Twin Disc Inc (TWIN) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Twin Disc, Inc. second quarter fiscal 2012 financial results conference call. During today's presentation all participants 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, January 23, 2012.

At this time I'd like to turn the conference over to Stan Berger of SM Berger. Please go ahead, sir.

Thank you, Chris. On behalf of the management 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 2012 second-quarter and first-half 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 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 Mike Batten. Mike?

Thank you, Stan, and good day, everyone. Welcome to our second quarter fiscal 2012 conference call. I will begin with a brief summary statement and then John, Chris, and I will be ready to take your questions. As you have already seen from our press release, Twin Disc had another solid three months, with second quarter earnings up 45% year over year on a 10% improvement in sales. Our backlog remains strong and we expect fiscal 2012 to be another good year for the Company.

Looking at the results for the quarter, net sales increased to $83 million from $75 million for the same period a year ago. Our oil and gas markets continued to be the main driver of demand. However, stable to slightly increased sales continued in a majority of our other markets, including our aftermarket, industrial, our airport rescue and fire fighting market, land and marine-based military, commercial marine, and pleasure craft markets. Year-to-date sales were $164 million compared to $137 million for the first half of fiscal 2011. Gross margin for the fiscal 2012 second quarter was 35.6% compared to 31.6% in the same quarter last year. The significant year over year improvement resulted from higher sales, improved manufacturing efficiencies and absorption, and a more profitable mix of business. On a sequential basis, gross margin was down from an all-time fiscal high of 2012 first quarter performance of 37.8% due to an anticipated shift in the business mix.

Year-to-date, gross margin was 36.7% compared to 32.1% for the first half in fiscal 2011. Our ME&A expenses as a percentage of sales were 24.2% for the current second quarter, compared to 24.8% for the same period a year ago. ME&A expenses increased $1.5 million versus the same period last year, with $1.2 million of the increase due to stock-based compensation associated with the rise of the Company's stock price during the second quarter. Year-to-date, ME&A expenses as a percentage of sales was 21.9% compared to 24.5% for the first half of last fiscal year. Stock-based compensation for the first half of the current year increased $100,000 compared to the same period last year. Year-to-date movement in foreign exchange rates increased ME&A expenses by $1 million for the first half compared to a year ago. And the net remaining increase of $1.5 million was primarily related to increased R&D activities and higher salary and wages.

Net earnings attributed to Twin Disc for the second quarter were $5.9 million or $0.51 per diluted share, compared to $4 million or $0.35 per diluted share for the fiscal 2011 second quarter. Year-to-date net earnings were $15.4 million or $1.34 per diluted share, compared to $6.7 million or $0.59 per diluted share for the first half of fiscal 2011. EBITDA for the current second quarter was $12.3 million compared to $7.3 million for the same period last year. EBITDA for the current first half was $30.1 million compared to $14.3 million a year ago.

We continue to see strong demand for our products, which is reflected in our fiscal 2012 second quarter results. While profitability in the second quarter was down from an exceptionally strong first quarter, the second quarter results represents the strongest second quarter in sales, gross margin, and net income the Company has ever achieved. Our results continue to be driven by outstanding demand for our 8500 series oil and gas transmission systems. We are pleased that after thorough field testing and product refinement, our orders for the 7500 series transmissions have grown in our six-month backlog.

Our six-month backlog at December 30, 2011 were $149 million compared to $165 million at September 30, 2011, and $147 million at the end of June 2011. While our backlog is down from the record high level in the first quarter, this is not an indication of slowing demand across our businesses. Our two main manufacturing operations made a considerable reduction in our past due backlog during the quarter and we are optimistic that we will continue to demonstrate solid year over year financial and operating growth as we enter the seasonally strong second half of our fiscal year. With two quarters remaining, we anticipate that fiscal 2012 will be another good year.

That concludes my prepared remarks. And now, John, Chris, and I will be happy to take your questions. Bisque, will you please open the line for those questions?

(Operator Instructions) Peter Lisnic with Robert W. Baird.

First question, if we could just explore backlog a little bit more. Down sequentially. Can you give us maybe some of the moving parts? It sounds like you clearly focused on getting some of the extended backlog out. But I'm just wondering if you could give us some end market color -- oil and gas, marine, some of the other end markets -- and what backlog was like?

John, do you want to handle that?

Sure. Some of the past due backlog that we were making up, primarily out of the Racine and Belgian operations, were in the industrial and marine markets. And I can say that the second quarter, as far as order intake, improved month over month. So October was the weakest, December was by far the strongest and improved across-the-board in all of our markets, including transmission in oil and gas. As far as the backlog, we knew it would be coming down as we worked through some of the past due. And it did improve within the quarter.

Okay, but orders actually accelerated through the quarter across end markets, correct?

Correct.

Okay. And if you bifurcated the oil and gas piece into 7500, non-7500, can you give us a little color on what the order trends were, one versus the other?

The orders were stronger for the 8500 but it's a much bigger market. There were some good orders for the 7500.

Okay. And then just in the context of what we're hearing out of some of the bigger oil service guys, like we did today, maybe potentially flat North American rig counts, how do you square that order strength that you're seeing in the oil and gas business relative to the outlooks that we're getting from the Halliburtons or the Schlumbergers of the world?

I would say that we are still seeing a pretty stable demand for the next 12 months. But it is not as feverishly crazy as it has been the past 18 to 24 months. I think we've done a pretty good job and we've got some good feedback from our customers, that our lead times now, we've been able to bring them back down slightly. And the demand is more stable. I certainly would say that there is not pause but there's good demand, but it's not crazy and let's bring it in whenever we can get it type attitude. If that answers your question.

It does. It sounds as though maybe you're still growing but slowing growth would be the way to phrase it?

That's a good way to phrase it.

Excuse me, Pete, for interrupting but, John, you might want to comment on the international order intake in that regard.

Yes, again, we mentioned it the last quarter of the conference call. Orders for our oil and gas transmissions in Asia, in particular, are increasing outside of North America. So there is a chance and the opportunity to continue to grow the order board even if North America slows.

Okay. And can you give us a sense as to how much of the business is skewed towards international versus North America currently?

About 25%.

About 25% international. Okay. And then maybe how about onshore versus offshore?

Offshore continues to improve, but that is primarily driven by North America, for North America. And a lot of the builders service West Africa. But it's also improving in Asia. And if I had to say which one grew more in the quarter, the offshore probably grew a little bit more than onshore.

Okay. And then, Chris, if I could, just the inventory increase in the quarter, a little color there?

Yes, it continues to be a similar story that we said in the first quarter, in terms of it really is inventory that's building to support this demand. First and foremost in the oil and gas but also as we're starting to see some increased activity in the other markets, as well.

Okay, that is helpful. I'll jump back in queue. Thanks for your time.

Andrea Sharkey with Gabelli & Company.

Let's talk about the gross margin a little bit. Sequentially it declined, which I think was expected, and you guys had guided towards that. One of the comments in your commentary was that it was mix shift. So I was just wondering if you could give us a better sense of maybe what was increasing to shift away. I think oil and gas typically has higher margins so I would think maybe some other end market products that were coming through stronger?

Yes, this is Chris. That's correct. As we've talked about in the past, in the first quarter our European operations tend to be shut down for a month, either in July or August. In the second quarter they would have been on for three months. So on average oil and gas does have a higher margin. So while it may have been relatively flat, there would have been a higher mix in terms of the European operation. But I think we still feel comfortable with our comments from the first quarter that mid 30%s gross margin rates are sustainable.

Okay. So maybe where we were this quarter would be fair to expect for the rest of the year?

That's probably a good guess, yes.

Okay. And then just on the ME&A, you went through where the increases came from. Would you expect that $20 million a quarter level to continue going forward? Is there something coming through that would continue to increase that? Or are there things that you could do to bring that in a little bit?

With the caveat that, of course, the stock-based comp was the biggest factor in terms of the increase, I wouldn't expect any significant things that would create that would cause that to go higher. Stock-based comp is really the biggest driver of what the increase was in the current quarter. So if not for that increase, we would have been below the $20 million mark, which I think is more historically where we've been at. So that's how I would answer your question.

Okay, great. And then you said that 7500, it's increasing in the backlog. Can you give us any sense of -- quantify that at all, as a percentage of your backlog or as a percentage of your oil and gas backlog? Just so we can get a sense of what kind of traction you guys are getting with that.

It's not something we generally disclose either for the 8500 or the 7500. But I will say it is becoming a more significant portion of the backlog. Now, in the second quarter in a row that it's seen a relative increase in it. But we don't generally disclose those specific numbers.

Okay, thanks a lot. That's it for me.

Jon Braatz with Kansas City Capital.

Looking at the order rates, it looked like the order rates in the quarter was down 32% sequentially and maybe 29% year-over-year. And you had mentioned that they improved monthly as the quarter progressed. Did the drop off in the order rates, maybe in October, surprise you? I don't know what the number was but presumably it was more than 32%. But was there a drop off in orders that just completely took you by surprise early on in the quarter?

Jon, this is Chris. I think there's probably a flaw in your math because those numbers don't even sound vaguely familiar. December year-over-year was a significant increase in order activity, I can tell you. And I think in a quarter as a whole. So you may be mixing manufacturing backlog, which is what we report, somehow with what's going on in distribution. But, yes, I can tell you, year-over-year, and in particular the momentum as it builds through the quarter, in December and then continuing into January, the order activity is up year-over-year significantly. I think part of the missing piece there is going to be the inventory that's been built for some of the demand that's coming.

Okay. I think also, maybe the first quarter call -- and I may be wrong, maybe it was in a conversation I had -- I think there were two large firms that you really don't do much business with in the transmission area. And you had suggested that maybe some of their arrangements with other providers were being terminated or coming up for renewal or whatever. The exclusivity was going to end. Anything on that front that you can talk about?

No, not right now, but those firms remain a target. But I would say, obviously, they continue to be targets and we're going to spend more energy on them in the second half of the year here. That's about the only update I can give you on that.

Okay, thank you very much.

Matthew Dodson with Edmunds White Partners.

Can you just help me walk through the SG&S? Last quarter I think you had a hit of $1.2 million, is that right? Because of stock comp, it was less. And then this quarter it was up $1.8 million, is that correct?

To take the different pieces, in the first quarter we actually had a benefit from the fact the stock price went down in the first quarter.

It was $1.2 million was that correct?

I recall $1.4 million but that number is close. And then in the second quarter we had the opposite occur where the stock price went up. So if you compare the second quarter figure, basically we had an increase of about $1.2 million year-over-year. And if you compare to the first quarter it's almost a $2.8 million swing.

Right, but the question I have for you is, if you put the $1.4 million into Q1, that means your base was like $17.3 million, right?

Okay, and then you'd have to back off a similar amount from Q2, because it's a net swing of $2.8 million.

Okay. So apples-to-apples, what did you spend more in dollars in Q2 versus -- without stock comp?

Right. If we assume that $1.4 million number, you would have been comparing -- you would also deduct, so there would have been a slight increase of, I think that would take you from just under $16 million to just over $18 million. And part of the answer to that question is we do see a seasonal increase in the second quarter. And also, as I mentioned, our European operations are all shut down for a month in the first quarter. So that would result in lower ME&A expense. So historically if you back out stock-based comp, in that $17.5 million to $18.5 million recent historic levels is where ME&A generally fall.

Got it. And then you said that you increased R&D spending. Is that for new products or is that for your new 7500?

Both. Spending on the 7500 and also spending on new projects.

Okay. And then the last question. I know last quarter you talked about your gross margin, it was perfect, you just had a perfect quarter, et cetera. But you grew sequentially. I would assume that you would absorb more fixed cost. So can you help us, did you have more marine this time? What caused the difference? What was the bad mix?

The difference, just on the product level, as some of our marine markets and other transmission markets within the transmission business all saw increasing sales in the second quarter. And then coupled with that, we had some of the European operations that don't have, as a general mix, the same gross margin as oil and gas. So you had expanding business in marine and other transmission segments. And you also had the European operations basically three months online with a slightly lower gross margin. So all of that had the effect of bringing the gross margin slightly down.

Got it. And then just the last question, though. Are you finding any pricing in your energy business? Is pricing starting to deteriorate there?

No. I would say, after a couple quarters of increasing surcharge, we saw this past quarter slightly tick down on surcharges. So it did not continue the trend of increasing surcharges.

Okay. So is there any way to quantify how important these surcharges were to your gross margin or overinflated your gross margin?

They weren't substantial at all.

They wouldn't have been inflating them. There would have been some pressure downward but they weren't significant.

Okay, thank you.

Elliott Blonde with Royal Bank of Canada.

Can you put a little more color on the translation of the currency?

Currency didn't have a significant impact in the quarter. So there was only a minor impact there that related to just transactional exchange. In this particular case, gains. But it was small. If you're talking about translation, it was very small.

Okay. And the last question, is there any way to quantify the rigs that are using your equipment that are percent to oil and a percent to gas with the stacking of gas rigs?

Information typically we don't give out. But if you go with the major players that build pressure pumping rigs, both in Canada and the US, those would be the major players who are our customers.

Okay, thank you.

(Operator Instructions) Jon Braatz with Kansas City Capital.

Can you provide us with any new developments on the Caterpillar relationship? And maybe refresh us of the timing and so on of when we might see some revenue?

Okay. The two parts here are, one is the agreement to sell our joystick system under the Cat label to Cat and their dealers. And that program will commence, really their sales program through their dealers, starting June 1, maybe July 1. And so we'll start to see the effects on our backlog a little bit this quarter, and then improving into the fourth quarter. We're also working on some control system designs for their pod system. And that is still a couple years out because the design efforts have just kicked off. So as far as a revenue impact, that's probably two full years out, maybe 2.5. But as far as revenue for the joystick, we'll start to see the revenue taking place in the first quarter of fiscal '13 for us. But you'll see some backlog impact in the next two quarters.

Okay. I know it's a ways away, but in terms of impact on the margin, how would you look at the gross margin on that joystick?

This will help our gross margin for our joystick product.

But I mean for overall corporate margin?

Overall corporate margin should be pretty close to not having much effect on it right now at all.

Okay. And the last question. I should know this, but you've incurred some stock compensation expense in the first half. Given what's happened today, would that be reversed? Is there a reversal possible?

Yes, if the stock price stayed where it is today, yes there would be a pick up in the third quarter.

On income.

Right, okay. Thank you very much.

Andrea Sharkey with Gabelli & Company.

Hi, I just had one quick follow-up. I believe Cummins had put out a press release a while ago saying they were going to be introducing a transmission for the oil and gas market, I think in the first quarter of 2012. And I know it's probably pretty early, but I was just curious if you guys had heard anything about it. Are you seeing anything from your customers related to it? Or any color that you can give on whether they actually introduced it, is it being adopted, anything you can tell us would be helpful.

Andrea, I know the press release you're referring to, and I know they have one in design and under test. But I don't think there's been any news on that as of late. So I really don't have any specific knowledge of it in the market or how it's doing. Haven't heard anything.

Okay, great. Thanks a lot.

Shawn Boyd with Westcliff Capital.

I just need to calibrate here on the stock-based comp, if I could. From the comments earlier, it looks like we're at about $3.5 million to $4 million in terms of that expense this quarter that's within the ME&A.

That's incorrect. I think it is for the quarter -- and I'm just trying to look here real quick -- in the quarter, the actual expense that was booked, just bear with me for a second, I apologize. The actual expense that was booked was $2.6 million. The swing versus the first quarter was $2.8 million. Because the adjustment that was booked in the first quarter actually resulted in stock-based comp income.

Of 200,000?

Correct.

Okay. And the year ago quarter, just while we're at it?

The year ago quarter, we're about $1.2 million higher this year versus last year second quarter. So last year would have been $1.4 million.

Got it. Okay, thank you.

[Michael Fremuth] with Wolverine Asset Management.

A couple questions. Back to the O&G transmission and the frac spreads, can you talk about any opportunities to pick up any remand business as the industry takes a little breather and possibly idle some equipment?

That's going to be an increasing component of the overall business in the next 12 to 36 months. We know that the rig manufacturers, unlike last spikes, are going to do much more of a planned rebuild program within their fleet. So that will be an ongoing activity for the foreseeable future.

Can you talk about relative margins?

They're as good or better as the existing oil and gas margins. So we like those margins.

And then, secondly, you talked about an uptick in marine. Can you differentiate between what you're seeing in commercial versus leisure?

Sure. Pleasure craft has improved but from a very low level, historically low. Most of the improvement has come from the inland waterways in North America, offshore oil and gas in North America, Asia. And then just the general work boat markets in Asia, as well, have improved. So a lot more substantially than pleasure craft, which has improved but really off of a big hit that they took a couple years ago.

And on the commercial side, especially in the oilfield services space, the order book has picked up quite a bit for new builds. What's your RFP activity look like there? Are you getting increased visibility?

Yes. It looks like the request for proposals have improved in this past quarter, which it usually bodes well for increased shipments probably six to nine months out from that. So, certainly, we're strengthening in the second part of this year and it's looking good for our fiscal '13.

Thanks a lot.

Thank you. Gentlemen, I'm showing no further questions at this time. I'll turn it back to you for any closing comments.

Okay, thank you. Thank you, everyone, again, for joining our conference call today. We appreciate your continuing interest in Twin Disc. And hope that we've answered all of your questions. If you have any follow-on questions, please feel free to call Chris, John, or me. We look forward to speaking with you again in April following the close of our third quarter. Biff, we'll turn it back now for you to terminate the call.

Thank you, sir. Ladies and gentlemen that does conclude our conference for today. Thank you very much for your participation and you may now disconnect.