James Imbriaco - VP and General Counsel
William E. Redmond, Jr. - President and CEO
Tom Testa - CFO
GenTek, Inc. (GETI) Q2 2008 Earnings Call Transcript August 12, 2008 11:00 AM ET
Good day and welcome to the GenTek Second Quarter 2008 Earnings Conference Call. Today’s call is being recorded. At this time for opening remarks, I would like to turn the conference over to Vice President and General Counsel, Mr. James Imbriaco. Please go ahead, sir.
Thank you and good morning, everyone, and welcome to GenTek’s earnings call for the second quarter 2008. Before proceeding, I would like to read the following statement.
Today’s conference call may include forward-looking statements that are subject to risks and uncertainties relating to GenTek’s future financial and business performance. Such statements may include estimates of revenue, expenses and income, as well as other predictive statements or plans dependent upon future events or conditions. These statements represent the company’s estimates only on the date of this conference call and are not intended to give any assurance as to actual future results. GenTek’s actual results could differ materially from those anticipated in these forward-looking statements. Although these statements are based upon assumptions the company believes to be reasonable based upon available information, they are subject to risks and uncertainties.
Please review the Risk Factors section relating to our operations and the business environment in which we compete contained in our second quarter Form 10-Q and in our 2007 annual report on Form 10-K, both of which are on file with the SEC, for a description of these risks and uncertainties. Please note that GenTek assumes no obligation to update any forward-looking statements from past or present filings and conference calls.
This conference call also contains references to non-GAAP financial measures as defined by the Securities and Exchange Commission in Regulation G. Reconciliations of the non-GAAP financial measures to their comparable GAAP measures are included in GenTek’s earnings press release for the second quarter, which has been furnished to the SEC on Form 8-K and can be found on both the homepage and in the Investor Relations section of the company’s website.
It is now my pleasure to introduce and turn the call over to Mr. William E. Redmond, Jr., President and Chief Executive Officer of GenTek.
William E. Redmond, Jr.
Thanks, Jim. Good morning and welcome to the GenTek second quarter 2008 earnings call. Joining me from the GenTek senior leadership team along with Jim Imbriaco is Tom Testa, our CFO, and Rob Novo, our VP of EH&S and HR.
We are pleased to report our second quarter results. The Performance Chemicals segment delivered strong operating results during the quarter, and we expect to build on this momentum in the second half of 2008. While the Valve Actuation business continues to see softness, driven by North American automotive market conditions, we have initiated steps during the quarter to reduce the cost structure of this business to more closely align with North American market trends. At the same time, we continue to vigorously invest in people and capital to drive new business awards.
I will speak in more detail about the impact of our key initiatives later in the call. Now, on to our earnings results for the quarter which Tom Testa, our CFO will review.
Thank you, Bill. Revenue for the second quarter was $162 million, an increase of $2 million or 1.5% versus the prior year. This increase was driven by the revenues in the Performance Chemicals business, which increased by $17 million, partly offset by reduced sales in the Corporate and Other segment of $9 million and Valve Actuation Systems segment of $6 million.
Revenues in the Performance Chemicals segment grew by $26 million, driven primarily by higher prices in the water treatment and chemical processing markets. Increased prices were necessary to offset the rising cost of raw materials, primarily sulfur and sulfuric acid, used to manufacture these products. This increase was partly offset by a $9 million reduction resulting from the sale of the Reheis antiperspirant actives product line.
Reduced sales in the Corporate and Other segment of $9 million were the result of the transition away from the supply of low-margin commodity wire products to the former Noma wire harness assembly business, coupled with reduced demand for industrial wire from our OEM customers.
Reduced sales in the Valve Actuation Systems business of $6 million were driven by three key factors; $3 million from the loss of engine component programs with Eaton and [Itek]; $2 million resulting from the idling of a key customer’s production facility in Brazil; and the balance the result of weak demand from our domestic OEM automotive customer base.
Year-to-date revenue through the second quarter was $313 million, down $1 million versus the prior year. This essentially flat revenue performance was the result of increased revenues in Performance Chemicals, which grew by $28 million, offset by reduced sales in the Valve Actuation Systems segment of $15 million and Corporate and Other segment of $14 million.
Increased revenue in the Performance Chemicals segment of $28 million was driven by broad-based strength across all markets. Revenue benefited from increased selling prices in all markets, driven by efforts to offset higher raw material costs. In addition, the 2007 acquisitions made in the water treatment market contributed $7 million toward the revenue growth. These increases were partly offset by an $11 million reduction resulting from the sale of the Reheis antiperspirant actives product line.
Reduced sales in the Valve Actuation Systems business of $15 million were impacted by the same issues as noted in the quarter; $4 million from the loss of the engine component programs; $6 million resulting from the idling of the customer’s facility in Brazil; and the balance the result of weak demand.
Reduced sales in the Corporate and Other segment of $14 million were the result of the lower sales to the former Noma wire harness assembly business, coupled with soft market demand for industrial wire.
For the second quarter, the company had operating profit of $13 million, which was comparable to the prior year. Favorable results in Performance Chemicals were offset by reduced profitability in both, Valve Actuation Systems and Corporate and Other.
Operating profit for the Performance Chemicals segment in the quarter of $16 million was up $3 million from prior year. Performance Chemicals’ operating profit benefited $2 million from price increases in excess of raw material costs, largely the result of the timing impact on passing through higher costs for sulfur and sulfuric acid.
Results for the current year benefited in comparison to prior year due to $1 million in restructuring charges, which were booked in the prior year, associated with the closure of the Newark sulfuric acid plant. In addition, results for the second quarter benefited by a $1 million correction relating to accounting for certain intercompany inventory transfer transactions relating to prior periods.
We identified a problem with how these transactions were configured in the initial implementation of the new SAP computer system. This correction, which was not material to our 2007 reported results, reduces cost of sales in the current quarter. A permanent fix has been implemented to the SAP system and tested to ensure that this issue cannot reoccur.
The Valve Actuation Systems business operated at a $2 million loss for the quarter, down $2 million from the prior year. Operating profit was reduced by $1 million versus prior year due to the weak revenue performance. The impact of the weak sales was compounded by an additional $1 million in higher costs, resulting in large part from increased steel raw material costs.
The Valve Actuation Systems business results include a $500,000 reduction in restructuring charges associated with a workforce reduction program initiated to reduce overhead costs in line with changes to current market demand. The impact of these charges are offset by restructuring charges booked in the second quarter of 2007 associated with the consolidation of manufacturing operations into the Tallahassee, Florida, facility.
Operating profit in the Corporate and Other segment was down $1 million from prior year, resulting from the impact of reduced sales volumes in the industrial wire market. On a year-to-date basis, the company had operating profit of $20 million, which was down $7 million from prior year.
This shortfall was the result of year-over-year performance in the first quarter, primarily driven by the Valve Actuation Systems segment. The Valve Actuation Systems business operated at a $2 million loss for the first six months of 2008, down $6 million from prior year.
Operating profit was reduced by $4 million versus prior year due to the weak revenue performance in North America. The impact of the weak sales was compounded by an additional $2 million from the idling of a major customer’s facility in Brazil and $1 million in higher costs resulting primarily from increased steel raw material costs. We expect the Brazil facility to restart in 2009, offsetting a portion of this shortfall.
Operating profit in the Corporate and Other segment was down $1 million from prior year, resulting from the impact of reduced sales volumes in the industrial wire market. Adjusted EBITDA for the quarter was $22.1 million, which was down 7.5% from the prior year. Year-to-date adjusted EBITDA was 39.4%, which was down 16.5% from prior year.
On an EPS basis, these results from continuing operations have driven income of $0.76 per diluted share versus 2007 second quarter EPS of $0.40 per diluted share. The improvement in EPS was driven by several items, including the impact of our share repurchase program; reduced interest expense, which was largely the result of a debt restructuring we undertook in 2007; and a favorable tax provision, which benefited from the reversal of a $2 million FIN 48 accrual during the quarter. Year-to-date EPS from continuing operations results in $0.88 per diluted share versus 2007 year-to-date results of $0.78 per diluted share.
That concludes my comments, and I will now turn it over to Bill.
William E. Redmond, Jr.
Thanks, Tom. Our Performance Chemicals business continues to perform well, more than offsetting the impact of rapidly increasing raw material costs. Driven in large part by fertilizer demand, we continue to see double-digit and greater percentage increases in our costs for sulfur and sulfuric acid.
The $17 million increase in revenues in the quarter are the direct result of our passing through these higher costs in the form of price increases to our water treatment and chemical processing customers. We have been successful in recovering the impact of these higher raw material costs and expect these trends to improve during the balance of 2008.
And as we reported yesterday, the US International Trade Commission voted unanimously in favor of our claim that imports of sodium nitrite from Germany and China were causing material injury to General Chemical.
As a result of this ruling, German imports of sodium nitrite will be subject to an antidumping duty order of between 247% and 150% of the FOB price. Imports from China are now subject to antidumping duties equal to 190% of the FOB price and countervailing duties to offset the unfair advantage of governmental subsidies equal to 169%. These duties are imposed for a five year term effective immediately.
We believe that as a result of the ruling yesterday by the US ITC, we can expect General Chemical’s revenues from increased sales of sodium nitrite to improve on a going-forward basis, resulting in annual operating profit improvements of approximately $2 million.
In our Valve Actuation Systems business, near-term volume reductions in North America focused our efforts on reducing the infrastructure of this business to align it with our going-forward expectations. To that end, we implemented a reduction in force at both the plant and overhead levels, which will result in $1.3 million in annual savings.
In addition, in working with Ford on the launch of the new Boss engine platforms, Ford has decided to eliminate a portion of the platform, resulting in a reduction to this initiative of approximately $40 million in annualized revenue.
We continue to invest along with Ford to launch the balance of the Boss and Scorpion diesel programs at reduced revenue levels, approximately $40 million to $50 million in new business, beginning in later 2009. While reduced in scope, these projects will still deliver attractive EBITDA growth from current levels.
Additionally, during the quarter, we’ve made strides in continuing to improve the long-term EBITDA of the Valve Actuation business through; first, securing commitment from two major North American customers to adjust pricing based on metal market adjustments; second, received a letter of intent from Fiat in Brazil to restart production of the Tri-Tech engine facility that we lost last year. This loss created a $2 million operating profit decline in the first six months of 2008. Third, we hired a new general manager in Brazil with a sales executive for South America starting on August 15th.
Now, while the reduction in the Ford programs was a disappointment, our results in cost reduction, middle-market adjustment and South American growth, along with other developments announced earlier this year, continue to point to a Valve Actuation business in 2009 and beyond which generates materially greater EBITDA and cash flow than current levels.
Thanks everyone for listening. I’d now be happy to take any questions that you may have.
Thank you, sir. Ladies and gentlemen, the question-and-answer session will be conducted electronically. (Operator Instructions). And ladies and gentlemen, with no questions, that concludes today’s conference. You may now disconnect.
William E. Redmond, Jr.