| | Q3 2003 Thermo Electron Corporation Earnings Conference Call
Boston, Oct 22, 2003 (CCBN StreetEvents) -- Event Transcript of Thermo Electron
Corporation conference call, 22-Oct-03 11:00am ET.
====================
Corporate Participants
====================
* Tim Corcoran
Thermo Electron Corp. - VP, IR & Communications
* Marijn Dekkers
Thermo Electron Corp. - President & CEO
* Theo Melas-Kyriazi
Thermo Electron Corp. - VP & CFO
================================================================================
Conference Call Participants
================================================================================
* Chris Shibutani
J.P. Morgan Chase - Analyst
* John Harmon
Needham & Co. - Analyst
* Annabelle Sanimi
Merrill Lynch - Analyst
* Larry Neibor
Robert W. Baird - Analyst
* Paul Knight
Thomas Weisel Partners - Analyst
================================================================================
Presentation
--------------------------------------------------------------------------------
Operator [1]
--------------------------------------------------------------------------------
Good morning, ladies and gentlemen, and welcome to the Thermo Electron
Corporation Q3 2003 earnings conference call October 22, 2003. At this time, all
participants have been placed on a listen-only mode and the floor will be opened
for your questions following today's presentation.
It is now my pleasure to interest your host, Mr. Tim Corcoran. Sir, you may
begin.
--------------------------------------------------------------------------------
Tim Corcoran, Thermo Electron Corp. - VP, IR & Communications [2]
--------------------------------------------------------------------------------
Thank you for joining us today. Also with me on this call is Dick Syron, our
Executive Chairman and Chairman of the Board, Marijn Dekkers, our President and
Chief Executive Officer, and Theo Melas-Kyriazi, our Chief Financial Officer.
If you have not received a copy of the press release, it's available on our Web
site, wwww.Thermo.com, in both the News and Events in Investors sections.
Please also be aware that this call is being Web cast live and will be archived
on our Web site until November 21, 2003. To reach the replay of the call on our
Web site, click on "Investors" and then "Audio Archives".
I'd like to begin the call by reading the safe Harbor statement. Various
remarks that we may make about the Company's future expectations, plans and
prospects constitute forward-looking statements for purposes of the Safe Harbor
provisions under the Private Securities Litigation Reform Act of 1995. Actual
results may differ materially from those indicated by these forward-looking
statements as a result of various important factors, including those discussed
in our Form 10-Q for the quarter ended June 28, 2003 under the caption
"Forward-looking Statements" which is on file with the Securities and Exchange
Commission and available in the Investors section of our Web site under the
heading "SEC Filings".
While we may elect to update forward-looking statements at some point in the
future, we specifically disclaim any obligation to do so, even if our estimates
change. Therefore, you should not rely on these forward-looking statements as
representing our views as of any date subsequent to today.
Now, during this call, we will be referring to certain financial measures not
(indiscernible) in accordance with Generally Accepted Accounting Principles, or
GAAP. A reconciliation of the non-GAAP financial measures used on this call to
the most directly comparable GAAP measures is available in a news release
setting forth our third-quarter 2003 earnings and future expectations and in the
table accompanying such release in the investors section of our Web site,
www.Thermo.com under the heading "News Releases".
Now, with that, I'd like to turn the call over to Marijn Dekkers.
--------------------------------------------------------------------------------
Marijn Dekkers, Thermo Electron Corp. - President & CEO [3]
--------------------------------------------------------------------------------
Good morning, everyone. Thank you very much for taking the time out of your
schedules to join us.
Overall, looking back at the third quarter, we are pleased that our financial
performance was at the high end of our previous guidance in spite of ongoing
challenges in some of the industries that we serve.
Our adjusted EPS in 2003 in Q3 rose 8 percent to 27 cents, compared to last
year's same period of 25 cents.
Now, this quarter, we are especially pleased with significant increases in our
adjusted operating margins, which were up both year-to-year and prior to the
previous quarter. Year-over-year, our adjusted operating margins increased 110
basis points to 11.9 percent, versus 10.8 percent a year ago. Compared to the
second quarter of this year, they also increased by 110 basis points.
Now, these earnings and margin improvements are the result of the ongoing
productivity efforts throughout the Company, and you have heard us talk about
our productivity before. We have a strong track record of delivering
productivity, and this has allowed us to improve earnings in the past few years
in spite of the difficult economic climate.
Now, it's important and I want to emphasize that this productivity comes from
structural changes that we've made in the Company. For instance, we have 60
factories and 110 sales offices less in the Company than three years ago, and I
promise you that we will not open 160 new locations in the next year as the
economy recovers.
Now, going forward, productivity, of course, remains an important objective for
the Company, but our primary focus is on driving revenue growth. As you can see
in the press release, industry challenges continue to put pressure on our top
line. Our revenues were down to 497 million, compared to 517 million a year ago.
If you break that out, organic growth declined by 7 percent, and when you adjust
for a 4 percent FX adjustment and then some minor acquisitions and divestitures
(sic).
We were not pleased with this revenue decline, but at the same time, the good
news is that our order activity in Q3 improved significantly. Our book-to-bill
in the third quarter was 1.04. In my opinion, even better than that -- our
orders were up sequentially 5 percent in the third quarter over the second
quarter of this year. This is -- (technical difficulty) -- third quarter is
usually our slowest order quarter as a result of (indiscernible), ect. So, those
are encouraging signs from the order front, and that's why we are cautiously
optimistic that the overall tone of business is getting better. Theo will put
some more color on that -- on the situation a little later.
Now, as you know, we're not just sitting back waiting for an economic recovery
to drive revenue growth. We have a number of key commercial initiatives to drive
revenue growth, and we've talked about them before with you, but let me just
highlight a few. One is our branding strategy. We now have only two brands in
the Company, Thermo and Spectra-Physics, down from the 75 we used to have. This
is really helping us to cross sell our products to the same customers. That's
clearly helping us to begin to drive sales.
Another area is our integrated sales offices and new Demo labs. We opened four
more integrated sales offices with brand-new, state-of-the-art Demo labs this
quarter in Tokyo, Frankfurt, Paris and Beijing. Basically, driving the
(indiscernible) Thermo approach with our customers in those key geographies.
What we do is we bring our customers into these Demo labs and let them see and
use the full range of our products all in one place.
Then thirdly, we continue to develop exciting new products. Particularly, we
are extremely -- with the emphasis on extremely -- pleased with customer
reactions to our new mass spec line, the new linear LPQ ion (indiscernible) and
the new LTQ-FT (ph) (indiscernible) transformed mass spec, where the response
has been phenomenal. Now, these are just a few examples of what we're doing to
drive growth internally.
In addition to that, somewhat new, recently, is that you can see in the press
release that we have become more active on the acquisition front. We did two of
the recently, Jouan and a small business from Siemens, the symmetry business.
Let me just quickly talk about both of them.
Jouan, first of all, is a great fit with our Bioscience Technology division.
Jouan is a 92 million revenue business that clearly expands our (indiscernible)
product line, especially in centerfudges (ph) and also in other automated sample
handling systems. Jouan has an extensive distribution network in Europe, which
will give us a stronger global presence. We expect to close Jouan towards the
end of the fourth quarter.
Now, also, we acquired the Electronic Personal Dosimetry business of Siemens.
This is a $10 million revenue business and it will become part of our
Environmental Instruments division. This business supplies radiation monitors
that are worn by people and also wireless modular systems that can be networked.
So, this is part of our safety and security product line in Environmental
Instruments.
For now, with respect to acquisitions, we plan to only make acquisitions in our
Life & Laboratory Sciences sector and in the Environmental Instruments division
of our Measurement & Control sector.
Now, in addition to doing acquisitions, we're also pruning our product
portfolio when we feel a business does not represent the growth platform for us.
Just recently, we sold our Test and Measurement product lines, which were part
of Measurement & Control, to SPX Corporation. We also sold our MBE,
molecular-beam epitaxy products line, which used to be part of Optical
Technologies, to Oxford Instruments.
Now, finally, before I hand it over to Theo, on guidance for the fourth
quarter, we expect our earnings improvement trend to continue for the rest of
the year. Our goal is to achieve, from an EPS -- adjusted EPS point of view in
the fourth quarter -- 32 to 34 cents, which would translate for the full year
into $1.07 to $1.09 of adjusted EPS.
So now, I'd like to turn the call to Theo for more details.
--------------------------------------------------------------------------------
Theo Melas-Kyriazi, Thermo Electron Corp. - VP & CFO [4]
--------------------------------------------------------------------------------
Good morning, ladies and gentlemen. The highlights of our financial performance
in the third quarter is I(sic) a strong increase in adjusted operating margins
that we've reported. I'm going to give you some details on this.
The second and important thing that we need you to focus on is the fact that
bookings were much stronger than the minus 7 percent organic revenues that we
reported in the quarter.
In terms of EPS for one second, GAAP EPS was 29 cents versus 23. This is one
more quarter where we report GAAP earnings that exceed our adjusted earnings,
and there is a detailed reconciliation in the press release between GAAP income
and adjusted income.
In terms of revenues, as we disclosed in the press release, reported revenues
were down 4 percent, organic revenues 7 percent. Orders show a different picture
and Marijn gave you just one snippet of it. Gross bookings were down 1 percent,
compared to the year ago quarter, so compared to Q3 of 2002. In the year ago
period, we had a large order from the U.S. government for explosive detection
instruments for U.S. airports -- to the TSA. Excluding that quarter in Q3 of
'02, our bookings were actually up 1 percent versus last year. If you look at it
by sector, gross bookings were up slightly in Life & Laboratory Sciences, there
were up double-digit in Optical Technologies, and they were down slightly in
M&C, excluding that TSA order last year.
Maybe even more importantly, if you look at bookings sequentially, bookings
were up 5 percent between the second and the third quarter, and that's
especially important in light of our weak seasonality in the summer months.
Again, if you look at it by sectors, Life & Laboratory Sciences bookings were
up slightly on the sequential basis. M&C bookings were up in the high single
digits, and Optical Technologies were up double-digit. So, if look at the
quarter -- (technical difficulty) -- all three sectors and we built backlog in
all three sectors. We typically also report gross book-to-bill, excluding
cancellations in both periods. If you look at that ratio, it's 1.05, even
slightly better.
If you look geographically, the patterns really didn't change much from the
first half of the year. Asia was the strongest geography for Thermo again in the
third quarter, driven by continued strong growth in China. The U.S. market
remained weak, and Europe was mixed with weakness in Measurement & Control and
Optical Technologies.
Let me spend three minutes now just going down the P&L and give you some
comments on the various line items. The gross margins in the quarter were 45.4
percent, up sequentially and up compared with the year-ago quarter. We have
positive impact in the quarter from the global sourcing efforts that we've been
at for some time. Part of the higher gross margin is also due to improved mix,
and Marijn talked a little bit about this -- we are consciously pruning some
older and less profitable product lines. This has a small negative impact on
revenues but a positive impact on gross margins and on EBITA (ph) margins.
SG&A was 26.5 percent of revenues in Q3, down sequentially from the second
quarter and flat with the year ago quarter. If you take a look at this in terms
of dollars and not as a percentage of sales, total SG&A spending is coming down,
even as we continue to invest in key commercial initiatives, especially in the
Life & Lab Sciences sector.
R&D was 17 percent of revenues, down slightly from the year ago and down
sequentially a tiny bit. Again, here, this is very much the same story; we
continue to be more discriminating where we spend the R&D dollars. We are
reviewing R&D spending from a top-down basis and we're pruning small R&D
projects selectively and allocating more dollars to opportunities that can
deliver higher growth down the line. We think that the FTMS is clearly an
evidence of that.
So, all that translates into an operating and adjusted operating margin, which
is up 110 basis points sequentially and year-over-year. This is in spite of the
organic revenue decline, and all three sectors showed higher EBITA (ph) margins,
both sequentially and over the year-ago quarter.
Now, in terms of below the line very quickly, the tax rate for the quarter was
26 percent on adjusted earnings, basically unchanged from the second quarter and
down from the year-ago quarter. We estimate now that we're going to have a 27
percent tax rate for the year as a whole. As we told you last quarter, that
reduction in the tax rate is a result of all the operational integration of the
Company in the U.S. and overseas.
In terms of Other Income and Net Interest Income, both these were down
substantially versus the year ago quarter. If you do the math, you see that that
cost us 1.5 cents of EPS, so Other Income is down; Net Interest Income is down.
As we pointed out on last quarter's earnings call, we had net interest expense
in the third quarter versus net interest income in prior quarter, and we expect,
in the fourth quarter, to again report net interest expense.
In terms of cash flow, we generated $38 million in operating cash flow from
continuing operation in the third quarter, and that includes $8 million in
after-tax restructuring costs that we paid out during the quarter.
We continue to pay a lot of attention to cash flow, and in the quarter,
receivables were up a little bit, 77 days, up sequentially from 71 days. The
largest contributor to the sequential increase in receivables is the European
and Asian sales offices in our Life & Lab Sciences sector. During the quarter --
and Marijn touched on this -- many of these sales offices were merged together
into one Thermo sales and demo facilities (sic), and this had an impact on our
receivable collections efforts. So, we expect to reduce these receivables in the
fourth quarter and make this up.
Now, in terms of inventory turns, very little change to report. Two turns
unchanged from the year-ago quarter, down very slightly from the June numbers.
In terms of fixed assets, they were down quite a bit -- $6 million if you look
at the balance sheet from the June period. We spent only $9 million on capital
expenditures, much less than the $12 million in quarterly depreciation expenses.
So, if you look at our leverage and our liquidity, we have $133 million of net
cash at the end of the third quarter, up from $91 million in June.
During the quarter, we finished our whole debt pay-down program. We redeemed
$200 million in convertible debentures, and that was really the final step in
the debt pay-down -- and we paid down $1 billion in debt since the beginning of
2002. So over the last seven quarters, we have paid down $1 billion in debt.
Today, we are left only with $260 million of debt outstanding. Almost all of it
is due in '07 and '08, so none of our cash flow over the next several years will
go to the repayment of debt -- lots of flexibility in terms of what to do with
that cash flow.
Marijn talked about the guidance -- 32 to 34 cents for the fourth quarter and
$1.07 to $1.09 for the year. I want to point out that, for the fourth quarter,
we expect to see a seasonal upswing in revenues, and we always see this every
year. And so, we estimate that revenues this year will show a 6 to 8 percent
sequential increase in Q4 from Q3.
As you compare Q4 this year with Q4 of last year, it's important to remember
that revenues last year in the quarter included $27 million from one large order
from the U.S. government for explosives detection to U.S. airports. Clearly,
those revenues will not be repeated this year.
Let me just wrap this up by saying that the increase in our operating margins
this quarter reflects the hard work that all of us at Thermo have done over the
last three years to transform Thermo into a company that's leaner and more
efficient and can achieve significantly higher levels of operating
profitability. Despite the weak revenues, clearly, the booking trends that we
saw in the quarter make us cautiously optimistic that things are looking up as
we enter 2004.
With that, operator, we're going to open it to Q&A. |
|
