Twin Disc Inc (TWIN) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Twin Disc third quarter fiscal 2014 financial results conference call.

(Operator Instructions)

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

Thank you, Angel. 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 2014 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 Mianecki, at 262-638-4000, and she will send a copy to you.

Hosting the call today are John Batten, Twin Disc's Chief Executive Officer, 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 John Batten. John?

Thank you, Stan, and good morning, everyone. Welcome to our fiscal 2014 third quarter conference call. As usual, we will begin with a short summary statement, and then Chris and I will be happy to take your questions.

Looking at our third quarter results, sales for the 2014 fiscal third quarter were $60.7 million, down 11% from $68.2 million for the same period a year ago. The lower level of shipments in our North American and European markets primarily drove the decline in sales.

As we mentioned in the press release, and while hard to quantify, some of the slowness in our industrial and after-market sales during the quarter can be attributed to the difficult winter conditions in parts of the US and Canada. However, we also feel that any delayed orders will be made up in the next couple of quarters.

On a more positive note, we continued to ship at record level sales into Asia, as demand for our pressure pumping transmission and commercial marine transmissions throughout the region remained at robust levels in the quarter.

Turning to our broader product market, global sales for our industrial, marine and transmission products were all down in the quarter versus last year, but only our transmission products saw a sequential decline when compared to the second quarter. This shortfall was primarily due to a lower level of demand for our legacy transmissions and our transmission systems in the quarter.

Shipments for both our marine and transmission products saw improving trends throughout the quarter. We mentioned during the last conference call that we had seen a drop in industrial demand during the last calendar quarter of 2013. I'm happy to report that even with some of the effect from the frigid winter our shipments of industrial products did improve sequentially versus the second fiscal quarter.

New order trends also improved throughout the quarter, specifically in Asia and North America. While our marine shipments are lower than year-ago levels, demand remains at high levels for the offshore and oil and gas markets, especially in the US Gulf Coast and Southeast Asia. There was also a lot of project activity for oil and gas transmission, and, as we mentioned in the press release, a good portion of our new pressure pumping transmission orders came from the North American demand.

Is this the beginning of a real recovery in rig construction? It is too early to tell, but there's a lot more optimism than there has been in the past. Many of the orders that we received in March and April will be shipped by the end of our fiscal year, as we are still maintaining three-month lead times for these transmissions.

Gross margins for the quarter were 27.4%, compared to 25.9% a year ago and 29.3% the previous quarter. A better mix of products, specifically within our transmission products, primarily drove the gross margin improvement over last year, but the sequential decline in gross margins was primarily driven by a lower level of sales. Year-to-date, gross margins are 29.3% versus 28.4% a year ago.

Third quarter spending in marketing, engineering and administrative, or ME&A, expenses decreased slightly, by $535,000, versus the same period last fiscal year, or from $17.4 million, or 27.8% of sales, to $16.9 million, or 25.5% of sales. Year-to-date, ME&A spending decreased $1.2 million over year-ago levels, from $50.8 million to $49.6 million.

As we mentioned in the press release, this reduction reflects continued spending controls in our North American and European operations, a reduction in stock compensation, which are partially offset by small increases in Asia and some increased spending on corporate projects. As I have mentioned in the last few calls, we continue to rationalize our resources and overhead in our European and North American operations.

Even with the opening of the plant near Chennai, the adds to the sales and service organization in Asia, our net employment is down versus fiscal 2012 and fiscal 2013 year-end levels, and we are constantly evaluating each subsidiary's spending and overhead.

Looking at the bottom line, fiscal 2014 third quarter net earnings were a net loss of $393,000, or $0.03 per share, versus a net loss of $757,000, or $0.07 per share, a year ago. Year-to-date, net earnings are $1.4 million, or $0.12 per diluted share, versus $3.8 million, or $0.34 per diluted share, a year ago. EBITDA for the third quarter was $2.4 million, compared to $2.9 million a year ago, and year-to-date EBITDA stands at $13 million, compared to $16.4 million for fiscal 2013.

Turning to the balance sheet, we ended the third quarter with a net cash position of $1.3 million, the second quarter in a row with such position. Inventory in the quarter rose $2.5 million, from $102.6 million to $105.1 million, and is $2.4 million higher than the start of the fiscal year. In general, inventory is down at our European operations but offset by increases from the North American operations and Asian operations.

Whether it's shipments on the water from the US to Singapore or China or increased WIP as we are converting raw to finished product, this is where the inventory increases lie. We are focused to keep inventory levels stable as we increase shipments in the fourth quarter.

Our six-month backlog rose slightly, from $56.2 million to $57.6 million, and, as we mentioned in the press release, this does include new unit orders for the North American oil and gas market. Further, while we continued to receive new orders for the 8500 oil field transmissions in China, we also had a very good quarter for the 7500 transmission systems, as well.

With respect to our marine and industrial products, the slightly stronger industrial backlog was offset by a slightly weaker marine backlog, which reflects continued market weakness in the lower horsepower range of our marine transmissions. All in all, our backlog, both six-month and total, took a positive step in the quarter.

The 2014 fiscal third quarter results reflected the same dynamics that have affected our business during the past several quarters, and, like fiscal 2013, third quarter proved to be the most challenging quarter of the year. However, the new order activity in oil and gas for both the 8500 and the 7500 leaves management slightly more optimistic about improving trends.

We continue to see strong demand from our global commercial marine customers and international oil and gas markets, which is somewhat offset by continuing weak activity for most of the European marine markets. We do see improving prospects for our larger pleasure craft marine transmissions, and there are more conversions to both our Express Joystick System and the Cat 360 Joystick System in the pipeline.

Looking at our outlook, while we feel positive about the change in our backlog, which includes the increase in North American oil and gas, we are well aware of the increased efficiencies being realized by the frac service companies and hesitate to predict that this is in fact a turning point for the domestic market. Given our historically short lead times for both our land-based and marine transmissions, our customers are placing orders just when they need them, and this is allowing us to fill new orders within the quarter. The negative effect of this is that it also shortens some of our visibility on when the demand will actually occur.

Middle to longer term we feel we are well positioned with products, people and a strategy and a healthy balance sheet to take advantage of the global opportunities ahead of us.

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

Angel, please open the line for questions.

Thank you.

(Operator Instructions)

Josh Chan, Baird.

Hi, good morning, John and Chris.

Good morning, Josh.

Hi. Just a question about the oil and gas potential improvement there. Could you talk a little bit more about what exactly you saw improving? I mean, obviously you got some new orders. Are you seeing service parts improving? Are you seeing customers talking to you about shipments further down the line, as well?

Josh, it's all of the above. But finally I think people are starting to address some of the rigs that need rebuilding. And so I think it's a balance of building new rigs or they are replacing components on existing rigs. But definitely as far as the quarter, the strongest quarter in a long, long time for new unit orders for North America.

Okay. And then if we think about sort of the pace or timing of this recovery, you said that you shipped some units by the end of your fiscal year, but when do you think we might see sort of a noticeable uptick in terms of revenue or margin? Would it be maybe into calendar year 2015?

Well, no, I think you'll see -- we are -- our lead times for oil and gas transmissions are under -- well, just about three months, so we can fill in the quarter. So all of the orders that we receive, the majority of those are going in the fourth quarter. And there'll be some spillover, of course, into the first quarter. So the impact on the new orders will be within the next two quarters as far as the margin.

Okay, okay. That's great to hear.

And, again, I hesitate -- this is -- it's the first real, I would say, blip for us that there's increased activity, and I'm hopeful. The trends have been positive in this quarter, as well. Let's see how the quarter finishes.

Yes, that makes sense. And then if I can ask about some of the non-oil and gas markets, I think your backlog total is up slightly, and oil and gas was part of that. And if you had some disruption in the quarter that you can't ship too much orders, would it imply that the non-oil and gas orders have been kind of soft in the quarter?

It's a balance. Our marine backlog for the offshore vessels and the large workboats is very good. The weakness in marine is reflected more in the lower horsepower range, which has been either small workboat, small fishing boat or pleasure craft. That was kind of the weakness.

But industrial -- given kind of the slowdown at the end of 2013 calendar year, industrial, I would say, picked up and improved. So really if there's one area that was weaker at the end of the quarter than the start it would be marine, but it's not driven by our large transmissions. It's more driven by the lower horsepower.

And what's your view on how that market might develop, the smaller marine market?

I think it's -- I honestly do believe it's starting to improve, certainly with the trends at the end of the quarter, but not enough to make up the trends that were happening at the beginning of the quarter.

Okay, great. That makes sense. And thanks for your time, and I'll hop back in the queue.

Okay. Thanks, Josh.

Operator? Hello? Angel? I think -- Stan, I think we got disconnected.

Oh, no.

Well, let's just wait.

Or we can't hear.

Stan, Chris thinks we're actually -- they may be able to hear us but we can't hear them.

Oh, something's wrong with the line, then.

Let's hold on a sec.

Let's hold -- yes, Chris, that's correct. Let me run over to the other office and call them. I'll be right back.

Okay.

I think investors can still hear us. So this is John and Chris. We're just trying to figure out why we can't hear you or the operator, so please just hold on a second.

We apologize. Your operator is having some technical difficulties. Everyone can still hear you, though, and your next question will come from the line of Walter Liptak, of Global Hunter. Please go ahead.

Walt?

Mr. Liptak, maybe you're on mute, but your line is open. Okay, let's try Doug Dyer, of Heartland Advisors.

Perfect. Thank you.

Good morning. Can you guys hear me?

Yes, can you hear us?

Hey, all right. All right.

Sorry about that.

Yes, we've been able to hear you the whole time.

Okay.

Listening to some of the pressure pumping providers with their conference calls last week they're ordering new equipment and they're taking delivery, or it seems like they're taking delivery late this calendar year and into early next year. Is that a function -- are they able to control when they take those deliveries, or is it your capacity to and other equipment providers, do they have to wait that long, six months, to get it out?

I've got to say each one, each situation is different. I'm sure that a lot of it's going to be the anticipation of getting their orders in to make sure they get the equipment in the time frame that they need. So I'm guessing that the one they're placing orders for is slightly longer than the lead time, and I'm sure they're allowing for a little bit of, I would say, drift in the delivery schedule.

But a lot of that -- I mean, trying to coordinate the schedule of engines, transmissions and pumps and getting in line to build the rig. So I think a lot of what they're going to have to do is reassemble crews at some of the rig manufacturers to get back into production. So, I mean, as I said, I'm hopeful that this is the first blip in the turnaround, but for a trend line I'd like to see kind of two quarters in a row.

Okay. And if I recall correctly, you did have some inventory on hand to build several transmissions. Are you currently ordering more parts for future use?

Yes, absolutely.

Okay. And can you give us any guidance as to the number of units that you can produce with current inventory and how many units you're ordering for?

You know, we -- it's not exactly balanced, but if you go back to our peak production, we probably have somewhere in the neighborhood of two to three months of inventory as far as the units that we -- we obviously have to bring in some parts to finish, but that kind of gives you a ballpark of where we are.

All right. Thank you very much.

(Operator Instructions)

Angel, this is Chris, from Twin Disc. Why don't we give -- wait a little bit of time just because we got disconnected from some people?

Absolutely, no problem, and my apologies, sir.

No problem.

Josh Chan, Baird.

Hi, just a follow-up. I think in the press release you talked about 4Q being sequentially better than 3Q, but I was just wondering if you have any more color around that. Is it possible that with all the improvement that 4Q becomes the best quarter of the year?

That is certainly our goal is to have it be the best quarter of the year. So I think that's possible, for sure.

Great. Thank you.

(Operator Instructions)

And we have no further questions at this time.

Okay. Thank you for joining our conference call today. We appreciate your continuing interest in Twin Disc and hope that we have answered all of your questions. If not, please feel free to call Chris or myself. We look forward to speaking with you again in August following the close of our fourth quarter.

Angel, now I'll turn the call back to you.

Thank you very much, gentlemen. Ladies and gentlemen, this concludes the conference call for today. Thank you for participating, and please disconnect your line.