Twin Disc Inc (TWIN) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the Twin Disc, Incorporated 2010 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 21st, 2009 and I would like to turn the conference over to Mr. Stan Berger. Please go ahead.

Thank you, Josh. On behalf of the management of Twin Disc, we are extremely pleased you have taken the time to participate in our call and thank you for joining us to discuss the fiscal first half 2010 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. 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 Miyanaki 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? Mike.

Thank you, and good day everyone. Welcome to our second quarter conference call. As Stan has indicated, I will start with a brief statement, and then John, Chris and I will be available to take questions.

Before getting into the details of our second quarter, I would like to emphasize the following points. First, in line with expectations, our financial results showed nice improvements sequentially from the first quarter. In addition, our operating cash flow reached 16 million for the first half of the fiscal year. And we were able to reduce our debt by 18% during the first half to $41.6 million. And finally our six month backlog is improved 15.6%, since the beginning of the fiscal year. All of these results point to an improving trend for the Company.

Now let's turn to revenues. As just mentioned, while we experienced a sequential improvement in sales from the first to the second quarter, our comparisons to the near record levels posted in fiscal year 2009 were unfavorable. Net sales for the second fiscal quarter of 2010 were $55.2 million, compared to the near record level of $81.6 million for the same quarter a year ago. Year-to-date sales were $102.2 million compared to $154.3 million last year. Our revenues continue to be affected by the impact of the global recession, specifically customers in the mega-yacht and industrial markets. Offsetting this weakness has been a stable demand from the airport rescue and fire fighting, land and marine based military, and Asia Pacific commercial marine markets.

Sequential improvement was also seen between the first and second quarters of the current fiscal year, from 20.7% to 26.8% in terms of gross margin for sales, reflecting increased sales volumes and product mix. Comparing fiscal year, gross margin percent was 26.8% of the fiscal second quarter compared to 28.1% for the comparable period a year ago. Year-to-date gross margin percentage for the first six months was 24% compared to 27.9% for the same period last year. Marketing engineering and administrative expenses for the fiscal 2010 second quarter were $14.9 million, and decreased $2.1 million compared to the same period a year ago. While year-to-date ME&A expenses were $27.7 million and declined $5.6 million compared to the first half of last year, the reductions reflect the impact of our cost reduction and cost avoidance programs placed into effect at the beginning of the fiscal year.

The Company recorded a net loss of $490,000 or $0.04 per diluted share for the second fiscal quarter, compared to net income of $3.4 million or $0.31 per diluted share for the same period the previous year. Quarterly sequential improvement was experienced compared to the $2.4 million net loss or $0.22 per diluted share sustained in the first quarter of fiscal 2010 for the first half of 2010. For the first half of the fiscal year, the Company reported a net loss of $2.9 million, or $0.26 per diluted share, compared to a net income of $5.9 million or $0.52 per diluted share for the first half of fiscal 2009.

During the first half of this fiscal year, we have generated $16 million in cash as previously noted from operations, compared to $13.7 million of the same period last year, total debt has been reduced in the first six months 18% to $41.6 million, and we have $16.7 million in cash at the end of the first half. Total debt to capital now stands at 27.5%, compared to 31.1% at the end of the first half last year. This is the strongest balance sheet that we have had in the past several years.

Turning to our outlook, our six month backlog at the end of fiscal, at the second fiscal quarter, was $70 million compared to $60.6 million at the end of the last fiscal year, and $62.5 million at the end of the first quarter. This increase was driven primarily by higher activity for the 8500 series transmission for use in our oil, and gas pressure pumping markets. Additional activity was seen in our land based and our marine based military markets. We continue to develop new and differentiating products for our customers, and are encouraged by the response we are receiving from the 7500 series transmission as well as the new joystick marine control system that we've introduced. While challenges will remain, we continue to expect that improving sequential quarterly trends for the balance of the year.

That concludes my prepared remarks, and now John, Chris, and I will be happy to take your questions. Josh, if you could turn to that now.

Yes, sir. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Paul Mammola with Sidoti & Company.

Good afternoon. Good, thanks. First and ME&A you highlighted year-over-year but a pretty good jump sequentially, can you flesh that out a bit and is any of it associated with the development of the 7500 series?

Paul, it is Mike. It is largely attributable to timing and the fiscal year, our first quarter generally is a lighter quarter in terms of ME&A as you go back over the last several years, I think we would see that. We continue to expect that our cost reductions will impact our spending, and we don't foresee any further significant increases in the coming quarters.

Okay. So, a $15 million run rate for ME&A is about right you would say?

Plus or minus, yes. But not a significant jump the way you saw in the first and second quarter.

Okay. Fair enough. And then on the 7500 series, how much is that going to cost to produce and market and how much of the cost lay ahead.

Well, John, do you want to speak to that?

Yes, Paul. I am trying to understand as far as engineering expense, and ME&A expense to develop the market.

Correct.

It is not going to greatly affect the balance of the year, going forward. It has been pretty much spread out, most of the development expense is behind us and we have marketing expense ahead of us, which is already factored into the remainder of the year, and it is not impacted quarter to quarter.

I will come back to the ME&A the first quarter, for Twin Disc, we don't have any trade shows. They all start in the second quarter, and we did have further development expenses for the marine, the joystick control system, which was previously mentioned. And we have go live on some ERP in Europe, which was some ramped up activity in the second quarter as well. But that is pretty much the difference.

Okay. Understood, a look at the 2010 CapEx budget yet?

The 2010 CapEx budget I have not seen it. We have received some orders from the region on the 8500. I'm not sure if that's the latest of the timing of the CapEx budget, though.

Okay, and Chris, you obviously generated good cash flow for the first half of the year. Would you say that's probably the bottom for receivables and inventory at this point or do you think you have more to go?

In terms of receivables, obviously as we ramp up on sales there's the potential that receivables would, I think we would all say that inventory continues to be something we're focusing on, so I wouldn't necessarily make the same comment with respect to inventory.

Thanks for your time.

Right on, Paul. Thanks.

Thank you, and our next question comes from the line of Peter Lisnic. Please go ahead.

Good afternoon, gentlemen.

Hi, Peter. How are you?

Good. How are you guys.

Good, thanks.

I just want to ask another follow up question on the ME&A side. If I look at the numbers of the percentage of sales, it is about 27%, you traditionally run in the low 20s. So I am wondering, are we at the point from a sales level where that 27% kind of rate is basically a fixed level, or can you quantify what I call one-time development expenses are on that number?

It's Mike, Pete. When we talk about the ME&A expense, obviously with the reduced sales percentages is going higher. So we expect that percentage to come down as we go forward, as revenues pick back up and clearly, you will see our order backlog trend growing, and we expect good results out of those shipments, primarily driven by oil and gas considerations. So, the ME&A side of things, we expect to more or less continue looking at level rates as we go forward, revenues will reduce the percentage.

Okay. All right.

It is John, the ME&A expenses as dollars will not be growing at the rate of sales revenues going forward.

Okay. In other words, we should probably, as the revenue line improves see a retreat back to the low 20% kind of level.

Absolutely.

In other words there's nothing structural here regarding the cost structure.

You're correct.

Okay. All right. Fair enough on that. In terms of the backlog you have given color commentary on that, can you paint us a picture on maybe what we are not seeing or numbers outside of backlog, what you are hearing from your customers in particular end markets that wouldn't show up yet in terms of order inquiries or how the orders may shape up or your order book may be shaping up relative to not the next two quarters but a little bit further out from that, because some of these businesses are clearly longer cycle.

Yes. Pete, it is John, I guess just from a high level, I would say that obviously the oil and gas industries are orders, as previously mentioned that marine based have been growing. Our military is stable our patrol boat market versus been growing and we see that going in, out past the next two quarters. Just a general comment on industrial and kind of the rest of the business, certainly Asia as an overall market has been stronger. Didn't subside very much, has held pretty stable. We see an increase in activity both in orders and interest and quotes in North America, and in Europe by and large, for everything, obviously they have a large pleasure craft and mega-yacht industry. I would say that region would be the slowest in overall recovery and pick up.

Okay. That does it for me. Thank you very much.

Thanks, Peter.

Thank you. (Operator Instructions). Our next question comes from Shawn Boyd with Westcliff Capital Management. Please go ahead.

Good morning. I wanted to come back to the ME&A expenses for just a second. If I am looking at this correctly, the expenses were down about $3.5 million in the September-quarter on a year-over-year basis. And then December down, oh, a little over $2 million, and you made the point about the quarter to quarter timing. So, I am trying to understand, can we take that $2 million drop and assume that kind of a year-over-year change again off of the year ago March and June quarters as we think about the forward quarters here or do we need to be using this 15, $14.9 million run rate as more of an absolute level going forward? If you could clarify that, it would be helpful.

Sean, this is Chris Eperjesy. Unfortunately you can't do that. One reason you can't is if you look at the third and fourth quarter of last year, and go back and look at our announcements back then, you will see there's noise in there, there was some reversal of stock-based compensation and incentive compensation. So those numbers were artificially low. So if adjusted for those, I think your analysis might be a little more, I think a better statement is to say that we don't see a significant move off of the levels of the second quarter.

Okay. I --

For the balance of this year.

Okay.

In particular the fourth quarter of last year which would have had a bunch at what I just described which is artificially low.

I got it. Okay. And -- getting away from that for a minute, on the mega-yacht, if you could, can you give us a little more color on what it takes to get that business back, and what I mean is there a ton of inventory out there on you know vessel that is haven't been built, is it the fact no inventory has been burned through and we just need orders to pick up, what did it take to get that business going again to contribute to Twin Disc?

John?

A little bit of everything you just said. There is still quite a bit of inventory in probably say the 40 to 60 to 70-foot range, and there's a lot of inventory that still needs to be worked through in the larger range, kind of the 70 plus, certainly above 100 feet, there really is to inventory and everything was built to order, and it is going to take realistically, an increase of disposable income, the feeling of the feeling you have, the stock market come back, and the ability probably most importantly, to finance it. Even people buying these boats are financing them, and they need to have access to capital to do it.

Got it. Okay. So it sounds like that business is probably going to be pretty -- for a little while here.

I would say looking at the recovery of the market, you are measuring in years not quarters.

That is about 20% of sales?

No.

What was that historically?

The pleasure-craft market is not so far off, in terms of 15 to 20%. You recall that we are also represented significantly in the commercial markets and the patrol boat markets around the world, so So, that is, that is an area that I think you are close to the number there.

Just pleasure-craft, 15 to 20.

The comments we have made and we are talking about this right now, applies specifically to the pleasure craft. When you go to commercial fishing, other work boat applications or the patrol boat. The patrol boat market is actually growing for us and the commercial markets are holding depending upon the region of the world that you are talking about growing in Asia, holding in the US, and Europe is particularly hit in this recession for a number of different marketplaces. That is, that is a little bit surprising this, this go around is how badly European markets have been hit.

Understood. That -- that clarification is really helpful. Can we think about it, can we talk to the industrial on the same, in the same vein meaning, industrial is a fairly large catch-all. What within that group is hurting the most here, and what do we think on timing? My gut is that probably comes back a lot faster than the pleasure craft.

No question. There's different parts. There's construction, our products go into construction equipment, irrigation for agriculture, some agricultural equipment, recycling, rock pressures, woodchippers, biomass, each one of those I mentioned has been down. Which one would come back the soonest, I can't say. It just says by and large our collection and PTOs have had increased order activity in the US, and not necessarily in Europe. So, I would foresee that coming back much quicker than pleasure craft marine.

Moving to let talk about the backlog growth, on the existing 8500 series, how does that look to you, how sustainable does it feel, is it fairly broad, is it one or two customers, is it a particular geography, and anything, anymore detail you can give us on that?

It's John again. I would say, compared to last time, the geography is broader, US and Canada, Asia and the customers now the number of customer that is have orders is more diverse than it was previously. Is it sustainable? I think so. I think there are other indicators that the overall economy is heating up. Not heating up but it is improving, I see it continuing for the next few quarters certainly, and beyond.

With the launch of the 7500 coming on, can you remind us again as to the market size that you're going to be able to tap at the 7500 versus the 8500 then also, any thoughts on what that initial order ramp or revenue ramp looks like?

Well, it is -- the best estimate is that the size of markets for the 7500 is 10 times that of the 8500. The 8500 really is 2700-horsepower to 3,000, the 26 to 3,000, the 7500 can tackle a market from 2500 to 15 had hundred and be competitive. The mark for new build is -- there's a lot more use, older rigs that could be --

How quickly it ramps up to a sizable market share, it's a balance of doing retrofits, new construction, and improving it in the field on different applications. So, we want to do it right and be prudent in the release. It will be a significant player in the market, that's for sure. A larger player than the 8500.

Very good. Would you expect to start actually taking orders and June-quarter on that?

I anticipate taking the first order some time this fiscal quarter, the third quarter.

In the March-quarter, okay. So that starts counting into backlog at that point.

I would anticipate not a huge amount, but a sizable amount for the 7500s in this quarter.

Okay. And last question on the pressure pumping, can you give us a feel for the current size of the businesses, of course without the 7500, maybe just orders on the existing 8500 series versus what they were say in peak 2007, 2008 levels?

I would say that right now we are somewhere as far as new construction we're somewhere in the 20 to 25 -- 20% range, maybe of what the build rate was two to two and a half years ago.

20% of peak.

Yes.

Got it. So down 80%. Very helpful. Let me jump back in queue. Thank you.

Thank you. Our next question is a follow up question from Peter Lisnic. Please go ahead.

Just wanted to follow up on gross margin. If I look at the number this quarter, the decremental looks better than it has during the downturn I think period. So, just wondering if maybe you can call that out a little bit in terms of what drove that in terms of either mix or restructuring whether those had come through according to plan, and what might be happening on the, the price costs or on the materials cost size as well.

Actually Pete I think you hit them all. Everything that you identified is something that had an impact in that whatever 600 some basis point improvement. It was all of those thing, the mix certainly there was mix, as John was talking about some of the markets there was clearly the fact that volume and absorption we continued to see the ramp up on the savings effect both in cost of goods sold and ME&A. So there were some bad guys in terms of the pension expenses we had announced at the beginning of the year was going to be up slightly this year, and overall everything that you identified is something that we are seeing the effects of in the second quarter.

Is there a way to weight those in terms of which were bigger contributors than others?

From the first quarter to second quarter? First quarter to second quarter, certainly the volume and the mix are going to be two leading, but I think a close third would be the savings initiative.

Okay.

Peter, it is John again. The biggest impact is going to be here in North America, the Racine operations had a four week shut down, they had a one week in the second quarter, so that was probably going to be, just for volume absorption, that would be the biggest impact and we started shipping 8500s again in the second quarter.

So whatever there was like a 45% manufacturing -- I think you were down 40% in the US in the first quarter, if I remember correctly, exactly but that was the big number. The one thing that we haven't really I think talked about a whole lot is that you introduced some of these new products like the 7500. Just sort of and I know this is sort of tricky but what expectations might be in terms of margin contribution are these products where you expect a return profile to be comparable to what you got in the portfolio now, or is there a chance these products actually turn out to be, markedly higher return products for you?

The margins on the 7500 are going to be percentage basis, comparable to our other oil and gas kinds of margins. So, I would see that there's leverage to be head as we go forward from all of the products that are used in the oil and gas industry, which would be the 8500, the 7500. We have some large air clutches, and industrial products that go into servicing equipment. So, by and large, we will see some leverage here.

And it looks like we have lost Peters line. Our next question comes from the line of John Debs with Bodri Capital.

Yes. Thank you, there's a push to replace diesel engines, going forward, supposedly there was a bill in Congress that would help this happen, would that help or hurt your business, or what impact if any that would have.

An increased demand for natural gas will absolutely help the business, a lot of these pressure pumping activity is in natural gas. And those have not recovered as they have in oil. So, I see that as a plus.

What about vehicles that you would supply transmissions or whatever for?

It would take some time I think to, to have that develop as a market. Having said that, John, we are not too concerned agent either side -- how our source is because of, we provide the products on the end of the power source.

Okay. And how important can pressure pumping be, if the business comes back somewhat in terms of your overall sales? It could be very helpful to us, we do get leverage from this particular industry, oil and gas. So, we would benefit more on the bottom line than on the top.

Thank you very much.

Thank you. Our next question is a follow up question from the line of Shawn Boyd. Please go ahead.

Thank you. I wanted to come back to the margin structure of the company, thinking about the answer on the ME&A expenses in the discussion the Company in previous gross margins over 30%, operating margins over 10%, is there a different kind of maybe medium term target and can you giver us a revenue run rate we might be able to think about going forward?

We don't do a lot in specific forecasting, Sean, but let's go back to the original question our targets would be to get back on an interim basis on the 30 kind of numbers. And to work up to the mid-30s which is where we got. Of course the mid 30s reflected a lot of oil and gas business during those years of starting 2007, and up to 2009, that was largely driven by mix, but we had been focused on getting the overall run rate, 30% and above. That's where our target would be.

Okay.

And as far as revenue run rate, that is -- we have some mixed bags as markets, Shawn. Oil and gas is coming back. The Pacific basin are growing nicely. But we do have some issues in the European market that we are having to deal with and we are just going into our planning process on the forecast. That would be for fiscal 2011. Looking at our outlook longer term, I am very encouraged by where we are positioned as a company, in terms of the market we are serving and the technologies and the products that we are bringing to the market for the next three or four years, because we have a lot to offer as we go forward.

Understood. And the question about the revenue run rate was in conjunction with the margin. So, so going back to an interim target with striving toward that 35.

We have got some good things, I mean it will depend upon the product mix because the, the various products that will get us there with higher margins could get us there sooner than with others. So, lots depends upon how much of the oil and gas comes back as to how soon we get to the, the numbers. So, if we see a good run in the global oil and gas markets it would be sooner.

Got it.

Rather than, than later.

I understand you aren't interested in disclosing exactly what those margins, but from the commentary here, I am guessing there are a lot more than one or two basis corporate average. You make a significantly better margin on that oil and gas product.

You made the comment.

Okay. Good enough. Thanks for the clarity and good luck, gentlemen.

Thank you.

Josh, are we still on?

Yes, sir. (Operator Instructions).

I am showing no further questions in the queue. Please continue with any closing remarks.

Fine, Josh. Thank you. Well, again, we would like to thank all of you who participated in today's conference call. We appreciate your interest and attention to our company and the progress we are making going forward. So thank you for your insightful questions today, and we look forward to sitting down with you again in 90 days after the April quarter. Or the March quarter in April. So, thanks again, and we will talk to you soon. Thanks Josh.

Ladies and gentlemen, this concludes the Twin Disc 2010 second quarter financial results conference call. If you would like to listen to a replay of today's call, you may do so by dialing 303-590-3030 or toll free at 1-800-406-7325 and entering the pass code 420-0481. Thank you for your participation and you may now disconnect.