Twin Disc Inc (TWIN) 2015 Q1 法說會逐字稿

Good day and welcome to the Twin Disc first-quarter fiscal 2015 financial results conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Stan Berger of SM Berger. Please go ahead, sir.

Thank you, Christy. 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 2015 first-quarter 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 and 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 2015 first-quarter conference call. As usual, we begin with a short summary statement, and then Chris and I will be happy to take your questions.

First, looking at the first-quarter results, sales for the 2015 first fiscal quarter were $64.8 million, down 2.5% from $66.4 million for the same period a year ago. The slight decline in year-over-year and sequential quarterly comparisons was driven by moderating demand from our Asian markets for commercial marine and oil and gas transmissions. Partially offsetting the decline in sales to Asia was an increased demand into our North American market, driven by stronger activity in our oil and gas and industrial markets.

Overall, sales into our European markets showed some slight improvement year over year, but remained at historically weak levels.

Looking at our broader product markets, the slight decrease in sales can be attributed to a decline in demand for our pressure pumping transmissions in China and softness in some of our Asian commercial marine and patrol boat markets, primarily in the lower horsepower ranges but also in some select high horsepower projects. However, crew boat demand in Asia and the US Gulf Coast remains strong for our higher horsepower marine transmissions. Sales for our propulsion products in the quarter also declined slightly year over year as many of the global patrol market projects have fallen behind schedule.

The global pleasure craft market specifically in the 40-foot to 80-foot range remained at historically weak levels. However, as we mentioned in our fiscal 2014 fourth-quarter call, we did see some increase in activity in the Australian yacht market and the North American customs sport fish market where we have been successful with our Express Joystick System in cooperation with Cat and their Three60 PC System.

While our marine shipments were lower versus year ago levels, demand remains at high levels for the offshore oil and gas markets, especially in the US Gulf Coast. First-quarter sales into our industrial markets increased when compared to last year. The majority of the improvement was driven by an increase in demand from our North American market sectors, including oil and gas, irrigation, recycling, and construction. We anticipate this trend continuing throughout the fiscal year.

Sales into our transmission markets improved versus fiscal 2014 first-quarter levels. Shipments into our North American oil and gas markets improved significantly. But partially offsetting this increase was a decline in the oil and gas demand from China and the anticipated slowdown in our legacy military contracts.

Gross margins for the quarter were 34.5% compared to 31.1% a year ago and 29.2% in the previous quarter. A better mix of products, specifically within our transmission products, drove the gross margin improvement over the previous quarters.

First-quarter spending in marketing, engineering and administrative or ME&A expenses increased by 2.5% or $393,000 versus the same period last fiscal year and $15.5 million to $15.9 million. Most of this increase was driven by inflationary items, offset by slight decreases in pension and stock-based compensation expenses.

Turning to the bottom line, the fiscal 2015 first-quarter net earnings were $4 million or $0.36 per share versus $1.3 million or $0.11 per share a year ago. EBITDA for the first quarter was $9.4 million compared to $6.6 million a year ago.

Turning to the balance sheet, we ended fiscal 2015 first quarter with total debt of $23.6 million compared to $18.4 million at the end of the previous fiscal year. Contributions to our domestic pension plans of $3.4 million were the primary factor in the increase. Inventory in the quarter declined slightly by $126,000 from $97.6 million to $97.5 million. Our balance sheet remains strong with debt to capital still low at 13.5% and a positive net cash position.

Our six-month backlog decreased from $66.1 million to $63.4 million. Orders for our North American markets improved while Europe remained stable, and net new orders for Asia decreased in the quarter. While taking this one data point, the slight decline is not good news, but we remain confident that the positive trends that we've been seeing in North America continue can continue, despite the many conflicting global macroeconomic indicators, and that our momentum in Asia will return during the fiscal year.

Certainly our first-quarter results, especially on earnings and margins, were a good start to the fiscal year, but the slowdown that we have seen in Asia began to solidify some of those global macroeconomic trends that we have been following. While we feel that fiscal 2015 will be an improvement over fiscal 2014, it is too soon to predict by how much. Our leadtimes remain historically short for our higher horsepower transmissions, including those in oil and gas to reacting to any new orders can happen within a quarter, and we still feel that there is some opportunity to take market share with these competitive leadtimes.

Looking at the longer term, we still feel that our overall energy markets are still a good place to be, and we continue to develop new products for these markets and acquisition opportunities to enhance our position within these markets.

That concludes my prepared remarks, and now Chris and I will be happy to take your questions. Christy, please open the line for questions.

(Operator Instructions). Josh Chan, Baird.

I was wondering if you can talk a little bit more about the softness that you're seeing in Asia, both on the marine side and the oil and gas side and what's causing that, and then also what gives you confidence that that might not recover within the year.

I guess I'll start with the easy one first. Some of the marine softness is really driven by the demand for coal in China, and so a lot of the activity that's lower versus year ago levels in some of the coal tugs and barge activity, and there was kind of a slowdown in orders and buildings, and we think that that has flattened out and should improve at some point during this fiscal year. And then there were some higher horsepower projects that were kind of delayed -- not kind of delayed; they were delayed.

So overall we think that those opportunities are still there. They've just been pushed out a quarter or two or maybe more. Oil and gas -- I should have been a little bit more specific. We did have demand. But some of the -- our customers in China are purchasing in the US. So they showed up as North American sales. I just think that there's been a slowdown in China in the plant and developing and issuing new leases and some of the planned activity. We don't see that going away. It just looks like they've moderated a bit in building new equipment because they are not sure the timing of when they are going to get the new leases for new activity. So, those are two primary places that we saw the slowdown.

Okay, okay. That's helpful. And if I can look into the North American market, your oil and gas market, you said in your comments that customers have been more cautious in placing orders, and I was wondering if you are seeing customers potentially want to defer deliveries as well.

We've had a mix. There has been some activity pushed out from one quarter to another, but then we've had other things pulled in. I guess one of the best signs that we've seen, Josh, really is the increase in rebuild activity and aftermarket rebuilding the equipment that's being used. And so that's one of the data points that makes us feel a lot better about the North American market in general going forward is that they are spending the money to rebuild things that have been used for the last maybe three to five years that they've been postponing.

So, there have been pushouts from one quarter to another. There have also been units that have been pulled in. Again, it's a mix depending upon the customer and what fleets they are concentrating on at any one time.

Okay. Okay. And how big is the rebuild in terms of order of magnitude compared to new equipment for you guys?

I don't have it in front of me. I would say off the top of my head, (inaudible) it was extremely low for many quarters. But we are probably up I would have to say maybe in the 20% range. You know, it's -- and I would say it's just kind of at the beginning of that, Josh.

Okay, okay. And so if we think about the North American oil and gas market, in an environment where pricing of oil has come down significantly, how should we think about kind of the trajectory of this market looking out you know six, 12, 18 months or so?

That is a very good question because, as you know, that $20 drop in oil happened so late in the quarter, I can't say what effect it had on the first-quarter results. But looking forward, certainly the drop in oil does not -- it doesn't improve the prospects any. But I don't know how much it damaged it because there is still the supply here. There's still the demand. I can't tell you what -- what is the price point that is going to curtail activity significantly. You know I don't know -- if it's in the $70s, if the low $70s, below $70s, it's certainly -- I think there are some other constraints on whether it's sand or the trucking and expense side. I guess part of that question is, how much is the expense side going to go up with the barrel price? I don't like to see it at $70. It kind of makes you wonder a lot more.

But my gut feeling is that it's going to start to go back up in the $80s because I just don't see it coming down. I know there are some people who -- I forget the guy's name who thinks it's going to go down to the $20s. I personally don't buy that. I don't think we buy that here. But I don't know when it's going to get back up over $100. But I see that a much more likely scenario than going down into the low $70s and $60s.

Okay, okay.

So far I can honestly say, Josh, so far, it has not had an impact. But it's too soon to tell.

Okay. So you haven't had anybody -- customers come and call because of the price movement basically is what you're saying.

No, no.

Okay, okay. All right. Yes, thank you for the color. I'll jump back in queue.

Walter Liptak, Global Hunter Securities.

This is [Ryan] on for Walt. Could you elaborate -- just to elaborate on the North American oil and gas market a little bit, could you talk about the order trends as you work through the quarter and possibly quarter to date? It doesn't sound like things changed too materially, but any color there?

Yes, I would -- again, I just want to preface anything -- it's hard to read on a quarter to quarter basis because we did have a lot of -- a good number of customers when they started ordering, replacing demand for six months. And so their overall demand and number of units hasn't changed really at all. It's more of the timing of when they want it and, depending upon who we are selling it to, when their customers want it.

I do sense that the increase in rebuild activity and replacing units with transmission or engines with new units is on the increase. So regardless of the price of oil, I guess going back to that, they still have to bring a certain amount of energy up out of the ground. And I know they are looking at it every day whether it's going to be a rebuild activity to replace that with new units or just buy new rigs altogether and keeping the costs down. Because one of the most expensive things you can do is get to a frac site and have several units not working and that frac job just got significantly expensive.

So I see the overall momentum still as positive. And to me it's who we buy -- for us the increase in aftermarket activity and rebuild activity. So, I suspect that we still have a good run here on orders for North America. But it could moderate quarter to quarter, and we don't report out at six months. So, a lot of what we could get on order is going to be planned for seven to eight months now, and it won't show up. So, overall positive, but the quarter to quarter could be up and down a little bit, like it was this quarter.

Okay. Thanks. And just to go back to the shadow inventories that we've talked about in the past, where do you think we are now in the channel, and are we kind of at equilibrium going forward?

We are a lot closer to equilibrium given the aftermarket activity. I think a lot of what they were doing was when the unit for whatever reason was not operable, they'd replace it with a new unit from inventory. And I think in the last three months, we've gotten down much closer to zero again with the preface that there are still some operators who have slightly more than others. So it's not uniform. But I'd say we are very close to that point where a lot of the inventory has been used up or will be in this quarter.

Okay. Great. Thanks for the color. I guess and then finally it sounds like in North America, the industrial end markets general industrial is strong for you guys. Could you just elaborate a little bit on what you're seeing there and where that demand is coming from?

Yes, actually I would say it's broad based. We've just had a lot more activity, and I know talking with our sales guys and our distributors, it just seems like a lot of projects that have been put on hold finally came through. I think we've also won a couple projects with our pump drives which we have been slower than we would have liked to get into market. We are battling a couple of domestic players that have an entrenched market share, and this is a product that we acquired many years ago from when we acquired Technodrive in Italy, and we're starting to see much better market penetration with our products.

So, that has improved. But if there's one product, that's where I think we've improved. But overall, I would say it's just broad. Some of our customers are feeling more confident in moving ahead with projects.

Okay. And this is my last one. I promise. But it sounds like the second-quarter sales are going to be flat to slightly up from last fiscal 2014. Is that in line with your overall plan? I know you guys have better visibility on the timing of shipments. I guess is that in line with your thoughts to begin the year, and have you always thought about second half being strongly weighted?

Yes, the short answer is yes. I do miss the days when our trends used to be that sales and earnings improved sequentially as we moved through the year. So, the first quarter was the weakest, and the fourth quarter ended the strongest. That trend has gone away. And so, now we are dealing with typically a first quarter that can be very strong and then a second quarter or third quarter not as strong as the first quarter, but the fourth quarter typically is very strong. So you have a first quarter and a fourth quarter that now seem to be the trend of the strongest quarters and the second and third quarters flip-flopping, which can be the most difficult.

But I would -- the second half of the year I think is going to be better than the first half of the year. And it's a question of will the second quarter -- and again, it's not that I'm trying to be coy or anything, but there are -- it's for us it can be the timing of shipments. For instance, if we ship 12 8500s to Asia, if we don't make the cut off in the second quarter as far as the timing, all of that will show up in the third quarter. So there are very discreet packets of shipments that can affect what quarter is going to be stronger, the second or the third quarter.

Okay. Great. Thanks for the color. I'll catch up more off-line. Thanks, guys.

Steve McManus, Sidoti & Company.

Just a quick question regarding ME&A. It jumped up to about 24.5% of sales this quarter. I just want to see your thoughts if you think that's a fair run rate going forward, or is it kind of hard to tell?

No. I mean it's not a fair run rate because taking into account John's comments just now, typically the top line is filled with growth throughout the year. You won't see a comparable growth in ME&A. So the answer is no. That's the high point.

Also, we are expecting this year to be a better year than last year. So there is some incentive compensation that is built-in to the numbers this year when there was virtually none last year. But the answer to your question is no. I mean that's a high point I would expect for the (multiple speakers) percentage for the fiscal year.

Okay. Great. Thanks, guys. And then, just getting back to the product mix shift, has there been a significant change weighted more towards the power transmission system since last quarter, and what are your thoughts on the mix moving forward?

Yes, there's two shifts. One, the oil and gas shipment as a percentage of our overall sales increased, and there was a shift from the shipments going to Asia versus the shipments staying here in North America. And the biggest -- I would say the biggest impact of that certainly is it drove the margins up just on the mix, but then the geographic mix and the timing -- you know when we ship to North America, we essentially can recognize the sale immediately. So, we get that margin impact. Typically when we are shipping to Asia, it's spanning quarters. So, that shift to North America had -- in the higher-margin mix shift had a good impact on the first quarter.

Okay. Great.

(Operator Instructions). Doug Dyer, Heartland Advisors.

What are you thinking in terms of Caterpillar's pricing? Is that helping or hurting you at this point, and do you sense that your market share is going in which direction?

You know, in the quarter, I have to say I haven't looked at it. I think -- I truly believe that both of our market share is increasing. And I don't think -- I think they share the same philosophy as we do. I don't think they are out to set any type of price war. You know, I don't -- the Cat pricing does come up. I think the Cat financing comes up more. And so builders who do need that channel of financing to operate, that is -- I think that is certainly a competitive dynamic that we are well aware of. But to date it doesn't come up as a major threat on Cat as far as pricing, if that's the question. I haven't seen that. We are working hard on -- as I assume they are-- on getting as much of the business that's out there. And certainly I do think that their market share is increasing, and I think that our market share in the market that's here and now right now is also increasing and particularly what we've been able to do in Asia.

All right. Thank you very much for the color.

Josh Chan, Baird.

Just a couple of follow-up questions. In your outlook comments, you said that Q2 the top line might be similar to last year. I guess is it fair to assume that perhaps you would still have a better mix than you did last year?

Yes. I think certainly there is. And I must say because it can change because the order leadtimes for a lot of the products is very short. But yes, certainly I think that given where we are today and what we've delivered in the first quarter, I think that's a fair expectation.

Okay. And then the last question is you said that you expected fiscal 2015 to be better than 2014 on the top line. My guess back to the first half is going to be down slightly. So, what in your mind will kind of drive the growth in the second half to make up for the difference?

Good question, Josh. In the first quarter already, I think we beat the first half of last year in terms of the bottom line. So (multiple speakers)

I don't think we've got that top line.

Oh, top line. Josh, were you talking about top line or bottom line?

Yes, the top line. Pardon me.

John, go ahead.

Yes, well, I do think, as long as we take currency out, I think that we can -- there's a chance we can hit last year and repeat last year in the first half. There is that chance. Certainly I think in the full fiscal year, it is a safe assumption, barring anything that we don't know now, that we will be at the top line of fiscal 2014.

I guess what I was wondering was, are there any specific markets that you sort of think can drive that growth compared to last year that you are more confident in than other markets?

Certainly North American oil and gas is one and just the North American broader industrial business is going to help drive it.

Okay. Great. Thank you for your time.

Walter Liptak, Global Hunter Securities.

Hi, guys. Just one more. It sounded like the pleasure craft market you know picked up a little bit and maybe outpaced your expectations. If that's true, has your outlook changed in pleasure crafts throughout the year? Because I know it's coming off almost zero. So just want to get your sort of (multiple speakers)

I would say no, and I'm going to be specific on the pleasure craft. Certainly, we don't participate in that trailer boat market, which I think is actually doing quite well. And then the -- I would call it the mega yacht, super yacht things about 100 feet, those are still doing relatively well. But there's just so few of those built. They don't really move the needle on them because there's just so few transmissions and propellers available in that market.

The real market that has suffered versus 2008 through 2008 is that 40 foot to, let's say, 90 feet -- 83 feet, 78 feet, those are the ones that are the multimillion dollar yachts that people were financing, and that financing is generally gone. And in Europe, even if you can pay cash for it, every time literally there are horror stories in Italy and France. Like every time you move out of the harbor, customs is there to make sure that you have your tax returns there and that you've paid taxes, and you can prove that you didn't have illegal funds to finance it. Here in North America that's not as much of an issue. It's just general financing. So it's -- I still think that we are years away from that market recovering.

Having said that, we were just talking about Cat in oil and gas and how we compete on transmissions. In this market, Cat is our best ally. Because typically our marine transmissions are designed around their engines, and we have the joint Joystick System and the Cat marine sales group is pushing hard to gain market share. They have new engines coming out. They've got pods coming out.

So, I do think that being teamed with them in this market will eventually get us some more business, albeit in a much smaller market historically than what we've been used to, at least in the 2000s -- kind of first in the tech bubble up to 2008. I don't know when that growth in that range of boats is going to come back. This is not going to be driven in Western Europe at all. So we are going to rely on North American, Australian and to some extent people from Hong Kong and China where are they going -- they can buy the boat. The question that they have in that market is, where are they going to put the boat? So still see a lot of opportunity, but it's going to be overall in a smaller market. I hope that helps.

Yes. It sounds like it's kind of unchanged, and any upside would be kind of incremental to people's expectations at this point.

I would 100% agree with your statement.

Okay. All right. Thanks, guys.

It appears there are no further questions at this time. I would like to turn the conference back over to Mr. John Batten for any additional or closing remarks.

Thank you, Christy, and 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 January, following the close of our second fiscal quarter.

Christy, I will now turn the call back to you.

That does conclude today's conference. Thank you for your participation.