Twin Disc Inc (TWIN) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Twin Disc, Inc. fourth quarter fiscal 2012 financial results conference call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time. (Operator Instructions)

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

Thank you, Ron. 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 2012 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 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 Mianecki at 262-638-4000 and she will send a copy to you. Hosting the call today are Mike 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 fiscal 2012 fourth quarter and year-end conference call. I will begin with a brief summary statement and then, John, Chris, and I will be ready to take your questions. As we noted in our press release issued earlier today, fiscal year 2012 was a record year in terms of sales and earnings that was driven by an exceptionally strong first nine months of the year, reflecting high oil and gas demand. However, softening demand from that sector produced moderating sales in the fourth quarter that's still ranked as our second best in history.

Turning to our results for the fiscal year 2012, Twin Disc reported record sales of $356 million compared to $310 million for fiscal year 2011. Gross margin for fiscal 2012 was 34.2% compared to 34.7% for the previous year. Marketing, engineering and administrative expenses held steady at $73 million for both fiscal 2012 and 2011.

Net earnings attributable to Twin Disc for the fiscal year were $25.8 million or $2.24 per diluted share compared to $18.8 million or $1.64 per diluted share for fiscal 2011. Sales for the fiscal fourth quarter of 2012 declined modestly to $96.1 million from $97.4 million for the same period a year ago. The anticipated decline in fiscal 2012 fourth quarter sales was from softening demand in oil and gas products. Shipments to the aftermarket and industrial products markets, land and marine-based military, airport rescue and firefighting, and commercial marine markets were good, while the yacht market continued to be challenging.

Gross margin for the fiscal 2012 fourth quarter declined to 29.4% compared to 37.1% for the fiscal 2011 fourth quarter and 34.6% for the fiscal 2012 third quarter. The year-over-year and sequential decline in gross margin reflected a change in the mix of sales, primarily due to the impact of lower oil and gas transmission sales as well as the unfavorable absorption impact due to the significant inventory reduction realized in the fourth fiscal quarter.

Spending on marketing, engineering and administrative expense declined $3.2 million to $19.3 million in fiscal 2012 fourth quarter compared to $22.5 million for the same three months of fiscal 2011, primarily due to a reduction in stock-based compensations, the details of which are set off in the press release.

In preparing our financial statements for fiscal 2012, we concluded that we were required to take an impairment charge, amounting to $3.7 million or $0.32 per diluted share in the fourth quarter of fiscal 2012 for the write-down of goodwill for our Italian operations, due to softness in the Italian mega yacht market.

The net effective tax rate for the fourth quarter was 81.1%, significantly higher than the prior-year fourth quarter rate of 41.4%. The primary factor increasing the current-year rate was the impact of the non-deductible impairment charge of $3.7 million that increased the effective rate by approximately 32 percentage points. The remaining rate increase was due to a combination of reduced foreign tax credits, elimination of the R&D tax credit, and additional impact of the valuation allowance related to the Company's Belgian facility.

Net earnings attributable to Twin Disc for the fiscal year 2012 fourth quarter were $1 million or $0.09 per diluted share compared to $7.6 million or $0.66 per diluted share for the fiscal 2011 fourth quarter. EBITDA for the current quarter was $8.8 million, compared to $16.3 million for the same period last year. Working capital improvements during the three months enhanced our operating cash flows that were used to reduce debt, invest in our facilities and buy back our common stock.

During the fourth quarter, the Company repurchased 125,000 shares of stock for $2.4 million at an average price of $19.40 per share. Our six-month backlog at June 30, 2012 was $99 million compared to $131 million at March 30, 2012 and a record $147 million at the end of fiscal year 2011.

While our business is demonstrating improving trends, especially to customers in our industrial and commercial marine markets, changes to the oil and gas market are impacting our near-term outlook. We anticipate a challenging North American pressure pumping market to remain for at least the first half of fiscal 2013, as rig operators adjust to lower pricing.

Sales to our Asian customers, including the sale of oil and gas transmissions, continue to be strong, with the result that Asia became our second largest end market surpassing Europe. Sales of marine products into the US Gulf region have improved and our development programs, including our collaboration agreements with Caterpillar for our QuickShift and Joystick technology solutions, are on track. Our commitment to innovation and quality has never been greater.

The slowdown in oil and gas markets will impact sales and profitability, and we remain cautious about the outlook for fiscal year 2013. Nevertheless, we will continue to make strategic investments that will improve our balance sheet, develop new products and capabilities, as well as create new markets.

That concludes my prepared remarks for today. And now, John, Chris, and I will be happy to take your questions. Ron, you may now open the line for questions.

Thank you. (Operator Instructions) Peter Lisnic, Robert W Baird.

Hi. Good morning. This is Josh Chan [pulling in] for Pete.

Hi.

Hi, good morning. Going to your outlook on the oil and gas market, you had talked about it being challenging through calendar 2012. I guess that's where the CapEx cuts are taking place. But given all the part fleets that are out there, would you expect that, that could meaningfully slow down a recovery for your equipment, even if the industry somehow finds a balance in 2013?

Hey, Josh, it's John. Absolutely. I mean the rig manufacturers and the operators need to work through the inventory of their fleet. And obviously, our recovery is dependent upon utilization and where those rigs are being utilized, is it in oil or is it in wet gas or is it in dry gas? So that is something that that we are watching.

Okay. And then, kind of on a similar note, how would you characterize the useful life of your transmission products at current utilization rates?

Well, it's depending upon -- I mean, we're still looking at 6,000-plus hours. So it's how are they utilizing it. They're utilizing that in a year-and-a-half or over multiple years. So the utilization hours are much higher in dry gas and lower in pure oil. So it all depends upon the mix of where they're using the rigs, but we're continually pushing to expand the effective hours of our rig [support] overall.

Right, makes sense. How would you characterize the rate of growth that you're seeing in the international market? You talked about shipments being higher there in oil and gas.

Yes, particularly in Asia, for us, it's been growing steadily throughout fiscal 2012. I think we've reached a pretty good point where it's a very active market for us. I think before we see the next jump of growth, we need to see some more infrastructure just in the oil and gas industry in China.

Right, okay. And then, switching over to your gross margin, you talked about mix being an issue, but it sounds like manufacturing absorption impacted you this quarter as well. Is there a way you can ballpark what kind of impact the under-absorption component had on your gross margin?

Well, it's difficult, Josh, this is Chris, because there's so many moving parts. But I would say between mix, under-absorption, and then some impact of pricing, they were all relatively equal and important.

Okay. All right. I think (multiple speakers) --

As you probably saw, there is a significant inventory reduction, I think almost $15 million in the fourth quarter.

Yes, yes, absolutely. So, that all makes sense. So, thank you for your time.

Yes.

Jon Braatz, Kansas City Capital.

Good morning, gentlemen.

Hi, Jon.

Good morning, Jon.

Couple of questions. Oil and gas slowdown, there seems to be another issue that is developing and that is because of the drought and the lack of water. Are you hearing about any delays, postponements, and cancellations of drilling work because of the lack of water out here in the Midwest?

Jon, this is John. I have not, but that's something I will look into, but I -- that is nothing that we have heard of yet.

Okay, okay. Secondly, the -- Chris, your inventory position, you've brought down rather significantly from the sequentially, but how do you view the -- your inventory position relative to the current production rates? And are you where you want to be, or are we going to see additional cutbacks in the inventory position? And then, correspondingly, when you look at the full year, maybe for this year, how much working capital disinvestment might there -- might we see this year?

I guess I can kind of answer both together. We see more room for additional improvement and that will be one of the focuses for us this year as we continue to work on working capital improvements. So I'm not going to give you a number, but certainly we think there's more opportunity.

Okay. Do you think -- one of the issues in your gross margin this quarter was the under-absorption. Do you think that will ease a little bit as we go forward? Will there be a little bit less under-absorption, so to speak?

Yes, I don't think you're going to see what you saw in the fourth quarter in terms of that significant of a falloff. I think it will be a more balanced approach for fiscal 2013.

Okay.

But you won't see that significant of an impact.

Okay. And then, lastly, any new thoughts on the Caterpillar relationship, and when that -- when we might see some of that begin to hit the P&L?

Jon, it's John, again. I would see -- probably, we'll have a little bit of impact on products being ordered and shipped to the Cat dealers this first half of the fiscal year, but it seems like they're targeting the real launch would be calendar 2013.

Okay.

I think some of the fall boat shows in particular, then Miami in February. That's kind of the launch cycle that we're on.

Okay. All right, thank you very much.

[Of course, Jon].

Andrea Sharkey, Gabelli & Company.

Hi, good morning.

Good morning, Andrea.

Morning, Andrea.

One thing that, I think, was positive for you guys is that the revenue really kind of held up a lot better than I thought given the weakening oil and gas markets that were pretty much -- were pretty flat year-over-year sequentially. Can you talk about that? Was -- is it because you're still pushing oil and gas out of inventory and out of backlog as we haven't really seen that drop yet or are there other end markets that are really offsetting (multiple speakers)?

Yes. It's a little bit of both, Andrea. North American oil and gas was down compared to last year, but making up to that, we improved commercial marine shipments to the US Gulf Coast and to Asia. We also had some oil and gas shipments to Asia and in general industrial, our industrial products were much better quarter compared to last year. So what we saw as a drop-off in oil and gas, we made up for it at the shipment level in marine and industrial.

Okay, great. And I guess how do you see that maybe going forward? Do you expect to see continued drop-off in oil and gas and then is there enough demand in the other end markets to see that kind of continued offset or do you think we'll see a bigger drop at next year, the next (multiple speakers)?

Yes, I think we will see some moderating levels. I think, marine and industrial will continue to improve, but I don't think they're going to make up at the top line for oil and gas coming down.

Okay. That's helpful. And then, on the impact of the mix on margins, is there anything that you can do -- I know you guys have added a lot of capacity for the higher oil and gas demand that you saw. Is there anything you can do to rebalance your manufacturing to sort of accommodate that decline or are there other product lines that you can run through there? I guess, how should we think about margins going forward? Are we going to continue to drop to high 20% gross margins or is it more low, mid to 20%? I know it's hard to be precise, but just to give us sort of an idea.

[Sure]. I think we're going see a more traditional fiscal year for Twin Disc, where the lowest margins are going to be in the first quarter, because we have a shutdown here in resin and we have longer shutdowns both in Belgium and in Italy. So we're going to see more traditional -- last year was an anomaly. We had a late last quarter, that's not going to be the case this year. We're going to have probably our -- the weakest top line and the weakest gross margins and then we'll build through the year.

But as we have capacity or overcapacity in Europe, we are still going to take advantage of the (inaudible) programs with basically government-sponsored layoff in Europe. We have more than enough business in North America with commercial marine where we're going to be fully -- we're going to be still working solid six days a week here to get all of the shipments out. So we will be able to improve gross margins in Q2 through Q4, but the first quarter is going to be a -- it will be a challenging quarter for gross margins, but it shouldn't be the indicator for the rest of the year.

This is Chris and that is the typical kind of historical trend. Last year's first quarter was unusual.

Okay, great. And then, one last question and then I'll (inaudible). Any idea on CapEx plans for 2013?

It will be relatively -- this is Chris again. It will be relatively consistent with this year in that $15 million to $20 million range.

Okay, great, thanks a lot.

Thanks, Andrea.

Joe Giamichael, Global Hunter Securities.

Thank you. I really was sort of [beating the margin question definitely] at this point, but just to follow up on it, it sounds like you discussed in the quarter sort of a trough for gross margins with Q1 being a seasonal softness because of the shutdown. Is it possible to maintain these levels as the mix shift continues to shift away from the oil and gas products?

Hi, it's -- Joe, it's John. It is, I think when we had the high oil and gas, we kind of set the new norm of mid to high 30s. No, I think we're looking at it with this mix low 30s, but I'd qualify that. It is going to be a tough first quarter to achieve that just because of the shutdown, but we still think we can -- we should be targeting above 30% gross margin. But obviously, oil and gas is going to have an impact of whether it's high 30s or low 30s.

Got it. That's fair. And you mentioned a pickup in the Industrial Products side, could you just give us a bit more color on the improvement there, sort of on either an end market demand or geographic basis, just to get (multiple speakers) sort of what's happening in the world?

Yes, we're having -- the North America is just -- it really has shown at this point, kind of eight quarters of steady improvement after the recession and it's in all markets. A lot of it is in road construction, a lot of rock pressures, aggregate-type business, biomass growing. We have a lot of shredders, large wood chippers, where we're selling our PTOs. It really is the industrial market in Europe is the one bright spot for us. It's the one market that is holding its own and has showed some growth and then we have a lot -- we've spent a lot of time in our distribution organization, both in Asia and South America would have been traditionally marine focused, are [now] getting more into the industrial products. So we have improved shipments into Asia and South America. So it's really -- it's a balanced solid growth from the depths of the recession.

Okay, great. Thank you very much.

Greg Garner, Singular Research.

Yes. Thank you for taking my question. Good morning, gentlemen.

Hi, Greg, there.

Just one last item on that gross margin. You mentioned it was probably even mix between pricing, the absorption and product mix. Will the total magnitude be about $5 million? It seems like that would put gross margin at your mid-35% range. Is that about the right dollar amount I should look at for the aggregate effect of these items?

That's in the ballpark.

Okay. And again, about equal mix, nothing more towards absorption versus pricing?

It was -- mix was big, but I mean so was the absorption impact as a result of the significant inventory reduction, but mix may have been slightly more, but they were both significant contributors.

Okay. Can you tell us anything about the 7500? Is that at least maintaining the level of oil and gas revenues that wouldn't have been -- wouldn't have occurred had that not been introduced or a level of interest or new projects with it?

It definitely contributed in the fourth quarter, because we didn't have it in the fourth quarter of fiscal 2011. But it suffered the same as 8500 and everybody else with just the rapid slowdown, but we do have a couple of significant projects with the 7500 where it could be a much bigger contributor this year.

Would that be in North America or would those projects be more Asia or Europe?

Yes. There will be one in North America and one in Asia.

Okay. Is it gaining much traction in Asia? You're talking about the Asia oil and gas doing better?

We've just started working the project in Asia. We were holding -- we want to do most of the initial production units in North America, but we have now opened it up to the customers in Asia as well.

Okay. And the impairment charge for the Italy, the yacht business there, does that mean that your outlook for how that may recover has declined? Or how has that -- could you give us more color on how your outlook for European yacht market, how it has changed?

Well, the problem is that it really hasn't changed the overall the macro market. It's the pleasure craft yacht market is going to be very challenged for the next few years. However, we feel that our opportunity with Caterpillar in the CAT 360 in our EJS that our outlook is better. Unfortunately, we have to look at the macroeconomic trends and when you look at that and you read the publications, they're not showing great growth. So that is where we had to base our decision upon was what are outside publication and people saying versus just what our internal forecasts are.

Okay. In the Caterpillar market, would be -- I mean, the assistance would -- through Caterpillar would be on a worldwide basis, right?

That's going to be worldwide through their CAT dealers, their marine dealers.

Okay. All right. Great, thank you.

Thanks, Greg.

Thanks, Greg.

(Operator Instructions) There are no further questions at this time, please continue.

Thank you, Ron. Everyone, thank you again for joining our conference call today. We appreciate your continuing interest and support of Twin Disc, and we hope that we've answered all of your calls -- all of your questions, excuse me. And if not, please feel free to give Chris, John, or me a call. We look forward to speaking with you again in October following the close of our first quarter. Ron, you can turn it back to you now.

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation. You may now disconnect your lines.