Q2 2012 Earnings Call
March 08, 2012 8:30 am ET
Lawrence D. Kingsley - Chief Executive Officer, President and Director
Lisa McDermott - Chief Financial Officer and Treasurer
Jonathan P. Groberg - Macquarie Research
Kevin R. Maczka - BB&T Capital Markets, Research Division
Hamzah Mazari - Crédit Suisse AG, Research Division
Tracy Marshbanks - First Analysis Securities Corporation, Research Division
Brian Drab - William Blair & Company L.L.C., Research Division
Previous Statements by PLL
» Pall's CEO Discusses Q1 2012 Results - Earnings Call Transcript
» Pall's CEO Discusses Q4 2011 Results - Earnings Call Transcript
» Pall's CEO Discusses Q3 2011 Results - Earnings Call Transcript
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
Good morning, and thanks for joining us. I'm here today with Lisa McDermott, our CFO; and Frank Moschella, our Corporate Controller.
We'll review the quarter and our outlook, but before I do that, I'll provide my assessment of the company, generally where we are and what we need to do after a couple quarters of experience. I came to Pall to build a company that's among the most respected in the world, and we have the potential to achieve that level of performance and the respect that comes with it. I visited most of our facilities around the world and met with many employees at all levels and positions within the company. I've also gotten lots of feedback from customers and suppliers. These meetings have reaffirmed my impressions of the company's opportunity. I see a very strong long-term value creation opportunity, and I stress, I'd like you to think about it that way as well. We have a lot of organization and operations foundation work to do over the next couple of years, but we'll get there. We also are focusing on taking waste out of the system and improving our cost structure now, particularly given some of the market softness that we're seeing. The big picture, we serve highly attractive end markets, many with high barriers to entry. 2/3 of the sales are consumables that are largely nondiscretionary purchases. Our applications expertise is second to none, as is our global sales channel, and we have a great balance sheet to fuel growth. Pall employees are highly committed to our success and hungry for change. All of this provides a great platform to build on.
We're beginning to execute a more focused company-wide agenda around people, process and technology. And so a little bit on each of those core components. We've changed our executive compensation plan, new metrics and key goals to align the top of the house with growing the company, improving our free cash generation, executing our focused agenda and driving total shareholder return. So a better pay-per-performance system that we will cascade to the organization. We continue to deploy resources into higher growth markets. The increase in SG&A spend reflects this, as we have the transitional overhang from making these investments, while we continue to execute on cost reduction efforts in lower growth markets. We've begun to implement organization and operational changes intended to improve our fixed cost structure and drive operational effectiveness. One that you may have seen in the release last night that impacts our external reporting is the alignment of Machinery & Equipment with Energy & Water under common management. These Pall markets with their connection to infrastructure are among the early beneficiaries of economic development around the world. A lot of their growth and market potential is in emerging markets. Also, these businesses are all similar in that they are the most capital-intensive product profiles that we sell. We believe that the combination will enhance our ability to accelerate our efforts to strengthen contract management, strategic pricing and to ensure that the consumable annuity pull-through potential does exist. So in other words, it's to improve our ability to sell and design systems that we can make money on and ensure that the follow-on consumable opportunity is real.
In general, we have a lot of work to do to drive consistent operational execution, particularly in supply chain and manufacturing operations. We've begun to add seasoned executives to the team to lead operations, strategic sourcing and IT.
And now moving on to process. We are very pleased that we have successfully fully deployed our ERP system. The Americas, the last phase of our global initiative, is now operational. It has been a major endeavor, and I would like to take this opportunity to acknowledge the tireless dedication that the core group has exhibited over the past several months to prepare and execute this critical step toward a global enterprise system. And we now have a global transactional system in place that can provide end-to-end visibility into the business. It will be a key enabler for moving forward with process improvements to achieve our Pall enterprise objectives.
In technology, our team is making real strides toward improving product developments and the time to market for new products. We still have a lot of work to do to improve our total product vitality, but we are now on our way, and you will hear more about this over time. And we closed on an acquisition last week of a small company that we had previously announced. ForteBio is a good strategic fit with technology that accelerates development and validation processes associated with biotech research. We welcome the ForteBio team to the Pall family. And we are implementing a corporate business development team with acquisition-integration capability, which will enable future acquisitive growth. Our investments will be disciplined and thoughtful to enhance our organic profile.