Q1 2020 Earnings Call
Please standby.
Good day, ladies and gentlemen, and welcome to the twin disc.
Fiscal first quarter 2020 earnings conference call and webcast. Please note today's conference is being recorded at this time, how much of the conference over to Mr. Stanley Berger. Please go ahead Sir.
Thank you Holly.
After the management of twin does we're extremely pleased that you've taken the time to participate in or call and thank you for joining us to discuss the.
Companies' fiscal 2021st quarter financial results and business outlook.
Before I introduce management I would like to remind everyone that certain statements made during this conference call, especially those that state management's intentions hopes beliefs expectations or predictions for the future are forward looking statements.
It's 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 are contained in the company's and report on Form 10-K copies of which maybe it seems like.
Contact either the company on or the FCC.
I know you should have received a copy of the news release, which was issued this morning before the market open.
You have not received a copy please call and that made a Nike twosix to suits create 4000 and she will send the copy to you.
Hosting the call today, John Baton Twin disc Chief Executive Officer, Jeff Loosen, the company's Vice President Finance, Chief Financial Officer, Treasurer and Secretary.
At this time I will turn the call over to John that John .
Thank you Stan and good morning, everyone welcome to our fiscal 2021st quarter.
Conference call as usual, we'll begin with the short summary statement and then Jeff and I'll be happy to take your question.
Since before Jeff was over the quarter results I'll touch on some of the operational highlights from the quarter.
As we previously mentioned in the prior call we faced several supply challenges in the run off of the 85 hundreds in fiscal 2018 and 2019 in order to meet demand.
The other products, we had to move supply to other vendors and I always at the lower cost availability in quality were primary concern because our customers could not wait this coupled with some key suppliers, who went out of business resulted in quick decisions just to maintain supply and resulted in higher prices on some key components for marine transmission.
Mission Arts transmissions, and newer oil and gas models I'm happy to report that between the combination of pricing and component cost reduction. We're just beginning to see the effects of our cost reduction efforts.
Well many of the wins have come from finding new suppliers other ones have come from the improved efficiency of our new Capex equipment recently.
All dinner plant here in Wisconsin, assuming a static mix and volume going forward. As an example, we would expect to see improved margins going forward over the next 48 quarters as we bring the new supply new supply sources online. We also address other cost drivers such as overhead and make the necessary adjustments.
I will turn into a couple of.
Strategic objectives for a moment.
We continue to drive actions and strategies that will limit our exposure to deep oil and gas cycles and prepares for the electrification evolution of our markets.
One of the biggest challenges we face at the top of and oil and gas cyclists physical capacity, which is why we took action to free up space in our main plant here in.
In Wisconsin as we stated in the fiscal 2019 fourth quarter call. We have moved our aftermarket facility out of the main production plant to more efficient warehouse facility, along I 90 for the new layout and better organization of parts, including a BLM storage system has almost doubled our efficiency with respect to picks per hour more importantly, the.
Move is freed up valuable space in our plan, so that we could be more efficient staging inventory closer to our assembly locations.
During the quarter, we made significant progress on our Lufkin facility. After summer of heavy rain, we should be operational at the 50000 square foot facility by the fourth quarter and we're beginning to higher.
Poised for the operation so that they can train and our processes here in Racine, we've held several kaizen events to optimize the layoffs of what we will need and lufkin, having a facility dedicated to our industrial products will improve efficiency, both with direct labor, but also greatly reduce the amount of indirect labor needed.
With respect to growth and diversification.
And our best acquisition has provided us with $60 million of non oil and gas business and the opportunity to grow that outside of Europe , we could not be happier with the progress with that propulsion. We continue to develop projects here in North America and in Asia in the synergy between the two teams could not be better, especially in terms of hybrid development.
That's experienced to date is having significant impact on our electronics electrification and hybrid efforts, we see opportunity in all of our markets and have applications in our marine and transmission areas and they're looking for industrial ones as well with that I'll turn it over to Jeff for some comments on the financials.
Thanks, John and good morning, everyone I'll briefly.
If we run through the fiscal 21st quarter numbers sales of 59.3 million for the quarter were down 15.4 million or 20.6% for the prior year first quarter.
The quarter decline as the result of a significant reduction in new build activity in the North American fracking market, along with the related reduction in aftermarket activity.
This accounted for $14.8 million as a first quarter reduction sale and as a continuation of the slow down we saw in the fourth quarter fiscal 19.
Well this important market isn't a temporary pause we continue to see solid growth in our industrial markets.
Global industrial volume was up 5.9% over the prior year first quarter following 10% growth.
It's in fiscal 19.
Global sales of ran for postal products were down 3.5% for the prior year first quarter, primarily on project timing.
Continuing to see strong project in quoting activity in the global commercial marine market.
We anticipate increasing volumes as we work through fiscal 2000.
The first quarter margin percent was 16 point.
3% compared to 32.1% of prior year first quarter, our gross margin performance for the quarter was severely impacted by a continuation of the unfavorable product mix experienced in the fiscal 19 fourth quarter with lower fracking demand for new reconstruction and reduced aftermarket demand being the primary drivers.
In addition, we recorded at Threepi.
$9 million charge to address the product performance issue.
Or high horsepower fracking transmission associated with the unique set of application characteristics.
This charge is intended to cover the entire population of impacted units and we estimate that 2.6 million of the cost will be addressed with existing inventory, resulting in a net cash.
Impact of approximately 1.3 million.
Excluding this charge gross profit would have been 22.8% for the first quarter slightly higher than the 22.7%.
Reported in the fourth quarter fiscal 19 on reduced first quarter sales level.
As we discussed in the yearend earnings call, we anticipated a continuation of this.
Sales mix and have been focusing on cost reduction and pricing actions to drive margin improvement.
We have started to see the initial benefits of these actions and anticipate improving margins through fiscal 20.
Spending on marketing engineering and administrative costs for the fiscal 21st quarter decreased 2.6 million or nearly 14% comparative.
Fiscal 19.
Decreases the result of reduce bonus marketing spending stock based compensation and professional fees along with the impact of the mill lock sale.
With reduced first quarter volume challenging product mix and product performance charge, we recorded an operating loss of 6.8 million in the quarter compared to 4.8 million.
Operating profit in the fiscal 19 first quarter.
Active tax rate for the fiscal 21st quarter was 20.5% slightly lower than prior rate of 23.4%.
Due to the jurisdictional mix of earnings.
The net loss for the first quarter fiscal 20 was 6.3 million or 48 cents per diluted share.
Compared to a net profit of 2.9 million or 24 cents per diluted share in the prior year first quarter.
Negative EBITDA of 4.69 for the quarter down from a positive $8 million in the prior year first quarter.
Balance sheet remains healthy with $33 million of debt debt to total capital of 22.3%.
Debt to EBITDA ratio.
2.38.
Inventory was up slightly in the quarter as reduction efforts were hampered by reduced volume and vendor commitment.
Six month backlog finished the quarter at 97 million, which is down slightly from 100 million at the end of fiscal 19.
Operating cash flow as positive 1.5 million, which is 700000 better than the prior.
Our first quarter, despite significantly reduced earnings and limited inventory improvement.
Free cash flow was negative 2.6 million in the quarter with significant capex of 4 million in the quarter.
We expect to spend between 12 and $14 million. This year as we invest in modern machining and quality technology to drive productivity and cost improvement.
And with that I'll turn it back to John for some final comments. Thanks, Jeff now spend a quick moment on our outlook.
We know the main question on everyone's mind that the timing or turn of new rig construction in North America, and what if any effects political promises the band.
And we'll have.
Both are good questions I do believe that the effective horsepower as much lower than most people believe in it could go lower if prices in demand to prove I think you could see a rebound in mid 2020, some of that growth, 10% to 15% potentially maybe frac solutions and we are ready for those types of applications.
With respect to political promises to ban fracking I don't see how that can be universally implemented beyond federal lands. If somehow it were the net cost of energy for everyone with sore and I don't think people realize how widespread pressure pumping is for oil and gas production and completion.
Finally, we want to convey the message that management continues to.
Focus on diversification and growth even as we address the short term margin challenges ahead of us and the should begin to improve going forward in the next few quarters. We continue to explore further opportunities to grow our industrial business and enhance our hybrid development.
That concludes my prepared remarks, and now Jeff and I will be happy to take.
Good questions Holly Please open the line for questions.
Absolutely. Thank you so much ladies and gentlemen, if you'd like to ask a question. Please second our pressing star one or any telephone keypad. If anything is speakerphone. Please make sure any assumptions turned off all your signal to reach our equipment again press star one to ask a question. Our first question today will come from Noah Kaye with Oppenheimer.
Thanks, Good morning appetite.
Thanks for taking questions.
I guess, maybe just to start with.
Discrete product issue that drove the charge you mentioned that was a function of.
Customer specific application can you give us just a bit more color on the application and really what drives your confidence.
That the issue is.
Kind of compliance year end buttoned up.
Well it's.
I give you some details I can't give you all the details because there are other.
Other components involves but it really is I would say in extreme application highest horsepower highest pressure and the highest.
Usage rate.
Good day, so generating the most hours in the shortest amount of time.
And just the application in general where there's there's other things like towards another vibration alignment.
Things that there are multiple people multiple multiple suppliers involved in and it really is.
Sitting down and addressing how how could this overall rig last longer and then it has it it is in many cases.
Well exceeding our warranty period, but it is not living up to the expected life of our transmission and some other components.
So it really is to Jeff's comments it.
Covers almost every every potential unit out there so we're being conservative in our in our estimate.
And we're expecting it by cutting it is it is something that we can address honor rig without having.
To to pull our transmission.
Okay.
And then you know just on the sort of the strategic actions to improve margins you kind of.
Listen a number of different items here I guess, we're just sort of add this all up.
What anyway to think about second quarter of matted magnitude in a static demand environment.
And bigger what really are the kind of the biggest driver share of margin improvement.
So.
Just to answer how to answer first I would the goal Noah is to.
Exit that the year in the high 20% gross margin I don't know forget to 30.
But there's a very good chance, we'll get to 28.
And a lot of that has to do is so we've had and I mentioned in the call and the ramp up of oil and gas in the 85 hundreds we did not very.
Yes make the best sourcing decisions with respect to costs, we were looking for quality and availability.
A lot of time Weve, obviously clearly brought in too much 8500 inventory for the moment.
That so moving other products for our marine transmission and ours to other suppliers to free.
We have capacity for 8500 resulted in net net cost increase we had a couple key suppliers primarily for castings.
That went out of business and there we were scrambling just define some.
Some some some shops that had availability oftentimes in significant cost increases.
Im happy Happy to report, that's where we found the first impact because we never we moved the castings, but we blew didn't stop we immediately were looking for new sources, because we knew the cost has gone up significantly. We're just now seeing production volume of these castings at a much lower price coming through the door. So.
You're going to see steady improvement over the next few quarters with cost decreases based on on components that we found new resources for or that we brought back inside and we can do it less expensive. That's that's one driver second driver.
Our cost increase price increases on.
On some of our transmission models and lower horsepower oil and gas models those are going into effect I would say starting this quarter late this quarter in early next quarter.
So we'll have.
Pricing improvement cost improvement those would be the I would say no those are the two.
The main drivers.
You'll see some we have aftermarket is operating more efficiently.
Once we get.
The industrial product out this will greatly improve efficiency at our plants here in Racine, and we'll be able to adjust overhead.
Mainly.
The race in particular the ratio of direct indirect.
We have I would say, we still have a lot of indirect temps.
I would say the plant here is still very full and we spend too much time moving inventory around so it's going to be a combination of all three of those.
But that the.
Immediate effect, you will see will be roughly 50 50 on margin improvement due to lower cost of components and higher prices.
Great appreciate that.
On the demand environment.
No.
Yeah, obviously, you're seeing stability now in the backlog.
I think with respect to Marine you commented on kind of continued.
Positive direction or quoting in demand.
You know just kind of wondering because as we continue to hear about macro uncertainty impacting.
Capex.
Oddly right because it's a little bit theme for industrials, how would you characterize.
Marine spending trajectory and can you give any color on how the portion of your backlog specifically relating to the marine end markets has been trending.
Sure I would.
With the.
New dimension for us is that because they typically are.
To put in perspective, you get a small orders several hundred thousand dollars a big one is over a million a project for a vessels. So when you have a.
$60 million business each order.
Is a big chunk.
And thats see that activity.
Has remained constant is actually because.
In Europe , but we're getting more and more interest in more and more project development in Asia and North America. So.
That's what I think gives us confidence that even in a.
Magnet market, we have the chance or declining market of or decline, we have a chance to remain flat or increase increase our sales.
It's a little bit tougher to say on just our traditional business, particularly here out of for scene, which is definitely more particularly.
In North America and in Asia actually is is more tied to the overall economy. So as long as the economy is doing well in room and people are confident I expect the marine trends, our domestic marine transmission market, where it is right now to remain to reflect the trends if if it were to if.
These were to decline in the macroeconomic environment, I think you'd see a slight decline in our in our marine transmission backlog.
Okay, great and having to squeeze one more and portraying it over.
I am a 2020 implementation beginning on January 1st are you seeing any impact.
On demand Oh or mix really any.
Shifted battery electric or any all the alternative.
Irene fuels or is there any color you can give on how maybe this is having an impact on you know what would normally be business as usual.
Hi.
I would have to get bad.
I will dig into more details.
At every month Noah every quarter, there are more and more hybrid applications coming coming up.
Well what is both good and bad in Marine.
For us at least as its.
It's not a Toyota Honda or at GM, where they can design, one solution and throw it across three or four platforms and sell millions of vehicles.
You are dealing with at designed for each both builder each.
Each owner so it's it's a lot more work for each application.
But absolutely.
Any customer of any size in any market is exploring.
Particularly in marine a hybrid.
Hybrid solution not or diesel electric solution.
And it's absolutely being driven by environmental concerns you know emissions many.
Cases their tax incentives to do it so part of it is economic.
But it's it is a it's hard to design one solution that fits all so it's a we're doing and we're doing a very good job with that on designing a control system.
That can go across multiple models and we're designing each one of our marine transmissions to be able to.
Simplify but plug and play.
We want to be able to react to a multiple multitude of hybrid diesel electric solutions in the marine market or any of our markets. So thats.
A lot of where our product development and thinking is as you know we know.
Particularly its going to go hybrid and we want to be ready. We also want to be ready if it goes purely electric but in a lot of our marine markets purely electric is difficult to achieve.
Yep Yep understood.
I'm sorry.
Sorry, just one quick housekeeping, one I apologize if any chance that you could provide the revenue breakdown for the manufacturing and distribution.
Got it eliminations.
The quarter goal.
Yeah, one second I do have that information.
[noise].
So it was a for the quarter round numbers 55 million manufacturing 22 distribution and about 18 eliminations.
Perfect. Thanks very much.
Banking and just a final reminder, if they're going to ask a question at this time. Our next question will come from Josh Chan with Baird.
Hi, good morning on John Jeff.
Good morning, Jessica.
Hi, Good morning, I guess my first question is on the backlog it would it be a fair to think of your kind of backlog right now.
Now as as predominantly marine and industrial and if youre to get any improvement in oil and gas that would be kind of on top of what's what the number is right now.
Yes, absolutely.
Okay.
So then I guess on the oil and gas potential improvement I mean, you guys mentioned that year.
Continuing to quote quote projects. So what are you hearing from your customers in terms of how they're thinking about.
Timing and what what that is dictated by I suppose over the next couple of quarters.
Hi, Josh it's John I eat out we still have a.
At a small and call it small.
Of what the overall peak was in Asia. So we have continued projects going on in Asia, I would say in North America.
Yeah.
It's the capacity I think the the pipeline issue out of the Permian is being addressed.
I think.
Honestly, it's again different for each each person I talk to each company, but its price stability.
And cost and cash flow I think I do think you're going to see the effective horsepower continues to decline.
In the North American fleet, so if theres any improved demand and pricing I think.
Sustained I think you'll see.
The fossett's turned back on a new rig construction.
But it's not something I see in the next quarter.
Maybe two quarters out middle of.
2020.
But again the problem is is it was to get there we get closer to a general elections. So.
Well, we'll see Josh, but I don't I don't see it getting much worse than it is right now and new rig construction in North America.
But the rigs again that everything that can.
Everything that all of our equipment is being used almost every single day.
Right. Okay, yeah, thanks for the color there.
And on the funding charge I just wanted to make sure that.
Is it the expectation that there wouldn't be a similar charge in the next quarter.
And then also just the mechanics of it if you kinda talk it against the inventory would that mean that when you sell that inventory you would have lower gross margin just kind of how would that kind of flow through.
Yes, so no it wouldn't be selling the inventory we'd be ticking up we would be taking inventory.
Hi, Alex to replace the the components that need to be replaced in the rig so it'd be a reduction in inventory and offsetting reduction to the accrual that we made yeah that accrual was intended to cover the population of impacted units. So yeah baseball. We know today, we don't anticipate.
Charge.
Okay, and anything else, Josh I think it because we'd be covered under our normal warranty warranty spending warranty accrual if something else that we don't do we don't know about today, but that was okay.
That would be that would be it.
Okay. That's great and then last question is is it still the.
Patient that you might be able to generate positive free cash flow. This year based on how the first quarter has gone up what are your thoughts that Jeff.
Yes.
It's going to be tight right I mean, we had a a little bit of I would say accelerated timing in capex just in terms of timing of.
Deliveries of machines.
So that should ease somewhat on average over the rest of the year.
That we're going to see some inventory reduction, but a lot of that depends on what the market does so I think we have a good chance of being positive free cash flow I would say for the rest of the year end and for the full year breakeven I think.
It is.
I would say, if we weren't bringing lufkin online we would be but that's that's but that is a strategic imperative for us to get that up and running.
Right, Yeah, that's definitely understandable. Thank you both fair time.
Thanks, Josh.
At this time, we have no further.
Questions in our Q will turn the conference back over to our speakers for any additional my closing remarks.
Thank you Holly and thank you for joining our conference call today. We appreciate your continuing interest in twin disc and hope that we have answered all your question if not please feel free to call Jeff for myself.
And we look forward to speaking with you again, following the close or fiscal 2020.
Second quarter Kaleo I'll now turn it back to you.
Thank you, ladies and gentlemen that does conclude our conference for today, we thank you for your participation.