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Twin Disc, Incorporated (NASDAQ:TWIN)

F4Q 2013 Results Earnings Call

July 30, 2013 11:00 AM ET

Executives

Stan Berger - Investor Relations

Michael Batten - Chairman and CEO

John Batten - President and COO

Chris Eperjesy - Vice President, Finance, CFO and Treasurer

Analysts

Josh Chan - Robert W. Baird

Peter van Roden - Spitfire Capital

Operator

Good day, ladies and gentlemen. Thank you for standing by. And welcome to the Twin Disc Incorporated Fourth Quarter Fiscal 2013 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)

I would now like to turn the call over to Mr. Stan Berger. Go ahead, sir.

Stan Berger

Thank you, Gel. 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 2013 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 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 the copy to you.

Hosting the call today are Michael Batten, Twin Disc 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. Mike?

Michael Batten

Thank you, Stan, and good day, everyone. Welcome to our fiscal 2013 fourth quarter conference call. As usual, I will begin with a short summary statement and then John, Chris and I will be happy to take your question.

First, I would like to cover a few of the highlights of the quarter and fiscal year. It was a year of transition. As predicted and primarily due to continuing weakness in the North American oil and gas market, our financial results have had a hard time keeping pace with the record sales and earnings reported last year, but they are in line with our expectation.

Partially offsetting these results, our sales to China have grown substantially to the point that it now ranks as our second largest market outside of United States. Also indicative of our emerging market strategy, we announced the opening of a new manufacturing facility in India and our balance sheet remains strong and we continue to generate strong cash flow. And finally, our six-month backlog is showing signs of improvement.

Sales for the 2013 fourth fiscal quarter were $75.9 million, down from $96.1 million for the same period a year ago. For the fiscal year 2013, sales were $285.3 million compared to a record $355.9 million for fiscal year 2012. The decline in revenues was primarily result of lower demand from the North American oil and gas sector, as well as softness in sales to our European customers.

Partially offsetting the decline in sales was higher demand from the North American and Asian commercial marine market, as well as steady strong levels of demand from the China pressure pumping market.

Meanwhile, demand from the mega yacht market remained at historic lows throughout the fiscal year, but demand remained steady for equipment use in our air force rescue and firefighting and legacy military market.

Our gross market for the quarter was 27.2% compared to 29.4% at the same quarter a year ago and 25.9% for the 2013 third fiscal quarter. For the full fiscal year of 2013, gross margin was 28.1% compared to 34.2% in fiscal 2012.

Spending for marketing engineering and administrative expenses declined both for the 2013 fiscal fourth quarter and for the fiscal year by $2.2 million to $17.1 million, and by $5.2 million to $67.9 million, respectively. The decreases are attributable primarily to stock-based and incentive bonus competition.

In connection with preparing the financial statements for fiscal year 2013, the company recorded an impairment of $1.4 million or $0.12 per diluted share, which represents the remaining intangibles and fixed asset of an Italian distribution entity for which the company expects to terminate the distribution agreement.

In fiscal year 2012, the company took an impairment charge of $3.7 million or $0.32 per diluted share for the write-down of goodwill and an Italian manufacturing operation due to softness in the Italian mega yacht market.

The company also recorded a $708,000 or $0.06 per diluted share restructuring charge in the fiscal 2013 fourth quarter, representing the minimum legal indemnity for a targeted workforce reduction at the company's Belgian operation, along with the cost associated with the elimination of a corporate office reposition. With the Belgian negotiations completed in July, the company will record an additional restructuring charge of approximately $1.1 million in the fiscal 2014 first quarter.

Moving to the bottom line, the company reported net income of $47,000 or $0.00 per diluted share for the fourth quarter, compared to $1.3 million or $0.11 per diluted share, for the same three months last year. For the fiscal year 2013, net earnings were $3.9 million or $0.34 per diluted share, compared to $26.7 million or $2.31 per diluted share for fiscal 2012.

EBITDA for the fourth quarter was $4.7 million, compared to $8.8 million last year. For fiscal 2013, EBITDA was $21.1 million, compared to $56.8 million a year ago. Positive changes in working capital, due to reductions in receivables and inventories allowed the company to generate $24.5 million of cash from operations. As a result, we reduced debt and invested in strategic capital expenditure.

As indicated above, fiscal 2013 was a transitional year for us. Our efforts to develop our geographic diversity has led to China becoming our second largest market, accounting for more than 10% of our sales. Further, for the last six years, our sales outside the United States have averaged above 50% of our total sales.

In addition to diversifying our sales geographically, after several years of developing our supply base, we expanded our manufacturing footprints with the commissioning of a facility near Chennai, India. This plant, which is already operating profitably, is producing industrial clutches and power takeoffs for the global market. We expect to add other products in due course.

Looking ahead, our six months backlogs stood at $66.8 million at June 30, 2013, compared to $64.9 million at March 29, 2013 and $98.7 million at June 30, 2012. The sequential improvement represents the first increase in seven quarters. But, we believe that our backlog has bottomed.

We do not anticipate a demand curve similar to our last recovery rather the first half of fiscal 2014 will be influenced by the same dynamics that have affected our business during the past year, that is, demand from global commercial marine customers and international oil and gas opportunities will be somewhat offset by continuing weak demand from European and global mega yacht customers. We are, however, cautiously optimistic about the improving prospects from the North American energy markets for the second half of the fiscal year.

Longer term, we are well positioned to take advantage of the global opportunities ahead of us. Our leading positions in the markets we serve, our innovative product development and our geographic diversity, reflects a sound strategic plan for the future.

Finally, as previously announced at this June board meeting, our Board of Directors elected John Batten for the position of President and Chief Executive Officer effective November 1, 2013. I will retire as an employee effective December 31, 2013 and assume the position of Non-Executive Chairman of the Board of Directors.

We have an experienced and strong management team. And the Board and I have full confidence that they will take the company to new levels of achievement in terms of growth and creation of the shareholder value.

That concludes my prepared remarks. And now John, Chris, and I will be happy to take your questions. Gel, will you please open the lines for questions?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And our first question comes from the line of Peter Lisnic with Robert W. Baird. Go ahead sir.

Josh Chan - Robert W. Baird

Hi. This is Josh Chan filling in for Peter. Good morning Mike, John and Chris.

Mike Batten

Hi Josh.

John Batten

Hi Josh.

Josh Chan - Robert W. Baird

Hi. Good morning. Just first question on your comment about the North American oil and gas market, how it could potentially improve in the second half of ‘14, just wondering how you are formulating that due in timing, was it based on discussions with customers. Have you actually received orders, just some color on how you’re thinking about the timing of the recovery there?

John Batten

Well, a couple of things that we’ve talked to some of our key customers. There is no commitment to that point of coming back but if we look at the last GAAP extending upon the customer 18 months to 24 months, that would indicate the recovery sometime in the first half of calendar 2014. But, we’re also having to -- starting to have more dialogue on what lead times are and things like that.

So nothing has hit the backlog yet obviously, but that would be our indication of when the first signs of some new construction would occur. And again just to echo on the comments for Mike, not necessary anticipating the rapid rise on construction that we saw two years ago. But I am confident that we’ll start to see some new construction in calendar 2014.

Josh Chan - Robert W. Baird

Okay. And what would be the lead time at least initially if demands starts to recover on the new constructions site?

Mike Batten

We’re well under six month for both the 8,500 and the 7,500, probably right now in the range of four to six months, don’t know how long that lead time would last…

Josh Chan - Robert W. Baird

Right.

Mike Batten

Depending upon how many orders come in but we certainly can react within six months.

Josh Chan - Robert W. Baird

Okay. Great. And then moving on to China, just based on the mix of products there, would it be safe to conclude that maybe oil and gas more than half when you sell there just trying to get a sense of what kind of product you’ve shown there with demand?

Michael Batten

No. Still the largest segment for us in China is commercial marine.

Josh Chan - Robert W. Baird

Okay. And then on gross margin, you have been negatively impacted by both volume and mix in the recent quarters. So as we look into the next year, have we come to the point where mix is no longer a drag or an issue and maybe volume becomes the primary driver of gross margin for at least the near term. Is that the right way to look at it?

Michael Batten

Well, I guess way to answer that Josh if mix doesn’t change, correct, so another way we don’t start to see recovery of North American oil and gas that correct volume would be the primary driver.

Josh Chan - Robert W. Baird

Okay. But there is no necessarily negative comparison of North American oil and gas remaining, I guess?

Michael Batten

There may have been some shift in the first quarter of last year, but it wouldn’t be significant.

Josh Chan - Robert W. Baird

Okay. Great. Okay. Thank you for your time and congrats Mike on your upcoming retirement and John your promotion.

Michael Batten

Thank you, Josh.

John Batten

Thank you, Josh.

Operator

And our next question comes from the line of Peter van Roden with Spitfire Capital. Go ahead please.

Peter van Roden - Spitfire Capital

Hey guys.

Michael Batten

Good morning Peter.

John Batten

Good morning Peter.

Peter van Roden - Spitfire Capital

Just a quick question on the pressure pumping side, how much of your demand and I know there is not really a normal year but let’s the shut for the high end in normal year will come from replacement demand versus new machines?

Michael Batten

I would say your comment is right. It’s hard to find a normal year. The vast majority has been for new construction. So I mean you can have any, I would say the replacement on existing rate maybe -- ranges from 5% to 20% given the year. So really, is no -- there is no real good trend there.

Peter van Roden - Spitfire Capital

Okay. And do you expect that to sort of tick up as these…

Michael Batten

I expect, going forward I think the trend might be higher that there will be higher percentage of replacement as opposed to complete new rig construction.

Peter van Roden - Spitfire Capital

Yeah. Okay. And then just in terms of trying to size the opportunity or the driven up trading for the whole company, if all of your segment sort of go in at a normal pace. What is -- what would be kind of max capacity, max revenue that you guys think you could do?

Michael Batten

Everything were going max, with the addition of India, I mean we’re certainly over 500 million.

Peter van Roden - Spitfire Capital

Okay. That’s helpful. And then just one quick question and I know if you guys could answer this but who is making the transmission for the new Haliburton Aspartame unit.

Michael Batten

I believe that is Allison.

Peter van Roden - Spitfire Capital

All right guys. That’s all I have and congratulation on a good quarter.

Michael Batten

Thank you.

John Batten

Thanks Peter.

Operator

(Operator Instruction) And gentlemen, it appears we have no questions at this time. I will turn it back to management at this time.

Michael Batten

Okay. Thank you Gel. I would like to thank you again for joining our conference call today. And we appreciate your continuing interest in Twin Disc. We hope that we’ve answered all of your questions and if not, and you’ve got follow on please feel free to call Chris, John or myself. We look forward to speaking with you again in October, following the close of our first quarter. Gel, I will turn it now back to you to terminate the call.

Operator

Thank you, sir. Ladies and gentlemen, this does conclude the Twin Disc Incorporated fourth quarter fiscal 2013 financial results conference call. Thank you for your participation. You many now disconnect.

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