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Twin Disc Incorporated (NASDAQ:TWIN)

F1Q10 Earnings Call

October 19, 2009 2:00 pm ET

Executives

Stan Berger – SM Berger & Company

Michael E. Batten – Chairman of the Board & Chief Executive Officer

John H. Batten – President, Chief Operating Officer & Director

Christopher J. Eperjesy – Chief Financial Officer, Vice President Finance & Treasurer

Analysts

[Bo MacKenzie – Global Hunter Securities]

Paul Mammola – Sidoti & Company

Analyst for Peter Lisnic – Robert W. Baird & Co., Inc.

Operator

Welcome to the Twin Disc Incorporated 2010 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 to questions. (Operator Instructions) This conference is being recorded today, Monday October 19, 2009. I would now like to turn the conference over to Mr. Stan Berger with SM Berger.

Stan Berger

On behalf of the management team 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 2010 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 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 10K 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 are Michael Batten, Twin Disc Chairman and Chief Executive Officer; John Batten, President & Chief Operating Officer; and Chris Eperjsey, 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 E. Batten

Welcome to our first quarter conference call. As Stan has indicated, I will start with a brief statement and then John, Chris and I will be available to answer questions. Sales for the first quarter were $47.1 million compared to $72.7 million for the same period last year which was the second best first quarter in the company’s history. The decline in the first quarter sales reflects the impact of the continuing global recession in our market, the seasonal weakness of the first three months as well as the planned shutdowns in our Italian, Belgian and Racine manufacturing facilities.

Shipments to the mega yacht, industrial and oil and gas markets remained weak during the quarter. Partially offsetting this softness we experienced good demand from the airport, rescue and firefighting market and stable demand from our land based and marine based military and Asia Pacific commercial marine market.

Gross profit as a percentage of sales for the first quarter was 28.7% compared to 27.6% last year. Gross margins were significantly impacted by our temporary plant shutdowns for the equivalent of two months at our European facilities as well as the one month closing of our domestic facility. Adjusting our production levels to near term demand had a negative impact on our absorption rate although tight controls on spending and other cost reduction initiatives helped offset the impact of the decline in volumes.

Marketing, engineering and administrative expenses declined $3.5 million to $12.8 million for the first quarter compared to $16.3 million last year as a result of previously announced cost reduction initiatives. As a percent of sales ME&A expenses for the current three months were 27.2% compared to 22.5% a year ago. The company recorded a net loss for the first quarter of $2.4 million or $0.22 per diluted share compared to net earnings of $2.5 million or $0.22 per diluted share last year. EBITDA was a loss of $800,000 for the first quarter compared to a gain of $6.8 million for the same period last year.

Turning to our financial condition, our liquidity and balance sheet continue to remain strong. Cash provided by operations for the first quarter was $8.1 million and at quarter end we had $17.1 million in cash compared to $13.3 million at the end of the June, 2009 fourth quarter. Total debt stands at $49 million compared to $50.8 million at June 30, 2009. Total debt to capital at the end of the current quarter was 31.4%.

The six months backlog at the end of the first quarter was $62.5 million compared to $60.6 million at the end of the fourth quarter of fiscal 2009. We are encouraged to see a slight improvement in our six month backlog. While demand from our pleasure craft and industrial markets remain depressed, trends in the commercial marine market, particular in the Pacific Basin remained steady. Orders from airport, rescue and firefighting and land based military sectors are also holding up well while order intake from the military patrol boat market has been growing.

Finally, we have experienced an uptick in orders for pressure pumping, transmission and air clutches from the domestic and international oil and gas market. We continue to expect our new 7500 series transmission to be available to the market by fiscal year end. Our outlook is for improving quarterly trends for the balance of the fiscal year.

That concludes my prepared remarks and now John, Chris and I will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Bo MacKenzie – Global Hunter Securities].

[Bo MacKenzie – Global Hunter Securities]

I’m sort of surprised although pleasantly that you guys are seeing an uptick in new transmissions. I guess you’re referring to the 7500. Can you give us a little more of an update as to exactly what’s going on with the 7500s? And, what the selling point is on those right now when you got the domestic pressure pumping market a little bit weak right now?

John H. Batten

The uptick is actually or the 8500 in air clutches and the uptick, as you point out, given the domestic flatness has actually been for Asia. We’ve had increased order activity both in North America and Asia but the majority of our new orders are actually going in to Asia. The 7500 is still on schedule for release and production in the fourth quarter. We’re completing lab testing and preparing to do the field test on rigs right now. The order uptick hasn’t been the 7500 yet, it’s strictly the 8500.

[Bo MacKenzie – Global Hunter Securities]

John, on that with the 7500, when you say the fourth quarter you mean the fourth calendar quarter, right?

John H. Batten

It would be the second calendar quarter of 2010, our fiscal fourth quarter.

[Bo MacKenzie – Global Hunter Securities]

Your fiscal fourth quarter?

John H. Batten

Correct.

[Bo MacKenzie – Global Hunter Securities]

I know that you’ve made this specifically designed to go for the pressure pumping business as opposed to modifying an existing transmission, can you describe kind of where you stand in terms of weight, or torque or whatever kind of the key things are that you’re going to be able to offer as a value as opposed to people that might have either an [Allison] or an existing 8500 installed on their equipment.

John H. Batten

Sure, we’ve actually done a lot of work on that. The transmission is rated at its release will be 2600 horsepower. It’s comparable in weight to the competition for horsepower per pound. The advantage really is that it is completely designed for frac pumping and the ratio splits are such that even competing against transmissions that are lower horsepower, operators will be able to operate more efficiently and potentially take fewer rigs out to do a job. So while they may have to spend more money for our transmission, they’ll use less assets at any given site to do the job. That’s how we’re positioning it and we think we have a very good chance to do that.

[Bo MacKenzie – Global Hunter Securities]

Does that imply then when you look at some of these markets like up in the Marcellus and the Appalachian Basin that you’re going to be able to get them in to sites that they might not have been able to get to before because of a lower equipment need?

John H. Batten

It’s a smaller footprint. We’re doing application studies at each of the main horsepower breaks 1500, 2250 and 2500 so we plan to be in the market at all of those horsepower ranges.

[Bo MacKenzie – Global Hunter Securities]

Then one final question if it’s alright, I know you guys have talked at least with me in the past, and I’m going to get the name wrong, is it slip shift that you were marketing to [DTP] kind of applications, how is that coming?

John H. Batten

It’s going very well. We have applications running now in all of the major theaters of offshore oil Europe, off the coast of Africa, Gulf Coast and in Southeast Asia. We’re not rushing, we’re taking our time and making sure we have each combination, each application correct. But, it does offer significant improvement in doing the job at the rig.

[Bo MacKenzie – Global Hunter Securities]

Just to follow that and then I’ll turn it back over, have you guys gotten that up to the horsepower to where you can deal with some of the 245 to 265 foot vessels or is that still a goal out there somewhere?

John H. Batten

No, that’s a goal for the future. Right now we’re kind of in the 200 foot range.

Operator

Your next question comes from Paul Mammola – Sidoti & Company.

Paul Mammola – Sidoti & Company

Was an extended shutdown in Europe part of the plan at the beginning of the quarter or did that sort of evolve as the quarter went on?

Michael E. Batten

Basically as we looked at it both the shutdown in the US and the equivalent shutdown in Europe is by the number of people that are working. We didn’t actually close the facility 100% except for the normal summer shutdown but they’re running at chomage or [inaudible] rate of 50% or better.

John H. Batten

I’d just add a little bit of color, we had our normal summer shutdown in the two plants in Italy. We had one in Switzerland at Arolla that we didn’t have the previous year and we had a lot of yards that kind of varied and took different shutdowns just based on volume. So, our chomage or [inaudible] rate was higher than planned just because during the first quarter there were a lot of customers who were also taking shutdowns that they didn’t take the previous year.

Paul Mammola – Sidoti & Company

By any chance do you know what the shutdowns cost you in terms of absorption on an EPS basis in the quarter? Does Chris have that?

Christopher J. Eperjesy

No, we don’t have that specific information Paul.

Paul Mammola – Sidoti & Company

In October so far are you running at a more normal utilization rate in those facilities, the three facilities?

John H. Batten

Yes, we are.

Paul Mammola – Sidoti & Company

Finally, Mike how long do you think it will take for the inventory glutton luxury marine to make its way through the channel if you had to take a best guess?

Michael E. Batten

That’s a good question. It’s going to be several months for that to work its way out. The large yachts, some of them are still being built and taking inventory. It’s the smaller yachts up in to the middle class up to the 70 foot yachts that are the problem. That’s going to take a while to work through Paul.

John H. Batten

We have been pleased with some of the fall shows in Europe. Some of the really high end 130 foot plus yachts have been selling so there is ongoing demand and there’s ongoing production at the yards.

Paul Mammola – Sidoti & Company

John, would you expect backlog growth do you think for next calendar year or do you think that’s too aggressive for the yards?

John H. Batten

Backlog growth for the yards?

Paul Mammola – Sidoti & Company

Yes.

John H. Batten

The ones that are building the high end mega yacht have the best chance but it’s too early to tell.

Operator

Your next question comes from Analyst for Peter Lisnic – Robert W. Baird & Co., Inc.

Analyst for Peter Lisnic – Robert W. Baird & Co., Inc.

You talked about October production rates being kind of normal. Do you have any other planned shutdowns within the near future?

John H. Batten

Yes, we do. We have in the domestic operations we’re seeing a one week shutdown for the week after Thanksgiving and then a one week shutdown for the week following the Christmas New Years week and that’s all we have scheduled at this moment. In Europe, we’re just going to be operating with the flexible staffing through the programs in Belgium, Italy and Switzerland.

Analyst for Peter Lisnic – Robert W. Baird & Co., Inc.

Taking in to account your cost reduction initiatives do you think you can kind of hold gross margins flat for the year?

Michael E. Batten

What do you mean by flat for the year?

Analyst for Peter Lisnic – Robert W. Baird & Co., Inc.

Flat in ’10 versus ’09?

Michael E. Batten

I think that looking at the first quarter that will be probably the bottom of the gross margin dip for us. I’m not sure that we’re going to get back up to the same level of gross margins for it, year-over-year basis at the end of the fiscal year. We may see in the second half of the year our margins approaching year ago levels and hopefully carrying beyond 2010. It’s going to be an upward slope from here through the balance of the year.

Analyst for Peter Lisnic – Robert W. Baird & Co., Inc.

Then in your outlook you talked about improving quarterly trends for the rest of the year. I was just wondering how quickly you think that will come? Can we still expect double digit negative comps in the fourth quarter or do you think it will be better than that?

Michael E. Batten

In the fourth fiscal quarter or the fourth calendar quarter?

Analyst for Peter Lisnic – Robert W. Baird & Co., Inc.

Fiscal quarter?

Michael E. Batten

Are you talking revenues?

Analyst for Peter Lisnic – Robert W. Baird & Co., Inc.

Revenues, correct.

Michael E. Batten

Well, I think by that time it will be a tossup – we won’t be seeing negative comparisons, significant negative comparisons, in fact, we may be even seeing some positive comparisons depending upon how the second half growth rates occur. But, I wouldn’t say double digit negatives in the fourth quarter, no.

Analyst for Peter Lisnic – Robert W. Baird & Co., Inc.

Then finally, could you comment a little bit about your cap ex plan for the year?

Michael E. Batten

We’re moderating off of last fiscal year a great deal. We’re going to see probably cap ex in the range of somewhat less than depreciation for the year.

Operator

Your next question comes from [Bo MacKenzie – Global Hunter Securities].

[Bo MacKenzie – Global Hunter Securities]

Two things, is there a way you could quantify with the plant shutdowns and stuff about what the impact was on the quarter?

Michael E. Batten

The plant shutdowns probably accounted for half or slightly more of the loss that we incurred.

[Bo MacKenzie – Global Hunter Securities]

With the two weeks coming in Q2, do you usually shutdown during Thanksgiving and Christmas or no?

John H. Batten

The one week will be in Q2 and one week will be in Q3, it’s the first week of the next two quarters. We usually are shutdown for the Christmas New Years week but we do have the three days at Thanksgiving too the plant is also shut down historically.

Michael E. Batten

What John indicated earlier is in addition to the normal schedule so that normal shutdown of a few days at Thanksgiving and several days over the Christmas break that’s normal. What is different this time is a week in addition following Thanksgiving and a week in addition following the Christmas shutdown which actually falls in the first part of the third fiscal quarter.

[Bo MacKenzie – Global Hunter Securities]

I know you guys have had a handful of good acquisitions under your belt historically, obviously with things off in the yacht business one would expect that the private company valuations have come in quite a bit. This is kind of a twofold questions, are you seeing much out there number one and number two what have the banks confirmed in terms of your credit facilities?

Michael E. Batten

Well, to answer the second question first we do have a $35 million credit facility that is only partially being used at the moment. About half of the facility is being used. We think that given the right acquisition we certainly have access to capital going forward. We have not asked nor have they given us any indication of what additional amount we would qualify for. We tend to look at it and they to as an as needed basis. I’m fairly comfortable as Chris is too that if we were to find the right deal we could get it financed.

Now, moving back to your first part of the question, valuations tend to lag actual fact. In other words, expectations are a die hard for valuation especially in a private owners mind. So, I think at this point in time they’re beginning to soften and we may find something that fits our requirement at a reasonable price for our shareholders. We tend to have pretty stringent acquisition criteria. We want to be accretive and we also want to be able to earn our cost of capital on the acquisition. Those are two pretty stringent criteria hurdle rates to get to. We’ve been fortunate in finding opportunities, as you pointed, graciously in the past and that’s our goal going forward, is to make good acquisitions for our shareholders.

[Bo MacKenzie – Global Hunter Securities]

Are you seeing opportunities out there where people are perhaps being forced to sell where they over leveraged, over extended themselves, or credit facilities have been withdrawn or anything like that that might make it even more of a buyer’s market or is that just not occurring particularly in the mega yacht business?

Michael E. Batten

Our scope goes beyond the mega yacht business, both marine and the land based side of our business so we aren’t only focused on marine and I know it wasn’t intended with the direction of your question but I wanted to clarify for others who are listening. The opportunities if we can call them that, that we have seen in that group tend to have more turnaround component than we would want to buy in to. We’ve seen a number of situations where companies are available but the point is do we want to get involved with it because they’re on the bank of financial collapse can we do something with that company and still meet our criteria?

There’s where the rubber meets the road for us is we don’t want to buy distressed merchandise. If there’s a modest turnaround component and we can bring to bear the global rich that Twin Disc has for a geographically challenged company that may work for us and we may see a way to do something.

[Bo MacKenzie – Global Hunter Securities]

One last thing, inventories, any chance of having to write anything off or is that something that we should expect to come down and be kind of a continuing source of cash through the year at the lower level of sales that you’re at this quarter and likely in to next quarter or what?

Michael E. Batten

I’ll give you my thoughts and then I’m going to turn it over to John who’s got the responsibility of making sure that doesn’t happen, that we don’t have write offs. But, we’re naturally very aggressive in looking at our inventories even in good times to make sure that things don’t happen at other times. With that as a preface, John why don’t you comment on what we are doing.

John H. Batten

Bo, the inventories would have come down more in the quarter it’s just that we didn’t have enough shipping days to get it all out. We’re going to work hard on that through the balance of the year. I anticipate further reductions through the remaining quarters.

Operator

Your next question comes from Analyst for Peter Lisnic – Robert W. Baird & Co., Inc.

Analyst for Peter Lisnic – Robert W. Baird & Co., Inc.

I’m just wondering in terms of your sequential backlog improvement is that due to all those orders kind of falling in to the six month time frame or is it due to some kind of improving order situation?

John H. Batten

It’s improving situation in some of our markets particularly here in North America. It wasn’t a huge uptick but you definitely could sense a change.

Analyst for Peter Lisnic – Robert W. Baird & Co., Inc.

Then if you had to guess would you kind of say that the $60 million range of backlog is near the trough this cycle?

Michael E. Batten

We would hope so. We would hope that we are at the bottom but there is nothing to say that it couldn’t spike up and drop back down again but we’re encouraged by what’s been happening, especially overseas in Asia. We’re getting a lot of activity in terms of oil and gas, military patrol boats for countries like India, China, some in the Middle East, Turkey. We tend to, because of where we live here in the US to view this in the scope of US economy but we’re very fortunate in having that global reach so we’re cautiously optimistic that we are seeing a turnaround and that the rate of change in terms of orders and backlog is turning positive.

Operator

I’m showing there are no further questions in the queue. Please continue.

Michael E. Batten

Thank you all for attending the conference call today. We appreciate your interest in Twin Disc. As we look forward to the balance of the year and beyond, we’re encouraged by the actions we have taken to address the near term demand by a geographic diversity and development of our global market particularly in Asia as we mentioned and by our product development pipeline that is bringing innovative products and technologies to our market place. Again, thank you for your attention and please have a good day.

Operator

Ladies and gentlemen that does conclude today’s Twin Disc Incorporated 2010 first quarter financial results conference call. If you’d like to listen to a replay of today’s call please dial 303-590-3030 or 1-800-406-7325, enter the pass code 4168638. Once again both numbers are 303-590-3030 or 1-800-406-7325, enter the pass code 4168638. Thank you for your participation. You may now disconnect.

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Source: Twin Disc, Incorporated F1Q10 (QTR End 09/25/09) Earnings Call Transcript
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