Pall Corporation (PLL)

PLL 
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Pall (PLL)

Q1 2013 Earnings Call

November 29, 2012 8:30 am ET

Executives

Lawrence D. Kingsley - Chief Executive Officer, President, Director and Member of Executive Committee

Lisa McDermott - Chief Financial Officer and Treasurer

Analysts

Kevin R. Maczka - BB&T Capital Markets, Research Division

Jonathan P. Groberg - Macquarie Research

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Brian Drab - William Blair & Company L.L.C., Research Division

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Derik De Bruin - BofA Merrill Lynch, Research Division

Presentation

Operator

Welcome to Pall Corporation's conference call and webcast for the first quarter of fiscal 2013. Today's call is being recorded and simultaneously webcast. [Operator Instructions] We'd like to remind you that the company's first quarter press release is available at www.pall.com.

Management's remarks this morning will include forward-looking statements. Please refer to Slide 2 or request a copy of the specific wording of this qualification of the company's remarks. Management also uses certain non-GAAP measures to assess the company's performance. Reconciliations of these measures to their GAAP counterparts are included in slides at the end of the presentation.

At this time, I will turn the call over to Mr. Larry Kingsley, Pall Corporation's President and CEO. Please go ahead, sir.

Lawrence D. Kingsley

Thank you, Brook. Good morning. Thank you for joining us as well. I'm here today with Lisa McDermott, our CFO; and Brent Jones, VP of Finance.

Our remarks this morning will be on a continuing operations basis, which exclude the results of the blood product line, which we divested on August 1.

As most of you know, we made public statements a few weeks ago to provide our initial read of our Q1 results and to update our perspective for the full fiscal year. We noted that the end market environment had changed since we provided full year guidance in early September, specifically after a typically slow but hard-to-trend August. Late September was slower than anticipated, and October, while showing signs of improvement, was also choppy. All of this was against the backdrop of public commentary and actual financial results by our customers, our peers, as well as other large industrial players. And even though some of the messaging was mixed, the underlying theme was clear: The macroenvironment is sloppy. There is continued pressure on capital investment, and the emerging country economies in particular are slower than most anticipated and were forecasting to us, in the case of our customers. Given the diversity of our exposure, it's often difficult to distill such an environment into summary-level themes. It tends to be more about the specific projects and about utilization rates, which drive consumption of our product.

A couple of current takeaways, though. First, despite the macro headwinds, the Life Sciences segment continues to perform, with Q1 growth of about 4%. Orders were up 5%, and the Life Sciences segment did experience strong momentum in the September-October time frame. The main driver was, unsurprisingly, biopharm, where we are winning new customers and new types of applications, all in a very attractive space. We continue to see strong momentum for the back half of the year.

Second, the global industrial end markets have taken a bit of a pause for a few months and look to be selectively soft for several months ahead. We sorted through how much of the impact to Q1 was end market demand reduction versus channel destocking, and it appears to be about 2/3 end market versus destocking that's contributing to our year-to-date results. Sales for our Industrial segment in total were down 3.5%, and orders were down about 13%. The most acute impact was from global semiconductor fabricators and Machinery & Equipment OEMs and end users. Our Industrial customers, in many cases, have adopted a much more cautious tone, though, for the foreseeable future.

The third takeaway, though, is the impact of our cost-savings initiatives. Our operating profit increased 80 bps on a year-over-year basis, and the Industrial business' segment margin increased 360 bps. Our structural cost-savings initiatives were not only necessary, a point that we have consistently made, but were also well timed. The team is acting globally to properly position our cost structure to perform in the current environment, but we will not disable our growth or innovation potential.

Fourth and finally, we're in an environment where growth is critical, and we're making the necessary investments to do so. As I've previously discussed, we're increasing the focus of our R&D organization so we can get the best bang for our buck but also increasing our actual spend. R&D investment in Q1 increased by $3 million, and it is expected to grow by $12 million to $15 million this fiscal year.

Moving on to look at Q1 results now from a geographic perspective first with some market-specific color. The Americas was not as strong as we expected, with sales up 2%, excluding FX, and down slightly organically, with strong biopharm-driven performance in Life Sciences, while Industrial was down. This result was significantly impacted by weakness in water, while orders from the industrial OEMs, who sell globally, were down. The Americas result is a function of export order volume decline in addition to the in-region end market demand.

Europe was a little stronger than expected, up a little over 3%, x FX. As expected, biopharm was a strong contributor, but the Industrial process systems business also shipped well in the quarter. However, orders were impacted by capital spend decisions.

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