Q1 2023 Twin Disc Inc Earnings Call
Greetings and welcome to twin disc incorporated fiscal first quarter 2022 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
Once you require operator assistance during the conference. Please press Star Zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Andrew Berger Investor Relations. Thank you you may begin.
Thanks, Latanya on behalf of the management team of twin disc. We are extremely pleased that you have taken the time to participate in our call and thank you for joining us to discuss the company's fiscal 2023 first quarter 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 state management's intentions hopes beliefs expectations or predictions for the future are 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.
Copies of which may be obtained by contacting either the company or the SEC.
By now you should have received the news release, which was issued this morning before the market opened.
<unk> not received a copy please call our office at 2626, 384000, and we will send a copy to you.
Hosting the call today are John Batten twin discs, Chief Executive Officer, and Jeff Knudson, The company's Vice President of Finance, Chief Financial Financial Officer, Treasurer, and Secretary at this time I'll turn the call over to John Batten John go ahead.
Thank you Andy and good morning, everyone welcome to our fiscal 2023 first quarter conference call as usual, we begin with a short summary statement and then we'll be happy to take your questions.
As much as went right in the fiscal 2022 fourth quarter, we'd hope that more of that momentum would carry over into the first quarter of this year, our global operations team did as much as they could with the supply chain getting out as much as we did we faced several shortages and delays in the quarter, whether it was chips wiring harnesses gears gears forgings cash.
Things and we face the new challenge with heat treat capacity.
Reassuring to North America is very real and causing considerable delays due to capacity constraints and continued elevated pricing even with scrap falling for six months.
The European supply chain continued to have its own struggles with high utility cost significant cost of living increases on wages and salaries and a shortage of labor in general it's disappointing not to have a much higher revenue line in the quarter because the demand was there and continues to be there.
European operations, we're going to address the cost structure in very short order based on the inflation, we've seen continuing to rise and our delayed ability to capture that real time pricing.
While European governments can raise salaries effective immediately manufacturers have to honor price at the time of quote. Additionally, those cost of living increases which were much higher than anyone had expected that.
We saw issued this summer and fall.
At this revenue level in the quarter, we would've expected to see gross margins at least 300 to 400 basis points higher and we will focus on making that a reality in the second and third quarter going forward.
Part of the expectation of lower margins can be explained by the vet propulsion products. We quoted over 12 months to 18 months ago before the rapid inflation of 2021 2022 those shipped late in the fourth quarter and into the fiscal first.
First quarter, and while we were able to mitigate some of the margin erosion due to inflation, we could not recapture all of it margins.
Margins on projects going forward are better and they will continue to get better as the fiscal year progresses.
The issue that we are also facing with I'm just on shipments in general we're facing with these larger propulsion projects in Europe continues to be the shipyards challenged with supply chain, whether that's diesel engines electric motors and holds and halls and other prefab components that are built in China and shipped to Europe .
Backlog has never been higher since the acquisition in 2018, and we are very confident that we will see margin improvement and revenue improvement throughout the year.
We continued to see strong demand in Asia for oil and gas, we see improving demand in our global Marine markets steady industrial demand in both Europe , and North America, and growing demand in our domestic oil and gas markets in the quarter, we cede more new unit orders for the domestic pressure pumping fleet and parts.
Parts demand continues at a very high level, we have orders for both the 7600 8500 transmissions built in Racine and the team here has a huge backlog in front of them is doing everything they can to deal with suppliers internal capacity and other delays to meet this demand.
In Lufkin, our team did a great job managing supply chain issues from India and is operating very efficiently in a hydraulic ptos have moved into production as we speak and should be shipping this quarter and into the remaining quarters of the fiscal year.
Last quarter, we mentioned the hybrid application with Hinkley yacht that vessel and technology is being very well received at the fall boat shows and we are working with many more customers and marine projects in the hybrid electric space and several other types of markets in the next few quarters will be very exciting on projects that are coming to fruition.
Just in the past few weeks, our distributors Stewart supply and their partner Grizzly released an E. Frac solution that uses our 7600 frac transmission. The reception has been very positive and it was just that the hybrid show down in Texas.
And we see lots of opportunity here on new unit construction and also the possibility of resets in the older tier two applications.
The number of hybrid and electrification projects continues to grow and that growth.
Will be constrained.
By the supply chain as well motors Inverters all have their challenges nothing is straightforward at the moment, but we are bullishly optimistic in our hybrid and electric future and now I'll turn it over to Jeff Let me talk about the financials.
Thanks, John and good morning, everyone I'll briefly run through the fiscal 'twenty three first quarter results sales of just under $56 million for the quarter were up $8 2 million or 17% from the prior year first quarter.
Sales increase reflects the improved demand as the company's global oil and gas industrial and marine market.
Shipments in the quarter were somewhat limited by ongoing supply chain constraints as mentioned in previous quarters electronic components remains the most challenging area to find reliable and predictable supply with.
With help from improving North American demand for pressure pumping equipment compared to the prior year first quarter, our transmission product sales improved by 30%.
Sales of industrial products increased by 15%, while marine propulsion product sales grew by 10%.
By region sales in North America were up 33% Asia Pacific up 8%, while sales into Europe were up just 2%.
The strengthening of the U S. Dollar has begun to impact our competitiveness what I'm, telling you that's produced goods into the European market.
Foreign currency exchange was a negative $4 8 million dollar impact to sales in the quarter.
Constant currency basis first quarter sales increased 27, 2% for the prior year.
The first quarter margin percent was 23, 8% compared to 28, 2% in the prior year first quarter.
Prior year results included several one off benefits, including domestic ERC credit a Dutch COVID-19 subsidy and a favorable adjustment to the warranty reserve.
Adjusting for these nonrecurring items the prior year gross profit would have been 22, 9%.
Kris the small increase in the current year that is a function of improved volume and a favorable product mix.
Partially offset by the negative impact of inflation, primarily at our European operations.
Spending and marketing engineering and administrative costs for the fiscal 'twenty, three first quarter increased $2 million or 15, 2% compared to fiscal 'twenty two.
Increase in the quarter is primarily due to the impact of prior year Covid subsidies in the U S.
Netherlands totaling 800000.
Along with inflationary impacts and a return to more normal spending activities in areas such as marketing travel salaries professional fees as a global bonus program those items totaling $2 1 million.
These increases were partially offset by a foreign currency translation impact of 900000.
As a percent of revenue for the first quarter everyday expenses were 23, 8% compared to 28, 2% in the prior year first quarter.
During the prior year first quarter, we recorded a $2 9 million non operating gain related to the sale and leaseback of our Swiss facility.
The effective tax rate for the first quarter of fiscal 'twenty, three was 26, 3% compared to 16, 2% in the prior year first quarter with a mix of foreign earnings by jurisdiction driving the increase in the effective tax rate.
The net loss for the quarter of two 2 million or 15 cents per diluted share compares to a net profit of $2 million or 14 cents per diluted share for the fiscal 'twenty to first quarter.
EBITDA was breakeven for the quarter down $5 4 billion.
Compared to the prior year driven by the prior year Covid subsidies and the gain of the sale of the Swiss facility in the prior year.
Turning to the balance sheet inventory was up $1 million for the for the quarter impacted by a significant currency driven declines of $4 5 million.
Significant increase excluding the translation impact as a result of supply chain imbalances customer delayed shipments the timing of shipments through our distribution operations.
We anticipate significant improvement in our second fiscal quarter as we continue to focus on and refined inventory planning and sourcing strategies that will drive progress.
With the increase in inventory and lower operating results operating cash was slightly negative for the quarter capital spending at $2 2 million for the quarter was focused on the modernization of our machine tools.
We expect a similar quarterly run rate and capital spending for the remainder of the year totaling between $10 million to $12 million for the year.
And now I'll turn it back to John for some final comments.
Thanks, Jeff and I'll spend a quick moment on our outlook. Despite our first quarter results. We still we still feel very good about fiscal 'twenty three like last year, we think the quarters will build through the year, we will have to address some local cost structure due to local conditions, whether that's inflation, we can't pass on supply challenges et cetera, but in general our.
Markets are much more optimistic than they were a year ago and we are to the challenges that manufacturers are facing are coming in waves and we will continue to deal with them.
As Jeff mentioned, the additional challenge right now in the past few months has been the strengthening of the U S dollar and while it helps our European operations selling into North American markets. It is it is a concern going forward on our.
U S based products, primarily marine transmissions, which are sold into Europe .
That concludes our prepared remarks, and now Jeff and I'll be happy to take your questions Latanya. Please open the line for questions.
Thank you we will now conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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Our first question comes from Noah Kaye with Oppenheimer. Please proceed.
Thanks for taking the questions John I think you mentioned.
Margin expectation three or 400 bed.
Higher than actual results, just really reflecting that.
A lag on on you know.
Price cost that so so just help us understand as you look at the backlog today, how does that look for subsequent quarters I think about two Q3 Q.
What is that 300 400 bps drag look like as we look in the next couple of quarters.
Well I'm going to let Jeff help me there too, but no I can just tell you on the trend it looks better going forward whats our backlog if we look at it.
Today going out the next three quarters.
Looks better than it did at the end of the fourth quarter, we knew.
The projects were at a lower margin than the inflation.
But just in general I mean, if you go back our first quarter is always our most challenging one just with.
With the shutdowns in Europe , you know longer shutdowns in Europe , we have shutdowns in North America, but Europe I would just say Europe in general with incredibly inefficient I'm not just talking about our operations Europe in general in the first quarter was incredibly inefficient.
And we had cost of living increases for instance, Belgium.
Usually 1% to 2%, we thought that given the extraordinary inflation times that would be too so maybe 4% and they always have it delayed a quarter.
They did an eight and a half effective immediately that was one of our European operations. We did we didn't anticipate that and the effect on the whole quarter. The Dutch cost of living increase was also.
Higher than expected, but.
In general we need to.
The revenue levels in Europe , and all over continued to be lower.
The demand is by 15% to 20%, meaning that there's 15% to 20% that gets caught because we don't have all the parts.
We're taking a seriously look on how long is this going to continue.
We.
Can you be staffed in certain operations when the revenue is going to be significantly lower based on supply chain. So that's what we're working through right now the frustrating part again is the demand is there I mean, we are optimistic we have lots of projects. Our sales team is is it particularly with <unk> around the world is doing a great job converting.
Projects into orders and our backlog has never been.
I would say, it's the highest percentage of projects outside of northern Europe . So.
One of the strategic objectives was to grow the business outside of their home market now.
Now we're doing that we just have to get all the parts and be able to ship them.
So we're often.
Forget looking at the details of the quarter, where we are right now is significantly better than where we were a year ago.
Just kind of the frustrating thing is a year ago, we had to deal with the rapid inflation in pricing and we did everything approved through the through.
Through the year through the quarters.
In very many ways, we're faced with some of those same challenges again this year, but again looking at our backlog and again not just our.
Our backlog that reported six months just a lot of what we have is beyond the six months. So you know we're optimistic that things will improve during the quarter.
Is it throughout the year. So you know I'm much happier this year than it was 12 months ago.
Yeah.
Okay. That's helpful and I guess just listening to to that answer there. There are a lot of companies in various industries that really had to change how they price right cause because we've been looking at some extraordinarily.
Challenging times with respect to.
Wrangling the installation bear.
So talk to us about how how you price and how that that May change you mentioned the cost of living.
In that.
You know what.
How do you price projects now and what are you changing and do you think that that allows though.
Better manage inflation going forward.
It does so what is besides the sheer frequency of our price increases, which I've never seen anything like it meaning you know price increases.
Every quarter.
Historically from North America, we had been priced at the time of shipment.
That was that was very difficult to.
We were able to do it we also just surcharge last year.
I'm not saying, we'll never go back to a surcharge.
But we are much more now pricing.
At the time of the order, we're giving you a price.
But the price May change next month, meaning you order model X y Z. The prices 100 today, if you order it but in two months it might be more.
So we are pricing at the time of shipment primarily because we can't in Europe . It is almost impossible to do price at the time of shipment its price at the time of order.
And you know you go back two years, we did annual price increases whats changed now is.
We're going to do that much more.
Much more frequently and look at every order and we're hopeful and I do think a lot of the inflation has stabilized at a at a much higher level, we don't see a lot of the material cost going up but they're not what I as I mentioned.
They're not coming down even with six months of of scrap prices fall and we're not seeing.
Price decreases necessarily from our suppliers.
So we feel better about the stability.
Some of it but it's a they're not coming down so to answer your question. It's we're looking almost everything is a case by case basis. When we quote are we confident.
And that we have the margin at that time and if it changes when we when someone wants to buy it a month from now the price may be different.
Okay, if I could sneak one more in.
I don't want to steal Thunder from future project announcements, but you did mentioned that you got some exciting projects in the hybrid and electric space.
Apart from it can you just maybe give us an idea of what what sort of applications are.
Yes more.
More of a people there's going to be more more work boat commercial related things like that.
Can you tell me was definitely.
A huge splash with one of the premier builders and the pleasure craft.
Market I mean, there are more projects there little bit longer term farther off.
But there is there's a lot more.
I'd say, it's not smaller but you know.
125, 10 vessels coming up in whether it could be a ferry it could be.
Taxi system it could be things like that so the commercial space is very very very active everyone is positioning defined a more fuel efficient green solution and you know with the vessel that they're using it as a revenue generating.
Business, So we're very optimistic.
Again, though.
It's going to it's.
Everything is everything is based on getting all the components there.
So electric motor lead times have been pushed way out. So that's that's one of the things that we're dealing with right now.
Trying to get some more announcements and so a lot of what we work on whether it's on land and in industrial construction type of equipment or vessel and we do the application they get it they want to they want to test it and do it for six to 12 months.
And then it'll be released but there'll be more coming through the year for sure.
We can talk about.
Great well I appreciate all the color on thanks.
Alright, Thanks Noah.
Once again, ladies and gentlemen to ask a question. Please press star one on your telephone keypad.
Our next question comes from Simon Wong with Gabelli funds. Please proceed.
Hey, John and Jeff, Hey, Simon Hi, Simon Hi, just.
Yes.
Yeah.
Some quick questions on the oil and gas side.
Hum.
How much of your sales this quarter was the oil and gas.
Yes.
Okay.
So it's a good question Simon.
Let me, let me do a quick.
Calculation why don't you jump on your next question and I'll come back to you real.
Real quick.
My next question also relate to oil and gas how much of the orders came here related to oil and gas because yes really nice quarter, just wondering how much of that was due to the north American.
The North American pressure pumping clock buffers coming back.
Okay.
I guess I mean, I can tell you. It's a big part I don't have the numbers I'm not in the same room with Jeff, but it's a it's a combination of equal part.
New unit orders as far as units, but also parts continue at a high level. So.
Was it pretty good quarter for for oil and gas in North America.
No I think related to traditional.
Diesel fleet or are we seeing.
For the.
So the parts obviously are for the traditional diesel fleet, but.
But we do have a it's a small percentage right now, but I would say that each quarter that we go forward units for the E. Frac fleet will.
We will get much higher I can see a point.
And the next few quarters, where were where you asked that question and we're at 15%, 25% potentially 50%.
That's not the that's not very far away.
Okay, alright, so if a pressure pumper, placing order for new equipment today, what's the lead time or actually not pushing.
Places an order for our transmission today, what's the lead time for you guys.
We could get you in the 8500.
For the traditional fleet probably in <unk>.
I would say three months.
Two to three months and the reason I go to three months is because we're dealing with.
You know.
And sorry in November and December are shorter months with holidays.
But yes, no you would if you ordered them today, we would have them early and.
In the calendar first quarter of next year.
Okay, Alright, great and then last question.
And Simon let me just stop it so one of the reasons, it's going to.
Come back to one of the reasons I think.
We haven't seen that we potentially could have seen more is.
Whats controlling the refit of the fleet continues to be lead times and availability of engine. So.
What what's happening as we see customers securing engine and then we're getting orders just enough transmissions to satisfy the number of engines that they have.
So I think it'll it will as engine supply becomes more reliable and more available than we will see our orders go up okay.
The flip side is when they don't have engines, we get more spare parts orders because they rebuild their rebuilding.
Right right, Okay, Great and then.
Do you like your something up of hydrogen in the in your press release can you talk more about what you're doing there.
Yeah.
Which part Simon.
Yes, but you have some new.
Our market leading trends.
The control system for hydrogen applications.
Our model.
Okay.
Yes.
In your press release, you have some youre looking at because you see the amount of cross sell.
Our global markets for our hybrid and electric vehicle allocation. Okay. So okay. I thought you said hydrogen.
No so yeah with with the Hinkley and with everything that we're working on.
Our controls group and engineering they continue to refine our are based hybrid controller, so using our controls logic being able to control multiple inputs and multiple outputs. So every project that we do we're getting better and better and better.
And on which our controls so I think of our controls.
Technology and the product that can that's the brains of the application and our mechanical products, whether it's the marine transmission to frac transmission and RF transmission or one of our hydraulic ptos that's the heart.
So that's that's what's moving stuff, making things work.
But our controls group is doing an incredible job with our controls technology.
Creating a very adaptable and cost effective control system that will work in all of our off highway markets.
So.
It's some.
Some of these.
Production delays I mean, we can't.
Giving them time.
And then also you know, giving them time to develop it develop sources multiple sources. So.
They have done an incredible job on the last in the last 12 months getting us ready for this transition and all of our markets.
They are they're very real strength of our company.
Okay great.
Hey, Simon just to go back to your first question it was about 20%.
The quarter was was related to oil and gas.
Yeah.
Can you give us do you have a split between.
Equipment, <unk> consumables, it's pretty pretty balanced actually pretty bad.
Yeah.
Yes, Simon it's balanced right and that goes back to what I just said if there were more engines available.
Would tilt to more units, but the engines aren't available. So we're seeing a lot more rebuild activity.
Yes, I'm hearing engineers.
Real constraints here yeah, Okay, great. Thank you guys.
Thanks Simon.
Our next question comes from Jim <unk> with Jefferies. Please proceed.
Yeah. Good morning Fellows could you give us some color on one on the inventory breakdown between North America on one hand in Europe and finished product versus work in progress and how that might skew by end market.
Energy and marine.
Yes, so we've got say a little over half of our inventory is in what we would call a saleable so either a finished part that could.
Could be sold as it is or assembled into a new unit or fully assembled units.
Say about 20% is is work in process and the remainder 30% ish is raw material.
A big component of that inventory I would say in terms of weapons.
Weapon finished parts as is in the oil and gas market here in North America.
That that would be the biggest component.
You know in Europe , it's primarily marine Europe , it's probably.
I will say just.
Maybe 40% of our total inventory, 60% would be.
Little over 50% in the U S and the remainder in Asia Asia Pacific.
In the in the U S. Like I said its industrial its marine but the biggest component would be the oil and gas piece of that that that's what's allowing us.
I guess from John's earlier point too to be able to deliver.
A very large and complex transmission within potentially eight week.
And one last inventory related question, how much of your inventory has already been priced into a final product, but can't be delivered because of other delays and how much are still open where you can charge whatever the market will bear.
That's a that's a good question I don't think its a huge percentage of our inventory that's locked in I would say.
And John you, maybe have a better feel I would say it's.
And 10% to 20% maybe range of of inventory that sort of committed to.
Price fixed price.
Orders, but I'll admit that isn't something that that.
I've thought through.
Completely.
Yes, it might be a little bit.
Higher, but it's not that it's not the majority of Jim that's for sure.
Thank you.
At this time I will turn the call back over to Mr. John Batten for closing comments.
Thank you Latanya and thank you everyone 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 reach out to either Jeff or myself and we'll get you an answer to your question as quickly as possible.
We look forward to speaking with you again at the close of our fiscal 2023 second quarter and now Latanya I'll turn the call back to you.
Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time and thank you for your participation and have a great day.
Yeah.