Q4 2021 Twin Disc Inc Earnings Call

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Please standby were about to begin.

Good day and welcome to the twin disc fiscal 2021 fourth quarter conference call. Today's call is being recorded at this time I'd like to turn the call over to Stan Berger. Please go ahead.

Thank you Katie on behalf of the management team of twin disc. We're extremely pleased that you have taken the time to participate in Europe.

Call and thank you for joining us to discuss the company's fiscal 2021 fourth quarter and full year financial results and business outlook.

Before introducing management I would like to remind everyone that certain statements made during the conference call, especially those that state managements intentions hopes beliefs expectations or predictions for the future are forward looking statements. It is important to remember that the company's actual results could differ materially from those.

Such forward looking statements.

Information concerning factors that could cause actual results to differ materially from those important as those in the forward looking statements are contained in the company's annual report on Form 10-K copies of which may be obtained by contacting either the company or the SEC.

By now you Should've 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 at 90.262.

384000, and she will send a copy to you.

Hosting the call today are John Batten twin disc Chief Executive Officer at this time I will turn the call over to John John.

Thank you Stan and good morning, everyone welcome to our fiscal 2021 fourth quarter and year end conference call as usual, we will begin with a short summary statement and then I'll be happy to take your questions.

Most of you will notice that stand did not mentioned, Jeff knudson as the host today. Unfortunately, Jeff Jeff was involved in an unfortunate incident earlier this week, which will require him to be on leave for the next few weeks. He is doing well and most likely listening to the call right now the good news is that we are expecting a full recovery of the bad news is just have me for the numbers.

But joining me today are Jim fire Tag, our President and Chief operating Officer, and Tim Batten, our vice President of sales.

Before I go over the quarter and year end results I'll, just touch on some of the operational highlights from the quarter.

As I've been mentioning in the past the number of hybrid products products projects in electrification projects continues to grow as does our product development in that area. Once our customers are ready to release their products, we will share them with you as I've mentioned in the past the development cycles for these applications is not a short one.

Covid related supply chain issues that we were seeing in the first half of the year continued throughout the fourth quarter, but we have seen some easement, particularly from supply coming from India.

Shipments from our new facility in Lufkin are hitting full steam they've been hampered a little bit by the supply chain issues from India, but they're hitting full stride in all of our mechanical clutches and <unk> that were once in production and we're seeing are now being produced in lufkin.

Orders in the fourth quarter was strong and driven by a strong aftermarket demand, including parts for North American oil and gas rebuilt while the six month backlog is down versus our third quarter backlog. The overall backlog increased nicely the shift out past our six month window is a combination of customer requirements for those dates and also the realization.

We're going to still have some supply chain issues.

We continue to work through our inventory at our distribution partners and we're confident that as they get new orders new orders will improve on the factory.

This inventory is being sold off in projects in our global Marine markets are driving this and that those projects remains strong and we should see new orders on marine continuing to prove in the coming quarters, new oil and gas shipments to Asia continues to be very steady and should increase later in this calendar year.

Looking at the numbers.

The fiscal 'twenty, one fourth quarter and full year numbers sales of $66.2 million in the fourth quarter were up $6.8 million or 11, 5% from the prior year fourth quarter the quarter improvement from the prior year was a result of strengthening global economy as the ongoing effects of the COVID-19 pandemic began to ease.

Compared to the prior year fourth quarter transmission sales were up 28, 9% industrial sales up 21, 1% and marine and propulsion sales down three 8%.

By region sales into North America were up 9% sales into Europe were up 11% and sales into Asia Pacific were up 5%.

Foreign currency exchange was a net positive $4.1 million impact of sales in the fourth quarter for the full year sales are down $28.2 million or 11, 4% foreign currency translation contributed a positive impact of $11.6 million compared to the prior fiscal year the.

The fourth quarter margin percent was 27, 7% compared to 23, 3% in the prior year fourth quarter.

Similar to the third quarter, the fourth quarter benefited from the employee retention credit, which contributed $1.2 million to gross profit adjusting for this benefit gross profit would have been 25, 8% still a significant sequential year over year improvement.

Reflecting our more positive or more favorable sales mix driven by aftermarket activity in the north American oil and gas market and the positive impact of targeted cost reduction activities.

Gross profit for the fiscal year finished at 23, 3% compared to 22, 6% for fiscal 2020 spending on marketing engineering and administrative costs for the fiscal 'twenty, one fourth quarter increased $1.6 million or 11% compared to fiscal 'twenty. The increase in the quarter is primarily to the partial achievement of global incentive metrics.

<unk> and our bonus expense of $2.3 million in the quarter, along with the positive currency translation impact.

These increases were offset by the M&A portion of the employee retention credit and the ongoing focus on cost containment, having a favorable impact on global discretionary spending.

As a percent of revenue for the fourth quarter M&A expenses were 25, 3% compared to 25, 4% in the prior year fourth quarter four.

For the fiscal year, EMEA spending is down $7.5 million or 11, 8%, finishing finishing at 25, 5% of revenue compared to 25 six for the prior fiscal year, we recorded a restructure restructuring charges totaling $6.6 million in the fourth quarter. This is comprised of a $2.3 million charge for a restructuring program at our bell.

<unk> operation, which will result in the elimination of 23 position of 23 positions and drive annualized savings of our products approximately $1.6 million. This charge represents the legal minimum cost of the action negotiations are ongoing and we anticipate a final charge will be recorded in the first half of fiscal 2022, we also Rick.

Quarter to $4.2 million impairment charge related to the write down of our corporate office building.

To be into an estimated fair value as this asset is currently held for sale during the fourth quarter. We received notification of full forgiveness of our $8.2 million PPP loan from the small business administration, resulting in other operating income benefit of $8.2 million recorded in the quarter.

Including the significant impacts of restructuring and PPP forgiveness operating income for the quarter was a positive $3.2 million compared to $1.5 million operating loss in the prior year.

<unk> tax rate for fiscal 2021 was negative 110, 4% compared to nine 5% for fiscal year 2020. During the current fiscal year. The company received full forgiveness of the PPP loan, which resulted in an increase to the effective tax rate of 17, 5% in the prior year the company determined that the carrying value.

A certain goodwill and intangibles exceeded the fair value and a 25 and a 27 million impairment loss was calculated which resulted in a decrease to the prior fiscal year effective tax rate of 13, 8%.

During the current fiscal year. The company was able to take advantage of the newly enacted high tax exemption regulations. The company filed its federal taxes are in utilizing this exception and had no guilty inclusion.

Creasing the current rate by 12% due to continued historical domestic losses and uncertain future domestic earnings the company recognized a full the full domestic valuation allowance, reducing the effective tax rate by 158, 6%. The net loss for the fourth quarter of fiscal 'twenty, one was $12.7 million or <unk> 98.

<unk> 96 per diluted share largely due to the $15 million deferred tax valuation allowance recorded in the quarter compared to a net loss of $1.8 million or <unk> 13 per diluted share in the prior year fourth quarter for the fiscal year, we reported a net loss of $20.9 million or one point at $1.58 per diluted share compared to 39.

8 million or $3.33 <unk> per diluted share in the prior year EBITDA of $4.9 million for the quarter was improved for $1.3 million in the prior year fourth quarter.

For the year, so far EBITDA $3.6 million nearly $34 million improved over the prior year.

Turning to the balance sheet inventory was down $1.7 million in the quarter and $5 six mind $55.6 million for the year. Despite the $3.4 million currency translation, driven increase with a focus on liquidity and cash flow, we were able to generate $1.5 million of operating cash flow in the quarter, bringing fee free cash flow to positive too.

One for the fiscal year capital spending at <unk> 6 million for the quarter was $4.5 million year to date has been focused on the new Lufkin facility and modern machine tools and testing equipment as we worked through a very challenging fiscal year, we focus on preserving liquidity and deferred all nonessential capital spending this will result.

And some catch up spending in fiscal 2022, where we expect to invest $10 million to $12 million during the fiscal year.

While monitoring the ongoing market recovery for any pauses or setbacks.

Looking to getting past the numbers just a quick moment on our outlook before I open up on onto questions. Obviously in the fourth quarter, we are varying in.

Encouraged by the improvements we're seeing in the markets and our order trends. This should continue throughout fiscal 'twenty to 'twenty two and we are approved we are expecting a much improved fiscal 2022 compared to fiscal 2021, we mentioned on the last call that we have been analyzing our global footprint and how we do business you saw some of those actions that we took in the fourth quarter.

To make us more profitable.

And basically it's a realization of right sizing our operations to the size of what we manufacture in size versus what we outsource and on the outside.

Finally, we're continuing to invest in our electrification efforts both in systems and data security and we are very optimistic in our ability to bring competitive solutions to our markets.

That concludes my prepared remarks, and now Jim Tim and I'll be happy to take your questions. Katie could you open the line for questions.

Thank you if you would like to ask a question you may 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 to allow your signal to reach our equipment.

Once again star one for questions, we'll go to Noah Kaye with Oppenheimer.

Hi, good morning, Thanks for taking the questions first you know best wishes Jeff.

Copies are you know back and well soon although data, we'll say you wish lists.

But with great efficiency.

I know before you ask your question I just realized.

Did I printed the wrong version of the script isn't that the.

The forgiveness of the PPP loan is not up and operating income. It is in the press release its income from the extinguishment of the loan. So that was my bad but it is hard to stop once you're once you actually reading it.

Yes, yes. Thank you for the clarification can we just start with.

Maybe a little bit more meat on the bone in terms of your electric our product development pipeline.

And specifically you know we understand these are relatively long product development cycles, but would just love to understand the potential revenue magnitude of what you're working on as they they got this is is that you know.

10, $20.30 million pipeline do you think it'll help folks understand our warehouse opportunities.

So.

That is a great question and I ask it the board ask that we all ask it. So just to just to give you on a just kind of an industrial application, so where we used to sell a 15 or a $20000 pump drive.

A hybrid system can be anywhere from 130 to 180000, so that kind of shows you the NASA for one piece of equipment. So.

You have a chance to.

The multiplier on your content is huge.

Gross margin is roughly the same might be a little bit less because we're not producing everything we're not manufacturing everything in the in the complete system. So we can't we don't have the same margin on all of the components the issue.

That you face is you know we have N D A's and we've got.

Applications I'm looking at our VP of sales pretty much every market segment that we operate.

Yes.

The issue is you know it.

It takes a year to develop the product takes a year to test and then it'll be the market acceptance. So if we could go from the first inning to the ninth inning, where everything is hybrid.

You would see our revenues increased dramatically, it's just the ramp up of how quickly.

Are we going to be able to prove these products out in the field, meaning us and the OEM and then how quickly others market acceptance for those products. So it is it's a huge opportunity Noah it's just.

How quickly it's going to and I say that I sound like a broken record no it'll happen much quicker in automotive because you have the car companies controlling everything and it's been in production and testing for a while.

Hmm the off highway markets.

Let's say, a scramble to catch up but theres, so many different applications and so many.

Variations everyone's trying to figure out what what combination is going to work. So I'm really optimistic because the projects that the products. The projects that we're involved in I think are going to be accepted very well in the market.

Yeah, It's just a question I'm sorry, what's the question.

How quickly will it happen.

Yeah. That's that's very helpful is that I mean it sounds.

Fair characterization, maybe we're in sort of the the top of the second here.

Yeah do you want to use your baseball analogy.

Yep Mhm.

Yeah, Okay, what looked like the oil and gas I mean, just given the you know.

Extremely low DUC counts and particularly the live DUC count.

It feels like the.

The tables could be setting up for.

You know an uptick in activity, yeah talk a little bit about your pipeline and your expectations for that market over the next year.

So I would expect Asia to show some I don't know say significant.

<unk> improvement, but noticeable improvement in the demand that we until the units that we ship there North America, we've had kind of the first two markers for <unk>.

<unk> spending and that has been aftermarket demand and our.

Ordering spare parts for rebuild.

And.

And and request for quotes and lead time, so we've gotten to that point. So I think at some point in the next couple of quarters, we will actually see new unit orders for the north for the North American market.

But theyre being I would say no much more cautious on capex spending right now and I still think there's some deals out there for idle equipment used equipment that hasn't been used very much in some of the big some of the big players whether they're public.

Public or independent are are snapping up some used equipment.

Okay, and then just the last general one at this point within the portfolio, where you actually capacity constrained and just you know you're still working to meet up with had to catch up with demand.

And where is that sort of less of an issue.

I'm going to I'm going to have Jim answer to I think all of the supply chains are still constrained.

The one that has been the most challenging would be a lot of our industrial products that we produce in lufkin have a supply chain coming from India, which was constrained so relatively long lead time, the delays, but for a product that has short lead times. So the customers were seeing long lead times for.

Other product, our marine transmissions and power shipped transmissions, but they have a longer lead time in general so the impact as a percentage has not been as great, but I'll, let Jim add.

Well, John Johns comments are correct the.

The issue with the Suez Canal put us back that has been rectified we're seeing.

Supply increase so we're we're looking at a much better fall then we struggled with when the Suez Canal went down.

So I think that that's going to clear itself with regard to oil and gas.

We have the inventory on hand to support the market.

With the marine.

The issue is not with getting parts from our suppliers, we're working closely with all of our suppliers.

And we do not.

Foresee that being a problem as we go forward over the next 12 months.

The biggest issue that we have is electrical connectors, which is the same thing your automotive has.

And everybody else around the world, but we are getting what we need to continue our shipments.

Okay that that was extremely helpful. Thank you and good luck to all.

Thanks Noah.

Thank you as a reminder, star one if you would like to ask a question.

We'll take our next question from Josh Chan with Baird.

Hey, good morning, and I hope for a speedy recovery for Geoff if he's listening.

Thanks, Josh.

I guess so my first question John is on the backlog. So I guess you know you're you're six months backlog was down a little bit but the total backlog went up so I guess what that meant to me was that you had some longer term projects that get booked in the quarter I would've thought that that might be oil and gas, but it doesn't sound like that that's coming back as quickly yet.

Can you explain sort of what what you booked kind of farther out beyond the six months.

Sure. So the biggest driver would be some military transmissions.

You asked for domestic and some oil and gas for Asia are there are the two big ones that drove backlog outside of the six month window.

And then it is also a realization just in general as we've I've mentioned going through our sales and operation planning the discipline that we're putting.

On the factors primarily the one here in Racine is scheduling to capacity and don't Overcommit. So just in general things have been scheduled out to the realization of when we're going to get inventory and when we have capacity, but the two the two drivers are the transmission business <unk> 10 and <unk>.

Some other components, and then oil and gas for China.

Okay. Okay that makes sense. Thanks for the color there and then on gross margin guidance also yep I would just add Josh that is also a great job on the on the the facilities pushing for a lot of a lot of sales went out in the fourth quarter. So we shipped everything we could.

That's right Yeah, that's definitely hum on the gross margin side into into next year.

You gave us.

So the pluses and minuses that you see you know maybe you get better volume in and hopefully you get better mix as well as oil and gas picks up in the second half how do you see gross margin trending.

Our gross margin should be trending up one of the biggest plus.

Pluses that I saw during the fiscal year was the focus on gross margin improvement at a product level cost reduction finding new suppliers. We got if you remember from calls in prior quarters in the last oil and gas run up in 2018, we actually had a couple of suppliers.

Go bankrupt and we were forced to scramble.

To find new suppliers, primarily with castings and forgings. So we've been able to resource that and recognize some cost reduction savings. So theres been the variable cost reduction.

We're going through and we've done fixed cost reduction during the year and these gross margins have been improving.

Including bringing lufkin online.

So I've been very pleased to see the gross margin improvement in industrial and then you know with some of the actions that we announced and in Belgium, and the sale of this corporate facility and that was still there were still some cost in the gross margin line once we.

Finalize a sale on this facility.

That will take some fixed cost out so Josh I expect gross margins to continue to improve nicely through fiscal 'twenty two.

And volumes certainly.

Certainly will help.

Okay. Yeah. That's that's that's good to hear and then I guess last one for me could you talk about the Capex and what do you plan to spend the Capex on this year and then any thought on a free cash flow given that the capex is higher.

So yeah.

We're still expecting positive free cash flow for the year. So the capex, we have some big machine tools on order a gear grinder for Belgium. Some test stands for the hydraulic PTO product line for Texas.

<unk>.

Theres, some other Jimmy or Theres, some other big big ticket items or were seeing Theres a few test stand upgrades, we wanted to do.

To improve our efficiencies and reduce our test time. In addition to that we have ancillary products going on in our some of our core manufacturing cells of gear grinding and shafts and we'll be adding specific pieces of equipment to improve our efficiencies there.

But we also have Josh them some some.

Noticeable engineering Capex on electrification and hybrid test stands and equipment for for that the amount you know theirs.

There's a lot there's a lot of development there and we're excited about it but it's the development is not free.

Right right.

Yeah, so absolutely well thanks for the thanks for the color and your time and best of luck into into 'twenty two.

Okay. Thanks, Josh.

With no additional questions in queue at this time I would like to turn the call back over to our speakers for any additional or closing remarks.

Alright, Thank you Katie and thank you for joining our conference call. Today. We appreciate your continuing interest in twin disc and hope that we've answered all of your questions. If not please feel free to call me email may reach out to me and I will get I'm sure. There is a question or two that wasn't asked because Jeff wasn't here, but if you send it to me I will get.

I'll get an answer to you as quickly as possible and we look forward to speaking with you, including with Jeff again at the close of our fiscal 'twenty, two first quarter, Katie and I will turn the call back to you.

Thank you that will conclude today's call. We appreciate your participation.

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