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Twin Disc, Inc. (NASDAQ:TWIN)

F1Q09 Earnings Call

October 21, 2008 2:00 pm ET

Executives

Michael Batten - Chairman and Chief Executive Officer

Chris Eperjesy - Vice President of Finance, Chief Financial Officer and Treasurer

John Batten - President and Chief Operating Officer

Stan Berger - Investor Relations, SM Berger & Company

Analysts

John Haushalter - Robert W. Baird & Co.

Paul Mammola - Sidoti & Company

Howard Keller - Hillsdale Investment Management

Ellie Epylon - RBC Wealth Management

Operator

Good afternoon ladies and gentlemen. Thank you so much for standing by. Welcome to the Twin Disc Incorporated 2009 first quarter financial results conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) As a reminder this conference is being recorded today on Tuesday, October 21, 2008. I will now turn the conference over to Mr. Stan Berger, please go ahead.

Stan Berger

Thank you, Michael. 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 2009 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 are management’s intentions, hopes, beliefs, expectations or predictions for the future, are forward-looking statements. It’s 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 Miyanaki] at 262-638-4000 and she will send a copy to you.

Hosting the call today are Mike Batten, Twin Disc’s Chairman and Chief Executive Officer; John Batten, President, 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 Mike Batten; Mike.

Michael Batten

Thank you, Stan and good afternoon everyone and welcome to our first quarter conference call. As Stan indicated, I will start with a brief statement and then Chris, John and I will be available to answer your questions.

Sales for the first quarter were $72.7 million, compared to $73.6 million for the same three months a year ago. Foreign currency translation favorably impacted the current quarter by $4 million. Demand from the commercial marine and mega yacht markets remained high during the quarter; however, first quarter sales included fewer oil and gas transmissions compared to the very robust demand for these products experienced in the same quarter last year.

Our international operations performed very well and partially offset the results we experienced at our domestic operation. Our Asian and European operations had strong quarters reflecting our geographic diversity. Shipments in the first three months were also impacted unfavorably by the implementation of a new ERP system at our domestic manufacturing operations that caused delays in shipments during July and August. The company began shipping at normal rates in September.

Gross margins, as a percent of sales for the current quarter were 27.6%, compared to 32.4% in last year’s comparable period. Profitability for the current three months was impacted by lower volumes, unfavorable product mix, higher material costs and a higher pension expense, partially offset by pricing and expanded outsourcing.

Specifically, margins were hurt due to fewer oil and gas transmissions being shipped versus last year and due to one-time shipping delays related to the implementation of the ERP system.

Marketing, engineering and administrative expenses as a percentage to sales, were 22.5% for the current first quarter compared to nearly 20% in the same period last year. First quarter 2009 expenses were unfavorably impacted by foreign exchange translation, higher corporate IT expense, higher pension expense and an overall increase in salaries and benefits.

Net earnings for the fiscal 2009 first quarter were $2.5 million or $0.22 per diluted share, compared to $5.1 million or $0.44 per diluted share a year ago. Against a record first quarter performance last year, the current first quarter reflected unfavorable comparison of both lower shipments of oil and gas transmissions as well as delay in shipments of product due to issues related to the implementation of the new ERP system.

Turning to our financial condition, Twin Disc maintains a strong financial balance sheet with excellent liquidity. The company has $14.9 million in cash and $55.2 million of debt or a total debt to capitalization ratio of 13.7%.

The recent financial turmoil has not yet had an impact on our business and we are actively monitoring the situation. Our six-month backlog stands at $118.6 million compared to $112.3 million a year ago. We continue to have a good order intake and we continue to be cautiously optimistic about our prospects for the balance of the fiscal year.

That concludes the prepared remarks for today and Chris, John and I are ready to take your questions; Michael

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Peter Lisnic - Robert W. Baird.

John Haushalter - Robert W. Baird & Co.

It’s actually John Haushalter on for Pete. Just a question for you guys with the margin on the ERP system, but is it safe to say that the gross margin improved in September, once shipments can resume the normal rate?

John Batten

That’s correct.

John Haushalter – Robert W. Baird & Co.

And were those on a year-on-year basis, when you guys closed the books for September was there degradation there or was it really pretty comparable year-on-year?

John Batten

Fairly comparable.

John Haushalter - Robert W. Baird & Co.

And then turning over to the oil and gas transmission business, if I remember right, that’s a longer kind of production time business where it doesn’t initially go in to your backlog I think? I mean you said orders were up, but I mean how much business did you book there that is going to happen and kind of the fourth quarter of fiscal ’09 or fiscal 2010?

John Batten

Well we are seeing order intake, some of the orders for the oil and gas transmissions are falling into this fiscal year, but some are falling out into fiscal ’10.

Chris Eperjesy

John, this is Chris Eperjesy. The number that we reported in the press release would only relate to the six month backlog. So, it would not relate to stuff that Mike referred to that was beyond that.

John Haushalter - Robert W. Baird & Co.

Okay, and its safe to say that probably the majority of the orders you took for oil and gas transmission fall outside that six-month backlog number?

Chris Eperjesy

We are prepared to ship before the six month period for certain opportunistic orders, but normal lead times would have them fall outside going forward, outside of the six-month backlog number.

John Haushalter - Robert W. Baird & Co.

Okay and I’m just following up on that a little bit. My last question just was the kind of the fall on oil prices the last kind of 40 days or so, have you seen a difference in kind of quoting activity or just interest from customers in kind of upgrading their fleets to higher horsepower transmission?

Chris Eperjesy

John, do you want to take that?

John Batten

No, no, we haven’t. We actually in the last, I would say three to four weeks have seen an up tick in the order activity, basically request for quote, lead times and things like that there’s actually been an increase.

John Haushalter - Robert W. Baird & Co.

Okay, and it just seems a little counterintuitive, is there any reason you would attribute to that or is it just kind of just people are busier then you would think or any thoughts behind why that is?

Chris Eperjesy

Well, it’s a global activity and my opinion is the people think that the downturn in oil prices is a temporary phenomenon, how long that temporary phenomenon is, no one is sure, but it’s just temporary.

Operator

Your next question comes from [Bob McKenzie] - Lafayette Capital.

Bob McKenzie - Lafayette Capital

First I’d like to congratulate you on what I think it was a lot stronger revenue quarter than I would expect. You talked about mix in the quarters, is there a way you can quantify the differential in the mix Q1 versus say the mix in Q1 of last year, what the percentages were amongst only yacht business versus marine business?

Chris Eperjesy

We don’t normally break out the specific mix information other than the call attention to it. Clearly, last first quarter of 2008, a year ago, we had a lot more oil and gas transmissions shipped than we obviously did in the first quarter this year. So, that fall off in a comparison works adversely of course in the current quarter, but having said that the order activity has increased in oil and gas as John has spoken.

The other component of which could be the mix is the fact that, we had the ERP system shipment delays that impacted first quarter shipments and these were largely service parts and industrial products that were impacted by the shipping delays because of the new system. So unfortunately the margins associated with service parts are larger than normal in our unit side of the business and that contributed to the adverse product mix in the quarter.

Bob McKenzie - Lafayette Capital

Well, everything else being equal then, kind of looking at your service stop which I’m not sure, whether or not that goes to backlog, but if it slipped out of Q1 and one would assume it slipped into Q2 and with the six month backlog as strong as it is, would that indicate, of course you have guidance that if you look at Q2 at least from a revenue perspective, you ought to be looking at a stronger performance than in Q1 or in Q2 of last year?

Chris Eperjesy

Well, one could say that, and actually we are, as we say in our outlook generally cautiously optimistic. Our optimism derives from the fact that we do see our backlog strengthened, we see the point that you just made that some of the shipments that were not shipped in the first quarter, will be shipped in the second quarter and beyond and so, there are obviously as well inquiries on our order intake for oil and gas and as we have pointed out in the press release our marine markets remain strong, and activity outside the United States remains strong. So, a number of things continue to go well for us and that’s why we maintain the outlook that we have.

Bob McKenzie - Lafayette Capital

This is hard data to get, but I am sure you guys look it. But do you look at the international shipyards circle, to the mega yachts? Have you guys heard anything that leads to the believe that the turmoil that’s going on out here for the average Joe is having any impact on the billionaires that are building these boats, any kind of find cancellations or any flags for alarm that we should be watching?

Chris Eperjesy

Well, I’m going to turn it to John.

John Batten

Hi Bob. We haven’t heard of any specific issues I know that shipyards, I mean they are moving their schedules around, but the only think that we see is that the pleasure craft worries kind of really crept up a little bit in the horsepower side, but as far as specifics to a shipyard or customers based on the financial crises, we haven’t seen anything in the last four weeks that would say its any worse. They were pleasure craft yards in trouble before the financial crises just on the general downturn. But we don’t have any specifics based on this current crises, not to say that there might not be something out there and we’re actively looking, but we haven’t come across anything yet.

Bob McKenzie - Lafayette Capital

But would a fair conclusion be the main yards you guys are dealing with, still out there backlog for several years?

John Batten

We believe the [Ferretti Group] in Italy are well positioned. I think they’re very financially stable and we don’t see anything in those big yachts, some takers no --?

Operator

Our next question is from the line of Paul Mammola with Sidoti & Company.

Paul Mammola - Sidoti & Company

Could you give us a sense in order of magnitude, a few you listed in terms of materials, product mix and volume, which was the most adverse, which had the most adverse effect on cost of goods sold?

Michael Batten

In terms of volume mix and so on.

Paul Mammola - Sidoti & Company

And materials, yes.

Michael Batten

Yes. Well, I think that you’re going to compare the first quarter of this year versus last year. Is that correct?

Paul Mammola - Sidoti & Company

Yes, but I guess it would be interesting to hear what you have to stay on 4Q fiscal ’08 as well just because you would expect higher marine sales to have an affect on margin but not to the extent of 200 basis points?

Michael Batten

Yes, the major impact on our profitability, our gross margins came from the adverse comparisons of having oil and gas transmissions out of the mix or reduced in the mix in the first quarter that was impact number one. Impact number two is the second component of the product mix and that was the delayed shipments of profitable aftermarket parts, and other industrial products. Number three, would be the volume impact, it’s a little bit slower in the summer and then material charges or price increases had an impact but that we see is now beginning to moderate.

Paul Mammola - Sidoti & Company

Okay. Thank you, that’s very helpful. So, I guess would it be fair to say that given strength in marine going forward is it fair to say that’s really is a 30% gross margin business and that most of this is one time in nature and if so, is there any thing in this quarter that we can quantify as one-time?

Michael Batten

I will ask Chris to comment on the one-time but to your first part of your question the business is still moving forward at a 30% gross margin basis. Chris, do you want to comment on that?

Christopher Eperjesy

Yes, and regarding the one-time comment. I think the only item that I would classify as one-time is the disruption that was caused by the implementation of the ERP in July and August, but it wasn’t a typical first quarter versus another typical first quarter.

Paul Mammola - Sidoti & Company

Is there any number on that by any chance Chris, in terms of the ERP effect?

Christopher Eperjesy

We haven’t quantified it, but I mean it had a significant impact.

Paul Mammola - Sidoti & Company

Okay and just one more thing go back to ’01, ’03 and the last manufacturing period in the U.S., sales are pretty stable for your guys, which is certainly positive. Do you see costs start to creep I guess is there anything that you can mention that could help you cut costs besides ERP, I guess more on the lines of ME&A going forward.

John Batten

Well, we are watching very carefully our ME&A expenses Paul and that the key things there that impact us are, obviously we had some FX impact. We had some increase in pension expense impact. We are probably going to see an offset on stock-based compensation in that regard. I did mention also delta on corporate IT expense. So, the bad guys are FX, IT expense and pension expense, the offsets to that going forward would probably be stock-based compensation and Chris am I...

Chris Eperjesy

No, you’re right on.

John Batten

Okay. So we do have some modest inflationary increase in the salaries and benefits, but we are looking very closely at our spending in this, financial environment and doing everything to control our costs to make sure that we aren’t over spending in that regard.

Pual Mammola – Sidoti & Company

Okay. So pretty differently I guess, did you think this business should be running at around 22.5% to 23% ME&A of sales, or do you think that maybe that’s the high watermark for the year?

John Batten

That’s our higher number, we think Paul. We should be running under that.

Operator

Your next question comes from [Ellie Epylon] - RBC Wealth Management.

Ellie Epylon – RBC Wealth Management

Good morning. Most of my questions have been answered. Maybe I can ask this in a different way. If we were to quantify the ERP, would $0.10 to $0.12out of this quarter would be a reasonable assumption?

John Batten

Yes, that would be in the ballpark.

Ellie Epylon – RBC Wealth Management

Thank you, otherwise I’m fine. Thanks.

Operator

(Operator instructions) Your next question comes from Howard Keller - Hillsdale Investment Management.

Howard Keller – Hillsdale Investment Management

I was wondering about what your thoughts were on share repurchase going forward?

John Batten

At this point in time, because the window is still closed and will be for most of this week. We do have some free board in our lines of credit and we will be looking at the markets and whether we should be in the market or not as we go forward. We also want to make sure that we have free broad for our external growth program, which maintains on an active status, so it will be a balance between those two items.

Operator

(Operator instructions) Your next question comes from Paul Mammola - Sidoti.

Paul Mammola - Sidoti & Company

Is there any corresponding to Marshall & Ilsley in terms of the revolver anything, any color there I guess?

Michael Batten

I’ll turn it to Chris.

Chris Eperjesy

I mean it’s business as usually, I would say, and we’ve had conversations with them, obviously as the crisis has been ongoing, but our revolver continues in place and it exists or the expiration date is another two years out, and at this point as Mike mentioned we continue to have capacity on that revolver and so, nothing really changed as a result of what we are seeing the marketplace.

Paul Mammola - Sidoti & Company

And then, I just lastly, on CapEx what’s the expectation of that for fiscal ‘09 and does that come down a bit due to ERP finally getting ramped up?

Chris Eperjesy

Well, the actual planning for this fiscal year is probably about the same level as we have been last year or roughly $15 million. We are watching that as events unfold, but at this point in time we’re looking at that kind of spending level.

Paul Mammola - Sidoti & Company

And what are the main uses their Mike, because it’s running quite a bit ahead of DNA?

Chris Eperjesy

What we’re doing is quite frankly investing in our core competencies in our factories both here and abroad and I’ll just leave it at that for the moment, but its basically assisting us to improve our productivity as you know when you walk through the plant, we had number of significant new machine tool purchases, which basically with one machine taking two, three even four older machines out of production, its that kind of productivity improvement that we’re investing in both here and in our plants overseas.

Operator

Your final question comes from Bob McKenzie – Lafayette Capital.

Bob McKenzie - Lafayette Capital

How much is left on the revolver and correspondingly given the massive declines in valuations of everything in the course of the last month or so anything out there that you might be a layout?

John Batten

Bob, you’re talking about how much is left on the revolver. Its $10 million that we have free board at this point.

Bob McKenzie - Lafayette Capital

Is there anything else that you wind up in the available credit facilities? For example say if like -- talk if like $50 million transaction order come up, our facilities in place that could do something with that or…

John Batten

I’m sorry to interrupt, you go ahead complete.

Bob McKenzie - Lafayette Capital

If given the massive sell up in valuation of everything in the world in last month or so what could you raise in way of liquidity without haven’t go out and originate new debt or equity?

John Batten

It would require our going out and looking to talk to our venders. We have very good relations with our venders, both M&I bank in Milwaukee as well as Prudential who has our long-term debt and at this point in time, we would think that we would have access for additional capital albeit at a higher rate of interest, but at this point in time, we don’t have this specific need, but should a specific need come up, I’m sure we could get access to the capital.

Bob McKenzie - Lafayette Capital

And how do you guys seen or even being look at, some of the things you might have had on your work list seeing the valuations come down somewhat or as the private market not really connected with what’s happen in the public valuation --?

John McKenzie

Well, that is a good question and we tend to look more as you know from our history at private companies and rather then the marketplace being the mechanism to instantly tell you what the current value is, you tend on dealing with peoples’ perception of their own companies worth and so there is usually some delay in that occurring.

Operator

Thank you, gentlemen. There are no further questions at this time. Please continue with any closing comments.

Michael Batten

Okay, thank you that’s it. We would like to thank you very much for attending this afternoon’s conference. We appreciate your interest in Twin Disc and your following our company. Again, if you have any follow-up questions that you think of after the call, please feel free to contact us at our offices in Racine. In the meantime, please enjoy your day and thank you very much. Thank you Mike.

Operator

Ladies and gentlemen, this does conclude the Twin Disc Incorporated 2009 first quarter financial results conference call. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030, using access code 3930325. Those numbers again 1-800-406-7325 or 303-590-3030, access code to utilize on either number 3930325. We would like to thank you very much for your participation. You may now disconnect. Have a very pleasant rest of your day.

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Source: Twin Disc, Inc. F1Q09 (Qtr End 9/30/08) Earnings Call Transcript
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