Twin Disc, Inc. F2Q09 (Qtr End 12/26/08) Earnings Call Transcript

Jan.22.09 | About: Twin Disc, (TWIN)

Twin Disc, Inc. (NASDAQ:TWIN)

F2Q09 (Qtr End 12/26/08) Earnings Call

January 22, 2009 02:00 pm ET

Executives

Stan Berger - IR

Michael Batten - Chairman and CEO

John Batten - President and COO

Chris Eperjesy - VP, Finance and CFO

Analyst

John Haushalter - Robert W. Baird & Company

Paul Mammola - Sidoti & Company

David Ehlers - Las Vegas Investment Advisors

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Twin Disc Incorporated 2009 Second 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).

This conference is being recorded today, Thursday, January 22, 2009. I would now like to turn the conference over to Stan Berger. Please go ahead, sir.

Stan Berger

Thank you, Randy. On behalf of the management of Twin Disc we are extremely pleased that you've taken the time to participate in our call. And thank you for joining us to discuss the company's fiscal 2009 second quarter and six-month 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 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 Mianake at 262-638-4000 and she will send you a copy.

Hosting the call today are Michael Batten, Twin Disc’s Chairman and Chief Executive Officer, John Batten, 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 Michael Batten, Michael?

Michael Batten

Thanks, Stan and good afternoon everyone. And welcome to our second quarter conference call. As Stan, has mentioned I will start with a brief statement, and then Chris, John and I will be available to answer your questions.

Sales for the second quarter were $81.6 million compared to $81.9 million for the same three months a year ago. Foreign currency translation negatively impacted the current quarter sales figure by $2.4 million, and adjusted reported sales would have been just under 3% higher without that impact.

Second quarter sales benefited from shipments that had been delayed due to the implementation of the new ERP system, at the Company's domestic manufacturing facilities.

Issues related to the domestic implementation of that ERP system have been successfully addressed, and we are currently working on installing the system throughout our global operations. We are pleased that second quarter results improved and those reported for our first fiscal quarter, even though we were not able to match the record operating performance of the second fiscal quarter of fiscal year 2008.

In addition to the continuing softness in our oil and gas markets we are now seeing softer demand in the mega yacht segment of the pleasure craft marine market. However activity in our commercial marine and industrial markets continued at or above year ago levels.

Gross margin as a percent of sales for the current quarter was 28.1% compared to 30.9% in last year's comparable period.

Profitability for the current three months was impacted by unfavorable product mix, higher material costs and an increase in domestic pension expense.

Marketing, engineering and administrative expenses as a percent of sales were 20.8% for the current quarter compared to 21.2% for the same period a year ago. ME&A expense benefited from a decrease in stock based compensation expense as well as reduced accruals for domestic incentive programs. However these benefits were offset by other costs related to severance, increased IT spending and higher pension expense.

Net earnings for the fiscal year 2009 second quarter were $3.4 million or $0.31 per diluted share, compared to $4.2 million or $0.37 per diluted share for the same period in the prior year.

Year-to-date earnings were $5.9 million or $0.52 per diluted share compared to $9.3 million or $0.81 per diluted share for the first six months of last fiscal year.

When this continues to maintain a strong financial balance sheet with excellent liquidity. The Company has $11.2 million in cash maintained a total debt-to-capitalization ratio of 31.1% and has existing credit facility of $11 million available, until October 2010.

Although, we had experienced cancellations and retiming of orders our six month backlog at December 2008 was $106.3 million compared to $120.8 million at June 30, 2008 and $121.3 million at December 31, 2007.

Like many industrial manufactures, we are experiencing softness in certain of our core markets. Specifically the oil and gas and mega yacht segments. We now expect demands from the mega yacht segment of the pleasure craft market to continue to weaken for the balance of the year. This will impact the Company’s propulsion and boat management system product lines.

Given the decline in price of oil, future demand for land based transmissions for the oil and gas market remains uncertain. While demand for vehicular transmissions for airport rescue and firefighting as well as military markets continued stable.

Demand for the Company’s industrial product lines has improved year-over-year and activity in the commercial marine market is expected to remain steady.

That concludes the prepared remarks for today, and Chris and John and I are ready to take your questions. Randy, will you please open up the lines please.

Question-and-Answer Session

Operator

Yes, thank you. We’ll now begin the question-and-answer session. (Operator Instructions). And our first question comes from the line of Peter Lisnic with Robert W. Baird. Please go ahead.

John Haushalter - Robert W. Baird & Company

Good afternoon, it's actually John Haushalter on for Pete. Just had a couple questions for you guys, first of just where ERP system being deployed kind of worldwide, is there potential protest similar disruptions what happened in the US, I guess in the first quarter if you are kind of looking towards third or fourth quarter of this year?

Michael Batten

John the ERP system next implementation will occur at the beginning of our new fiscal year 2010.

I'll let John pick up on that.

John Batten

We don’t anticipate nearly the type of interruption that we had in our domestic operations. We learned a lot with that implementation and are taking extra time with people that have been involved in the first implementation as we roll it out at our other manufacturing locations and then distribution operation. So, the most complicated and comprehensive implementation was the first one and the next one should be much smoother.

John Haushalter - Robert W. Baird & Company

Okay, so there is a true learning curve there where you guys are much more comfortable kind of approaching the implementations in fiscal 2010?

John Batten

Absolutely, the internal team will remain the same. So, they've had quite a learning curve in the last six months.

John Haushalter - Robert W. Baird & Company

Okay, and I guess one more on the cost side before shifting to demand. But just on that materials cost front impacting us on the quarter. Are you still seeing kind of costs pressure there and just kind of given the inventory turns, I know its going to take a while the kind of flow through if you are getting kind of lower purchase prices right now but just what's your outlook for kind of the big commodity cost or just kind of cost picture there?

John Batten

We had a lot of the material cost increases that slowed in to the second quarter are attributed to -- a lot the surcharges and cost increases that we would actually receive physically in the first quarter. Some slipped in to the second quarter as we were getting all of those things through the system. We had as far as surcharges and commodity cost they came down steadily in the second quarter. We had a bit of blip in December which we’ll be circling around to tackle. But we see hopefully that’s certainly surcharges on steel and other metals has started to come down quickly.

John Haushalter - Robert W. Baird & Company

Okay, on the demand front because you guys report kind of six month backlog, but you also have a better visibility in some of the businesses for periods beyond that. And just have to the extent there has been kind of this retiming or cancellation, has it all been basically push outs or has come out of the backlog beyond the six month period been effected also?

Michael Batten

The backlog, this is Mike, again, the backlog has in both cases has moderated somewhat both on the six month which is reported, as well as our total backlog. As you'll recall most of our backlog beyond six months falls in to the longer lead time items that include primarily, industrial kinds of transmissions both industrial and vehicular as well as some longer lead time marine. So, we are seeing some moderation long-term in both components of the backlog.

John Haushalter - Robert W. Baird & Company

Okay, I guess one final then I’ll let other people ask questions. But just on the reduced kind of CapEx forecast that you put out there. Just to what, is it just kind of your anticipation demanding if it's slower given the softening in the marine or what kind of are you changing there in terms of kind of cutting the CapEx forecast?

Michael Batten

We have been looking at where we need to have our CapEx closer in and what we have commitments on, and that’s where we're going to be spending our money in the short-term and that reflects what we indicated in the press release. What was cut back really reflects some longer-term thoughts on some spending. And by and large, they've, just been moved out rather than cancelled.

John Haushalter - Robert W. Baird & Company

Okay.

Michael Batten

From next fiscal year or so on.

John Haushalter - Robert W. Baird & Company

Okay, and that's just a nice bounce kind of current end market or push out of CapEx and more than most manufacturers at this point?

Michael Batten

Right, we are watching our cash flow and moderating spending based upon that.

John Haushalter - Robert W. Baird & Company

Okay, thank you. I'll get back in queue.

Michael Batten

Okay. Thanks John

Operator

Thank you. And our next question comes from the line of Paul Mammola with Sidoti & Company. Please go ahead.

Paul Mammola - Sidoti & Company

Hi. Good afternoon, guys.

Michael Batten

Hi, Paul.

Paul Mammola - Sidoti & Company

First, could you give us a sense what sales trends were year-over-year for marine versus the industrial markets? I guess, more specifically, were the oil and gas transmission sales significantly lower and then, marine making up that shortfall, is that fair to say?

John Batten

That's fairly accurate. The commercial marine, globally, whether it is related to oil and gas or transportation, with stronger year-over-year, there has been moderation down on the oil and gas, the pressure pumping transmission. But the make up really that’s accurate. Our industrial markets and commercial marine markets help make up in the second quarter

Paul Mammola - Sidoti & Company

Okay. That’s helpful. And then, on commercial marine, John, what are the contributing factors that are making that end market stable for you guys? Are there any specific examples you can give us?

John Batten

One, I think, I believe we are gaining market share, specifically in Southeast Asia. We have a fairly strong market share in North America, and also I think we are gaining market share in the European market. But with respect to oil and gas, I still think there is a positive attitude that the current price of oil, it will be here for the short-term rather than the long-term.

Paul Mammola - Sidoti & Company

I agree. But given that how about the Canadian markets on the oil side? Have you seen any material change there? Are things still pretty depressed?

Michael Batten

No we haven't seen anything.

John Batten

Correct. There has been no up tick there.

Paul Mammola - Sidoti & Company

Okay, okay that's fair. And then have there been any discussions with M&I on the revolver at all in the interim or last time we talked?

Chris Eperjesy

Paul, it's Chris. No, the agreements have been placed until October of 2010. As we noted in the press release, we have available borrowings under that. And obviously, the interest rate right now is very attractive, so we don't intend to do anything for the foreseeable future on that.

Paul Mammola - Sidoti & Company

Okay, that’s fair. And then finally, do you anticipate any further price action in the year, or it was the 6% increase all that's going to go on here?

John Batten

Well, we did. We had a price increase July 1, we had the 6% in North America and the price increased in Europe. We'll see where the balance of the year goes. But we anticipate any pricing action in the remainder of this fiscal year being much more challenging.

Paul Mammola - Sidoti & Company

Okay. And then finally just one more thing, sorry. Oshkosh has seen increased military action as of late, or military orders I should say. Is there any chance you guys get anything incrementally from that? And then also could you quickly outline what could happen if we do withdraw from Iraq and maybe anything you might get from that?

Michael Batten

Well, I think on the military front, Paul, we continue to receive orders for as you know we call the legacy kinds of equipment. We haven't seen anything specifically out of Oshkosh that I am aware of, John?

John Batten

No.

Michael Batten

And with your question about Iraq, I think the scenario that is likely there is that to the extent that we would withdraw from Iraq, it is very likely that the equipment that is there will be left there more or less. That doesn't mean we wouldn’t return it at all. That would put the US military in a position of having fewer vehicles then they would want to have for any other ongoing support, so we would expect that there will be some continuing demand how much we can't predict, but there would be continuing demand for military transmission.

Paul Mammola - Sidoti & Company

Okay. Thanks for your time.

Michael Batten

Yeah. You are welcome, Paul.

Operator

Thank you. (Operator Instructions). And our next question comes from the line of David Ehlers with Las Vegas Investment Advisors. Please go ahead.

David Ehlers - Las Vegas Investment Advisors

Good morning, guys, and congratulations on I think an excellent quarter given the atmosphere is really soft.

Michael Batten

Well, thank you, David.

David Ehlers - Las Vegas Investment Advisors

I am just curious to know, have you looked at, or have you been in any contact, or is there any to tell you with regard to our new President's programs, and how these might impact business of Twin Disc?

Michael Batten

We are looking at what President Obama's program is going to be, and where it might impact our product line, or future product planning. A lot depends upon where Congress will fund and how much they'll fund, and how quickly that money will get into the marketplace of course, but we are actively looking at what we can on his initiatives, and looking at directing ourselves to take advantage of anything that we can.

David Ehlers - Las Vegas Investment Advisors

Well, thank you very much. Again, congratulations, guys. This quarter was excellent given the as I said worldwide economy.

Michael Batten

Well, thank you. We appreciate, and thanks, David.

David Ehlers - Las Vegas Investment Advisors

Welcome.

Operator

Thank you. And at this time, we have no further question in the queue.

Michael Batten

Okay. Well, thank you very much everyone for your participation and for taking time today out of your schedule to visit with us on our results and outlook. We look forward to chatting with you again in three months time, thank you.

Operator

Thank you, ladies and gentlemen. This concludes the Twin Disc Incorporated 2009 second quarter financial results conference call. This conference will be available for replay. You may access the reply system at anytime by dialing 303-590-3030 or 1-800-406-7325 and entering the pass code of 3961116.

Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!