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

Colfax Corporation (CFX)

F1Q08 Earnings Call

June 17, 2008 8:00 am ET

 

Executives

Scott Faison – Chief Financial Officer

John Young – President, Chief Executive Officer

Analysts

Michael Schneider – Robert W. Baird

Jason Feldman – UBS

Shannon O'Callaghan – Lehman Brothers

Josh [Bogawinski] – Keybanc

 

Operator

 

Good day everyone, welcome to the Colfax first quarter earnings conference call. (Operator instructions) At this time I would like to turn the conference over to Scott Faison, please go ahead.

Scott Faison

 

Thanks, good morning everyone and thanks for joining us. On the call today we’ll have John Young our President and CEO. I’d like to point out that our earnings release and 10-Q are available in the investor section of our website, ColfaxCorp.com. We’ll also be using a slide presentation to supplement today’s call which can be found on the investor section of the Colfax website.

Both the audio of this call and the slide presentation will be archived on the website later today and will be available until the next quarterly call. In addition, a replay of this call will be available until approximately July 1. The replay number in the US is 888-203-1112 and internationally it is 719-457-0820 and the access code is 4889794. This information is listed in our press release as well.

I would also like to note that in order to help you understand the company’s direction, we’ll be making some forward-looking statements during the call, including statements regarding events or developments that we believe or anticipate will or may occur in the future.

These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. It is possible that the actual results might differ materially from any forward looking statements that we might make today. The forward-looking statements speak only as of the date they are made and we do not assume any obligation or intend to update any forward-looking statements except as required by law.

During the presentation we’ll describe certain of the more significant factors that impacted our year over year performance. Please refer to the accompanying slide presentation and the MD&A section of our first quarter 10-Q for details regarding additional factors that impacted year over year performance.

With respect to any non-GAAP financial measure during the call today, the accompanying information required by the SEC regulation G relating to those measures can be found in our earnings press release. References in this presentation to adjusted net income, adjusted operating income and adjusted EBITDA exclude the impact of asbestos liability, defense cost [for] income and costs related to litigations against our asbestos insurers.

With that I’d like to hand it over to John.

John Young

 

Thanks Scott, good morning and it’s a real pleasure to welcome you to our first earnings call as a public company. We are pleased with our first quarter results which are at the high end of the range presented in our prospectus.

Before I discuss the quarter’s financial results, I wanted to acknowledge what has been accomplished to take the company public. Everyone in our organization has worked extremely hard over the past 13 years to form what is today Colfax Corporation. I’d thank our 2,000 associates around the world for their hard work. I’m extremely proud with how we’ve grown the business, not only in terms of products and end markets, but also our revenues and profitability which are reflected in our earnings results this quarter.

Since there are investors on the phone and webcast who are new to Colfax, I’m going to begin with a brief overview of the company. I will then cover some of the first quarter’s more significant highlights and some of the key performance measures we achieved. I’ll follow with a review of our strategic end markets which continue to be driven by global infrastructure build and energy demand.

Our strong end markets, organic growth programs and the Colfax business system are the key levers driving our business today. Finally, I will review the financial results and the offering and then we’ll open up for Q&A.

Colfax Corporation is a global supplier for a broad range of fluid handling products, including pumps, fluid handling systems and specialty valves. Our products serve a variety of applications in five strong and growing strategic end markets, commercial marine, oil and gas, power generation, global navy and general industrial.

We design and engineer proprietary products for use in critical fluid handling applications. We also offer customized fluid handling solutions to meet individual customer needs based on our in depth application knowledge. One of Colfax’s competitive advantages is that our brands are well known and have a premium position in the marketplace.

Allweiler, [Paltine], Imo and Warren are among the oldest and most recognized names in the markets in which we participate, with Allweiler dating back to 1860. As we announced in the press release issued this morning, Colfax is off to a great start in 2008. Adjusted net income was $8.9 million, a 48.3% increase over last year’s first quarter.

Net sales for the quarter increased by 13.9% with organic growth at 2.1%, positive currency effects of 9.6% and the acquisitions of Fairmount and LSC contributed 2.2%. We refer to organic sales growth as sales growth from existing businesses, net of acquisitions and foreign currency translation. This provides a measure of growth from factors such as price, mix and volume.

Organic sales growth exceeded our internal expectations for the quarter as we had anticipated the timing of several navy foremarket shipments and other project business in the oil and gas end market would occur later in 2008 than in 2007.

Organic sales growth was particularly strong in the power generation end market which was up 27.4% as well as general industrial market which was up 12.2%, particularly in the chemical and machinery support sub segments. Adjusted operating income increase by $3.6 million to $18.3 million driven by a strong gross profit performance, adjusted operating profit margin increased 120 basis points to 14%.

Likewise, adjusted EBITDA increased by $3.8 million to $22 million while adjusted EBITDA margin increased by 100 basis points to 16.8%. We continue to see strong growth in our order rates and backlogs. Order rate has grown steadily on an organic basis by 17.7% in 06, 17.6% in 07 and by 24.2% for the first quarter of 2008.

Backlog at the end of the first quarter was $353.6 million. Backlog has increased from the prior year’s first quarter by 72.8% and on an organic basis is up by 49.7%. With what we are seeing in our order rate and the present backlog, we believe that we are well positioned to deliver double digit sales growth in 2008.

Our first quarter performance builds on a consistent track record of sales and profit growth. Sales have grown organically by 11.8% in 06, 13.5% in 07 and we expect to growth double digits again in 2008. From a profitability perspective, we have achieved a 24.3% compound annual growth rate over the last three years in adjusted EBTIDA.

For the quarter, adjusted EBITDA is up 20.9% from the first quarter of last year and we have increased margin by 100 basis points to 16.8%. We participate in five strategic and diverse end markets, commercial marine, power generation, oil and gas, navy and general industrial.

Commercial marine orders were extremely strong. In fact, we are now booking orders for delivery in 2011 in that particular end market. ON the sales side, the only notable change when comparing Q1 to a full year of 2007 is about a 5% swing from oil and gas to general industrial, driven primarily by the timing of incoming oil and gas project orders.

Turning to our strategic end markets, commercial marine is our largest single end market and was 25.2% of our first quarter sales. We had an exceedingly strong order quarter in commercial marine with orders being 36.4% of the total. Organically the order growth was 76%. We expect that growth in international trade, regulatory regulations and the high demand for oil and commodities will continue to drive demand for bulk carriers, container ships, tankers, supply vessels and FPSOs.

Oil and gas sales were 9.7% of total sales for the quarter, while comprising 7.3% of our orders. On an organic basis, orders were down 26% over prior year. This was a timing issue as we booked several large oil projects in the month of April.

We expect activity in the oil and gas market to remain favorable as capacity constraints and continued growth in global demand keep oil prices elevated. We believe high oil prices will continue to drive development of heavy oil reserves and that overall project size will continue to increase.

In the power generation market, we expect activity in Asia and the Middle East to be robust as economic growth continues to drive significant investment in energy infrastructure projects. For the first quarter, sales into the power generation market were 10.8% of our sales and 11.6% of our orders.

Finally, sales into the global navy market were 5.3% of our total sales and orders were 6.1% of our total orders. In the global navy market, we expect that the US navy will continue to appropriate funds for the next generation of naval vessels as older classes are decommissioned.

We also believe that demand will increase for integrated fluid handling systems that reduce operating costs and improve efficiency. We expect countries outside of the US to continue to expand fleets to address national security concerns.

We expect continued infrastructure development throughout the world will drive capital expenditures and our sales in the general industrial market. We are presently seeing strong order rate growth in chemical processing, heat transfer and machinery support. General industrial sales were 49% of our revenue in the first quarter and were 38% of our total orders.

Turning to a more detailed review of our first quarter results, gross profit was very strong, increasing $9.4 million with margin improving 310 basis points to 36.9%. Margin improvement was driven primarily by our European operations. We have been successful increasing the profitability of our commercial marine business by driving price as well as lower cost by improving manufacturing productivity in Europe and generating incremental production from our Wuxi, China facility.

We also saw a higher percentage of high spec commercial marine products that are more highly engineered and present higher margin opportunities which is consistent with our long term strategy in this end market.

Aftermarket was strong in Europe for the quarter with an organic increase of approximately 10%. Selling, general and administrative expenses increased as a percentage of sales by 170 basis points to 21.8%. These expenses in 2007 had the onetime benefit of the $1.1 million gain related to the sale of securities the company received in an insurance demutualization.

Professional fees and audit fees were also $700,000 higher in 2008, the professional fees relate to the final billing on a legacy legal matter. We invested $15.8 million in inventory during the quarter to support a large amount of project business upcoming for delivery in the second quarter.

Net cash flow from operations for the quarter was a use of $11.1 million. The use of cash was driven primarily by this investment in inventory as well as a net cash outflow of $8.2 million related to asbestos matters.

The company’s proceeds from the IPO on May 8 were approximately $193 million which were used primarily to repay debt, for dividends to existing preferred shareholders and other corporate purposes. We believe that we are well positioned financially to continue to execute our growth strategies.

While we do not plan on providing quarterly earnings guidance given the unusual timing of this earnings call, it’s appropriate to provide some color on our anticipated second quarter performance.

Through the first two months of the quarter total sales growth was29% of which 15% was organic. Orders remained strong, up 46% year over year with a 28% organic growth rate. At the end of May, backlog stood at $379.4 million.

In summary, we had a very strong quarter profitability wise and sales growth exceeded our internal expectations. We continue to see strong order growth across our strategic end markets and across each of our geographic regions. With our existing backlog and accelerating order rate, we are well positioned for strong performance for the balance of the year.

With that, I’ll open up the floor for Q&A.

Question-and-Answer Session

 

Operator

 

(Operator instructions) Your first question comes from Michael Schneider – Robert W. Baird.

 

Michael Schneider – Robert W. Baird

 

Did I hear you correct that the first two months of the quarter you’ve shown 25% organic revenue growth and 29% order growth?

John Young

 

The total sales growth was 29%, 15% organic growth or revenue and then organic growth on the bookings side was 28% for the months of April and May.

Michael Schneider – Robert W. Baird

 

Was there some unusual timing just as orders fell in Q2 versus Q1? Or is that scheduled delivery dates just per the customer’s request?

John Young

 

Given that we have a substantial amount of project related business, we are a little bit lumpy sometimes on the order rate. It just happened to fall in particularly in April was a very heavy month for project business. So we saw a particularly large amount of bookings in that particular month.

Michael Schneider – Robert W. Baird

 

And then the breakdown today between price and units, it looks like Q2 was maybe aberrationaly low, but if you look at for example the 15% organic in April and May, can you give us a sense of how much price is contributing at this point?

John Young

 

Since we haven’t official released earnings yet for the second quarter, I don’t want to comment too heavily on that. But we’re pretty consistent on price this year in the 3-4% realized rate. So it’s a combination of volume and price for the second quarter.

Michael Schneider – Robert W. Baird

 

And then your lead times, can you talk about today your lead times on quoted projects, are they still lengthening, have they plateaued at this point in the cycle?

John Young

 

It depends. Some of the lead time increase has certainly been driven by, in particularly in the commercial marine market by the order rate that the yards are receiving and therefore they are pushing out their lead times to their customers. So that hasn’t changed. In fact, as I mentioned, we’re now starting to book orders for delivery in 2011 in commercial marine because basically yards are full throughout 09 and 010.

On the non-marine side of the business, I would say somewhat plateaued in terms of the length of lead time, somewhat driven by our suppliers, particularly in some of the key commodities where lead times from our suppliers have lengthened out. But I think that, I think we’ve probably seen a plateau in that particular factor.

Michael Schneider – Robert W. Baird

 

On raw materials, do you believe in that 3-4 points of price is sufficient today to cover your raw materials or have you changed your pricing strategy at all vis-à-vis current raw material prices?

John Young

 

We have. I mean we’ve certainly been very aggressive at passing along our increased costs. We do a lot of project business as you know and so it’s difficult to capture the exact percentage of price increase because you’re not comparing exact projects year over year or quarter over quarter. But since we tend to bid jobs based on the most current raw material pricing, we feel that we’re effectively able to price according to the changes in our raw material costs.

Scott Faison

 

I’d like to add to that. We’ll continue to monitor that, we’ll stay nimble and you know with regard to our ability to increase price, I think with our premium market position, premium products, we’re in a very good position to maximize price.

Operator

 

Your next question comes from Jason Feldman – UBS.

Jason Feldman – UBS

As we’ve talked about before and you reiterated today, you’re looking for double digit organic growth this year. Obviously the first two quarters, the first two months of the second quarter are consistent with that. But how does the first quarter change your thinking on that at all, or does it?

John Young

 

It doesn’t. We came in right where we, actually a tad bit higher than we anticipated given the project orientation of our business, we tend to be a little bit lumpy. In the first quarter of last year we had strong shipment, particularly in our navy business of large foremarket projects that we anticipate will ship later in 2008.

So based on that comp and also some project business in our oil and gas business, we kind of went into the year anticipating the first quarter was going to be around a 2% organic growth and that’s where we came in.

Scott Faison

 

Sure, when we looked out in August at the first quarter, we anticipated the organic growth rate to be slightly below where we actually came in. So we’re tracking long our internal plan quite closely.

Jason Feldman – UBS

I certainly understand that especially with product based business, I mean the navy in particular I understand but also oil and gas, I think can be lumpy. But do you feel that you have a reasonable amount of visibility? I guess the question is, with the potential for lumpiness, could something like that again happen in the third, fourth quarter where you have products get pushed out?

John Young

 

It really is based on scheduled shipment dates. And so as Scott said, we knew in August where the, based on our backlog and the scheduled shipment dates where we were going to come out in the first quarter. So I think from a visibility perspective, given the lead times on a lot of our business, we feel pretty comfortable with the balance of the year.

Jason Feldman – UBS

So basically the general feel you have, at least six months visibility, probably something beyond that, and we’re not talking about 2011, I know you have a couple of commercial marine orders there, but what do you normally kind of feel that you have from a visibility perspective, is it six months, is it 12 months?

John Young

 

I think six months is a pretty good visibility range. After that sometimes you get project dates moving around a little bit.

Jason Feldman – UBS

Any update on the litigation against the asbestos insurers? It seems like it’s running about $3 million in the first quarter, we have maybe one more quarter of that?

John Young

 

Yes the trial date is set to begin at the very end of the third quarter. And we’re hopeful that date will stick. So we certainly believe that by the end of the year, that case will run its course.

Jason Feldman – UBS

So again, for the kind of the onetime portion of that, we’re looking at kind of a consistent rate, maybe $3 million a quarter through the rest of the year or so?

John Young

 

I think that’s a pretty good estimate.

Jason Feldman – UBS

And for the more recurring asbestos issues, is $4-$5 million a year still kind of a reasonable run rate to expect on an annual basis going forward?

Scott Faison

 

Yes, we tracked right on that the first quarter.

Jason Feldman – UBS

It seemed a little lower in the first quarter, is it just seasonal?

Scott Faison

 

Yes, the underlying claims number and defense cost number was right in line with our projections. The reason why it’s actually a little lower in the first quarter is we received a settlement from an insurer that we had previously considered insolvent that came in as income.

Jason Feldman – UBS

So the original $4-$5 million number is still reasonable?

Scott Faison

 

Yes.

Jason Feldman – UBS

Could you give us a little more color perhaps on the general industrial business in terms of what really drives that? I know it’s kind of a collection of niche businesses, but are there any particular areas of strength or a particular area of concern within that, given some of the economic deceleration we’re seeing in the US and Europe.

John Young

 

I would say the biggest driver right now in our general industrial business is the chemical market. We had very strong sales and orders in that particular sub segment. We really haven’t seen any areas of what I would say particular concern our weakness.

Our order rate continues to be very consistent on the day to day business in general industrial. We’re certainly cognizant of the economic issues, particularly in the US and somewhat in Europe. But at this point, haven’t seen any indication of slowing in our general industrial segment.

Operator

 

Your next question comes from Shannon O'Callaghan – Lehman Brothers.

Shannon O'Callaghan – Lehman Brothers

 

On the margins a little bit, this 100 basis points of EBITDA margin improvement, can you talk about your expectations looking forward in terms of what margin improvement is normal to expect in that line and sort of the components of it versus gross profit SG&A?

John Young

 

I won’t give you too much forward-looking guidance on profitability. But we did in the first quarter have strong gross profit improvement performance, particularly in Europe. That was a combination of several things, one we had some pretty good mix and some productivity improvements, particularly related to our commercial marine business.

So I would say margin improvement certainly is a focus for us, particularly in that particular business unit. And we anticipate trying to drive additional improvement there over the course of the year, particularly as we ramp up from a revenue perspective. The first quarter is typically our smallest revenue quarter of the year. So we tend to growth throughout the year with the fourth quarter being the largest.

Shannon O'Callaghan – Lehman Brothers

 

Would you characterize this gross profit expansion in the quarter as somewhat abnormal given the mix?

John Young

 

I think it is somewhat consistent with what we saw last year. Over the course of the last three quarter of 2007, in that particular business unit, we certainly are targeting margin improvement there for the balance of the year. I’d be hesitant to, it was a fairly significant improvement in the first quarter, certainly be hesitant to give you guidance that that will continue at that rate going forward. But we would certainly hope to continue to drive some margin improvement there.

Scott Faison

 

The other thing I’d like to add is we are focused on increasing the margin in that business unit and we had results in the first quarter, they were actually better than we had expected.

Shannon O'Callaghan – Lehman Brothers

 

On guidance generally, you gave a little color on 2Q, I mean are you guys going to give more formal guidance, I mean you have pretty good visibility in the model, how are you thinking about it?

John Young

 

I think for the balance of this year, we won’t. I think as we get closer to the end of the year we will start providing guidance on 09. But I think given that we’ve been public for a month now, we’ll give ourselves some time to ease into the guidance.

I think it was somewhat unusual that we did the first quarter call two and a half months into the second quarter. So we certainly felt that given the timing of the call it was important to give a little color on the second quarter.

Shannon O'Callaghan – Lehman Brothers

 

Relative to the results we’re looking at here, through March, what are the moving parts we should factor in when we’re modeling looking forward? I mean you had, now you have some public company costs that are going to be absorbed and things like that, what would you call attention to?

John Young

 

I think the public company costs will really start impacting us more in the third and fourth quarters. We’ll have a little bit in the second quarter but that should run about $1.5-$2 million, call it $2 million a quarter going forward.

Operator

 

Your final question comes from Josh [Bogawinski] – Keybanc.

Josh [Bogawinski] – Keybanc

 

Just going to the commercial marine business for a moment, it sounds like on the margin some industry sources have put an 09, 010 going into 2011 as kind of peak years and I’m just wondering, have you guys seen any cancellation activity in your order books and have you heard anything on the margin of maybe some purchasers having a hard time finding credit?

John Young

 

It’s a good question, I’ve certainly read a lot about those two factors in the press here over the course of the last month or so. At this point, we have not seen any order cancellations on our order book. We’re obviously monitoring it very closely you know in talking to our customers on a daily basis. But we have not seen any cancellations at this point.

Josh [Bogawinski] – Keybanc

 

As a follow on to that, just to help understand the timing a little better, from the time a shipyard receives an order, how long until you guys see an order on your books?

John Young

 

It varies, it depends on the channel we sell through because we sell not only direct to the ship owner as well as the yard but also through OEM channel at times. So it could be almost immediate after the shipyard gets the order or it could be three to six months before the ship is scheduled to deliver.

It is kind of all over the place depending on the channel. But I would say more typically the initial order, if we’re shipping to a shipyard comes reasonably soon after the order is taken by the yard, particularly in the case where our product is spec’d in by the ship owner.

Josh [Bogawinski] – Keybanc

I know you guys had talked in the past about trying to ramp up in the commercial marine aftermarket business, just maybe a little more color on any traction you’re getting there, any initiatives that you’ve undertaken?

John Young

 

We did see some increase in our aftermarket business in commercial marine in the first quarter. In fact we were up a little over 10% organically in that segment. So we’re starting to see the benefit not only of the installed base that we’ve put on the water over the course of the last five years, but some of the organic growth programs centered around the aftermarket.

So we’re starting to see some traction and I think that will continue to be a bigger part of our business in commercial marine and we anticipate that mitigating some of the inevitable drop off in some point in time in the foremarket.

Operator

 

There are no further questions.

John Young

 

Thanks again for listening in this morning to the first quarter call, our first earnings call as a public company. We appreciate your participation and look forward to our second quarter call upcoming here fairly shortly.

 

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: Colfax Corporation F1Q08 (Qtr End 03/28/08) Earnings Call Transcript
This Transcript
All Transcripts