Gehl Company Q2 2008 Earnings Call Transcript

Gehl Company (GEHL)

Q2 2008 Earnings Call

July 28, 2008 2:00 pm ET

Executives

William D. Gehl – Chairman of the Board & Chief Executive Officer

Malcolm F. Moore – President & Chief Operating Officer

Shannon Van Dyke – Corporate Controller

Analysts

James Bank – Sidoti & Company

Charles Brady – BMO Capital Markets

Robert McCarthy – Robert W. Baird & Co., Inc.

Presentation

Operator

Welcome to Gehl Company’s conference call to discuss its second quarter 2008 financial results. (Operator Instructions)

Before I turn the call over to the company, please note that today’s conference call, including answers to your questions, will include statements that Gehl Company believes to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters the company has described in its Form 8K filed today with the SEC and other filings with the SEC. The company disclaims any obligation to update these forward-looking statements.

I will now turn the call over to William Gehl, Chairman and Chief Executive Officer of Gehl Company.

William D. Gehl

Welcome to Gehl Company’s second quarter earnings conference call. With me today are Mac Moore, President and Chief Operating Officer, Mike Mulcahy, Vice President and General Counsel and Shannon Van Dyke, Corporate Controller.

In the second quarter of 2008, our business exhibited strength in several areas. The company gained market share in its two key product categories: skid loaders and telehandlers, continued cost saving initiatives and generated strong international sales with skid loader shipments outside of North America now representing 47% of total skid loader shipments. In the second quarter of 2008, the company generated net sales of $111.1 million compared to net sales of $135.3 million in the same period one year earlier. Net income from continuing operations was $5.2 million or $0.43 per diluted share. This compares with net income from continuing operations of $8.8 million or $0.71 per diluted share for the second quarter of 2007.

Our view of 2008 remains generally unchanged as the diversification of our serve markets including commercial construction, agriculture and international markets will partially offset continued challenges in the domestic residential construction market and decreased capital spending by large rental companies. Net sales in the first quarter of 2008 were $111.1 million compared to first quarter 2007 net sales of $135.3 million. The combination of robust agricultural markets, strong international sales and market share gains in the company’s two key product categories has partially offset the impact attributable to weakness in the U.S. residential housing sector. International markets continued to perform well as sales outside of the United States grew to 30% of total company sales in the second quarter of 2008 compared to 26% in the same period of 2007.

Despite challenges in the domestic market, the company performed well relative to the industry. The company achieved continued market share gains as its North American retail skid loader volume decreased 1% during the second quarter of 2008 versus the same period of 2007. While the overall industry retail numbers decreased nearly 10% for the quarter, the company’s telehandler retail demand declined 14% in the second quarter in an industry wide market that declined over 23%. Second quarter 2008 gross margin of 20.5% compared to 21.8% in the same period of 2007. A decline in unit volume and higher steel and component prices was partially offset by tight cost control and cost savings resulting from investments in new manufacturing equipment.

Gross profit for the second quarter of 2008 was $22.8 million compared to $29.5 million in the second quarter of 2007 which primarily reflected the lower sales volumes. Selling, general and administrative expenses decreased to $14.7 million for the second quarter of 2008 compared to $15.7 million over the same period one year ago. This decrease primarily reflected several cost savings initiatives including savings associated with the streamlining of sales and support groups for the Gehl and Mustang brands, lower travel spending and decreased employee benefit cost. As a percentage of net sales operating expenses increased to 13.2% from 11.6% in the prior year.

Turning to our balance sheet for a moment, we ended the quarter with $78 million in debt compared to debt of $74 million at the end of the second quarter 2007. The year-over-year increase in our debt levels is primarily attributable to capital expenditures related to our new research and development facility and increased inventory levels driven by new products, partially offset by a reduction $42 million in wholesale accounts receivable driven by our efforts to reduce field inventory levels. Capital expenditures and depreciation were $5 million and $1.1 million respectively in the second quarter of 2008.

Based on the company’s first half results, current backlog position and management’s current 2008 market forecast, the company has adjusted its 2008 full year outlook. The company expects its 2008 earnings from continuing operations to be in the range of $0.85 to $1.05 per diluted share on net sales of $390 million to $410 million.

That concludes our prepared remarks and I will now turn it back to the moderator for the question and answer session.

Operator

(Operator Instructions) Your first question comes from the line of James Bank with Sidoti & Company.

James Bank – Sidoti & Company

In regards to your R&D spending, what was it in the quarter?

Shannon Van Dyke

There wasn’t a significant incremental in the quarter. Year-to-date read an increment of about $900,000.

James Bank – Sidoti & Company

So, again, what I’m getting at is that there was a period of SG&A ramping up as you guys were spending a lot on your R&D. At this point, given the state of the economy and other tight cost controls you have in place, is this the run rate we should be seeing for SG&A throughout the year?

Shannon Van Dyke

I think we have some minor increases yet in the back half of the year as new products are still being designed but we keep getting close to a run rate.

James Bank – Sidoti & Company

If you could just run through the state of your receivables, meaning you guys are still in terms of delinquency or uncollectible which should only be maybe a historical high of 2% of the total that you’re showing?

Shannon Van Dyke

Yes, I think that’s still reasonable. We’ve certainly reviewed again, at each quarter as we reviewed our reserves, and we did bump the reserve a little bit in the quarter but nothing out of the ordinary. And 2% still seems very reasonable.

James Bank – Sidoti & Company

So I won’t ask you about next year but so for the remainder this year, you wouldn’t foresee any surprises in terms of receivables being uncollected?

Shannon Van Dyke

No.

William D. Gehl

No. Not at this time.

Operator

Your next question comes from the line of Charlie Brady with BMO Capital Markets.

Charles Brady – BMO Capital Markets

Bill, what is the impact of that gross margin isolating the raw material steel cost increases and the component cost increases and have you put through price increases? Do you expect to recover the cost increases over the remainder of the year?

William D. Gehl

Well we have instituted price increases again this summer. We had a price increase in January. We are looking out towards the balance of the year and making a determination as we go as to whether or not we’ll need to increase prices further but we haven’t included that at this point. Shannon, do you have the breakdown on the gross margin?

Shannon Van Dyke

Yes, the increase in the steel and component cost is resulting in about a 230 basis point reduction in growth margin and the price increases are offsetting a portion of that as well as reduced spending on the plant side, but the number you’re looking for I think is the 230 basis points.

Charles Brady – BMO Capital Markets

It sounds as though your European business is holding up maybe better than I would have thought, given what we’ve heard from other companies as the overall European economy getting soft and some purchase by rental companies over there being curtailed fairly significantly in some cases. Can you just comment more specifically on what you’re seeing in the European marketplace and what driving or holding you up maybe a little bit better than the market?

William D. Gehl

Well, what we’re seeing, specifically, is the market in Spain for skid steel loaders is down quite significantly from a year ago. That relates to their own housing problems that they have out in their country, much not unlike some of the things that are going on here. They’re in an overbuilt situation and they’re working off of a large inventory of unsold units, particularly residential units so Spain is our weakest country. France and Germany and the northern European countries are holding up fairly well. We anticipate that there can be some slowness but at this point in time business is continuing. We also have opportunities in Eastern Europe which we’re pursuing and in Russia so across the board we’re cognizant of the fact that European economies are predicted to be slower. We haven’t felt the full impact of that other than specifically in the market in Spain. It’s anticipated that the U.K. will be slowing in the months ahead but as yet we haven’t felt the full impact of that.

Charles Brady – BMO Capital Markets

You think that’s more, is it a function of your gaining market share or is it the markets themselves, excluding Spain, just haven’t really declined significantly?

William D. Gehl

I think it’s a combination of both. We are gaining market share.

Operator

Your next question comes from the line of Robert McCarthy with Robert W. Baird.

Robert McCarthy – Robert W. Baird & Co., Inc.

I wonder if you could first share with us the share of sales in the quarter for telehandlers and skid loaders?

Shannon Van Dyke

Yes. In the quarter skid loaders is about 40% and telehandlers is 29%.

Robert McCarthy – Robert W. Baird & Co., Inc.

I believe I heard earlier that of the 40%, roughly 47% was international?

Shannon Van Dyke

Yes. In the quarter I believe it was yes, 47%. Yes.

Robert McCarthy – Robert W. Baird & Co., Inc.

I need to follow up answer to a previous question about the impact of steel and component cost. The 230 basis points, was that in the quarter or is that year-to-date?

Shannon Van Dyke

That’s in the quarter.

Robert McCarthy – Robert W. Baird & Co., Inc.

That’s in the quarter. What was the number in the first quarter? Can you remind us?

William D. Gehl

The year-to-date is 1.6.

Shannon Van Dyke

Yes, year-to-date is 160.

Robert McCarthy – Robert W. Baird & Co., Inc.

Bill, can you talk about it in a general sense how much tougher you think the second half is going to be, from managing and put cost perspective?

William D. Gehl

I’d like to ask Mac Moore to comment on the steel situation particularly.

Malcolm F. Moore

Rob, we certainly expect some headwinds in both the third and the fourth quarter as these surcharges come into effect which we’ll see especially in the third quarter, and then we expect in the fourth quarter things will level off a bit. Obviously, we’ve been doing everything we can to protect our exposure through negotiations and also through the price increases that, the two price increases that we’ve already taken this year. Of course, we’re evaluating what else we need to do for the remainder of the year.

Robert McCarthy – Robert W. Baird & Co., Inc.

Do you feel like you had pretty good visibility of the current surcharge environment of when you set the size of the most recent price increase?

Malcolm F. Moore

Yes.

Robert McCarthy – Robert W. Baird & Co., Inc.

When you talk about negotiating I assume in part you’re referring to backlog exposure?

Malcolm F. Moore

Yes.

Robert McCarthy – Robert W. Baird & Co., Inc.

Do you hope that you will be able to get some help in that regard?

Malcolm F. Moore

Yes.

Robert McCarthy – Robert W. Baird & Co., Inc.

Can you give us an idea of how big? We’re getting a pretty good time series here now. Can you give us an idea of how big backlog was at the end of the quarter?

Shannon Van Dyke

Yes, the backlog was sitting right around just over $73 million at the end of June. That’s up about 9% from last year and up about 83% from year end.

Robert McCarthy – Robert W. Baird & Co., Inc.

One more and then I’ll let somebody else go. Your inventory is up compared with the first quarter and if I look at typical seasonal decline and how big that might be and then I gross up margin, it looks like maybe sales were something like $15 million to $20 million below your expectations for the quarter? And seeing as a lot of that ended up in inventory, it creates the impression anyway, or I can infer from that maybe that the business really softened up more later in the quarter, in a time frame that didn’t give you really sufficient time to react to it. Am I reading that right and are you comfortable that what’s inventory now simply turns into revenue in the third quarter and it’ll clear itself out at that point?

Shannon Van Dyke

Rob, one of the biggest drivers right now is our increase in inventory as well as it’s a large portion of our sales mix for the second quarter released to the launch of our articulated loaders. The timing of that was originally, we had hoped to start shipping those units over to Europe already in April. We ran into some supplier constraints and issues that had to be resolved and those units really didn’t start shipping to Europe until late June. We didn’t recognize an end sale on those really starting until July for the most part. Those were both in inventory as well as we’ll recognize as revenue later in the year.

Robert McCarthy – Robert W. Baird & Co., Inc.

Sure, of course and this is something that would be measured in double digit millions in terms of revenue impact?

Shannon Van Dyke

It’s somewhere between I would say seven and nine.

Robert McCarthy – Robert W. Baird & Co., Inc.

So fairly significant. So to what extent, if I understand correctly, you’ve brought field inventory down on a year-to-date basis by, on the order of magnitude $42 million? So you’re feeling like at this point, you’re figuring internal inventory, field inventory production is pretty well balanced? Am I reading that right, Bill? Are you worried about incrementally weaker retail conditions?

William D. Gehl

Not particularly worried about it, Rob. No.

Robert McCarthy – Robert W. Baird & Co., Inc.

Did I get that number right in terms of the reduction field inventory?

Shannon Van Dyke

That’s as compared to last year?

Robert McCarthy – Robert W. Baird & Co., Inc.

As compared to last year. Where are you compared to the end of the year?

Shannon Van Dyke

Year-to-date we’re down 9.7 approximately.

Robert McCarthy – Robert W. Baird & Co., Inc.

About 10. And your target, if I remember correctly, is in the $40 million range?

Shannon Van Dyke

Yes.

Operator

Your have a followup question from the line of Charlie Brady with BMO Capital Markets.

Charles Brady – BMO Capital Markets

A 31.5 was done in 1Q and 2Q. Are you at that run rate now going forward?

Shannon Van Dyke

I’m sorry. Could you say that again?

William D. Gehl

I didn’t catch the first part of the question.

Charles Brady – BMO Capital Markets

With regard to the tax rate, you’ve been at 31.5 for the first two quarters. Are we at that run rate now or does shift a little bit?

Shannon Van Dyke

No. I anticipate it staying there. It may even come down slightly. It really depends on the mix of our income in Germany versus here given that the tax rate there decreased substantially this year but right now we feel like 31.5 is adequate.

Operator

You have a follow up question from the line of Robert McCarthy with Robert W. Baird.

Robert McCarthy – Robert W. Baird & Co., Inc.

Did you buy stock back in the quarter?

Shannon Van Dyke

We did not have any repurchases in the quarter.

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