Global Power Equipment Group Earnings Call Nuggets: Research & Development, Shipments Timing

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

Research & Development

Joe Bess – Roth Capital Partners, LLC: David, could you talk a little about your efforts in R&D? I know you guys have kind of been focusing on that a little bit more than you guys have historically. Can you give us an update on what you guys are doing?

David Willis – SVP and CFO: Yes. So I think on our last call we had talked about – we spent a fair amount of time and effort last year on two new product developments. One, we talked about openly is what we call the (ECHO diverter). We’re in the process of bidding projects, taking that to market as we speak. We have nothing in the backlog for that new product line, but we’re cautiously optimistic we’ll have bookings in 2013. Now this is going to be a product line pretty similar timing profile as our core Braden products, so booking this year would likely translate to revenue and margin benefit next year upon shipment. There’s some other products that we have been technically qualified with our customers. We run through those traps, fairly similar progress on those. We are bidding projects on those, again, nothing in backlog today, but we’re optimistic that we could secure bookings this year, which would be revenue and margin benefit to us next year.

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Luis Manuel Ramirez – President and CEO: Joe, I’d add one more thing. One thing we started to do this year and one of the things we kind of launched the Europe with some strategic initiatives that we mentioned earlier is really to create a whole tollgate process and created a list of product and service ideas from the businesses to create some organic growth place for us and so far so good. What I can tell you right now is that we’ve completed the first 60 days of understanding what’s in the pipeline, what we have available to us and what we’ve been covering is a lot of a value that we mentioned a few months ago was kind of unlocked in our organization and we’ve seen some really great ideas come out. Things the people have been working on kind of in skunkwork environment, which we’re ready to start to make a little bit more movement on. So, I’d say in the next few quarters, we’re going to be spending some time creating some beta tests and things like that to prove some of the things we’ve looked at and then we’re probably going to decide on commercialization similar as well. So, the process here is really to try to create some organic growth opportunities within the businesses where we really haven’t had a process to do it in the past and I think it’s certainly – my experience in the last 60 days is seeing the team that is very positive. I think we’re going to hear more of these types of programs like the (ECHO diverter) and others coming from our Braden business and even our Williams business in terms of services…

Joe Bess – Roth Capital Partners, LLC: Orders in the quarter, could you break that out in the product division by Braden versus KWCC?

David Willis – SVP and CFO: I said that orders in the first quarter for our Products Division I think we included that in one of the tables on the press release. Approximately $56 million, the organic business which is Braden and Consolidated Fabricators was approximately 60% of the first quarter orders and then the two acquisitions from last year KWCC and TOG comprised the other 40%.

Joe Bess – Roth Capital Partners, LLC: So for KWCC and TOG, that kind of frames about it, a 2.0-ish book-to-bill. Can you frame that a little bit more about what really what demand you guys are seeing and what – is this a sort of growth that we continue to see out of this business or orders?

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David Willis – SVP and CFO: Well, I’ll tell you. One of the strategic, I guess, objectives we wanted to accomplish with particularly the KWCC acquisition with access to new end markets served. We had very limited product scope, certain the oil and gas pipeline industry and these package control houses are used. I think we’ve talked in last call and each one of the on these compressor stations every 75 to 90 miles on an oil and gas term pipeline. Most of that order activity you are seeing there in the first quarter is very heavily loaded towards oil and gas. Now they also participate on the power item like our core Braden and its (contract) businesses. But the mix in the quarter was heavily tied to oil and gas pipeline work and by all accounts I think proposal activity in that end market remains robust. Everything we are seeing in the overall industry there, that’s likely to see a pretty good run here over the next couple of years. So I think we are one of the many suppliers benefiting from the spend in that space.

Shipments Timing

Chase Jacobson – William Blair: On the Products business last year you had some issues with the timing of the shipments. There was a small cost issue this quarter. Can you just talk about what’s going on in that division to try to mitigate some of the risk of some of these issues going forward?

Luis Manuel Ramirez – President and CEO: Sure, I think we talked a lot about the on-time shipment challenges last year and some of it being; a lot of it being driven by customers, but some of it was our on doing. And I would say we are disappointed with kind of the results of the first quarter as it relate to the product shipment, there is four or five products that we have the issues with. I’d say that one of the things we did last year and it goes into this year as we implemented a strong review process around on-time delivery and all of those things and I can tell you that the on-time delivery for first quarter was 100%. So and by the way I didn’t expect it to be that, I usually would see on-time delivery quarter-to-quarter can be between 89% and maybe 95% and you are talking best-in-class companies. So, for us to be at 100% was actually quite good, but what we saw is, as we went back to last year, some of the things that we were looking at last year in terms of how these projects were being managed and so on, I think that kind of led into this year, because some of that stuff was already work in progress last year. So, we got our arms around it in the fourth quarter. In the first quarter, I’d say, our arms are completely around it and I’d say for the rest of the year we are probably going to see a lot of improvement or significant improvement in those results and I don’t see a – I don’t anticipate a repeat of either the on-time delivery issues or the issues that we had on these four specific projects. What I will tell you too is that one of the challenges that we have in our Products business has always been making sure we have more visibility to what the customer’s decisions are as they are managing their own sites and how that can have an impact on cost or on the timing of when we would ship a product. So, I’d say the team is really belted down the buckles. We actually restructured some of that organization at the beginning of the year, which I think was a great point for us to see some of the things that we were anticipating we would see in the quarter. So, for us we got our hands our around it. It’s totally unacceptable that we had that issue. I don’t anticipate we’re going to have that issue going forward as we finally implemented all the changes we wanted to do at the beginning of the first quarter. So, that will be the way we operate the business and I think the team will continue to see those improvements as we get to the year.

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Chase Jacobson – William Blair: David, following up on that. Can you just – I think you talked about this a little bit last quarter. I think it has to do with timing of shipments, but if you could just remind us on kind of a walk from the 15.3% gross margin this quarter to the 20% to 22% guidance range for the year?

David Willis – SVP and CFO: Yes. So, from the timing perspective and in terms of revenue volume, as Luis mentioned, we’re not too pleased with the hole we’ve dug for ourselves here in the first quarter. Having said that, we’re confident, we can deliver the year, but mathematically, we still expect to be very back half loaded. Particularly we’re expecting a heaving third quarter from both our Braden auxiliary product business shipments as well as heavy amount of packaged control houses coming out Koontz-Wagner. So, in terms of the margin bridge, the embedded margin in our backlog which we’ve scrubbed for some of these issues, isolated issues, we saw in the core organic business, the margin profile backlog is higher than what we reported by a fair amount here in the first quarter. So, as Luis said, I think we’ve got our arms around these discrete issues in terms of productivity in our (indiscernible) facility. I think we’ve properly factored that into our guidance for the full year and so I think the combination of heavier shipment volumes later in the year at a higher margin profile. You know on a more granular basis, we sell this in the fourth quarter. For us to hit our guidance last year, we had extremely high volume at better margins in the fourth quarter which brought the full year back in line with our revised guidance that we gave last year. So, I think we’re seeing a similar profile. We will be back half loaded with better margins stuff going out the door later in the year.

Chase Jacobson – William Blair: Then, just one more, on the acquisition Louis, it’s only been a week and half, I know. But can you just – can you maybe give us some color on some more detail on where you’re seeing the revenue synergies or cost synergies from Hetsco, and if possible, have you had any initial reaction from customers and are you seeing things coming quickly or just going to kind of play out as we go through the year?

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Luis Manuel Ramirez – President and CEO: Well, I’d say on the customer side, as you know we do a due diligence process. We had an opportunity before we did the decision to close the deal, to meet with several customers and the customer feedback was quite overwhelming and positive. I’d say we had people were very excited about Hetsco going to a strategic, because they felt that they would be able to grow and to also do more things in the future. A smaller company can always do, they also like the fact that we were a global business Hetsco, the installed base of a lot of the product that they go repair. If you look at a map of the world it’s equally distributed any country where you see oil and gas facilities or infrastructure. You will see this equipment and they are really doing this work all over the world. So from a commercial synergy that we are looking to play out is to use the Hetsco natural gas services play, repair services and also work together with some of the things that we’ve done in our installed base around auxiliary equipment and power items around places like the Middle East and so on and grow there. I think those are great beach heads that we haven’t had before. And now that we have an aftermarket component which as you see from the numbers is a nice margin business for us. We’d like to expand that for sure. And in terms of the operational piece of it, what we also inherited from this is a facility down in Houston, one of the things we didn’t have in the business was a facility in Houston to give us more access to the oil and gas space there. The channels to market there as well as the physical water channel to be able to be closer to some of the end customers that are buying Koontz-Wagner products. That are buying products from Braden and so on. So we are excited about that and think that, that’s going to help us to establish our own beach head in North America in the area where we see a tremendous amount of investment going in right now with both suppliers and end customers decision makers right there in that part of Texas. So, that’s going to be another opportunity for us. I’d say also that as I think about the business itself and what we’re seeing things, I think that the business has shown a great growth record the last two years and that’s one of the reasons why we were really attracted to this space. The leader who runs the business is a well regarded by the customer base. He has excellent technical knowledge and he also runs a really tight ship commercially. So, all of these were a elements for us to say. This is a business that we can build our natural gas story from and continue to work on that space over the next three to five years as we build the business out.