Twin Disc Inc (TWIN) 2008 Q1 法說會逐字稿

Good afternoon, Ladies and gentlemen, and thank you for standing by. Welcome to the Twin Disc Incorporated 2008 first quarter financial results conference call. At this time all participants lines are in a listen-only mode. And during the presentation today, you will be given a chance to ask questions. Instructions will also be given at that time. (OPERATOR INSTRUCTIONS) . As a reminder this conference is being recorded today, Tuesday, October 23, 2007. At this time I would now like to turn the conference over to our host, Mr. Stanley Berger. Sir, you may now begin the call.

Thank you, Craig. On behalf of the Management at Twin Disc, we are extremely pleased that you have taken the time to participate in our call, and thank you for joining us to discuss the companies 2008 first quarter financial results and business outlook.

Before I introduce the management, I would like to remind everyone that certain statements made during the course of this conference call especially those that states management s intentions, hopes, beliefs, expectations, or predictions, or the future or forward-looking statements. It is important to remember that the companies actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company's Annual Report on Form 10K. Copies of which may be obtained by contacting either the Company or the SEC.

By now, you should have received a copy of the news release, which was issued this morning before the market opened. If you have not received a copy, please call Pauline Collins at 262-638-4000, and she will send a copy to you. Hosting the call now are Michael Batten, Twin Disc Chairman, President, and Chief Executive Officer, and Chris Eperjesy, the Company's Vice President of Finance, Chief Financial Officer and Treasurer. At this time, I will turn the call over to Mike. Michael?

Thanks, Stan, and good afternoon, everyone and welcome to our first quarter conference call. We hope that you'll find this session informative. As Stan Berger has indicated I will start with a brief statement and then Chris and I will be available to answer questions. As you will all have read by now, Twin Disc reported record first quarter results and the Board of Directors increased the dividend by 27% and split the common stock 2 for 1. Sales for the quarter improved 11.9% to 73.6 million from 65.8 million last year. The net impact of foreign currency was to increase sales by 2.4 million in the quarter with the result that organic growth was 8.2%.

Gross margins improved to 32.4% from 30.9% in the year ago quarter where the gross margin was adversely impacted by an unfavorable purchase accounting adjustment to inventory in the amount of $734,000. Net earnings for the three months were up 39.1% to 5.1 million or $0.88 per diluted share from 3.7 million or $0.62 per share a year ago. For the three months, EBITDA increased 33.3% to 10.8 million compared to 8.1 million in the same period a year ago. As indicated in our release, we are pleased with the results of the first quarter. Sales of our land based transmissions for oil field and military applications matched last years first quarter base , while sales of our vehicular transmissions for use in airport rescue fire fighting vehicles were up for the quarter; however, industrial products continued to experience some cyclical softening in the three months. On the marine side of the business, we continue to see strong demand for our commercial and pleasure craft marine products in the quarter. Sales of our commercial marine gears into our Southeast Asia and U.S. Gulf Coast were particularly robust. In addition, marine propulsion system sales into the Italian Mega Yacht market continue to expand versus the same period last year.

Looking ahead, we expect that fiscal 2008 will be another good year for Twin Disc. Our backlog of orders to be shipped over the next six months stands at 112 million, up 12.1% from the same period last year and up 2% compared to fiscal year 2000 year-end. As indicated in our releases the Board of Directors voted to increase the quarterly dividend by 27% to $0.14 per common share from $0.11 per share payable December 3, 2007 for shareholders of record November 9, 2007. The Board also split the stock 2 for 1, effective January 2, 2008, for shareholders of record December 10, 2007. That concludes the prepared remarks, and now Chris and I will take questions. Craig, you can open up the lines.

Certainly. (OPERATOR INSTRUCTIONS). Our first question comes from the line of Harris Hall with Singular Research. Please go ahead.

Congratulations, gentlemen, on the quarter.

Thank you, Harris.

Just so you know I'll be taking over coverage from Joseph on your stock, so I'm still a little new to the name. I was wondering, is there any cyclicality to your business?

Yes, there is cyclicality to our business, and we have been in the capital goods industrial along and find that we are subject to certain swings as the economy varies as well.

I guess I misspoke. What I meant was seasonality in your business.

I'm sorry.

Yes, it's my fault.

There is a certain amount of seasonality that comes into play. Typically the Summer months have in the past been at somewhat lower sales and earning levels due to the fact that our customers and some of our operations have vacation shut downs.

The Summer months are generally lower?

That's correct, yes. So first fiscal quarter.

Okay, and you mentioned in your release that transmissions for oil field and military applications were flat with last year. Can you elaborate on what those are a little bit?

The transmissions that we supply the oil field are high horsepower, 3,000 horsepower style transmissions that are used in fracturing rigs that are part of well servicing activities. The transmissions that we supply the military in large measure at this point go into what we call our Legacy Vehicles. These are applications such as the M88 tank retriever that are in the fleet, the government fleets at present and we supply new vehicles to those existing fleets or to remanufacture transmissions for vehicles that come out of the fleet for remanufacture and updating.

But those are more kind of repair and renewal than new military sales?

That's correct, though we do participate periodically in new military contracts.

But you do have a marine military business?

We do, yes.

Which is a separate division in this?

Well, not division but it is a separate activity and we participate and supply transmissions and other propulsion systems for patrol boats primarily.

Okay, and do you generally file your 10-Q within a couple days of the release or when should we expect that?

The Q, it's going to be the second week in November and I don't have the date in my head. I believe it's the 9th. We generally file it when it's due, so it would be November 9th.

Okay, and then just lastly you mentioned you see cyclical softening in the industrial products. Can you elaborate a little bit on that?

Yes. The products in question typically are power take-offs and industrial clutches that are power take-offs that basically is a industrial clutch for application on diesel engines used in applications such as recycling, tub grinding, wood chipping, those kinds of activities, quarrying activities and irrigation activities. They're following a run up associated at the aftermath of Hurricane Katrina. Sales have subsided in this sector.

So the clients, who would be typical clients to these products?

The industrial products would be our own distributors who in turn sell them to engine manufacturers for fabrication into irrigation units and things like that or they may be people like Morbark or Peterson who make equipment for recycling activities.

Okay, great. Thank you very much for answering all of my questions.

You're quite welcome. Craig, next one?

(OPERATOR INSTRUCTIONS). Our next question comes from the line of Jordan Grayson with Outpoint Capital.

Hi. Wanted to know about the linearity of the quarter, how your revenues kind of broke down between the months, whether the end was stronger than the beginning?

Yes. Our months can fluctuate and the quarter had its best month in August. July typically is a start-up month that includes our vacation schedules. We have a plant shut down. August is more of a straight forward month. September is somewhat affected by the Labor Day weekend, but August was our strongest month.

And that's typical with previous years, nothing changed this quarter over what you might have seen in a typical Q1 and previous years?

The months can bounce around. The year before, we had August as a slower month and September as a better month domestically. Overseas, our facilities tend to see July and August as a vacation month for Belgian and Italian operations in particular, so September is their best month in the quarter, so we tend to see some fluctuation but all in all, this year , perhaps a little softer in September versus last year but that would be it.

I have another question, your former President and COO received a $0.5 million retirement payment I saw in your proxy. What quarter was that paid in from last year, and I assume that his commentation won't be recurring this year?

I believe that would have occurred in February '07 and let me see, that was the first, he retired in July and he would have another payment due in February of '08.

Is that a similar size?

Roughly comparable.

Okay. And public company expenses, should we expect these to be going up or down, just looking at some more numbers from your proxy, from this year over last year and trying to get an idea of what or how to model G&A.

You're talking about the public company?

Like directors fees of 450,000, audit of 860,000, tax of 500,000.

These should be about the same and flat with last year.

And do you guys have, I understand you have owned property in Wisconsin for a long time now. Do you have a sense for what the fair market value of the property in Racine might be?

Not off the top of my head. Chris?

We do, also not off the top of my head. Obviously we get that valuation done from time to time for property tax purposes but I don't have it off the top of my head. But you don't adjust that on the balance sheet at all?

No.

And when was that acquired? Around what time?

The earliest was 1918. For one facility, 1956 for the other in Racine.

Okay, great. Thanks, guys. Great quarter. Appreciate it.

Thank you. Next question, Craig?

Our next question comes from the line of Wey [Lee] with White Box. Please go ahead at this time.

Hi, guys, good quarter.

Well, thank you., Wey.

I'm actually quite impressed to see your commercial marine product and pleasure craft is doing quite well compared with the rest of the boat builders. Can you elaborate a little bit more on that and what are you guys selling to Asia at this point?

Let's split the markets. In our commercial business, we are selling primarily marine transmissions into the U.S. Gulf Coast, oil field, offshore oil market and these are crude and supply boats. The same is true for Southeast Asia. Our Singapore office is very active in the marine market and oil and other work boats in the area, fishing boats and other work boats are also very strong at the present time, so that's what's driving our commercial business. Other factors would also include push boats, tugboats, and the like are also applications in the commercial area.

On the pleasure craft side, we're seeing a good demand from the mega yacht market which would start at about 60 to 70 feet upwards up to approaching 300 feet in length and here, we sell a whole portfolio of products including marine transmissions of various propulsion systems and boat management systems reflecting acquisitions that we've made in recent years, so both of these markets, the commercial markets and the upscale pleasure craft marine markets are doing very well at the present time.

Great. So you guys are seeing acquisitions you're making last year start to pay off right now as the buyers by it like a single product?

Right. We are seeing pay off on our acquisitions especially Italy, the Italian market is the largest mega yacht market in the world today. It surpassed the U.S, It would be Italy, U.S, And Great Britain are the three major markets, but especially in the Italian market with the integration of our acquisitions, we are able to go to market now in a very concentrated way and it's paying dividends for us.

Great. One more macro question for you guys for obviously had a blockbuster '07 and you're saying '08 will be another good year. How should we think about this? Is '08 going to be like better than '07? I don't want to put you on the spot but just giving some flavor for modeling purposes what should we think about?

Sure. We've indicated that '08 was going to be another good year for Twin Disc and we had some discussion at the last conference about what sort of growth rate was appropriate and that growth rate basically sorted out in this quarter, which we confirmed our expectations that we are seeing moderating growth but still growth, so we're off the double-digit growth rates that we had in '07 and we're in a more moderate single, high single-digit growth rate this year.

Okay, that's very good to hear, thank you. Final question is on currency. It seems that the majority of your product has, you will benefit a lot from the U.S. dollar depreciation but also at the same time you have some dollar exposure too, but in general, if we're seeing U.S. dollar coming down against other currency, it's good for you guys, right?

Yes. The weaker dollar is good and we've got a foot in each canoe so to speak, because the dollar, the weaker dollar obviously favorably impacts products produced in the U.S. and at the same time, it adversely impacts the competitiveness of European produced products in the U.S. market. If the dollar were to strengthen, we would see a reverse equation working. The U.S. products would be less competitive in World Markets and the European products would be more competitive, so we get both sides of that coin working simultaneously.

Okay, great. That's all I have. Great job, guys. Thank you.

Thank you. Craig?

Our next question comes from the line of Ephraim Fields with Clarus Capital.

Hi, good afternoon. I was a little confused by an answer you just gave about the properties that you have in Racine? Could you just repeat what your answer was?

Yes.

The 1918 and the 1956?

Correct. We have a building in which our corporate headquarters is located and we have a plant below it on the first floor and that building was started in 1918, expanded through the next decade to take up the present location that we have right now. In 1956, the Company established a second facility in the western part of the city for a second plant location here in Racine, and that's where we produce our marine and land based transmissions.

Got it. So it looks like on your books you have those facilities on your books for like a $1 million and I assume they haven't been brought up to fair market value since either 1918 or 1956?

The last part of your statement, this is Chris, the last part of your statement would be correct. I'm not so sure about the first part because I'm not sure we were getting the $1 million from. If you're just taking it from the balance sheet that would include all of our Company owned land around the world.

Yes, no, I just went back and pulled up quickly an old 10K, but okay.

Okay.

My next question I was just trying to freshen up my cash flow analysis and Mike, I see you were paid $3.5 million last year. Do you happen to recall how much of that was cash and how much was non-cash?

The question again, Ephraim?

You were paid, Mike, $3.5 last year, and I'm trying to understand how much of that was cash and how much was non-cash.

I haven't got the numbers specifically in my head, but the round numbers are that I had roughly 450,000 in salary, another approximately 450,000 to 500,000 in bonus, and 800-- another 300,000, so that would be say a 1.3 million in cash and the rest would have been in stock.

Okay, great. And my final question just has to do with I see that the Board members were reimbursed about $10,000 a piece for spousal travel. Could you just tell me what that related to?

We took the, part of it pertains to normal travel of Directors coming in from their various locations --

Forgive me for interrupting you. This was just reimbursing for spousal travel, not their own travel.

Yes, okay, and I'm sorry, and then there was a trip to visit our operations in Europe.

So you flew the Directors wives out to Europe?

Yes.

Okay, thank you for your answers and terrific quarter.

Thank you. Craig?

Our next question is a follow-up question from Harris Hall with Singular Research. Please go ahead.

Thanks. I was wondering if you could comment a little bit on raw material price pressures you're seeing in gross margin terms ?

Well, we are seeing some acceleration in surcharges that have been occurring in various metal markets, and but we have been able to offset those increases increases price realization or through aggressive outsourcing to lower cost countries.

So would you describe the 32.4% gross margin in Q1 as kind of indicative of where you expect to end the year or higher or lower?

Well, it's in the range of what we are looking to achievement we could see impact as it relates to product mix but we are working on programs to as I say offset through price realization or outsourcing to maintain margins.

By price realization you just mean charging higher prices ?

That's correct.

Okay. Thank you very much.

Uh-huh. Craig?

(OPERATOR INSTRUCTIONS). Gentlemen at this time there do not appear to be any further questions. Please continue with any comments you may have.

Okay, Craig, thanks very much and ladies and gentlemen, I appreciate your participation in today's meeting, and we look forward to the next meeting which would be scheduled in the third or fourth week of January. Thank you.

Thank you. Ladies and gentlemen, that does conclude or conference call for today. If you wish to listen to a replay of this conference you may do so by dialing area code 303-590-3030, or for international participants 1-800-406-7325. You will need to enter the access code of 3793131. This conference will be available after 2:00 p.m. Eastern Daylight Time today. Once again those replay numbers are 303-590-3030 or 1-800-406-7325 with the access code of 3793131. We do thank you for your participation. You may now disconnect your lines at this time.