Piedmont Lithium Inc.
Q3 2011 Earnings Call Transcript

Published: 9 Jun 2011

[Operator:]

Welcome to the Pall Corporation’s Conference Call and Webcast for Third Quarter Fiscal 2011. Today's call is being recorded and simultaneously webcast. [Operator Instructions] We'd like to remind you that the company's third quarter press release is available at www.pall.com. Management's remarks for this morning call will include forward-looking statements. Please refer to Slide 2 or request a copy for the specific wording of this qualification of the company's remarks. Management also uses certain non-GAAP measures to assess the company's performance. Reconciliations of these measures to their GAAP counterparts are included in the slide at the end of the presentation. At this time, I will turn the call over to Mr. Eric Krasnoff, Pall Corporation's CEO and President. Please go ahead, sir.

[Eric Krasnoff:]

Thank you, and good morning, everyone. We appreciate your joining us on our third quarter conference call. I am here on this very sultry morning with Lisa McDermott, our Chief Financial Officer; and Frank Moschella, the Corporate Controller. Now our first 3 quarters have been strong and place us around the higher end of our earnings guidance for fiscal 2011. The company also continues to make progress towards its long-term performance goals to create further value for shareholders. Today, we will update you on our business and then look forward to your questions. There are a number of factors driving growth. Pall has an accomplished and capable management team with solid depth throughout the organization. Top and bottom line growth strategies had differentiated Pall from its competitors. We provide total fluid management and are now a well-respected systems engineering company, a business developed organically. We have positioned the company to capitalize on improving economic conditions and emerging market trends. We're continuing to execute these strategies to expand opportunities and improve performance. A confluence of trends are supporting the business and setting the stage for future growth. Among them, improving economies, arising middle-class and developing regions, game-changing technologies in areas such as electronics and biotechnology and of course the economics of environmentalism and increasing regulation. All of these drive Pall's enabling technologies. It's clear that it's a good time to be a leader, and I want to quote from an annual report of Pall's from 1959

[Lisa McDermott:]

Thank you, Eric, and good morning, everyone. Before getting to the financial details, I'd like to start off with some more good news. As you may recall, in 2007, the company announced that it would restate its financial statements for the fiscal years 1999 through 2006 for the under payment of income taxes, primarily in the United States. We reported last evening that late last month, the IRS concluded its audits of fiscal year 1999 through 2005. While we are still in the process of finalizing the impact of this to our financial position, I would like to highlight 3 key items. First, no penalties were assessed. Secondly, our current estimate is a reduction of net liabilities in the range of $20 million to $30 million, such benefits to be recognized in this year's fourth quarter. And this has no impact to the company. And thirdly, of the $127 million of additional unrecorded potential penalties that we've disclosed previously, we have now concluded that the likelihood of assessment of about $106 million of these penalties is remote. The balance primarily relates to some foreign matters. So with that update, let's get to the financial review of the quarter and 9 months. Net earnings in the quarter were $71.1 million or $0.60 per share. This compares to $69.7 million or $0.58 per share last year. Pro forma earnings per share as defined in the appendix slide were $0.72 compared to $0.58 per share, an increase of 24%. Net earnings in the 9 months were $218.1 million or $1.84 per share, and this compares to $186.3 million or $1.56 per share last year. Pro forma earnings per share were $2.01 compared to $1.40 per share, an increase of 44%. The foreign currency translation increased earnings per share by about $0.04 in the quarter and $0.05 in the 9 months. The sales increased 15% in the quarter and 14% in the 9 months compared to the same periods in fiscal 2010. Foreign currency translation increased the top line by about $28 million or 4% in the quarter and by about $17 million or about 1% in 9 months. Local currency sales were up almost 11% in the quarter. Consumables sales increased about 9%, and systems sales were up over 29%, bringing system sales to just over 12% of total sales compared to 10.5% in the third quarter of 2010. In the 9 months, local currency sales grew 13%, reflecting about a 12% increase in consumables and a 25% increase in system sales. Overall, pricing gains contributed approximately $3 million to the top line in the quarter and $10 million in the 9 months. Gross margins for the 9 months stand at 50.8%, up 40 basis points year-over-year, as an improvement in Industrial was partly offset by a decline in Life Sciences. Now this is down 50 basis points from the 6 months ended January as we saw gross margins dip in the third quarter. I'll provide the key drivers of these results by business in a moment. SG&A was 29.5% of sales in the third quarter, down from 30.4% last year. And in the 9 months, SG&A came in at 30% compared to 32% last year. These improvements reflect top line leverage and tight cost controls on G&A spend while spending in other key areas is ramping up. Excluding the estimated impact of foreign currency translation, SG&A expense increased about 8% in the quarter year-over-year and 7% in 9 months. Looking at the quarter, most of the increase reflects a ramp-up in spend on sales and marketing in 3 key areas

[Eric Krasnoff:]

Thanks, Lisa. That's very exciting. Now we have carefully positioned the company to benefit from and outpace the economic recovery. Our sustained results attest to the demand for Pall technologies and solid execution for our growth plans. We believe that the global economy will continue to improve, albeit, not always steadily. Our strategic plan is crafted to yield sustained revenue and profit growth and drive further value creation for shareholders. Now we've covered a lot of ground this morning, and I appreciate your patience. Before getting to your questions I do want to update you on the search for my successor. The board is working diligently to identify the right candidate to lead the future growth of Pall Corporation. While the management team here remains focused on maintaining our strong performance and momentum, Pall has a deep bench of dedicated, experienced and talented leaders who are continuing to steer Pall on this path to sustainable profitable growth. So our company is in good hands. And with that, we will ask the conference operator to facilitate your questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Hamzah Mazari with Crédit Suisse.

[Hamzah Mazari:]

I was just wondering if you could flush out just the negative mix during the quarter and how that plays out going forward, say, over the next 12 months.

[Eric Krasnoff:]

Sure.

[Lisa McDermott:]

Well, when you say flush out, Hamzah -- and the question was for everyone on the call, as all the people can’t hear it, Hamzah was asking about the negative mix in the quarter and how that plays out over the next 12 months. Principally, the negative mix in the quarter related to a surge in system sales. System sales were up significantly in the quarter both year-over-year as well as sequentially, coming in for the quarter at over 12% of our total sales. In addition, particularly in Pall Industrial, we saw some negative mix with the growth in Aerospace and Power Gen. For instance, we're at the beginning of the wind turbine market and given it's at the beginning and it's growing quite well but the margins right now are not so strong on that. So that's what we saw in the quarter. As we look at the balance of the year, we continue to expect some mix pressure, although as I said, we do expect the fourth quarter gross margins to bounce back from the third quarter because we don't expect to see the unusual charges that we took in the third quarter. I won't comment on fiscal year 2012, and I will wait to comment on that with our fourth quarter earnings call.

[Operator:]

Your next question comes from the line of Jon Groberg with Macquarie.

[Jonathan Groberg:]

I guess, can you maybe, Eric, just talk a little bit about, I guess, current state of the business? It sounds like orders were still pretty strong in the last quarter, the past and I know for -- particularly on the consumables side, you tend to ship those pretty quickly. But maybe just given a lot of the macro and leading indicators that suggest things are slowing. Maybe just kind of describe the current state of your business.

[Eric Krasnoff:]

Yes, I think that we could just talk globally, on the Life Sciences side of biotech is growing. We're going to see be seeing biosimilars, which will increase the volume and the variety of production for biotech drugs. In Medical, it's increasingly a public health concern about acquired infections for pathogens such as E. coli, not just in the hospital setting and nursing homes but now of course in the food supply as well. Those are major drivers for our business. And we also, with our Blood business continue to grow. And a lot of that growth both in BioPharm and in Medical is in the emerging regions. Now that's the thing we also see on the Industrial side, very large growth in the areas that we've invested in infrastructure in Latin America, Eastern Europe, Middle East, North Africa and in Southeast Asia. The Industrial markets overall, we think, of course, that our mix is so varied that we have confidence that mining is strong. The production of energy, of alternative energy and the increased filtration, purification requirements of the environmentalist issues, those are monetary issues now to producers in economies. So I think overall, even if there is a modest decline, let's say, in GDP in some of the West, probably primarily the Western countries, that we'd still be able to post results that will lead us to our 2013 goals.

[Jonathan Groberg:]

Okay. Can I just get one clarification? What percentage of your sales -- and I think last quarter you said what percent of your total sales were Asia-Pac. But maybe what percent are Asia-Pac x Japan or emerging markets, however you want to define it?

[Eric Krasnoff:]

Well, we take that for that emerging market is about 22% now, so it's a big number. Asia, outside of Japan, is as I remember that's like 18% of Pall sales.

[Jonathan Groberg:]

Okay.

[Operator:]

Your next question comes from the line of with Brian Drab with William Blair.

[Brian Drab:]

First question, just to clarify, on Slide 17, when you talk about the sequential comparison in the gross profit section, you talk about unfavorable absorption of manufacturing overhead. Given the sequential, a significant volume improving, can you describe what's going on there in a little more detail?

[Lisa McDermott:]

Sure. As we mentioned in the second quarter, our plan in the back half of the year was to very much focus on bringing our inventory levels down. We did build our inventory levels up to a point that we felt comfortable that we could take the so-called pedal up the metal. So principally, in our media plants and our medical plants, on the Life Sciences side, we did see a lower level of production, and therefore, although sales are up, that's being underwritten to some extent by the inventory level at the end of the second quarter. We did bring inventory levels down in Life Sciences, so we saw that there. And although inventory levels are slightly up compared to the second quarter, in the context of the overall volume level, as you're pointing out, our days in inventory have reduced pretty significantly against the second quarter. So that was done purposefully.

[Brian Drab:]

Okay. That's very helpful. And the next question is just around the system sales. It sounds like systems sales as a percentage of sales is going to be a little bit lower in the fourth quarter. Is that right? Or is that -- what's the main driver of the expected increase in margins in the fourth quarter from the third quarter if not that?

[Lisa McDermott:]

System sales will be a higher percentage of sales in the fourth quarter. What's driving our expectation that gross margins will be better than the third quarter, number one, is there is some pretty significant charges taken by Life Sciences that we would consider to be non-repeating. So we will not see that headwind in Life Sciences in the fourth quarter. And we don't expect to see some of the other negative mix items that we had in the third quarter repeat in the fourth quarter.

[Brian Drab:]

Okay. And what should we expect if you can give us any feel for this in terms of restructuring charges in the next couple of quarters? It was a little higher than we expected in this quarter.

[Lisa McDermott:]

Given the nature of restructuring charges, they are difficult to forecast. I know right now, I can tell you what I know right now that there will probably be at least $3 million of restructuring one-time items in the fourth quarter, which is not, by the way, included in the Reg G table in the back of our deck today.

[Eric Krasnoff:]

But there are no other major ones that we see on our radar right now. And we only have 2 months to go.

[Brian Drab:]

Got it. All right.

[Operator:]

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

[Richard Eastman:]

Just 2 quick questions. One is, Lisa, in the gross margin slide, you mention this inventory contract related charges. What's that related to? What's the magnitude to that?

[Lisa McDermott:]

Well, the magnitude of it was about $6 million in the quarter. And it's related to a number of different things. As we're progressing with the Life Sciences, European regional headquarters, we are rationalizing some of the inventory and writing off some of the inventory. There was a contract that we had to provide some reserve for. So it was just a number of different things that happened to occur in the third quarter.

[Richard Eastman:]

It wasn't a clunker system or anything like that?

[Lisa McDermott:]

No.

[Richard Eastman:]

Okay. And then that was all in Life Sciences?

[Lisa McDermott:]

Yes.

[Richard Eastman:]

Okay. And then also just -- when you talk about in the Industrial side of the business, Eric, you had mentioned this as well, the gross margin was unfavorable due to mix. Is that primarily higher system sales or was the mix on the consumables side noticeably lower margin as well?

[Eric Krasnoff:]

It was both. On the consumables side, I think Lisa referred to the windmill -- not windmill, the wind turbines. And what happens there is the initial sale is generally to the OEM at a lower margin and then the consumables strain picks up, and it’s a much higher margin. We see that in mobile equipment, we see it in Aerospace as well.

[Richard Eastman:]

Okay. And then just lastly, I just wanted to double check a number. You had mentioned price in the third quarter contributed $3 million?

[Eric Krasnoff:]

Yes.

[Richard Eastman:]

Okay, great.

[Operator:]

[Operator Instructions] Your next question comes from the line of David Rose with Wedbush Securities.

[David Rose:]

A couple of quick questions. On pricing, do you plan to have any additional pricing actions in the fourth quarter? And if so, how much should it contribute in the quarter? And then secondly, are we still in line with the approximate $0.09 per share for -- x tailwind for the year given that we have $0.04, I guess we have $0.05 for the first 9 months that implies another $0.04 for the fourth quarter? And then lastly, can you talk a little bit about your Asahi agreement and when that expires and what you plan to do with that.

[Eric Krasnoff:]

Sure. First, on pricing, we don't have a periodic pricing schedule. We are -- in different businesses, in different parts of the world, there's always pricing activity going on as contracts come up for renewal, as we're pricing new products, et cetera. So that's an ongoing effort, and particularly with our belief that inflation is going to become much more significant over the next few quarters, we've revved up those. I don't want to quantify the amount right now for the fourth quarter.

[Lisa McDermott:]

Although we do expect to see continued pricing improvement.

[Eric Krasnoff:]

Yes. On Asahi, the Asahi alliance has been going on for well over 20 years right now. It's very solid. We're partners. We continue to expand the commitment to each other in the marketplaces. And there's no tombstone event out there I would look out or any dates that I think we should -- need to focus on. It's been a great relationship for both parties.

[Lisa McDermott:]

I'll take the FX question since it was a 3-part question. We do see, as I mentioned, FX as a stronger tailwind than -- at current rates than the $0.09. So I would put us in the range of $0.09 to $0.12 for the year.

[Operator:]

And your final question comes from the line of Jon Wood with Jefferies.

[S. Brandon Couillard:]

This is Brandon Couillard in for Jon. Lisa, if I take a step back and look at your fiscal '13 financial targets, I believe it included an assumption that the diluted share count kind of migrates toward the 113 million range. And so given where paltry interest income rates are, can you comment on your enthusiasm for share repurchases, would have anticipated perhaps more activity on that front?

[Lisa McDermott:]

Well, my comment would be that we are highly enthusiastic about the company. And we continue to be highly enthusiastic about buying back shares. I will say that we are behind schedule with respect to the targeted share count for 2013. And there's a number of factors impacting that, not just the level of buyback but also the spot price, where it's been. But you should expect from Pall to continue to see the $100 million to $150 million buyback history this year that you've seen in prior years.

[S. Brandon Couillard:]

Great. And then in the context of what we've seen from a few semiconductor-related companies in the last month or so, is there anything changed on the macro front in that market recently that gives you any pause or concern on the trajectory of that business?

[Eric Krasnoff:]

Our orders were I think still up about 8% on a 7% sales increase in the third quarter. What's cushioning us now is the Consumer Electronics side of that business, which is not all semiconductor. But having said that, we expected the third quarter to be relatively flat, up a little bit, and we're expecting our fourth quarter to be flat, and maybe we'll be pleasantly surprised again.

[Operator:]

There are no further questions at this time. I would like to now turn the call back over to Mr. Krasnoff.

[Eric Krasnoff:]

Okay. Thank you. I want to thank all of you for participating this morning and for your interest in Pall. Please put September 14 and 15 on your calendars for our fourth quarter and full year results. We're going to release on the 14th after the market closes and follow up with our conference call the next morning at 8

[Operator:]

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.