Q3 2005 Robbins & Myers Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Ladies and gentlemen, thank you for standing by. Welcome to the third-quarter 2005 Robbins & Myers earnings conference call. My name is Liz, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Peter Wallace, President and Chief Executive Officer. Please go ahead, sir.

PETER WALLACE, PRESIDENT, CEO, ROBBINS & MYERS: Thank you Liz, and good morning. Joining me this morning are Mack McAdams, Manager of Investor Relations and Kevin Brown, Chief Financial Officer. I'll ask Mack to take you through the precautionary statements, and I'm sure everyone is familiar with this by now, but after this, he will turn it back to me for a discussion on the third-quarter results for our fiscal year 2005.

MACK MCADAMS, MANAGER, IR, ROBBINS & MYERS: Thank you Pete, and good morning. And thank you for joining us today for the third-quarter fiscal 2005 earnings conference call. Financial results for the third quarter ended May 31, 2005 were released last evening and are available on the Company's website at www.RobbinsMyers.com.

This conference call is being webcast, and replays can be accessed through the website. A copy of the slide presentation will also be available on the website.

This morning, Peter Wallace, President and CEO of Robbins & Myers, will provide an overview of the business, and then Kevin Brown, Vice President and Chief Financial Officer, will review the financial highlights for the period. At the end of their presentation, Pete and Kevin will take questions.

Before we begin the main portion of the call, I would like to quickly run through slide number 2, the cautionary statement concerning forward-looking information. In addition to historical information, this presentation contains forward-looking statements identified by use of words, such as expects, anticipates, estimates and similar expressions. These statements reflect the Company's expectations at the time this release was issued. Actual events and results may differ materially from those described in the forward-looking statements.

Among the factors that could cause material differences are a significant decline in capital expenditures in specialty chemical and pharmaceutical industries and major decline in oil and natural gas prices; foreign exchange rate fluctuations; the impact of Sarbanes-Oxley Section 404 procedures; work stoppages related to union negotiation; customer order cancellations; the ability of the Company to comply with the financial covenants and other provisions of its financing arrangements; the ability of the Company to realize the benefits of its restructuring program in the pharmaceutical segment, including the receipt of cash proceeds from the sale of excess facilities; and general economic conditions that can affect demand in the process industries.

The Company undertakes no obligations to update or revise any forward-looking statement. This presentation refers to various non-GAAP measures. Earnings and earnings per share excluding special items are non-GAAP financial measures. The Company believes these measures are helpful to investors in assessing the Company's ongoing performance of its underlying businesses before the impact of special items on its financial performance. In addition, these non-GAAP measures provide a comparison to our previously announced earnings guidance, which excluded these special items. Earnings and earnings per share before special items are reconciled to earnings presented according to GAAP in our applicable 10-Q and 10-K.

At this time, I would like to turn the call back over to Pete Wallace, President and CEO of Robbins & Myers. Pete?

PETER WALLACE: Thank you Mack, and welcome to everyone listening to our third-quarter update. We appreciate your interest in Robbins & Myers. For those on the Internet, you can follow along with a synchronized slide show that accompanies our comments this morning.

The agenda this morning includes an overview of the quarter, highlights from our business segments, and update on the restructuring program initiated earlier and the future outlook for the balance of fiscal year 2005. Following my comments, I will turn the presentation over to Kevin Brown for a more detailed discussion on the financial performance of each of the business units during the quarter and year-to-date. Following the financial update, we will open the phone lines to address your individual questions. After the press release issued last night, I anticipate that several of you may have some follow-up questions.

Income for the quarter was $0.20 on a pre-restructuring basis. During the quarter, we incurred restructuring costs of $1.2 million or $0.06 per share, as we continue to implement the restructuring program in the pharmaceutical segment. Earnings on a GAAP basis post restructuring were $0.14 per share. Sales for the quarter were up $5.1 million versus the prior year. But on a constant dollar basis, sales actually declined $700,000. A lot of our sales are based in euros, and this is the major driver for the foreign exchange adjustment.

Orders were down $6.8 million from the prior year third quarter and $11.8 million on a constant dollar basis. At the last quarterly conference call, we explained that our backlog was up year-on-year after adjusting for currency changes and order cancellations in the prior year. With a weakness in orders this quarter, we have brought backlog down to fiscal year 2004 third-quarter levels after making the same adjustments for currency and order cancellations in 2004.

Our capital expenditures are $14.6 million year-to-date and in line with the full year plan of $20 million. The currency adjusted sales volume decline of $700,000 in the quarter, restructuring costs of $1.2 million and competitive price pressure in the pharmaceutical segment contributed to an EBIT decline of $1. (sic) million. Cost reductions totaling $3.2 million associated with the restructuring program offset some of the profit decline. We continue to have a real mix in the end markets across our business segments.

For the last 2 years, we have mentioned the weakness in pharmaceutical capital expenditures as it relates to capacity. The industry slump has continued with weak orders and sales in our fiscal Q3. The weakness in overall demand has created a very difficult trading environment. Competition is fierce amongst the major suppliers in the industry, as everyone is facing under-absorption issues in their business.

The energy segment continues to set new records for Robbins & Myers. We're coming off a record year and anticipate further improvement in the months ahead. There is strong activity in gas drilling throughout North America, and our expanding presence in international markets is bringing in new business.

The industrial segment has been mixed. There is a slight increase in the chemical markets, but the wastewater and municipal markets have been weak. Our focus has historically been concentrated in the U.S., and we're planning to get some traction in China as our joint venture gets up and running.

Many of our customers have been setting up new plants and making their new capital investments in Asia and Asia-Pacific regions. Many of the Pharma customers have set up operations in India, and many of the larger chemical processing projects are now going into China. We're making headway in this key part of the world, but we will need to do more at a much faster pace in the months ahead.

On a constant dollar basis, both sales and EBIT in the pharmaceutical segment are down from the prior year third quarter by $4.8 million and $3.3 million respectively. We're confident that restructuring savings are coming through, generating $3.2 million of savings in the quarter compared to the prior year. Yet, this is not enough to recover from the sales decline, competitive price pressure, and restructuring costs that we incurred in the quarter, again of $1.2 million.

The most troubling issue is the incoming order level in the third quarter, down $17.4 million from the prior year third quarter. Due to this, backlog has come down to a level below fiscal year 2004 from the pharmaceutical segment. Customers are talking to us regularly about major projects; yet, they are reluctant to make the final commitment. We've seen weakness in both Romaco and Reactor Systems.

On a brighter note, we have been picking up some nice orders at Romaco during the last few weeks since the quarter closed. Due to the longer lead-time associated with many of these projects, many of these will ship in the next fiscal year.

The Reactor Systems business is growing in the developing markets; yet, we continue to face weak end markets in the western areas of the world. Due to the somewhat lumpy nature of orders and sales, the pharmaceutical business is more difficult for us to forecast.

Sales and orders continue to advance in the energy segment with sales up 16.3% in the quarter on a year-over-year basis, again after adjusting for currency. This is driven by continuing strength in our key markets and new business with some of the recent startup service and rod guide shops in Venezuela and other markets.

EBIT continues to improve with year-on-year improvement of 25.5% on a constant dollar basis. New product introductions, such as the even rubber thickness power sections, have generated a lot of interest and new orders. These power sections allow our customers to drill faster and improve overall efficiency by providing more power to the drills. The newer international rod guides and rod guide shops are operational and bringing in new incremental business. Backlog in the segment is up due to some large orders entered earlier in the year, principally in the Kazakhstan area. Our backlog is generally low in this segment with levels generally measured into weeks versus months.

The industrial segment had an increase or actually a decrease in sales of 1.9%, and orders were up slightly over the prior year. EBIT was 30% lower due to lower sales and higher medical and commodity prices. We have implemented another round of price increases in some business units this month to recover the full impact of steel increases and surcharges, which we experienced throughout the fiscal year. Backlog supports higher shipments in the next quarter. We have seen some pickup in the chemical processing market, but the municipal wastewater market continues to be lower than prior year levels. As the market leader in the municipal market for PC pumps, we know that …