Twin Disc Inc (TWIN) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Twin Disc, Inc 2010 fourth quarter financial results. (Operator Instructions). As a reminder, this conference is being recorded today, Tuesday, August 3, 2010.

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

Thank you, Barbara. On behalf of the management of Twin Disc, we are extremely pleased that you've taken the time to participate in our call. And thank you for joining us to discuss the Company's fiscal 2010 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 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 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 Maianoki] at 262-638-4000, and she will send you a copy.

Hosting the call today are Michael Batten, Twin Disc's 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. Mr. Batten?

Thanks, Stan. Good day, everyone, and welcome to our fourth quarter and year end conference call. As Stan has indicated, I will start out with a brief statement, and then John, Chris and I will be available to take your questions.

It is gratifying to report that with solid sequential improvement in the fourth quarter, we were able to report a profit for the full year. Considering where we started at the beginning of the year, we are pleased with the outcome. At the same time, we generated $35 million in operating cash flow, lowered our debt 39% to $31 million, and finally, our outlook for the coming fiscal year is for continuing improvement.

Let's turn now to the summary details of the fourth quarter. Revenues for the final three months were $64 million compared to $72 million posted last year. Orders and shipments to the oil and gas of oil and gas transmissions along with stable demand for our ARFF, land and marine based military, and Asia-Pacific markets offset continuing softness in the mega yacht and European markets. Total revenues for fiscal 2010 totaled $228 million compared to $296 million for fiscal 2009.

Our gross margin as a percentage of fourth quarter sales was 30.2% compared to 26.7% for the same period last year. The improvement reflects the benefits of our cost reduction efforts, higher volume, as well as favorable mix in our business. Year-to-date gross margin as a percentage of sales was 26.6% compared to 27.6%, and reflects the narrower margins experienced earlier in the fiscal year.

Our ME&A expenses as a percentage of sales for the quarter were 22.8% compared to 17.5% last year. For the current fiscal year they were 25% compared to 20.5% for the previous fiscal year. Overall, ME&A expenses were down $3.6 million year-over-year, reflecting a netting of increased expenses in pension and stock-based compensation, and reduced expenses resulting from across the board cost reduction initiatives in wages and salaries, including executive compensation, the elimination of the bonus plan, and changes to certain benefits.

The Company's tax rate for the fourth quarter was 54.4% compared to 46.9% in the comparable period last year. For the full year, the effective rate was 57.6% compared to 34.7% in the prior fiscal year. The relatively high tax rate for the current period reflect operating at a loss or near break-even where small adjustments can have a relatively larger impact on the tax rate.

Net earnings for the fourth quarter were $2 million or $0.18 per diluted share, compared to $2.7 million or $0.25 per diluted share for the same period last year. For fiscal 2010, net earnings were $597,000 or $0.05 per diluted share compared to $11.5 million or $1.03 per diluted share for last fiscal year.

We ended fiscal 2010 with a strong balance sheet. As indicated earlier, we generated $35 million in operating cash flow during the year, and reduced our debt 39% to $31 million. Our total debt to capitalization at June 30, 2010, stood at 26%.

Looking ahead, our six month backlog at June 30, 2010, was $84 million, up 39% from the same date a year earlier. The improvement in our backlog reflects the strengthening of orders for our 8500 series transmission for the oil and gas sector. The 7500 series transmission has entered the field test phase, and is expected to be in production in the second half of fiscal 2011. We anticipate more modest growth in demand from our ARFF, land and marine based military, and Asian marine customers that will offset the continuing weakness in the industrial pleasure and European markets.

That concludes my prepared remarks, and now John, Chris and I will be happy to take your questions. Barb, we're open for questions now.

Thank you, sir. (Operator Instructions) Our first question comes from the line of Paul Mammolo of Sidoti and Company. Please go ahead.

Good afternoon everyone.

Hi, Paul.

Would you guys say your cost structure is such that at around $64 million in sales you can keep a gross margin near 30% or would you say what you saw in the fourth quarter was really more mixed related than anything else

That's a good question and I think we have hopes moving forward to have gross margins in the 30% plus range.

Okay, fair enough. Can you give us a general sense of how much off-highway or how off-highway did in the quarter relative to marine?

John would you like to respond to that one. I would say it were improving quarters were off-highway. They have been improving throughout the year and marines have been relatively flat and stable throughout the year so as far as quarters ago it was the best mix of off-highway to marine.

Okay and would you separate pleasure craft and mega yacht, is it fair to say that mega yacht is really weighing things down and maybe you might be seeing some improvement on a pleasure craft side per se service drives or steering systems.

I would say where our products end up, the pleasure craft areas is by far the weakest still and we had good activity, good growth in the patrol boat market which happens to use the same marine transmission, drives, propellers and hydraulics so we're very fortunate that those markets picked up throughout the year.

Okay that's helpful and then finally, is the 7500 series making up a meaningful piece of backlog yet of the $84 million?

I would say for this point a good backlog but our backlog has grown so much so that I don't know if I would consider it as significant at all at this point.

Okay fair enough, thank you

Part of that, Paul, Mike again, is that obviously we report a six-month backlog. And the orders that we have in the backlog right now are primarily for field test units with production starting outside of the frame of the six-month backlog that's where we would expect to see meaningful improvements going forward and right now the 8500 series is in great demand -- is a proxy both for 8500 and 7500.

Okay, so when you look at your backlog mix this year, would you say it substantially different compared to last year at this time? Meaning, I would guess, there would more 8500 series in here, is that fair to say?

Mike again, Paul. Yes, the backlog in oil and gas is significant and because it is a longer lead time product, what you are seeing is the benefit in the first six months for orders entered during the second half of this fiscal year but you aren't seeing the significant growth in the backlog that is occurring beyond what we report.

Okay thanks again

Thank you. Our next question comes from the line of [Bo MacKenzie with Global Hunter]

Hey guys, I don't know if it was my system or your system but at the start of the call I could hear you talking a little about what's going on with the 7500 tests I couldn't make it out loud. How is the tests going so far on that and what is your hearing from the customers in terms of their satisfaction, the smaller size whatever the criteria would be.

Well the lab testing went great. We have moved to field testing and are really installing it at Rick now for testing in the field whether it tests well (head) or at a job site. I would say overall, the impression when they get the unit it is obviously smaller and lighter than 8500, so they are pleased with that and it fits in a more standard design of a frac [inaudible] in the frame will so that's about what we have in the next six months we're going to be doing a lot of testing out in the field and at well sites.

Along that front, in the oil patch we keep hearing the E&P companies and the frac companies in Haynesville, Eagleford and the Bakkan is just eating equipment up. That people are taken 50,000-horsepower off the 30,000 horsepower job because pressures and temperatures are such that it's just wearing the equipment out. Is there a big aftermarket for you guys on the existing 8500 installed base or are you seeing customers having to come through and replace stuff that pumping 30,000 horsepower frac jobs is just wearing the equipment out faster.

One of the differences this time versus a few years ago, Bo, is there an aftermarket component because every rig manufacture operator that we're talking to -- the higher pressures, they're running longer, and they're basically operating not 24/7, but they're operating a lot more per day than they had been so there's definitely an increased aftermarket component now.

Can I ask one more question? I'm looking at the June of '07 K. and you guys peaked out of a $110 million of six month backlog. You just reported [inaudible] six month backlog. The composition has changed quite a bit from [inaudible] to now . Is it fair to say that reading between the lines or really not that much between the lines in the press release, the mix right now versus where you would've been at the end of '07, -- fiscal year '07, has got a lot more of the 7500/8500 series and a lot less of the mega yacht business, I would guess, huh?

That's fair to say in '07 every end market where we have product in was basically at or near the peak which is not the same now, Pleasure Craft is way down from 2007

So you were at 80% before you peaked out, but without that side working for you right now.

Correct.

Sounds good to me. Thanks

(Operator Instructions) Our next question from the line of Peter Lisnic of Robert W. Baird

Good afternoon everyone. I guess first question can you give us a little color commentary on what's happening with military end markets which are hearing from your customers in terms of budget pressures and kind of spending on some of those programs that would have impact on your top and bottom line.

The legacy first, we have a couple projects within legacy military for the US military and those projects are continuing on kind of a stable volumes, these vehicles are in use everyday in Iraq and Afghanistan and there's a rebuild program going on and we have a good backlog of orders going out quite a ways on those. The big change would be the patrol boat market in the global war in Asia and India as far as growing market share in that part of our military business is going

You mentioned market share is a function of a market share and market growth or a latter of the two?

It's more of the market growth. There's a lot more activity and spend particularly in patrol boat marine type applications for vessels that are in our size range so it's a very good market for us.

How much visibility do you have in that business? In other words, I assume when you're talking to these customers are probably looking at more than a year out if you will in terms of what they might be ordering, is that the right way of thinking about it?

When you first hear about a project to when the boatbuilder wins the tender, that can be measured in years but usually once a project is awarded its probably 12 to 18 months visibility that you have and when you need to deliver.

All right and then on the 7500, I understand that's not really on backlog yet. Can you give us a little bit color on what you're experiencing from an order inquiry perspective on the product?

We have customers that have 8500 orders in with us and we expect as we approve the 7500, their application for the 7500, that some of the 8500 orders would be converted to 7500 but we're also expecting growth with just the 7500 stand alone

Okay. Last question maybe could help here. In terms of the gross margin you made a comment earlier about the 30% clip and being able to run above that. My guess is part of that is due to mix as the backlog skews more toward oil and gas. A) is that correct, and B) how should we think about how some of the cost savings that you talked in the past, how those flow through incrementally 2011, Any changes on that cost savings front?

Right. Clearly the margin from the third quarter to the fourth quarter and the growth throughout the year was a combination of the volume and also the mix that the 8500 picked up throughout the year. So to answer the question yes that was a part of it.

Regarding B) you also started to see the effect of some of that. I understand that the percentage of sales was up but clearly you saw when you adjust for some of what I'll call noise, the stock based comps, the pension and other one-time items last year, there was a reduction on the ME&A line which I know was below gross margin yield benefit but also there were things that were done and part of that cost reduction effort last you that affected fix cost, that certainly will have an effect as we increase volume throughout 2011.

Okay. And are there any changes in terms of engineering expense for this year realizing now that you're got the 7500 in testing phase, I would assume there new products that are on the books but just wondering if there's any big change in spending that we should sort of think about modeling.

No, we have some key projects coming up this fiscal year as well as beyond. That's one of the areas, Pete, last year where we didn't do-- we continued with the plans that were on so it wasn't as if there were major cuts in that area. So I guess the answer is definitely we're going to continue moving forward with those types of projects that technologically differentiate our products.

Okay that Is very helpful. Thank you.

Thank you. Our next question comes from the line of Shawn Boyd with Westcliff Capital Management. Please go-ahead.

Hi Shawn

Hi there. How are you guys doing? A couple of quick ones for you. What is your manufacturing capacity on 8500 also on 7500 once they go into commercial production on that?

We don't break out, Shawn, the exact capacity but we have ample capacity through internal production capabilities as well as expanding our subcontracting source of supply.

Okay. What would lead times look like right now for the 8500, MIchael?

At six or seven months say. Seven to eight months.

And what was at say six months ago?

Six months ago it probably would've been in the four to six-month range. There were very few orders. It's been the last quarter plus a couple months getting all of the supply base back up into production.

Got it, okay. And on the gross margin question that might be making you repeat something here, but I heard the earlier comment regarding shooting for over 30% and I'm also thinking about a mix hear that's been dominated by energy and I'm kind of going back to the days of 35% gross margin so I don't want to push too hard but is there any chance that we can see something more into the mid- thirties given our backlog mix right now?

We answer the question the way we answered it but obviously we're pushing ourselves to grow our margin and to get back to what we demonstrated which was about 33% or 34% on an annual basis in '07 and '08. But at this point in time I think looking out for this fiscal year as a start, I think the 30% is a reasonable number but we're going to be pushing to do better.

Okay very good and on the backlog, you guys give us a six-month backlog and there's a couple comments earlier that made me think a little bit more about that. You're looking at a total backlog and then just reporting the six-month, given that we're at the cusp of going into commercial production at 7500, seems like your total backlog could be growing at a faster rate right now than in the six-month. Is that correct.

That's a good observation.

And I've got to try, can you give us a little of back--

It was a good try Shawn, but at the moment that's not a number that we fully disclose but rest assured the content outside of the six-month time frame is been growing nicely. Were putting two and two together with our lead time and where our incoming orders for 8500 have to be placed or 7500 and the demand has been very good.

Okay sounds good. The only other question for me I guess is on the airport rescue, fire fighting and land and marine-based military strength that you're seeing. Is there any one time and nature is there anything that you expect to fall off there and how would you characterize the demand going forward versus the June quarter.

You listed airport rescue, fire fighting and land and marine-based military. ARFF and land-based military I see being very stable going forward. Marine military just by the nature of the project that's always a little bit more erratic but over all you see the market continuing to be good. That is a little bit harder to predict quarter to quarter because of when projects fall.

Got it. Got it. Okay. And I lied. One last one that just popped in. We mentioned the strength obviously in 8500 and coming on the 7500, would you say energy at this point was over 50% of the backlog

No. But it's the fastest-growing part of the backlog.

But I assume higher than your average.

In the backlog we have continuing ARFF and land-based military marine that we spoke about. We do have work boat and crew boat kind of orders from around the world continue to come in so they still account for the majority of the business but clearly the run-up in the backlog is largely attributable to the 8500 and forthcoming the 7500 series.

Got it. Very good. Congrats on the quarter and congrats on the process in orders.

Thank you.

Our next question comes from the line of John Braatz with Kansas City Capital.

Good afternoon gentlemen. As I was doing some work on the Company, a couple months ago, I was working under the impression that the 7500 product was distinctly different than the 8500 and would be serving a different market and as you mentioned in your prepared comments that you got some 8500 series products that would probably be replaced by the 7500 when it is available. How much cannibalism might there be as we look forward to the introduction of the 7500 and how distinctly different marketplace is a 7500 going to serve?

While I don't think there's very different markets, they're both oil and gas, primarily gas in the shale field. The 8500 has the higher horsepower range 3,000 horsepower versus 2600-horsepower. The 7500 weighs a lot less, it is less expensive. It's dimensionally smaller so it can fit in what we say portable rigs, frac rigs that don't need special permits to move from one area to another, so just by the nature of organization and planning those types of rigs are easier to have on hand to move where you have the demand.

We see some cannibalization, I don't think it will be much because there's a lot of rig producers who are producing at the 3,000 horsepower level so the 7500 cannot fit on that. We are applying some 8500 in the 2200 horsepower range and we expect those to go to the 7500 but we don't expect to introduce the 7500 and have the overall oil and gas backlog remained flat, we do expect growth to that.

So is there a way you can quantify the new market that the roadable rigs that you might be entering with the 7500 how sizable that is, compared to what your current market size is and what the 8500 is selling into?

If I go back a few years, the horsepower range from 1500 to 2250 any given year could be given five to ten times larger than what the 8500 would be just at the high horsepower.

Okay.

I think in this latest ramp up, I think that the high horsepower segment may have grown faster than the lower horsepower segment, but I don't know if that still holds right now.

You think it would still be larger.

Yes, absolutely.

Just not of that multiple. Okay. You talk about the weakness in the pleasure craft and the mega yacht area, is it worsening or just flattening out and remain weak or do you see the trend a little bit-- worsening a little bit

I would say it's hit bottom, but it's certainly not noticeable improvement. That would be the fair statement and again it depends on the area and the builder, inventory they have and what they're trying to move. It's not a very yacht friendly marketplace right now.

I understand. One last question. When I go back and look at revenues by quarters it always looks as though the first quarter seasonally is lower than the fourth quarter but given the ramp up your seeing in the 8500 in the oil and gas market, will that trend be the same this year?

Last year we had a month shut down the US manufacturing operations as well as the shutdown in Europe which is traditional there. Europe was also basically the days they were shipping were at a 50% manning level. There is no month long shut down in the US this year. Similar situation still in Europe, so I think you will see it's the number of shipping days that we have in the first quarter.

But the number of shipping days will relatively speaking will be greater this year than last year.

Greater this year than last year, but not as many as the fourth quarter.

Okay, all right. And as we look forward the tax rate expectations for 2011, clearly it's good to go back to a more historical norm, I think just like give a mix of products given mix of the tax rates by the jurisdictions in the jurisdiction it comes from but my expectations would be more than normalized 36% to 38% range. Okay, all right. Thank you very much.

We have a follow-up question from Bo Mackenzie with Global Hunter.

Thanks you guys, are you able to track where the transmissions are going. Some of our friends over at the (inaudible) say that lot of the international markets, predominently Schmidt Equipment but there's a number of European sales that seem to be giving some interest. This cycle might have a fair amount of frac equipment built for the European market that the last cycle might not have.

I can't, Bo, I don't-- I know that our equipment is going to the familiar places, Canada, Western United States, and some going to Russia, I have not heard specifically if any of the new construction or old construction going into some of the European fields yet.

And are there any signs that you guys are seeing over on the workable rig side pickup the torque conversion clutches yet.

We are seen a lot of spare parts aftermarket parts for the converters that are in those rigs

And then one last one, I guess it's been up while since I thought about this, but think you guys were (inaudible) what they call slip shift, quick shift, I forget the name. . I think you're going to try to adapt it for dynamic positioning work, I lost track of what happened that is there anything new going on in that front?

We've done what a bit and also GP work with quick shifts and then also GP two. We have applications in all the major areas operating out of Africa and southeast Asia and certainly in the Gulf Coast.

Has it gained much commercial traction yet?

While the market certainly I'd say it's flattened out on that type of build, but we are we are gaining-- we are selling more of our crew boat transmissions and quick shifts.

Great, thanks.

In our next question comes from the line of Rick Whitting with Rockview Advisors. Please go ahead

Thank you. Just wanted to talk about the ARFF business a little bit and see the characterization I've heard so far on this call is that you feel like it's fairly stable at this level, not necessarily growing much but at least stable. Would that be a down tick from how you saw it say six or nine months ago.

Actually in holding in terms of relative growth rate your correct we are growing at the same pace that we were but we are holding at a higher level of activity.

And particularly on the airport rescue, fire fighting side of it, would that be a business that's going to be constrained as long as government's remain constrained in terms of their own budgets. Where does the funding generally come from for that equipment?

It definitely comes from the government but it usually comes from airport authorities and a lot of the market activity is really driven outside of North America in the EU. In countries where they need to upgrade their safety equipment for international flights. So we see these developing countries, if they want to have intercontinental international flights and they have to upgrade their equipment.

Is that an upgrade that is because of the equipment they have is getting old and not as reliable or is that because of the new mandate.

It's safety standards but it's really going to what a ARFF vehicle is versus a traditional firetruck in a lot of places. It goes , Rick, to the point of safety and the ability to do the mission acceleration rates play into this payload and the amount of time it takes to empty the payload on a crash in the event that happens.

Okay, thank you for that clarification. As you look at your backlog, which has grown very nicely, is there any point in your supply chain that gives you any pause for concern that might stretch that backlog out.

No one area, what we been battling the last three to six months is getting the suppliers for oil and gas back up to really from zero to a hundred in a pretty short order. There is in some areas there is less capacity in steel for bearings and forgings. A lot of capacity was shut down over the last 18 months and it's a wait-and-see attitude before there's added capacity back into the system.

Okay. Listen thank you and congratulations on a nice quarter.

Thank you.

Thank you, and we have a follow-up question, from the line of Shawn Boyd with Westcliff Capital Please go ahead.

Hi guys. Just one follow-up on Europe, if you could you mentioned that the areas of the weak could you just remind us what percentage of the business that is in the last quarter so we can get a feel of where it is in the depressed level and also are there other areas besides mega yacht, what are the European sales? I understand from the earlier question though that we don't really have any oil and gas there yet ,but maybe the other product areas would help us

You're coming through quiet what our sales in Europe. What type of end markets are there?

What percentage of revenues is Europe at this point given that it's probably lower than it used to be with the weakness? Then also what type of end markets to the European sales represent?

We don't give out the geographic numbers that way. We do break out domestic and Italy and the rest of the world I believe, but the end markets that we serve in Europe largely relate to pleasure craft, the Italian and the UK primarily mega yacht market which were down on the order of about 30% year over year. And then industrial markets that have languished a bit because of the European recession so that the order of magnitude that we've seen over there. I would also add Shawn, that we also -- the same products that are produced in Europe for pleasure craft are the ones going to the patrol boat market so they have export component even though their domestic markets or internal markets may be slowing and we had a lot of business for ARFF into Europe which are taken care by the European operation.

Okay got it. So the mega yacht and industrial are those areas still weakening or would you say those are at a low level that is just kind of waffling. How would you characterize it?

All of the end of markets in Europe our waffling and not doing as well as any other region of the world trade.

Right. Okay good enough thank you.

Thank you. And there are no further questions in the queue. I'll turn it back to management for any closing statements.

Thank you, Barb. Again thank you everyone for joining our conference call today. We appreciate your interest in Twin Disc and hope that we've answered all of your questions. If you have follow on questions please do not hesitate to call Chris or John or myself and we look forward to speaking with you again at our conference call at the close of the first quarter in October. Thank you. Barb?

Thank you ladies and gentlemen, This does conclude our conference call for today, Thank you for your participation, You may now disconnect.