to a $498,000 loss last year. Discontinued operation includes the Company's former Forestry equipment division that was sold in the fourth quarter of 2007.

Quarter end debt was $296.7 million, down slightly from yearend 2007. This year's debt level is $70.8 million lower than it was at the end of last year's first quarter. Cash on hand was $42.5 million at the end of the first quarter. EBITDA as defined by our credit agreement was $2.4 million in the first quarter and LTM EBITDA was $109 million. This yielded a total debt-to-EBITDA leverage ratio of 2.8 times and a net leverage ratio of 2.4 times.

In the first quarter of 2008, we used $15 million of cash for operating and investing activities including Cap Ex. Included in the use of cash was an increase of $8.7 million in receivables and a $5.1 million build in inventories. In the first quarter this year, CapEx spending from continuing operations was $5.9 million compared to $5.3 million last year.

For the full-year, we expect to spend between $24 million and $26 million for CapEx. Of the forecasted CapEx spending approximately one-third is for maintenance and the remainder for increased capacity and cost reductions.

Our current view for 2008 is that sales will range between $550 million and $560 million, reflecting full year growth rate of between 7% and 9% from 2007. Our full year estimate for operating income is between $79 million and $82 million. As Jim mentioned, we expect to see continued pressure on operating margins for the balance of the year, as steel price increases are being implemented by our suppliers.

Additionally, our view is that the Canadian dollar and the Brazilian real will maintain their strength and therefore we do not expect any currency relief on our costs this year, although the year-over-year comparisons will improve as the year progresses. We have implemented selling price increases that are effective tomorrow and will seek additional selling price increases to offset the rising commodity and transportation costs.

We expect full-year net interest to be approximately $25 million and our income tax rate to be between 33% and 35%. Cash flow available for debt repayment is expected to be between $28 million and $33 million.

I believe that covers all the highlights in the first quarter for 2008, so at this time, I'd like to turn the call back over to the operator to open up for any questions you may have.

Questions-and Answers-Session

Operator

(Operator Instructions). Your first question comes from the line of Curt Woodworth.

Calvin Jenness

Good morning, Curt.

Curt Woodworth - J.P. Morgan

Yeah. In terms of the thinking around the updated guidance, which the midpoint is a couple million above your previous outlook for operating income, is the more favorable outlook just driven by the fact that the end markets are holding up better than you anticipated?

Calvin Jenness

Yeah. I would say that our top line has been stronger than we had originally anticipated. As Jim commented, the results in the US in the first quarter were up, there's two quarters in a row they were up so that was somewhat surprising, so that reflects some of that overall top line growth so we're getting some volume bump there from a previous forecast probably offset by some of this commodity pressure.

James Osterman

And we also have a very favorable backlog at this time.

Curt Woodworth - J.P. Morgan

Right. Okay, and then in terms of the after market growth being up 21% this quarter, what was driving that and how do you guys forecast that for the remainder of the year? Do you kind of principally look at, like, logging activity expectations or just kind of what the distribution channel is telling you?

James Osterman

Well, it's a little bit of everything. We look at the areas where the growth is, mainly outside of the United States. We talk to our customers down there. We look at the activity going on and the forecast they're giving us, and in all those areas they appear to be very strong.

Curt Woodworth - J.P. Morgan

Okay. And what's the reasoning for the international, or the European market outperforming the US market so dramatically?

James Osterman

Well, the US market, I think is down primarily due to the drop in housing. The fear of recession, people are holding back. On the other side, the weak dollar, and we sell in dollars, has given us a real advantage in the international markets and I think people are trying to take advantage of that.

Curt Woodworth - J.P. Morgan

Okay. So you're capturing probably some share gains in Europe then?

James Osterman

Yes.

Curt Woodworth - J.P. Morgan

Okay. And for FX, the hit this quarter was $2.7 million. What are you guys assuming for the total FX impact for the year that's in your EBIT guidance?

Calvin Jenness

It's probably $5 million.

Curt Woodworth - J.P. Morgan

Okay.

Calvin Jenness

A lot of that would be, Curt, a lot of that will probably second quarter, probably still be pretty strong, too, and then we're lapping some comparable currency rates when we get into the fourth and third quarter.

Curt Woodworth - J.P. Morgan

Okay. In terms of your steel requirements, what percent of your cost structure is steel and how much of those, your steel needs are locked up this year with fixed prices?

James Osterman

Roughly 30%, I think is cost.

Curt Woodworth - J.P. Morgan

Yeah.

James Osterman

We have really been working with the steel vendors. We haven't got long-term contracts with them. We've been getting price increases beginning now, as we mentioned, $450,000 in the first quarter.

We're working very hard with the vendors who are willing to hold prices down to assure that they'll have our long-term business. And we're working quite hard to direct our orders to companies that are not giving us surcharges. But we've seen commodity prices rise in the world. We're doing the best we can to hold them down.

We will also offset these with price increases and from additional price increases we expect in commodities, we're also expecting to go out with additional price increases this year.

Curt Woodworth - J.P. Morgan

Right. Okay, so I mean in the quarter it looked like the cost side hurt margins by 250 basis points even with some of the pricing because maybe there was a mix offset in there as well. Given the recent run-up obviously in fuel, this past quarter, steel's gone pretty vertical, do you feel like that will continue to be that type of negative for you over the next couple quarters and when would you hope to get parity on that? Or get close, I guess. It's probably hard to get back to parity.

James Osterman

I'm not sure we'll ever get back to parity.

Curt Woodworth - J.P. Morgan

Yeah.

James Osterman

But we expect that prices will go up through the third quarter and start moderating if not going down in the fourth quarter.

Curt Woodworth - J.P. Morgan

Okay. So that 250 basis point hit, you would expect that to narrow over the coming quarters or maybe about the same?

Calvin Jenness

About the same on the cost side, I mean, we'll get a little more pricing on there.

Curt Woodworth - J.P. Morgan

The costs are going up about the same rate?

Calvin Jenness

They're going up pretty rapidly, yes.

Curt Woodworth - J.P. Morgan

Okay. But you don't think that that worsens materially for the company?

Calvin Jenness

I think short-term it probably, the steel prices started going up to us late in the quarter.

Curt Woodworth - J.P. Morgan

Right.

Calvin Jenness

Continued into this quarter.

Curt Woodworth - J.P. Morgan

Okay.

Calvin Jenness

Pricing is going to effect tomorrow, May 1st, so I think you're going to get kind of a squeeze in the short-term from that as prices go up.

Curt Woodworth - J.P. Morgan

Okay.

Calvin Jenness

So short-term is probably going to be a squeeze and, as Jim said, maybe as the fourth quarter goes in with additional price increases on our part, and a lessening of the impact to steel maybe you can back then later in the year.

Curt Woodworth - J.P. Morgan

Okay.

Calvin Jenness

But it'll be a tough go here for the short-term I think.

James Osterman

I think that's a very fair analysis.

Curt Woodworth - J.P. Morgan

Okay. That's very helpful. And then just, you know, last question on the CapEx spending, I which, roughly $15 million to $17 million the increase capacity, where are the capacity increases, you know, what locations are they going to come from, and is that essentially saying that you're running at basically very high utilization rates right now?

Calvin Jenness

Yes, but I think on we said a third is main so the other $15 million or $16 million is capacity and cost reduction, so it's not all capacity.

Curt Woodworth - J.P. Morgan

Oh, okay.

Calvin Jenness

It's probably about half and half, Curt.

Curt Woodworth - J.P. Morgan

Okay.

Calvin Jenness

Of that amount.

James Osterman

And, Curt, we still have certain products that we simply don't have the lines in place to meet the demand.

Curt Woodworth - J.P. Morgan

Okay.

James Osterman

So we're very rapidly catching up on that, trying to improve customer service and I will say that we're very happy that customer service has improved this year.

Curt Woodworth - J.P. Morgan

Okay. And kind of given the currency issue on your cost structure, is there any strategic opportunity to displace capacity in Canada and maybe increase it Asia or elsewhere? Is that something you think about.

James Osterman

Sorry, didn't mean to cut you off.

Curt Woodworth - J.P. Morgan

No, that was it.

James Osterman

We continually look at that and we've had in all plants managers meetings. We're looking at being able to take advantage of our low cost opportunities. It just takes a while for the transfers to go through.

Curt Woodworth - J.P. Morgan

Okay, great. Thank you, guys.

Calvin Jenness

Thanks, Curt.

James Osterman

You bet.

Operator

(Operator Instructions). Your next question comes from the line of Bob Franklin.

Bob Franklin - Prudential Equity Group

Hi.

James Osterman

Hi, Bob.

Bob Franklin - Prudential Equity Group

Let me see, with respect to your guidance, if I got it right, it looks like your cash flow available for debt repayment went up a little bit and your CapEx guidance went down a little bit from the fourth quarter release. Did I get that right?

Calvin Jenness

Yes, I think last time we said our plan was 27 on CapEx and we backed off a little bit on that.

Bob Franklin - Prudential Equity Group

Okay. And is one replacing the other?

Calvin Jenness

Yes, some of that, yes, yes. Some of that's in there.

Bob Franklin - Prudential Equity Group

And seems every conference call you talk about bolt-on acquisitions and sometimes maybe I'm reading into it, it sounds like it is little closer when you say you are kicking the tires. Can you tell us what's going on there?

James Osterman

Well, I can only tell you we're still kicking the tires. There's a lot of, lot of discussions going on.

Bob Franklin - Prudential Equity Group

Okay. And are you still thinking in terms of bolt-on, or would you consider a larger one?

James Osterman

Well, we're, right now we're looking at bolt-ons in our strategic plan, looking out we would look at larger ones. But right now, we think bolt-ons provide lots of opportunities for our company.

Bob Franklin - Prudential Equity Group

Okay. And can you remind me of, I guess, competitive landscape there, as you implement price increases because your costs are going up. Can you remind me how many competitors you have so that we get a sense of what it takes for market discipline and then how many real buyers of this there are, too?

James Osterman

Well, competitors, we have German, American and Chinese competitors, also a competitor in Korea. There has been a number of Chinese trying to come into the business who have had some impact on the consumer market. In the professional or higher end of the consumer markets, there are three main competitors.

Bob Franklin - Prudential Equity Group

And I guess you're all seeing the same cost increases. Is there anybody putting through the same kind of price increases?

James Osterman

We haven't really had any feedback on others increasing prices. We know that the German competitor has had to increase prices because they mainly sell Swiss franc.

Bob Franklin - Prudential Equity Group

Okay.

Operator

Your next question comes from the line of Dax Vlassis.

Dax Vlassis - Gates Capital Management

Yes, I was wondering, can you explain the foreign exchange impact? It seems like you're getting benefit on the top line and then you're getting hit from a margin perspective given where your manufacturing is.

I'm trying to understand if you're getting benefit from the top line, if the actual hit that you're taking from an operating income perspective is a total of $2.7 million, or 2.6% according to your operating products margin change.

Calvin Jenness

Yeah. It's about a $2.7 million hit in the quarter, I believe, and it's just a factor of the stronger euro helps us out on the top line. The Canadian dollar hurts us because we have a large plant in Toronto, or near Toronto. And then we have a Brazil, which is a net exporter of product, the product that leaves the Canadian facility, only about 10% stays within Canada and the rest goes around the world, a lot of that being dominated in US dollars, so we're getting squeezed there.

And then Brazil, to a lesser extent, we have a plant in Brazil. Obviously the real has strengthened quite a bit since last year and some of that product is sold within Brazil, so it's not as big but it's still a drain on overall margins.

Dax Vlassis - Gates Capital Management

But on a net basis, you're saying it was a $2 million hit?

Calvin Jenness

2.7, I believe, Dax.

Dax Vlassis - Gates Capital Management

$2.7 million hit. Sorry, $2.7 million hit from an operating income perspective taking into account the benefits of foreign exchange.

Calvin Jenness

Yes.

Dax Vlassis - Gates Capital Management

Okay. Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Alan Robinson.

Calvin Jenness

Hi, Alan.

Alan Robinson - RBC Capital Markets

Good morning. You mentioned in your opening remarks that you opened new distribution channels in Europe. Can we expect any more similar channels to be opened in the next few quarters that might similarly positively affect overseas operations?

James Osterman

No, we don't see any new ones. We had some very good opportunities in Europe and we were able to take advantage of that, but there's nothing outside of that that we see right now.

Alan Robinson - RBC Capital Markets

Okay. And then on the expense line, the SG&A expense line, obviously, you noted some one-time items that you incurred during the quarter. I'm trying to get a feel for what flexibility you have in terms of your SG&A costs if you continue to see pressures on the gross margin lines there is input costs. How do you see SG&A costs panning out through the year now?

Calvin Jenness

Well, we try and run a pretty lean organization on the SG&A side. The actions that resulted in the severance cost in the first quarter were just things we did to downsize, really, our combined corporate operations and Outdoor Products division headquarters here. So that will save us, probably close to $1 million a year when it's all behind us. But other than that there's not a lot of variable items in there, or discretionary items in there.

I think one thing we talked about on last call was we did decide this year to add about $2.5 million of product development opportunity, overall. So that is incremental cost. I don't think it was much in the first quarter, maybe about $300,000 incremental, but that will all eventually pay off in the way of additional sales and profit. But probably not this year, so there'll be more costs in there, but not significant.

And then, just to remind you, I mean when you look at the numbers, too, there's a fair amount of currency in the SG&A, too, because of our European operations.

Alan Robinson - RBC Capital Markets

Sure. Okay. Okay.

So given your view of the way currency is likely to pan out during the year, could we assume that something like a $24 million to $25 million run rate quarterly is a target that we can expect?

Calvin Jenness

Sounds about right, let me just check that out. Yes, probably around 25 a quarter.

Alan Robinson - RBC Capital Markets

Okay. And then last question, I just wanted to clarify this. Did you say you expect both the Canadian dollar and the Brazilian real to stay fairly strong during the year?

Calvin Jenness

Yeah, relatively strong, I think our view on the Canadian dollar is that maybe it weakens a little bit but nothing significant relative to historical amounts and the real will probably strengthen a little bit.

Alan Robinson - RBC Capital Markets

Okay. So any situation that is different to that, any strengthening of those currencies would presumably make your EBIT target much easier to achieve?

Calvin Jenness

Opposite. I mean if those currencies significantly strengthen, that's a negative.

Alan Robinson - RBC Capital Markets

Yeah. Sorry, I meant US dollar strengthening, exactly.

Calvin Jenness

Yeah.

James Osterman

We all pray for that.

Operator

Your next question comes from the line of Dax Vlassis.

Dax Vlassis - Gates Capital Management

So I was curious, did you make the $15 million tax payment from the asset sale in the first quarter?

Calvin Jenness

We made some payment I think it wasn't that large. Most of it is behind us right now. Between taxes and monies that we paid, we probably paid about $4 million or $5 million in the first quarter. We probably have about $2 million or $3 million to go right now. So, the tax bite is probably a little bit less.

Dax Vlassis - Gates Capital Management

So you still have $9 million in escrow?

Calvin Jenness

Yes. We do.

Dax Vlassis - Gates Capital Management

Okay. And then absent acquisitions, would you expect to reduce the term loan with free cash flow because it looks like there was a, I guess there was a use of cash in the quarter both for paying the taxes and it also looks like there was a slight uptick in receivables, in inventory.

Calvin Jenness

Right.

Dax Vlassis - Gates Capital Management

I'm assuming that's seasonal?

Calvin Jenness

Yeah, the receivables are reflect the double-digit growth going up. It was a pretty strong quarter. And inventory generally does go up in the first quarter and then we work it down. So I think cash flow, you're right, it was negative in the quarter. It generally is negative in the first quarter.

Dax Vlassis - Gates Capital Management

And would you expect to utilize the free cash flow of the company to pay down the term loan, absent acquisition, or will you build cash?

Calvin Jenness

We had no acquisitions we would pay down debt.

Dax Vlassis - Gates Capital Management

Okay. Thank you.

Calvin Jenness

We have term loan.

Dax Vlassis - Gates Capital Management

Thank you.

Operator

At this time, there are no further questions. I would like to turn the conference back over to Mr. Jenness and Mr. Osterman for closing remarks.

James Osterman

Well, we'd like to thank you for your continued interest and hope you have a good day.

Calvin Jenness

Thank you.

Operator

Thank you. This concludes today's Blount International, Inc teleconference. You may now disconnect.

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: [e-mail]. Thank you!