Twin Disc Inc (TWIN) 2013 Q4 法說會逐字稿

Thank you, Joe. On behalf of the management of Twin Disc, we're 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 2013 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 statement. 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 Michael Batten, Twin Disc's Chairman and Chief Executive Officer; John Batten, President and Chief Operating Officer; and Christopher Eperjesy, the Company's Vice President of Finance, Chief Financial Officer and Treasurer.

At this time, I will turn the call over to Michael Batten. Mike?

Thank you, Stan, and good day, everyone. Welcome to our fiscal 2013 fourth quarter conference call. As usual, I will begin with a short summary statement and then John, Chris, and I will be happy to take your questions. First, I would like to cover a few of the highlights for the quarter and fiscal year. It was a year of transition. As predicted, and primarily due to continuing weakness in the North American oil and gas market, our financial results have had a hard time keeping pace with the record sales and earnings recorded last year, but they are in line with our expectations.

Partially offsetting these results, our sales to China have grown substantially to the point that it now ranks as our second largest market outside of the United States. Also indicative of our emerging market strategy, we announced the opening of a new manufacturing facility in India. And our balance sheet remains strong and we continue to generate strong cash flow. And finally, our six-month backlog is showing signs of improvement.

Sales for 2013 fourth fiscal quarter were $75.9 million, down from $96.1 million for the same period a year ago. For the fiscal year 2013, sales were $285.3 million compared to a record $355.9 million for fiscal year 2012. The decline in revenues was primarily result of lower demand from the North American oil and gas sector as well as softness in sales to our European customers. Partially offsetting the decline in sales was higher demand from the North American and Asian Commercial Marine market as well as steady, strong levels of demand from the China pressure pumping market.

Meanwhile, demand from the mega yacht market remained at historic lows throughout the fiscal year while demand remained steady for equipment used in an airport, rescue, and firefighting and legacy military market. Our gross margin for the quarter was 27.2% compared to 29.4% in the same quarter a year ago. And 25.9% for the 2013 third fiscal quarter.

For the full fiscal year 2013, gross margin was 28.1% compared to 34.2% in fiscal 2012. Spending for Marketing, Engineering, and Administrative expenses declined both for the 2013 fiscal fourth quarter and for the fiscal year by $2.2 million to $17.1 million and by $5.2 million to $67.9 million respectively. These increases are attributable primarily to stock base and incentive bonus competition.

In connection with preparing the financial statements for fiscal year 2013, the Company recorded an impairment of $1.4 million or $0.12 per diluted share, which represents the remaining intangibles and fixed assets as an Italian distribution entity for which the Company expects to terminate the distribution agreement. In fiscal year 2012, the Company took an impairment charge of $3.7 million or $0.32 per diluted share for the write-down of goodwill at an Italian manufacturing operation due to softness in the Italian mega yacht market.

The Company also recorded a $708,000 or $0.06 per diluted share restructuring charge in the fiscal 2013 fourth quarter, representing the minimum legal indemnity for a targeted workforce reduction at the Company's Belgium operation along with the costs associated with the elimination of a corporate officer positions. With the Belgium negotiations completed in July, the Company recorded an additional restructuring charge of approximately $1.1 million in the fiscal 2014 first quarter.

Moving to the bottom line, the Company reported net income of $47,000 or zero cents per diluted share for the fourth quarter compared to $1.3 million or $0.11 per diluted share at the same three months last year. For the fiscal year 2013, net earnings were $3.9 million or $0.34 per diluted share compared to $26.7 million or $2.31 per diluted share for fiscal 2012.

EBITDA for the fourth quarter was $4.7 million compared to $8.8 million last year. Our fiscal 2013, EBITDA was $21.1 million compared to $56.8 million a year ago. Positive changes in working capital due to reductions in receivables and inventories allowed the Company to generate $24.5 million of cash from operations. As a result, we reduced debt and invested in strategic capital expenditure.

As indicated above, fiscal 2013 was a transitional year for us. Our efforts to develop our geographic diversity is has led to China becoming our second largest market, accounting for more than 10% of our sales. Further, for the last six years, our sales outside the United States have averaged above 50% of our total sales.

In addition to diversifying our sales geographically after several years of developing our supply base, we expanded our manufacturing footprint with the commissioning of a facility near Chennai, India. This plan, which is already operating profitably, is producing industrial clutches and power take-offs to the global market. We expect to add other products in due course.

Looking ahead, our six-month backlog stood at $66.8 million at June 30, 2013 compared to $64.9 million at March 29, 2013 and $98.7 million at June 30, 2012. The sequential improvement represents the first increase in second quarter. While we believe that our backlog has bottomed, we do not anticipate a demand curve similar to our last recovery. Rather, the first half of fiscal 2014 will be influenced by the same dynamic that has affected our business during the past year. That is demand from global commercial marine customers and international oil and gas opportunities will be somewhat offset by continuing weak demand from European and global mega yacht customers. We are however cautiously optimistic about the improving prospects from the North American energy markets for the second half of the fiscal year.

Longer term, we are well positioned to take advantage of the global opportunities ahead of us. Our leading positions in the markets we serve, our innovative product development, and our geographic diversity reflect a [solemn] strategic plan for the future.

Finally, as previously announced at its June Board meeting, our Board of Directors elected John Batten to the position of President and Chief Executive Officer effective Nov 1, 2013. I will retire as an employee effective Dec 31, 2013 and [is still] in the position of Non-Executive Chairman of the Board of Directors. We have an experienced and strong management team, and the Board and I have full confidence that they will take the Company to new levels of achievement in terms of growth and creation of shareholder value.

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

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions). One moment for our first question. Peter Resnick - Robert W. Baird.

Hi. This is Josh Chan on behalf for Peter. Good morning, Mike, John and Chris.

Hi, Josh.

Just first question on your comment about the North American oil and gas market, how it could potentially improve in the second half of 2014, just wondering how you are formulating that view and timing, was it based on discussions with customers, have you actually received orders, just some color on how you're thinking about the timing of the recovery there?

Well, there are couples of thing that we've talked to some of our key customers. There's no commitment to that point of coming back, but if we look at the last [GAAP] depending upon the customer 18 months to 24 months, that would indicate the recovery sometime in the first half of calendar 2014, but we're also having -- starting to have more dialog on, what lead times are and things like that. So nothing is hit the backlog yet obviously, but that would be our indication of when the first signs of some new construction would occur. And again, just to echo on the comments from Mike, not necessarily anticipating the rapid rise on the construction and we saw two years ago, but I'm confident that we'll start to see some new constructions in calendar 2014.

Okay. What would be the lead time at least initially if demand starts to recover (multiple speakers)?

We are well under six months for both the 8500 and the 7500, probably right now in the range of four months to six months, don't know how long that lead time would last.

Right.

Depending upon how many orders come in, but we certainly can react within six months.

Okay. Great. And then, moving on to China, just based on the -- your mix of products there, would it be safe to conclude that maybe oil and gas is more than half of what you sell there, just try to get a sense of what kind of products you sold there?

No, still the largest segment for us in China is commercial marine.

Okay. Okay. And then, on gross margin, you have been negatively impacted by both volume and mix in the recent quarters. So as we look into the next year, have begun to the point where makes is no longer track or an issue and maybe volume becomes the primary driver of gross margin for at least the near term, is that the right way to look at it?

Well, I guess the way to answer that, Josh, is if mix doesn't change, I'm correct.

Yes.

So in other words, if we don't start to see a recovery in North American oil and gas and correct, volume would be the primary driver.

Okay, but there is no necessarily a negative comparison of North American oil and gas remaining, I guess?

There may have been some shipped in the first quarter of last year, but it wouldn't be significant.

Okay. Okay, great. Okay, thank you for your time and congrats Mike on your upcoming retirement and John, your promotion.

Thanks, Josh.

Thank you, Josh.

Peter Van Roden - Spitfire Capital.

Hi, guys.

Hey, Peter.

Hi, Peter.

Just a quick question on the pressure pumping side, how much of your demand -- and I know there's not really a normal year, but let's just try to find a normal year will come from replacement demand versus new machines?

I would say your comment is right, it's hard to find a normal year, but the vast majority has been for new construction. So -- I mean you can have any -- I would say for replacement on existing rig, maybe it ranges from 5% to 20% given the year. There really is no -- there is no real good trend there.

Okay. Yes. And do you expect that to sort of tick up as these (multiple speakers)?

Yes. Going forward, I think the trend might be higher, that there will be a higher percentage of replacement as opposed to a complete new rig construction.

Yes. Okay. And then, just in terms of trying to sized the opportunity or the [gearing up] opportunity for the whole Company, if all of your segments are sort of going at a normal pace, what is -- what would be kind of the max capacity, max revenue that you guys think you can do?

Everything we're going Mac with the addition of India. I mean we're certainly over $500 million.

Okay. It's helpful. And then, just one quick question, and I don't know if you guys can answer this, but who is making the transmission for the new Halliburton pressure pumping unit?

I believe that is A - Allison.

Okay. Alright, guys, that's all I have. And congratulations on a good quarter.

Thanks.

Thank you.

Thanks, Peter.

(Operator Instructions) And gentlemen, it appears we have no questions at this time. I'll turn it back to management at this time.

Okay. Thank you, Joe. We'd like to thank you again for joining our conference call today and we appreciate your continuing interest in Twin Disc. We hope that we've answered all of your questions. And if not, then, we've got follow-on. Please feel free to call Chris, John, or myself. We look forward to speaking with you again in October following the close of our first quarter. Joe, I will turn it now back to you to terminate the call.

Thank you, sir. Ladies and gentlemen, this does conclude the Twin Disc Incorporated fourth quarter fiscal 2013 financial results conference call. Thank you for your participation. You may now disconnect.