Pall Corporation (PLL)

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Pall (PLL)

Q4 2011 Earnings Call

September 15, 2011 8:30 am ET

Executives

Eric Krasnoff - Chief Executive Officer, President, Director and Chairman of Executive Committee

Lisa McDermott - Chief Financial Officer and Treasurer

Analysts

David L. Rose - Wedbush Securities Inc., Research Division

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

Dane Leone - Macquarie Research

Tracy Marshbanks - First Analysis Securities Corporation, Research Division

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

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Robert W. Mason - Robert W. Baird & Co. Incorporated, Research Division

Christopher S. Parkinson - Crédit Suisse AG, Research Division

Presentation

Operator

Welcome to Pall Corporation's Conference Call and Webcast for the Fourth Quarter for Fiscal 2011. Today's call is being recorded and simultaneously webcast. [Operator Instructions] We'd like to remind you that the company's fourth 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 Eric Krasnoff, Pall Corporation's CEO and President. Please go ahead, sir.

Eric Krasnoff

Good morning. Thank you all for joining us for our fourth quarter and year-end conference call. I'm here this morning with Lisa McDermott, our Chief Financial Officer, and Frank Moschella, our Corporate Controller. Now 2001 overall was a decent year. Life Sciences turned in another excellent performance. Pall Industrial faced challenges in the fourth quarter of the year. This morning, we'll provide an exposition of the factors that, despite achieving targeted top line growth, combined to place Pall Industrial profit below our expectation. Along with that, we will outline actions that were taken to address those issues. We'll also talk about what we saw as we exited the year and the current outlook for fiscal 2012. And, of course, there will be ample time for your questions.

We're not going to make excuses for the disappointing finish to the year. We will keep some perspective. To paraphrase an English aphorism, one swallow does not a summer make, and for Pall, one quarter does not a trend make. The hard work we have done has produced solid results over time, and the company is well positioned to capitalize on tomorrow's opportunities and continue to deliver sustainable profitable growth.

Now let's start with overall fiscal 2011. Sales grew by double digits in both Life Sciences and Pall Industrial, as all of our markets grew. While the earnings per share we achieved were not what we wanted, they are 32% better than a year ago. This quarter's results show there are still some bumps in the road, but they are basically either discrete, onetime issues or correctable. Now this is my 68th earnings call, earnings cycle. As you know, it is also my last call. I'll be retiring shortly as CEO. Our management transition is well under way, and I'm confident that our next CEO, Larry Kingsley, will build on our solid foundation and strong culture to take Pall Corporation to ever-greater heights.

So now, let's turn to the business. Life Sciences, which represents just over half of sales and 63% of segment operating profit, had a good year. Sales increased 11%, and operating margin rose to 24%, achieving a 34% incremental margin year-over-year. BioPharmaceuticals, the largest and most profitable piece of Life Sciences, grew about 16%. Medical sales increased 5%, and Food & Beverage was up 10%. Industrial also had strong top line growth of 11% on good performance from all markets. Microelectronic sales increased over 14%. Aerospace sales grew 11%. And Energy & Water, the largest of the Industrial markets, was up almost 9%. Pall Industrial's operating profit, while less than we expected, increased 19% over fiscal '10. It's clear we still have work to do, and Lisa will discuss this in more detail later.

Now going to the fourth quarter, sales came in at $780 million, and this is up 15% over last year on an as-reported basis and 6% in local currency. Life Science sales grew by 8%, and Industrial moderated to turn at 5% growth. Sales in the Western Hemisphere increased 2% after 4 consecutive quarters of double-digit growth, and Europe posted its third consecutive quarter of 10%-plus growth. Asia grew about 6%. A better measure for that is to exclude Japan, and then we see Asian sales increasing 14%. Q4 orders were up 1% compared to 19% a year ago. Orders in Life Sciences increased about 1.5%, and Industrial orders were flat, reflecting 29% growth in systems, offset by a 5% decline in consumables. Almost all submarkets showed a decline in consumable orders, with the exception of M&A within Industrial.

So what's happening with orders? On the full Industrial side of the business, we are seeing signs of contraction in Microelectronics. In the Western Hemisphere, OEM activity, a leading indicator for this industry, slowed. We also saw a slowing in Asia. Microelectronics orders in August continued to be down. We believe some of the slowing in orders, particularly in the more lumpy Energy & Water markets, is due to timing. Some is the comparison to the prior period. This is the case with Aerospace, where orders were flat in Military compared to last year's 41% increase. In August, we saw Military orders almost double compared to August of last year.

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