Q3 2022 Twin Disc Inc Earnings Call
Greetings and welcome to the twin disc, Inc. Fiscal third quarter 2022 earnings conference.
This time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I'll now turn the conference over to your host Stan Berger you may begin.
Thank you sure Molly 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 2022 third quarter at 91 financial results and business outlook.
Before introducing management I would like to remind everyone that soon.
Certain statements made during this conference call, especially those that state management's 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 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 .
Lisa 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 262 <unk>.
It's 384000 and she will send the copy to you.
Most of your call today are John Batten Twin disc, Chief Executive Officer, and Jeff Knutson, The company's Vice President of 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 2022 third quarter conference call as usual, we will begin with a short summary statement and then we'd be happy to take your questions.
Before we go over the quarter results I will touch on some of the operational highlights from the quarter.
As we mentioned in the last call, we headed into the third quarter with a nice backlog and our orders continue to improve in the quarter supply chain issues from a few key vendors really hampered our shipments, especially for our transmission and marine transmission product lines that are in Racine, Wisconsin and develop Belgium facilities well.
While all components and raw material lead times are shot out over the past year, we had particular problems with some large casting deliveries and electronic components connectors and wiring harnesses. We're also an incredible short supply our team has been working hard to reschedule incoming inventory to meet the cadence of components that are in short supply.
Lead times are not improving predictability is improving and that gives us confidence that we'll be able to improve on our shipments in coming quarters.
Obviously supply chain issues caused some inventory issues as we had several $50000 and 150000 dollar transmissions waiting for $200 harnesses before shipment. We also had several millions of dollars of inventory on the water headed to both China and Australia. They did not leave in time to be shipped on to end customers in the quarter.
Oil and gas demand for our pressure pumping transmissions continued its strong pace for China and for our aftermarket parts for the North American fleet. Besides orders for our 7600 transmission. We also have orders for our 8500 transmissions for China 8500 rebuild that activity for the North American fleet is almost doubled in.
The past six months and we are receiving requests for quotes for new spreads.
One of the bright spots in production with our facility in Lufkin, where we produce all of our North American industrial P. T OS and clutches with the least amount of reliance on electrical components and a very resilient Indian supply base. Their run rate has increased over 40% since they went into production over a year ago.
Moving or the hydraulic PTO product line there this spring and summer.
Jeff has the specific numbers in his comments, but this quarter's results were really driven by improved industrial sales modest growth in transmission shipments and strong shipments into North America in general, but particularly of the aftermarket parts for oil and gas. This mixed drove both sales and improved gross margins.
The outlier in my comments right there were strong marine and other shipments into our Australian market twin pack handles the entire market in Australia and has strong demand for our marine product line, but also they also handle the C keep her gyro.
Australian market and those sales have grown significantly in the past quarters and in the past years.
During the quarter, we continue to work extensively with our customers who are designing hybrid and electric prototype equipment and a few have moved into their prove out phase. Once we can share. The details we will but so far we are very pleased with the results and our team is working hard on this day in and day out.
Hopefully this will be the last call. We discussed Covid specifically the late December and January were not good months for either twin disc internally or supply chain internally. We had several lost days due to quarantine the same and the same can be said for our suppliers staffing shortages in the cost of goods area of cost of goods sold area is a global problem.
Any of our electronics and connector shortages can be traced back to China, and we're hopeful that that locked down and bottlenecks at their force will improve this spring and summer.
And now I'll turn it back to Jeff for some financials.
Thanks, John and good morning, everyone I'll briefly run through the fiscal 'twenty, two third quarter and year to date numbers.
Sales of $59 3 million for the quarter were up $1 6 million or two 9% from the prior year's third quarter.
But down 600000 or 1% from the previous quarter.
Sales increase compared to the prior year reflects continuing growth in demand across our markets. Although shipment performance has been severely limited by supply chain challenges across our locations.
As noted in previous quarters, and as John just mentioned, we've experienced a significant increase in lead times from suppliers unpredictable delivery performance and difficulty in receiving primary will primarily electronic components.
Or specifically challenging.
Has resulted in delayed shipments an increase in past due backlog and an increase in inventory levels as we await delivery of final components before being able to ship the complete units.
As the industrial product line has the least exposure to the electrical component shortage sales of industrial products improved by nearly 45% compared to the prior year third quarter.
With greater exposure to that supply chain weakness off highway transmission sales grew by just five 4% and marine propulsion sales actually declined by just a one 7%.
By region sales into North America were up 26%, while sales in the Asia Pacific were down 10% and sales into Europe are down 14%.
Foreign currency exchange was a negative 3 million impact to sales in the third quarter and through the first nine months. We are now at nine 6% or $14 6 million ahead of the prior year.
The third quarter margin percent was 29, 8% compared to 24, 2% in the prior year third quarter. The improved margin in the current year is the result of increased revenue more profitable mix of product and the positive impact of pricing actions taken early in the quarter to impact.
To offset the impact of inflationary cost increases across our supply base.
We continue to monitor the inflationary environment and are prepared to react with any additional required pricing actions.
Spending on marketing engineering and administrative costs for the physical 22 third quarter increased $1 2 million or 9% compared to fiscal 'twenty one.
The increase in the quarter is primarily due to the return of a global bonus program spending on professional fees.
Our return of spending in marketing and travel and inflationary increases partially offset by the favorable impact of a Dutch COVID-19 relief subsidy that was recorded in the quarter.
As a percent of revenue for the third quarter, I mean expenses were $24 three compared to $22 nine in the prior year third quarter and for the nine months <unk> expenses were 25, 6% of revenue for both fiscal 'twenty two in fiscal 'twenty one.
We recorded restructuring charges of 300000 during the quarter, primarily related to an adjustment to the carrying value of an asset held for sale are specifically the corporate headquarters building and end up with.
With a an agreed a price hmm.
Price was slightly lower than what we had accounted for earlier.
Including the restructuring charge the operating profit for the quarter was $3 1 million compared to an operating profit of half a million in the prior year's third quarter.
And the first three quarters operating income of $3 3 million, which includes a two point million dollar gain on the sale of our Swiss facility as 10, and a half million dollars improved for fiscal 'twenty, one first three quarters.
The effective tax rate for the first nine months of fiscal 'twenty, two was 76, 5% compared to 28, 9% in the prior year comparable period.
The current year rate was significantly impacted by the domestic full valuation allowance, resulting in no tax benefits being record recognized on current domestic losses.
So that profit to the third quarter of fiscal 'twenty. Two is 300000 or two cents per diluted share compared to a net loss of $8 2 million or 62 cents per diluted share in the prior year nine months period.
EBITDA of $5 8 million for the quarter was improved from $3 8 million in the prior year third quarter and for the first nine months EBITDA has improved by $12.3 million from the prior year from an EBIT loss of $1 3 million to positive EBITDA of $11 million.
Turning briefly to the balance sheet inventory was up $16 1 million through the first three quarters, driven primarily by the supply chain imbalances John noted.
We are focused internally on inventory planning and sourcing strategies that will balance incoming components with the shortage items currently preventing final assembly and shipment of units.
With a significant increase in inventory operating cash was negative $7 2 million in the quarter capital spending at just $2 4 million for the first three quarters remains well behind schedule impacted by lead times.
On machine tools, given the slower start in capital spending we now anticipate that we will invest in the $4 million to $6 million range in fiscal 'twenty two.
And with that I'll turn it back to John for some final comments.
Jeff just spend a quick moment on the outlook clearly our backlog is improving and orders continue their improving trend supply chain issues continue to concern us, particularly or you're in a European supply area, who rely more heavily on Russian and Ukrainian raw material.
So far we have not seen any huge impacts other than elevated prices and delayed deliveries due to temporary shutdowns longer term, we feel that the demand for north American natural gas is going to drive a lot more U S and Canadian production. This however will be tempered by labor and supply shortages all in all we see quarter over quarter.
Improvements headed out through the balance of the year provided some sell insanity rules the day with respect to Ukraine and Russia.
That concludes our prepared remarks, and now Jeff and I'll be happy to take your questions. Shirley. Please open the line for questions.
Sure at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Our first question comes from the line of Josh Chan with Baird. Please proceed with your question.
Hey, good morning, John and Jeff.
Hey, Josh.
Hi, good morning.
I guess my first question on on John Your comments on getting some quotes for the new oil and gas spreads I guess could you talk about the kind of urgency or the timing behind those requests is it next calendar year or is there a willingness or ability to kind of pull that spend for it even.
I think the spend I think you'd see I don't think it's sales wouldn't affect this fiscal year, obviously it would be the first half of our fiscal 'twenty, three probably and I don't I don't know I can't say, if the deliveries would be the end of Q1 or Q2, but sometime in that that late fall.
Area.
Okay.
Encouraging and I guess in terms of the trajectory of this recovery that you'd expect.
And have a rush like some of the prior cycles and if so how are your parents are kind of service that potentially.
I think Josh with what's different this time is just the the availability of of people.
And and material, whether it's to build new rigs I just think I think just this.
This wave is just going to be different because it's gonna be constricted. So.
Hum.
I I, just I, I, see which which hopefully means it'll be a longer recovery.
Right right, yeah, so, but I just think it's you know it's hard it's hard to find people to build rigs you know hard to find get everything. So that's why I think you'd see a lot of rebuild activity right now because you've got the rig you rebuild the engine you rebuild the pump you rebuild the transmission. So there's a lot of that going on.
But I do think that they you know.
Certain certain operators need new equipment, so, but we see that you know I think the lead times for everything for that are you know at least.
Six to nine months out so that's why that's why I'm thinking it's going to be.
Now October ish timeframe November 2nd quarter.
Understood that makes.
And then on the AR on the revenue progression into next quarter. I think you might have made some comments at the end John but usually you see like an uptick in in the fourth quarter compared to a third but it is it possible with the supply constraints that you're seeing now.
I mean to me I.
Everything is lining up with the fourth quarter will be the strongest quarter of the year on the top line for sure. It's you know unless unless something hits us that we're not even if that hasnt hit us yet as far as a supply crunch, but we have the orders we have most of the inventory here. It's it's just execution on some some glass critical components.
[laughter].
That's great and I guess the last question for me, it's like very strong gross margin this quarter.
I guess you have pricing actions are coming through is is this level sustainable going forward or the D. A.
There anything unusual that that kind of helped the margins this quarter well I think that the margin was absolutely helped me and you saw that it's the mix of the products. So heavy on a much heavier on the oil and gas transmissions.
China.
That didn't go backwards.
Because of the supply chain, we had a lot of spare parts activity for North American oil and gas and the mix was bigger for North American industrial So certainly pricing was part of it but mix mix was a big part of it as well.
Okay.
So in terms of thanks Angela.
It was a sustainability I guess that that's the question is what is the mix in Q4 with a similar mix yes.
And that's that's what is shaping up for the quarter was this a similar mix.
Okay, great. Thanks for the color and good luck on the rest of the year.
Thanks, Jeff.
Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.
Hi, Good morning, Thanks for taking the question I would love to actually dig into the quarter a little bit more here first I don't know if you've got it but if you've got it how much did price total price benefit growth.
Yeah. So I can I can give you a couple of things I guess Noah you know if we if we look at and maybe the more interesting thing is Q2 to Q3, because that was a significant increase.
The way I look at that we had about a 730 basis point improvement in margin quarter to quarter I would say something just over half of that is sort of the net price.
Inflationary impacts so somewhere around 380.
<unk> ish.
Basis points.
Mix is probably another 220 to 250 and the rest is sort of a different kind of mix or customer mix within product lines.
And and cost reduction so.
Yeah, I think when we look at it what price did for US really was get us back to what we would consider.
A normal non heavy oil and gas kind of margin in that 26% range.
And I think that's kind of lumpy we've talked about at the call last quarter was given the mix. We had in Q2 with the pricing we should get by the end of the year into the.
Mid to upper 26 range 26 to 27 and I think that's what we actually did see.
Well I would just comment first that to get positive price cost in this environment as alone a significant approach so well done.
But to your point around the mix being an uplift can you just repeat because I didn't quite catch it what happened with our land based transmissions in the corner I think you said industrial sales were up 45% year over year.
But you know marine was down slightly and I think you said off highway was down can you just repeat that.
Sure. So yeah land base was was up five 4%, but I think the bigger story. There is is that the oil and gas part of a lot of land based was up.
I don't have that number but more than five 4% offset by the other areas. So the RF.
And military where we're offsetting that to get to a net $5 four but the oil and gas component of land base was up and the aftermarket component of land base was up.
So those are the when we talk about mix driving higher margin those are the key yes backup.
Yeah, if if some of the you know inventory tied up in a very supply chain issues in freight.
If that actually comes into the quarter.
Basically like that had come into this quarter is that you know kind of corporate average contribution margin a little bit better and that's what I'm trying to figure out here is you know if if some of the.
Bottlenecks start to ease a little bit it seems like margins might actually be able to break 30%.
So you know.
And that but just let me know what you think.
Yeah, I mean, I think that's that's not out of the question I mean, we we finished at 29 eight.
For the quarter. So yeah things are you know volume.
Alone with a similar mix just more volume of everything would get US there. So yeah, I think with with the continuation of what we what we did in Q3, which is a pretty healthy mix, that's kind of what where.
Seeing as we as we work into Q4.
Yeah, with some things going our way, it's not a not out of the question again.
Okay and then just the last question around you know the inventories and the working capital management.
Is it feasible to bring inventory levels down sequentially and poor Q, you know that sort of in your plan and how should we be thinking on a full year basis about you know working capital.
Yeah, I mean, I think yes, where we're really focused on on driving inventory Oh, we want to be smart about it obviously, we don't we.
We don't want to shoot ourselves in the foot going into into fiscal 'twenty, three but I think what we see is as you know some of those things coming together and us being smarter about bringing inventory in that that should drive some inventory reduction as we as we close out the year.
So you know that should drive.
You know a bit of a reversal in free cash flow in Q4.
Not not to the extent, where you know we reverse our our negative Q2, and Q3, but I think we reversed that trend and get positive in Q4.
Yeah, that's that's sort of where we're focused and getting getting them getting the planning done.
To bring our components and get product out and be smart about what we're bringing in.
Okay.
And maybe just a.
A little bit longer term question here, but how are some of the electric programs going you know I think in the last couple of quarters, There's just been a ton of activity dimension.
Nothing hugely material in terms of revenue at this point do you view that changing you know maybe as we look into 'twenty 'twenty three.
So what I can't so I do I think it's still it's still really early for as far as other revenue on the revenue side.
Tons of work so far on on.
On the project side and the prototypes at our customers.
You know we do have I think we have the order for the first system for one of our land based customers I'm just waiting for them to release. It you know it's.
No. Unfortunately.
They want to release season shows trade shows where people are in person you know so.
That.
So I think that you'll see that over the summer. So hopefully at the next call. The fourth quarter. We can we can share one but I think we'll start to see you know and again, it's the just the dollar amount you know 130000 dollar component versus.
A hybrid system, it's 200000 so it's.
It's you know for the same piece of equipment.
So it's a it's a huge potential so we're excited to see how how the market embraces this in and the growth opportunity, but I think starting you know the second half of this calendar year we'll.
We will start to have some more news about you know all the projects that we're working on is there is as customers release their either their vessel or their piece of construction equipment.
Okay perfect. Thanks, so much for the color.
Thanks Noah.
And again as a quick reminder, if anyone has any questions. You May press star one on your telephone keypad to join the question and answer queue.
Our next question comes from the line of Ryan dressing with Uber. Please proceed with your question.
Hey, guys.
Iran rent.
I'm talking about like where the heck out there in the future.
Oh, Yeah, we're hearing of.
You know people in the Oh services equipment business sort of Repurposing.
Technologies.
For non carbon energy extraction. So one of the things I've heard is that.
Our frac rig is being used to inject water into a deep into the earth.
Backup pressurized runs children.
And I know this is sort of weighed out there, but I just don't.
Technology.
Okay.
Thank you Kim.
Have you guys.
Dissipating any of these trials.
He was he's taken king.
Nextgen technology.
Don.
I don't know that one specifically and I can say, yes or no.
Yeah, we've been you know working on and getting ready to prototype and going to customers with.
And electric solution with one of our transmissions.
And it's too soon to say yeah. You. If you. If you can think of a way to do pressure pumping. We were involved in some form of a project to do it differently. So.
Lots of different projects lots of different power generation and delivery of the energy to the pump.
Yeah. It's there are a lot of different solutions being discussed designed in and getting ready to be prototypes.
Yeah, all right I'll share with you soon.
Around that that would be.
Very interesting.
Okay great.
Glad to hear that.
You know, where we've got a little bit of a demand signal, Washington and to your point of sustainability that would be.
You've got a couple of years of sustainable demand that would be really helpful to the company. Thank you.
Thanks Brent.
Yeah.
And we have reached the end of the question and answer session I'll now turn the call back over to John Batten for closing remarks.
Thank you sure Molly and thank you everyone for joining our conference call today, we truly appreciate your continuing interest in twin disc and hope that we've answered all of your questions. If not please feel free to call either Jeff or myself and we'll get your question answered as quickly as possible and we look forward to speaking with you again following the close of our fiscal.
<unk> 22 fourth quarter and year end conference call Shamalia I'll now turn the call back to you.
Thanks, John and this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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