Q1 2021 Twin Disc Inc Earnings Call
Good day and welcome to the twin disc Inc. fiscal first quarter 2021 earnings Conference call. Today's conference is being recorded at.
At this time like to turn the conference over to Mr. Stan Berger. Please go ahead Sir.
Thank you Cody.
We have fundamentally twist is extremely pleased that you have taken the consequences.
Well thank.
Thank you for joining us to discuss the company's fiscal 2021 first quarter financial results.
So.
Before introducing that Oh.
I'd 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 forward.
Forward looking statements.
It is important to remember that the company's actual results could differ.
Currently those projected in such forward looking statements.
Information concerning factors that could cause actual results to differ materially because those are the schools looking statements or could taser weapons and the report on form 10-K copies of which may be obtained by contrast, the either the company or do you actually see.
No you should have received a copy of the news release.
This morning before the market open.
If you look back what she's a copy please call the lucky.
<unk> to six to 68000 and she will send a copy to you.
Hosting the call today are John.
Its chief Executive Officer.
Jeff could you to the company's Vice President Finance, Chief Financial Officer, Treasurer and Secretary at this.
Tom I will turn the call over to John John.
Thank you Stan and good morning, everyone welcome to our fiscal 2021 first quarter conference call as usual of younger short summary statement on the jets and I'll be happy to take your questions.
For just goes over the quarter results I'll just touch on some of the operational highlights of the quarter as you saw in the release.
Sales year over year were down significantly really across all geographical regions and markets.
With exception of Australia, we continue to see very strong demand for.
Marine products down there.
Aftermarket for the commercial market and one in one area and one one geography in one market that continues.
Peter expectation.
During the quarter operationally at our plants, we had extended shutdowns.
In the U.S. and in Europe, and then we had the normal vacation in Europe. So all in all which is historically, our slowest quarter or fiscal first quarter should be again this year and it was hampered a little bit tighter centered shutdown.
What we've been doing as a management team and a pen around the world is focusing on our cost control cash flow keeping employees safe.
We've done I think an outstanding job all of our managers around the world to keeping the cove its impact to a minimal we've had very few infections and varied in plants in office transmission.
We also have been working hard on getting our facility in Las getting up and running we've taken possession of the 50000 square foot facility and as we are having this conference call today now the team from Luskin itself in Racine loading inventory for industrial products, starting with a clutches and then mechanical P. Jos a later the higher.
The hydraulic clutches and those are moving down to lufkin as we speak we've gone through our conference room pilot and we should be in preproduction on some cost lines.
Next month in November we plan to move the rest of the inventory over the Christmas shutdown and started production in full in January.
We've also had obviously as everyone has a lot of virtual meetings with customers I have been amazed at the number of hybrid and electrification projects that have ramped up even on these last three months. It seems that a lot of people are taking this different type of work environment. So look at doing things differently and it's been across our market.
Thats been in Marine it's an arsonist in the industrial space and a lot of work has been done.
Partners getting projects ready, but I think you'll see rolling out in the years to come.
We've also been re looking at our sign up process sales inventory and operational planning.
Doing a lot of work on that again why people can't travel and they're here in the plant and we will be implementing that telling him 2021.
We've also been re imagining the work from home.
It's obviously, a new paradigm now a lot of functions have been doing extremely well financed I T I'm not coming into the office very much at all and as a result, we've added been analyzing our footprint and as we mentioned in the release.
One of the things were looking at is selling or corporate office here and we're seeing currently we have three facilities in eastern Washington County.
Under this new paradigm, we probably only need to particularly with lufkin.
Coming online and taking a lot of inventory that we're holding at this facility.
With that now I'll turn it over to Jeff for some comments on the financials, and then Jeff and I'll be back for for questions.
Thanks, John I'll briefly run through the fiscal 21 first quarter numbers.
Sales of 46.1 million for the quarter were down 13.2 billion or 22.2% from the prior year first quarter.
The quarter decline from the prior year was the result of a generally weak global economy due to the ongoing effects of the cold the 19 pandemic compared to the prior year first quarter transmission sales were down 23.7% industrial sales down, 22.5% and marine propulsion sales down 25.2%. So.
So broad based decline across our products in the market.
By region sales in North America were down 34% sales in Europe were down 29.3%.
While sales at the Asia Pacific as John mentioned were slightly or up slightly on improving Australian market for that.
Foreign currency exchange was a net positive 4.5 million impact to sales in the first quarter.
The first quarter margin percent was 22.3 compared to 16.3% in the prior year first quarter of the prior.
Prior year.
If you remember included a $3.9 million or one time product performance charge.
Adjusting for this the fiscal 21st quarter margin percent would have been 22.8 again compared to the 22.3. This year a slight decline from this level at fiscal 21 was due to the reduced volumes and a slightly less profitable mix.
Partially offset by improved efficiencies proactive expense management and the positive impact of.
Foreign COVID-19 really programs that we benefited from in the first quarter.
Spending on marketing engineering and administrative costs for the fiscal 2000, <unk> first quarter decreased 3.3 million or 20% compared to fiscal 20.
The decrease as a result of reduced payroll cost bonus expense corporate travel and marketing activities, along with the announced a 50% reduction is all north American wages, we continue to aggressively pursue cost reduction opportunities to compensate for the decline in volume.
A restructuring charge of $400000 was recorded in the first fiscal quarter.
Charge, primarily relates to actions to adjust the cost structure domestic operation and ongoing cost reduction and productivity actions at our European operations.
Lets reduce first quarter volume and challenging product mix, we reported an operating loss of 3.2 million in the quarter compared to a loss of $6.8 million in the prior year fiscal first quarter.
The improvement is a function of the prior year product performance charts, and the successful cost reduction partially offset by the volume decline.
The effective tax rate for fiscal 21 first quarter was 19.1 consistent with the 20.5% for the same period last year.
A slight decline as a result of the mix of earnings by jurisdiction.
Net loss for the first quarter of fiscal 2001 was $4 million or 30 cents per diluted share compared to a net loss of 6.3 million or 48 cents per diluted share in the prior year first quarter.
EBITDA was negative 1.6 million for the quarter was improved from negative $4.6 million in the prior year for first quarter.
As we communicated last quarter, we finalized an amendment to our credit agreement that provides covenant relief through.
Our fiscal 21.
And then that removed the leverage ratio covenant, beginning with the fourth quarter of fiscal 20 through the fourth quarter of fiscal 21 in favor of a cumulative.
EBITDA covenant and a minimum liquidity covenant.
Our first quarter numbers resulted in continued compliance with both of these covenants.
Turning to the balance sheet inventory was down just slightly despite a 1.8 billion dollar currency.
Revenue increased.
Domestic operation delivered a $5 million reduction since year end. This was partially offset by an increase at our Dutch operation do.
It really is a customer requested delivery push outs.
By three just volume operating cash flow, let's just $700000 below breakeven.
Capital spending at $1.4 billion for the quarter.
Focus primarily on the new Lufkin facility resulted in negative free cash flow of $2.1 million for the first quarter of the year.
As we enter what we continue to anticipate it will be a challenging fiscal 21 market environment. We will continue to defer all non essential capital spending and expect to invest between five and $7 million during the year.
And now I'll turn it back to John system sales.
Thanks.
Tom It's just mentioned, it's hard to predict fiscal 2021 orders in the second half of the first quarter were improving.
The U.S., leading it leading indicators that we track are all improving we know that our equipment equipment that we're on is being used we know inventories coming down.
What we don't know is how much the second wave of COVID-19 could impact that delayed.
But we feel that we are we are at the bottom and most of the indicators leading indicators are tracking up.
And the inventory we track in the channel is coming down and it is pointing to better quarters ahead.
Having said that we're going to prepare for the situation markets to stay as they are.
We're focused on cash flow liquidity and operational improvements.
And doing what we can to execute our strategic objectives of diversification and work towards hybridization electrification would finally I'd just like to thank our employees around the world to had to do a lot of different things since kogut 19th struck different jobs make things happen to work from home, particularly the employees here in the U.
Yes, where we had most impact most of the restructuring still are working at slightly reduced salaries.
And continues to do an excellent job keep us safe and keep product going out the door to our customers. So that concludes our prepared remarks, and now Jeff and I will be happy to take your questions could you. Please open the line up.
Absolutely. Thank you if you'd like to ask a question. Please ignore pressing star wondering your telephone keypad. If you are using a speakerphone. Please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again that is star one if youd like to ask a question, we'll pause for just a moment hello, everyone an opportunity to signal.
Take our first question from Noah with open.
Please go ahead Sir.
Thanks, Good morning, John Jeff good to be with.
My question is really.
Okay first question is really on.
Managing the cost structure.
Going forward you know if I look at.
You know the current run rate on EMEA.
You know in this in this low revenue environment I mean, it's kind of comparable to you know on a full year basis, where you're at in 2017 right.
Sort of that top of all that the run rate.
My question is really.
Lots about some so some planning optimization adjusting to the new normal.
Thank you can hold the line at this current run rate and then the AE has revenues showed revenue come back.
Or I guess, that's a different way do you think all the planning you're doing like set you up or.
A lower level of M&A spending.
I comparable revenues.
As we kind of look towards a recovery here.
And if so anyway to quantify that.
Any way to qualify that.
Okay I'll try to to answer that one no I would say we can maintain this level of spending at at current volumes. So I think plus or minus where we've cut maybe their places we can still cut but were about.
Going forward.
Where we can be I think we'll get a little bit more savings out of the cost reduction actions without sort of a mid quarter accident in Q1.
Corporate travel is that at a bare minimum all of our sort of discretionary spending is at a bare minimum as we change structure a little bit so for instance.
Successful sale of the facility will allow us to reduce or reduce spending.
But on the other hand as volume comes back.
Activity comes back, we'll certainly have additional spending to drive that additional travel and there's no.
There are likely be the recovery of the of the.
Wage reductions there I think there are pluses and minuses.
But I would say at a at comparable.
Volume levels, we'll have lower heavy there going forward I think that that vessel.
Thats a fair statement that will.
We'll focus on.
Okay no that is helpful. Thanks.
Yeah, John can you talk a little about where you're seeing the signs of life. You said that you feel what kind of at the bottom here.
You are seeing sodium coolers mid quarter, where things picking back up.
And then you talk about how that might translate some mix and where margins go ahead.
That would be to actually helpful Falls.
Sure. So in general the orders have been improving I would say in Europe first.
And again I think it's a function of.
The distribution network not having as much inventory there so as projects come up everyone needs to order something whereas here in North America, our distributors typically hold a lot more inventory than their global counterparts.
So in Europe, and it's been primarily marine a little bit of industrial in the U.S.. We've seen some good activity. Some on some some work both up and down river for sprouts.
Up and down the Mississippi.
Industrial here in the U.S. and again as we were talking earlier in Australia.
The Australian market is doing remarkably well given where the rest of the world is so their orders have been strong.
It hasn't we haven't seen yet in orders, although we've we've had calls Weve discussed project is really yet anything in north American oil and gas that's been very quiet, but again, our distributors I'm pretty much any part that's been needed is already at the distribution level.
Those inventories are coming down and a lot of horsepower the.
The older rigs have been have been scrapped so there are fewer and fewer rigs out in those in the fleet, but their operating so we would expect to see some activity there.
In the next three months.
And then again what's.
More or less stable would be our our military business for you know what we sell to the government and are getting it has little to slow down.
Kind of seeing a co that hang over.
There was a lot of markets have slowed down right away in March as covert hit and then others the orders slowed down a little bit in the summer. So I would say more than that and that the airport rescue firefighting not a lot of quarters over the summer. So that's going to be slow on shipments coming up here in December.
December and January but overall.
We have good weeks and bad weeks, but the trend is improving and if I have to point to the improvement it's going to be in Europe, primarily and then secondarily as the product market marine seems to be improving more than other markets.
Okay, that's helpful and just.
To be clear so to the extent that there is potential for sequential revenue improvement from here.
You should we think about favorable mix on that you know sort of gross margin expansion sequentially.
Or or would you say that there still handle that.
I would I would say there's.
Just trying to get I would say the gross margin there is going to be a little bit of upward pressure.
Not going to be significant.
<unk>.
You know really significant.
Something that's going to push would be obviously, some oil and gas, but just a little bit more aftermarket activity across the board, but right now I would say its marine or industrial.
There are about equivalent on margin. So it doesn't the mix the mix is going to be the same and as Jeff pointed out there is going to be more in.
Improved margin because we have more days at a lower cost structure than we did in the first quarter.
Yep.
I apologize my colleagues here at the firm so too many questions, but I just did want to sneak in one more because you mentioned earlier.
Being a oh.
Our real upswing in hybrid and electric.
Design works, maybe you could talk a little and you and you mentioned, it's very broad based.
Hey talk about what you think is driving that be talk about.
Yeah, I'd be interested in terms of your product portfolio and offerings.
And you know.
Do you believe that we'll start to materially impact.
In terms of evolving towards more fiberglass triple approved and promotions.
Yeah, I'm going to try to give a short answer to a really good question.
It is there's definitely there is no question that in all of our markets all of our geographies. This is number one or number two on everyone's list of things to talk about the skus.
Fortunately its not like automotive on highway where you can design, one hybrid solution or one electric solutions and apply it to a million vehicles.
Case in 0.1 industrial customer you're doing a hybrid solution and they may sell 10 to 12 screens a year at that so it's there's a lot of work in going into it. So we're seeing a huge ramp up in application Act activity.
And I think what you will see and it's again in industrial whether it's construction equipment it could be marine it could be a tug boats it'd be a push boat it could be a patrol boat and.
And then it could be an RFP vehicle, but I think what you're going to see in the off highway markets in our space is a lot of customers.
Building their first couple hybrid and then seeing what the market will bear for them and being able to sell it it doesn't mean, it's a potentially huge.
Shifting to content for us, where maybe we're going to sell a $30000 torque converter, but now we're going to sell $150000 hybrid system.
So there's a chance for companies like us to invest where you don't have to increase the number of cranes are vehicles or boats and our sales to go up now the average margin will probably go down because we're not going to produce all the components that are in that system.
But what's what's what's great to see is that because of our control technology more and more of the customers are looking to us to provide the entire solution. So you can't just fine electric motor throw it into a boat and expect it to work there's a lot of controls work going into that and that.
That is you know one of our core competencies is being able to better manage whether its a diesel engine electric load or a week.
We can manage dual imports into one elsewhere or we can manage you know.
Electrical power into a propeller shaft or axles. So there are more and more of these applications I think we're going to be swapped with applications for the next couple of years sell some initial systems.
But I do think that it.
It will take a while before we see a revolution in the off highway space other than the big guys can't will do their own system volatile do their own system and their equipment.
Come up a little but there are a lot of other players out there. It's just going to it's going to take a little bit of time, but theres going to be it. There's a lot of upfront application work. It duration. It's just going to work what are you trying to achieve so but there's no question that the momentum is there and that's the future.
I appreciate that color. Thank you.
Thank you well nothing for next question from Josh Chan with Baird.
Hi, good morning, John.
Hey, Josh.
<unk>.
Well I mean, right John I guess I was wondering if a you feel a little bit better about the oil and gas market now than you did maybe a couple of months ago, and if that's going to become more positive I guess, what has and they said that they are improved.
The improvement there.
Yeah, just I guess ill.
I'll take the $40 now to to negative futures a few months ago for sure.
No what I feel good and talking to some customers.
The equipment is being used we know our equipment is being used heavily and be available horsepower continues to come down as customers scrap and tire spread.
Spreads so.
I think.
I truly believe that there is an opportunity for a much better market in fiscal 2021, I think one of the only thing that.
Needs to change and that where the second wave of coal that could delay it a little bit is just travel whether its business travel air travel just general travel is down and so there isn't there isn't that demand for more oil and more gas.
But there's very limited I think she'll be surprised at how.
How much the available horsepower has come down so.
So I don't think its going to take much whether an increase in demand a higher price definitely will help but just an increased demand in oil and gas could have a huge impact on on.
The North American market next year.
So I would expect it to start improving you know throughout calendar 2021.
Thanks.
And then if I could jump over to the Europe I guess, you mentioned Oh led I think some of the.
Governments over in Europe has kind of been increasingly.
Putting on more restriction so.
What are you seeing over there and any chance for potential bad disruptions in our operations.
So far so yes, we've been hearing from our employees in Europe, particularly.
In France that they are you know stay at home restricted travel.
So far.
You know.
All of our facilities are going to remain open I think.
By and large I think where we are so, Belgium, Netherlands, Italy, and Switzerland are going to do everything they can to keep manufacturing facilities open.
If there is a shutdown, we'll we'll deal with it I think we get a very or our managed our operations team did a great job managing through that this spring so.
I know, we can do it again, but yet there's the potential for disruptions from suppliers and end customers not being open to receive product, but you.
You know we managed I think we managed through it very well. This spring I think we'll do a better job. This time, just because we've had practice.
And everyone's everyone everyone knows how to do zoom calls with all of our customers and suppliers. So.
It potentially could have a a an impact but I don't think it will be as big as it was in the fourth quarter for us.
Okay, and then I guess the last one I have is that I think you talked in the past you know about trying to make the company at a little bit less reliant on oil and gas market and just wondering if that's sort of still that aimed and then you know how are you thinking about that.
That's right.
As Josh absolutely.
Diversification away from oil and gas without you know, we don't want to give up the market. We think were very good player, but we want to grow the other parts of our business much faster and that is that has been the reason why we've been pushing so hard doing as much research developing relationships with partner.
Partner providers for the hybrid system as we can because we want to emphasize and grow you know our marine market.
Our industrial market, whether it's construction or whatever outside of the oil and gas space. So you know.
A lot of our focus on on this hybrid electrification is growing those markets other than oil and gas, we still see a strong demand, particularly for gas for a long time just for like you know generating electricity.
But a lot of our product development, you know is focused away away from markets tied to oil and gas.
And we'll continue to be.
That's great. Thanks for the color.
Thanks, Jeff.
Thinking with your Thats Star one if I could ask a question, we'll hear next from Barry Haimes with Sage asset management.
Hi, Thanks, so much for taking my questions.
Couple of questions on the cost structure. So if we.
Take the first quarter as a baseline if you will when lufkin is fully up and running and operating normally.
How much cost will you save versus the first quarter, either because you got an extra expenses to get it up and going in the first quarter.
And then this with a lower run rate expense to produce the same products and new facility. That's the first question. Thanks.
That's a good question, we didnt have a I would say a real significant increase in cost in the first quarter to get it up and running.
You know Weve used you know our own people to move things.
Yeah, we would capitalize certainly some of the costs down there to get a good equipment and then I guess the building up so I think what we'll see and it's and it's probably not until next fiscal year when were up and running the benefit of the efficiencies of the new.
You know the new production line, that's put in down there.
A better approach to the manufacturing of that product.
I hesitate to give you a quantification of that or a margin impact on that.
But we definitely expect to see improved margin in our industrial product, which should also drive.
From a volume and a more competitive.
Pricing more available.
And shorter lead times, so I'm, you know sort of hitting on all those good things out that product growth.
Okay, Great and then.
The other question again sticking on the cost side is.
The the sell through was seen could you talk about what sort of range of proceeds you might expect from that.
And then again in terms of reduction in cost structure, you know in terms of their costs are real estate.
Any feel for that thanks.
Sure I mean, obviously, we're just we're just hitting the market on on the building. So you know it's.
It's a pretty wide open range right now I think you know what Weve been told is yeah, we could expect something in the $3 million to $5 million range for the facility.
But maybe as important to US is is what you mentioned acts as the cost savings.
And you know, we see that as roughly its cost $50 million a year right now to operate this facility. So that's.
A huge chunk of cost that really isn't contributing in a meaningful way.
Through the business so.
A big incentive for us to move very I'm, sorry, I didn't catch the another <unk> what was that cost number sorry.
Roughly a million dollars a year.
Okay. Thanks.
Yeah. So Barry this has been the building that we're talking about as our corporate headquarters, which was the original plan.
And we haven't done.
Any assembly or manufacturing here in about.
About eight years, so it's just a corporate offices the sales offices here.
And we hold excess slow moving inventory for the plants across town.
A lot of that inventory is industrial so at Lufkin coming online you know a lot of what was in this building is going to be headed down to Texas.
We just opened up in the aftermarket facility and 2018 out near I 94 to be you.
You know much easier shipping what regular shipping instead of having to come eight miles east of I 94 to pick up. So you know with work from home and cultivate it was easy to it was easy to imagine everything that was happening here at this location either going to Texas or one of the other two facilities the plant which.
As office space, and aftermarket, which can hold the rest of the the inventory so.
What's nice Jeff mentioned <unk> million dollars, what we would save on annual expense here, you know basically more than pays for the lease payment in lufkin. So.
If you combine the two together, bringing luskin on online and eliminating this facility, it's definitely a gross margin improvement.
Got it and then and then last question just actually asked me since you mentioned that.
Have you any sort of work from home and how that's worked for a number of different functions. If you were to take the non manufacturing employees and had to take a shot at you know what what percent do you think will work from home going forward versus you know what percent will go into an office, which is kind of.
Curious as you look at it how that works. Thanks.
That is a very good question. There's there's two part I I have Ah that could say that I'm amazed, but our finances Nikkei group you know.
Done incredibly well exceptionally well almost not being here at all other than to pickup checks and deposit them in the banking and summit.
Demonstrated they can they can do it from home 100% of the time right.
We've done that with engineering HR sales.
Sales has had to do with customers you know if they can't see customers. It's you know we tried to get back to 25%, but we saw the spike in where in the hotspot in the country in Wisconsin, So that slowed down a lot of other companies here. It's a good question I don't know if it's 50% that's one of the things.
You know that that that led into the and why we haven't made a decision on where we're going to potentially if we can't fit into facilities, where would we had a corporate headquarters.
How many people are going to be able to work from home continually that's one of the things we want to address.
You know how many want to work from home can work from home, how many want to come into the office, but.
I think we're going to start with the assumption.
That it's going to be in that.
You know, we have 50% to 75%.
Coming in have you know of the employees and that's going to be kind of our.
Our model to think about going forward or planning office space, but in this market the traffic and where we are located where we're it's it can be it for people to get to downtown were seeing so I you know I wouldn't be surprised if our numbers are higher from people working for.
Oh very.
Great. Thanks, so much appreciate it good luck.
Thank you.
Hey, Kevin at this time. It appears there are no additional questions in the queue I'd like to turn the conference back over to management for any additional or closing remarks.
Thank you Cody.
Thank you everyone for joining us on 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 or email, Jeff or myself and we look forward to speaking with you again following the close of our fiscal 2021 second quarter, Tony and I will turn it back to you.
Thank you so much that does conclude today's conference. Thank you all for your participation you may now disconnect.
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