Twin Disc's CEO Discusses F4Q12 Results - Earnings Call Transcript

Jul.31.12 | About: Twin Disc, (TWIN)

Twin Disc, Inc (NASDAQ:TWIN)

F4Q12 Earnings Call

July 31, 2012 11:00 am ET

Executives

Stan Berger – Investor Relations, SM Berger

Michael Batten – Chairman and Chief Executive Officer

John Batten – President and Chief Operating Officer

Christopher Eperjesy – Vice President-Finance, Chief Financial Officer and Treasurer

Analysts

Josh Chan – Robert W. Baird

Jon Braatz – Kansas City Capital

Andrea Sharkey – Gabelli & Company

Joe Giamichael – Global Hunter Securities, LLC

Gregory Garner – Singular Research

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Twin Disc, Inc Fourth-Quarter Fiscal 2012 Financial Results Conference Call. At this time all participants are in listen-only mode. Following the presentation, we’ll conduct a question-and-answer session, and instructions will be provided at that time. (Operator Instructions) I would now like to turn the conference over to Mr. Stan Berger of SM Berger. Please go ahead sir.

Stan Berger

Thank you, Ron. On behalf of the management at 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 2012 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 states 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 maybe 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 today are Mike Batten, Twin Disc Chairman and Chief Executive Officer; John Batten, President and Chief Operating Officer; and Christopher 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 day, everyone. Welcome to our fiscal 2012 fourth quarter and year-end conference call. I will begin with a brief summary statement and then John, Chris and I will be ready to take your questions. As we noted in our press release, issued earlier today fiscal year 2012, was a record year in terms of sales and earnings that was driven by an exceptionally strong first nine months of the year, reflecting high oil and gas demand. However, softening demand from that sector produce moderating sales in the fourth quarter is still ranked as our second best in history.

Turning to our results, for the fiscal year 2012 when this reported recorded sales of $356 million compared to $310 million for fiscal year 2011, gross margin for fiscal ‘12 was 34.2% compared to 34.7% for the previous year. Marketing, engineering and administrative expenses held steady at $73 million for both fiscal ‘12 and ’11. Net earnings attributed to Twin Disc for the fiscal year were $25.8 million, or $2.24 per diluted share, compared to $18.8 million, or $1.64 per diluted share for fiscal 2011.

Sales for the fiscal fourth quarter of 2012 declined modestly to $96.1 million from $97.4 million for the same period a year ago. The anticipated decline in fiscal ’12 fourth quarter sales was from softening demand in oil and gas products. Shipment to the aftermarket and industrial products market, land and marine-based military, airport rescue and fire fighting and commercial marine markets were good while the yacht market continued to be challenging.

Gross margin for the fiscal 2012 fourth quarter declined to 29.4%, compared to 37.1% for the fiscal ‘11 fourth quarter, and 34.6% for the fiscal ‘12 third quarter. The year-over-year and sequential decline in gross margin reflected a change in the mix of sales, primarily due to the impact of lower oil and gas transmission sales, as well as the unfavorable absorption impact due to the significant inventory reduction realized in the fourth fiscal quarter.

Spending on marketing, engineering and administrative expense declined $3.2 million to $19.3 million in fiscal ‘12 fourth quarter, compared to $22.5 million for the same three months of fiscal ‘11, primarily due to a reduction in stock-based compensation, the details of which are set out in the press release.

In preparing our financial statements for fiscal ‘12, we concluded that we were required to take an impairment charge amounting to $3.7 million, or $0.32 per diluted share in the fourth quarter of fiscal ‘12 for the write-down of goodwill for our Italian operations, due to softness in Italian mega yacht market.

The net effective tax rate for the fourth quarter was 81.1%, significantly higher than the prior year fourth quarter rate of 41.4%. The primary factor increasing the current year rate was the impact of a non-deductible impairment charge of $3.7 million that increased the effective rate by approximately 32 percentage points. The remaining rate increase was due to a combination of reduced foreign credits, elimination of the R&D tax credit, and additional impact of the valuation allowance related to the Company’s Belgian facility.

Net earnings attributable to Twin Disc for the fiscal year 2012 fourth quarter were $1 million, or $0.09 per diluted share, compared to $7.6 million, or $0.66 per diluted share for the fiscal 2011 fourth quarter.

EBITDA for the current quarter was $8.8 million, compared to $16.3 million for the same period last year. Working capital improvements during the three months enhanced our operating cash-flows that were used to reduce debt, invest in our facilities and buyback our common stock. During the fourth quarter, the company repurchased 125,000 shares of stock for $2.4 million at an average price of $19.40 per share.

A six-month backlog at June 30, 2012 was $99 million, compared to $131 million at March 30, 2012, and a record $147 million at the end of fiscal year 2011. While our business is demonstrating improving trends, especially to customers in our industrial, commercial marine markets, changes to the oil and gas market are impacting our near-term outlook. We anticipate a challenging North American pressure pumping market to remain for at least the first half of fiscal 2013, as rig operators adjust to lower pricing.

Sales to our Asian customers including the sale of oil and gas transmissions continue to be strong with the result that Asia became our second largest end market, surpassing Europe.

Sales of marine products into the U.S Gulf region has improved and our development programs including our collaboration agreements with Caterpillar for our QuickShift and Joystick technology solutions are on track. Our commitment to innovation and quality has never been greater.

The slowdown in oil and gas markets will impact sales and profitability, and we remain cautious about the outlook for fiscal year 2013. Nevertheless, we will continue to make strategic investments that will improve our balance sheet, develop new products and capabilities as well as create new market.

That concludes my prepared remarks for today, and now John, Chris and I will be happy to take your questions. Ron, you may now open the line for questions.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen, we will now conduct the question-and-answer session. (Operator Instructions) Your first question comes from Peter Lisnic from Robert W. Baird. Please go ahead.

Josh Chan – Robert W. Baird

Hi, good morning, this is Josh Chan in for Pete.

Michael Batten

Hi.

Josh Chan – Robert W. Baird

Hi, good morning. Going through your outlook on the oil and gas market, you’ve talked about it being challenging through calendar 2012, and I guess that's where the CapEx cuts are taking place, but given now the part fleet that are out there, would you expect that, that could meaningfully slow down on recovery for your equipment even if the industry somehow finds the balance in 2013?

John Batten

Josh, it’s John, absolutely. The rig manufacturers and the operators need to work through the inventory up their fleet and obviously our recovery is dependent upon utilization and where those rigs are being utilized, is it in oil, is it in wet gas or is it in dry gas. So that is something that we are watching.

Josh Chan – Robert W. Baird

Okay and then kind of on a similar note, how would you characterize the useful life of your transmissions product at current utilization rate?

John Batten

Well, we’re still looking at 6000 plus hours. So, how are they utilizing? They’re utilizing that in a year and a half or over multiple years. So the utilization hours are much higher in dry gas and lower in pure oil. So it all depends upon the mix that where they’re using the rigs, but we’re continually pushing to expand the effective hours of our rigs for overall.

Josh Chan – Robert W. Baird

Right, it makes sense. How would you characterize the rate of growth that you’re seeing in the international market? You talk about being higher there in oil and gas.

John Batten

Yeah, particularly in Asia for us, it's been growing steadily throughout fiscal ’12. I think we’ve reached a pretty good point, where it’s a very active market for us. I think before we see the next jump of growth we need to see some more infrastructure just in the oil and gas industry in China.

Josh Chan – Robert W. Baird

Right, okay, and then switching over to your gross margin, you talk about mix being an issue, but it sounds like manufacturing absorption impact you in this quarter as well, is there a way you can ballpark, what kind of impact the under absorption component had on your gross margin?

Christopher Eperjesy

It's difficult, John. This is Christopher. There are so many moving parts, but I would say between mech under absorption, and there’s some impact of pricing, they were all relatively equal and they’re important. As you probably saw there was a significant inventory reduction I think almost $15 million in the fourth quarter.

Josh Chan – Robert W. Baird

Yeah, yeah, absolutely, so that all make sense, so thank you for your time.

Christopher Eperjesy

Yep.

Operator

Your next question comes from Jon Braatz from Kansas City Capital, please go ahead.

Jon Braatz – Kansas City Capital

Good morning, gentlemen.

John Batten

Hi, Jon.

Christopher Eperjesy

Hi, Jon.

Jon Braatz – Kansas City Capital

A couple of questions. Oil and gas slowdown, there seems to be another issue that is developing and that is because of the drought and lack of water. Are you hearing about any delays, postponements, cancellations of drilling work because of lack of water out here in the Midwest?

John Batten

Jon, this is John. I have not, but that’s something I would look into, but I have said nothing that we’ve heard of yet.

Jon Braatz – Kansas City Capital

Okay. Secondly, Chris, your inventory position you brought down rather skeptically from the sequentially, but how do you view your inventory position relative to the current production rates and are you where you want to be or we’re going to see additional cutbacks in the inventory position? And then correspondingly, when you look at the full year, maybe for this year, how much working capital disinvestment might there, might we see this year?

Christopher Eperjesy

I guess I kind of answer both together, we see more room for additional improvement, but that would be one of the focuses for us this year as we continue to work on working capital improvement, so I am not going to give you number, but certainly, we think there’s more opportunity.

Jon Braatz – Kansas City Capital

Okay, one of the issues in your gross margin in this quarter was the under absorption. Do you think that will ease a little bit as we go forward, will they be a little bit less under absorption so to speak?

Christopher Eperjesy

Yeah, I don’t think you’re going to see what you saw in the first quarter in terms of that significant fall-off, and it will be a more balanced approach for fiscal ’13. You won’t see there’s significant of an impact.

Jon Braatz – Kansas City Capital

Okay, and then lastly, any new thoughts on Caterpillar relationship, and when we might see some of that begin to hit the P&L?

John Batten

Jon, it’s John again. Probably we’ll have a little bit of impact on product being ordered and shipped to the CAT dealers this first half of the fiscal year, but it seems like they’re targeting the real launch would be calendar 2013. I think some of the Boat Shows in particular then Miami in February, that kind of the launch cycle that we’re on.

Jon Braatz – Kansas City Capital

Okay, all right, thank you very much.

Christopher Eperjesy

Thanks, Jon.

Operator

Your next question comes from Andrea Sharkey from Gabelli &Company. Please go ahead.

Andrea Sharkey – Gabelli & Company

Hey, good morning.

Unidentified Company Representative

Good morning, Andrea.

Andrea Sharkey – Gabelli & Company

One thing that I think was (Inaudible) for you guys is that the revenue really kind of held up a lot better than I thought, given the weakening in oil and gas market that’s a pretty much, they’re pretty flat year-over-year sequentially. Can you talk about that, is it because you are still pushing oil and gas out of inventory and out of backlog, as we haven’t really seen that drop yet or are there other end market that are really offsetting (Inaudible) demand?

Michael Batten

Yes, it’s a little bit of both, Andrea, that North American oil and gas was down compared to last year, but making up for that we’ve improved commercial marine shipments to the U.S. Gulf Coast and Asia. We also had some oil and gas shipments to Asia, and in general, our industrial products were much better quarter compared to last year. So what we saw the drop-off in oil and gas we made up at the shipment level in marine and industrial.

Andrea Sharkey – Gabelli & Company

Okay, great. And how do you that maybe going forward? Do you expect to see continued drop-off in oil and gas, and then, is there enough demand in the other end market to see that kind of continue to offset, or do they both will see a bigger drop at next year, next (Inaudible)

Michael Batten

Yeah, I think, we will see some moderating levels. I think the marine and industrial will continue to improve, but I don't think they're going to make up with the top line for oil and gas coming down.

Andrea Sharkey – Gabelli & Company

Okay, that's helpful. And then on the impact of the mix on margin, is there anything that you can do? I know you guys have added a lot in the past for the higher oil and gas demand that you saw. Is there anything you can do to rebalance your manufacturing to sort of accommodate that decline, or are there other product lines you can run through there, I guess how should we think about margins going forward, are we going to continue to drop to high 20% gross margins, or is it more low-mid 20%, I know it's hard to be precise, but just to give us sort of an idea?

Michael Batten

Sure. I think we're going to see a more traditional fiscal year for Twin Disc where the lowest margins are going to be in the first quarter, because we have a shutdown here in Racine, and we have longer shutdown both in Belgium and in Italy. So, we're going to see more traditional. Last year was an anomaly, we had late last quarter, that's not going to be the case this year. We’re going to have probably the weakest top-line and the weakest gross margins, and then we'll build through the year. But, as we have capacity or overcapacity in Europe, we're still going to take advantage of the (Inaudible) programs, but basically government-sponsored layoff in Europe. We have more than enough business in North America with commercial marine, but we are going to be still working solid six days a week here to get all the shipments out. So, we will be able to improve gross margins in Q2 through Q4, but it will be a challenging quarter for gross margin, but it shouldn't be the indicator for the rest of the year.

Christopher Eperjesy

This is Chris. That is the typical kind of historical trend, last year's first quarter was unusual.

Andrea Sharkey – Gabelli & Company

Okay, great. And then one last question in all, but I have a chance. Any idea on CapEx plans for 2013?

Christopher Eperjesy

This is Chris again. It will be relatively consistent with this year in the $15 million to $20 million range.

Andrea Sharkey – Gabelli & Company

Okay, great. Thanks a lot.

Michael Batten

Thanks, Andrea.

Operator

Your next question comes from Joe Giamichael from Global Hunter. Please go ahead.

Joe Giamichael – Global Hunter Securities, LLC

Thank you. I really sort of the margin question at this point, but just a follow-up on it. It sounds like you’ve discussed in the quarter as sort of a trough for gross margins with Q1 being a seasonal softness because of a shutdown. Is it possible to maintain these levels as the mix shift continues to shift away from the oil and gas products?

John Batten

Joe, it's John. I think when we have the high oil and gas; we kind of set the new norm of mid-to high 30s. I think we're looking at with this mix low 30s, but I didn’t qualify that it is going to be a tough first quarter to achieve that just because of the shutdown but we still think that we should be targeting above 30% gross margin. But, obviously, oil and gas is going to have an impact of whether it's high 30s or low 30s.

Joe Giamichael – Global Hunter Securities, LLC

Got it, that's fair. And you mentioned a pickup in the industrial products size. Could you just give us a bit more color on the improvement there sort of on either end-market demand or geographic basis? Just to get a sense of sort of what’s happening in the world?

John Batten

Yes. The North America has just really shown at this point kind of eight quarters of steady improvement after the recession. And it’s in oil market, a lot of it is road construction, a lot of rock pressures, aggregate type business, biomass growing, we have a lot of shredders, large wood chippers, we're selling our PTOs use. It really is the industrial market in Europe. It’s the one bright spot for us. It’s the one market that is holding its own and had showed some growth and then we spend a lot of time in our distribution organization, both in Asia and South America would have been traditionally marine focus, are now getting more into industrial products, so we have improved shipments into Asia and South America. So, it's a balance solid growth from the depths of the recession.

Joe Giamichael – Global Hunter Securities, LLC

Okay great, thank you very much.

Operator

Your next question comes from Greg Garner from Singular Research. Please go ahead.

Gregory Garner – Singular Research

Thanks for taking my question. Good morning, gentlemen.

Michael Batten

Hi, Greg.

Gregory Garner – Singular Research

Just one last item on that gross margin, you mentioned it was quite even mix between pricing, adsorption and product mix. With the total magnitude be about $5 million, it seems like that would put gross margin at your mid-35% range. Is that about the right dollar amount I should look out for the actuarial effect of these items?

Michael Batten

That’s in the ballpark.

Gregory Garner – Singular Research

Okay, and again about equal mix, nothing more towards absorption versus pricing?

Christopher Eperjesy

Mix was big, but so was the absorption impact as a result of the significant inventory reduction, but the mix made that slightly more, but they were both significant contributors.

Gregory Garner – Singular Research

Okay, can you tell us anything about the 7500? Is that at least maintaining the level of oil and gas revenues that wouldn’t have occurred, had that been introduced or level of interest or new projects with it?

Christopher Eperjesy

It definitely contributed in the fourth quarter, because we didn't have in the fourth quarter of fiscal '11, but it suffered the same in 8500, everybody else would, just the rapid slowdown, but we do have a couple of significant projects with the 7500, where it could be a much bigger contributor this year.

Gregory Garner – Singular Research

Would that be North America or those projects be more Asia or Europe?

Christopher Eperjesy

There’ll be one in North America and one in Asia.

Gregory Garner – Singular Research

Okay. Is a game attraction in Asia you're talking about the Asia oil and gas doing better.

Christopher Eperjesy

We've just started working the project in Asia. We were holding, we want to do most of the initial production units in North America, but we have now opened it up to the customers in Asia as well.

Gregory Garner – Singular Research

Okay. And the interim charge for the Italy, the yacht business there, does that mean that your outlook for how that they recover has declined, could you give us more color and how your outlook for European yacht market, how it is changed?

Christopher Eperjesy

Well, the problem is that it really hasn't changed the overall the macro market. It’s the pressure craft yacht market is going to be very challenged for the next few years. However, we feel that our opportunity with Caterpillar, and the CAT 316, our EJS that our outlook is better. And unfortunately, we have to look at the macro economic trends. And when you look at that you read the publication, they're not showing great growth, and so, that is what we have to base. Our attrition upon was what outside publication and people saying versus just what our internal forecasts are.

Gregory Garner – Singular Research

Okay. In the Caterpillar market, the assistance would through Caterpillar would be on a worldwide basis, right?

John Batten

It's going to be worldwide through their marine dealers

Gregory Garner – Singular Research

All right great, thank you.

John Batten

Thanks, Greg

Operator

(Operator Instructions) There are no further questions at this time. Please continue.

Michael Batten

Thank you, Ron. Everyone, thank you again for joining our conference call today. We appreciate your presenting interest and support of Twin Disc, and we hope that we’ve answered all of your questions, and if not, please feel free to Chris, John or me a call. We look forward to speaking with you again in October following the close of our first quarter. Ron, you can take it back to you now.

Operator

Ladies and gentlemen this concludes the conference call for today. Thank you for your participation. You may now disconnect your lines.

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