Gehl Company Inc Q1 2008 Earnings Call Transcript

Gehl Company Inc. (GEHL) Q1 2008 Earnings Call April 25, 2008 11:00 AM ET

Executives

William Gehl - Chairman and Chief Executive Officer
Malcolm [Mac] Moore - President and Chief Operating Officer
Jim Monnet - Vice President and Treasurer
Shannon Van Dyke - Corporate Controller

Analysts

James Bank - Sidoti & Co
Charles Brady - BMO Capital Markets
Robert McCarthy - RW Baird

Operator

Good afternoon and welcome to Gehl Company’s conference call to discuss the fourth quarter and full year 2007 financial results. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference.

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 Security 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 that the company has described in its form 8-K filed today with the SEC and other filing with the SEC. The company disclaims any obligation to update these forward-looking statements.

In addition reconciliation for non-GAAP measures discussed on the call today is available on the company’s website in the press release filed this morning at www.gehl.com.

I would now turn the call over to Mr. William Gehl, Chairman and Chief Executive Officer of Gehl Company. Please go ahead sir.

William Gehl

Good morning and welcome to Gehl Company’s first quarter earnings conference call. With me today are Mac Moore President and Chief Operating Officer; Jim Monnet Vice President and Treasurer and Shannon Van Dyke, Corporate Controller.

In the first quarter of 2008 the company generated net sales of $82.2 million compared to net sales of a $115.2 million in the same period one year earlier. Net income from continuing operations excluding $0.11 impact in the adoption of FAS 157 associated with fare value measurements was $600,000 or $0.05 per diluted share. This compares with net income from continuing operations of $6.5 million or $0.52 per diluted share for the first quarter of 2007.

While weakness in the North American housing market continued to impact our domestic sales, it is also important to note that we reduced field inventory by approximately $18 million in the first quarter as we prepared for the introduction of new products in 2009. This compares to an increase in field inventory in the first quarter of 2007 of nearly $13 million.

Despite headwinds in the quarter the company performed well on several fronts including maintaining gross margin level, continuing to take market share in key product areas and driving cost out of the business. Additionally our international business is performing well and we expect this to continue throughout the remainder of the year. Our view of 2008 remains unchanged as we except continued challenges in the residential construction market to impact our domestic business while our international business is expected to produce another good year.

Net sales in the first quarter of 2008 were $82.2 million compared to the first quarter 2007 net sales of $115.2 million. The decline in sales reflected a continued deterioration in the domestic housing market as well as a reduction in field inventory levels of $18 million. Despite challenges in the domestic market, the company performed well relative to the industry.

Retail skid loader volumes for the company declined less than 2% in the quarter compared to a year ago while the industry declined 14%. Similarly the company’s telehandler retail volumes declined 18% while the industry experienced a 43% decline in the first quarter. Our international business remains strong now representing 34% of total company sales in the first quarter of ‘08 compared to 28% in the first quarter of 2007.

First quarter 2008 gross margin of 22.4% was unchanged from the comparable period of 2007. Despite a decline in unit volume and higher steel prices, gross margin exceeded our expectations due to favorable product mix, effective supply chain management and manufacturing efficiencies. Gross profit for the first quarter of 2008 was $18.4 million compared to $25.8 million in the first quarter of 2007 which primarily reflected the lower sales volumes.

Selling, general and administrative expenses increased to $16.3 million for the first quarter of 2008 compared to $15 million over the same period one year ago. This increase primarily reflected planned increases in research and development and information technology projects totaling $800,000 and onetime cost associated with the stream lining of sales and support groups for the Gehl and Mustang brands. This effort however is expected to generate $1 million in ongoing annual cost savings.

As a percentage of net sales, operating expenses increased to 19.9% from 13% in the prior year. The company recorded other expense of $2.9 million in the first quarter of 2008 versus other expense of one million in the comparable period of 2007. The increase in other expense was the result of the required adoption of FAS 157 which increased the loss on sale of finance contracts by $2 million.

Turning now to our balance sheet for a moment, we ended the quarter with $74 million in debt compared to debt of $65 million at the end of the first quarter of 2007. The year-over-year increase in our debt levels is primarily attributable to an increase in our retained interest in our securitization facility partially offset by a reduction of $32 million in whole sale accounts receivable driven by our efforts to reduce field inventory levels.

CapEx and depreciation were $1.4 million and $1.3 million respectively in the first quarter of 2008. Based on the company’s first quarter results current backlog position and management’s current 2008 market forecast, the company reaffirms its 2008 full year outlook. The company expects its ‘08 earnings from continuing operations to be in the range of $0.95 to $1.20 per diluted share or net sales of $405 million to $425 million.

This concludes our prepared remarks and I will now turn it back to the moderator for the question-and-answer session. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of James Bank with Sidoti & Co.; please proceed.

James Bank - Sidoti & Co

Gehl, I’m sorry I might have missed this; what actually was adjusted in the FAS 157 on the balance sheet?

Shannon Van Dyke

James this is Shannon. If you had seen net other income and expense line, the total was a pre-tax charge of $2 million related to the adoption which is $1.5 million after tax or $0.11.

James Bank - Sidoti & Co

Right, but what actually was the asset?

Shannon Van Dyke

Oh I’m sorry; it relates to the retained interest in the securitization facility.

James Bank - Sidoti & Co

Okay, is this going to happen for the next three quarters?

Shannon Van Dyke

No, this is a one time charge related to the adoption. It’s a required adoption at the end of the first quarter of 2008.

James Bank - Sidoti & Co

Great, okay thank you; and in terms of your SG&A, I do remember a lot of the talk last year about you guys ramping up R&D expense; now the SG&A that we are seeing this year, is this something that’s going to be elevated in ’09; is it flat in ’09, is it down in ’09?

Shannon Van Dyke

At this point we are anticipating this to be a run rate for at least one more year and then we anticipate we are going back to a normal run rate below what we are currently at.

James Bank - Sidoti & Co

Okay great; and it looks like you guys repurchased roughly 500,000 shares in the quarter?

Shannon Van Dyke

No that’s…

William Gehl

No that was in prior quarters James.

Shannon Van Dyke

Right. At December 31 we had purchased -- I believe it was 123,600 or so and then there was another 30,000 in January.

James Bank - Sidoti & Co

Okay, how many do you have left?

Shannon Van Dyke

We have a total authority for 1 million shares and we purchased approximately 153,000 I believe.

James Bank - Sidoti & Co

Okay, great thank you; and in regard to your guidance and then I’ll -- just last question and I’ll jump back in line. The bottom line guidance, it seems you trimmed $0.05 off the top end range, what was the reason for that?

Shannon Van Dyke

No, it was actually a reaffirm of our original guidance issued in February in our release.

William Gehl

It’s unchanged.

James Bank - Sidoti & Co

Alright, I’ll have to go back and check. I’m sorry I thought it was $0.95 to $1.25. Okay, I’m sorry I’ll go back and look.

Operator

Your next question comes from the line of Charles Brady with BMO Capital Markets; please proceed.

Charles Brady - BMO Capital Markets

Thanks, hey good morning. Gehl can you just talk about on the raw material cost increases. It sounds like you guys are doing a pretty good job managing that. Maybe a little more color on how you are managing that and are you set for the rest of the year.

William Gehl

Well, so far Charley we have done a fairly decent job because we had locked in some pricing through June and going forward basis, I’ll let Mac Moore our Chief Operating Officer comment on what we anticipate here.

Malcolm Moore

Yes, hi Charles. Charley we’ve obviously continued our discussions with our suppliers and are now -- we are talking to them regularly, but we have now extended our coverage on the majority of our sheet and plate through the remainder of the year. That said, of course there are other elements, input costs, steel based in foot costs that aren’t as easy to cover, so in this very dynamic situation we are hopeful that we’ve done everything we can to mitigate the impact to this, if certainly on sheet and plate.

Charles Brady - BMO Capital Markets

Have you received any surcharges, on either steel or plate?

Malcolm Moore

No not yet. We’ve been hearing rumors that there will be a 150 and now this week I heard 250 a ton surcharge, but we haven’t seen any of that yet.

Charles Brady - BMO Capital Markets

Thanks and Bill can you just talk about the streamlining of the sales and support staff between the Gehl and Mustang brands?

William Gehl

The basic premise there Charlie was to integrate the Mustang sales force with the Gehl sales force. They had a separate sales force operating out of Owatonna, Minnesota with a support staff up there and our goal here is to combine the sales force which has already occurred, so that we will have one sales force calling on the Gehl and the Mustang dealers. That’s our cost saving and efficiency actions that we’ve taken and it just was at the right time to do that to reduce some of the duplication in the administrative aspects of it, particularly from order entry and parts and service, so that was the rationale behind it Charlie and as I mentioned in my remarks we should anticipate seeing about $1 million of annual savings as a result of that consolidation.

Charlie Brady – BMO Capital Markets

And with regard to your market share gain, in any particular product were you seeing more of a significant gain than others?

William Gehl

Well the telehandler business as you know Charlie has been in a deep depression now for many months and that has continued in the first quarter of this year. That market on retail sales numbers from AEM is down nearly 43% and as I mentioned our sales, retail sales are down 18%. So I think in the light of the extreme difficult situation facing telehandlers we’ve done a pretty good job in that regard.

Operator

Your next question comes from the line of Robert McCarthy with RW Baird, please proceed.

Robert McCarthy – RW Baird

Could you tell us what the contribution to total revenue in the quarter was from telehandlers versus skids loaders?

William Gehl

Sure, Shannon?

Shannon Dyke - Corporate Controller

Telehandlers in total represented about 30% of our total company sales and skid loaders is right about 45%.

Robert McCarthy – RW Baird

Okay and within the skid loader category how did that break down, North America versus international?

Shannon Dyke - Corporate Controller

North America was about, I believe it was about 50% of that, a little over 50% was domestic and 49% was international.

Robert McCarthy – RW Baird

Thank you. After the last quarter when we kind of dealt out how the year might shape up in terms of dealer inventory management, I think you all were expecting a smaller sort of $5 million to $10 million decline in inventories in the current quarter and then of course with seasonal activity you might even see inventories increase a bit in the second, third and you’d meet your full year objective then in the fourth; any change in that. Have we changed our ultimate expectations for dealer inventory reduction for the full year?

Shannon Van Dyke

No, I don’t think we have. I think it’s really been a shift in the timing of when we’ll see those inventory reductions. We did expect a little bit more in the first quarter than we originally had anticipated, primarily being driven by our track loaders partially because we are experiencing some new units that we’ll be rolling out here related to Q3 and that’s been pushed back a little bit in the terms of timing, so we’ll be seeing more decreases there.

Malcolm Moore

Q3 has been a real influence on inventory planning, the availability and components and major suppliers.

Robert McCarthy – RW Baird

And in this case, the message being availability more of an issue than dealers strategy if you will.

Malcolm Moore

That’s right. That’s exactly right Rob.

Robert McCarthy – RW Baird

And security number, you are reporting for telehandler retail in the first quarter. I mean there have been a variety of macro economic developments during the course of the quarter. Has your outlook for your primary markets in the US and Europe changed any material way since the last time you issued your forecast?

William Gehl

No, not really Rob

Robert McCarthy – RW Baird

And the $0.11 charge, I assume you are excluding from your unchanged outlook.

Shannon Van Dyke

No, that actually includes the charge.

Robert McCarthy – RW Baird

In other words your outlook for the full year has improved by about a dime.

Shannon Van Dyke

The $0.11 charge was in the range of what we expected related to 157.

Robert McCarthy – RW Baird

Okay, alright. Now that certainly puts a different impression on things; and the annualized savings that you look to get from the consolidation initiative, what kind of a contribution are you looking for this year, in a the partial year?

Shannon Van Dyke

The consolidation happened late February, so we obviously won’t expect a full year impact of it just yet and then we did take the additional charge of $400,000 related to that transaction, so it’s going to be minimal, probably $400,000 to $500,000 at that.

Robert McCarthy – RW Baird

You mean on a net basis, net of the charge?

Shannon Van Dyke

Right.

Robert McCarthy – RW Baird

Okay, but in other words you would expect to see most of the annualized gross benefit actually show up.

Shannon Van Dyke

Correct.

William Gehl

That’s correct.

Operator

(Operator Instructions) We have a follow up question from the line of James Bank with Sidoti & Co.; please proceed.

James Bank - Sidoti & Co

I just want to first say I apologize for that guidance comment. You guys were absolutely spot-on that it was $1.20, sorry about that oversight, but just for clarification Shan, I’m sorry so your bottom line guidance is GAAP?

Shannon Van Dyke

Correct.

William Gehl

Yes.

James Bank - Sidoti & Co

Okay, that is interesting. Two last questions. Any more chance there could be further a bad debt accrual or do you think you’re set for the year?

Shannon Van Dyke

I think we are always reviewing accounts on a regular basis. At this point we feel our reserve is adequate and it’ll depend on what the markets do going forward to determine whether or not we need a further reserve but we continue to review accounts and reserve is necessary.

James Bank - Sidoti & Co

Okay great and could you just break out your short term debt for me, for the quarter?

Shannon Van Dyke

The majority of that relates to our commercial paper facility; approximately $50million relates to our commercial paper. Debt of component is very small.

Operator

Your have another follow up question from the line of Robert Mccarthy, RW Baird; please proceed.

Robert Mccarthy - RW Baird

Or I might have two. If we have done our calculations correctly, your international sales in the quarter were down a bit over 10%. Can you help reconcile that with your more favorable outlook for full year results?

Shannon Van Dyke

I think there is a couple of impacts that are occurring. We were down slightly internationally. As Mac mentioned Q3 is having a significant impact on timing of some of our sales at this point. We are going through some Q3 upgrades in several models and there was a timing shift of some of when that was to occur, so we do still anticipate to have a strong international year.

Robert Mccarthy - RW Baird

There is no danger of missing the prime selling -- I mean now second quarter you wouldn’t expect significant impact on your business in the second quarter from these issues or is it something going to be?

William Gehl

No Robert, there isn’t. This is really the week-to-week, a shortage here. It’s like the way there, but in terms of an overall annual impact or quarterly impact, no.

Robert Mccarthy - RW Baird

Okay very good. In the past you have been kind enough to at least periodically but I think semi regularly, recently update us on backlog levels at the end of the first quarter?

William Gehl

Yes we have done that occasionally.

Robert Mccarthy - RW Baird

That’s something you want to do again Bill?

William Gehl

Well you got a good memory, I’ll give you that and as we are paging through some information here we will get to it.

Robert Mccarthy - RW Baird

Okay I’ll give you my other question then. The kudos again on the retail performers relative to market, but I as you would expect suspect that a portion of that out performance would be related to your historically smaller presence with the national rental chains and that’s something that you think was an issue specifically in the first quarter. In other words that part of the market’s down more than the traditional business.

William D. Gehl

Yes, in fact that’s right.

Robert Mccarthy - RW Baird

And do you think that that’s all based on your own conversations with national rental. Do you think that that’s strictly a function of the weak fundamentals in our markets here in the US or some of the other equipment manufacturers have been talking about a desire on the larger rental chains to spread their purchasing more evenly across the year or at least across spring, summer. Are you seeing that in your customer base as well?

William Gehl

I think it’s just more of a management of their balance sheet and their capital expenditures Rob. In pulling back in general when you look to see what your CapEx budgets are for the year, there are significant pull back from those large companies.

Robert Mccarthy - RW Baird

Okay and so then that just leads the backlog question?

Shannon Van Dyke

Yes Rob in terms of backlog right now, we are sitting about 150% over where we ended the year at which is about down about 20% from the same time a year ago.

Operator

You have another follow up question from the line of Charles Brady with BMO Capital Markets; please proceed.

Charles Brady – BMO Capital Markets

I just wanted to just clarify on FTNA expense you mentioned you are going to be at current run rate throughout 2008 and then dip down, are you speaking in terms of dollar terms or its percentage of sales terms?

Shannon Van Dyke

It’s really in dollar terms.

Charles Brady – BMO Capital Markets

And then I don’t wanted to be dead horse in this, but just to clarify your EPS guidance of $0.95 to a $1.20, that includes a negative $0.7 in Q1 correct?

Shannon Van Dyke

Correct.

William Gehl

Yes.

Operator

Ladies and gentleman this concludes the Q-and-A session of our conference call. Thank you for joining us this afternoon. We appreciate your interest in Gehl Company.