Twin Disc, Incorporated
Q4 2015 Earnings Call Transcript

Published: 5 Aug 2015

[Operator:]

Good day and welcome to the Twin Disc Incorporated Fourth Quarter Fiscal 2015 Financial Results Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Stan Berger of SM Berger. Please go ahead, sir.

[Stan Berger:]

Thank you Angela. On behalf of the management of Twin Disc, we’re 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 2015 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 intention, 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 a copy to you. Hosting the call today are John Batten, Twin Disc’s Chief Executive Officer, President and Chief Operating Officer; and Jeff Knutson, the company's Vice President of Finance, Chief Financial Officer, Treasurer, Corporate Controller and Secretary. At this time, I will turn the call over to John. John?

[John Batten:]

Thank you, Sam and good morning everyone. Welcome to our fiscal 2015 fourth quarter conference call. As usual we will begin with a short summary statement and then Jeff and I will be happy to take your questions. Looking at our fourth quarter results. Sales for the 2015 fourth quarter were $67.3 million versus $73.6 million a year ago, down about 8%. The general conditions in our geographic markets remain unchanged from the third quarter. However, with the exception of the land based transmission markets, all other sectors saw improved shipment levels from the third quarter, most notably in marine. Customers moving up shipments in advanced of our July and August shut downs can explain part of this increase and I will cover that in more detail later in the call. When we look at our broader product end markets, the growth we saw in North America was not enough to offset lower levels of activity in Asia, north of 6% negative impact of foreign currency translations. Our fourth quarter sales in our industrial markets improved by about 3% with slightly higher shipments in North America, this is versus the third quarter. Most of our North American market sectors included oil and gas, irrigation, recycling and construction relatively stable versus the third quarter, but when compared to the previous year, shipments were down about 8%. Sales into our transmission markets declined versus fiscal 2014 fourth quarter levels by about 23%, again driven by the relatively strong shipments into our North American oil and gas market at the end of fiscal 2014. Compared to the third quarter, our transmission shipments were down about 16% reflecting the slowdown in oil and gas shipments into North America and continued weakness in the Chinese markets. The one bright spot in the overall product markets was our marine products sales, which were up over 20% versus the third quarter and posted its highest mark in eight quarters. But sales improved in all geographic regions, part of this increase can be explained by the timing of our plant shutdown. All of our European plants which ranged from 50% marine products to 100% take at least two weeks shut down in our first fiscal quarter, some take three weeks plus depending upon market condition. This year due to the lower demand from the oil and gas sector, our largest plant based here in Wisconsin took a five week shut down in July. Many of our customers moved planned shipments up from July and August and requested them in June. This partially explains both the funds in sequentially sales versus the third quarter and larger than expected fall off in backlog which I will cover later in the call. Gross margin for the quarter were 29.0% compared to 29.2% a year ago and 31.2% the previous quarter. A good mix of product which included a lot of aftermarket helped offset the decline in oil and gas unit shipments. Fourth quarter spending in marketing, engineering and administrative or M&A expenses decreased by $1.7 million versus the same period last fiscal year and 17.8 million or 24.2% of sales, with 16.2 million or 24.0% of sales. The reduction year-over-year despite the 1.1 million bonus accrual reflected onetime items such as, one time item the professional services, a cash surrender value of life insurance policy, reduced bad debt expense, lower pension expense, currency translation and of course cost containment efforts. Looking at the bottomline, the fiscal 2015 fourth quarter net earnings were $437,000 or $0.04 per diluted share versus 2.3 or $0.21 per share a year ago. The fiscal 2014 fourth quarter earnings included a pretax 3.3 million charge for the restructuring at our North American operations. And again I will have more detail later in the call. For the full fiscal year, net earnings were 11.2 million or $0.99 per diluted share versus 3.6 million or $0.32 per diluted share a year ago. And this is on a slight revenue increase for fiscal 2015. EBITDA for the fourth quarter was 2.6 million compared to 6.5 million a year ago. For fiscal 2015 EBITDA finished at 26.5 million compared to 19.5 million a year ago. Looking at the balance sheet we ended fiscal 2015 with a total debt of 13.8 million and cash of 22.9 million for the net cash position of just over 9 million. We reduced inventory 18% from the end of fiscal 2014 to June 30, 2015 and 12% in the quarter alone from 97.6 million at the end of fiscal 2014 to 80 at the end of the quarter and the fiscal year. Our six month backlog decreased from 47.8 million to 34.4 million. Products with oil and gas exposure continued to drive a decrease in backlog. The rapid decline in the price of oil in the first calendar quarter had a significant impact on net new orders for land base and marine transmission systems that are used in the industry. As I mentioned earlier because of lengthened shut down here at North America we did see positive pressure on revenue in the fourth quarter offset by negative pressure on the backlog going forward as those shipments were not yet replaced by orders. Certainly the six month backlog is not a perfect indicator of the full upcoming fiscal year, but it is an indicator that the first half of 2016 will be challenging. Norm at oil and gas may not come back for several quarters. We decided in the quarter that it was imperative that we lower our cost structure. As is mentioned in the press release, we took a 3.3 million charge that reflected actions taken at our domestic manufacturing operations to reduce headcount by almost 20%. Three quarters of this reduction came through a voluntary separation program or early retirement and one quarter through involuntary actions. These actions were not taken lightly and mostly that our employees understand the necessity of doing this, even also coming after a very good fiscal year. The annualized savings of these actions will be close to $6 million and are split between M&A and cost of goods sold. As many of you can imagine the fourth quarter was both professionally and personally taxed in for many of us at Twin Disc. As all of our planning of these actions was in process, and we continued to push our corporate development activities, our Chairman and former CEO Mike Batten passed away unexpectedly. Jeff Knutson and I were actually on a West Coast Roadshow when it happened and my last conversation with him was discussing all of the investor that we met. He truly enjoyed speaking with all of you and getting your perspective on our business and the markets in general. We have been operating the entire fiscal year without a VP of Operations and half the year with Jeff filling both the CFO and Controller roles. I am pleased to say that we are now fully staffed. Jeff is our permanent Chief Financial Officer and his new Controller started today. Malcolm Moore, a former CEO of GAIL [ph] and a former Twin Disc board member has agreed to resign from our board and take the role of Executive Vice President of Operations. His extensive experience in acquisitions and global operations is a perfect fit for what we need right now. David Rayburn, our current board member and former CEO of Modine Manufacturing here in Racine was elected our new Chairman and filling next vacant seat on the board is Janet Giesselman, who was the former President of Dow’s Oil & Gas Division. I am extremely excited about her new lineup of management and board members. We are invigorated and motivated to grow our business during these interesting and trying times. Finally I would like to thank those of you who sent incredibly kind messages to me and the management team, after my father’s death. We truly appreciate it. That concludes my prepared remarks and now Jeff and I will be happy to take your questions. Angela could you please open the line for questions.

[Operator:]

Thank you. [Operator Instructions]. And we will take our first question from Josh Chan with Baird.

[Josh Chan:]

I’m sorry, sincere condolences to you John. It was enjoyable working with you and Mike for sure. And so Jeff into the questions, you talked about there is some shifting of backlog from the marine orders that were shipped in the fourth quarter. Is there a way to kind of quantify how much demand you think shift is from Q1 to Q4?

[John Batten:]

I would say yes, Josh its probably somewhere in the 3 million to 4 million range.

[Josh Chan:]

So yes, so meaningfully effective numbers, but it wasn’t a dramatic amount, I guess?

[John Batten:]

I would say I mean just -- and that was Josh, it’s for everyone that 3 plus million was primarily in North America, so there will be no currency translation. And Jeff the currency translation, I mean in just the fourth quarter.

[Josh Chan:]

On the backlog?

[John Batten:]

Yes, okay so it really, so that would have been the big impact -- we had just a jump here in the plant here in Racine after we announce the shutdown 0

[Josh Chan:]

Right, okay and if you can kind of take a look into fiscal ‘16 and just kind of looking at your major end markets; maybe could you comment on kind of which markets you are seeing relative strength and stability and then which markets are more worried?

[John Batten:]

I would say anything related to oil and gas is worry, and that's not just obviously pressure pumping. But we still has orders that we’ve shipped and planned orders for crew boats, the fat supply vessels, both here and North America and in Asia not as strong as a year ago, but they are still there. What’s relatively stronger are anything that push load activity, we call that brown water on the river system. That's been relatively stronger in North America and we have some push load activity in Asia. But those are kind of what I would say the strength. Overall our industrial products, the clutches and PTOs have not seen that downward pressure that marine oil & gas and land-based oil & gas have seen. So that is a positive. And then of course the aftermarket business, in general for us, for all of the businesses has stayed pretty stable. And that continues at a pretty good level. And then just quickly touch again, our efforts remain fairly stable. But it continues to be the oil & gas exposure, not just land based but kind of uncertainty and where the marine is going to go.

[Josh Chan:]

Okay that make sense, so in oil & gas I think some quarters this year was up and then other quarters were down. So how did oil & gas revenue finished fiscal ‘15 kind of compared to what it was a year ago?

[John Batten:]

By and large up 15%, I would say in the 15% range -- it was up, but we saw that remember fiscal 14 ended strong in oil & gas, fiscal ‘15 ended up again strong in oil & gas. So here it's tough. The comparisons in oil & gas, at the beginning of the year, they were great, a lot better than 2014. But the comparison -- that increase is along during the second half of the year.

[Josh Chan:]

Yes, that makes sense. And is there a maintenance level of oil & gas that we should think about even if new CapEx orders are weak? Are we sort of at this level?

[John Batten:]

I don't know how to answer that right now. We have customers that are doing maintenance. We also have customers that are probably going to be buying some fleets at auction. I don't know if any of that are selling. So it's a very uneven. And we have some customers that are looking at buying new units to work like this older units or competitor's unit. So it is a very strange time, last time when we have this down drift, everyone kind of just sat on their inventory and kept it. I think they were going to use it, and by and large they consumed a lot of their available inventory going up to last year -- no, a year ago April, and now this downward pressure has certainly caused a lot more stress in the operators and so I think some are looking to sell fleet. So I think there's going to be some opportunistic buys of fleet, but I still judge my sense -- both hearing from customers and guys out in the field that our rigs are getting used and I see that in aftermarket. So I’m more optimistic that we will continue to do well on spare parts for 8500 and 7500 just based on what I hear of what’s getting used in the field. So it's hard for me to quantify right now because the last three to four months has just been -- I can’t give you a trend in the orders but my overall sense says it is in a balanced seasonality. It's going to be okay in the spare parts area.

[Operator:]

And we will now go to Walter Liptak with Global Hunter.

[Walter Liptak:]

Yes, our condolences as well. I wanted to just to follow-on to that last question, I think what we saw with oil prices picking up in the last couple of months, that there were some hopes, the rig counts just bottomed and then there might be some more workout in the field. So I was wondering during the quarter if you saw any signs of hope with oil prices having picked up and then with oil prices having come down in the last month, if this kind of reduce the near term outlook?

[John Batten:]

I would say that, yes it did, I mean certainly discussions of buying a spread of whether it was 8 or 16, in the last couple of months when the oil was rebounding, those conversations and discussions with customers started to happen. And when could you deliver if we ordered. So we still could deliver in the first quarter. If someone replaced orders for units, probably even 8 to 16 probably could do. I don’t want speak for manufacturing but it will be more than 16, but less than 32. And so I don’t sense that one of those projects have been affected by this drift down. I think there were some sound economical financial reasons for them to be looking at that. If this continues on and we start drifting and drifting and drifting maybe those projects drift sideways. But I am hopeful that we’re going to get new unit orders to replace older one. Like I said, it's unbalanced where the inventory is. Some are doing much better with their access inventory versus others. Tough question to ask, but I am not totally 0

[Walter Liptak:]

So you have given where the backlog is in this tough environment, the 20% cut to employment, the restructuring charge; I wonder how you came about sizing it to that level and how we should think about the savings in terms of overall profitability for the next year. If we get the savings in the next year, can you -- is there like a level of breakeven and profitability that you’re shooting for?

[John Batten:]

We certainly, we didn’t -- what's the right way and the best way to answer this. The levels that we went to was based on what we saw kind of in the next three to six months. But at a level that if the market came back, not just oil and gas, but it starting to improve, we could react quickly. So it was a balancing point and we aired probably going a little bit leaner than the conditions would indicate. So it wasn’t easy calculation, I don’t think, certainly what you’re going to see in the first quarter -- the first quarter will be by far almost challenging quarter on the top-line followed by the second quarter. And that’s just really was an indication to the backlog. But we are much closure to breakeven in the first quarter than we would have been certainly in the second quarter. So I don’t know how to calculate the best breakeven, but it brought it down significantly well.

[Operator:]

[Operator Instructions] And we’ll take our next question from Steve McManus with Sidoti & Company LLC.

[Stephen McManus:]

So when you mentioned the end market diversification, are there any new particular target areas or areas of focus that you guys are trying to capitalize on to offset the weakness?

[John Batten:]

Steve, I didn’t hear the first part, what you said, the end markets?

[Stephen McManus:]

No, diversifications.

[John Batten:]

Okay. Certainly our biggest push on product development and release is going to this fiscal year and our sales guys are on the industrial markets. So finding opportunities for our clutches, whether it’s dry clutch, hand accelerated or dry clutch remote accelerated or the hydraulic clutches the HPTOs, finding new applications in just a very broad industrial markets; developing some OEMs to new types of applications whether the blast-hole whole drills or things in construction. It’s a big push to get into those markets, because we feel there are opportunities there. We can take some customers away from some other technologies or some other of our competitors. So really that’s where we’re putting our push on since. There is not a lot whole lot we can do to change to move the needle on oil and gas, the pressure pumping right now. Certainly can stay close to the customers that don’t have much inventory and are looking to replace our transmission or a competitor’s transmission; but those really the opportunities that we see and that's globally, whether North America, Europe or in Asia and South America. So that is where a lot of our push is and of course also corporate development activity. We're looking in that area as well.

[Stephen McManus:]

And then with respect to the geographic mix, any target area there shift with respect to mix abroad?

[John Batten:]

We’re certainly remaining very cautious on Asia and China in particular. But there's still some business there. I think a lot of times we forget, and everyone forget that there is a lot of ships that are built in Southeast Asia whether that we sell them through our office in China or Singapore, out for international customers, whether they’re going to the Middle East, India, Europe or North America. So there's still a base business there. So it’s hand-to-hand combat everyday to get those orders in those sales. But finally we do things that there are growth initiatives in industrial with our products in Asia, but it's certain to focus where we can have an effect on fiscal ’16, are going to be North America and Europe for our industrial products

[Stephen McManus:]

And then just looking at this year there was a bit of an uptick in CapEx, and projected for next year another increase. Can you just give us a bit of an idea of what the capital spending is being direct at?

[John Batten:]

It’s been a mix of some new machine tools here in North America, a piece of equipment in Belgium. But then we also had do a little bit of PP in e-maintenance. We’ve been blessed with a flat roof in the mid-West. So that's an ongoing issue here in Racine. We also had the tent to our facility in Belgium with some CapEx there on basically heating and office, just maintenance of the building in general. It was kind of, I would say the upticks versus last year. In Singapore we had to move into a bigger facility, we’ll had to, we chose to move into a bigger facility in Singapore, because the products that we were selling were getting bigger. So there were some CapEx involved and outfitting that new facility. But those were, I would say there might be some drift into some expenses in the first quarter, but certainly seeing the conditions going into ’16, we will control CapEx spending according to cash flow and debt.

[Stephen McManus:]

And then last one for me just cutting back to the cost savings from the headcount reduction. Is that can be relatively evenly ratable across ’16, there is going to take couple of quarters where those savings really start to materialize?

[John Batten:]

Yes. The first quarter a lot of the people worked into the first quarter, at least a month. So the first quarter won’t be the true run rate. You have to see the second and the third quarter to get the true run rate of savings.

[Operator:]

It appears there are no other questions at this time. I would like to turn the conference back over to today’s presenters for any additional or closing remarks.

[John Batten:]

Thank you, Angela. And thank you for joining our conference call today. We appreciate your continuing interest in Twin Disc and hope that we have answered all of your questions. If not, please feel free to call Jeff or myself. We look forward to speaking with you again in October, following the close of our fiscal 2016 first quarter. Angela, I’ll now turn the call back to you.

[Operator:]

Ladies and gentlemen, this does conclude today’s conference. We thank you for your participation. You may now disconnect.