Q2 2020 Earnings Call
Welcome.
Second quarter 2020.
Call Today's conference is being recorded at this time I would like to turn the conference over to Stan Berger. Please go ahead Sir.
Thank you could see well be Youre limited to the point is we were extremely pleased that you're taking the time spinner cool. Thank you for joining us to discuss the company's fiscal 2022nd quarter in six months financial results and Disney job.
Before I introduce management 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 teacher.
Looking statements.
Important to remember that the company's actual results could differ materially.
Justin such forward looking statements.
Additional information concerning factors that could cause actual results could differ materially from those in the forward looking statements are contained in the cookies and report on form 10-K copies of which may be obtained by current that you do the company or do you actually see.
I know you should have received a copy of the news release.
Good morning, before the market open.
Yeah, that's actually to copy please call me Inaki six to 60 years 2000.
Sure.
Hosting the call today, John Dan Twin disc jockey blockbuster good news.
Hi, good in the finance people into HM Treasury Secretary.
During the call over to John John.
Thank you Stan good morning, everyone welcome to our fiscal 2022nd quarter Conference call usual, we're beginning to shorten the statement and then Jeff and I'll be happy to take your questions.
For just goes over the border results I'll touch on somebody else operational highlights from the quarter as we mentioned in prior calls we've been addressing cost issues on some of our marine transmission models do this for supplier changes during the oil and gas run up in fiscal 2018, and 19 in order to meet demand and other products, we had moved to apply to other vendors enough.
Always at a lower cost.
Significant progress in the quarter, improving how many new parts from new suppliers and actually had fewer go into production today, we have identified over a million dollars in savings for fiscal 2020 spread out just over three models. We expect to continue to add to this is more components all approved assuming a static mix and volume going forward and example, we expect.
Margins continue to improve over the next four to eight quarters as we bring many new supply sources online.
Also begun to work with the key outside partner to help us identified to validate more suppliers in the Asia region.
In the quarter. We also offered in early retirement package to our employees and our domestic operations and we've reduced our domestic headcount by about 10% for a bottom another million eight.
Millions savings in the second half of the year, there's demand in our markets improve some of this last capacity will be added two or lufkin facility as a comes online. This summer we continue to address other cost drivers on a global basis, such as non essential overhead and it makes it necessary a judgment or.
Adjustments.
One bullet that probably sit album release was the partner cancellation of the Marine propulsion program.
We're see outcome, we're different but it isn't the end of the story. This is an accounting moment in time and also the end of any charges or write offs. This program may continue.
Before.
I will turn to a couple of our strategic objectives for a moment.
Acquisition continues to surpassed our expectations would be the focal point for diversification efforts that orders an active projects in Asia and North America continue to grow one of our more recent applications debate in the midst Niagara falls in all electric ferry boat that is getting a lot of attention and you should see more coming in the near future with the.
Integrated l. drives from that propulsion.
The cross Pollinization between back into wouldn't just continues to drive or hybrid strategy and our other markets as we jealous both component and system solutions as our market our markets continue to involved.
In terms of capacity planning for the full cycle, including the ups in oil and gas. We told you that we've moved our north American aftermarket business to a standalone facility along I 94 corridor between the walk in Chicago that facility has been up and running since last summer, we're running more efficiently in terms of man hours per shipment that we were when we're in the factory.
Vertical list modules and the layout dedicated departures, making the operation much more efficient currently we are using facility is a depot location for our marine transmission is coming in from a European operations.
Our facility and lock in Texas is nearing completion, we should take occupancy in our fiscal fourth quarter with the first shipments in the first quarter fiscal 21, we've Gotta limited hiring program in Texas and identified key personnel tone seems a little moves to help get the plant operational access to a growing challenged at North American Labor Force is critical for our girls.
Objectives shipments from the plant should grow throughout fiscal 21, as we ramp up different models for production.
Finally at our main facility in Wisconsin, We got a new sales and operations planning program to retool, our processes and how we run our business. The downturn of 2015 recent retirements and all of our new hires in the past two years is the perfect time to reset into best utilize our new capex spending and freedom floor space.
This is an 18 to 24 month journey that we kicked off earlier this month.
With that I'll turn it over to Jeff for some comments on the financials.
Thanks, John and good morning, everyone I'll briefly run through the fiscal 22nd quarter numbers sales up 59.59 for the quarter were flat with the previous quarter, [laughter] and down 18.6 million or just under 24% from the prior year second quarter.
Quarter decline is primarily the result of a significant reduction new build an aftermarket activity in the north American trucking market a lot of what the softening in the global Marine and industrial markets.
Oil and gas decline accounted for 16, and a half million or the second quarter reduction in sales and as a continuation of the slowdown we saw in the fourth quarter fiscal 19.
Through the first half sales are now down 34 million or 22.2% compared to the prior year with foreign currency exchange contributing 2.6 million to this decrease.
Second quarter margin percent was 26.4% compared to 33.4 in the prior year second quarter.
Our gross margin performance for the quarter was again severely impacted by a continuation of the unfavorable product mix, which began in the fiscal 19 fourth quarter with lower fracking demand for new reconstruction and reduced aftermarket demand being the primary drivers.
Gross profit per cent for the second quarter is improved over the first quarter.
16.3 in the fourth quarter fiscal 19, which was 22.7.
Improving trend as result of targeted cost reduction actions on key products and overall focus on cost containment and production efficiencies.
As we don't discuss them yearend 19 earnings call, we anticipated a continuation of this difficult telmex.
I have been focusing on cost reduction and pricing actions to drive margin improvement.
We expect to see a continuation of this positive trend through fiscal 20.
Spending on marketing engineering and administrative costs for fiscal 20, a second quarter decreased 2.9, or just over 13% compared to fiscal 19.
The decrease is result of reduce bonus marketing spending stock based comp and professional fees along with the impact of the no lock sale, which happened in the.
Third fiscal quarter of last year.
Oil and gas market struggling over the past three quarters, we've aggressively pursue cost reduction opportunities to compensate for the decline in gross profit.
A restructuring charge of 4.2 million was recorded in the second quarter. A this charge included 3.29 related to the partner driven termination of emerging for Paulson program for which we had provided development and production services.
3.29 charge was comprised of 2.2 million a noncash write offs of assets and a 1 million dollar cash a cool to sell a supplier commitments associated with the program.
Additionally, we recorded about 1 million in restructuring charges related to headcount reductions that are domestic in European operations.
As John noted adults reductions will generate a just over a million dollars of savings in the second half and a little over 2 million on an annualized basis.
What the reduced second quarter volume challenging product mix and the significant restructuring charge, we reported an operating loss of 5 million during the quarter compared to a 6.7 million operating profit in the fiscal 19 second quarter through the first half operating profit has declined by 23.4 million.
The loss of 11.8.
Operating profit compared to operating profit of 11.6 in the prior year.
The fiscal 21st half includes 4.4 million of restructuring charges and 3.9 million price performance charge, we recorded in the first quarter.
The effective tax rate for a physical 21st half was just 4.3% significantly lower than acquiring a rate of 25 one.
The current year rate was significantly impacted by the guilty provisions on the tax cuts and jobs Act, which requires because the inclusion of foreign income buffer that certain foreign deductions and credits want to domestic loss position.
You'll be inclusion decrease the first half tax rate by 18.6%.
The net loss for the second quarter fiscal 20 was six and a half nine or 49 cents per diluted share compared to the net profit of 4.1 billion or 31 cents per diluted share in the part of your second quarter.
Year to date, the that loss was 12.89 or 98 cents per share compared to net profit of 6.9 million of 56 56 cents per share in the fiscal 19%.
Thank you that EBITDA 2 million.
The quarters down from a positive EBITDA of $9 million applying or second quarter for the first half the because there's no negative 6.6 million compared to 17.1 positive EBITDA in the fiscal 19%.
Lets recently declined EBITDA results in a slight increase in debt levels, we anticipated in the likely would assume they maintaining compliance with the debt to EBITDA covenant in our credit agreement.
We began discussions with BMO during the quarter and were able to close the third amendment to the credit agreement on January 28.
Amendment provides temporary covenant relief as we work through the current market challenges.
Under this amendment, we finished the quarter with the debt to EBITDA ratio of 3.11, which was well within the revised covenant requirement of 4.0.
Inventory was up 7.4 million in the quarter as reduction efforts were hampered five and reduced volume and vendor to them as.
$2.3 million of this increase was related to the termination of the Paulson program as a percentage of completion accounting, resulting in a 2.3 million cumulative credit balance in the inventory at the kind of program was cancelled.
With no inventory improvement and significant capital spending free cash flow was negative 4.29 in the corner driving a 3 million.
Entries in debt.
Six month backlog finished the quarter at 94.79, which is down just slightly from the 109 at the end of fiscal 19.
Operating cash flow was slightly positive for the first half 3.9 like better than the prior year for south despite significantly reduced earnings at an increasing inventory.
Capex levels remain relatively high as we execute on some key investments and machinery and equipment.
We expect to spend between 11 and 13 million this year as we invest in modern machining and quality technology to drive productivity and cost improvement.
And I'll turn it back to John for some final comment thanks, Jeff I'll spend a quick little it on the outlook. The second half of fiscal 2020 still faces some of the same domestic oil and gas challenges of the first half we're seeing aftermarket signals of life across a broad range of markets, including oil and gas. We are seeing increased rebuild activity and hope that this continues.
Ah throughout the we're into the fiscal year a disappointment in the second quarter was the rapid drop in industrial demand speaking with suppliers. This happened across the market early signs in January or positive backed up by increased aftermarket orders.
We have the backlog to make our third quarter better better quarter in terms of revenue and margins and provided the recent corona virus outbreak doesn't dramatically affect our customers in Asia.
Fourth quarter should also see that improvement trend continue we don't see any domestic do unit demand in oil and gas until this summer.
That concludes my prepared remarks, and now Jeff and I'll be happy to take your questions. Kristina could you. Please open the lines for questions.
Yes. Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question.
And we'll take our first question from Noah Kaye with Oppenheimer.
[noise], Thanks, and good morning so.
You know stripping out year over year restructuring.
It looks like EBITDA Deco metals got back to what you can see normal levels.
Improved gross margins.
Sequentially.
You mentioned some actions to pick up costs.
I'm just trying to.
Understand how you further cost reduction efforts.
Vis-a-vis or your commentary around potential improvements in the back half and activity, which lever there you're going to continue focusing on.
Our any cost is likely to come back you know the pool.
We're seeing some more.
I'm, just kind of help us through <unk>.
Are you kind of balancing those factors documents.
Sure So no it's John.
Two parts of all three parts were going to continue the material variable cost coming in finding new suppliers second one is operational improvements in our domestic operations.
Getting industrial outs and down to Texas.
Reorganizing the plant here being more efficient with our processes, but then there's still a component outside of North America that I would say is fixed cost rationalization.
And we're actively working on all three of those.
Okay.
That's helpful.
Then to be very unique set it at the at the end of your prepared remarks, you're not expecting.
North America or it wouldn't get less transmissions, certainly not you know.
Mark at the coming back anytime soon.
I think we could see some orders in this fiscal year, but my gut tells me there won't be any shipments. This fix it there won't be any significant shipments this fiscal year.
But they they wouldn't be values.
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But.
If I if I could ask on the determination that marine propulsion program can you just give us entry into a little bit of Colorado that.
With that with that legacy.
Wouldn't program that program.
Yes.
I understand that it was for sure.
That's a throat.
Yeah, It's John again, it's a program that we announce.
Close to eight years ago, maybe more within engine OEM here in North America.
And there their strategy has changed.
And so the program.
It was canceled we never got into production. So part of the charge is you know if there's a continuation where we will we continue on.
A lot of us.
After the will have to have our name on it. So there's there's there's there's a pause here and a lot of the charges reflected we can't continue on with another name on it. So it's not the end of the story no.
I hope I have.
So there's a chance if there's a release before the third quarter conference call well, but certainly by the third quarter conference call have to I hope to have the rest of the story here for you.
Sure that I'll also impacting kit.
Okay.
Well take her next question from Tim.
Wash with Baird.
Hey, Hey, good morning, guys close enough.
Okay.
Maybe just a just so in the back half a as you're thinking about you know just just some of the Asian orders that you've got and maybe some of the permits you see them read how how big of a revenue ramp can you do you think we can see in the back half a year.
We may be used just kind of like $59 million to $60 million run rate in the first half assets.
As a base [noise].
Yeah, Yeah, it's Jeff.
John I, just a side by side, where we were thinking kind of 15% as what is what is.
Anticipated.
From the first half.
Yes.
Okay, Okay gotcha.
Okay and then once the how big was the I think in the press release, you mentioned some some production delays a that impacted shipments how how how big was that.
That material.
Yeah. So the way we quantify that it's about 6 million that could have gone out had we've been able to.
Yet the the materials that we needed to do the assembly and able to wrap up our assembly to where we expect we should be.
So it's about 6 million impact in the corner.
Okay and that would be kind of included in that and it's about one really ship you think in the third quarter.
Yes, Okay gotcha okay.
And then.
I guess, just just on some of the restructuring in the end the voluntary voluntary retirement comments that you made John.
Is there going to be some shifting of the workforce structurally from we're seeing down to Texas because.
I guess from from from what we've kind of seen over the last couple years. It's been it's been hard for you to five people in Racine and so I'm just kind of curious that kinda does the maybe some color on the background of just the voluntary retirement.
Yeah, it's a I mean.
The timing was right on two fronts.
We had excess capacity in terms of of people and we're seeing or near retirement at retirement age.
And we have a plant coming on line down in Texas, So you're absolutely right.
We'll take care. The early retirement, we've got a lot of people with a lot of knowledge, leaving.
And we can handle the production that we have right here, but as we as as Luskin comes on line, you're absolutely right the hiring and replacing of those bodies a lot of asking that happened in Texas.
Okay and.
Barry again, we're very optimistic and what are the reasons. We chose lufkin was specifically because of their labor pool down there.
Okay and that the polity employees that we've been able to find down there.
Okay.
And then and then Jeff what could both from gross margin level do you think we can kind of exit the year out.
And and then as you look at 2021 as Lufkin comes up is there any sort of.
Under absorption or anything like that that we should be aware of.
Yes, so I think yeah, we've been targeting I think we said last quarter as well to get to the high Twentys.
As we exited the year.
Assuming no significant change in mix.
Any any change in mix would probably be a good guy.
And I think we will as we wind down maybe some activities that are being moves to a.
To lock in and ramp up Lufkin I think we might have some some slippage in absorption you know in the first quarter, just gonna have increased expense and moving but I think it'll improve yeah, well it'll definitely take a little bit of it'll be a drag for the first few quarters, because we because we can't just we did in Q1 of.
Whatever is the first quarter, we won't be shipping, 100%, we'll be bringing it up slowly.
Right.
Want to do it right.
Okay, Okay that makes sense and then I.
I guess just from an X. gionee perspective, if you're kind of at this level of revenue would you expect kind of the 16 $17 million kinda kind of level for us you need to be be pretty pretty consistent are sustainable.
Yeah, I think so I mean within that range, plus or minus a couple of percent yep. Okay.
All right and then last one do you think just with inventory you'll be able to generate positive free cash flow for the rest of the year.
So I'm glad you asked that 10, because I was going to interject that just doesn't get like because given that you asked the question [laughter] and it despite like.
The Jones.
I have a shock to me and again I didn't foresee the negative inventory reversal from.
The marine propulsion program, but inventories at our factory.
Primarily here in the same actually went down in the quarter.
We had a lot of stuff shift from factories in December that did not make be quarter cut off so they're either in transit or they got to our distributors a company on distributors and we don't and they haven't gotten to the customer yet so I Didnt do you did the trend if you will see during the remainder of the.
The second half the year will be an improving trend.
Okay.
It sounds like first on that that's going to factory.
Yeah, we're going to see it go down at the factory and it's getting to the customer.
Right I mean, it kind of married with what you're saying on some of the production delays at 6 million you called out.
That's probably in transit and that's probably pretty pretty decent inventory, that's going to flush out so.
There's there's a big chunk of it in in transit right now.
Okay great.
At the time good luck on the rest of your guys. Thanks.
Thanks, Tim.
And we'll go to our next question from Randy Johnson with.
Neuberger Berman.
Hey, guys.
Hi, Brad.
Well that last question you can give you a little more specifics I mean, we.
So we generate a $10 million and operating cash flow.
Second World.
You know given yet it wasn't gross margins and you've got inventory coming out of that I would expect to see some flush.
Yeah.
10 million, Mike Hi side I think.
I think operating cash we should definitely be positives in the second half of free cash I'd like to say, we will be positive in the second half, we do have capex, which you know where about call. It halfway through a what we thought we would spend so I think in that.
You know seven to 9 million of operating cash and maybe a one one to three and free cash in the second half is.
As what I, Okay, we might expect.
Okay.
And one of these side I know, it's not it's wrapped into the company, but can you give us a sense corridor. The revenues there at this time.
Ran we do you you cut out a little bit on the first part of the question.
On the acquisition beat on the acquisition and development Yeah.
One of the revenue yeah.
And I'm, assuming it's sort of a.
Mid single digit growth.
Yeah that's.
The revenues to the first half for around 20 324 million.
I would say their first half they're very project oriented so their shipments come in big chunks first half was like kind of flat compared to the previous year I think what we have a lot of optimism around is the activity order activity.
In particular in North America that we're seeing right now driving growth in the as as we get into fiscal 21.
Okay.
So obviously, we've had the weak that's one of broaden out.
The whole revenue base I think.
So that's one of the case.
Sure.
Markets, a week or just imports like reform.
Yeah, Yeah, I think so I think you know there there are no. There's no end markets right. Now that are that are growing beyond you know, one or 2% and there's weakness I would say across most of them. So yeah. There few bright spots a stable is about.
As good as it gets right now.
Well I would say they'd be.
Hey, guys see him.
Yep.
Right right I would add though that.
Okay with that though we are taking we are gaining market share in Asia, and North America, even in a down market. So I wouldn't I would expect our growth rate the vet and at that to continue to outperform the market growth rate.
Okay, great great looking forward, because you know better results on them.
Second half and greater 21. Thanks.
Thanks, Ryan So are we thinking.
And again, if you would like to ask a question. Please press star one at this time and get that star one to ask a question.
We'll take our next question from Simon Wong with GE research.
Hi, good morning, John and caps.
Hi.
Can you quantify how big energy businesses this quarter.
A good question we.
Kind of.
We know specifically that like the units that ship a energy wise the.
Aftermarket and little bit more of a gas.
So I would say it's in the five to 6 million.
Yeah.
5 million it would be my my best guess when you combine forward in aftermarket.
Okay. So Gary if somebody from new goes in there so again.
It's all over Asia.
Okay, Yeah, I would guess yet half that most I would say assignment, 90% well into second quarter, 100% of the new units went to China.
Okay, Okay, great at home.
Okay, I mean, I'm just trying to understand how big is the aftermarket business. That's why I'm just trying to get out yeah.
Because I guess, maybe I've gotten all around.
The market for the energy business.
Ah this quarter.
I would say this quarter it was roughly half.
Okay.
Okay.
And you also have some energy business going to the offshore popping hearing that all shipping picking up for a few quarters now hockey.
Are you seeing that in your order rate incoming orders pick up in offshore.
If we're just starting to see some project quote activity as well Fortunately all of that's being handled by inventory at our and our just existing inventory at our distributors. So first thing we have to do for US is get get inventory, that's sitting out into the market and then we'll get replacement or.
<unk>.
Yeah, I would say there's been some signs of some side, so small signs of life in that market.
Encouraging.
Look I try to six years ago, how big was just offshore energy business for you.
Oh, five or six it twice, so you're going back to almost our peak.
I, probably would have been too.
20.
Simon I I was double check I went back to the 20 million.
Okay, all right great and then.
Yep.
And then on the on the Covenant side, you mentioned that you just kinda Mad men logical to four times are all four times leverage how long time doesn't include for and what does it go back after getting them. It ends.
Yeah. So there's an 8-K, though he filed you can see the details, but essentially we've got.
A four to one for the quarter that just ended goes up to five to one or in the next quarter and that starts backing down over the next few quarters, then we get back to the three to one in the.
Second quarter of fiscal 21, or the fourth quarter of calendar 20.
So it's a it's not really three four quarters of relief.
Okay, all right great. That's how the question I think you.
I guess the other Simon the other component that maybe as important as we it also includes the add back of the 3.9 million charge in Q1 or two remember the product performance charts gets added back to EBITDA kind of treaty that essentially as a restructuring charge.
Okay, great. Thank you.
Oh.
It appears there no further questions at this time Mr. Baton I'll turn the call back to you for any additional or closing remarks.
Alright. Thank you Christina Thank you for joining our conference call today. We appreciate your continuing interest in twin disc and hope that we've answered all your questions. If not please feel free to call, Jeff or myself and we look forward to speaking Gee with you again following the close of our fiscal 2023rd quarter, Kristina and then I'll turn the call back to you.
Thank you. This concludes today's call. Thank you for your participation you may now disconnect.
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