Twin Disc, Incorporated
Q3 2014 Earnings Call Transcript

Published: 29 Apr 2014

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Twin Disc Third Quarter Fiscal 2014 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 conference over to Stan Berger of SM Berger. Please go ahead, sir.

[Stan Berger:]

Thank you, Angel. 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 2014 third quarter and nine 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 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 the copy of the news release, which was issued this morning before the market opened. If you have not received the copy, please call Annette Mianecki, at 262-638-4000 and she will send the copy to you. Hosting the call today are John Batten, Twin Disc’s Chief Executive Officer, 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 John Batten. John?

[John Batten:]

Thank you, Stan and good afternoon everyone. Welcome to our fiscal 2014 third quarter conference call. As usual, we will begin with the short summary statement and then Chris and I will be happy to take your questions. Looking at our third quarter results, sales for the 2014 fiscal third quarter were $60.7 million, down 11% from $68.2 million for the same period a year ago. The lower level of shipments in our North American and European markets primarily drove the decline in sales. As we mentioned in the press release, and while hard to quantify, some of the slowness in our industrial and aftermarket sales during the quarter can be attributed to the difficult winter conditions in parts of the U.S. and Canada. However, we also feel that any delayed orders will be made up in the next couple of quarters. On a more positive note, we continued to ship at record level sales into Asia as demand for our pressure pumping transmissions and commercial marine transmissions throughout the region remained at robust levels in the quarter. Turning to our broader product markets, global sales for our industrial, marine and transmission products were all down in the quarter versus last year, but only our transmission products saw a sequential decline when compared to the second quarter. This shortfall was primarily due to a lower level of demand for our legacy transmission and power transmission systems in the quarter. Shipments for both our marine and transmission products saw improving trends throughout the quarter. We mentioned during the last conference call that we have seen a drop in industrial demand during the last calendar quarter for 2013. I am happy to report that even with some of the effects from [resurgence] where our shipments of industrial products did improve sequentially versus the second fiscal quarter. New order trends also improved throughout the quarter, specifically in Asia and North America. While our marine shipments are lower than year ago levels, demand remains at high levels for the offshore and oil and gas markets, especially in U.S. Gulf Coast and Southeast Asia. There was also a lot of project activities for oil and gas transmission. And as we mentioned in the press release, a good portion of our new pressure pumping transmission orders came from the North American demand. Is this the beginning of a real recovery in rig construction, it is too early to tell, but there is a lot more optimism than there has been in the past. Many of the orders that we received in March and April will be shipped by the end of our fiscal year as we are still maintaining three months lead times for this transmission. Gross margins for the quarter were 27.4% compared to 25.9% a year ago and 29.3% the previous quarter. A better mix of products, specifically within our transmission products primarily drove the gross margin improvement over last year, but the sequential decline in gross margins was primarily driven by lower level of sales. Year-to-date gross margins are 29.3% versus 28.4% a year ago. Third quarter spending in marketing, engineering and administrative or ME&A expenses decreased slightly by 535,000 versus the same period last fiscal year or from $17.4 million or 27.8% of sales to $16.9 million or 25.5% of sales. Year-to-date ME&A spending decreased $1.2 million over year ago levels from $50.8 million to $49.6 million. As we mentioned in the press release, this reduction reflects continued spending controls in our North American and European operations, a reduction in stock compensation which was partially offset by small increases in Asia and some increased spending on corporate projects. As I have mentioned in the last few calls, we continue to rationalize our resources in overhead in our European and North American operations. Even with the opening of the plant near Chennai, the adds to the sales and service organization in Asia, our net employment is down versus fiscal ‘12 and fiscal 2013 year-end levels and we are constantly evaluating each subsidiary spending and overhead. Looking at the bottom-line, fiscal 2014 third quarter net earnings were a net loss of $393,000 or $0.03 per share versus a net loss of $757,000 or $0.07 per share a year ago. Year-to-date, net earnings are $1.4 million or $0.12 per diluted share versus $3.8 million or $0.34 per diluted share a year ago. EBITDA for the third quarter was $2.4 million compared to $2.9 million a year ago and year-to-date EBITDA stands at $13 million compared to $16.4 million for fiscal 2013. Turning to the balance sheet, we ended the third quarter with the net cash position of $1.3 million, the second quarter in a row which such position. Inventory in the quarter rose $2.5 million from $102.6 million to $105.1 million and is $2.4 million higher than the start of the fiscal year. In general, inventory [astounded] our European operations, but offset by increases from the North American operations and Asian operations. Whether the shipments on the water from the U.S. to Singapore or China or increased [width] as we are converting raw to finished products, this is where the inventory increases lie. We are focused to keep inventory levels stable as we increase shipments in the fourth quarter. Our six month backlog rose slightly from $56.2 million to $57.6 million and as we mentioned in the press release, this does include new unit orders for the North American oil and gas market. Further, while we continue to receive new orders for the 8500 oil field transmissions in China, we also had a very good quarter for 7500 transmission systems as well. With respect to our marine and industrial products, the slightly stronger industrial backlog was offset by slightly weaker marine backlog which reflects continued market weakness in the lower force power range of our marine transmission. All-in-all our backlog of six months in total was a positive step in the quarter. The 2014 fiscal third quarter results reflected the same dynamics that [protected] our business during the past several quarters and like fiscal 2013, third quarter proved to be the most challenging quarter of the year. However, the new order activity in oil and gas to both 8500 and 7500 and management is slight more optimistic about improving trends. We continue to see strong demand from our global commercial marine customers and international oil and gas markets which is somewhat offset by continuing weak activities from most of the European marine markets. We do see improving prospects for larger budget [class] marine transmission and there are more conversions to both our Express Joystick System and the CAT360 Joystick System in the pipeline. Looking at our outlook, while we feel positive about the change in our backlog, which includes the increase in North American oil and gas, we are well aware of the increased efficiencies being realized by the frac service companies and hesitate to predict that this is in fact the turning point of the domestic market. Given our historically short lead times to both our land base and marine transmission, our customers are placing orders just when they need them and this is allowing us to fill more orders within the quarter. The negative effect of this is that it also shorten some of our visibility on when the demand will actually occur. Middle to longer term, we feel we are well positioned with products, people and the strategy and the healthy balance sheet to take advantage of the global opportunities ahead of us. That concludes my prepared remarks. And now Chris and I will be happy to take your questions. Angel, please open the line for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. (Operator Instructions). And your first question comes from the line Josh Chan from Baird. Please go ahead. Mr. Chan, your line is live.

[Josh Chan:]

Hi. Good morning, John and Chris.

[John Batten:]

Good morning, Josh.

[Josh Chan:]

Hi. Just a question about the oil and gas potential improvement there. Could you talk a little bit more about what exactly you saw improving, I mean obviously, you’ve got some new orders, are you seeing service parts improving, are you seeing customers talking to you about shipments further down the line as well?

[John Batten:]

Josh, it’s all of the above. But finally, I think people are starting to address some of the rigs that need rebuilding. And so I think it’s a balance of building new rigs or they replacing components on existing rate. But definitely as far as the quarter, the strongest quarter in a long, long time for new unit holders for North America.

[Josh Chan:]

Okay. And then if we think about sort of the pace or timing of this recovery. You said that you’ll ship some units by the end of your fiscal year. But when do you think, we might see sort of a noticeable uptick in terms of revenue or margin, would it be maybe in to calendar year ‘15?

[John Batten:]

Well, no, I think you’ll see and we are -- our lead times for oil and gas transmissions are under -- well just about three months, so we can fill in the quarter. So all of the orders that we received, the majority of those are going in the fourth quarter. And there will be stone spillover of course into the first quarter. So, the impact on the new orders will be in the next two quarters as far as the margin.

[Josh Chan:]

Okay. That’s great to hear.

[John Batten:]

And again I hesitate, this is -- it’s the first where I would say a blip for us that there is increased activity. And I am hopeful that the trends have been positive in this quarter as well, but let’s see how the quarter finishes.

[Josh Chan:]

Yes that makes sense. And if I can ask about some of the non-oil and gas markets, I mean your backlog total is up slightly and oil and gas is part of that and if you had some disruption in the quarter that you can’t ship too much orders, would it imply that the non-oil and gas orders have been kind of soft in the quarter?

[John Batten:]

It’s a balanced. Our marine backlog for the offshore vessels and the large workforce is very good. The weakness in marine is reflected more in the lower horsepower range, which has been either smaller workforce, more efficient go for Pleasure craft that was kind of the weakness. But the industrial, given the kind of the slowdown at the end of 2013 calendar year, industrial I would say picked up and improved. So really it is one area that was weaker at the end of the quarter and started with the marine, but it’s driven by our large transmission, it’s more driven by lower horsepower.

[Josh Chan:]

And what’s your view on how that market might develop the smaller marine market?

[John Batten:]

I honestly do believe it’s starting to improve, certainly with the trends at the end of the quarter, but not enough to make up the trends that were happening at the beginning of the quarter.

[Josh Chan:]

Okay, great. That makes sense. And thanks for your time and I’ll hop back in the queue.

[John Batten:]

Okay. Thanks Josh. Operator?

[Stan Berger:]

Hello. Angel?

[John Batten:]

Stan, I think we got disconnected.

[Stan Berger:]

Oh no.

[John Batten:]

Let’s just wait.

[Chris Eperjesy:]

We can’t get, we couldn’t.

[John Batten:]

Stan, Chris thinks actually they may be able to hear us, but we can’t hear them.

[Stan Berger:]

It’s something wrong with the line then.

[Chris Eperjesy:]

Let’s hold on a sec.

[Stan Berger:]

Yes. Chris is correct. Let me run over the other office and call them. I’ll be right back.

[Chris Eperjesy:]

Okay.

[John Batten:]

I think investors can still hear us. So, this is John and Chris. We’re just trying to figure out why we can’t hear you or the operator, so please just hold on a second.

[Operator:]

We apologize. Your operator is having some technical difficulties; everyone can still hear you though. And your next question will come from the line of Walter Liptak of Global Hunter. Please go ahead.

[John Batten:]

Walt?

[Operator:]

Mr. Liptak maybe on mute, but your line is open.

[Operator:]

Okay. Let’s try Doug Dyer of Heartland Advisors.

[John Batten:]

Perfect. Thank you.

[Doug Dyer:]

Good morning. Can you guys hear me?

[John Batten:]

Yes. Can you hear us?

[Doug Dyer:]

Hey, all right, all right.

[John Batten:]

All right, sorry about that.

[Doug Dyer:]

We’ve been able to hear you all time.

[John Batten:]

Okay.

[Doug Dyer:]

Listening to some of the pressure pumping providers with their conference calls last week, they are ordering new equipment and they are taking delivery or it seems like they are taking delivery late this calendar year and particularly next year. Is that a function -- are they able to control when they take those deliveries or is it your capacity to other equipment providers, do they have to wait that long, six months to get it out?

[John Batten:]

I think you see each one, each situation is different. I’m sure that a lot of it’s going to be the anticipation of getting their orders and to make sure they get the equipment in the timeframe that they need. So, I’m guessing that when they’re placing orders for is slightly longer than the lead time. And I’m sure they’re allowing for a little bit of I would say drift in the delivery schedule. But a lot of that, trying to coordinate the schedules, engine transmissions and pumps and getting inline to build the way. So, I think a lot of what they’re going to have to do is reassemble crews, add some of the rig manufacturers to get back into production. So, I mean as I said, I’m hopeful that this is the first blip in the turnaround, but for a trend line I’d like to see kind of two quarters in a row.

[Doug Dyer:]

Okay. And if I recall correctly you did have some inventory on hand to build several transmissions. Are you currently ordering more parts for future use?

[John Batten:]

Yes, absolutely.

[Doug Dyer:]

Okay. And can you give us any guidance as to the number of units that you can produce with current inventory and how many units you’re ordering for?

[John Batten:]

It’s not exactly balanced, but if we go back to our peak production, we probably have somewhere in the neighborhood of two to three months of inventory as far as the units that we’ve -- we obviously have to bring in some parts to finish, but that kind of gives you a ballpark of where we are.

[Doug Dyer:]

All right, thank you very much.

[Operator:]

(Operator Instructions)

[Chris Eperjesy:]

Angel, this is Chris. Why don’t we give a little bit of time just because we got disconnected from some people?

[Operator:]

Absolutely. No problem and my apologies, sir.

[Chris Eperjesy:]

No problem.

[Operator:]

And we do have a question from Josh Chan from Baird. Please go ahead.

[Josh Chan:]

Hi, just a follow-up. I think in the press release you talked about 4Q being sequentially better than 3Q, but I was just wondering if you have any more color around that. Is it possible that with all the improvement that 4Q becomes the best quarter of the year?

[Chris Eperjesy:]

That is certainly our goal is to have the best quarter of the year. So, I think that’s possible for sure.

[Josh Chan:]

Great, thank you.

[Operator:]

(Operator Instructions) And we have no further questions at this time.

[John Batten:]

Okay. Thank you for joining our conference call today. We appreciate your continuing interest in Twin Disc and hope that we’ve answered all of your questions. If not, please feel free to call Chris and myself. We look forward to speaking with you again in August following the [close] of our fourth quarter. Angel, now I’ll turn the call back to you.

[Operator:]

Thank you very much, gentlemen. Ladies and gentlemen, this concludes the conference call for today. Thank you for participating and please disconnect your lines.