Twin Disc Inc (TWIN) 2016 Q4 法說會逐字稿

Good day, and welcome to the Twin Disk fiscal fourth-quarter 2016 investor 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, Brian. On behalf of the management of Twin Disc, we are extremely pleased to the you have taken the time to participate on our call. And thank you for joining us to discuss the Company's fiscal 2016 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 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 are 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 you a copy.

Hosting the call today are John Batten, Twin Disc's President and Chief Executive Officer, and Jeff Knutson, the Company's Vice President of Finance, Chief Financial Officer, Treasurer and Secretary. At this time, I will turn the call over to John Batten. John?

Thank you, Stan, and good morning, everyone. Welcome to our fiscal 2016 fourth-quarter and year-end conference call. As usual, we will begin with a short summary statement, and then Jeff and I will be happy to take your questions.

Before I begin, both Jeff and I would like to apologize for the slight delay in announcing our fiscal 2016 fourth-quarter and year-end results. We would like to reassure all of you on the call that this was not due to an accounting irregularity or anything of that nature, but rather the lengthy second-round analysis for goodwill impairment.

It should come as no surprise to anyone that the continued sluggish markets and declining comparables to previous years made this year's analysis more rigorous, especially with the backlog that continues to bounce around the bottom. Of the $13.2 million of goodwill that we had on the books, it was decided to take a non-cash charge of $7.6 million and to write down assets with respect to our domestic industrial business and European propulsion business. We can get into more details of this later in the call.

Looking at our fourth-quarter results, sales for the 2016 fiscal fourth quarter were $42.6 million versus $67.3 million a year ago, a decrease of about 37%. Full-year sales were $166.3 million, which were also 37% lower than year-ago levels of $265.8 million. FX had a negligible impact in the quarter-over-quarter sales comparison, but a negative $7.8 million impact on the full fiscal 2016 to 2015 comparison.

As with previous quarters in fiscal 2016, we saw no recovery in our domestic oil and gas markets or Asian marine market. European demand for our marine industrial products remained weak but stable throughout the year when compared to fiscal 2015. Aftermarket, industrial and non-oil and gas marine transmission products were relatively stable in the quarter throughout fiscal 2016 in our North American market. The one market highlighted the year would have to be our sales into Australia, where a subsidiary had another good year of marine sales, both in the pleasure craft and commercial markets spearheaded by our electronic joystick technology.

Gross margins for the quarter were 26.2%, compared to 29% a year ago and 23.2% in the previous quarter. While not at year-ago levels, 26.2% represents the highest gross margin percentage of the year and is more representative of the annual run rate resulting from the cost reductions taken earlier in the year. Fiscal 2016 gross margins were 24.4% versus 31.2% a year ago.

Fourth-quarter spending and marketing, engineering and administrative expenses decreased by $3 million versus the same period last year from $16.2 million to $13.2 million. For the year, M&A spending was $7.2 million less than in 2015.

Looking at the bottom line, we reported a loss of $5.5 million, or $0.48 per diluted share, compared to a net earnings of $476,000, or 4% per share, in the fourth quarter of fiscal 2015. Our fourth-quarter earnings were affected by the $7.6 million goodwill impairment on our domestic industrial and European propulsion business. Year to date, net earnings were at a loss of $13.1 million, or $1.17 per share, versus a net earnings gain of $11.4 million, or $1.01 per share, a year ago. EBITDA for the fourth quarter was a negative $7.6 million and a negative $16.1 million for the full fiscal year. Without the goodwill impairment, the fourth-quarter EBITDA would have been the first positive quarter since fiscal 2015.

Our inventory rationalization efforts continued on the $1 million per-month trend, and we are now $14 million lower, or 17%, than we were at the fiscal year-end of 2015. Again, looking further into the balance sheet, we had a strong cash-generation quarter and delivered $8.7 million of operating cash flow, which allowed us to increase our cash position to $18.3 million while making the final payment on our senior note.

Our six-month backlog decreased from $39.9 million at the end of the third quarter to $35.7 million, but at the end of the fourth quarter it was still $1.3 million higher than at the end of fiscal 2015. Clearly, we have not yet seen an overall recovery in our broader end-markets. And our customers, both direct OEMs and distributors, are only ordering what they absolutely need and when they absolutely need it.

Looking at the outlook, given the vacillation in our six-month backlog in oil's retreat from $50, we are not expecting the next couple of quarters to be any different from the previous four on the demand front. We have put a lot of effort into expanding our industrial markets with the release of new products, with more to come this fiscal year, calls to potential new customers, both in existing and new markets, and extensive cost reduction efforts. We remain optimistic that we will -- we could see some oil and gas volume this fiscal year in terms of both unit rebuild activity and transmission replacement activity. Our 8,500 units that have been rebuilt this year have hit the 16,000-hour mark, which is a staggering number, and some of our 7,500 units have hit the 3,000-plus half an hours of just pumping activity.

With the exception of our Australian market, we expect fiscal 2016 to remain challenging for our global marine products -- I'm sorry -- our marine products, as the global new-ship builds has declined dramatically in calendar 2016. Despite the weakened markets and the continued low oil prices, management remains very positive on the medium- and long-term prospects of the Company. We will continue to manage our balance sheet so that we are in a position to make a strategic acquisition when the opportunity arises or to further our global restructuring efforts in order to become more efficient in these difficult market conditions. Or both.

We are also actively looking at ways to apply our controls technology into new market and application and to bundle a variety of mechanical components into a system managed by our controls technology.

Finally, on behalf of the management and the Board, Jeff and I would like to thank all of you for your continued interest, your questions and support of the Company.

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

(Operator Instructions) Josh Chan, Robert W. Baird.

Great job on the cost control and the cash flow. My first question is on the oil and gas conversations with the customers. I assume they are not placing orders at this point. But what is the tone like, and when -- are customers talking about potentially seeing any type of improvement there?

We have had conversations on rebuild activity. There is very -- a small amount of that still going on. But we are getting into more conversations about replacing some of our competitors' transmissions in the field. So, whether that is in the next quarter or two, there is still a good chunk of the fleet -- both of our transmissions and others' -- that are working and are doing work.

So, I think finally, our story is getting out on how long our units are lasting in the field. So, we are getting more interest in replacing maybe someone's older -- another -- a competitor's older transmission with a new one of ours. So, as long as oil is not above $50, I think that is going to be our opportunity, particularly in North America, in the next 12 months.

Okay. Well, that's good that you are -- go ahead.

And I would just say, again, I used to think it was in the high $50s, closer to $60. But I think if we can sustain oil above $50 for any length of time, I think we can see that activity might increase a little bit.

Okay. Sounds good. It sounds like you may also have some share opportunity there. (multiple speakers)

Yes.

Okay. So then, in terms of the year-over-year comps, is there is still a lot of oil and gas activities to cycle through in fiscal 2016 as we look at (multiple speakers)?

We are going to start fiscal 2017 to fiscal 2016 comparisons pretty clean of oil and gas.

We had a few units shipped in Q2 of last year, but that was about it.

Yes.

Okay. So then, looking at some of the other end-markets, do you anticipate those markets potentially growing in fiscal 2017? And one I was particularly interested in was Asia marine, and it sounds like weakness there is a little bit more persistent than maybe previously thought.

Yes. It has been a very, very slow year for the Asian marine market. So, any new activity, I think we could say, would be some growth. So it is going to be challenging. I see any growth in Asia or Europe might be offset a little bit by a slight slowdown in North America because we have seen the build activity in the golf Gulf Coast start to slow down. And that is with respect to offshore oil and gas.

We will see what happens in more of the commercial -- the river traffic -- the barge activity, push boat.

But I just think, overall, it is going to be stable where we have been running. I am just not that optimistic that the next two quarters are going to see any significant growth in marine.

Okay. Then, I saw the pension line on the balance sheet move higher. So, is there going to be a pension expense headwind as we look into fiscal 2017?

There will be a little bit, not as significant as you see in the -- that's the result of our valuation exercise. So, that has a tendency to move in big amounts, depending on what the discount rates are and what the asset returns do during the course of the year. It doesn't always translate into that significant of an impact on the expense -- or cash contribution in that next year.

Okay. Great. Those are all my questions. Thanks for the time.

(Operator Instructions) Walter Liptak, Seaport Global.

Congratulations on the adjusted profits today, too, with the cost down. (inaudible) the comment that you made about the hours worked on some of your OMG transmissions, the frac equipment. And I wonder if you can just provide some color on the equipment that is out there, how it is being used, if you're getting calls on equipment breaking down. And in the past, we have talked about that shadow inventory out there and cannibalized equipment. And any update that you might have gotten that kind of led to that 1,600 hour worked -- or hours on the machine, that would be helpful.

Yes. The 16,000 hours are coming from the Canadian fleet. And, clearly, I doubt that those 16 hours -- 16,000 hours were in hard shale formations. There is probably more in pure oil and wet gas. So, slightly easier on the unit, but 16,000 hours is a lot of ours. And they have been putting off -- they don't have to do anything to the transmissions as far as maintenance. They haven't been doing it. They have done some of the preventative maintenance, so they have gotten a lot more life out of these than I think they thought.

So, we have seen the transmissions -- most of our rigs, right now, are in fleets that are doing pure oil and oil and gas, and not a whole lot of pure gas. So, the application, the demand on the unit, has been a little bit less. I am still looking for the increase in usage in gas because we have just seen coal has been beaten up to a point where I don't know if that is going to recover. And I believe it was April where there was a tipping point where natural gas was the primary fuel for electricity generation for the first time. So, that demand is good for gas. Then as export demand builds up, I am optimistic -- or I don't know if I should say optimistic -- or hopeful that that could be a trend that will help us. Is not so much the oil part of oil and gas, but gas. And that the demand for gas drilling will increase some activity, both on the rebuild side and on the new unit side.

And as far as what fleets are out there in inventory, I don't have a real update. But it just seems like from our customers, there hasn't been -- other than Trican selling their North American fleet a few quarters ago, I haven't seen a whole lot of movement of our units with our equipment in it moving or changing hands.

Okay. Has there been any -- when you are talking to customers about replacing transmissions, is there any description of the sizes? Is it the 7500 or is it a larger one that are being used in this environment?

Yes. It is a combination of both, I think, primarily just from the size of the actual -- the whole rig. It will probably be more applications for the 7500. And that is not to say that we can't modify the 7500 more to make that transition a lot easier. So you don't have to do as much work on the rig to make that happen. But there certainly will be some of that demand for the 8500. But we see more of it on the 7500 side. And we are working to address to make that easier so it is not as much work on the rig to put in the 7500 if another transmission is already there.

Okay. And as you are having these conversations with customers on the rebuild opportunity, I think a lot of it is their investment is return days; then there is a lot of price focus by the service providers. Are they hitting you guys up hitting for lower prices or trying to put it out to bid or something? Are you able to get a return on what you are making?

Absolutely still able to get a return. We haven't (multiple speakers) --

Okay. Maybe that is the wrong way to ask the question. Sorry. I guess the question is, is it not just pricing pressure. Are they trying to work down price?

There is some pricing pressure, for sure. But, I mean, there hasn't been these big contracts or bids for spreads. So a lot of it has been on sharpening your tool on the hourly rate -- sharpening your pencil. Make sure that you are competitive on what your labor rates are to help with the refit and doing the rebuild activity. We are still -- you picked a model -- we are less expensive than one of our competitors. And they don't seem to sharpen their pencil that much. So that helps.

Okay. I hear that. I wanted to ask about the comments about the -- that you made, Jeff, on the annual run rate of gross margin with the 700 -- or $7.5 million of cost out. Is this gross margin level -- you said it was the run rate. So that is maybe like the average that we would see for 2017? Or do you think the gross margin still has some benefits from cost-cutting in 2017?

I think the fourth quarter really saw the full run rate of all the actions we have taken to date. So, I think movement going forward will be based upon future actions we might take and then further efficiencies that we continue to push forward in all of our plants. And then mix. So, it is hard to give an expectation. I think we're pretty happy with where Q4 came in.

Walt, I would just caution you and everyone that the first quarter is -- now that oil and gas is out, it is historically our lowest, on both the sales and the margin, because of the shutdown. We have a one-week shutdown here in the US, but also up to a three-week one at the plants in Europe. So, the third -- sorry -- the first fiscal quarter for us is historically the lowest, both on sales and particularly on the margin level.

Okay. Well, thank you (inaudible). And maybe just the last one for me, just sequentially in the industrial exposure that you have, are you seeing any changes during the quarter? Anything getting better or worse from month to month?

I would say only that we are making a lot more calls. So, it didn't really change that much quarter to quarter. It is just that -- and what you look at the pure numbers. But I would say our opportunity now to grow is a lot better than it was even in the third quarter. We have made a lot of more contacts and a lot of more single-unit sales to new customers.

The growth from Q3 to Q4, which is about $1 million on the top line, was pretty much all industrial. So, some of that is showing in the results.

Okay. Great.

(Operator Instructions)

Okay, Brian. I think that's it.

Josh Chan, Robert W. Baird.

Just two follow-ups. First one is, is there going to be an opportunity to generate further working capital reductions in terms of a cash flow basis next year?

It becomes more challenging, Josh. Obviously, we have done a lot with inventory. We expect volume to -- as we have been bouncing along the bottom in terms of backlog. So I don't think we anticipate significant declines. I think, as we hopefully see volumes start to improve, there would be some investment in working capital. So, I think it is going to be more challenging, and I don't think we will see a quarter like we saw in the fourth quarter, which was -- had a lot of good movements on our balance sheet. We obviously will continue to manage it as well as we always have.

Okay. And then last one for me. You alluded to some new-product development. Could you kind of elaborate on where you are focusing efforts there and what are you looking at?

Yes. I would say a lot of it has been on the new industrial products, both extending the horsepower range of our hydraulic PTOs, which can go into big rock crushers, wood chippers, but also bringing that hydraulic clutch technology down the horsepower range. Then, we also have been releasing -- a lot of our PTOs out in the field are mechanical. There is a lever. You have to engage it and disengage it by hand. And we have been working on both electronic and hydraulic clutches for those. So you can retrofit existing PTOs with -- so you don't have to engage it by hand. You can do it either electrically or hydraulically. So those models are starting to roll out. Then we have been looking at controls technology on how do we control our products, our components, but other people's as well, and offer systems and capabilities to customers.

Then in the oil and gas area, with respect to the pressure pumping transmission, is saying that the new fleet activity, new builds, keeps being pushed out a couple of quarters, a couple of quarters. What can we do to make our transmissions and the configurations easier to swap out if someone wants to replace someone else's transmission with ours? So right now, that is where the activity is focused.

Great. Thanks for the color.

And there are no further questions in the queue at this time.

Okay. All right. Thank you, Brian. And thank you all 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 2017 first quarter. Brian, now I will turn the call back to you.

And, ladies and gentlemen, that concludes today's conference call. We thank you for your participation.