Exhibit 99.2
Global Power Equipment Group Conference Call
February 26, 2002, 10:00 a.m.
Operator: Good morning and welcome to the fourth quarter 2001 earnings
conference call for February 26/th/, 2002. Your host for today's call will be
Bob Zwerneman. Mr. Zwerneman, please go ahead.
Bob Zwerneman: Thank you very much Steve. Good morning everyone. I would
like to welcome you to Global Power Equipment Group's fourth quarter and fiscal
year 2001 earnings conference call. Joining me on our call today is Mr. Larry
Edwards, Global Power Equipment Group's Chief Executive Officer and Mr. Mike
Hackner, our Chief Financial Officer. I assume everyone has received a copy of
our earnings press release from yesterday. However, in the event you have not,
please contact Rebecca Bisbee (ph) at 918-488-0828 and she will either fax or
e-mail you a copy immediately. You can also visit our website at
www.globalpower.com to find a copy of our press release on our home page. There
is also a link to a presentation of select information which we will be sharing
with everyone this morning if you go to www.globalpower.com/q401 to find the
slides. It is case sensitive. Everything is lower case. If you do not have
access to the internet and would like a copy of the slides sent to you, also
please contact Rebecca Bisbee and we will arrange to send you a copy. Her number
again is 918-488-0828.
Before I turn the call over to Larry to discuss our results,
I must inform everyone that during this call, we will be making forward-looking
statements relating to results of operations, benefits of certain initiatives,
outlooks for the market we serve and certain aspects of our sales strategies.
Such statements are made based on management's beliefs as well as assumptions
made by and information currently available to management, pursuant to safe
harbor provisions of the private securities litigation reform act of 1995. While
these statements reflect our best judgment, they are subject to risks and
uncertainties that could cause a change in focus and direction. A discussion of
certain risk factors that may cause actual results to differ from these
forward-looking statements can be found in Global Power Equipment Groups form S1
and in our 10Q for the period ending September 29/th/, 2001 as well as other
reports on file with the SEC. With that, I would now like to turn the call over
to Larry Edwards.
Larry Edwards: Thanks Bob and good morning everyone. Hopefully all of you
have found the slides we'll be presenting this morning. If you have, please go
forward to slide number three which gives you a brief outline of what we will
cover today. A lot has changed in the energy related business since our last
conference call. The overall softening of the market coupled with the fallout
from Enron's implosion which has made the biggest headlines, has had a
significant impact on other firms credit ratings and their forward capex
spending plans. I want to address our operating strategy in light of those
developments
and provide some details of our sales initiatives since these changes have
occurred. Mike Hackner will address our quarterly financial results in a moment
and provide detailed guidance concerning our 2002 financial outlook. However
before Mike does that, I would like to report to you a recent, interesting
development.
Two weeks ago a number of the Global Power Equipment Group
management team and I spent two days at the General Electric Global Suppliers
conference in Orlando. Only the largest of their almost sixteen thousand vendors
were in attendance. Just being invited to this conference is an honor that
signifies that a company has performed a very high standard. So you can imagine
how proud we were when GE Power Systems named our Braden Manufacturing Division
as one of only two companies as recipient of the Supplier of the Year Award for
2001. We were all very pleased with the recognition of our hard work and
achievement which really embodies the entire Global Power Equipment Group
Organization. At the conference, GE informed everyone one of their objectives of
reducing their number of suppliers and concentrating more business with the
remainder. We believe Global Power Equipment Group will benefit from this
process.
During the two day event, GE disclosed sensitive and
confidential information to us, some of which I cannot reveal. What I can say is
their message closely tracks some of the public statements GE's top management
has been signaling in recent weeks. It does appear the gas turbine power
generation market will reflect some softening in 2003 but before I provide an
update on our sales effort and our acquisition initiatives in light of the
tempered business outlook, I would like for Mike Hackner to review our financial
highlights. Mike.
Mike Hackner: Thank you Larry. Good morning everyone. If you could turn to
slide number four, we'll look at some of the highlights from the quarterly
income statement. As you were able to see from yesterday's press release, Global
Power Equipment's 2001 financial results were very impressive. Our fourth
quarter revenues of two hundred and fifteen point one million dollars were up
one hundred and two point seven million dollars from what we recorded in the
comparable quarter last year. Also up nineteen percent sequentially from our
September 2001 quarter. For the quarter, net income was seventeen point nine
million dollars or thirty-nine cents per diluted share. Our EBITDA was
thirty-one point eight million dollars for the final quarter. Although not shown
on this slide, for the full year we recorded full revenues of seven hundred and
twenty-three point five million dollars and pro forma net income of forty-nine
point three million dollars or a dollar five per share. Our EBITDA totaled
ninety-four point four million dollars for the full year. Our gross margin for
the fourth quarter came in at a record forty-two point six million dollars
yielding a nineteen point eight percent gross margin.
For the entire year, our gross margin was eighteen point two
percent. Several forces contributed to the unusually high gross margin in the
quarter. As I mentioned on our third quarter conference call, our ongoing effort
to shift the companies manufacturing focus to lower cost international supply
sources, could produce a positive effect on margins. That did occur. More
importantly, our customers requested early delivery of several projects and we
were able to accommodate those requests. Most of these projects were being
fabricated in lower cost countries and produced a revenue mix that yielded
operating leverage well above our initial expectations. These developments
combined with reduced interest expense gave rise to the excellent fourth quarter
results. Given changing conditions in the industry environment over the past
couple of months, we believe competitive pressures may have a muting effect on
our future operating results. We anticipate that our gross margin could drop
back somewhat but still average between seventeen point five and eighteen
percent for fiscal year 2002. In a few moments I will provide our detailed
guidance for the current fiscal year on a quarterly basis.
Now if you turn to slide number five, you will see the
breakout of our revenue on both a segment and a geographic basis. Our HRSG
segment posted very strong revenues of one hundred and thirty-four point three
million dollars in the fourth quarter, an increase of one hundred and eleven
percent above last year and four hundred and forty-two point three million
dollars for the full year. The HRSG segment accounted for sixty-one point one
percent of consolidated revenues. Our auxiliary power segment also posted record
revenues of eighty point eight million dollars in the fourth quarter, an
increase of sixty-six percent. Geographically, ninety-one point four percent of
our quarterly revenue originated within the US market. Larry will address both
the backlog as well as sales pipeline in a few minutes. Going to slide number
six, this is the same table we have included in our previous earnings
presentations and in yesterday's press release to reconcile our reported figures
to pro forma. This table adjusts for the affects of our change in tax status and
our main IPO. These figures are useful to help people new to the Global Power
Equipment story, better understand the gap versus pro forma earnings numbers.
Turning to slide number seven, I want to discuss what is
behind some of the figures representing the cash flow for the quarter. During
the quarter, our working capital needs increased in tandem with the sharp rise
in revenues, particularly in November and late December. This is reflected in
our average DSO's which increased to fifty-two days and caused us to briefly dip
into our revolver. Our fourth quarter order flow which Larry will address in a
couple of minutes is also behind our higher working capital needs. We expect to
eliminate the revolver debt in the first half of the current year and our plan
is to continue to retire debt from internally generated funds.
Now turning to slide number eight, we'll discuss our sales
backlog. While January and February bookings have rebounded slightly,
new order bookings at the end of the year were flat. As a result, our firm
backlog at the end of December was five hundred and fifty-seven million dollars
compared to four hundred and sixty-five million dollars a year ago and six
hundred and eighty-nine million dollars at the end of September. While we have
not seen any measurable cancellations from our backlog, a couple of customers
have moved production schedules forward in time on orders representing
approximately one hundred million dollars of future revenues. Larry addressed
this topic in the press release by pointing out how development time tables have
been pushed out. We have the preliminary orders but are working with a few of
our customers on firm production and delivery schedules before we classify these
orders into the backlog. Regardless, we enter fiscal year 2002 with the
healthiest year and book of orders in the company's history, up twenty percent
from the year before. This backlog provides the basis for our continued strong
financial guidance for 2002.
Larry will have some further comments about the sales
pipeline in a few minutes. For fiscal year 2002, we currently expect the
following results on a quarter by quarter basis. On the top line, we expect
revenues to be earned as follows; Q1, two hundred million dollars; Q2, one
hundred and eighty million dollars; Q3, one hundred and sixty million dollars
and Q4, one hundred and seventy-five million dollars for a total of seven
hundred and fifteen million dollars which is the approximate midpoint of the
range shown in the press release, representing a slight decrease of one percent
from our 2001 results. On an earnings per share basis, using a constant of
forty-five point seven million diluted shares and an effective tax rate of
thirty-nine percent, we are currently projecting quarterly EPS of Q1, thirty-one
cents; Q2, twenty-seven cents; Q3, twenty-four cents and Q4, twenty-six cents
for a total of one dollar and eight cents per share or three percent above 2001.
This is also the mid point of the range outlined in the press release.
Turning to slide number nine, in this last schedule we have
summarized some of the key financial statistics that illustrate the financial
strength that Global Power Equipment Group offers. Although our fourth quarter
was the anomaly, over the past twelve months we operated in a negative
networking capital position based on our HRSG segments practice of receiving
progress payments and maintaining billings in excess of cost and estimated
earnings. As I mentioned, earlier, our receivables increased moderately in part
due to a very high quarterly revenue and several large billings to key customers
in the last week of the year. Additionally, working capital was affected by
contract positions on some very large orders for which the payment terms
deviated from our normal practice. These orders are part of a multiple unit
arrangement with a well capitalized customer offering tremendous prospects for
additional business.
We utilize only a small portion of our ninety-four point
four million dollar EBITDA to cover our capex spending of twelve point four
million dollars for last year. This strong cash flow story continues for 2002
where we expect our capex to be less than one half of that spent in 2001. We
expect EBITDA to be similar to 2001 based upon the guidance I just gave you.
Although our debt rose slightly during the quarter, our debt to cap ratio
declined to fifty-seven point eight percent at the end of the fourth quarter.
Our return on equity and return on capital were significantly higher than other
engineering and manufacturing or E&C concerns that operate with in the power
generation sector. This further illustrates the value added by our management
team. I will now turn the call back to Larry.
Larry Edwards: Thank you Mike. I would now like to share with you our view
of our business opportunity and what steps we're taking to improve shareholder
value. Let me first say a couple of things about the guidance Mike just
provided. We understand our marketplace and we know our customers very well. As
we have often stated, we constantly communicate with our customers and with our
manufacturing partners and it gives us a unique perspective that enhances our
revenue and profit visibility. However, we cannot see in the future with total
certainty and predicting forward results is difficult. That said, we want to
remind everyone that we promptly adjusted our fourth quarter expectations
roughly one month after our third quarter earnings conference call and again on
January the 22/nd/ to raise the fourth quarter bar closer to the mark we could
see at the time. It was our customers that asked us to accelerate delivery
schedules for work in process that ultimately gave way to our very strong fourth
quarter results. Good or bad we will continue the practice of interim
announcements as necessary to provide every investor the most accurate
information we can.
Mike provided the quarter by quarter expectations for
revenues and earnings that we currently see for 2002. As you know, we had
previously indicated a range of between seven hundred and seventy-five to eighty
hundred and ten million for the year. However in light of the upheaval that has
occurred in the power generation sector over the past two months, our current
expectation is now between seven hundred to seven hundred and thirty-five
million for 2002. Our new EPS guidance of a dollar and eight cents for the mid
point is only six cents below the current consensus. We still may be able to hit
the original target, time will tell. Additionally, while we are not providing
any guidance for 2003 at this time, let me say this. Based on all the
information available to us, including the information supplied by General
Electric, 2003 could prove to be a turning point for us as well. I want to
emphasize it could be rather than will be and here is why. Less than a year ago,
Wall Street firmly believed the ambitious plans that IPP's and other power plant
developers were talking about. Today the pendulum has swung the other way the
focus has been on what is not going to be built rather than what is still under
development.
However according to Resource Data International, RDI,
figures that were recently presented at a power industry conference we attended,
three hundred and forty thousand megawatts of power plants are still
proposed for development over the next four years in North America. With gas
turbines making up approximately ninety percent of the new capacity. In
recognizing that completions of power plants when compared with announced
proposal is normally around fifty percent, we obviously still have a good solid
market in North America. So while we anticipate more postponements to be
announced over the next year or so, with some cancellation, we must remember the
fundamental basis for our business is not really changed. The world's population
growth continues, standards of living in developing countries keep improving and
there is no end to the growth in the world for computers, electronic equipment
and the internet. While much of the US experienced the warmest weather in over a
century this winter, longer term, weather patterns will return to normal and
energy demand will grow.
As many of you know, our business extends to markets outside
the United States, markets that are gaining momentum. I discussed the European
activity on our last call and I'm happy to report those projects continue to
move forward without any delays. The forty turbines GE will be placing into
Spain, Italy, Germany and Turkey, all large frame machines provides us an
opportunity to participate. And as I indicated in my January 22/nd/ letter, Asia
is coming back to life and we are now working on new orders since our last call
from South America and the Middle East. The key take away here is we are not
curtailing operations or reducing engineering staff. In fact, we continue to
search for international manufacturing partners to help us expand our very large
geographic footprint and remain the supplier of choice in the industry.
Now let me follow up on what Mike discussed earlier about
our year end backlog. Our backlog at the end of December declined by a hundred
and thirty-two million from the end of the quarter, third quarter, to five
hundred and fifty-seven million. As utilities, merchant plant producers, IPP's
and developers revise their forecast and modify their forward plans during the
fourth quarter, our bookings were also obviously well below what we had seen in
the pipeline and were working on early in the quarter. Additionally we increased
our outsourced manufacturing base in order to complete jobs faster to meet
tighter delivery schedules for our customers as our fourth quarter results show.
Our backlog may decline again during the current quarter and should stabilize
around the five hundred million dollar mark for much of the year. We have seen
the good times and the bad times and we understand the difference. Based upon
that experience, we presently have a very good business environment and a
relatively strong sales pipeline. I would not describe it as a strengthening
pipeline but still very strong compared to history.
And finally I want to briefly cover our acquisition initiatives. On our last
call, I discussed our acquisition strategy and outlined three criteria that must
be met before we consider a target. Those were and still are, number one, an
acquisition target must offer market or operational synergies that compliment
our existing businesses. Secondly, it must provide us entrees into other
industries or
locations that we believe are vital to our future and finally the valued
opportunity must be accretive to our earnings without unduly leveraging our
balance sheet. Since our last call we've evaluated over ten acquisition targets
and several are still under consideration. In one instance, we passed on an
opportunity to only good business that fit really well into our operations but
we passed for the right reasons; it simply cost too much. First and foremost, an
acquisition must be accretive and it must be a business that can grow. I wish I
could provide more detail on the targets we're evaluating but for obvious
reasons, I do not have the liberty to do so. I can say we're working very hard
to find the right opportunity and that I am very involved in the process. And
partly because of the current market environment, we're beginning to see
valuations for companies becoming more realistic. With that I'd like to, Mike
and I would both like to take questions that you might have.