Twin Disc Inc (TWIN) 2015 Q4 法說會逐字稿

Good day and welcome to the Twin Disc Inc, fourth-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. Stan Berger of SM Berger. Please go ahead, Sir.

Thank you, Angela. 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 2015 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 Jeff Knutson, the Company's Vice President of Finance, Chief Financial Officer, Treasurer, Corporate Controller and Secretary. At this time I will turn the call over to John. John?

Thank you, Stan, and good morning, everyone. Welcome to our fiscal 2015 fourth-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 fourth-quarter results, sales for the 2015 fourth quarter were $67.3 million versus $73.6 million a year ago, down about 8%. The general conditions in our geographic markets remain unchanged from the third quarter; however with the exception of the land-based transmission markets, all other sectors saw improved shipment levels from the third quarter, most notably in marine.

Customers moving up shipments in advance of our July and August shutdowns can explain part of this increase, and I will cover that more detail later in the call.

When we look at our broader product end markets, the growth that we saw in North America was not enough to offset lower levels of activity in Asia nor the 6% negative impact of foreign currency translation.

Our fourth-quarter sales into industrial markets improved by about 3% with slightly higher shipments in North America. This is versus the third quarter.

Most of our North American market sectors include oil and gas, irrigation, recycling and construction were relatively stable versus third quarter. But when compared to the previous year, shipments were down about 8%.

Sales into our transmission markets declined versus fiscal 2014 fourth-quarter levels by about 23%, again driven by the relatively strong shipments into our North American oil and gas markets at the end of fiscal 2014.

Compared to the third quarter, our transmission shipments were down about 16% reflecting slowdown in oil and gas shipments into North America and continued weakness in the Chinese market.

The one bright spot in the overall product markets was our marine product sales which were up over 20% versus the third quarter and posted its highest marks in eight quarters. While sales improved in all geographic regions part of this increase can be explained by the timing of our plant shutdowns.

All of our European plants, which range from 50% marine products to 100%, take at least a two-week shutdown in our first fiscal quarter. Some take three weeks plus depending upon market conditions.

This year, due to the low demand from the oil and gas sector, our largest plant based here in Wisconsin took a five-week shutdown in July. Many of our customers moved plants shipments up from July and August and requested them in June. This partially explains both the bump in sequential sales versus the third quarter and the larger than expected falloff in backlog, which I'll cover again later in the call.

Gross margins in the quarter were 29.0% compared to 29.2% a year ago and 31.2% the previous quarter. A good mix of product, which included a lot of aftermarket, helped to offset the decline in oil and gas unit shipments. Fourth-quarter spending and marketing engineering and administrative or MEA expenses decreased by $1.7 million versus the same period last fiscal year from $17.8 million or 24.2% of sales to $16.2 million or 24.0% of sales.

The reduction year-over-year despite the $1.1 million bonus accrual reflected one-time items such as -- one-time items related to professional services, a cash surrender value of a life insurance policy, reduced bad-debt expense, lower pension expense, currency translation and of course cost containment efforts.

Looking at the bottom line, fiscal 2015 fourth-quarter net earnings were $437,000 or $0.04 per diluted share versus [2.3] or $0.21 per share a year ago. The fiscal 2014 fourth-quarter earnings include a pretax $3.3 million charge for restructuring at our North American operations. And again, I'll have more detail later in the call.

For the full fiscal year, net earnings were $11.2 million or $0.99 per diluted share versus $3.6 million or $0.32 per diluted share year ago and this is on a slight revenue increase for fiscal 2015.

EBITDA for the fourth quarter was $2.6 million compared to $6.5 million year ago. For fiscal 2015, EBITDA finished at $26.5 million compared to $19.5 million a year ago.

Looking at the balance sheet, we ended fiscal 2015 with the total debt of $13.8 million and cash of $22.9 million from a cash position of just over $9 million. We reduced inventory 18% from the end of fiscal 2014 to June 30, 2015 and 12% in the quarter alone from $97.6 million at the end of fiscal 2014 to $80 million at the end of the quarter and the fiscal year.

Our six-month backlog decreased from $47.8 million to $34.4 million. Products with oil and gas exposure continued to drive the decrease in backlog. The rapid decline in the price of oil in the first calendar quarter had a significant impact on net new orders for land-based and marine transmission systems that are used in the industry.

As I mentioned earlier, because of the lengthy shutdown here in North America, we did see positive pressure on revenue in the fourth quarter offset by a negative pressure on the backlog going forward as those shipments were not yet replaced by new orders.

Certainly, the six-month backlog is not a perfect indicator of the full upcoming fiscal year but it is an indicator that the first half of fiscal 2016 will be challenging. Knowing that oil and gas may not come back for several quarters, we decided in the quarter that it was imperative that we lower our cost structure.

As was mentioned in the press release, we took a $3.3 million charge that reflected actions taken at our domestic manufacturing operations to reduce headcount by almost 20%. Three quarters of this reduction came through a voluntary separation program or early retirement and one quarter through involuntary actions. These actions were not taken lightly and I'm most pleased that our employees understand the necessity of doing this even off coming after a good fiscal year. The annualized savings of these actions will be close to $6 million and are split between ME&A and cost of goods sold.

As many of you can imagine, the fourth quarter was both professionally and personally taxing for many of us at Twin Disc. As all of the planning of these actions was in process and we continue to push our corporate development activities, our Chairman and former CEO, Mike Batten, passed away unexpectedly. Jeff Knutson and I were actually on the West Coast roadshow when it happened and my last conversation with him was discussing all of the investors that we met.

He truly enjoyed speaking with all of you and getting your perspective on our business and the markets in general.

We've had -- we've been operating the entire fiscal year without a VP of Operations and half the year with Jeff filling both the CFO and Controller roles. I'm pleased to say that we are now fully staffed. Jeff is our permanent Chief Financial Officer and as new Controller started today.

Matt Moore, the former CEO of Gayle and a former Twin Disc Board member has agreed to resign from our Board and take the role of Executive Vice President of Operations. His extensive experience in acquisitions and global operations is a perfect fit for what we need right now. David Rayburn, our current Board member and former CEO of Modine Manufacturing here in Racine was elected our new Chairman and filling Matt's vacant seat on the Board is Janet Giesselman who is the former President of Dow's oil and gas division.

I'm extremely excited about our new lineup of management and Board members. We are invigorated and motivated to grow our business during these interesting and trying times.

Finally, I would like to thank those of you who sent incredibly kind messages to me and the management team after my father's death. We truly appreciated it.

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

(Operator Instructions) Josh Chan, Baird.

(technical difficulty) Yes, sincere condolences to you, John. It was enjoyable working with you and Mike for sure. And so, jumping to the questions, you talked about there was some shifting of backlog on the marine orders that were shipped in the fourth quarter.

Is there a way to kind of quantify how much demand you think shifted from Q1 to Q4?

Yes, I would say -- yes, Josh, should be somewhere in the $3 million to $4 million range.

Okay, so it meaningfully affected the numbers but it wasn't a dramatic amount, I guess.

I would say in that was, Josh, for everyone, that $3 million plus was primarily in North America. So there would be no currency translation. And Jeff, the currency translation just the fourth quarter?

On the backlog?

Yes.

Really flat.

Yes, so really that would have been the big impact. We had just a jump here in the plant here in Racine after we announced the shutdown of the -- trying to get stuff before July. And by and large, they were not replaced by new orders to replace that.

Right, okay, and if you could kind of take a look into fiscal 2016 and just kind of looking at your major end markets. Maybe could you comment on kind of which markets you're seeing relative strength and stability and which markets are more worrisome?

I would say anything related to oil and gas is worrisome and that's not just obviously pressure pumping but we still have orders that we shipped and planned orders for crew boats, the fast supply vessels both here in North America and in Asia. Not as strong as a year ago but they're still there.

What's relatively stronger are anything that push boat activity, we call it brown water on the river system. That's been relatively stronger in North America, and we have some push productivity in Asia. But those are kind of what I'd say a strength.

Overall our industrial products, the clutches and PTOs, have not seen that downward pressure that the marine oil and gas and land-based oil and gas have seen. That is a positive.

And then of course, the aftermarket business in general for us for all of the business has stayed pretty stable, and that continues at a pretty good level.

And just quickly touching on ARFF has remained fairly stable. But it continues to be the oil and gas exposure, not just land-based but kind of uncertainty in where the marine is going to go.

Okay, okay, that makes sense. So in oil and gas, I think some quarters this year was up and other quarters were down. So how did oil and gas revenue finish fiscal 2015 compared to what it was a year ago?

By and large it was up about 15% -- in the 15% range it was up but we saw that -- remember, fiscal 2014 ended strong in oil and gas and fiscal 2015 -- fiscal 2014 ended strong in oil and gas, fiscal 2015 began strong in oil and gas. So it was tough.

It was -- comparisons in oil and gas at the beginning of the year were great. We were a lot better than 2014 but the comparisons -- that increase shrunk during the second half of the year.

Yes, that makes sense. And is there a maintenance level of oil and gas that we should think about even if new CapEx orders are weak? Are we sort of at this level?

I don't know how to answer that right now. We have customers that are doing maintenance. We also have customers that are probably going to be buying some fleets at auction. I don't know of any that are selling. So it is -- it's very uneven and we have some customers that are looking at buying new units to replace older units or competitors units. So it is a very strange time.

Last time that we had this downdraft, everyone kind of just sat on their inventory, kept it and they were going to use it, and by and large, they consumed a lot of their available inventory going up to last year kind of last -- year ago April. And now this downward pressure has certainly caused a lot more stress in the operators. And so some -- I think some are looking to sell fleets. So I think there's going to be some opportunistic buys of fleets.

But I just -- I still, Josh, my sense -- both hearing from customers and our guys out in the field that our rigs are getting used and I see that in after markets. So I'm more optimistic that we will continue to do well on spare parts for our 8500 and 7500 just based on what I hear for what's getting used in the field. So hard for me to quantify right now because the last 3 to 4 months have just been -- I can keep your trend in the orders but my overall sense is when it balances out, it's going to be okay in the spare parts area.

Thank you for all the color and best of luck for next year.

Thanks, Josh.

Walter Liptak, Global Hunter.

Yes, our condolences as well. I wanted just a follow-on to that last question. I think what we saw is with oil prices picking up in the last couple of months that there was some hope that the rig counts in bought/owned and that there might be some more work out in the field. So I was wondering if during the quarter if you saw any signs of hope with oil prices having picked up and then with oil prices having come down in the last month if this kind of reduced the near-term outlook?

I would say that, yes, it did. Certainly, discussions of buying a spread of whether it was 8 or 16 in the last couple of months when the oil was rebounding. Those conversations and discussions with customers started to happen and when could you deliver if we ordered? So, when we still could deliver in the first quarter. If someone replaced order for units probably even 8 to 16, we probably could do -- I don't want to speak for manufacturing but it would be more than 16 but less than 32, say.

And so I don't sense that those projects have been affected by this blip down. I think there was some sound economical financial reasons for them to be looking at that. If this continues on and we start drifting and drifting and drifting, maybe those projects drift sideways but I am hopeful that we are going to get new unit orders to replace older ones.

Like I said, all of the -- it is unbalanced where the inventory is. Some are doing much better with their excess inventory versus others. Tough question to ask but you know I'm not totally doom and gloom, Walt, at all on that. There's definitely some opportunities. You just have to stay close to the customers.

Okay, all right, sounds good. So given the where the backlog in this tough environment, the 20% cut to employment, the restructuring charge, I wonder how you came about sizing it to that level and how we should think about the savings in terms of overall profitability for the next year?

If we get the savings in the next year, is there like a level of breakeven or profitability that you're shooting for?

Well, we certainly -- we didn't -- what's the best way to answer this? The level that we went to was based on what we saw kind of in the next three to six months but at a level that if the market came back and not just oil and gas but it started to improve, we could react quickly. So it was a balancing point.

And we erred probably going a little bit leaner than the conditions would indicate. So it wasn't an easy calculation.

I don't think -- certainly what you're going to see in the first quarter, the first quarter will be by far our most challenging quarter on the top line followed by second quarter and that's just really, Walt, an indication of the backlog. But this -- we are much closer to breakeven in the first quarter than we would've been in certainly the second quarter.

I don't really know how to calculate the best breakeven. But it brought it down significantly, Walt, significantly.

Okay, good. Okay, thank you.

(Operator Instructions) Steve McManus, Sidoti & Company, LLC.

Thanks for taking my questions. And John, my condolences for your loss.

So when you mention the end market diversification, are there any new particular target areas or areas of focus that you guys are trying to capitalize on to offset the weakness?

Steve, I didn't hear the first part when you said the end markets -- no, diversification. (multiple speakers)

Yes, initiatives for, you know --

Yes, okay. Certainly our biggest push in product development and release is going to this fiscal year and our sales guys are on the industrial markets. So, finding opportunities for our clutches, whether it's dry clutch, hand actuated, or dry clutch remote actuated or the hydraulic clutches, the HPTOs, finding new applications in just the very broad industrial markets. Developing some OEMs, some new types of applications whether they are blast hole drills or things in construction.

We have -- it's a big push to get into those markets because we feel that there are opportunities there. We can take from customers away from some other technologies or some other of our competitors.

So really that's where we're putting our push on. Because there is not a whole lot we can do to change or move the needle on oil and gas or pressure pumping right now. We certainly can stay close to the customers that don't have much inventory and are looking to replace our transmission or a competitor's transmission but those are really the opportunities we see. And that's globally whether North America, Europe or in Asia and South America. S

So that is where a lot of our push is. Of course, also corporate development activity is looking in that area as well.

Okay. And then, with respect to the geographic mix any target areas there, shifts with respect to mix abroad?

Yes, were certainly remaining very cautious on Asia and China, in particular. But there's still some business there. I think a lot of times we forget and everyone forgets that a lot of the ships that are built in Southeast Asia whether there's -- we sell them through our office in China or Singapore -- are for international customers. Whether they're going to the Mideast, India, Europe or North America. So there's still a base business there.

So it's hand-to-hand combat every day to get those orders and those sales. But by and large, we do think that there are growth initiatives in industrial with our products in Asia. But certainly the focus where we think that we can have an effect on fiscal 2016 are going to be North America and Europe for our industrial products.

Okay, and then just looking at this year, there was a bit of an uptick in CapEx, and you know, projected for next year, another increase. Could you just give us a bit of an idea what the capital spending is being directed at?

Sure, it's been a mix of some new machine tools here in North America. A piece of equipment in Belgium but then we also had to do a little bit of PP in e-maintenance. We've been blessed with a flat roof in the Midwest so that is an ongoing issue here in Racine but we also had to tend to our facility in Belgium with some CapEx there on basically heating and office, but just maintenance of the building, in general. It was kind of, I would say, the uptick versus last year.

And Singapore, and we had to move into a bigger facility -- well had to, we chose to move into a bigger facility and Singapore because the products that we were selling were getting bigger. So there was some CapEx involved in outfitting that new facility.

But those were -- I would say there might be some drift and some of the expenses the first quarter but certainly seeing the conditions going into 2016, we will control CapEx spending according to cash flow and debt.

Okay, and last one for me, just getting back to the cost savings from headcount reduction. Is that going to be relatively evenly ratable across 2016 or is it going to take a couple of quarters before those savings really start to materialize?

Yes, the first quarter, a lot of the people worked into the first quarter at least a month. So the first quarter won't be the true run rate. You'll have to see the second the third quarter to get the true run rate of savings.

Okay, great. Thanks a lot guys, I appreciate it and best of luck.

Okay, thank you.

It appears that there are no other questions at this time. I would now like to turn the conference back over to today's presenters for any additional or closing remarks.

Thank you, Angela, 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 Jeff or myself.

We look forward to speaking with you again in October following the close of our fiscal 2016 first quarter.

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

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.