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

Cybex International Inc. (NASDAQ:CYBI)

Q2 2008 Earnings Call

July 22, 2008 4:30 pm ET

Executives

John Aglialoro - CEO

Art Hicks - President and COO

Analysts

Paul Swinand - Stephens and Co.

Reed Anderson - D.A. Davidson

Bruce Olifant - Oppenheimer

Tom Shaw - Stifel Nicolaus

Operator

Good day everyone, and welcome to the Cybex International Incorporated Second Quarter 2008 Earnings Call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation.

This conference call may contain forward-looking statements. There are a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by the statements that follow. These include but are not limited to; competitive factors, technological and product developments, market demand, economic conditions, the resolution of litigation involving the company, and the ability of the company to comply with the terms of its credit facilities. Further information on these and other factors, which could affect the company's financial results, can be found in the company's previously filed reports on Form 10-K for the year ended December 31, 2007, its reports on Form 10-Q, its current reports on Form 8-K, and its proxy statement dated April 4, 2008.

It is now my pleasure to turn the floor over to your host, Mr. John Aglialoro, CEO of Cybex. Please go ahead, sir.

John Aglialoro - CEO

Thank you, Keith. Good afternoon, ladies and gentlemen. At this moment serious issues of credit, debt levels, consumer spending attitudes, and commodity prices are affecting the global economy, the US economy, our fitness industry, and certainly Cybex. For now I'll restate what was reported at this meeting at the last quarter in April, and that is that their orders dropped suddenly at the end of March, affecting Q2 results.

Q1 had double-digit revenue gains and solid earnings. Currently for Q3, we see that our midpoint in June again, after the Euro drop in late March, April and May. We see that in a pick up in orders, and they are continuing to pick up in July. Although I can't predict Q3 at this point, yet we have an excellent product map, a good balance sheet, and favorable indication for the industry, and Cybex at large, into the future. The culture change, I believe, is authentic: people are exercising more, health clubs are opening more and more, because of the benefits of exercise.

Our competition: I don't think there is going to be, most of our competitors are going to escape, and I think similar circumstances could be at play here with a first to report and now we'll see how that unfolds. But as I said, it's too early in Q3 at this time to say that, will orders continue but they certainly are at the present time.

Overall the feel was better. I think the general concern that I have is one of confidence, I think, for the economy, for our industry. I think confidence has been wobbly, but as we know, that sentiment can change on a dime. I'd like to ask Art Hicks now to report specifically on Q2 financial results and give an overview. Art?

Art Hicks

Thanks, John, good afternoon. Sales for Q2 of '08 were $33,136,000; that was down about 4.6% from Q2 of '07. Cardiovascular equipment sales were down about 8% to $17,32,000. Strength equipment sales were down 4% to $12,811,000, and the other sales categories, including brake parts and miscellaneous, was actually up 16% at 3,293,000.

North America sales were down just under 5%, and international sales were just down a little bit over 4%. So it was a fairly mixed reaction at one source of the sales decrease. Gross margin was negatively impacted by lower sales levels as well as higher commodity prices in the quarter; they were down 2.9 margin points. The major contributors brake accounted for about 0.8 margin point decrease.

Overheads, mainly related to the New Owatonna facility, increased overhead as a percentage of sales 1.9 margin points and direct material somewhat impacted by mix, but most recent higher steel costs, were 0.8 margin points down from the prior year. On the positive side warranty costs were less than prior year as a percentage of sales, improving margins by 0.6 margin points.

Selling, general, and administrative costs were held down in the quarter. They were 3% lower or 265,000. Nothing serious to note there, it was a nice job by all trying to maintain cost. Selling and marketing costs were the biggest contributor to the decrease in SG&A.

Interest expense was up about $326,000 in the quarter, and just as a reminder there was a $289,000 gain last year for interest rate swap accounting after Q2, effective hedge accounting was deployed for the interest rate swap. So, there was no income statement impact after Q2. Also higher interest levels started in Q3 of '07 related to the Owatonna building. Bottom line was $0.01 per share versus $0.06 in Q2 of '07.

In terms of the balance sheet, cash flow is good, and continues to be good. Cash up was up about $600,000 in the quarter and about $1 million over 12/07 level. DSOs and receivables were 42 days versus 47 at the end of Q1. Inventory was down in Q2 versus Q1 by about $700,000.

I normally don’t mention this category, since not much happens here, but the prepaid and other category was up almost $2 million, which represents an amount owned to us by the lender under revolving credit agreements whereby deposits are swept into the account. They paid us in the first week in July, so that ends up increasing cash $2 million in early July.

Debt was down $1.7 million versus 12/07, and down $0.5 million versus the Q1. John, never mind comments for the financial statements for Q2.

John Aglialoro

All right, thanks, Art. Keith, I'd like to open the meeting up now for Q&A?

Question-and-Answer Session

Operator

(Operator Instructions) We'll go first to Paul Swinand of Stephens and Co.

Paul Swinand - Stephens and Co.

Good afternoon, everyone.

John Aglialoro

Hi, Paul. Hello.

Paul Swinand - Stephens and Co.

Can you give us a little more breakdown on where the sales were weak? Is there any color that's useful by product type? I mean, are we missing anything as far as stuff that you're lapping, that you introduced last year, or any color will be helpful.

Art Hicks

Sure. In terms of product category, the decrease in cardio equipment was generally explained by Arc Trainers. Arc Trainers were down almost 17% in the quarter, contributing to our lower margins. As you know, the Arc Trainers are good margin items for us. Treadmills were actually up a little bit in the quarter, mostly the effect of the new 750T, which seems to be well received in the marketplace.

Strength equipment, VR1 seems to be doing very well. That's our new product category that was actually up in the quarter. Most other strength lines were down. You saw from North American international sales data that there wasn't much of a concentration in terms of sale decreases. Likewise, I don't think there is any one single element driving sales down during the quarter.

Paul Swinand - Stephens and Co.

Okay. And on those Arcs being down 17%, was there any one large customer or anything that you are lapping, anyone customer that may be attributed to that decline in the Arc so that's just across the whole board?

Art Hicks

Yeah I didn’t see anything to note of any kind of concentrated item there. As you know we are introducing the Arc 2 later this year, which I think will reinvigorate that line or the top position that is still not widely recognized in all markets, so we still think between better marketing and the new Arc 2 line that we should be able to turn those projections we're in.

Paul Swinand - Stephens and Co.

Okay. And on inventories, you did mention that they were down such that I would have thought on split sales inventories would have been up. The reason inventories were higher last year or what’s going on there?

Art Hicks

The inventories fluctuated in a number of causes; one happens to be with new product introductions, timing of sourcing parts as we source more globally, you have some bumps in inventories. We did make a concerted effort in the beginning of Q1 to take a look at safety stocks and ordering rate and all the mechanics that goes into inventory management, and the team did a good job looking at that I think. I’m still not pleased with inventory turns but we’ll continue to work on it.

Paul Swinand - Stephens and Co.

Okay. And one last one, I’ll let somebody else in. Where do you guys stand with eNova right now? That might get pushed back a little, but where do we stand as far as cost and when we’ll see revenues?

Art Hicks

We’re evaluating the eNova relationship currently. There are some product introductions in the Plate Loaded & Free Weight area and there are some definite contributions by eNova in getting up a seven or eight piece product line together in the cable/electorized mode. These would sell with the Eagle Line VR1, VR3 strength line. That would be in addition. We don’t currently have a cable line now. That cable line I think will add some interest for Cybex customers and that will have an additional strength line.

The relationship has always been a contractual one, that the contract is up for renewal in the months ahead and we’re going to see whether they are interested, were interested and come to a conclusion.

Paul Swinand - Stephens and Co.

Thank you.

Operator

(Operator Instructions). We will go next to Reed Anderson with D.A. Davidson.

Reed Anderson - D.A. Davidson

Right, good afternoon. Art, on the gross margin side, on the overhead piece you referenced 1.9 percentage points, was that just purely less absorption because of sales being down or is that more attributable to overtime or ramping up?

Art Hicks

It’s mostly the former. Mostly lower sales absorption for overhead. The labor efficiencies then continued to improve and with higher volumes I think as we saw in Q1, that plan will start paying off.

Reed Anderson - D.A. Davidson

Okay, that makes sense. And then on the material side, I’m just curious, how far out are you costed for this year? Are you pretty well out to the end of the year, or is that another risk if prices were to creep up some more. Give us some color on that?

Art Hicks

Well we just updated our standard cost, effective July. I would say Q2. This is a rough ballpark but probably reflect probably 70% of the price increases that we know about.

Reed Anderson - D.A. Davidson

Okay. I was just curious, what is your’s if you would look over your vision, what percent does that represent of the material’s piece, what ballpark?

Art Hicks

I have that number. That’s roughly 20% of our direct material in steel.

Reed Anderson - D.A. Davidson

Okay, got it. That’s good, helpful. Then John, on the customer side and the sales side, just curious, I know I think in the first quarter you maybe saw a little, maybe a little pull back from telling your key customers that the smaller the neighborhood health club centers types of things, but I was wondering if that had changed at all, even worse in the second quarter that’s held pretty steady?

John Aglialoro

No. I think overall sales from the small guy to big guy. As we said, there was this drop. Around mid, late March, it is continuing, it was not a matter of lets get a price promotion deal for certain customers, let’s take less margin across the board. I mean, you’re not going to give it away and I don’t mean people wouldn’t have taken it for huge discipline, we weren’t going to give it away, but there was not interest at any price added to in April and May.

Suddenly, things were almost normal again, and in June we saw definitive increases that have continued into July. So, as I said, the feel is better. Some of this I think is out of our water. I think as a global economy, persons in the news are [branky] everyday and a lot of the stuff is not about making a nice product and selling it at a fair and reasonable price with a good service contract. It’s about people that own the club, either 500 clubs or one club and they’re saying to me, what am I going to do, should I invest there right now, I’ve got a brand new shopping area and it’s a good club, should I decrease pricing, should I extend my promotions, all of that. I think it is this general confidence meter that gets hot and then gets cold and then gets hot again.

Reed Anderson - D.A. Davidson

To your comments on pricing, so you really haven’t had to do anything to alter your pricing practices to win additional business. You haven’t been able to hold that constant but for whatever reason, demand has picked up here in late June?

John Aglialoro

Well I think we began preparing for this possible downturn, top line in cost side, back around September-October of ‘07. I think there were some explosions in the global marketplace around August and then again in October. So we began saying, let’s get prepared. Things were still hot in the industry. We upped prices pretty well at the end of ‘07 with the idea that we might need to really start doing some price promotions or be prepared to take less margins.

Though we did some of that, though from a price increase, we don’t have any large, any significant price increases that we’re looking at this point. So I think we’re priced attractively and if this upturn in orders continues throughout the industry I hope, because what affects the industry affects Cybex. I think we’ll be in pretty good shape.

Reed Anderson - D.A. Davidson

Great. Thanks very much.

John Aglialoro

Thanks, Reed.

Operator

We’ll go next to [Bruce Olifant] with Oppenheimer.

Bruce Olifant - Oppenheimer

Yes. Discovery Fund alms are believed about 6.6% of Cybex stock. Do you know anything about Discovery Fund and are they a passive investor?

John Aglialoro

We met with Discovery Fund folks. They’ve got I think in the 6% area of Cybex stock. We welcome them as shareholders. It was very casual and then they ask some of the same questions that on these type of calls quarterly and had a little bit of factory tour I believe, these sellers went through and not with that.

Bruce Olifant - Oppenheimer

Also, I noticed that there’s been heavy insider buying. Can you just go over the breakup because it seems like when in absence of the insiders come up, it seems like there is repetition. Lets call it between let’s say you are purchasing John, quarter and UM Holdings, is that one purchase?

John Aglialoro

That's really all in one purchase. I don't know why it separated. I think they are just trying to say who is part of the UM Holdings, which of course is the owners, have about 33% of the stock. And as the stock moves down and conditions essentially from their point of view looks sound, they bought stock and I think I don't know what will happen tomorrow with that idea but this things continue to look good in their mind. They may or may not continue to purchase.

Art Hicks

Yeah the proxy rules Bruce has always been kind of confusing, even if you look at the proxies that the shares are double counted as those individual and their affiliates I’m not sure.

Bruce Olifant - Oppenheimer

To the first of your actual purchases made by John of 295,000 and 125,000?

Art Hicks

No I have not purchased individually any stock but UM Holdings has.

Bruce Olifant - Oppenheimer

Okay, correct. Alright. The one thing I want to ask you is, could you as the stock has been sort of down in the dumps here, at what point would you consider taking the company project?

John Aglialoro

Well I couldn't really respond to that at in any way. For any public company, there is a time when shares are sold because it’s overpriced, fully priced personal needs of the institution or individual. And then on the other side of it, there’s times when people will stable out. Look at the crazy price. I mean look at the bank stocks and you couldn't give away Wachovia. Well, you could give it away, you give it away at about $8 you gave Wachovia away a week ago and today it's doubled in one week Wachovia, same bank doubled from $8 to $16. Now we can go over 101 companies like that in the airline or oil, where oil is being dumped to some degree and banks. So I am convinced markets have no sanity.

Bruce Olifant - Oppenheimer

This just seems like we've never had that much of a strong following just a lack of interest in our company it seems like. And you can see that the way the stock even trades.

Art Hicks

I think until this particular quarter, we've had 23 continuous quarters of upward revenue growth. It's an exciting industry. We are not hyper growth. We are not a biotech. We have not been given, 30%, 40%, 50% growth aspirations, but I think it's been a good story, a solid performance and I agree. I think the stock is low priced.

Bruce Olifant - Oppenheimer

How much shares are currently held by insiders?

John Aglialoro

Well, between UM Holdings is about a third and few other 5% plus I guess close to 50%.

Bruce Olifant - Oppenheimer

And the book value right now?

Art Hicks

It's about 325.

John Aglialoro

Yeah, it is about between about 3.5 plus or minus.

Bruce Olifant - Oppenheimer

Right and the market cap must be right now about what 70 million?

Art Hicks

The market caps is about the half of revenues.

Bruce Olifant - Oppenheimer

About half of revenues. There are also some other issues that on the first quarter conference call, I remember you making a comment that usually the lead time for products was like between 10 and 12 weeks and that you were seeing at that time on the conference call you said two to four weeks of lead time for products and that was a drastic drop. I'm wondering what you are seeing now as the lead time?

Art Hicks

Yeah, it has picked Bruce by a week. So things have moved out a little bit showing the strength of the order book.

Bruce Olifant - Oppenheimer

When you say by a week it's got about five weeks now?

Art Hicks

It's from two to four it's three to five.

Bruce Olifant - Oppenheimer

Okay.

Art Hicks

And the 10 to 12 was an anomaly and that was kind of a peek in Q4 typically we like to keep it like a six week lead time.

Bruce Olifant - Oppenheimer

With the miss here in the second quarter, I think the estimates to the quarter were about in the vicinity of $0.05 or $0.06. So it was a good $0.04 or $0.05 miss. Do you see us making that up in the third quarter and fourth quarter, are you comfortable with the current estimates that are out there?

Art Hicks

We really don’t comment on the analyst coverage and couldn't say about the third quarter and fourth quarter earnings.

Bruce Olifant - Oppenheimer

You do foresee that some of the business that we missed in the second quarter can be made up in the rest of the year?

Art Hicks

Yeah, I think John mentioned that the orders were stronger, too early to tell about Q3, but certainly the feel of the business is better than it had been when we were here a quarter ago.

Bruce Olifant - Oppenheimer

Thank you very much.

Operator

We'll go next to Tom Shaw with Stifel Nicolaus

Tom Shaw - Stifel Nicolaus

Art Hicks

John Aglialoro

Hi.

Tom Shaw - Stifel Nicolaus

Few questions here, first question we've danced around a little bit, but in terms of the products that are come out, expected to come out in the back half, can you give us any better sense of the timing and do you think that this environment has caused products to maybe be particularly on the consumer side pushed down to 2009?

John Aglialoro

The 368A, new version of the Home Arc we have a team in Taiwan now evaluating production and expect shipments in late Q3. They should be shipping in September. I've a fairly high confidence level there. The Arc 2 will be a Q4 late October introduction. The plate loaded line will be late in '08 and the bike line will be late in '08 as well. Not much of an impact in Q4, I wouldn't think.

That the product line between now and let's say, the major trade show of the year, which is March of every year, they're all well funded. So there wouldn't be a matter of some testing blitz or something like that. But the way to go from a funding point of view when we see engineering coming together and we've instituted a soft launch, which I think we're going to put a lot of attention to, which is essentially as per to beta testing.

We then are going to come up with a fixed number of production models and put them in the field and see what happens and get back and then begin our production line. And even that we want to have lot of limited number and increase that monthly. So that when a product comes out it is confident that it is Cybex-built, it works and people feel encouraged by the new product launch as it occurs throughout the year. That's a strong part of our growth expectation is Cybex had had in the late 90s, middle-late 90s, more of a expectation of products or in kind they work and we have done a lot of work diligently to get to that point again and I think we are there.

Tom Shaw - Stifel Nicolaus

Okay, how about the consumer multi gym. Is that something that's still in the works.

John Aglialoro

Yeah, that will be in late fourth quarter as well.

Tom Shaw - Stifel Nicolaus

Okay. What about trends on the hospitality side, obviously there is something that takes a while to develop those relationship that any progress with those efforts?

John Aglialoro

I went to a hospitality conference about two months ago or so with the fellow that is head of that division and it was an amazing thing. Hotels really are now more about just selling rooms and a coffee shop. I was convinced more than ever that there’s a place there. We need to commit capital there. We are committing capital in the verticals line. These are not full commercial products that you generally put into a hotel or spa. And although they do, when we’ve got a good vertical line of products, I was introduced, met a lot of different folks. We benefit from some of the larger hotel names after a while. I think our name is now in there. We’ve been signing up several that are going to their process before they put you on a list where you can bid.

So our division head has been very successful, came from that world, knows the players and then also it’s the folks at that hotel hospitality conference. And interestingly their comments were similar to many other industries. They are optimistic about the future, there are some short-term things about their comps and from last year to now but interesting to say that, I really think that will be just rather than a miscellaneous revenue source. I really think it’s going to be in the next three or five years a definitive piece of one’s revenues in this industry and a piece you really go after.

Tom Shaw - Stifel Nicolaus

Okay. Two more quick ones I guess. Have you seen a change in the growth of just the health club environment, some of the bigger players out there?

Art Hicks

I think there has been some success and some not success. The companies that have not been over extended are continuing to open them up. Those who came out hosted the trade organization that we work with. Their latest issue had the 25 global players in that health club world and then I think the next week or two there is going to be, they have a trade show for the mountain pops, in the one, two, three. How to make a profit, when to open up your club, how to price it, how to keep the locker rooms clean? And overall the numbers I think have shown some flatness in some parts but overall have been positive in the mid upper-single digits. Although most lately, I think there has been a bit of flatness there.

Tom Shaw - Stifel Nicolaus

And last one, just I don’t if you can further characterize the sales in June, but were those sales when they started shipping, were they positive for the month. Can you give that kind of detail?

Art Hicks

I’m sorry. I am not sure I understood your question, Tom.

Tom Shaw - Stifel Nicolaus

Well, we know sales were for the quarter but when our trends started improving in June, was that improvement enough to create positive sales year-over-year.

Art Hicks

For the month of June, yes a little. I wouldn’t want to start quoting months since teams can move back and forth. But as the order rate for June was above last year and certainly as John mentioned appears to be a change in the wins. We’ll see whether trends continue, but, it was definitely better year-over-year improvement.

Tom Shaw - Stifel Nicolaus

Okay, thanks.

Art Hicks

Yes.

Operator

And our last question is from Paul Swinand with Stephens.

Paul Swinand - Stephens and Co.

Hi. I just had a few follow-up questions. What do you think was driving the decline in international? In other words, if we are attributing the declines to the macro environment in the US, I guess I would have thought the international would have still been strong and even at some of the shows that we’ve been to, we’ve talked to international buyers that were eager to increase their business we procure in our other vendors that were there?

Art Hicks

Alright. It’s interesting and you’ve probably have seen it and with your exposure, that the markets are not consistent. Spain was very soft, seemed to be more impacted by credit markets then will pretended to be a macroeconomic guru but, yet in Scandinavia is going to be holding up strong. So, I don’t think there is one paint brush for the US or the rest of the globe. I think it thus depend on region by region reflex, my take on it. I think was just a general conservatism throughout the industry in terms of customers delaying when they could, some refurbishment projects or some new club. And like I said in June, it looks like things hopefully are turning for the better.

I don’t need say to, aside from the quarter, the first quarter, second or third, whatever of those international numbers for those three quarters happened to be, clearly for ‘08, ‘09 and on, international will become a growing percentage of revenues for CYBEX.

Paul Swinand - Stephens and Co.

So you still see it growing even in ‘08 as a percentage of total, so it will accelerate in the back half of the year.

Art Hicks

Yeah, I would say whatever the results for CYBEX are that the percentage of revenues coming from international will be greater than in ‘07 and I believe ‘09 will be greater than '08 and ‘10 will be greater than ‘09.

Paul Swinand - Stephens and Co.

Yes, understood. And then, the only other question I have is, since we don’t have I mean just quickly looking at the balance sheet, it looks like you actually created good operating cash flow, do you have that number yet, or cash flows from operating, I mean…

Art Hicks

Income category was up and was about $6.8 million, net cash provided by operating activities for the six months versus $2.6 million for the six months of ‘07.

Paul Swinand - Stephens and Co.

Okay. And then again with the balance sheet you can try what D&A was. Do you have that or--?

Art Hicks

$2.4 million versus $1.6 million.

Paul Swinand - Stephens and Co.

Okay, alright. And I guess the only other question was interest expense came in line with our forecast but it looks like it’s going down sequentially. Do you see that continue to come down throughout the year or--?

Art Hicks

We do have some CapEx spending in the second half of the year at a higher rate than the first half. As you know the CapEx closely linked with new products and with all the new products coming out at the end of the year, I would expect the debt levels probably to be close to where they are now, especially with the fourth quarter build up in working capital as you would expect with our stronger fourth quarter, at least historically it’s been tough.

Paul Swinand - Stephens and Co.

Okay. Still kind of in line sequentially with this quarter.

Art Hicks

Probably that’s what I would expect.

Paul Swinand - Stephens and Co.

Okay. Thank you.

Art Hicks

Thanks, Paul.

Operator

We have no further questions. We’d like to turn it back to the speakers for any additional or closing remarks.

John Aglialoro

Thanks very much Keith for your attention to this meeting and thanks to all of you shareholders, and we will look forward to speaking with you again. Bye-bye.

Operator

Ladies and gentlemen, this does conclude today’s conference. We appreciate your participation and you may disconnect at this time.

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: Cybex International Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts