Twin Disc Inc (TWIN) 2010 Q3 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Twin Disc Inc. 2010 third quarter financial results conference call. (Operator Instructions) Following the presentation, the conference will be opened for questions. This conference is being recorded, today, Tuesday, April 20, 2010. I would now like to turn the conference over to our host, Mr. Stan Berger. Please go ahead, sir.

Thank you, Christina. On behalf of the management of Twin Disc, we are extremely that you have taken the time to participate in our call. Thank you for joining to us discuss the Company's fiscal 2010 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 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 Mianake at 262-638-4000 and she will send a copy to you. Hosting the call today are Michael Batten, Twin Disc Chairman and Chief Executive Officer; John Batten, President and Chief Operating Officer; and Chris Eperjesy, the Company's Vice President of Finance, Chief Financial Officer and Treasurer. At this time, I will turn the call over to Michael Batten. Mike?

Thank you, Stan. And good day, everyone and welcome to our third 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 your questions.

We are pleased to report that we posted a profit in the third quarter and our financial results continued to show sequential improvement. Year-to-date cash flow from operations reached $23.1 million. And total debt has been reduced 15.6% to $35.1 million. And our outlook for the balance of the year is for continued improvement.

Now, let's turn to the details of the third quarter. Revenues for the current three months were $61 million, down 12% from the fiscal 2009 third quarter but up 10% from the 2010 fiscal second quarter. The year ago comparisons continue to reflect weakness in the mega yacht market. However, strengthening demand from our customers in the oil and gas market and continued demand from the airport rescue, fire fighting and land and marine based military and Pacific commercial marine markets; drove the sequential improvement from the second quarter. Year-to-date, revenues totaled $163.2 million, compared to $223.6 million posted last year.

Our gross margin, as a percent of sales, was 27.1% in the current third quarter, compared to 27.6% in the comparable period last year and 26.8% in the 2010 fiscal second quarter. Gross margins have continued to improve sequentially during the year, as a result of increased sales volumes and a slight improvement in sales mix. Year-to-date, gross margin as a percent of sales was 25.1%, compared to 27.8% for the fiscal 2009 nine-month period.

For the fiscal 2010 third fiscal quarter, our ME&A expenses were $14.6 million, compared to $14.5 million a year ago. In the prior year's three months, there was a $733,000 reversal of corporate bonus expense that reduced ME&A expenses in that period. In addition, a year over year changes in foreign exchange had a net translation effect of increasing ME&A expenses by $484,000 in the current quarter, compared to the same three months last year. As a percent of sales, ME&A expenses for the current fiscal year were 23.9%, compared to 21% for the same period last year. While the current nine months were 25.9%, compared to 21.4% for the same period a year ago.

Net earnings for the current quarter were $1.5 million or $0.13 per diluted share, compared to net earnings of $2.9 million or $0.26 per diluted share a year ago and a net loss of $490,000 or $0.04 per diluted share for the fiscal 2010 second quarter. Year-to-date, the Company reported a net loss of $1.4 million or $0.13 per diluted share, compared to net earnings of $8.7 million or $0.78 per diluted share for the first nine months of fiscal 2009. During the first nine months of the fiscal year, we generated $23.1 million in cash from operations. Total debt has been reduced by 16% to $35 million. And total debt to capital now stands at 25.2%, compared to 33.2% at the same time last year. Our financial condition remains strong and we have flexibility for the future.

Turning to our outlook. Our six-month backlog, at the end of the third fiscal quarter, was $72.8 million, compared to $60.6 million at June 30, 2009 and $70 million at December 25, 2009. Our backlog continues to strengthen, as order rates from customers in the oil and gas markets are increasing. And we expect sequential improvements to continue in the fiscal 2010 fourth quarter. We remain optimistic about our long-term business prospects, as well, as a result of the introduction of our world class new product offerings, our customer service and our significantly improving financial position.

That concludes my prepared remarks. And now, John, Chris and I will be happy to take your questions. Christina?

Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions) And our first question comes from Peter Lisnic with Robert W. Baird. Please go ahead.

Good morning. This is Josh Chan filling in for Pete. It sounds like you guys are expecting better demand trends out there. My question is, as your sales improve, how much leverage do you think you can get out of the ME&A base? So, for example, can you hold it relatively flat if there's a gradual improvement in end markets?

Josh, it's John Batten here. Yes, to some extent that is true. We've been running at this rate throughout the year. And certainly, heading into next year, we're going to try to control those expenses as best as possible. Obviously, there are other things that were mentioned, some of the noise, the pension expense going back and forth. But as far as the run rate and what we're spending on promotion, travel, entertainment and things like that and factoring, we're going to be very mindful of that headed into the next fiscal year.

Okay. And then you've -- switching to sales, you've alluded to some sort of sequential improvement in the fourth quarter. And if you look back in the last couple of years, you typically run a 4% to 5% increase but if you go back a little farther, you've got bigger increases than that. Can you talk about maybe which [camp] that you guys are expecting this time around?

Well, I think in looking at the market, I do think we're going to have sequential improvements going into this fourth quarter. Certainly, there is the growing demand in the oil and gas, recovering demand in after market in our industrial products. So, I do expect the improvement to continue. Whether it's the traditional 4% or something more, it's going to be a good quarter.

Okay. Got you. And if we think about your gross margin for fiscal 2011, you'll hopefully get higher volume and then, mix could be favorable. Anything that worries you on gross margin? Any commodity concerns, pension, anything like that?

No, Josh, this is Chris. At this point, I would say no. Obviously, there's, as John and Mike both alluded to, we do have some momentum in terms of volume. So, obviously that comes with some benefits. We have some mix considerations that are coming into play. But, at this time, I don't expect any major impact from, in particular, the pension you talked about in terms of expense. So, no, there's nothing on the radar, as of right now.

Anything on commodities?

There's always the concern of some of the raw material prices coming up. Especially, we're competing against other industries that seem to be improving, namely auto. And we're always watching that to stay ahead of it.

Okay. And then final question, you talked about a $25 million cost reduction costs avoidance program before. How are you thinking about those costs going into fiscal '11? Are any of those coming back in any sense?

We may see some of those expenses coming back on a marginal basis but, this is Mike, Josh, a large measure of the cost reductions will remain in effect as long as, especially, the European operations remain as soft as they have. And we do see that Europe is probably going to be the area in our portfolio that is going to take the longest to recover. So, those employees who are on Chomage or Cassa Integrazione are likely to remain that way. Whereas, the demand that we are seeing is affecting our US operations and our Pacific markets. So, where we would see potential recovery of some of the costs would be here in the States.

Okay. Thanks for your time and good luck.

Thank you.

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

Good morning, everyone. Guys, what's going on with the 7500? Is that on track? Do you think that that has an impact on 4Q '10 backlog?

What was the last part, Paul, on the fourth -- on the current backlog?

The fourth quarter backlog, whether it will effect it.

Paul, it is on track. It is finishing the last test and we're headed out to the field in the next two months. We do have -- it's part of the current backlog but not a significant amount of the six-months backlog. It will have more of an effect on the fourth quarter, as we are shipping the first units at the end of this calendar year into the field. But, yes, we are moving into the field for some testing early in this quarter.

Okay. So, sorry to clarify, the first shipments of the unit will be towards the end of calendar '10.

What we would consider production, not prototype testing in the field with customers.

Okay. And then, Chris, you made a good dent on inventory in the quarter. I would assume that's probably at the distribution level. Do you think there's more room to go there?

Well, you're correct that some of it came at the distribution level and I think the answer is, yes. There's certainly -- it's one of the areas we're always looking at is inventory reduction. And we're going to have to balance that with what we're seeing in terms of the backlog. We have the 7500 coming on. So, certainly there will be pressures in both direction but as always, we're focusing on a net inventory reduction.

Okay. On that thought, how much -- how many units do you think a distributor would hold? What would you push through to the distribution channel on unit-wise for the 7500? Do you have a sense of that?

Paul, it's Mike. The distribution of these transmissions is largely direct from our corporate Company to the supplier, to the customer. We have [one] entity that is involved in sales -- three, excuse me, John corrects me. We have three that would hold inventory. John, why don't you finish?

Yes, Paul, we would have -- there would be three. Primarily, the bulk of the business would be direct from Twin Disc or through three distribution entities. It all depends upon the size of their market. We would, of course, expect them to have swing units and units in inventory to deliver to their customers. How much that would be, I'd imagine it would be somewhere in the neighborhood of their business to their customers. They hold somewhere between 10% to 20% of what have they expect to sell in their market.

Okay, that's helpful. On the pricing side, you guys talked a little bit about material costs. Do you push anything through here in the first few months of the year in terms of price?

No, we did not.

Okay. And then, finally, one thing we haven't talked about in a little while is any action on the military side. I know you guys have some good legacy products there. Is there anything stirring on the replacement side or anything for power take-offs or transmissions for maybe some of the tanks that you've worked on before?

We're still in the development stage of new projects. But the main one that we have continues, the XT. If I'm not mistaken, we are booked, I believe, into calendar 2012 and there are extensions to that coming up. So, that one remains strong. But we are actively trying to put to bed some other ones that would fall into the category of legacy military.

Okay. Thanks for your time, guys.

And our next question comes from the line of Jon Braatz with Kansas City Capital. Please go ahead.

Good morning, gentlemen. I'm a little bit new to the Company but going back to the 7500. If you could just touch on a little bit about the uniqueness and the difference between the 8500? And when it becomes commercially available and you begin selling it in the latter half of this year, this calendar year, does it cannibalize the 8500 product?

Jon, it's John. What's unique about the 7500 is the transmission that is designed specifically for pressure pumping. It's not a transmission that's come out of a vehicle application. So, the ratios are evenly split and they are designed with the engine and the pumps in mind that are used in these applications.

The difference between the 7500 and the 8500, while they're close in horsepower, the 7500 is considerably lighter and it is able to fit within the frame rails of on-road frac rigs. So, it can go on to rigs that don't need special permits to move from one field to another.

And it will work in a range of 1,500-horsepower to 2,500-horsepower. Which is a market that is considerably bigger than kind of the 2,500 to 3,000-horsepower application, which is primarily limited to special permits applications, yet you have to take bridge laws into account. They're used more in the remote areas. Certainly, on shale applications, unique gas applications and then, offshore on the rigs. So, the more traditional, high volume pressure pumping rigs are what the 7500 is aimed at.

So, would that be, as just a point of clarification, mostly designed for the fracing industry?

The 7500 was designed specifically -- it's not designed for any -- it has no other application. It's all for pressure pumping.

Okay, all right. And that's a much larger market than you're selling into than the 8500?

Well, the 8500 now is all pressure pumping but it's such a small segment of the overall market.

Okay. Speaking about working inventories and working capital, they way I look at working capital, the last three quarters, it's come down. Would you expect as the business begins to turn up that you're going to have to invest some money into working capital?

Of course, we're going to have to. We've been very mindful to bring it down, both at the factories and at the distribution subs. The only -- the main area that's come up a little bit is just for the 7500 and the 8500 with the increase in demand. But we're going to be very mindful of that going into next year as the volume increases. We certainly don't want to miss sales opportunities but we're going to be very careful in how we bring the inventory in.

Okay. And then, lastly, in terms of the mega yacht category, based on your history in this area, how quickly can that business snap back?

That is very good question debated within the industry. It typically would mirror how the stock markets are doing, confidence levels and it obviously, does very well in retrospect bubble-type economies. We see a good potential for to us grow, even in a down market, with some of our products that are coming out. The Joystick docking system, or EJS, we think gives us a very good competitive advantage even at a lower market level. But, certainly of all the markets that have come down since the financial crash, this one will probably be the last one to recover.

Have you seen any incremental improvement?

Yes, we have. We have seen incremental improvement. There's a lot of news of boat yards actually hiring employees back, which is a good sign. But we certainly haven't seen significant improvement. But it has, at least, shown a sign of where the bottom is.

Okay. All right. Thank you very much.

And our next question comes from the line of Shawn Boyd with Westcliff Capital Management. Please go ahead, sir.

Good morning, how are you all doing? Just a couple of follow-ups if I could. Given the strength that we've had over the past couple of quarters, with energy continuing to improve and mega yacht frankly continuing to stay weak. Can you just give us sort of a point in time, where we are at this point, maybe as a percentage of revenues, how much energy is or as a percent of revenue of gross profit? I know you get a little bit better margins there. And then of course, the flip side, what are we down to on mega yacht?

Well, we don't, Shawn, normally break out that information specifically. But clearly, our oil and gas is tending to consume more, as a percentage of our sales, as it recovers fairly strongly during the last quarters and as we see it moving out into fiscal '11. So, we would see an increasing share of the revenues in oil and gas going forward and there is some gross margin leverage associated with those products.

On the mega yacht side of the business, again, we don't break out specific numbers but we're in three major segments of the marine industry. Mega yachts is only one them and, at the time, is the smallest. The other would be -- the larger segment would be commercial marine for offshore oil, fishing, tugboat kinds of use, as well as patrol boats where that market is doing very well for us. And so, the growth in those markets will tend to minimize the percent of mega yachts for us. But clearly, mega yachts is down 50% year over year and continues to be in that kind of a weakness.

Got it. Okay. That's helpful. So, if we think about with the launch coming up on the 7500, is there a point down the road here, let's say within the next year or two, where given the strength that we're already seeing in the aftermarket and energy of the existing products. And then, we bring in the new launch of the 7500. Energy is 50% plus of the overall Twin Disc business at some point?

I don't see that that number is going to be the case because we have other things that are going to come into the market that will help us. But the energy market is probably not going to consume more than 50% of our sales at this time.

Got it. Okay. And then, as we think about that launch hitting, if I heard it correctly, you expect first production shipments by the fourth calendar quarter of 2010. Should we expect to see a backlog build ahead of that?

Yes.

I would expect to see the 7500, a noticeable effect on the six-month backlog, really starting the first two quarters of next fiscal year.

The September and December quarters.

Correct.

Got it.

But really production in the second half of next fiscal year, fiscal '11.

Okay. And what is your production capacity of the new 7500 Series, by the way?

Well, we don't divulge those numbers specifically for competitive reasons. But we will be able -- we're building additional capacity beyond, obviously, the 8500 and we don't see any significant capacity constraints in that regard.

Okay.

We should be able to supply everything that we need.

Okay, very good. Given where the rig count is today, there's a lot of speculation that perhaps that needs to come off a little bit and really the kind of drilling that needs to come off is some of the more shallow drilling. Are you guys -- so, it doesn't seem like that would really cause any issue to you all in terms of your existing energy business. But let me just ask you straight up, are you seeing any moderation in the improvement that we've seen so far in the energy subsegment for you guys?

John, do you want to take it?

Well, I think as far as, if you look at the offshore supply vessels and crew boats, I would say, there's some cautiousness there on what actually is going to happen, as far as more drilling or whether or not they're going to be able to drill more. So, I would say, they're cautious right now.

But on the land based --.

On the land based side, obviously, the demand is increasing and is showing signs of continuing in the foreseeable future.

Got it. Okay. And how much of your business is offshore versus land based within energy?

Again, we don't break out those numbers, Shawn, but a fair amount of our business is definitely in the offshore crew boat, supply boat business. However, with the combination of the 8500 and the 7500, we should perhaps reach parity in that regard.

Got it. Okay. Thank you so much.

You're welcome.

(Operator Instructions) And we have a follow-up question from there line of Jon Braatz with Kansas City Capital. Please go ahead.

Thank you. Back to the 7500, would you envision the 7500 being a product for new rigs or sort of a replacement product for existing transmission products out there? How would you see that moving into the marketplace?

It's John, Jon, it certainly can be in both retrofit and new applications. Obviously, there is additional engineering involved in a retrofit because you're looking at a rig that was designed in one configuration and has to be undone. We're certainly looking at both but as far as testing -- and initially, we're looking at new construction. So, it's designed with the 7500 in mind from the get-go. But to answer your question, it has applications, certainly, in both areas.

Okay. But it's a little bit costlier to do it on a retrofit basis.

Correct, there's more man hours involved.

Yes, okay. Do you get some pay off- payback on that cost?

Absolutely, depending upon the rigs, in some instances, we are seeing you can retrofit in the 7500 and utilize 50% the amount of rigs to do an equivalent job. So, there is payback on the operators depending upon the application.

Okay. And do these drilling companies, do they typically lease this equipment or do they own it?

I don't know -- off the top of my head, most of our customers own the equipment because we're dealing in the cycles of their budgets and their capital purchases. So, I'm assuming that most of these are owned. A lot of -- we deal with customers who build the rigs and use them themselves and we deal with customers who buy their rigs from rig manufacturers builds.

Okay, all right. Thank you.

(Operator Instructions) Management, I'm showing there are no further questions. Please continue with any closing remarks you may have.

Thank you, Christina. Again, everyone, thank you for joining our third quarter conference call. We appreciate your interest in Twin Disc and hope that we've answered all your questions today. And we look forward to speaking with you again at the close of the fiscal year when we have our next conference call. Thank you.

Ladies and gentlemen, this concludes the Twin Disc Incorporated 2010 third quarter financial results conference call. If you'd like to listen to a replay of today's conference, please dial 1-800-406-7325 and entering the access code 4282461. Thank you for your participation. You may now disconnect.