Q2 2021 Twin Disc Inc Earnings Call
Okay.
[music].
Please standby.
Good day and welcome to the Twin disc Inc. Fiscal second quarter 2021 earnings Conference call. Today's conference is being recorded at this time like to turn the conference over to Stan Berger. Please go ahead Sir.
Thank you James on behalf of and management.
We're extremely pleased that you have taken the time.
Maybe on the call and thank you for joining us to discuss the company's fiscal.
21 second quarter and at first half financial results and business outlook.
Before I introduce and manage through it.
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 on forward looking statements.
It is important to remember that the company's actual results could differ materially from those projected in such forward looking statements.
Information concerning factors that could cause actual results to differ materially from those and the forward looking statements are contained in the company's annual report on.
And on form 10-K copies of which may be obtained by contacting either the company quarter.
And that and you should have received a copy of the news release, which was issued this morning before the market opened if you have not received a copy please call me and not be at 262.
688, 4000, and she will send the copy to you and.
Hosting the call today are John Batten twin disc Chief Executive Officer, Jeff Knudson, The company's Vice President of Finance, Chief Financial Officer, Treasurer, and Secretary at this time and I will turn the call over to John Batten John.
Thank you Sam and good morning, everyone welcome to our fiscal 'twenty, One second quarter conference call as usual, we will begin with a short summary statement and then Jeff and I will be happy to take your questions.
Before Jeff goes over the quarterly results I will touch on some of the operational highlights are headwinds that we faced in the quarter again and that the.
The fall timeframe, our second quarter, we faced again, a lot of our distributors and end customers working down inventories within the pipeline.
And we've seen that come and that trend start to reverse and orders and the backlog improved and the quarter I thought our team did an excellent job navigating and and continued continuing COVID-19 pandemic and ongoing staffing issues due to quarantines.
Obviously, having people out and the plants here and we're seeing 15% to 20% of the staff, but there are a lot of increased efficiencies and some extra overtime on people who were not on <unk>.
Cash at the top line net that we faced and the second quarter was due to aftermarket and obviously aftermarket.
<unk> come in at a higher margin and a lot of that and this was due to a lot of decreased activity the ability to do rebuild out and the market and we've seen that trend reverse as of late as far as incoming orders and the quarter and that continued into January and facility in Lufkin did come on line in late November early December and we start.
And producing and shipping our some of our mechanical clutch line and all of the Mccann on the rest of the mechanical clutches and <unk> were transferred there over the holiday shutdown.
Orders in the quarter did show some improvement.
And our backlog as you've seen on the press release did increase during the quarter.
We saw strong orders at our vet subsidiary, we saw and good orders in Asia, and Australia, and a lot of the U S and European core markets, obviously activity in North American oil and gas remains extremely low, but we did see some aftermarket demand and orders at the end of the quarter and we are seeing some re.
<unk> activity and some of our customers starting in January.
We did have a nice increase again and projects for hybrid and electrification and our application and engineering teams are very busy.
And with projects and most of our core markets, whether it's industrial marine and oil and gas and we are expecting.
Net more orders.
As these projects come to completion.
With that I'll turn it over to Jeff for some comments on the financials before I come back for and outlook.
Thanks, John and good morning, everyone I'll briefly run through the fiscal 'twenty, one second quarter numbers sales of $48 $4 million per the quarter down and $11 1 million or 18, 6% per the prior year second quarter.
The quarter declined from the prior year was the result.
And the continuation of a generally weak global economy due to the ongoing effects of the COVID-19 pandemic.
Compared to the prior year second quarter transmission sales were down 28, 7% industrial sales down $8, two and marine and propulsion down $18 one.
By region sales and in North America were down 35% sales into Europe were down 17% and sales into Asia Pacific were actually up 11% on.
And proving Australian market demand and relatively stable demand for oil and gas transmissions in China.
Foreign currency exchange on the net positive $2 1 million impact to sales.
For the quarter.
For the first half sales were down $24 2 million or 24% with currency translation contributing a positive impact of 369 and compared to the prior year first half.
Second quarter margin percent was 19, 6% compared to $26 four and the prior year second quarter.
And and margin percent was primarily a function of the reduced volume and then and a very unfavorable product mix with a significant decline.
And aftermarket volume and shipments into North America oil and gas market.
Gross profit for the first half finished at 29 compared to 21, 3% for the fiscal 'twenty first half.
Spending on marketing engineering and administrative costs for the fiscal 'twenty, one second quarter decreased $2 4 million or 15% compared to fiscal 'twenty the day.
And primarily the result of reduced payroll cost bonus expense corporate travel amortization expense and marketing activities.
Along with the reduction and all North American wages will continue to aggressively pursue cost reduction opportunities to compensate for the decline in gross profit.
As a percent of revenue for the second quarter.
And with expense was 28, 8% compared to 27, six and the prior year second quarter and.
For the first half M&A spending is down $5 8 million or 17, 6%, finishing at 28, 5% of revenue.
Compared to 27, six and the fiscal 'twenty first half.
A restructuring charge of 120000 was recorded and the second fiscal quarter, primarily related to actions to adjust cost structure at our domestic operations and ongoing cost reduction and productivity actions at our European operations.
With reduced second quarter volume and challenging product mix, we reported an operating loss of $4 6 million and in the quarter compared to a loss of $5 million on the prior year quarter and slight improvement.
<unk> share of the prior year impairment charge, partially offset by the volume decline unfavorable mix impact.
First half operating loss of $7 8 million reflects a $4 million improvement over the fiscal 'twenty first half.
Significant other expense of $1 7 million for the quarter and $2 9 million for the first half is primarily due to translation losses on euro denominated liabilities to the weakening of the us dollar.
The effective tax rate for the fiscal 'twenty on second quarter was 38, 1% compared to negative 19, 2% for the.
Same period last fiscal year.
And the current year rate benefited from newly enacted regulations related to the guilty provision on the tax cuts and jobs Act.
Net loss for the second quarter of fiscal 'twenty, one was $4 3 million or <unk> 33 per diluted share compared to a net loss of $6 five.
And a <unk> 49 per diluted share on the prior year second quarter through the first half and reported a net loss of $8 3 million or <unk> 63 per share compared to $12 8 million.
<unk> 98 per diluted share and the prior year first half.
EBITDA was negative $3 6 million for the quarter was reduced from negative $2 million on the prior year second quarter and for the first half EBITDA was negative $5 $2 million is $1 5 million better than the prior year first half.
As we work through the second quarter with little market improvement. We determined there was a high likelihood that we would not meet the minimum cumulative EBIT covenant for the quarter.
As a result, we have entered into a forbearance agreement with BMO, which relieves us of the EBIT to covenants through September 30 of 2021.
And this agreement also reduces our maximum capacity to $42 $5 million and the current and $45 million for the forbearance period and include some additional reporting requirements, which are described in more detail and the 8-K filed earlier today.
Turning to the balance sheet inventory was up $1 6 million due to a $4 9 million currency translation, driven increase partially offset by a significant reduction at the North American operation.
With a focus on liquidity and cash flow, we were able to generate $3 5 million of operating cash flow and the quarter, bringing free cash flow to essentially a breakeven through the first half.
Capital spending.
At $1 4 billion for the quarter was focused on the new Lufkin facility and modern machine tools and testing equipment.
As we remain in a very challenging market environment, we will continue to deferred all nonessential capital spending and continue to expect to invest $5 million to $7 million during the fiscal year, and then I'll turn it back to John for some final comments.
Jeff and I will have just a few comments on the outlook as we've mentioned orders and backlog improved and the second quarter and we saw that across most markets, including oil and gas and some spare parts orders and we expect our markets and core markets to improve throughout the year, obviously oil and gas may improve a little bit.
Towards the latter half of the year.
We are seeing as I mentioned, much better demand and our aftermarket spare parts orders the order rates in January were double what they were throughout the summer. So that gives us a lot of optimism heading into calendar 2021.
Our focus remains diversification through the growth of our other markets outside of oil and gas primarily industrial with our new products coming out whether it's the <unk> or they are Aro PTO line.
And it can be produced at the Lufkin facility and again, our focus on how we participate whether supply and the complete system and hybrid and electrification are how we provide the key components that work in and the general systems. We will continue with those product development efforts throughout the year and continue to rationalize.
Our investment in bricks and mortars, whether it's in North America or in Europe.
That concludes our prepared remarks, and with that now James I'll turn it over for questions.
Thank you, Sir if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off tomorrow, you will treat our equipment again press star one to ask a question.
And we'll take our first question of day from Noah Kaye with Oppenheimer.
Hey, good morning, John and Jeff.
So let's start with.
The transition.
And ramp up Lufkin.
I understand.
Maybe you can talk a little bit about how the transition.
And is going and how you see.
Revenue and capacity ramping at loft and hold up here.
The next day.
The revenue do you think that can support and.
And how much of that is incremental and then just to clarify as did you have any sort of production slowdowns or and the lost revenue in the quarter from the transition or do you expect any.
Thanks.
I know I think it is John.
Probably.
Probably so lufkin will probably be for the first 12 plus months about 1 million to 1 million five of shipments a month as we transition the units that were being produced here.
And we're seeing.
And that facility.
And we easily that facility depending upon what units go there we have the bricks and mortar their phase 150000 square feet, we easily could.
It could go to $30 million to $50 million, depending upon the value of the units that are produced there. So we have considerable room for growth there.
So the incremental I wouldn't say, they're as much incremental business there, it's moving business from Racine.
But given the extra room and the capacity there and the team focused.
We are determined to grow our industrial business and growth in a way that we could not have done it and we're seeing given the constraints here. So part of the plan with Lufkin is to move obviously the industrial production. There we moved the inventory we free up room here and we're seeing we have three facilities currently.
And we're seeing county, we have corporate headquarters.
First street, which is their main manufacturing plant and then we have and aftermarket warehouse out on on the Interstate.
So the plan is once <unk> is up and running we can consolidate.
Some of the facilities that we have and in machine here for further savings so.
On the long term plan is growth and for our industrial business and Lufkin, which will then allow us to consolidate some of our facilities here and we're seeing.
Yes and.
And then I would say that run rate there is there is.
A lot of untapped markets, you could play and but can you talk a little about your strategy for growing industrial sales and markets.
Applications range is where you. Thank you.
Have those and they will close.
So it's our biggest potential for growth is in the industrial markets and it's with the clutches and the PTO lines, we're doing a lot of projects and a lot of development on being able to plug and play into hybrid and electrification efforts, all many of which require motors and English.
Hyatt require gearboxes with motors and control systems.
No.
Whether it's expanding our hydraulic PTO, which typically are larger horsepower than the mechanical ptos or remote remote control activated mechanical PTO lines.
Our pump drives and gearboxes, so pumped driver AAM line basically and our hybrid application connects behind the diesel engine and provide inputs, whether it's a hydraulic pump or and electric motors.
So as more and more applications shift to hybrid and electrification we have pieces.
Net plug and very nicely to that so it's growing the core and the existing and just the purely internal combustion engine part of industrial but then we see a lot of the growth in the hybridization and electrification area. So.
It is across all markets it could be recycling construction.
Biomass.
And some oil and gas applications. So we're really looking to grow and have the focus and the capacity of our facility that is not on different cycles.
So well.
And with Lufkin facility will be solely dedicated to the industrial business.
Okay, great. Thanks, so much.
Thanks Noah.
Next we'll hear from Josh Chan with Baird.
Hi, good morning, and non-GAAP.
Right.
Alright.
Yes, so on selling on the on the prior question about the strategy and to grow on industrial I guess.
And we'll do that kind of require you to book with New Oems and you haven't weapon and deposits or are these usually with Oems and they have a relationship with them and how.
And when you talk about those.
Yeah.
Josh it's both and all of the above it is working with our existing customers as they venture into hybridization and electrification.
And it's working with new Oems that we that.
We haven't worked with before and then a lot of it is working with with partners because as I've mentioned in previous calls.
Where that one company can provide all of the components and the solution. So we find ourselves working with electric motor manufacturers people, who do the inverters.
Other controls companies.
And so it's it.
It is a.
It's not a one size fits all solution and what we're trying to do is look at our traditional customer base and other customers that we don't have.
<unk> worked with them on solutions that they need and then try to put together the solution for them and we can provide all of that while we can provide part of it or that we have the products that plug into a hybrid solution or and electrification solution and if someone else's providing so.
It is all of the above.
Our main effort my effort and.
The management team is to focus in on the solutions and they're going to provide the best return and the near term. So we can't obviously, we can't focus on everything we have to sharpen our focus and that's what we've been concentrating on the last year is working with key customers that have been long term customers and then and then.
And it's exciting stuff for us working with some new customers.
Okay.
Good day here.
And I guess my next question is on the on the oil and gas business.
Does the backlog improvement may include some of the improvement that you expect to see.
The next couple of quarters and and.
And I guess broadly with respect that the replacement cycle.
How do you expect the pace of that to come through I know there and the past.
Newbuild prices have been sort.
Sort of all at once but.
On the replacement kind of some of that and a more gradual pace.
Yeah, so josh and improve and the backlog and I'd say this.
Unit demand improvement for Asia.
Some spare parts.
Manned improvement here in North America.
A little bit stronger demand on some of our distributors. So they've had some inventory that they're able to get out of their.
And their inventory and <unk>.
We will soon see being replacement orders on us.
I don't see I don't see a a new unit demand for new construction like we saw and.
2018, 2017, 2018, or 2011 and 2012 line, we'll see one.
Maybe at the end of.
Second half of this calendar year, but I think you'll see a steady improvement.
Some rebuild activity.
And again.
And we're waiting to see as is transportation demand to get back to even though what.
It was before the Covid pandemic get demand demand on oil up and that will drive production and make people more comfortable about investing and rebuild activity.
Yes.
And then I guess last question is how should we think about it.
Ability.
Leverage the MBNA line.
And I guess, presumably.
And next.
And next year.
And can we expect and see some leverage there are some.
Expenses kind of come back on.
Yeah.
Yes.
And as Jeff and Josh I think.
As we recover to sort of more normal market conditions and some of it makes sense, we'll come back. We've obviously done a lot of a reduction and some of those permanent some of those you know the wage reduction for instance on the bonus program on that kind of stuff.
Would come back in normal times, but I think we have done a good job of really making.
On a sustainable reductions and our cost structure on the other day.
Thank you for free at that.
We'll move on to Rand gearing with Neuberger Berman.
Hey, guys.
Hey, Brandon.
I guess.
I think one of the day the healing.
The next couple of quarters and you talk on perspective.
John.
John.
And.
And therefore and avoid.
And again.
So.
I'm, just wondering about sort of the free.
Free cash neutrality.
I'm not sure if on the working capital over kicks back and we've talked about expenses maybe a.
On a GAAP what's your.
The conviction that you can sort of keep out on.
And the cash burn and the second half.
And as we've talked about the first couple of quarters that that's our focus and we're happy with where we are I think I think we have the ability to continue to.
So to stay neutral I think on.
Honestly any activity and north American oil and gas is only going to help us we have inventory to support that demand and that can turn into cash very quickly.
And as John pointed out we're starting to see some of that aftermarket demand and so we're still in my mind, we're still focused on staying neutral and.
Athlete and cash and.
Fiscal year.
Most of the orders and you say well most.
And most recently are those sort of book and ship.
Repricing.
Outside of the year fiscal year.
And what can chip in it.
The book and ship, Yeah, essentially book and shift and the aftermarket.
Segment Okay.
And any update on the sale of the force.
<unk> headquarters.
No it's been I would say.
Relatively quiet we've had one interested party, but nothing nothing to report.
Okay and.
And that's it on the market growth.
I think the list prices for three.
Okay perfect.
Grand Geneva Clean office.
And they've got very welcome.
Yeah.
Okay, good well, obviously that we're bringing a little bit on liquidity.
Monetize.
Okay. Thanks.
And check on those items.
Thanks Ryan.
Okay.
We have a question from Jim Tim chatter with Maryland and investments.
Good morning.
Hey, Kevin.
Yeah.
On the liabilities, which you referred to the Euro base translated navies and we keep dollars can you give any more detail as to what that is.
<unk>.
Sure we have part of our revolver as is.
As a euro based liability was the stat that we.
Took on when we acquired the vet.
Subsidiary.
And a half ago.
So that's denominated in euro and that's the biggest piece of it.
Got it thanks and.
Just for my Edification.
Land transmission shipments.
What how much of that is.
Specific wins.
Yes, I mean, obviously that's.
Our most cyclical.
Piece, so right now.
And it's probably 20% oil and gas.
All Asia Sn.
Essentially all Asia.
Right now, but it can be over 50% oil and gas weighted.
And it's at its peak.
And.
To what extent do you think.
Progress on gross margin for Q2, and so work.
Relies on North American natural gas recovery.
Sure.
Sure.
Looking around the corner question a little bit.
And your gross margins here and kind of sub 20, guys. Thank you.
And on the X gene problem and this quarter, but I'm, just curious north American natural gas Inc.
And with oil and gas and.
Higher gross margin piece and that segment. It really is a driver for gross margin or is that and that's the case.
It is it is a driver and I think.
That's when you go back to some of our best quarters. When we were in the mid thirties, and that's really high and North American oil and gas activity I think we can get.
Can get improved margin certainly without a significant move and oil and gas but.
But to get to where we all want to be which is back.
Back around 30.
And it's going to require some north American oil and gas at least and AR and the near term and we're working on a lot of things to drive improvement.
And both our cost structure and new products to improve margin, but right now yeah that north American on oil and gas and the aftermarket component on that.
<unk> is a big driver of our mix impact.
And margin.
Performance.
Yes.
From a big picture perspective, do you see in case of oil and gas cycle is any different from prior cycles and refused or are you on the assumption that activity and we'll come back and cash always.
Cash.
This is John and Tim.
It will come on.
I do not think the next way it will be as big as the one five years or.
Three years ago.
There.
People will be more tempered on investment.
I think the.
The long term outlook is still good.
We still need to generate electricity and natural gas as you point out is the primary source of electricity.
Renewables are coming on line and increasing that percentage every year, but.
But I still think theres, a huge role for natural gas and.
And that mix for electricity and to and honestly that that plays into our strong strong suits because that's typically the higher horsepower fracturing legs and that tends to our 8500 transmission fits in perfectly there so.
Long term optimistic that we still have a very strong market.
I think everyone who's in the market ourselves included.
Would like it to be more balanced and steady state then and binary if either being all on or all off.
That's our hope we would take years.
Lower demand per year over more years than all or nothing and a year and a half or two years.
And then the cycle turn off again.
But we're optimistic.
And there will be some new rig construction were also.
Some retrofit and rebuild activity.
Again I think.
We would've seen more of that and calendar 'twenty.
2020, if it were not for the pandemic that put a lot of capital spending plans on hold this demand plummeted and the price of oil plummeted. So.
We see a reversal of that trend and I think a lot of it has to do it'll be it'll be completely not completely but very much tied to.
The general economy improving.
Post Covid post vaccine and if I had to guess I had a crystal ball.
And once we get to a widespread activity where people feel comfortable on moving in and around the economy and traveling again.
And see some noticeable increase and rebuild retrofit new construction.
Quarter or two after that would be my best guess.
So if we have something late spring summer.
Sure.
A more normal economy is moving people and moving around and there's a better demand for oil I think it would be within a quarter or so you would see you would notice that across the board on some equipment manufacturers.
Bill.
Believe it or points here.
I think.
Is there a is there a weird simple.
And maybe it will.
And the U S went through sort of the 567 year cycle work again and has tremendous growth and Jane.
Global oil and.
And <unk> million.
And.
The 11, 12, 13, and I think it's worth peaked out.
In 2019.
With all of the OPEC plus and <unk>.
Trees.
And having their production substantially to support last year.
Is there really going to be a.
Are we not on a slow decline in the.
Production for the next several years.
Net dynamic change and that would that would be kind of day.
And the framework.
He'd be walking and are.
And you wouldn't be looking at every day.
And domestic oil production so much interest would it be.
Steady decline because and tech plus is really.
The supply and control at this point, it's not where on a completely different paths and where we were.
And <unk>.
<unk> and into 2018 and he just said.
And that's something that I guess Jonathan.
What's your view of the world.
Hi, its rice.
And I wouldn't disagree.
But I would say that is still on the base production if I take your assumption that north American oil and gas production North American oil production.
Well it will have a steady state decline.
That is certainly that is a scenario that's one of the most likely scenarios, but again.
Theres still production and the equipment needs to be replaced.
And.
Pressure pumping and it's a.
And he is an integral part of that.
And we see more we've seen less investment offshore and deepwater so more and more of the swing production and demand I think is going to be onshore.
So the market may not be as.
Big or growing but the equipment absolutely has to be replaced.
On rebuilt and.
And maintained.
And again, we're not.
Tim I guess, nothing surprises me and oil and gas meeting day.
And any little event or hiccup and the mid east.
And could.
Could change.
Opex plans and we can't forget that OPEC.
No.
And as nations they need oil prices to be a lot higher just to fund their budgets, which is not the case here and the U S and.
That said and the path, it's an asymmetrical battle of war if you want.
U S producers and Canadian producers are basically competing with nations.
And Russia, and OPEC, they need or I mean realistically for their fiscal budget, they need oil around $100 to pay for all of their social programs. This country doesn't candidate doesn't and so.
All that's doing is driving Canadian and American producers to be more efficient.
So I.
Again, Jim nothing surprises me, but certainly and our planning and that's one of the reasons. We wanted to diversify we still want to get everything we can and oil and gas on North America on onshore because we've seen the pressures that are offshore.
But again, why we want to grow our business outside of that because we'll take the bubble provided our base business is growing other places.
Great.
Helpful.
And just your thoughts on the planning aspects of it I appreciate that.
Alright, Thanks, Tim.
That will conclude today's question and answer session I will now turn the conference over to Mr. Batten for any additional closing remarks.
Thank you James and thank you everyone for joining our conference call today as always we always appreciate your continuing interest and twin disc and hope that we've answered all of your questions. If not please feel free to contact Jeff for myself, and we will try to get back to you as quickly as we can and we look forward to speaking with you again following the close of our.
Fiscal 'twenty, one third quarter and with.
That James and ill turn the call back to you.
Thank you Sir that will conclude today's conference. Thank you for your participation you may now disconnect.
And.
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