Twin Disc Inc (TWIN) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Twin Disc, Incorporated, 2010 first 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, Monday, October 19 of 2009.

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

Thank you, Val. On behalf of the Management team 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 2010 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 Mianaki at 262-638-4000, and she will send a copy to you. Hosting the call 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. Mike?

Thanks, Stan, and good day, everyone, and welcome to our first quarter conference call. As Stan has indicated, I will start with a brief statement, and then John, Chris, and I will be available to answer questions.

Sales for the first quarter were $47.1 million compared to $72.7 million for the same period last year, which was the second best first quarter in the Company's history. The decline in the first quarter sales reflects the impact of the continuing global recession in our markets, the seasonal weakness of the first three months, as well as the plant shut downs in our Italian, Belgium and Racine manufacturing facilities.

Shipments to the mega yacht, industrial, and oil and gas markets remained weak during the quarter. Partially offsetting this softness, we experienced good demand from the airport rescue and fire fighting market, and stable demand from our land based and marine based military, and Asia Pacific commercial marine market.

Gross profit as a percentage of sales for the first quarter was 20.7% compared to 27.6% last year. Gross margins were significantly impacted by our temporary plant shut downs for the equivalent of two months at our European facilities, as well as the one month closing of our domestic facility. Adjusting our production levels to near term demand had a negative impact on our absorption rate, although tight controls on spending and other cost reduction initiatives helped to offset the impact of the decline in volume.

Marketing, engineering and administrative expenses declined $3.5 million to $12.8 million for the first quarter compared to $16.3 million last year, as a result of previously announced cost reduction initiatives. As a percent of sales, ME&A expenses for the current three months were 27.2% compared to 22.5% a year ago.

The Company recorded a net loss for the first quarter of $2.4 million or $0.22 per diluted share compared to net earnings of $2.5 million or $0.22 per diluted share last year. EBITDA was a loss of $800,000 for the first quarter compared to a gain of $6.8 million for the same period last year.

Turning to our financial condition, our liquidity and balance sheet continue to remain strong. Cash provided by operations for the first quarter was $8.1 million, and at quarter end we had $17.1 million in cash compared to $13.3 million at the end of the June 2009 fourth quarter. Total debt stands at $49 million compared to $50.8 million at June 30, 2009. Total debt-to-capital at the end of the current quarter was 31.4%.

The six month backlog at the end of the first quarter was $62.5 million compared to $60.6 million at the end of the fourth quarter of fiscal 2009. We are encouraged to see a slight improvement in our six month backlog.

While demand from our pleasure craft and industrial markets remain depressed, trends in the commercial marine market, particularly in the Pacific Basin, remain steady. Orders from airport rescue and fire fighting, and land based military sectors are also holding up well, while order intake from the military patrol boat market has been growing.

And finally, we have experienced an uptick in orders for pressure pumping transmission and air clutches from the domestic and international oil and gas market. We continue to expect our new 7500 series transmission to be available to the market by fiscal year end.

Our outlook is for improving quarterly trends for the balance of the fiscal year. That concludes my prepared remarks, and now John, Chris, and I will be happy to take your questions. Val?

Thank you, sir. We will now begin the question and answer session. (Operator Instructions). Our first question comes from the line of Bo McKenzie with Global Hunter Securities. Please go ahead.

Hi, guys. Congratulations on the uptick in orders. I'm sort of surprised, although pleasantly, that you guys are seeing an uptick in the new transmissions, I guess you're referring to the 7500's? Could you give us a little bit more of an update on exactly what's going on with the 7500's, and what the selling point is on those right now when you've got the domestic pressure pumping market a little bit weak right now? Thanks.

Bo, it's John. The uptick is actually for the 8500 and air clutches, and the uptick as you point out given the domestic flatness has actually been for Asia. So the increased order, we've had increased order activity both in North America and Asia, but the majority of our new orders are actually going into Asia.

The 7500 is still on schedule for release and production in the fourth quarter. We're completing lab testing and preparing to do the field test on rigs right now, so the order uptick hasn't been the 7500 yet. It's strictly the 8500.

And John, on that with the 7500, when you say the fourth quarter, you mean the fourth calendar quarter, right?

No, I'm sorry, Bo. It would be the second calendar quarter of 2010. Our fiscal--

Oh, your fiscal fourth quarter.

Yes.

And I know that you've made this specifically designed to go for the pressure pumping business, as opposed to modifying an existing transmission. Can you describe kind of where you see it in terms of weight or torque or whatever the key things are that you'll be able to offer as a value, as opposed to people that might have either an Allison or an existing 8500 installed on their equipment?

Sure. We've actually done a lot of work on that. The transmission is rated at its release will be 2600 horsepower. It's comparable in weight to the competition for horsepower per pound.

The advantage really is that it's completely designed for frac pumping, and the ratio splits are such that even competing against transmissions that are lower horsepower, operators will be able to operate more efficiently and potentially take fewer rigs out to do a job. So while they may have to spend more money for our transmission, they will use less assets at any given site to do the job. So that's how we're positioning it, and we think we have a very good chance to do that.

So does that imply then when you look at some of these markets like up in the Marcellus and the Appalachian Basin that you're going to be able to get them into sites that they might not have been able to get to before because of a lower equipment need?

It's a smaller footprint.

Okay.

And we're doing application studies at each of the main horsepower breaks, 1500, 2250 and 2500, and we plan to be in the market at all of those horsepower ranges.

All right, and then one final question if it's all right. I know you guys have talked, at least with me in the past, about, I know I'm going to get the name wrong, is it slip shift that you were marketing to DPC kind of applications?

Correct.

How is that coming?

It's going very well. We have applications running now in all of the major theatres of offshore oil, Europe, off the coast of Africa, the Gulf Coast and in Southeast Asia, and it's just, we're not rushing. We're taking our time and making sure that we have each combination, each application correct, but it does offer significant improvement in doing the job at the rig.

And just to follow that, and then I'll turn it back over, have you guys gotten that up to the horsepower to where you can deal with some of the 245-foot, 265-foot vessels, or is that still a goal out there somewhere?

That's a goal for the future. Right now we're in the 200-foot range.

Great. Thanks a lot.

You're welcome.

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

Hi, good afternoon, everyone.

Hi, Paul.

Was an extended shut down in Europe part of the plan at the beginning of the quarter or did that evolve as the quarter went on?

That basically, as we looked at it, both the shut down in the US, and the equivalent shut down in Europe is by the number of people that are working. We didn't actually close the facility 100% except for the normal summer shut down, but they're running at a Chomage rate or a Cassa Integrazione rate of 50% or better. Paul, it's John. I'll just add a little bit of color. We had our normal summer shut down in the two plants in Italy. We had one in Switzerland at Rolla that we didn't have the previous year, and we had a lot of yards who kind of varied and took different shut downs just based on volume. So our Chomage or Cassa Integrazione rate was higher than planned just because during the first quarter there were a lot of customers who were also taking shut downs that they didn't take the previous year.

Okay, fair enough, and by any chance, do you know what the shut downs cost you in terms of absorption on an EPS basis in the quarter? Does Chris have that?

No, we don't have that specific information, Paul.

Okay, so in October so far, you are running at a more normal utilization rate in those three facilities?

Yes, we are, Paul.

Okay, and then finally, Mike, how long do you think it will take for the inventory glut in luxury marine to make its way through the channel, if you had to take a best guess?

Well that's a good question. It's going to be several months for that to work its way out. The large yachts, some of them are still being built and taking inventory. It's the smaller yachts, up into the middle class, up to the 70-meter yachts that are the problem. 70 feet, sorry, 70-foot yachts that are the problem. That's going to take a while to work through, Paul.

Okay, thanks for your time guys.

Paul, it's John again. Just to, I mean we have been pleased with some of the fall shows in Europe that some of the really high end 130-foot plus yachts have been selling, so there is ongoing demand and there's ongoing production at the yards.

John, would you expect backlog growth do you think for next calendar year or do you think that's too aggressive? For the yards?

Backlog growth for the yards?

Yes.

The ones that are building the high end mega yacht have the best chance, but it's too early to tell.

Okay, thanks again.

Yes.

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

Hi, good afternoon. It's actually Josh Chan on for Pete. You talked about October production rates being kind of normal. Do you have any other planned shut downs within the near future?

John, go ahead. Yes, Josh, it's John. Yes, we do. We have a, in the domestic operations here in Racine, a one week shut down for the week after Thanksgiving, and then a one week shut down for the week following the Christmas, New Year's week, and that's all we have scheduled at this moment. In Europe, we're just going to be operating with the flexible staffing through the programs in Belgium, Italy and Switzerland.

Okay. So would that, and then kind of taking into account your cost reduction initiatives, do you think you can kind of hold gross margin flat for the year?

What do you mean by flat for the year, Josh?

Flat in 2010 versus '09?

Well, I think that looking at the first quarter, that will be probably the bottom of the gross margin dip for us. I'm not sure that we're going to get back up to the same level of gross margins for us, a year-over-year basis at the end of the fiscal year. We may see, Josh, in the second half of the year, our margins approaching year-ago levels, and hopefully carrying beyond 2010.

Okay, great.

But it's going to be an upward flow from here, through the balance of the year.

So you just may not get there for the full year, I got you. And then in your outlook you talked about improving quarterly trends for the rest of the year. I was just wondering how quickly you think that will come, can we still expect double digit negative comps in the fourth quarter, or do you think it will be better than that?

In the fourth fiscal quarter or the fourth calendar quarter?

Fiscal quarter.

Are you talking revenues?

Revenue, correct.

Yes, well, I think by that time, it will be a toss up as to, we won't be seeing negative comparisons, significant negative comparisons. In fact we may be even seeing some positive comparisons depending upon how the second half growth rates occur, but I wouldn't say double negative, double digit negative in the fourth quarter, no.

Okay. And then finally, could you comment a little bit about your CapEx plan for the year?

Yes. It's Mike again, Josh. We're moderating off of last fiscal year a great deal. We're going to see probably CapEx in the range of somewhat less than depreciation for the year.

Okay, great. Thanks for your time.

Yes, sir. Thanks, Josh.

Thank you. Our next question is a follow-up question from the line of Bo McKenzie with Global Hunter Securities. Please go ahead.

Yes, hi. Two things. Is there a way you could quantify with the plant shut downs and stuff, about what the impact was on the quarter?

Well, the plant shut downs probably accounted for half or slightly more of the loss that we occurred.

Okay, and with the two weeks coming in Q2, between Thanksgiving, do you usually shut down in Thanksgiving and Christmas in Racine or no?

Bo, it's John. One week will be in Q2 and one week will be in Q3. It's the first weeks of the next two quarters, and we usually are shut down for Christmas, the Christmas, New Year's week, but we do have the three days at Thanksgiving, too, the plant is also shut down, historically.

Okay.

Bo, let me just jump in. What John indicated earlier is in addition to the normal schedule, so that normal shut down of a few days at Thanksgiving and several days over the Christmas break, that's normal. What is different this time is a week in addition, following Thanksgiving, and a week in addition, following the Christmas shut down, which actually falls in the first part of the third fiscal quarter.

Okay, great. Thanks for clearing that up.

Yes.

And I know you guys have had a handful of good acquisitions under your belt historically, obviously with things off in the yacht business, one would expect that the private company valuations have come in quite a bit. It's kind of a two-fold question. Are you seeing much out there, number one, and number two, what are the banks confirmed in terms of your credit facilities?

Well, the answer to the second question first, I mean, we do have a $35 million credit facility that is only partially being used at the moment, about half of the facility is being used, and we think that given the right acquisition, we certainly have access to capital going forward. We have not asked nor have they given us any indication of what additional amount we would qualify for. We tend to look at it, and they too, on an as needed basis, so I'm fairly comfortable, Chris is too, that if we were to find the right deal, we could get it financed.

Now, moving back to your first part of the question, valuations tend to lag actual fact. In other words, expectations die hard for valuation, especially in a private owner's mind, so I think at this point in time they're beginning to soften, and we may find something that fits our requirement at a reasonable price for our shareholders.

We tend to have pretty stringent acquisition criteria. We want to be accretive, and we also want to be able to earn our cost of capital on the acquisition, so those are two pretty stringent criteria or hurdle rates to get to. We've been fortunate in finding opportunities, as you pointed graciously in the past, and that's our goal going forward, is to make good acquisitions for our shareholders.

Are you seeing opportunities out there where people are perhaps being forced to sell, where they over-leveraged, over-extended themselves or credit facilities have been withdrawn or anything like that that might make it even more of a buyer's market, or is that just not occurring particularly in the mega yacht business?

Well, our scope goes beyond the mega yacht business, Bo, both in marine and in the land based side of our business, so we aren't only focused on marine, and I know that wasn't the intent of your question but I wanted to clarify for others who are listening.

The opportunities, if we could call them that, that we have seen in that group tend to have more turnaround component than we would want to buy into. We've seen a number of situations where companies are available but the point is, do we want to get involved with it, and because they're on the bank of financial collapse, can we do something with that company and still meet our criteria. And so there's where the rubber meets the road for us is, we don't want to buy distressed merchandise. If there's a modest turnaround component and we can bring to bear the global reach that Twin Disc has for a geographically challenged company, that may work for us and we may see a way to do something.

Right. That's fair enough. Then one last thing. The inventories, any chance of having to write anything off or is that something we should expect to come down and be kind of a continuous source of cash through the year at the lower level of sales that you're at this quarter and likely in the next quarter or what?

Well, I'll give you my thoughts and then I'll turn it over to John who has the responsibility of making sure that that doesn't happen, that we don't have write-offs. But we're naturally very aggressive in looking at our inventories even in good times to make sure that things don't happen at other times, so with that as a preface, John, why don't you comment on what we're doing. No, Bo, the inventories would have come down more in the quarter. It's just that we didn't have enough shipping days to get it all out, and we're going to work hard on that through the balance of the year. So I anticipate further reductions through the remaining quarters.

Okay, great. Thanks a lot again.

Okay, Bo, thanks.

Thank you. Our next question is a follow-up question from the line of Peter Lisnic with Robert W Baird. Please go ahead.

Hi, this is Josh again. Thanks for taking my question. I'm just wondering in terms of your sequential backlog improvement, is that due to existing orders kind of falling into the six month time frame or is it due to some kind of improving order situation?

Josh, it's John. It's improving situation in some of our markets, particularly here in North America. It wasn't a huge uptick, but you could definitely sense the change.

Okay, and then if you had to guess, would you kind of say that the $60 million range or backlog is near to trough this cycle?

We would hope so, Josh. It's Mike. We would hope that we are at the bottom, and there's nothing to say that it couldn't spike up and drop back down again, but we're encouraged by what's been happening, especially overseas in Asia. We're getting a lot of activity in terms of oil and gas, military patrol boats for countries like India, China, some in the Middle East, Turkey. So there are, we tend to, because of where we live here in the US, to view us in the scope of US economy, but we're very fortunate in having that global reach. So we're cautiously optimistic that we are seeing a turnaround, and that the rate of change in terms of orders and backlog is turning positive.

Great. Thank you very much.

You're welcome, Josh.

Thank you. (Operator Instructions). I'm showing there's no further questions in the queue. Please continue.

Thank you, Val, and thank you all for attending the conference call today. We appreciate your interest in Twin Disc.

As we look forward to the balance of the year and beyond, we're encouraged by the actions that we have taken to address the softer near term demand by geographic diversity and development of our global market, particularly in Asia as we mentioned. And by our product development pipeline that is bringing innovative products and technologies to our marketplace. So again, thank you for your attention and please have a good day.

Thank you, sir. Ladies and gentlemen, that does conclude today's Twin Disc, Incorporated, 2010 first quarter financial results conference call. If you'd like to listen to a replay of today's call, please dial 303-590-3030 or 1-800-406-7325 and enter the passcode 4168638. Once again, both numbers are 303-590-3030 or 1-800-406-7325, enter the passcode 4168638. Thank you for your participation. You may now disconnect.