Global Power Equipment Group Earnings Call Insights: Acquisitions Outlook and Productivity Programs

Global Power Equipment Group, Inc. (NASDAQ:GLPW) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Acquisitions Outlook

Joe Bess – ROTH Capital Partners, LLC: So, when I take a step back and start to look at acquisitions that you did about a year ago, the KW and TOG acquisition. Can you talk a little about, given that data on what you guys are seeing, what you guys’ expectations are for that business going forward and kind of how that compares to where you guys were, maybe 12 months ago…?

Luis Manuel Ramirez – President and Chief Executive Officer: Sure when we talk about those acquisitions actually on the KW side that sits primarily inside what we now call the Electrical Solutions business — Electrical House Solutions business. When we acquired that business a year ago, as you know, we were primarily focusing on the end customer market that was serving the power generation space and what’s happened over the last 10 months is we have seen a lot of the business and the performance in the business shift to a lot more work around oil and gas pipelines and other natural gas related activities. The business is growing at a pretty fast clip since we acquired it, in fact I’d say this year our prognosis looks pretty positive that we will probably beat the original plan for the business this year. With the acquisition of IBI that we just announced a few weeks ago, that’s going to add more capacity to that business because we are seeing a lot more order intake than what we had capacity to serve. So it’s actually a really good story all the way around. It’s a very good business in terms of how close we are to customers and how we are managing working around the other areas of the business that expanded for the markets that we serve.

Joe Bess – ROTH Capital Partners, LLC: Then thinking about the IBI acquisition of KW fits into that. Can you talk – are you going to quantify at all how much you think that the lack of capacity could have bottlenecked your revenue growth in the quarter or for the year? When you think about your leadership position with the combination of the two can you talk about what you guys see as annual market opportunity for this combination?

David Willis – Senior Vice President and Chief Financial Officer: Yes. Joe this is David. In terms of the bottleneck capacity, I think we would have had a bigger challenge delivering ’14 order flow than we really would have in ’13. So I think we talked in our last call, Koontz-Wagner, they are building their backlog. They were really at it at a level where they were full up for the capacity that we had available within those operations. So I think practically speaking, the addition of IBI frees up capacity and create some upside for that segment more for ’14, necessarily than for ’13. In terms of the facilities, both of those are strategically located in positions that where we want to be to take the related – the Caldwell facility, really gives us access to West Coast project opportunities. You may recall, freight is typically incorporated into our scope of work for this business, though with the (Southend) facility it was very difficult to be competitive on West Coast projects. So, the Idaho facility really opens up the geographic market, we didn’t have competitive access to before.

Joe Bess – ROTH Capital Partners, LLC: Then can you talk a little bit about what the margin opportunity you think there might be for this business with the combination of the two?

David Willis – Senior Vice President and Chief Financial Officer: Well, this is incorporated into our guidance, in terms of the overall profile of this business it looks and feels similar to our auxiliary products lines, meaning kind of low to mid-20% gross margins. Now, as the overall supply chain in the oil and gas sector gets filled out clearly some of the pricing leverage reverts to those of us in the supply chain. But in terms of the contract profile it looks and feels pretty similar to our organic auxiliary products business. Obviously, in a tight market, we’ve got a bit more pricing leverage. In the down market, you are going to see pressure on prices. But with the oil and gas activities that Luis had mentioned, we’re very comfortable with that business right now where its situated…

Joe Bess – ROTH Capital Partners, LLC: Then with realignment process and restructuring implementation going forward, can you talk about a little bit about what the succession plan is at this point time with the departure of Ken, a few months ago?

Luis Manuel Ramirez – President and Chief Executive Officer: Well, one of the things that we did as I alluded to on the pages that we have at the end of the presentation today is we split the businesses in Services into four main P&L’s and we are announcing also a new leadership structure there. So, we’ve announced the COO of the business, (Neil Riddle) who’s been there for the last few months and really learning the business as he came in, is now going to be running the nuclear services business and we’ve also announced that (Tedd Sellers) who has come in from the outside will be running the new energy services business. So, we have two seasoned leaders with experience in services and really a great platform on both sides to really kick off what we’re trying to do is, some of the new acquisitions like Hetsco that we just brought in a few months ago and also to put more feet on the ground for TOG, the acquisition we did last year, which is mostly selling aftermarket service parts. So, we’re really pleased with both segments right now and we think that the way we’ve aligned the business to be market phasing is going to be a tremendous advantage in the marketplace for us.

Joe Bess – ROTH Capital Partners, LLC: Will they be reporting directly to you? Is that the structure?

Luis Manuel Ramirez – President and Chief Executive Officer: Yes, they will.

Productivity Programs

Jon Braatz – Kansas City Capital: Luis, when we think about the realignment and some of the things you’re going to be focusing on over the next three to five years, will it require additional personnel, additional investments and when we think about the goal of achieving doubling operating margins, three to five years, is there some low hanging fruit that maybe we see a disproportionate share of the improvement in the early years and any color in that area?

Luis Manuel Ramirez – President and Chief Executive Officer: One of the things that we started to do earlier this year is we started to spend a lot of time on productivity programs. A business that’s growing and also expanding its footprint based on the acquisitions and everything that we’ve been working on the last few months really requires us now to take a look at that structure and make sure that we’re aligning it properly for the market. Then internally we are going to make sure that we are running an efficient structure for the long-term, so that we can leverage as we go up in sales over time and the costs hopefully go down over time. So what we’ve been doing the last few months is identifying those opportunities. We do have some things that were – some things are very basic things like just shining more light on some of the areas of expenditure that we should be shining more light on and making sure we are doing better on that. We are also looking for lean opportunities, so we are leaning our processes in the manufacturing side right now. We kick those teams off running this year so we expect that for next year we are going to see about a third of the productivity programs coming out of the lean activities. Then the other piece that we are going to do is, we are going to do some investment for productivity. So we think that some improvements that we could make in terms of capital improvements in a few of the factory locations. Also, I’d say, with footprint reduction and consolidation those two things are going to require some additional capital expenditures. But I think as we are doing this we are creating capacity with our productivity programs to help fund some of the programs as well. So that’s what we are trying to do. I’d say we are in the process right now, coming up with a detailed plan and we should have a pretty good plan to talk about in the next few months with all of you.

Jon Braatz – Kansas City Capital: Going back to the Electrical Housing area, how large a market is that in its entirety? Sort of your combined operations now, how big a player are you in that market from an overall perspective?

Luis Manuel Ramirez – President and Chief Executive Officer: We have been looking at that the last few months as well. I’d say the market can range depending on where – which market you are serving. In North America right now we think the market is somewhere around $1 billion to $2 billion of opportunity, with the segments that we’re serving today. Obviously, a lot of what we do has a lot of adjacent spaces as well. I’d say in our segment, we are probably one of the leaders right now in terms of the work that we’re doing for oil and gas and power generation, I’d say, we’re in the top two right now, based on how combined we are. So, my goal for that business is to continue to invest in the areas around oil and gas, especially around the Gulf of the United States. We have plans to position a location. We’ve now got Hetsco facility down in Houston, Texas. We have the need to open up some more allocation for this business for the Koontz-Wagner business as well. We also think that some of the Services businesses that we have launched on under Energy Services will benefit from having a consolidated location in that region. So, one of the plans, I think they will be talking more about it, how we’re going to try to do that, try to consolidate some of those activities, which is then going to give us access to another market that we’re not working with today.

Jon Braatz – Kansas City Capital: I think when you acquired IBI, I went to their website and I thought I saw on there that they were maybe thinking about a facility down in Houston or already had a facility in Houston?

Luis Manuel Ramirez – President and Chief Executive Officer: No, they were in the planning stages of doing that and what we’ve done with that is we have continued that planning process with our business.

David Willis – Senior Vice President and Chief Financial Officer: John, you may recall our Hetsco acquisition from the second quarter also has a facility down in Houston. So, we’re advancing the plans, but what we are really contemplating is trying to find a facility that could accommodate both of our businesses down there.

Jon Braatz – Kansas City Capital: Last thing Luis you mentioned a little bit tougher pricing in the utility area?

Luis Manuel Ramirez – President and Chief Executive Officer: Yes.

Jon Braatz – Kansas City Capital: How tough is it and do you see any improvement going forward?

Luis Manuel Ramirez – President and Chief Executive Officer: Well, I take a lot of my cues from my customers, and as you know from the OEM market, both GE Power & Water and Siemens recently reported that they’re still seeing a lot of pressure in terms of global turbine orders and so, that’s one of the main drivers of that comment. The other comment I’ll make is also the utility spending in North America. I think with the price of natural gas and the challenges of cost going up, one of our customers in the nuclear side told me that in their region, the energy demand is still around 1% for new energy demand, but that their costs are going up 5%. So, it’s clearly an inopportunity for us to help them find ways to be more productive and I think a lot more of the products and service in the future that we’ll see, that we’ll be offering to those customers will be related to that. How can we do better on productivity at the customer site and also help them create some capacity for what they need to do and invest. So, those are the challenges that we see right now, in that market.