Gardner Denver Earnings Call Insights: Pressure Pumping Business, EPG Orders

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On Monday, Gardner Denver, Inc. (NYSE:GDI) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Pressure Pumping Business

Joshua Pokrzywinski – MKM Partners: Just to start off on the pressure pumping business, have you guys been surprised (here either) positive or negatively how pricing has held in or not on the aftermarket side?

Michael M. Larsen – Interim CEO, VP and CFO: Yeah. Josh, I would say, we really didn’t see much change here in the third quarter relative to the second quarter and I’d go back to some of the comments I made on the last call that if you want a quality reputable fluid end from a Company that that will give you a warranty and standby, it’s fluid end in terms of safety. You really don’t have that many alternatives. So, while I’d say upstream clearly, we all know that pricing has been under pressure. We are really seeing a fairly limited pricing pressure on fluid ends and if you look at the total EPG segment, pricing in the quarter and year-to-date is up 2%. So, obviously with the new capacity that’s been added this is something we’re watching very closely, but we have not seen a significant impact at this point.

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Joshua Pokrzywinski – MKM Partners: Then thinking about where we’re at and maybe the drilling pump cycle, seems like that one is maybe moderated more recently. I guess the think about maybe the base flowing out, and you think we are there and based on where we’re at today, when should we see something close to a bottom in that?

Michael M. Larsen – Interim CEO, VP and CFO: In drilling pumps we saw a similar decline in orders in the third quarter as the one we saw in the second quarter and our stance is that there is just a lot of uncertainty and hesitation amongst our customers. So at this point, where typically we would tell you we have six months backlog, where I would characterize it as closer to three to six months backlog in this business. I’d say domestic rig count obviously is headed downward slightly, but still at a pretty good level here north of 1,800 and in addition to that when you look at crude oil prices, that’s clearly providing some support, but as I said, it looks as if our customers are being very cautious and so we have not seen the order in the third quarter that typically we would have seen for shipment starting in the second quarter of 2013. So, like I said, the good news is that commodity, oil price is around $85, the economics are still pretty good and when orders come back, we will be in a very good position to meet the needs of our customers.

Joshua Pokrzywinski – MKM Partners: Just to sneak in one more here, do you think we’re kind at a low watermark on margins in EPG? What’s your confidence and ability to hold something in the 20% range and then I guess same question on IPG, obviously nice uptick. Should we really view this as something closer to the low watermark that you are able to move higher going forward?

Michael M. Larsen – Interim CEO, VP and CFO: Yes, sure. Let’s start with EPG, I mean we just saw nearly 25% OE in EPG and that’s probably close to the peak at this point. Our Nash business, our late cycle Nash business which is also a high margin business is still going strong and so that’s helping us but clearly there is some mixed pressure here as the energy business cycles. So if you look at the last cycle – you look back at ’09 and ’10 EPG margins for the year were about 20% with a few quarters in the high teens. So I would say trough margins in EPG are probably somewhere in the high teens as we sit here today. The other thing I would tell you on IPG obviously the team has made good progress and we are currently sitting at 13% in the third quarter for the year. We are slightly ahead of 12% which is – I think it’s 12.2% which is actually ahead of last year. So while we are cautious in the fourth quarter we believe that all the controllable operating improvements that we are working on should allow us to come in slightly better than 12% for the year. Then all the things I talked about in terms of rightsizing and restructuring, our sourcing efforts, here we are going to get a full year benefit as we move into next year. So we had expect that with moderate growth rates we would be able to continue to expand margins well on our way to 14% we have committed to by 2014 and then the European restructuring like I said as we execute that by the end of 2014 will add another 300 basis points to that. So now we are in the mid to high teens and moving closer to where some of our competitors are positioned. So, that’s how I would answer the IPG question. In terms of IPG on trough margins, I really don’t think there is much more to go on the downside here. I will tell you that our – if you at incrementals in both these businesses IPG at about 25% typically, EPG 30% to 35% and total Gardner Denver Way at about 30%. It works the same way on the way down. So, when you do see revenue declines, your incrementals obviously become your detrimental.

EPG Orders

Kevin Maczka – BB&T Capital Markets: Michael, going to EPG orders down sharply year-over-year, but I think you said up 30% sequentially in October and even up 5% in P&IP, can you give a little bit more of a sense of what’s driving that and if you have a sense if it’s bottomed here?

Michael M. Larsen – Interim CEO, VP and CFO: I would be somewhat cautious at this point. I mean we’re talking about three weeks into October, but – so, I think it’s too early to call a bottom in our P&IP business. I mean I’d say we’re encouraged by orders being up 5% sequentially in P&IP and across the board here quarter-to-date, we’re up 30%. So, I’d just – I’d be careful. Portions of our EPG business as you know Emco Wheaton and Nash in particular orders and can be fairly lumpy. A bit project you either book it in one quarter. We cut it off, September 30, and if the order comes in the next day, obviously it falls in the next quarter. So, I’d say it’s encouraging. It’s too soon in my mind to call a bottoms-out, but we’re cautiously optimistic, but again I mean like I said, the overall macro environment and the energy cycle are still tough. We’re not expecting and improvement here in the fourth quarter for example in our pressure pump business, but that’s how we characterize kind of the recent order trends.

Kevin Maczka – BB&T Capital Markets: Shifting over to the international opportunity in P&IP, I think you have mentioned that before, you mentioned it again today. Can you say any more about and I know this is hard to call, but the timing, the magnitude of what that opportunity may ultimately be?

Michael M. Larsen – Interim CEO, VP and CFO: Sure. I mean we previously said it’s probably in terms of international pressure pumping another three to five years. I’d also say that obviously activity is picking up globally more and more truck is countries like Argentina and China in particular and so we still think it’s a couple of years out, but we also think it will be a very good business for Gardner Denver as our large customers in this space continue to focus more internationally and take advantage of the grow opportunities, so as our customers go international, so will we as they take our pumps with them.

Kevin Maczka – BB&T Capital Markets: Finally from me on the sourcing benefit that you mentioned, given all the actions that you’ve done year-to-date, can you just frame what that benefit will be when we talk about the full year benefit for the first time seeing that in ’13?

Michael M. Larsen – Interim CEO, VP and CFO: I’ll tell you Kevin, I mean I think we were encouraged by our margins and if you look at our gross margins we had a nice improvement as well. We haven’t seen a full quarter yet of sourcing savings that we are expecting. I think the fourth quarter and then the beginning of 2013 is really when we expect to see the impact. So it’s a little too soon for me I’d say to give you a number. I want to make sure that we see it in the financials at the end of the fourth quarter and then when we start talking about 2013 which will be on the earnings call in February we will give you a little more color on what we think the impact could be financially. We have a team now of about 20 employees focused primarily on the IPG side, 15 in China, five in India. We have got a leadership team that knows how to do this and so we are encouraged by the progress. We are I’d say to some extent waiting to see a full quarter’s worth of results and then we get to February and we will give you a much clearer view of what we think the impact could be here in 2013. But like we have said before I mean, if our current local country sourcing as a percentage of our total material buy were probably in the 15% range, I mean obviously our global competitors are many of them in the 30s and structurally there is no reason why we wouldn’t be able to attain their levels over time.

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