Twin Disc Inc (TWIN) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Twin Disc Incorporated 2009 second quarter financial results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions.) This conference is being recorded today, Thursday, January 22, 2009.

I would now like to turn the conference over to Stan Berger. Please go ahead, sir.

Thank you, Brandy. On behalf of the management of Twin Disc, we are extremely pleased that have you taken the time to participate in our call. Thank you for joining us to discuss the Company's fiscal 2009 second quarter and six-month 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 you a copy. Hosting the call today are Michael 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 Michael Batten. Michael?

Thanks, Stan. And good afternoon, everyone. Welcome to our second quarter conference call. As Stan has mentioned, I will start with a brief statement and then Chris, John and I will be available to answer your questions.

Sales for the second quarter were $81.6 million, compared to $81.9 million for the same three months a year ago. Foreign currency translation negatively impacted the current quarter sales figure by $2.4 million and adjusted reported sales would have been just under 3% higher without that impact. Second quarter sales benefited from shipments that had been delayed due to the implementation of the new ERP system at the Company's domestic manufacturing facilities. Issues related to the domestic implementation of that ERP system have been successfully addressed and we are currently working on installing the system throughout our global operations.

We are pleased that second quarter results improved on those reported for our first fiscal quarter, even though we were not able to match the record operating performance of the second fiscal quarter of fiscal year 2008. In addition to the continuing softness in our oil and gas markets, we are now seeing softer demand in the mega yacht segment of the pleasure craft marine market. However, activity in our commercial marine and industrial markets continued at or above year-ago levels. Gross margin as a percent of sales for the current quarter was 28.1%, compared to 30.9% in last year's comparable period. Profitability for the current three months was impacted by unfavorable product mix, higher material costs, and an increase in domestic pension expense.

Marketing, engineering, and administrative expenses as a percent of sales were 20.8% for the current quarter, compared to 21.2% for the same period a year ago. ME&A expense benefited from a decrease in stock-based compensation expense as well as reduced accruals for domestic incentive programs. However, these benefits were offset by other costs related to severance, increased IT spending and higher pension expense. Net earnings for the fiscal year 2009 second quarter were $3.4 million or $0.31 per diluted share, compared with $4.2 million or $0.37 per diluted share for the same period in the prior year.

Year-to-date earnings were $5.9 million or $0.52 per diluted share, compared to $9.3 million or $0.81 per diluted share for the first six months of last fiscal year. Twin Disc continues to maintain a strong financial balance sheet with excellent liquidity. The Company has $11.2 million in cash, maintains a total debt to capitalization ratio of 31.1%, and has existing credit facility of $11 million available until October, 2010. Although we have experienced cancellations and re-timing of orders, our six-month backlog at December, 2008, was $106.3 million, compared to a $120.8 million at June 30, 2008 and $121.3 million at December 31, 2007.

Like many industrial manufacturers, we are experiencing softness in certain of our core markets, specifically the oil and gas and mega yacht segments. We now expect demand from the mega yacht segment of the pleasure craft market to continue to weaken for the balance of the year. This will impact the Company's propulsion and boat management systems product lines. Given the decline in the price of oil, future demand for land-based transmissions for the oil and gas markets remains uncertain while demand for vehicular transmissions for airport rescue and fire fighting, as well as military markets continues stable. Demand for the Company's industrial product line has improved year-over-year and activity in the commercial marine market is expected to remain steady. That concludes the prepared remarks for today and Chris and John, and I are ready to take your questions. Brandy, will you please open up the lines please?

Yes, thank you. We will now begin the question-and-answer session. (Operator Instructions.) One moment, please, for our first question. Our first question comes from the line of Peter Lisnic with Robert W. Baird. Please go ahead.

Good afternoon. It is actually John Haushalter on for Pete. Just have a couple of questions for you guys. First off, just with the ERP system being deployed worldwide, is there a potential for it to have similar disruptions to what happened in the US in the first quarter, if you're looking to the third or fourth quarter of this year?

John, the ERP system -- the next implementation will occur at the beginning of our new fiscal year, 2010, and I will let John pick up on that. We don't anticipate nearly the type of interruptions that we had at our domestic operations. We learned a lot with that implementation and are taking extra time with people that have been involved in the first implementation, as we roll it out at our other manufacturing locations, and then distribution operations. The most complicated and comprehensive implementation was the first one and the next one should be much smoother.

Okay. There is a true learning curve there where you guys are much more comfortable approaching the implementations in fiscal 2010?

Absolutely. The internal team will remain the same so they have had quite a learning curve in the last six months.

Okay. One more on the cost side before shifting to demand. But just on the materials cost front impacting you guys on the quarter, are you still seeing cost pressure there? Given the inventory turns, I know it is going to take a while to flow through if you're getting lower purchase prices right now? What is your outlook for the commodity costs or cost picture there?

We had -- a lot of the material cost increases that flowed into the second quarter are attributed to -- a lot of the surcharges and cost increases that we actually received physically in the first quarter, some slipped into the second quarter as we were getting all of those things through the system. We had -- as far as surcharges and commodity costs, they came down steadily in the second quarter. We had a bit of a blip in December which we will be circling around to tackle. But we see hopefully that certainly surcharges on steel and other metals has started to come down quickly.

Okay. On the demand front, because you guys report six-month backlog, but you have a bit of visibility in the businesses for periods beyond that. To the extent that there has been a retiming or cancellation, has it all been basically pushouts or has the backlog beyond the six-month period been affected also?

The backlog, this is Mike again. The backlog has, in both cases, has moderated somewhat, both on the six-month which is reported as well as our total backlog. As you recall, most of our backlog beyond six months falls into the longer lead time items that include primarily vehicular -- I mean industrial kinds of transmission, both industrial and vehicular, as well as some longer lead time marine. We're seeing some moderation long term in both components of the backlog.

Okay. One final one and then I will let other people ask questions. On the reduced CapEx forecast that you put out there, just what -- is it just your anticipation of demand being a bit slower, given the softening of the marine market? Or what are you changing there in terms of cutting the CapEx forecast?

Well, we have been looking at where we need to have our CapEx closer in -- and than what we have commitments on. That's where we're going to be spending our money in the short term. That reflects what we indicated in the press release. What was cut back really reflects some longer term thoughts on some spending. By and large, they have just been moved out rather than canceled.

Okay.

The next fiscal year or -- and so on.

Okay. Just in response to the current end market of pushout to CapEx similar to most manufacturers at this point.

Right. We're watching our cash flow and moderating spending based upon that.

Okay. Thank you. I will get back in queue.

Okay. Thanks, John.

Thank you. And our next question comes from the line of Paul Mammola with Sidoti and Company. Please go ahead.

Good afternoon, guys.

Hi, Paul.

First, can you give us a sense what sales trends were year-over-year for marine versus the industrial markets? More specifically, were the oil and gas transmission sales significantly lower and then marine making up that short fall? Is that fair to say?

That is fairly accurate. The commercial marine globally, whether it is related to oil and gas or transportation, was stronger year-over-year. There has been a moderation down on the oil and gas pressure pumping transmission. But the makeup really -- that's accurate. Our industrial markets and commercial marine markets help make up in the second quarter.

Okay. That's helpful. And then on commercial marine, John, what are the contributing factors that are making that end market stable for you guys? Are there any specific examples you can give us?

I think one -- I think I believe we're gaining market share, specifically in Southeast Asia. We have a fairly strong market share in North America. I would also add I think we're gaining market share in the European market. But with respect to oil and gas, I still think there is the positive attitude that the current price of oil -- it will be here for the short term rather than the long term.

I agree. But given that, how about the Canadian markets on the oil side? Have you seen any material change there? Or are things still pretty depressed?

No, we haven't seen any. Correct. There has been no uptick there.

Okay. That's fair. And then have there been any discussions with M&I on the revolver at all in the interim or the last time we talked?

Paul, it's Chris. No, the agreement is in place until October of 2010. As we noted in the press release, we have available borrowings under that. Obviously, the interest rate right now is very attractive so we don't intend to do anything for the foreseeable future on that.

That's fair. And then finally, do you anticipate any further price action in the year? Or was the 6% increase all that is going to go on here?

We did -- we had a price increase July 1. We had the 6% in North America and a price increase in Europe. We will see where the balance of the year goes, but we anticipate any pricing action in the remainder of this fiscal year being much more challenging.

And then finally, just one more thing. Sorry. Oshkosh has seen increased military action as of late or military order, I should say. Is there any chance you guys get anything incrementally from that? And also, could you quickly outline what could happen if we do withdraw from Iraq and maybe anything you might get from that?

I think on the military front, Paul, we continue to receive orders for what -- as you know, we call the legacy kinds of equipment. We haven't seen anything specifically out of Oshkosh that I am aware of. John? No.

And with your question about Iraq, I think the scenario that is likely there is that to the extent that we would withdraw from Iraq, it is very likely that the equipment that is there would be left there, more or less. That doesn't mean we wouldn't bring some of it home. That would put the US military in a position of having fewer vehicles than they would want to have for any other ongoing support. We would expect that there will be some continuing demand. How much, we can't predict, but there would be continuing demand for military transmissions.

Okay. Thanks for your time.

Yes. You're welcome, Paul.

Thank you. (Operator Instructions.) One moment, please. An our next question comes from the line of David [Ellers] with Las Vegas Investment Advisors. Please go ahead.

Good morning, guys. And congratulations on a what I would think an excellent quarter, given the atmosphere that the world is involved in.

Thank you, David.

I'm just curious to know, have you looked at -- or have you been in any contact or is there anything you can tell you with regard to our new President's programs and how these might impact the business of Twin Disc?

We are looking at what President Obama's program is going to be and where it might impact our product line or future product planning. A lot depends upon where Congress will fund and how much they will fund and how quickly that money will get into the marketplace, of course. But we are actively looking at what we can on his initiatives and looking at directing ourselves to take advantage of anything that we can.

Thank you very much. Again, congratulations, guys, on -- this quarter is excellent given the worldwide economics.

Thank you. We appreciate it. Thanks, David.

Thank you. And at this time, we have no further questions in the queue.

Okay. Thank you very much, everyone, for your participation and for taking time today out of your schedule to visit with us on our results and outlook. We look forward to chatting with you again in three months time. Thank you.

Thank you. Ladies and gentlemen, this concludes the Twin Disc Incorporated 2009 second quarter financial results conference call. This conference will be available for replay.

You may access the replay system at any time by dialing 303-590-3030 or 1-800-406-7325 and entering the pass code of 396-1116. Thank you for your participation. You may now disconnect.