Twin Disc Inc (TWIN) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Twin Disc 2009 third 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). For participants using speaker equipment, it maybe necessary to pick up your handset before making your selection. This conference is being recorded today, Tuesday, April 21, 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 you have taken the time to participate in our conference call, and thank you for joining us to discuss the company's fiscal 2009 third quarter and nine 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 states 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 maybe 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 [Mianaki] 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 Mike. Michael?

Thank you, Stan, and good afternoon, everyone.

Welcome to the third quarter conference call. Stan has mentioned I will start with a brief statement and then John, Chris and I will be available to answer questions. Sales for the third quarter were $69.3 million compared to $85.8 million for the fiscal 2008 third quarter. Foreign currency translation negatively impacted sales by $2.9 million for the current three months. Going into the third quarter. we knew that Twin Disc was not immune from the challenges facing the global economy.

While we saw signs of softening in certain markets such as oil and gas as early as the first quarter, our overall business remained firm; however beginning in February and accelerating during the remainder of the third quarter, we experienced a significant downturn in volumes and orders in the mega yacht market and an order reversal in the industrial market that we had not experienced during the first six months. As the slowdown developed in these markets, we began to process of aligning our global cost structure with the changing business levels, including reducing production primarily at our European operations, which are closely tied to the mega yacht marine markets, as well as adjusting employee and inventory levels at our subsidiaries. We will continue to take appropriate actions to manage our cost structure, to maintain a level of profitability that we feel the Company can achieve during slowing sales.

On the other hand, our market diversity and niche market focus has helped us somewhat to insulate Twin Disc from the impact of the global slowdown, as certain of our markets actually experienced growth in the third quarter. Sales to the patrol boat and commercial marine markets were up during the quarter and in addition, demand for airport rescue and fire fighting vehicles has remained good, and we continue to benefit from market share gains at one of our major ARF customers as well as from their increasing success in the global marketplace. Gross margin as a percentage of sales was 27.6% in the current quarter compared to 31% in last year's comparable period. Our gross margin was negatively impacted by lower sales volumes, unfavorable product mix, increased warranty and pension expense, as well as the impact of foreign currency translation.

Marketing, engineering and administrative expense as a percentage of sales was 21% for the third fiscal quarter compared to 17.4% for the same three months a year ago. Due to a significant reversal of an accrual for stock based compensation in the third quarter of fiscal 2008, amounting to approximately $2.3 million, have reflected the decline of our stock price during that quarter a year ago, stock based compensation expense for the current quarter was $2 million higher. This was partially offset by a reduction of $1.5 million in accrued bonus compensation and $824,000 for foreign currency translation.

Net earnings for the fiscal 2009 third quarter were $2.9 million or $0.26 per diluted share compared with $7.9 million or $0.70 per diluted share for the same period last year. Our Balance Sheet and overall liquidity remained strong. The Company had $12 million in cash, maintained a debt to total capitalization ratio of 33.2%, and has funds available under an existing credit facility of $35 million credit revolver until October 2010. Our six-month backlog as of March 27, 2009, was $81.5 million compared to $120.7 million at the beginning of the year and $125.7 million at the end of March 2008. While expected to be down, the acceleration of the decline in our backlog during the past two months was disappointing.

Although it was difficult to predict the extent of the downturn on our business, we remain committed to serving our niche in Global Markets with exceptional products and services. They're optimistic that once the global economy stabilizes, we will be in an improved competitive position with differentiated products to offer our existing and new customers. We are introducing three new products for production in fiscal 2010. Specifically we have developed a new hybrid ready marine transmission that helps lower the environmental and noise pollution a boat makes operating a low power RPM, a joystick control system combining Twin Disc electronic and BCS Boat Management Technology, that will compliment our existing quick shift marine transmissions, and finally, a new 7500 Series transmission designed for use in the oil and gas market for pressure pumping applications in the 1800 to 2250-horsepower range to compliment our 8500 series transmission.

That concludes my prepared remarks, and John, Chris, and I will be happy to take your questions now. Brandy, you can open up for questions.

Thank you, sir. We'll now begin the question and answer session. (Operator Instructions). Our first question comes from the line of Paul Mammola with Sidoti & Company. Please go ahead.

Hi, good afternoon, guys.

Hi, Paul.

Can you quantify for us how much in cost you've taken out of the business thus far?

Well it's difficult to quantify the specific costs but what has been taking place is that in our European operations, we've Incorporated both Shomaj and Casa Integrazione and John, you might want to speak to what's happening there. Yes, Paul. It's a variable staffing level, in Italy, it's both for the hourly and the salaried group and in Belgium, as of the moment it's just for the hourly group and we can go up to 50% either Shomaj or Casa Integrazione where we pay for the time but they're in the plants and the government picks up 80% of the remaining time that's out of the plants. Both in Belgium and in Italy, we started that process during the third quarter, and to initiate the process you have to go through vacation time, where employees use their vacation time first so it really didn't kick in that much in the third quarter at all. It's going to be a fourth quarter activity and then going forward. There were permanent reductions at some of the distribution subsidiaries of employees, but the real effect of all of these actions that we're taking will be going into next year.

Okay, so am I correct to assume that the $2.5 million sequential tick down in ME&A is basically on lower sales rather than from a sort of cost cutting initiatives?

Right. And we will be continuing to -- at the actions that are required in face of softening business, Paul, so we probably haven't seen the full extent of the actions, but what John has described is probably not the full extent.

Okay, that's helpful. On CapEx, I know you're planning on adding to some machinery. Is that still the case, or has some of the events out there kind of curtailed the original plans?

The softening economy has curtailed our plans. I think we announced at some point in the last quarter that we are boosting our CapEx forecast from a level of about $16 million to $17 million but plan for the year down to the neighborhood of $12 million and that actually could be a little bit softer than $12 million as well.

Okay. Can you elaborate on the features of the new 7500-horsepower or transmission I should say and how you intend to approach that market? Also, who is the biggest competitor there for that unit?

John, do you want to speak to that? Sure. The 7500 is designed specifically for the oil and gas market. We're going to promote it based on technology. It is the ratios in this transmission are designed specifically for pressure pumping. This is not a vehicular transmission that's being converted. It's going to be significantly lighter than our 8500, and some of the other competitors in the high horsepower market. It has an aluminum housing.

We've eliminated the torque converter, and we've introduced some of our clutching technology, which in this transmission is called the Master Clutch so we are going to be shifting in between the ratio steps without a torque converter but with the master clutch in front of the transmission, and we are introducing more technology in the clutches, which we refer to as balance clutches, which help the performance and reliability of the clutches going in between the harsh shifts that these transmissions have. The largest competitor in this market would be Allison, but in a size to weight package, we would be very competitive, we'll be able to fit in the same rigs, the over the road rigs that don't require special permits as the Allison. It's very competitive in the weight range as well.

Okay, that's certainly helpful, and then finally, Mike? Given your experience, how long do you think an energy cycle like we're in can persist in the trough with the reduction in rig count that we've seen in North America?

Well, that's a good question, Paul. I think that what we're going forward is that there I think that what we're going forward is that there demand that will drive the energy markets and that's one of the reasons why we have confidence in coming to market with the 7500 is that we believe unlike the last big crash in oil which occurred in the early 80's, this time around, there is more in the way of global demand that is going to support the oil markets than in the past, so I see while there is softness and no doubt about it, I see that the markets will likely come back sooner rather than later.

Okay, that's helpful, Mike and last one for me. Do you supply anything for BJ Services for their offshore drilling operations?

Not at the moment, but we'll leave it at that.

Okay, thanks for your time.

Thank you. Brandy, next question.

Thank you. Our next question comes from the line of Peter Lisnic with Robert W. Baird.

Good afternoon, everyone.

Hi, Peter.

Hi. I guess first question if we could maybe talk a little bit more about profitability. It sounds like you've pulled some levers here in the quarter, or in the third quarter I should say, in response to the demand environment. I'm trying to get a better sense as to just how much more can you do and given what you've done, what sort of decremental margins should we be thinking about for the business?

Wow, that's a lot of questions. Mostly where we have responded is where the demand at this point, we've seen the demand fall, which it's been largely in this quarter concentrated at our subsidiaries in Europe, primarily focused on the mega yacht market, and as John described, the actions taken is there. Clearly, if softening continues, we will need to address that elsewhere throughout the Company, and clearly, we will be, and are looking at all of the options that we have. Obviously looking at all areas of the Company in terms of cost reduction, both variable as well as fixed and we are in the process of evaluating what further actions are required.

And is there a way that you could maybe give us a sense as to, given what you saw at the end of the quarter, maybe give us a sense as to how significant those levers might be in terms of both costs that would run through the income statement and then what the benefits would be?

Well, we've got a number of different possibilities and Peter at this point, we aren't going to be specific about what kinds of actions that we're contemplating or going to take. I'm sorry if I'm maybe not being responsive in that regard but at this point, we also have to think about regard but at this point, we also have to think about what actions are telegraphed or actually taken, so we are looking very clearly at our margins with respect to what is required to maintain levels of profitability that we know that we are going to have to take to generate. Clearly, we are looking at our covenants and fully intend to make sure that under any demand scenario, we continue to make those covenants with a good cushion windward on being able to make that, so that's what's really driving our decision-making at the present time is work from the bottom up so to speak and say at any given demand level what have we got to do, what is the number, what are the actions, what is the art of the possible to make sure that we generate the right kind of margins to give us cushion on the covenants.

Okay, all right, and no need to apologize. I totally understand not being able to give us all of the granularity that sometimes we need, but the other thing I wanted to ask or pursue was pricing in terms of what you're seeing there by end market. Can you maybe talk about what you're seeing on the pricing front?

Okay, I'll turn that to John. Do you mean pricing as our pricing out or pricing as we're receiving material and goods in?

Well, we always want the complete answer so how about both?

I would say as you can probably imagine, the marketplace is not very receptive to pricing in this current atmosphere. We have been very aggressive over the last 12 months in pricing, particularly when we were seeing levels of surcharges not decreasing. Those have since started to subside dramatically in some places. As far as the forward market, not very receptive to price increases. We will continue to look at that going forward. Material increases coming into the plant have, into all of our operations, with possible exceptions in some specialty forgings and key components like bearings, everything else seems to have calmed down over the last --

Okay, that is helpful and then since it was brought up in terms of the covenants, my guess is just looking at it you have 2.5 times leverage ratio covenant that you have to meet but even if things get markedly worse my impression is that you're not really pushing the envelope on that one all that much. Can maybe one of you comment on some of the stress testing you've done and how bad things could get before you actually tripped that leverage covenant?

Well, it's Mike, Peter. What we have not learned per se at this time that we are going to in any way run afoul of those covenants, we are just steering the boat so to speak to make sure that under any kind of demand scenario that we make sure that we don't trip the covenants. On the leverage side of it, clearly, we have got working capital reduction programs under way and the working capital has peaked and they're seeing that now beginning to work down and got pretty aggressive plans to reduce inventories and of course receivables in a softening environment, so we see cash coming in. Clearly, we will do what we need to do from a margin point of view to maintain margins and cash flow as well, so we don't see it as a major concern. I only point that from we're looking very much at the bottom up to make sure that we do our job, get cash standings and maintain our cost structure so to create the EBITDA flow that we need.

Okay, yeah, it didn't look like too much of a concern here either, so I just wanted to clarify. Thank you very much for your time and help.

Fine, Peter, thank you. Brandy, next one?

Thank you. Our next question comes from the line of Andrew Cash with Point Clear Value Management.

Hi, good afternoon.

Hi, Andrew.

I know this is kind of a moving target question but at these lower levels of business conditions, I was wondering if you could take a stab at giving me a rough idea of how much cash flow do you think you generate for the repair and replacement market?

Well, the after market is a significant market for us, Andrew, and it typically varies a bit by product line but on general, it runs 25 to 30, maybe a little over 30% of our typical sales and that can vary, the percentage can vary by how much new business in a cycle we're generating on the forward, but it's a sizeable cash and profit generator for us.

Well obviously during a slowdown, I mean, I would assume that number goes up during a business slowdown.

On a percentage basis.

Yes, on a percentage basis.

Right.

So maybe the 25 to 30 would be more representative of what happened in 2008?

Typically, yes.

Okay. Now, how much capital spending would be associated with that level of business activity?

In the after market?

Yeah, in the after market.

The after market basically feeds off of the forward market, the same machines that generate the in-house product and it generates also the parts for the after market, so we don't do specific capital expenditures for the after market.

Okay, so it should be, that should be a lot of free cash flow associated with the after market business as you call it?

Look at it as an incremental basis, yes.

Okay. The other question I have is kind of a big picture here. The stock market acts like kind of the worst is over here. Do you think that that's just mere speculation or do you think there's a fundamental reason for the recent investor enthusiasm?

Well, that's a good question. I mean, the stock market tends to anticipate, doesn't it, what it feels the economy is going to do.

Or it's guessing.

That's right. It tries to guess what the stock market is going to do, but clearly, I don't know really it's a question of how far out ahead does the market get to the real recovery in the economy and of course the economy tends to cycle with the beginning of the cycle kinds of activities and late cycle kinds of activities, so the marketplace I think right now looking at some optimism that the current recession isn't going to be as deep or protracted as it might be and could recover late 2009 or early 2010.

Well as far as your visibility, you've got your backlog that you track. Do you think that you're nearing the bottom in your backlog or do you have some sort of indication that there maybe an uptick by the end of the year?

Well, I think that our backlog could subside a little bit further. We're going into a seasonal situation where historically if you look at our numbers, our backlog numbers, we tend to now begin to show the Summer months, which is the slow quarter for us seasonally. The six months starting at the end of March includes the fourth quarter and our first quarter next year, and so that first quarter, July to October through September is always a softer backlog period for us, but we're going to have backlog numbers that are going to be softer than we normally have at the other times of the year.

Okay, thank you very much.

You're welcome, Andrew. Brandy?

Thank you. (Operator Instructions). At this time, there are no further questions in the queue.

Okay, thank you Brandy. Everyone, I appreciate that we all do the management team and Stan appreciates your attending this conference call and we look forward to speaking to you again in three months and in the meantime we hope you have a good day. Thank you.

Thank you, ladies and gentlemen. This concludes the Twin Disc 2009 third 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 access code of 405-5769. Thank you for your participation. You may now disconnect.