Twin Disc Inc (TWIN) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you so much for standing by. Welcome to the Twin Disc Incorporated 2009 fourth quarter and year end financial results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) As a reminder, the conference is being recorded today on Tuesday , August 4, 2009.

I now turn the conference over to our host, Mr. [Andrew Berg]. Please go ahead.

Thanks, Michael. On behalf of the management of Twin Disc, we are extremely pleased that you have taken the time to participated in our call. Thank you for joining us to discuss the company's fiscal 2009 fourth quarter and full year 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's important to remember that the company's actual results to 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 [Annette Mianake] at 262-638-4000, and she will send a copy to you. Hosting the call today are Michael Batten, Twin Disc's Chairman and Chief Executive Officer, John Batten, President and Chief Operating Officer, and Christopher 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. Mike?

Thank you, Andy, and good afternoon, everyone, and welcome to our fourth quarter conference call. As Andy has indicated, I will start with a brief statement and John and Chris and I will be available to answer questions in a few minutes. Sales for the fourth quarter were $72.1 million compared to $90.3 million for fiscal 2008 fourth quarter. Sales for the entire fiscal year 2009 were 295,000 -- $295 million compared to $332 million for fiscal 2008. Foreign currency translations negatively impacted sales by $3.4 million and $4.8 million, respectively. The company continued to experience the impact of softening in many of our key product markets. The mega yacht marine, oil and gas and industrial markets continue to experience a significant falloff in both shipments and orders. However, we continue to experience encouraging demand in our commercial marine, land and marine based military and airport rescue and fire fighting markets.

While the North American and European markets experienced year-over-year declines in sales, the Pacific Rim continue to offer expanding opportunities for the company as both sales and orders into the region continue to grow and are at historically high levels. Gross profits as a percentage of our fiscal 2009 fourth quarter sales was 26.7% compared to 32.1% in the same quarter last year. For the entire fiscal year 2009, gross profit as a percentage of sales was 27.6% compared to 31.6% for fiscal 2008. The gross margin for the quarter and the year was unfavorably impacted by lower sales volume and unfavorable shift in product mix primarily due to lower shipment of oil and gas transmissions and an increase in warranty expenses. As a percentage of sales, marketing and engineering administrative expenses for the fourth fiscal quarter were 17.5% compared to 21.4% for the same fiscal quarter in 2008. As a percentage of sales, M&A expenses for fiscal year 2009 were 20.5% compared to 20% for fiscal 2008. Several significant adjustments were recorded in the fourth fiscal quarter and are set out in the press release. Chris will be available to answer questions on them as well as on the fourth quarter tax rate in a few minutes.

Net earnings for fiscal 2009 fourth quarter were $2.8 million or $0.25 per diluted share compared to $7 million or $0.62 per diluted share recorded in the same quarter last year. For the current full year, net earnings were $11.5 million or $1.03 per diluted share compared to $24.3 million or $2.13 per diluted share for fiscal year 2008. Turning to our financial condition, our liquidity and balance sheet continue to remain strong. At fiscal year end, we had $13 million in cash and total debt stood at $50.7 million. Total debt to capital was 32.2%, and the interest rate on our revolving credit facility was 4%. During the fourth quarter, we renewed our $35 million credit facility until May 2012. Our six-month backlog at June 30, 2009 was $60.6 million compared to $120.8 million a year ago and $81.5 million at the end of March 2009. While the June backlog typically is softer reflecting the vacation months of the first quarter, there's no doubt that some of our markets have weakened.

As mentioned previously, certain of our markets, namely mega yacht marine, oil and gas and industrial, have seen significant softening over the past few quarters, although, inquiries for oil and gas have increased in the last two months. Other markets, namely our commercial marine, land and marine based military and airport rescue and fire fighting have held stead or even increased in strength. In addition, North America and Europe has suffered while the Pacific Rim and Asia in general has strengthened. In this context, we took strong action in the fourth quarter to address the softening demand in the American and European sectors by announcing a $25 million cost reduction and avoidance program for fiscal 2010.

These actions included expense and force reductions, growing layoffs as well as freezing our domestic pension plans in the United States, the utilization of government-sponsored layoff programs in Europe and other downsizing of subsidiary operations were appropriate elsewhere in the world. At the same time, we have maintained our focus on spending on differentiating new product development that will help grow our business in the short and long term. The 7500 series transmission for oil and gas applications, our joystick marine control and hybrid-ready marine transmission are but three examples of these initiatives. Other new product programs are in development that we believe will foster additional growth. Further, we are taking actions to enhance our positions in the developing countries where we are seeing continuing growth opportunities.

As we look ahead to next fiscal year, our outlook is somewhat mixed. On the one hand, we are tightening our belt to control costs, to deal with the softer markets in the early part of the year. On the other hand, we are moving forward aggressively to take advantage of the opportunities we see and are cautiously optimistic about the second half of the year as a result. That concludes my prepared remarks and John, Chris and I will be happy to take your questions now. Michael?

All right, thank you, sir. Ladies and gentlemen, at this time, we will begin our question-and-answer session. (Operator Instructions) Our first question is from the line of Bo McKenzie with Lafitte Capital. Please go ahead.

Hey guys, congratulations on a really good quarter in a tough environment. On the inquiries that you talked about, Michael, from the oil patch, specifically, what are you seeing in terms of the pickup in inquiries and if you don't mind, I'd like to follow that up with a few questions about the 8500 and 7500 as well.

Okay, Bo. I'm going to ask John to respond to that. Sure. Bo, the activity compared to the first three calendar quarters of the year has been much stronger for mainly the frac transmissions and air clutches, but also keeping projects for offshore marine going particularly in Asia. Unfortunately, not a lot of the inquiries in the frac transmissions have turned into orders yet, but the activity keeps increasing as the price of oil continues to creep higher. So --

If I could ask specifically a question on the offshore and the onshore side, if you don't mind. Onshore was a little long-winded, so I apologize in advance. But if you look at overall, at least the North American, what may be happening internationally with time, you had a decline in overall drilling but the decline in directional drilling, which is tied into the shale plates, been a lot less. Shale plates are getting bigger and bigger frac jobs. When you look at the market for the 7500 in particular, what -- and by the way, the frac companies are scrapping some of the older equipment. So when you look at the market for the 7500 in particular, what are the key selling points? Are you able to go in and convince them somehow or another that this is something that could go into an upgrade as opposed to new product -- new unit sales?

Bo, I would say 50% or more of the inquiries for the 7500 have been into rebuild of existing frac rigs as opposed to new construction.

What is the big selling point? What is it offering that the 8500 doesn't?

Dimensionally, it's narrower. It can fit into the same frame rails that the competition can, so you can take an existing rig. You have to modify it, but you don't have to change the overall structure of the trailer. So the lighter weight allows you to -- it's roteable without special permits, so you can use the same tractor-trailer arrangement. Secondly, the ratios are designed specifically for pressure pumping. So they're even-step ratios. It's not a converted vehicular transmission. So those are the key selling features.

And does Allison, I guess, you mean by your main competitor in there, have a comparable product that's designed specifically to the frac market or are they largely taking the medium duty truck application, putting it into the frac business?

Every other frac transmission started its life doing something else.

Okay.

It's probably modified over time, but to our knowledge, basically, the ratios that are in there were designed for vehicular application. 7500 was never designed for vehicle, only pressure pumping.

Okay. And is it able to handle a higher horsepower, or --?

Yes. It's -- well, the horsepower's less than 8500, kind of the low 2250 range, and the durability of this should be much better than anything that's out there in the field as a result of being designed specifically for pressure pumping.

And then one last question on this, then I'll put myself back in the queue and come back on the 8500. You talked about this being commercially available sometime late next year, late next fiscal year . I would assume you guys are in the field testing phase right now if that's the case?

The goal is to be ready for shipments in the fourth quarter of this fiscal year, and we're starting --

This fiscal year by the June quarter of 2010?

Correct.

Yes.

Right now, we are in the process of moving out of the initial spin test in the lab into the power test. Then we'll also be going into some test well applications down in Texas before we go out to an actual field test.

Okay. I'll pop back off and let some other people ask some questions.

Okay.

Thank you. Our next question is from the line of Paul Mammoli with Sidoti & Company. Please go ahead.

Hi, good afternoon, everyone.

Hi, Paul. How are you?

Good, thanks. The $25 million in cost savings, can you give us a sense of how much of that would fall in costs of goods sold in ME&A?

That's a good question, Paul. I would say probably a good two-thirds of it would fall in costs of goods sold and a third would fall in ME&A plus or minus 10%.

Okay, and should we expect that to be evenly spread throughout the year or is it more scattered?

No. I would say it's more evenly spread than scattered, but I would say that there's probably -- given that we had announced the one month shutdown of our facility here in Racine in July, obviously, that's going to have an effect in July. But in general, I would say a lot of the costs are evenly spread throughout the year.

That's helpful.

-- the savings.

Okay, and then can you give us a sense of what the marine and off highway sales declines were in general in the quarter?

Paul, marine and which?

Off highway.

In marine, it's mostly related to pleasure craft, the mega yacht, and off highway would be mostly the oil field activity.

Sorry, John, in terms of numerical declines, just generally?

The marine -- and Paul, this is Mike. The marine business actually grew in the fourth quarter.

Okay.

And the transmission business declined primarily because of the year-over-year comparisons. That was the impact there. And just for point of clarification, Paul, when Mike says that the marine grew, that's the marine transmission part of our business.

Okay. Is the pickup in second half 2010 sales you alluded to in the press release and right now substantiated by any comments in forecasts from BJ services, or is this more of your general feel, Mike?

It's more of a general feel than it is specific to any given customer. As John indicated, we are seeing inquiry activity increase, especially in the last couple of months. And we are also looking at the forthcoming introduction of the 7500 based on the inquiries and the discussions we've had with potential customers.

Okay. That's fair. And then can you expand at all on what product lines observed the increased warranty expense, and do you see that as more of a one time blip than anything else?

Yes.. The warranty expense is primarily -- and it really -- warranty is a little bit of a misnomer. In was in the 8500 in pressure pumping, and i It was basically on a new application where we were spending more time in a ratio that we had not seen before. So we had to convert some units because the operator was operating in a ratio that's typically not used.

Okay, perfect. Thanks for your time.

Right, Paul. Thank you.

All right, thank you. Peter Lisnic with Robert W. Baird. Please go ahead.

Good afternoon, gentlemen.

Hi, Peter.

The first question may be for Chris. On the pension curtailment, can you give us the breakdown of how that allocates between cogs and ME&A, please?

You know what, I'm going to have to apologize. I have a lot of pages here on the pension, but it's probably the one I can't give you, Pete. I apologize. I don't have the split between ME&A and costs of goods sold.

Okay, that's fine.

I can say that I know it's probably close to two-thirds/one-third in terms of the two-thirds being costs of goods sold.

Okay, all right. That's fine. If you look at the restructuring savings that you're talking about, the $25 million that you put in the press release a couple of months ago, I guess it was. In two thirds of that coming through costs of goods sold, I guess the implication is 5 or 600 basis points of potential gross margin improvement year-on-year. Is that the kind of right way to think about it with the volume pressure that you might see in the first half of the year? Is it reasonable to assume that you'll still be able to put up, call it a 30% gross margin in fiscal 2010?

Well, I -- this is Chris. I think it goes back to what Mike was talking about earlier. Some of the cost reductions are the cost savings and some of them are cost avoidance. So the portion that's cost avoidance is really to maintain margin. So I guess the answer is that, a lot of the cost reductions are cost avoidance who aren't necessarily going to drop through as incremental.

Okay. And if I remember right, it was about half and half sort of avoidance versus savings? Is that the right mix?

It's probably not too far off, give or take 10%.

Okay. That's fine. Then can you talk a little bit about the military business, the military transmission business, whether it's any new programs or awards that are coming down the pipe that ought to help you? And then in the context of all the focus on military budgets and government spending, what the longer term implications for that business might be as well?

Well, the first part's a little bit easier than the second part. For the military contracts, we have ongoing business for the XT1410, the Hercules, and that we have booked out quite a ways throughout the fiscal year. And there are some potential add on parts to that, and the AA V7 may have some life yet again at the end of this fiscal year. And we're always looking for new projects that we feel we can add value to and earn a good margin, both domestically and overseas. There are a lot of projects that we have in the pipeline that we just haven't heard thumbs up or thumbs down. There has been, as you probably read in the newspaper, a big reshuffling in the priorities of our defense department. It's just too soon to tell how that could potentially affect some of the projects that we're on. It's probably pluses and minuses, we just don't -- can't say for sure yet.

Okay. all right. That is very, very helpful. Thank you all.

Thank you. Our next question is from the line of Julian Allen with Spitfire Capital. Please go ahead.

Hi, Julian.

Good afternoon, thanks for taking my question. Could you please give us a little more color on the commercial marine segment which obviously has at least two components. One is the Asian distribution business and then also the domestic business, which is more oriented towards the gulf coast vessels and new builds, and specifically, given that your backlog number's a six month number, are you preparing for a potential downturn, particularly domestically as that late cycle business potentially winds down? I'd love to get some color from you on that segment. Thank you.

Thanks, Julian. There's a couple pieces, you hit everything. A lot of the business in Asia commercial ring is new construction, and order activity is increasing, project activity is increasing. And I think it's partly due to the Chinese stimulus package. There's a lot of building still going on, and we're doing quite well there. In the US, the commercial activity is focused around offshore oil and then mainly for us, river traffic, push boats, tugboats, harbor activity. There we're participating both in new construction but also retrofitting. In the offshore, we're retrofitting our quick shift transmissions and DP2 control systems and the vessels that hadn't had that before. We're also retrofitting and new construction in some of the larger fleet operators on the rivers with quick shift and electronic control. Then there is some projects out there for the core of engineers for a lot of vessels. It should start to kick in, so I'm hopeful that this market -- I'm pretty sure is going to stay active in Asia, but in North America, I'm hopeful that there's enough here even with retrofits to keep a pretty strong market going for a while. But obviously, if conditions change, we'll have to readjust. But optimistic on this market particularly.

Great, thank you very much.

Thank you, ladies and gentlemen. (Operator Instructions) Bo McKenzie, please go ahead with your follow-up.

Hi. On the quick shift, I know you guys talked in the past about, I believe, you said that you were trying to get the horsepower capabilities up to the point that you could market towards some of the bigger equipment out in the oil patch. I was wondering how that stood in terms of the larger horsepower. I know you guys picked up a number of crew boats projects before with Seacor and and a few other people. Yes, we have -- it's -- for the Twin Disc, for our range, we're at the max horsepower capability, and we're always looking at the opportunity, but for right now, the top of our line for -- crew boats is MGX61500 and for offshore vessels, it's MGX5600 and at least for the next 12 to 18 months, that's going to -- we have the horsepower range we're going to have for the next year and a half or so. All right. If there was one thing that stood out a little bit, inventory level's still kind of high. Is this much you guys could do to take cash out of inventories over those next several quarters?

You would have seen the bigger decrease. There was significant decreases at the manufacturing operations, specifically here in Racine, in Belgium and in Italy. We'll shipped a lot of stuff to Asia that's going to be delivered in this quarter. So there should be a continued trend of inventory going down.

Okay, and then one final, unrelated question. If you looked at the cash you've got and the renewed credit lines and the fact that valuations are off, I would assume for anything that might be of interest to you guys, pretty much half of what they were a year ago. Do you guys see any kind of opportunities that are out there that might give you a chance to expand like you did when you picked up the stuff in the mega yachts a couple of years ago?

We're -- Bo, it's Mike. We're active in the market. You hit the right point that valuations had been on the high side and should be coming down. And we feel we've got enough dry powder to make a meaningful acquisition as we go forward. So we're back in the market, and that's about all I'll say at the moment, but it's definitely something that we're working on.

Great. Thanks a lot again.

Okay, good. Thank you, Bo.

Gentlemen, there are no further questions at this time. Please continue with any closing remarks you might have.

Thank you, Michael. Thank you all for attending the conference call today. We're very pleased to have your continuing interest in Twin Disc, and we appreciate your attention. The process that we're going through, as I've indicated, is to tighten our belt for the near term, and that is clearly one of the things that our cost reduction program is targeted to do, is to address the softness that is here in the North American and the European markets. Offsetting that, as we said in our remarks, is continuing encouraging demand rates coming out of Asia, and we're doing everything possible to grow that sector of the world. So while backlogs have moderated, nevertheless, exposure to Asia and the Pacific Rim has helped us, and we see that as a good sign going forward. Having said that, of course, we do see that the near term is going to be an issue, but as we look out into the latter part of the fiscal year, we should be seeing more positive signs and results occurring. So again, thank you for your attention, and have a good day.

All right. Thank you. Ladies and gentlemen, this does conclude the Twin Disc Incorporated 2009 fourth quarter and year end financial results conference call. This conference will be available for replay after 3:00 p.m. central daylight time today through August 11 at midnight. We thank you very much for your participation. You may now disconnect. Have a very pleasant rest of your day.