Q3 2021 Twin Disc Inc Earnings Call
Good day and welcome to the Twin disc, Inc. Fiscal third quarter 2021 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Stan Berger. Please go ahead.
Thank you Christina on behalf of the management of twin disc. We're extremely pleased that you have taken the time to participate in our call. Thank you for joining us to discuss the company's fiscal 2021 third quarter of nine months financial results and business outlook.
Before introducing management I would like to remind everyone that certain statements made during this conference call, especially those that.
Net state managements intentions hopes beliefs expectations or predictions for the future of forward looking statements.
It is important to remember that the companys 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 in the forward looking statements are contained in the company's annual report on form 10-K copies of which may be obtained.
But the content.
Neither of the company or the SEC.
By now you should have received the copy of the news release, which was issued this morning before the market opened if you have not received a copy. Please call me Inaki of 2626 384000, and she will send the copy to you.
During the call today are John Batten twin disc, Chief Executive Officer, and Jeff Knudson, The company's Vice President of the Finance Chief Financial Officer, Treasurer, and Secretary at this time I will turn the call over to John Batten John.
Thank you Stan and good morning, everyone welcome to our fiscal 2020 one of the third quarter conference call as usual, we will begin with the short summary statement and then Jeff and I will be happy to take your questions.
Before Jeff goes over the quarter results I will touch on some of the some of the operational highlights from the quarter. Our global team continues to do a great job keeping our employees and their families safe while continuing to operate the business.
More so than in North America, we saw significant challenges both in Asia and Europe are COVID-19 cases, ex COVID-19 cases rose and work our in office work became more restricted for our teams in those two regions did a fantastic job keeping the facilities running employees safe and product moving to the customer.
You can imagine twin disc along with everyone else face several COVID-19 related supply chain issues in the quarter, especially.
With respect to container ships inbound from India and container ships outbound to China. Unfortunately, we expect that this will continue to linger through mid summer.
Until things get get back into full swing and and and.
Ships are moving more freely.
As I mentioned at the last quarter conference call of our facility in Lufkin came online in late November and early December. It is now in full production of our mechanical clutches and P. T O and we continue to staff the location for the future sourcing and planning employees engineering and sales are all being added as we speak in the fourth.
Quarter, we will be moving our remote remote actuated Ptos and then followed by our hydraulically actuated ptos in in our fiscal 'twenty two.
Orders in the third quarter started off strong and it seemed to take of spring break vacation with the rest of the country in late March but I'm happier for it that April orders are back in line with what we were seeing in January and February continuing the quarter over quarter of improvements that we have seen since last summer.
As Evan mentioned in previous calls, our R&D and project activity in hybrid and electric electrification continues to increase and we've rolled out of.
The goal of electric portion of our website that lays out our product development plan for for our future products and our global off highway markets.
We continue to work through the inventory at our distribution partners and new unit orders on the factories continues to improve we saw this improvement first in Europe before we saw it in North America, but we're starting to see that trend in North America as well.
Happy to also report that were starting to see rebuild activities for our North American.
Frac rigs at our distribution, both in Canada, and the U S.
Our new oil and gas unit shipments to Asia remained steady and should increase later in this fiscal year and into the.
The fiscal 'twenty, two and our projects in the global Marine markets remains strong and we should start to see improving orders continued improving orders and shipments throughout the remainder of the year with that I'll turn it over to Jeff for some comments before I come back on the outlook.
Thanks, John and good morning, everyone.
Briefly run through the fiscal 'twenty, one third quarter numbers, the sales of $57 6 million for the quarter were down $11 million or 16% from the prior year third quarter.
The quarter a decline from the prior year was the result of the generally weak global economy due to the ongoing effects of the COVID-19 pandemic.
Per the prior year third quarter transmission sales were down $13 four per cent industrial.
<unk> down 14.8% Marine propulsion down 23 two per cent.
Looking by a range of sales into North America were down 29%, while sales into Europe are down 10% and sales in the Asia Pacific were down 6%.
Foreign currency exchange was a net positive $3 9 million dollar impact of sales in the third quarter and for the first three quarters sales are now down $24 2 million or 24 per cent compared.
Compared to the prior year foreign currency translation contributing a positive impact of $7 5 million compared to the prior year first three quarters.
The third quarter margin percent was 24, 2% compared to 24.1 per cent of the prior year third quarter the.
Third quarter benefited from the employee retention credit for which contributed $1 $2 million two of the gross profit for the quarter adjusting for the benefit gross profit would have been 22 point of 1% of sequential improvement and reflecting an overall continuation of the less profitable mix of revenues with declines in the aftermarket volume in the.
Shipments into the North American oil and gas market.
Gross profit for the first nine months of finished at $21 four per cent compared to $22 three per cent for the fiscal 29 months.
Spending on marketing engineering and administrative costs for the fiscal 'twenty, one third quarter decreased $2 2 million or 14 per cent compared to fiscal 'twenty.
The decrease is primarily the result of the reduced payroll cost amortization expense and marketing activities as well as a 600000 dollar of favorable impact from the employee retention credit I just noted.
We continue to aggressively pursue cost reduction opportunities to compensate for the decline in revenues.
As a percentage of revenue for the third quarter I mean, the M&A expenses were 22, 9% compared to $22 four per cent of the prior year's third quarter and for the first nine months I mean are they spending is down $9 1 million or nearly 19%, finishing at $25 six per cent of revenue compared to $25 seven per cent.
For the same period last year.
Our restructuring restructuring charge of 251000 was recorded in the third fiscal quarter, primarily related to actions to adjust the cost structure at our domestic operations and ongoing cost reduction and productivity actions at our European operations.
The prior year third quarter operating income was impacted by $27 $6 million impairment charge. Excluding this charge operating income was essentially level with the prior year on reduced volume of nearly $11 million for.
For the first nine months of the operating loss of $7 2 million reflects the $3 9 million dollar improvement or the fifth.
For the fiscal 'twenty first nine months exclusive of the prior impairment charge.
The effective tax rate for fiscal 'twenty, one nine months of 28, 9% compared to just $8 nine per cent for the same period last fiscal year.
The impairment loss recorded in fiscal 'twenty of resulted in a decrease to the prior year rate of 13, 8%.
During the current fiscal year of the company was able to take advantage of the newly enacted high tax exception of regulations, resulting in an increase to the rate.
The net profit for the third quarter of fiscal 'twenty, one was a 100000 or one cent per diluted share compared to a net loss of $25 2 million or a dollar of 92 per diluted share of the prior year's third quarter.
Through the first nine months, we reported a net loss of $8 2 million of 62 cents per diluted share compared to $38 $1 million of our $2.89 per diluted share in the prior year comparable period.
EBITDA of of $3 8 million for the quarter was improved from negative $24 9 million in the prior year third quarter for the year, So far EBITDA of $1 3 million as over $30 million of improved over the prior year.
Turning to the balance sheet inventory was down $5 5 million in the quarter at $3 9 million year to date. Despite the $3 2 million dollar currency translation drove an entries where the focus on liquidity and cash flow, we were able to generate $2 2 million of operating cash flow in the quarter.
Bringing free cash flow of the positive $1 2 million for the first nine months capital spending at 1.1 day for the quarter of $3 9 million year to date has been focused on the new Lufkin facility in the modern machine tools of testing equipment.
And absolutely remain at a very challenging market environment, we continue to defer all nonessential capital spending and continue to expect to invest roughly.
Roughly $5 million to $7 million during the fiscal year.
And with that I'll turn it back to John for some final comments.
Jeff I'll just spend of a couple of moments on the outlook as mentioned earlier in the call are.
April orders of rebounded from the little bit of a March lull, which continues our thought that our markets are going to be improving throughout the calendar year, we've seen upticks in order and spare parts of new units and we've seen some activity in north American oil and gas rebuilds.
So optimistic that our markets continue to improve from their lows of late last calendar year during.
During the last 12 months as everyone hasn't been of analyzing how we do business in.
As travel continues to open up we will begin to implement some of the changes that we had been planning with respect the facilities further cost reduction activities and new sourcing initiatives.
You can imagine much of this has been difficult to do via email or video conference. One of the first things that Youll see is as I've mentioned in calls our corporate headquarters and are the original plant here in Racine about 186000 square feet represents about 30% of our square footage and there we're seeing area.
Given work from home.
Modernizing the plant the twenty-first street, taking old machine tools out we have room to fit almost everyone from this facility into our larger plan to cross town and in our aftermarket facility, we may need to lease some office space, but.
You'll see us winding out of this facility throughout the calendar year and expect to see some other changes in facilities and in the coming future for.
Finally, we continue to invest heavily in our electrification efforts both in CIS products systems, and the data security and we are very optimistic in our ability to bring competitive solutions into our global off highway markets and as we come into the.
The further conference calls hopefully, we'll have some some customer information and detail. The we can share with you, but nothing that we can share at this point.
So with that Christina that completes our prepared remarks, we'll be happy to take questions at this time.
I would like to ask the question. Please signal of by pressing star one on your telephone keypad.
Using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Again press star one to ask the question.
We will take our first question from Josh Chan with Baird.
Hey, good morning, John John Thanks for taking the question.
Hi, Josh because I Josh right.
Hum.
Just on the oil and gas side, you mentioned of some kind of improved rebuild activity Hum.
When do you think that you'd see kind of a kind of a more pronounced type of uptake, including kind of new equipment is that still kind of several quarters away or are the you see that becoming a little bit more clear at this point.
I think I think we'll see the rebuild activity.
Probably continue for the next quarter I would anticipate units.
Maybe late summer early fall.
Would be my guess at this point.
Okay, Okay, well that's the.
And then on the staying on oil and gas.
And customers they have the desire of eventually for sort of a hybrid of electric fracking.
Equipment.
Do you or will you have kind of products that the kind of it is able to serve.
Particularly the desire.
Yes, and I would hope that it may be the next call.
Or the one after that I'll actually be talking about one.
In the survey.
Oh Wow, Okay, Yeah look forward for that.
Last question that I have is.
What kind of.
Incremental gross margins can we kind of expect an endpoint to assuming that the market recovers I guess I'm. Just wondering you know off of the right.
The more trough levels.
Hobby is the gross margin improving of the next the next year or so as the at the end market growth.
Yeah, Josh this is John so.
You know, we're aware of the heavily mix impacted the company based upon you know what what's happening in North American oil and gas and aftermarket I think you know we would look for incrementals to be in the mid thirties as as the markets recover it can be a little bit higher than that if it's if it's heavily weight.
The towards the North American oil and gas a little bit lower if if it's a matter of some of our lower margin.
Products, but we've been very successful over the last 12 months and driving cost reductions into some of our key products.
We're seeing that that margin improvement start to hit the P&L now. So you know I think mid thirty's on the Incrementals as we.
As we work through into.
Fiscal 'twenty two.
Great well, thank you for the kind.
The guy.
Thanks, Josh.
Again as a reminder, if you'd like to ask a question. Please press star one at this time.
Go to our next question from Noah Kaye with Oppenheimer.
Good morning, John Jeff Thanks for taking the questions.
I think in the prepared remarks, you talked a bit about you know some of the supply chain issues and honestly I mean, any industrial company is going through that this quarter. So I don't think it's the huge surprise and and they will continue as you said in future quarters can you first of all sort of dimension for us.
If you can the margin headwind impact.
Some of those supply chain issues.
Did they actually manifest more in things like premium rates.
The materials cost inflation for the door.
What was the margin drag in the quarter.
No that is the bad debt is a good question I'm trying to quantify it quickly in my head.
I think our team did a very good job mitigating I know we had some air freight.
Coming on parts from India.
I would say to be honest Noah the impact probably wasn't that great in the quarter I think it's things that are the bills that will be paying this month.
And next month.
So I would try to get an answer I don't want to throw something out of that is gonna be wrong, but it hasn't been.
I wouldn't say you'd see it in the P&L, yet it's something that we're mitigating.
And we've announced price increases effective July one.
In that 4% to 5% range based on what.
What we've seen in steel surcharges steel pricing and increased freight so.
We've kind of anticipated that it's gonna be you know that the impact going forward is in that 3% range in that so.
The three to four and so depending upon the product we're in that that four plus percent pricing range I hope that helps.
Yeah. So it sounds like you do expect.
Price this quarter.
Okay.
Yeah.
Sure.
Yes.
Yeah.
Great.
Okay.
Okay.
For that.
But the timing.
The only the catch up.
Yeah, sorry.
A bit of digital there, but did I answer it just with the.
With Ikea.
I think it's going to be impacted in this quarter, but we are mitigating it in quarters going forward.
Right. So so you'll be positive price cost for the September quarter, but you may have the drag in this next quarter.
There that is exact yes, yes.
Yes, exactly alright, Yep alright.
Alright, Yeah, sorry, sorry for for the digital Entertainment and then just you know to make sure where were in terms of any supply chain bottlenecks were you able to produce the end market demand this quarter and do you anticipate any issues with that on on any of kind of a key skus.
Yes.
Actual book.
Yeah.
So we the what the.
Products that were affected most of the industrial products that we are producing lufkin, because a lot of their parts coming from India.
The team in Texas in here in Racine has scrambled and you know worked very hard with the the shipping companies.
The stuff we were caught behind.
The was it evergreen or are the <unk>.
Suez ship.
But that they've got that and they are afraid of some parts in so we look good right now through most of the fourth quarter. We have container ships that are due in.
You know that are scheduled to be due in in late may if anything we may.
We may lose a little bit of industrial so the the revenue dollars won't be big but whatever we missed in the fourth quarter, we certainly made up in the first quarter.
The other parts that we have coming in from India as Jeff was alluding to some of our cost reduction initiatives.
So there were actually just bringing a lot of those parts in the trials. We have we already have parts here in North America. So I think the impact it may there may be an impact in the fourth quarter I don't at this point I don't think it'll be significant at all.
Yep. That's that's helpful. You know so well done on on generating the positive free cash flow.
Just you know for the fourth quarter here any any working capital headwinds to be aware of or you know do you feel pretty comfortable that you'll be positive for the year modestly.
Yeah, I'm not aware of any headwinds no I think you know well continue the the sort of the discipline that we've had through the year of hope to again be marginally positive free cash flow in the fourth quarter operationally and.
Oh, Yeah, I'll hope to continue that trend and then come out as as volume comes back to to maintain that discipline in the working capital area and.
Continue to focus on that as we grow.
Great and if I could just sneak one last one in you know.
Can you talk about kind of kicking of the industry went down, but the California fracking ban that's being proposed to starting in 2024.
You know something that some investors have noticed I guess, just maybe helpful for for investors to better understand kind of your regional exposure with your North American oil and gas business.
You know whether that.
That announcement of its something that concerns you and if not the Hawaii.
No. It's John not really there wasn't a whole lot of activity going on there.
So our exposure is as.
As the industry exposure really were.
We're in the Marcellus we're in you know.
In and around Texas, and all of the southern and Canada and the Dakotas. So.
New York, and California don't really play into the.
Into the the dollars of the number of units at all so.
I guess the short answer is no it doesn't really concern us.
Your line I mean, it's the data and so it's the Yep Yep Yep.
Uh huh.
Oh, I'm, sorry, I didn't mean to cut you off.
You were your decision but.
No I'd, just say that you know.
As I'm amazed we are a strong believer in in in natural gas for the future you know as as as our markets continue the hybridization and electrification we need the.
This country needs to generate electricity and we need to upgrade the grid generate electricity.
And it's great to see solar and wind and more of a percentage, but we definitely feel that natural gas.
Is is that replacement energy source.
As compared to coal so again that speaks debt.
Right into the our 7600 8500 for the foreseeable future.
Alright, I really appreciate the color. Thank you.
Alright, Thanks Noah.
And as a reminder, if you'd like to ask the question. Please press star one at this time again that is star one for questions.
And as it appears there are no questions at this time I will turn the call back to Mr. Berger for any additional or closing remarks.
The limit.
Good day.
Thank you Kristina and thank you for joining our conference call. The day. We appreciate your continuing interest in twin disc and hope that we've answered all of your questions. If not please feel free to contact Jeff or myself and we look forward to speaking with you again at the close of our fiscal 2021 quarter and August Kristina I'll turn the call back.
To you.
This concludes today's call. Thank you for your participation you may now disconnect.
Yeah.
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