Twin Disc Inc (TWIN) 2014 Q4 法說會逐字稿

Good day, and welcome to the Twin Disc, Inc. fourth-quarter fiscal 2014 financial results conference call. Today's presentation is being recorded.

At this time, I would like to turn the call over to Mr. Stan Berger of SM Berger. Please go ahead, sir.

Thank you. On behalf of the management of Twin Disc, we are extremely pleased that you have taken the time to participate (technical difficulty) call, and thank you for joining us to discuss the Company's 2014 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 states 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 fourth-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 fourth-quarter results, sales for the 2014 fiscal fourth quarter were $73.6 million, down 3% from $75.9 million for the same period a year ago, but up 21% from the fiscal third quarter.

The sequential improvement over the third quarter was driven largely by the increase in shipments to the Asian and North American oil and gas markets. For the full fiscal year, fiscal 2014 sales were $263.9 million, down 7.5% from a year ago.

Looking at our broader product market, this decrease in sales in part can be attributed to a slight fall-off from record levels in some of our commercial marine markets, primarily in the lower horsepower ranges. However, crew boat demand in Asia and the US Gulf Coast remained strong for a high horsepower marine transmission. Sales for our propulsion products also suffered during the fiscal year, as many of the global patrol boat projects had fallen behind schedule.

In what should surprise no one, the global pleasure craft market continued to struggle, although we did see some pockets of promise in the Australian yacht market and the North American custom sportfish market, where builders used our Express Joystick System and Cat Three60 Precision Control System as differentiation against the competition. While our marine shipments were lower than the year-ago levels, demand remained high at the offshore oil and gas markets, especially in the US Gulf Coast and southeast Asia. In the second half of the year, shipments were stronger than in the first half of the year.

Sales into our industrial markets declined when compared both for the prior fourth quarter and full fiscal year. The majority of the impact was driven by the slowdown on the North American and European sectors, including oil and gas with air clutches, but also in irrigation and construction. On a positive note, our industrial product sales improved sequentially throughout the fiscal year, and order rates improved in the fourth quarter.

While sales into our transmission markets were essentially flat compared to last year, both when comparing the fourth quarter and full fiscal year, the momentum that we have seen in the North American oil and gas market in the last few months was a welcome addition to our backlog. As we anticipated, the new order rates had not duplicated what we saw in 2010 and 2011; but we believe that these trends will hold, and could even improve, as we move through the balance of fiscal 2015.

The main difference between 2014 and 2010 is that four years ago everybody needed products; a lot of products. Today the situation is different at each customer, as they are all in their own unique recovery and utilization of inventory. But, clearly, the broad momentum has changed from the last 12 months, or even six months ago.

As we discussed in prior calls, the global ARFF market remained flat year-over-year, but sales into our legacy military products declined as vehicle utilization in Iraq and Afghanistan declined with the planned troop drawdowns. New order trends also improved throughout the quarter, specifically in North America, and driven by oil and gas. This is the third quarter in a row where our six month backlog increased, and now stands at $66.1 million, up sequentially 15% from the previous quarter.

Gross margins for the quarter were 29.3% compared to 27.2% a year ago, and 27.2% for the previous quarter. A better mix of products, specifically within our transmission range, primarily drove the gross margin improvement over last year, and the sequential improvement versus the third quarter. We also saw improvement in all product areas when comparing to the third quarter. The year-to-date gross margins were 29.3% versus 28.1% a year ago.

Fourth-quarter spending in ME&A -- marketing, engineering, and administrative expenses -- increased by 4.3% or $730,000 versus the same period last fiscal year; and $17.1 million, or 22.5% of sales, to $17.8 million or 24.2% of sales.

There were several one-off items that contributed to the negative variance, including $572,000 relating to the cash surrender value of a split-dollar life insurance policy; $567,000 relating to the investigation, which includes audit, legal, and severance costs of a previously announced accounting irregularities at our Belgian operations. That investigation did not uncover any other matters that required us to amend our financial statements.

Additionally in the fourth quarter, we reported a $320,000 charge related to a nexus study on sales and use tax at our North American distribution operations. Year to date, ME&A spending decreased 0.7% or $490,000 over year-ago levels, from $67.9 million or 23.8% of sales to $67.4 million or 25.5% of sales.

As I have mentioned in the last few calls, we continue to rationalize our resources in both the European and North American operations. Even with the opening of the plant in Chennai, the adds that we have made in Asia, our net employment is down again year-over-year.

Looking at the bottom line, the fiscal 2014 fourth-quarter net earnings were $2.3 million or $0.21 per share versus the net loss of $48,000, $0.00 per share a year ago. You will recall that in the fiscal 2013 fourth quarter, we had $2.1 million in restructuring and impairment charges at our European operations. Adjusting for this and other one-time items, the current quarter was an improvement versus a year ago. Year to date, net earnings were at $3.6 million or $0.32 per diluted share, versus $3.9 million or $0.34 per diluted share a year ago.

EBITDA for the fourth quarter was $6.5 million compared to $4.7 million a year ago, and year-to-date EBITDA was $19.5 million compared to $21.1 million for the prior fiscal year.

Turning to the balance sheet, we ended 2014 fourth quarter with a net cash of $6.4 million. Total debt at June 30, 2014, declined 32% to $18.4 million from $27.2 million at June 30, 2013. Fiscal 2014 was another good year for cash flow, as we generated $25.7 million from our operating activities.

Inventory in the quarter declined $7.5 million from $105.1 million to $97.6 million, and is $5.2 million lower than the start of the fiscal year. The bulk of the decline in the year and in the quarter came from a manufacturing sub with increased levels of shipment again in the fourth quarter, but we also saw reductions at most of our distribution subsidiaries as well.

Returning to our six-month backlog, the $8.5 million increase from $57.6 million at the end of the third quarter to $66.1 million was, as I said, driven by new unit orders for the North American oil and gas market. But we also continued to receive new orders for the 8500 and 7500 Series oilfield transmissions for China.

With respect to our marine and industrial products, the stronger transmissions backlog was offset by a slightly weaker marine backlog, which reflects continued market weakness in the lower horsepower range of our marine transmissions.

Turning to the outlook, the 2014 fiscal fourth quarter, like fiscal 2013, was a nice rebound from the third quarter, which in the past two years has been our most challenging quarter. The new order activity in North America in oil and gas makes management more optimistic about fiscal 2015 when compared to fiscal 2013 and 2014.

We continue to see strong demand from our global commercial marine customers, again especially in the offshore markets, which is somewhat offset by the continuing weakness in many of the European marine markets. And as I mentioned earlier, there are some bright spots in the larger pleasure craft and marine sector, primarily with our Joystick and the Cat Joystick systems.

With respect to a broad recovery in North American oil and gas markets, I will just reiterate that the situation is different at each player and each type of application, but there is no doubt that the excess inventory in the market has come down significantly. Even with the recent ramp-up on oil and gas shipments, our lead times remain historically short for both our land-based and marine transmissions. The 8500 Series lead times remains 12 to 14 weeks compared to 26 plus weeks for the competition. As a result, our customers are placing orders just when they need them. And this is allowing us to fill more orders within the quarter, or the next quarter at the latest.

Middle- to longer-term, we are well positioned with products, people, and 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.

Leah, please open the line for questions.

(Operator Instructions). Josh Chan, Baird.

Just wanted to ask more about the excess inventory comment that you just made there. I think there's been some recent comments about part capacity being brought back. Just wondering what you're hearing on industry capacity, and how broad-based of a demand that you are seeing across your oil and gas customer base.

Josh, I didn't -- did you say part capacity (multiple speakers)?

Part capacity coming back, yes. And then what do you think about industry overcapacity at the moment?

Well, I'll speak for what we're seeing, not necessarily what everyone else is seeing. What we're seeing is that some of the smaller, independent operators and builders in the industry seem to have worked through their excess inventory faster than maybe some of the larger players. And so they are the ones that have been placing orders on us sooner. And that's what leads us to believe -- there's a bit still of an imbalance. Some of the larger players still have excess inventory. But we are seeing, particularly in higher horsepower from the smaller independents, that's where we are beginning to see -- that's where we saw the demand push at the end of the third quarter with new orders, and that continued through the fourth quarter.

Okay. Do you have any sense in terms of how long it would take the larger players to work through their relatively higher inventory?

I'm sensing that it's maybe this quarter, but by this -- I would say certainly within the calendar year. I know that the larger players have been ordering some new spreads. But I think as a percentage of their overall fleet, it's smaller as a percentage of their fleet versus the smaller independents, if that makes sense.

Right, yes. That definitely (multiple speakers).

Doesn't seem to be having the impact that the independents are at this point.

Okay, okay. And then you talked about the moderate pace of recovery, and that certainly makes sense. Appreciate the color there. Your backlog this quarter did improve at a pretty healthy rate. And so -- in fact, pretty similar to the rate of improvement that you've seen at the beginning of the last cycle.

So I'm wondering, are there any other sources of strength that you are seeing in terms of your backlog? Or are you perhaps being a little bit conservative in terms of what to expect in terms of demand?

Of course, we're probably being a little bit conservative. Certainly the biggest improvement in this quarter was the oil and gas. But I would say, in general, how we feel about the rest of the businesses in the backlog, we're feeling pretty good; specifically because the second half of the year for both marine and industrial, besides transmissions, were stronger than the first half.

So, there's definitely (technical difficulty) in oil and gas, specifically North America. And then as far as the shipments and the orders in the second half of the year for marine and industrial than in the first half. So, management here, we're feeling a lot better today than we were a year ago on the conference call, is that what the fiscal year ahead of us was going to present.

Great. That's encouraging. And if I can ask about the comment about the CapEx. Pretty sizable ramp, so wondering what do you expect to work on next year, in terms of capital spending-wise?

Well, it continues with -- and targeted machine tools that we just didn't get in this year. And again it has to do with gears and housing. To be honest, we didn't get a lot done in our European operations in the last four months of the year for obvious reasons. So we have some PP&E to do there, as well. And I neglected -- we have a plant, a fairly large one, that started this year on improvement on the corporate facilities here.

So those are the big ones, but we also have some machine tools going into India, and upgrading in move service facilities going in into Asia, outfitting those. So it covers everything, but a lot of it has to do with make-up on what didn't happen in Europe in fiscal 2014.

Okay, great. Thanks for your time, and good luck in the next year.

Thanks, Josh.

(Operator Instructions). Ryan Cassil, Global Hunter Securities.

Just a question on orders. If my quick math is right, orders were above 30%, and you had some weakness I guess in commercial, as expected. Would you mind just breaking out the transmission-related order growth, if that's something you guys want to break out?

We don't typically disclose the order activity. And I noticed in your earlier report that you guys tried to calculate it. That's tough to do with the information we do disclose, because we only report a six-month backlog, and there could be things that -- growth in the beyond-six-months backlog.

But to John's comments earlier, the majority of the growth in our backlog -- more than the majority of our growth in the backlog -- came from oil and gas sector. With the marine market, which had -- and fiscal 2013 was a record year, despite the pleasure craft market being down, actually the backlog did come down a little bit in the quarter.

And again the mix -- what was different than any quarter this year or last year was the weighting towards North America as the end market for oil and gas.

Okay, okay. Okay, that's good color. And I know you talked about shortening lead times. And last quarter you talked about increasing inventory to try and take advantage of the shortening lead times. But have they actually become shorter than you had expected, and are you positioning yourself to take advantage of that?

The answer to the last question is yes. But are they shorter than we anticipated? The answer to that is no, but I will modify that. We've held -- we've now gone through a quarter of a bump-up in production in oil and gas, and we're holding the lead time. And we've made that a priority here, where the transmissions are produced here on the scene. But we're going to do whatever we can which is prudent and possible to maintain those lead times as long as we can.

So, if we have a steady-state increasing demand, I think we can continue to hold these types of lead times, despite back in 2010 and 2011, just blew everything out the window. Because everyone was ordering at once, and there was a rush of spare parts; aftermarket as well. But if we can -- if the market comes back consistently, and the growth is consistent, then we are going to do whatever we can to hold these lead times.

Okay. Yes, no, you talked about a more gradual ramp. Is it fair to think about the shipments you've had in the transmission side, kind of a base year in Q4? And then, going forward, we should see gains on top of that, as this cycle plays out?

That is the indication that we're having, that we're just beginning to start a ramp-up in improvement. Now, having said that, it may not be a nice, smooth line going up. But I definitely see the trend, at least for the next 6 to 8 quarters, of an overall improving market in oil and gas, particularly in North America.

So, (technical difficulty) quarter may be slightly lower than the first quarter, or the third quarter might be lower than the second quarter. But we definitely see the trends for fiscal 2015 should be better -- will be better than fiscal 2014.

Okay. And then as we ramp the transmission orders -- and this has been a pretty strong margin, or at least a great incremental margin business in the past. Has anything changed from a margin perspective? What are the expectations there, as we ramp?

We're expecting to hold the same margins, within 1 point here or there that we had in the last ramp-up.

Okay, okay. And then for commercial marine, you had a tough compare this year. What are your expectations for 2015? Is that a flat to slightly growing market, or (multiple speakers)?

Yes, that's -- I would say it's certainly flat to growing. There are some markets that have -- particularly in some of the Asian economies, or Asian countries and South America, here's always politics involved with elections and this, that, and the other. So we're expecting some of that to move past us, early this fiscal year. So there should be improvement.

And one of the markets I'm thinking about in particular is Indonesia, with the coal tugs. That took a turn backwards in fiscal 2014, but we see that improving, heading into 2015. So, there are some of our lower horsepower markets that hopefully will bounce back, and we're optimistic that flat to growing is what we're going to see in commercial marine.

Okay. And then in pleasure yachts, it's been a challenging past couple of years. I heard you mention something about the sport fishing, or a sport fishing win. Could you just talk about what you're seeing in pleasure yachts, and does that even classify as -- are you putting that (multiple speakers) buckets?

Overall, I think the pleasure craft market is still down almost to where it was when it dropped. Where we're seeing our improvement, really, are in applications with our Joystick System where we can differentiate ourselves and then take market share from the competition. And the two that I've mentioned, one is in Australia in the overall yacht market, where the Australian market has gravitated towards the Joystick technology and are demanding yachts with that in it.

The win here in the US was directly related to our partnership with Caterpillar and the EJS, and also the Cat Three60 Precision Control system, which they have been pushing heavily through their dealer network, into some of the custom yards and some of the production builders -- and I will mention Viking is one. So, that has been a market (technical difficulty) win for us.

So, there are -- while the market is down, I do believe that our pleasure craft sales are going to increase in fiscal 2015. And it's primarily driven by those two areas: what's happening in Australia; and what's happening, from the mid-Atlantic region down through the Carolinas, in the custom sport fish market.

So, I think we'll see some growing -- production of marine transmissions, and then a whole range of [whole] systems and thrusters. All should see an increase in the pleasure craft market this year.

Okay. That's great to hear. All right. Thanks, guys. I'll jump back in queue.

(Operator Instructions). And no one has queued up at this time, so I'll turn the call back to John Batten for any additional or closing remarks.

Thank you, Leah. 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 to you again in October, following the close of our fiscal first quarter for 2015.

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

Thank you for your participation, and this concludes today's conference.