Q4 2020 Twin Disc Inc Earnings Call

Welcome to the twin disc Inc. fiscal fourth quarter Twitchy Twitchy earnings Conference call. Today's conference is being recorded at this time, that's it sort of concerts over just Stan Berger. Please go ahead Sir.

Thank you would want to go.

After the movies with when do you usually give or take turns consistent cool.

Thank you for joining us to discuss the Companys that's cool.

24th quarter, two your financial results of this itself.

Before introducing management I would like to remind everyone that certain statements made during this conference call, especially those that speech management's intentions hopes beliefs expectations or predictions for the feature.

Looking speakers.

It's important to remember the cookies actual results could differ materially.

Those projected in such forward looking statements.

[laughter] that could also cause actual results could differ materially later.

'cause it.

Good night team crisis.

Nation concerning factors that could cause actual results to differ materially but those are the.

That's a concerning the Companys annual report on form 10-K copies of which maybe frame.

Currently uses a company or do you actually see.

I know you should've received a copy of the countries.

This morning before the marketplace.

If you have now obviously the copy please call no they tend not to six to 64000.

A copy to you.

Hosting the call today, John Dan <unk>, Chief Executive Officer, and Jeff groups.

It's nice personal finance Chief Financial Officer Trade show in Chicago true.

Now I'll turn the call over to John Bair John.

Thank you scan and good morning, everyone. Thanks for taking the time to join our conference call Edgy OIC in America I'm sporting for what the challenge, but I thought our team responded very well and delivered results even above our expectations and again.

I think really in the fourth quarter. The third challenge. It seems had to say to had wouldn't that continue to push us work over the global trade wars, especially in China.

The Saudi Russia oil war, which drove the price of oil down even before coated.

In Tobin on copper that which really affected all of our market.

Somewhat healthy whether it was marine or industrial.

A dramatic slowdown.

In projects new orders.

In general I thought our team did a fantastic job globally getting product out the door that mattered most of our customers priorities were always changing.

<unk>, particularly in Europe, whether your suppliers, which supplier was gonna be open.

Close.

Which customer would you be able to take product and pay our facilities in the scene and pop in direct Netherlands remained open throughout the quarter throughout the call the crisis.

And even with the four shutdowns in Italy, Belgium, and Switzerland, our team did a great job bouncing back and getting everything out the door that could go out the door.

Earlier in April.

Our third quarter call, we announced that we applied for and received the P.P.P. long.

What were $8 million.

The vast majority of that the painful salary wages and benefits here in North America was in the U.S. proceed in nursing based employees.

Those funds and good on July 20 force and we had to react based on the condition that we face and we see for the next few months and really don't conditions that we can see at this time, but the unknown length of the bottom.

Jeff will provide more detail on those cuts.

After getting the ended the third quarter, Paul we had about $4 million in cost savings.

TGP and yet to this morning, we're now just over 7 million. Those aren't addition, that's just a a ratchet up three months ago. We bought 4 million will be the right number and today, we think that's just over 7 million.

A lot of things I would say you don't see some signs of life. Our average order average daily order rate ticked up slightly.

But it's certainly not back to the level, we're going to see the backlog growing.

Necessary to make these cats.

With that I'll, let you go over some of the numbers for come back on the outlook.

Sure. Okay. Thanks, John Good morning, everyone.

For fiscal 24th quarter numbers sales and 59.4 million for the quarter were down 13.1 billion or 18% from the prior year fourth quarter.

Clients in the prior year as John mentioned, principally driven by the ongoing effects of the cold the 19, a pandemic on the global economy.

I can't reduction in the North American tracking market all of the softening in the global Marine and industrial markets, the oil and gas decline.

In particular accounted for approximately 8 million or the poor quarter reduction in sales.

For the full year sales were down 55.8 billion or 18.4% compared to the prior year with foreign currency exchange contributing 4.8 million to this increase.

Fourth quarter margin percent 23.2, compared to 22.7 in the prior year fourth quarter, our table favorable gross margin performance for the quarter.

Since the prior year was result of some targeted cost reduction efforts on t. products.

Along with a global focus on cost reduction.

The margin percentage for the full year fell to 22.6% compared to 29.6 for the fiscal 19.

Performance out of more difficult product mix and a if you recall, we had a 6 million.

Charge $6 million part performance charge that we recorded in fiscal <unk>.

I think on our marketing engineering it administrative costs for the fiscal 24th quarter decreased 1.2 million or 7% compared to fiscal 19.

The decrease as a result of.

Broad based focus on.

Reducing costs in particular reduced professional fees salary expense corporate travel marketing activities.

Et cetera, the oil and gas markets troubling over the past four quarters now law with a downturn associated with called the 19, we have aggressively pursued cost reduction opportunities.

Compensate for the decline in gross profit.

For the full year spending was down 8.3 million or 12%.

As John noted and as we get out in the press releases warn you have taken cost reduction actions that will provide 7.2 million.

In annualized savings, primarily at our domestic locations and again to be clear. This is not in addition to the 4 million savings we discussed at our third quarter call. It is a reaction to Oh.

The full utilization of the PPP funds and the current market conditions.

Indicating that we needed to again, taking aggressive actions to put our cost structure, where it needs to be up for the next few quarters. The current action. So reinstates the savings that we announced earlier with additional 3.2 million of annualized.

A restructuring charge of 200000 was recorded in the fourth fiscal quarter similar axle due to what we've had throughout the year primarily related to ongoing cost reduction.

And productivity actions that our European operation.

With reduced fourth quarter volume, a challenging product mix, we reported an operating loss of 1.5 million in the quarter.

Compared to the breakeven corridor in the prior fiscal year and for the full year operating profit has declined by 58.8 million.

Operating loss of 40.3 million compared to an operating profit of 18.5 million in fiscal 19.

The fiscal 20 year to date result includes 5.1 billion of restructuring charges of 6.1 billion product performance charge I noted and the 27.6 million dollar impairment charge I recorded a third quarter.

Adjusting for these items the year to date operating loss would've been approximately 1.5 million.

For a 20 million decrease from fiscal 20 on it 56 million dollar reduction in sales.

You talked a tax rates in fiscal 2000 was just a 9.5% significantly lower than the prior year rate of 25.6%.

The current year rate was significantly impacted by the 26.7 million impairment charge recorded in the third quarter, which resulted in a 13.3% decrease for the current your effective rate.

It is hurt your rate was also impacted by the guilty provisions of the tax cuts and jobs Act, which were part of the inclusion of foreign income, but prohibit certain foreign deductions.

And credits one in a domestic loss position.

Guilty inclusion decrease a year to date effective rate by 2.8%.

The net loss for the quarter for the fourth quarter fiscal 20 was 1.8 million or 13 cents per diluted share compared to a net loss of eight.

Point 8.800 million or six cents per diluted share.

In the prior year fourth quarter and for the full year.

While 39.8 million or $3, a three cents per share argument net profit of 10.7 million or 83 cents per share fiscal 19.

EBITDA of 1.39 for the quarter was down from 2.9 million in the prior year fourth quarter.

For the full year EBITDA finish that negative 40.2 million compared to 29.9 million positive EBITDA answers for 19.

Turning your EBITDA includes the 27.6 million dollar a impairment loss.

We recorded a third quarter.

As we indicated during the third quarter call challenging market conditions made it's highly likely that we would not.

Yeah, and compliance with the leverage ratio Covenant included in our view about credit agreement.

Fourth quarter recording a we began discussions with people during our fourth fiscal quarter and were able to finalize an amendment to.

To address the issue on July 22nd This amendment removes a leverage ratio covenant beginning with the recently completed fourth quarter fiscal 20 through the fourth quarter fiscal 21 in favor of a cumulative minimum EBITDA covenant.

Sorry projections indicate compliance with this revised covenant, but do require improving market conditions through fiscal 2001.

Inventory was down 7 million in the quarter and $14 million in the second half as we get reduction efforts remain a priority list.

The solid inventory improvement and good working capital results operating cash flow positive 4.3 million this quarter.

Capital spending was the lowest levels year at 1.5 million.

Probably in a positive free cash flow 2.79 for the final quarter of year.

As we answer what we anticipate will be a challenging fiscal 21 market environment, we will be deferring all non essential capital spending.

And expect to invest $7 million to $9 million during fiscal 2001.

And with that I'll turn it back to John for some final comments.

Just a quick look at the outlook is if you can imagine our big take away from Q4 is the second half of 2020. The first part of our fiscal 21 will be very challenging in all of our market orders were not strong that's reflected in the backlog, although I would say in July the average daily order rates did improve showed some signs.

Life.

But they have a ways to go.

In some areas that we're seeing signs of life, we get active projects are in oil and gas in China.

<unk> military project in marine that are close to fruition.

New applications and volume in North American industrial customers with our new product.

And work from our customers in the North American oil patch or 8500 are working strong and working every day.

We continue to be impressed with our team at that in the Netherlands, and their resiliency to drive projects through the fruition get new projects and do this all remotely around the world without without traveling.

We also continued in the fourth quarter and up to now actually projects in design and getting product ready and hybrid and electrification project with Crane ARX vehicles in oil and gas in marine So our product development continues to push forward. Despite.

The market conditions around us and.

Little bit clarification, the press release on operational the Lufkin facility, we took possession and occupancy on August 1st and so we plan to compete in production with there are first models the P.T. O probably in middle to late second quarter.

And we're very optimistic that this will drive future growth in our industrial business. It's we have a team in Texas focused on our customers every day on this product has a very different cadence than the other products that are 27th Street facility, which are the oil and gas transmission our transmissions in marine.

Mean transmission much different cadence different suppliers and.

We're very optimistic about the future of Lufkin facility in our industrial business.

We're seeing facility. We're looking at you know what work from home and a reduction in headcount we were looking at how we can get all of us into one facility here in the speed Wow interest for each other if there's one tier one facility. So we're actively looking at that how we can be more cost effective here in the corporate and must be.

Based operations.

Other than that I'm going to open it up the questions now Eduardo could you open the lineup and just and I are happy to take questions.

Thank you and she'd like to ask your question. Please think they'll definitely star one on your telephone keypad, if you're using this beautiful. Please make sure. Your mute function is turned off till I, just did not reach or equipment.

Again that is star one under its also Pete that asked a question false or just a moment to.

A lot of questions to come true.

I'll take your first question from no. Okay on open Heim. Please go ahead.

Hi, good morning, and thanks for taking the questions.

You know to start with one thing that stood out to US is I'm sure I'm reading the press release right at 26% increase year over year for fourth quarter for but [noise].

He just given.

Can you talk a little bit.

Out how you were able to achieve the growth there and you know should you should we be expecting with the continued to outperform in future quarters or kind of the market trends.

So no it's John I guess I just didn't provide color I would say the fourth quarter last year was I would <unk>, a little bit worse than expected.

And this quarter's a little bit better than expected. So if I had that just give you my <unk> from in the when I would say it's more like it.

True on 10, 10%, but again, the 17 and that product in there and the markets that they serve have done a much better job holding up year over year in the crisis. So can we can expect continued growth in favorable comparison I think if there's one area.

In our business right now that's the area that can that can performed the best with all the headwinds facing it.

Is that share gains or is that end markets can can you talk a little bit about their position and if you could comment that as well as you know some of that sales synergies starting to translate but I just want to get out a little bit more.

I'd say, it's a mix of share gain and the market and that market growing.

So yeah. It's got it's got to actually I'd say two tailwinds, we had a great product a great team and their now part of a global twin disc team, which helps open doors and and eat People's minds on haven't global service for that product.

But we also see more vessels being built with that technology.

So you know where other markets are facing headwinds there certainly things seem to poke at 19 headwind, but they have tailwind that are also helping them.

Yeah, Yeah, you know annoying cats, I mean, you know basically it seems like that's the producers are saying with cap I said, they're done for the year right. Yeah themselves. So basically there's going to there's going to be on the OE site. You know continued headwinds and in your first fiscal half of 21, How's the aftermarket holding.

You know, what's what are sort of.

What's activity like and what are sort of share dynamic but there.

It.

It's slower the aftermarket I would say a slower than I would've expected.

Given the number of you know I would say anecdotally the talking to customers the V.

The rate at which our rigs are working so.

I would've expected a little bit more aftermarket activity.

And I guess, what's happening right now is this something.

Again.

This is not a new playbook, its a rig need maintenance and certain dollar amount they'll parking and use another way. So we have to go through that a little bit and again sleep horsepower is reducing people are scrapping seat.

So I actually think right now with this battling.

You know, let's use an idle rig versus doing the maintenance I mean, we are getting some but I've given that the amount given the activity that we know about.

And then it's our rigs being used I would've expected more after market right now been done we're actually getting so I think there is.

I think there its future demand coming I just I, it's hard for me to predict when that is gonna be.

We're not banking on it or you know for the next six months.

Right right right. So as you think about you know and this is in relation to the commentary around.

Prospects for compliance with the covenants you know you are expecting some gradual recovery over the course of the fiscal year. They had to put your finger on it you know where would that where would that really now.

I would I would wait till calendar 21.

I mean, it sort of goes out of the end markets improving you know.

Yeah, I end markets, improving I'm, not I'm, not expecting end markets improve until calendar 21.

Okay. Okay. That's helpful and maybe just a last one you know you mentioned that number of cost actions or it sounds like there's a contemplation of potential.

Just real estate for put on a consolidation in racing I, just tentatively I mean, I don't know how far you are with planning, but you know what's the word to do that war with kinda BD life savings.

The we would shoot for seven figure stapling and operating it up on.

And it's it's really you know we aren't the point now with work from home [laughter].

And the number of people in the office everyday and we don't.

We don't see that and you know changing dramatically in the next six months and then it's you know if it if it doesn't it if it's not changing because it can.

Then we can decide how we want to.

How we want to operate and have a different style of office, which was a dedicated office to kind of what the hotel models. So if we can get into one facility I think we should absolutely look at that that is something that that we should seriously consider and and we started the analysis and and the planning of how how would we.

Hi, everyone. That's in the corporate office into our Swin co or North American operation facility. So.

It would be a shoehorns right now, but it's absolutely worth looking at because.

You know this facility that used to house 40, 50 60 people every day is now underway. So it's the right thing right analysis did it.

Okay, alright, thanks, very much taking the questions.

Thanks, though.

Once again that is star one it's like to ask a question what I'll take your next question from Josh Chan of Baird. Please go ahead.

Hi, Good morning, John death.

Hey, Josh.

Hi, Good morning, I'm, just if I can tell all comes the cost savings question. So all of the 7.2 million annualized I guess, how much of that did you realize this year and then I guess how much they book for next year and then also.

Steve do you think that those savings are more temporary in nature. Just in response to the demand or are they kind of like structural cost are permanently taken out with it.

Yeah, I can jump John you can comment, but I think you know based upon the actions and the timing we could get 80% of that within this fiscal year.

I would say that's it is a reaction to the markets and that the incoming order rates and you know as markets recover I think we would.

Just our cost structure. It is is it.

No.

Impacting everybody in Racine and in one way or another and it's not what we would consider a a permanent situation. It's a it's a temporary reaction to to the current market.

Okay, Yeah that doesn't make sense and then John you talked about the average daily order rates kind of improving a little bit. The you know is it kind of a broad base you're seeing it across many different markets are there specific spots that you're seeing.

Back a little bit I would say.

Yeah, I would I would say that the and Jeff jump in because I know you've got the chart in front of view I would say, Josh it's it aftermarket marine and industrial typically.

And after market, you know cross like oil and gas park, everything, but our new unit order and transmission, whether it's our military or oil and gas comes in pockets huge huge pockets.

So what we're seeing it you know.

Marine New unit industrial New unit in aftermarket those are the daily order rates. It as you know shown some side and again [laughter], we're measuring off the you know we're measuring from him to chase them. So we're kind of stepping up the stairs out of the basement just like at least at least they're going the right direction, they're not getting worse.

Yeah.

Yeah, [laughter] that definitely it could sign.

Yeah I'm sure you would hope for a greater in group, Yeah, Oh, Jeff Correct me, if I'm wrong Abbas will talk.

Sorry go ahead Jim.

What was there.

But the bottom was about April and Jeff you wrong and it's just it's improved slightly since April.

Right Okay.

Okay, all right Yeah I appreciate the color there and then my I guess my last question that.

On on the gross margins I guess.

2020, you had a feel kind of items that kind of impacting the gross margin. So I guess, if you get the benefit lacking.

Those items. So how do you think gross margin could shape up in 21 basis point, even though as you kind of anniversary day, one timers, but then the other demand probably softer to start the year. These.

Yes, that's a good question, obviously for us Nexus such as such an important factor and whatever margin looks like.

I think with a similar mix you know without that 6 million dollar charge and 20, we would've been about 25%. We've had I think really really good cost reduction effort.

Improvement through the year kinda demonstrated in our fourth quarter year over year improvement. So I think annualized at the same or with the same mix, we could do slightly better than 25.

Even with what might be a little bit softer volumes I think we will get the we'll get good cost saving I think we'll be in that range.

With that let's say similar mix, obviously, we would.

We would certainly enjoy some improvement in our mix and volume coming back in oil and gas in the second half, which would drive us into the higher 20.

All right well, that's that's encouraging alright. Thanks for your time, guys and that goes up in the next to see.

Alright, Thanks, Josh.

Right. It was not seek their next question from Barry Haimes Sage asset management. Please go ahead.

Oh, thanks, so much Uh huh, just wanted to make sure I understood the PPP impact.

In terms of how it affects the P. analysis does or if it's just a cash I didn't notice to say it again and I raised this is forgiven assuming you you know spend with them against employee expenses and so on yeah. So that's right is there a female impact in terms of the cash.

Cash impact I'm, giving you mentioned it ended in July so how much of it.

Yeah was was in the fiscal fourth quarter versus how much of it might have gone into the first quarter. Thanks. So much.

So yeah barrels.

Question for Jeff [laughter] Good question.

Yeah, so you're.

Answer the first part it could be the spending was expense right. So there was no for getting necessary in our fiscal fourth quarter. So no <unk> impact as it relates the P.P.P. forgiveness.

We spent approximately 6 million of the 8.2 million or within the fourth quarter and the remainder remaining 2.2 and in the first fiscal quarter of 21 way that forget this process or at least we anticipate it working.

We will apply for forgiveness, a this quarter I'm a later in August and then there they process.

That followed by our bank and the S.P.A. to determine ultimate the ultimate level of forgetting that and you're right. There's a formula and there's specific spending you need to have.

Got the money on which we obviously, we focus very very much on getting it spent on the right kinds of items. It's one of the reasons. We we brought back people and returned wages to their normal levels. When we receive the funds. So a thing for more more information on that.

You are those for a follow up.

Better look at where we are.

Yes.

Great. Thanks, so much appreciate it.

Yep.

Mr appears to be no further questions as a written all sort of box to the speakers for any additional or closing remarks. Please go ahead.

All right. Thank you Eduardo Thank you everyone for joining or conference call. Today, we truly appreciate your continuing interest in twin disc and hope that we've answered all of your question. If not please feel free to call Jeff's or myself, we look forward to talking with you after the close.

First quarter I don't the call will be the last day of October early November I'm gonna be after annual meeting so the Florida and now I'll turn it back here.

Thank you and this concludes today's call. Thanks, you for your participation you may now disconnect.

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