Twin Disc Inc (TWIN) 2015 Q3 法說會逐字稿

Good day and welcome to the Twin Disc, Inc., third-quarter fiscal 2015 financial results conference call. Today's conference is being recorded.

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

Thanks, Amber.

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 third-quarter and nine months 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.

With us on the call today are John Batten, Twin Disc's Chief Executive Officer, President, and Chief Operating Officer, and Jeff Knutson, Vice President, Finance, Interim Chief Financial Officer, Corporate Controller, Interim Treasurer, and Secretary.

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

Thank you, Andy, and good morning, everyone. Welcome to our fiscal 2015 third-quarter conference call. As usual, we will begin with a short summary statement and then Jeff and I will be happy to take your questions.

Looking at our third-quarter results, sales for the 2015 fiscal third quarter were essentially flat at $60.9 million versus $60.7 million a year ago. The general conditions in our geographic markets remain unchanged. When compared to previous-year levels, our North American manufacturing and distribution operation showed good growth in the quarter in most product end markets, but that growth was offset by moderating markets in Asia and continued low demand from Europe.

When we look at our broader product end markets, the growth that we saw in North America was not enough to offset the lower levels of activity in Asia, nor the 5% or $3.2 million negative impact of foreign currency translation primarily from Europe.

Our third-quarter sales into our industrial markets were essentially flat year over year, with slightly higher shipments in North America offset by currency translations at our European operation.

Most of our North American market sectors, including oil and gas, irrigation, recycling, and construction, were relatively stable during the quarter. With the exception of oil and gas, we anticipate this trend continuing throughout the fiscal year.

Sales into our transmission markets improved versus fiscal 2014 third-quarter levels, again driven by the relatively strong shipments into our North American oil and gas end markets. Compared to the previous quarter and sequentially quarter, our transmission shipments were down, primarily driven by a lower level of shipments to Asia.

After second-quarter shipments rebounded nicely from a relatively weak first quarter, our global marine markets declined when compared both to the second quarter and previous-year quarter levels. Negative currency translation had the biggest impact in our marine markets, due to the high percentage of marine activity at our European operations.

While revenues did come down and the outlook is cautious due to the moderating day rates and rig counts, we are optimistic that any down cycle will not be nearly as severe as what we have seen in the pressure pumping area.

Gross margins for the quarter were 31.2%, compared to 27.2% a year ago and 30.4% the previous quarter. A strong mix of product, which included both oil and gas units, service, and parts drove the gross margin improvement. Year to date, our gross margins are 32% versus 29.3% last year.

Third-quarter spending in marketing, engineering, and administrative, or ME&A expenses, decreased by 210 basis points or $1.2 million versus the same period last fiscal year, from $16.9 million or 27.8% of sales to $15.7 million or 25.7% of sales.

Reductions due to currency translation, pension expenses, reversal of stock compensation, and general spending controls were partially offset by an increased bonus accrual and general inflationary expenses. Year to date, ME&A spending is $48 million or 24.2% of sales versus $49.6 million or 26% of sales a year ago.

Turning to the bottom line, the fiscal 2015 third-quarter net earnings were $2.9 million or $0.26 per share versus a loss of $0.5 million or $0.05 a share a year ago. For the first nine months of the year, net earnings of $10.7 million or $0.95 per share compared to $1.3 million or $0.12 per share a year ago.

EBITDA for the third quarter was $6.2 million, compared to $2.3 million a year ago, and year-to-date EBITDA is at $23.9 million, compared to $12.9 million a year ago.

Looking at the balance sheet, we ended the 2015 third quarter with a total debt of $12.4 million, compared to $18.4 million at the 2014 fiscal year-end, and we also had cash on the books of $23.6 million. Working capital declined almost $13 million since the beginning of the fiscal year and $17 million from a year ago. Our balance sheet remains strong, with debt to capital still below 10% and a positive net cash position of over $11 million.

Our six-month backlog decreased from $58.3 million to $47.8 million in the quarter. Products with oil and gas exposure drove the decrease in backlog. The rapid decline in the price of oil had a significant impact on net new orders for land-based and marine transmission systems that are used in the industry.

While we are pleased with our results for the first three quarters of the year, the confidence and optimism that we had this time a year ago has changed to one of cautiousness. While the drop in oil prices, day rates, and rig count has certainly curtailed a lot of new equipment purchases, North American oil production remains at historically high levels. Equipment is being used and will need to be serviced and eventually to be replaced.

Looking specifically at the North American pressure pumping market, we felt that as of last fall we were very close to the 100% utilization of the fleet, after having an excess capacity of almost 25%. With the dramatic drop in new drilling activity, we may be headed to that level of excess capacity until the rig count begins to rise again.

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

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

(Operator Instructions). Tim Wojs, Robert Baird.

I guess first question, just on -- I was wondering if you can just maybe add a little bit of color around just the oil and gas order activity, how that trended through the quarter, maybe how it looks in April. And then, maybe just add on how the aftermarket also trended through the quarter.

I would say the order activity for units, particularly for North America, was very quiet in the quarter. Thankfully, as far as spare parts, that continued, but not at the level that we saw in the second quarter. So, the service activity for North America will, I think, slow down through the -- we're in the fourth quarter right now. That will slow down.

There's still some work to do that we have on the books, but with the excess capacity, I think we're going to see a lot of the operators rotating rigs and not repairing right away if they don't have to.

Okay.

So anything as far as order activity, we have seen a switch from past years where we are primarily North American shipping, then that trended in 2013 and 2014 where a lot of it was to Asia, and this year it was primarily back to North America, but I think going forward we will see a higher percentage going back to Asia for the time being.

Okay, and I guess just on Asia, how has that played out through the quarter? Has that continued to weaken or has there been a little bit of strengthening in that market?

It depends. I would say marine got -- as far as where we started at the beginning of year, the marine part has gotten slightly better, but oil and gas has stayed at a, I would say, relatively weak position compared to where it was a year ago. So that really hasn't improved very much.

But it doesn't -- while it is down, it is not down as significantly as North America looks to be for the next couple quarters.

Okay, okay, that's helpful. And then I guess just on the outlook, I guess we are closer to fiscal 2016 now. Should we think about revenue and, I guess, EBIT being flat to down-ish next year? Is that probably the best view at this point?

Yes, I would say that certainly our toughest quarter of this fiscal year is going to be the fourth quarter. And that usually has a mirror going into the -- coming out. So, certainly the toughest quarters for us for fiscal 2016 are going to be the first couple of quarters.

It is going to take some recovery in the price of oil and the number of rigs to at least stabilize, stop reducing, and then I think we will see some improving trends.

Okay. And then, you highlighted the balance sheet in your prepared remarks, and I know that the end markets have been choppy. I guess today versus maybe three or six months ago, are you more willing to do an acquisition now or would you rather wait to see visibility improve a bit?

If it's strategic, I definitely have the capacity and the desire to do one. I think our balance sheet can handle an acquisition and some choppy markets.

Okay, great. I appreciate the help.

(multiple speakers) if it's the right one.

Sure, sure. I appreciate that. Well, thanks, guys.

Steve McManus, Sidoti & Company, LLC.

I guess just staying on the topic of the aftermarket and new rig activity, what has the mix been at the end of this quarter versus the last couple, and where do you see that moving forward?

I would say I believe that as far as aftermarket as a percentage of the sales was the highest in the third quarter, driven by aftermarket staying at similar levels throughout the fiscal year, but the unit sales being down.

And I see that general activity still being very good for the next few quarters. The trends look good in all, not just oil and gas, but marine, industrial, just general activity. A lot of the rigs are still being used, so there is going to be some repair work, and a lot of our equipment out there is still being used and there is going to be repair work. So, that part I am pretty confident in.

We tend to bounce -- we can be as low as 30% and as high as 40%, and right now, we are in the -- just touching close to that 40% ranges, aftermarket and service as a percentage of sales.

Okay, great. And then, there has been a bit of a ramp-up in CapEx. Can you, I guess, [just] the allocation a bit, and do you think the spending levels are going to remain at this level through fiscal 2016?

That depends. We have had some projects, some plant activity here, working on the facilities here, and we have a project in the fourth quarter at one of our European operations for just some general facilities.

From the outside, that will look like the spending will probably be up, but we are going to be mindful of what's happening in the markets and certainly mindful of any acquisition opportunity and spend where needed, but be cautious.

Okay, great. And then the last one for me, I know the effective tax rate was impacted by a period of adjustment. Do you guys have a fair run rate moving forward that we can expect?

Yes, this is Jeff, Steve. I think the rate is going to stay in that 35%, 36% range, given where earnings look to be coming from. I think the face of the P&L is always going to be a little bit challenging, just because of the adjustments and, like we call out, some of our energy, it's a valuation allowance. But I think as a run rate, you would look at that 35% to 36%.

Okay, great. Thanks a lot, guys. I appreciate it.

Walter Liptak, Global Hunter.

I wanted to ask one on the pressure pumping business. I think you said that the units were down during the quarter. But it sounds like you are still getting some orders, is that right, in North America?

I would say the units were down versus the second quarter, but up versus the third quarter of last year. The orders -- I would take say it is a firming up of the scheduling in Asia. There really hasn't been any net new orders for North America in the quarter for units.

Okay.

Any orders (multiple speakers) for aftermarket.

Okay. And along those lines, the delta in backlog from December through March is about $10 million, and I wonder if we can get a little bit more description -- I think you went through some of it already, and we can imagine where some of it is coming down, but I wondered if we can get more detail.

Besides the FX trends, I think there was about $1 million, it is pretty much, Walt, going to be an oil and gas story. Just a drop of -- for every -- yes, $6 million of it, oil and gas, which will be the pressure pumping; about $1 million, I think, was translation; and the balance is probably weighted mostly in marine and, again, trending towards what would be offshore oil and gas.

So, 10% currency translation, 90% oil and gas related, and primarily, obviously (multiple speakers) -- just to be obvious, extreme cautiousness over the price of oil.

Right, right. Okay. You did mention that pricing held, and I think a theme that we have been hearing throughout the quarter was just the pricing pressure. I wonder if you are getting any of that on either units or remands or parts for the pressure pumping.

Look, I would say we are starting to see certainly at the distribution level there is pressure on pricing as far as service and repair work. And we're feeling that, too, certainly on new -- any new quoting activity as far as new units, particularly so far we have seen it mostly on the marine side.

Not to say that there wouldn't be a little bit of pressure on oil and gas, it's just that in this quarter there hasn't been a lot of quoting activity for new equipment.

But you have seen -- Walt, you have seen what the oil services companies have been able to do just as far as efficiency on labor. They are producing as much oil right now with dramatically fewer rigs, and so a lot of the efficiency gains have been how they are servicing and staging the fracking and other activities.

So, I do think that frack operators have gotten significantly more, let's say, cost competitive or brought the costs down in the whole scheme of things.

Okay, I got it. Okay, and you mentioned the marine. I want to make sure I have got this right. It sounded like it is trending a little bit better than it was with your comments last quarter, and if that's right, is it work boats or is it Coast Guard or something? Where is it getting better?

General workboat activity, pushboats along the river moving commerce, whether it's in North America or Asia, with the exception of the coal barges in Indonesia for China, that is doing okay.

It is really the offshore where we see -- as a crew boat is delivered, there is not necessarily one coming in behind it, or if someone drops out and a big guy takes that spot, again, the slot behind him is not being filled for the moment. So it is just generally cautious right now, very cautious.

Okay. And in Europe, the pleasure craft, is there anything improving there?

Actually, I would say in different parts of the market, yes. I would say something we don't serve, the trailer boat market, that is definitely getting better, but we are seeing some improved activity in North America with our Joystick System, concerning new orders, Australia as well.

So that is actually in the backlog, but I think some of it is outside the backlog with their schedule. So that is one area in marine that has been a benefit of a highlight.

Okay, great. And then, just the last one for me on industrial, how are you seeing the industrial parts of the business this early in 2015?

Thankfully, very stable. Good in North America. Not as good in Asia or Europe right now, but hopefully that is a trend that can continue and doesn't suffer a little decline like we are seeing in oil and gas. But overall, those markets have been, for us at least, pretty good, pretty stable, and we're optimistic. We have some new products coming out, so that is one area that heading into the next fiscal year that there is at least a ray of optimism.

Okay, great. Thank you.

(Operator Instructions). Doug Dyer, Heartland Advisors.

With some of the pressure pumping equipment that has been stacked, does any of that idled equipment ever become competition for your parts business or is that -- since they are stacking the least productive equipment, that doesn't enter into the equation?

Good question, and that is one that is going to change -- the answer is going to change depending upon who the fleet operator is.

Most likely if there's a problem on a rig, they will swap it out with a new rig and just park the rig and then rebuild the rig at some later date. We don't see or hear as much of them cannibalizing parts from a transmission unless it's something -- of the systems, the whole frack, unless it's something that they can get at easily.

So it's going to depend by operator, but by and large they will swap out. If the frack rig is not working, they will just replace it with a different frack rig and then attend to the problem either immediately or sometime down the line.

But to answer your question, yes. It can provide a competitor because it delays either replacement or a rebuild.

All right, thank you.

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

Thank you, Amber.

Thank you for joining us on the 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 Jeff or myself. We look forward to speaking with you again in August following the close of our fourth quarter and end of fiscal-year 2015.

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

Thank you. That does conclude our conference. Thank you for your participation.