Twin Disc Inc (TWIN) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you so much for standing by. Welcome to the Twin Disc, Inc. 2009 first quarter financial results conference call. (OPERATOR INSTRUCTIONS)

I'll now turn the conference over to Mr. Stan Berger. Please go ahead.

Thank you. On behalf of the management of 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 Company's fiscal 2009 first quarter financial results and business outlook. Before I introduce management, I would like to remind everyone that certain statements made during the course of this conference call, especially those that state management's intentions, hopes, beliefs, expectations or predictions for the future are forward-looking statements.

It is important to remember that the Company's 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 10-K, 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 [Annette Mianacki] at 262-638-4000 and she will send a copy to you. Hosting the call today are Mike Batten, Twin Disc Chairman and Chief Executive Officer; John Batten, President and Chief Operating 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 Batten. Mike?

Thank you, Stan, and good afternoon, everyone, and welcome to our first quarter conference call. As Stan indicated, I will start with a brief statement and then Chris, John and I will be available to answer your questions. Sales for the first quarter were $72.7 million compared to $73.6 million for the same three months a year ago. Foreign currency translation favorably impacted the current quarter by $4 million. Demand from the commercial marine and mega yacht markets remained high during the quarter. However, first quarter sales included fewer oil and gas transmissions compared to the very robust demand for these products experienced in the same quarter last year.

Our international operations performed very well and partially offset the results we experienced at our domestic operation. Our Asian and European operations had strong quarters, reflecting our geographic diversity. Shipments in the first three months were also impacted unfavorably by the implementation of a new ERP system at our domestic manufacturing operations that caused delays in shipments during July and August. The Company began shipping at normal rates in September. Gross margins as a percent of sales for the current quarter were 27.6% compared to 32.4% in last year's comparable period.

Profitability for the current three months was impacted by lower volumes, unfavorable product mix, higher material costs, and higher pension expense, partially offset by pricing and expanded outsourcing. Specifically, margins were hurt due to fewer oil and gas transmissions being shipped versus last year and due to one-time shipping delays related to the implementation of the ERP system. Marketing, engineering and administrative expenses as a percentage to sales were 22.5% for the current first quarter compared to nearly 20% in the same period last year. First quarter 2009 expenses were unfavorably impacted by foreign exchange translation, higher corporate IT expense, higher pension expense, and an overall increase in salaries and benefits. Net earnings for the fiscal 2009 first quarter were $2.5 million, or $0.22 per diluted share compared to $5.1 million, or $0.44 per diluted share a year ago. As a record -- against a record first quarter performance last year, the current first quarter reflected unfavorable comparisons of both lower shipments of oil and gas transmissions, as well as delayed shipments of product due to issues related to the implementation of the new ERP system.

Turning to our financial condition, Twin Disc maintains a strong financial balance sheet with excellent liquidity. The Company has $14.9 million in cash and $55.2 million of debt for a total debt to capitalization ratio of 30.7%. The recent financial turmoil has not yet had an impact on our business and we are actively monitoring the situation. Our six-month backlog stands at $118.6 million compared to $112.3 million a year ago. We continue to have a good order intake and we continue to be cautiously optimistic about our prospects for the balance of the fiscal year. That concludes the prepared remarks for today, and Chris, John and I are ready to take your questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question is from the line of Peter Lisnic with Robert Baird. Please go ahead.

Good afternoon. It's actually John Haushalter on for Pete. Just question for you guys with the margin and the ERP -- the ERP system. But is it safe to say that the gross margin improved in September once shipments kind of resumed their normal rate?

That's correct.

And would those on a year-on-year basis, when you guys closed the books for September, was there a degradation there or was it really pretty comparable year on year?

Fairly comparable.

Okay. Thank you. And then turning over to the oil and gas transmission business, if I remember right, that's a longer production time business where it doesn't initially go into your backlog, I think. How much -- you said orders were up, but how much business did you book there that is going to happen in kind of the fourth quarter of fiscal '09 or fiscal 2010?

Well, the -- we are seeing order intake. Some of the orders for the oil and gas transmissions are falling into this fiscal year, but some are falling out into fiscal '10.

John, this is Chris Eperjesy. The number that we reported in the press release would only relate to the six-month backlog, so would not relate to the stuff that Mike referred to that was beyond that.

Okay. Fair to say that's probably the majority of the orders you kept for oil and gas transmission fall outside that six-month backlog number?

We are prepared to ship before the six-month period for certain oportunistic orders, but normal lead times would have them fall outside going forward, outside of the six-month backlog number.

Okay, and then just following up on that a little bit, my last question, just with the kind of the fall in oil prices, the last kind of 40 days or so, have you seen a difference in kind of quoting activity or just interest from customers in kind of upgrading their fleets to higher horsepower transmissions?

John, do you want to take that?

No, no, we haven't. We actually in the last, I would say three to four weeks have seen an uptick in the order activity, basically requests for quote, lead times and things like that. There's actually been an increase.

Okay, and is there -- it seems a little counter intuitive. Is there any reason you would attribute to that, or is it just kind of just people are busier than you would think or -- any thoughts behind why that is?

Well, it's, it's a global activity and I think people -- my opinion is that people think that this -- the down, the downturn in oil prices is a temporary phenomenon. How long that temporary phenomenon is, no one's sure, but it's just temporary.

Okay. Thank you. I'll get back in queue.

All right, thank you. Our next question's from the line of Rob McKenzie with [Lafitte Capital]. Please go ahead.

Hi, guys. First, I would like to congratulate you on what I think was a lot stronger revenue quarter than I expected. You talked about mix some in the quarter, is there a way you can quantify the differential in the mix Q1 versus say the mix in Q1 of last year, what the percentages were amongst the oil and gas business versus the marine business?

Hi, Paul. Nice to have you on this call. The -- we don't normally break out the specific mix information other than to call attention to it. Clearly last -- first quarter of 2008, a year ago, we had a lot more oil and gas transmissions ship than we obviously did in the first quarter this year. So that falloff in comparison works adversely of course in the current quarter. But having said that, the order activity has increased in oil and gas, as John has spoken. The other component of -- which could be mix, is the fact that we had the ERP system shipment delays that impacted first quarter shipments and these were largely service parts and industrial products that were impacted by the shipping delays because of the new system. So we had unfortunately the margins associated with service parts are larger than normal and our unit side of the business and that contributed to the adverse product mix in the quarter.

Well, everything else being equal then, kind of looking at your service stuff, which I'm not sure whether or not it goes through backlog, but if it slipped out of Q1, one would assume it slipped into Q2. And with the six-month backlog as strong as it is, would that indicate, without forcing your guidance, that if you look at Q2, at least from a revenue perspective, you ought to be looking at a stronger performance than in Q1 or in Q2 of last year?

Well, one could say that and actually we are, as we say in our outlook generally cautiously optimistic. Our, our optimism derives from the fact that we do see our backlog strengthened. We see the point that you just made, that some of the shipments that were not shipped in the first quarter will be shipped in the second quarter and beyond. And so there are obviously as well, inquiries on our order intake for oil and gas and as we pointed out in the press release, our marine markets remain strong and activity outside the United States remains strong, so a number of things are going -- continue to go well for us and that's why we maintain the outlook that we have.

This is hard data to get, but I'm sure you guys look at it, but do you look at the international shipyards that are building the mega yachts, have you guys heard anything that would lead you to believe that the turmoil that's going on out there for the average Joe is having any impact on the billionaires that are building these boats, any kind of signs of cancellations or any flags for alarm that we should be watching?

Well, I'm going to turn it to John.

Hi, Bo. We haven't heard of any specific issues. I know that shipyards are moving their schedules around. About the only thing that we see is that the, the pleasure craft worries kind of maybe crept up a little bit on the horsepower side, but as far as specifics through a shipyard or customers based on the financial crisis, we haven't seen anything in the last three weeks, four weeks that would say it's any worse. There were pleasure craft yards in trouble before the financial crisis just on the general downturn.

Right.

We don't have any specifics based on this current crisis, not to say that there might not be something out there and we're actively looking, but we haven't come across anything yet.

But would a fair conclusion be the main yards that you guys are dealing with are still out there backlogged for several years?

We believe so. The [Feretti Group], Azimuth in Italy are well positioned. I think they are very financially stable. We don't see anything in those big yards. Sun seekers, no.

All right. Well, thanks a lot, guys.

Thanks, Bo. Michael?

Thank you. Our next question's from the line of Paul Mammola with Sidoti & Company. Please go ahead.

Hi, good afternoon, guys.

Hi, Paul.

Could you give us a sense in order of magnitude a few things that you listed in terms of materials, product mix and volume, which was the most adverse, or which had the most adverse effect on cost of goods sold?

In terms of volume, mix and so on?

In materials, yes.

Yes. Well, I think that when you're going to compare the first quarter this year versus last year, is that correct?

Yes, but I guess it would be interesting to hear what you have to say on 4Q, fiscal '08 as well just because you would expect higher marine sales to have an effect on margin, but not to the extent of 200 basis points.

Yes. The major impact on our profitability or our gross margin came from the adverse comparisons of having oil and gas transmissions out of the out of the mix or reduced in the mix in the first quarter. That was, that was impact number one. Impact number two was the second component of the product mix and that was the delayed shipments of profitable aftermarket parts and other industrial products. Number three would be the volume impact. It's a little bit slower in the summer. And then material charges or price increases had an impact, but that's, that we see is now beginning to moderate.

Okay, thank you. That's very helpful. So I guess would it be fair to say that given strength in the marine going forward, is it fair to say this really is a 30% gross margin business and that most of this is one-time in nature. And if so, is there anything in this quarter that we can quantify as one-time?

I'll ask Chris to comment on the one-time, but to your first part of your question, the business is still moving forward at a 30% gross margin basis. Chris, do you want to comment?

Yes, regarding the one-time comment, I think the only item that I would classify as one-time is the disruption that was caused by the implementation of the ERP in July and August.

Okay. Is there any--?

When you look at the typical first quarter versus another typical first quarter.

Is there any number on that by chance, Chris, in terms of any ERP effect?

We haven't quantified it, but it had a significant impact.

Okay, and just one more thing. If you look back to '01, '03 or the last slow manufacturing periods in the US, sales are pretty stable for you guys, which is certainly positive. But you see costs start to creep. I guess is there anything that you can mention that could help you cut costs, besides ERP, I guess more on the lines of ME&A going forward?

Well, we are watching very carefully our ME&A expenses, Paul, and the, the key things there that impact us are obviously we had some FX impact. We had some increase in pension expense impact. We are probably going to see an offset on stock-based compensation in that regard. I didn't mention also a delta on corporate IT expense. So the bad guys are FX, IT expense and expense -- pension expense. The offsets to that going forward would probably be stock-based compensation of -- and -- Chris, am I--?

No, you're right on.

Okay. So we do have some modest increase, inflationary increase in salaries and benefits, but we are looking very, very closely at our spending in this financial environment and doing everything to control our costs to make sure that we aren't overspending in that regard.

Okay. So phrased differently, do you think this business should be running at around 22.5, 23% ME&A of sales, or do you think that maybe that's the high watermark for the year?

That, that's a higher number, we think, Paul.

Okay.

We should be running under that.

Okay. Thanks for your time.

You're welcome. Michael?

Thank you. [Elliott Blouth] with RBC Wealth Management. Please go ahead.

Good morning. Most of my questions have been answered. Maybe I could ask this in a different way. If we were to quantify the ERP would $0.10 to $0.12 out of this quarter be a reasonable assumption?

Elliott, that would be in the ballpark.

Thank you. Otherwise, I'm fine. Thanks.

Thanks for your input.

All right. (OPERATOR INSTRUCTIONS) Abbott Keller with Kestrel Investment Management, please go ahead.

Yes, I was wondering about what your thoughts were on share repurchase going forward?

At this point in time, of course the window is still closed and will be for most of this week. We do have some free board in our lines of credit and we will be looking at the, at the markets and whether we should be in the market or not as we go forward. We also want to make sure that we have free board for our external growth program, which maintains on an active status. So it will be a balance of between those two items.

Okay. Thank you.

You're welcome.

All right. Thank you. I'm not registering any further questions at this time. (OPERATOR INSTRUCTIONS) We do have a follow-up from the line of Paul Mammola of Sidoti. Please go ahead.

Hi, guys. Sorry. Has there been any correspondence with Marshall & Ilsley in terms of the revolver, any color there, I guess?

I'll turn it to Chris.

I mean it's business as usual, I would say. We've had conversations with them, obviously as the crisis has been ongoing, but our revolver continues in place and exists, or the expiration date is another two years out and at this point, as Mike mentioned, we continue to have capacity on that revolver and so nothing's really changed as a result of what we're seeing in the marketplace.

Okay. That's helpful. Lastly, on CapEx, what's the expectation for that for fiscal '09 and does that come down a bit due to ERP finally getting wrapped up?

Well, the actual planning for this fiscal year is probably about the same level as we've spent last year, roughly $15 million. We are watching that as events unfold, but at this point in time, we're looking at that kind of spending level fall.

And what are the main uses there, Mike? Because it's running quite a bit ahead of D&A.

What we are doing is, quite frankly, investing in our core competencies and our factories both here and abroad and I'll just leave it at that for the moment, but it's basically assisting us to improve our productivity. As you know, when you walk through the plant, we had a number of significant new machine tool purchases which basically with one machine taking two, three, even four older machines out of production, it's that kind of productivity improvement that we're investing in both here and in our plants overseas.

Okay. Good enough. Thanks again.

All right. Thank you. And a follow-up from the line of Rob McKenzie. Please go ahead.

Yes, how much is left on the revolver, and correspondingly, given the massive declines in valuations of everything in the course of the last month or so, are there things out there that you might be able to add?

Bo, you were talking about how much is left on the revolver?

Yes.

It's $10 million that we have free board at this point.

Right.

Is there anything else that you've got wound up in the available credit facilities? For example, say like a attractive like $50 million transaction were to come up, are facilities in place that could do something with that or would you--?

I'm sorry to interrupt you. Go ahead, complete.

If given the massive sell-off in valuations of everything in the world in the last month or so, what could you raise in the way of liquidity without having to go out and originate new debt or equity?

Well, it would require our having to go out and looking to talk to our lenders. We have very good relations with our vendors, both the M&I bank in Milwaukee, as well as Prudential who has our long-term debt, and at this point in time, we would think that we would have access for additional capital, albeit at a higher rate of interest, but at this point in time, we don't have the specific need. But should a specific need come up, I'm sure we could get access to the capital.

All right, and have you guys seen or even looked to see if some of the things you might have had on your want list have seen the valuations come down somewhat? Or is the private market not really connected with what's out in the public valuations yet?

Well, that's a good question, and we tend to look more, as you know, from our history, at private companies, and they are -- rather than the marketplace being the mechanism to instantly tell you what the current value is, you tend on dealing with people's perception of their own Company's worth. And so there's usually some delay in that occurring.

Right. All right. Well, listen, thanks a lot, guys.

Okay. Thanks, Bo.

All right. Thank you. Gentlemen, there are no further questions at this time. Please continue with any closing comments.

Okay. Thank you. That's it. We would like to thank you very much for attending this afternoon's conference. We appreciate your interest in Twin Disc and your following our Company. Again, if you have any follow-up questions that you think of after the call, please feel free to contact us at our offices in Racine. In the meantime, please enjoy your day and thank you very much. Thank you, Mike.

All right. Thank you. Ladies and gentlemen, this does conclude the Twin Disc, Inc. 2009 first quarter financial results conference call. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325, or 303-590-3030. Use the access code 3930325. Those numbers again, 800-406-7325 or 303-590-3030, the access code to utilize on either number 3930325. ACT would like to thank you very much for your participation. You may now disconnect. Have a very pleasant rest of your day.