Williams Controls F4Q07 (Qtr ended 10/30/07) Earnings Call Transcript

Williams Controls Inc. (WMCO) F4Q07 (Qtr ended 10/30/07) Earnings Call December 12, 2007 4:15 PM ET


Dennis Bunday - EVP, CFO and Secretary

Pat Cavanagh - President and CEO


John Nobile - Taglich Brothers


At this time, I will like to welcome everyone to the Williams Controls host fourth quarter 2007 results conference call. (Operator Instructions)

Thank you. Mr. Bunday, you may begin your conference.

Dennis Bunday

Thank you and good afternoon, everyone. I know as we have a number of people on the call this afternoon and on behalf of Pat and myself, I would like to welcome all of our special guests who have logged in, especially Clark W. Griswold and his cousin Eddie.

Now, welcome to our fourth quarter and yearend fiscal 2007 conference call. Before we begin, you should note that the following discussions and responses to questions reflect management's views as of today, December 12, 2007, and may include forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements.

Information concerning risk factors and other factors that could cause actual results to differ materially is included in our filings with the SEC, including our 2007 annual report on Form 10-K, our fiscal 2007 quarterly reports on Form 10-Q, and our fiscal 2007 current reports on Form 8-K. Specific factors that may cause a difference include, but are not limited to availability of adequate working capital, domestic and international competitive pressures, increased governmental regulation, increased cost of material and labor and general economic conditions in the United States and abroad.

I will now turn the call over to Pat Cavanagh for his comments on the quarter and the full year.

Pat Cavanagh

Thanks, Dennis. Good afternoon, everyone, and happy holidays. Welcome to our fourth quarter and fiscal year end conference call.

This morning we released financial results for our fiscal fourth quarter and year end. Sales for the fourth quarter were $16.4 million, down $3.4 million from $19.8 million in the year ago quarter, but up from last quarter. Earnings were $0.20 per diluted share versus $0.37 for the year ago quarter.

Sales for the fiscal year were $68.9 million, down $5.7 million from fiscal 2006. Earnings were $1.03 versus $1.25 per diluted share a year ago. Our NAFTA heavy truck sales were down $10.5 million from fiscal 2006, while sales in the first and second quarters of 2007 were strong, reflecting the 2006 prebuy, our third and fourth quarters reflected weaker than anticipated sales in this downturn.

Our NAFTA heavy truck sales were also negatively impacted by almost $1.1 million as a result of an unfavorable product mix caused by product introduction delays at one of our customers. As a result, our sales win for the NAFTA heavy truck market dropped 36% on a year-over-year basis.

During the year, our international and off-road sales increased approximately $5 million, offsetting the severity of the NAFTA truck market downturn. As many of you know, our strategy over the last three years has been to maintain our position in the NAFTA heavy truck market while growing our sales in the international and off-road markets.

This strategy has allowed us to diversify our business and allowed us to be solidly profitable in this significant NAFTA truck market downturn. We expect the NAFTA truck market downturn will be temporary, rebounding in 2009 in front of the 2010 emission changes.

Our heavy truck and off-road markets performed well in Europe this year, growing 15% year-over-year to $13.6 million. We are currently implementing market penetration plans in Eastern Europe, particularly Russia, to more fully capitalize on the growth opportunities in this region.

Williams' strong customer relationships have also led to increased business in India's heavy truck market where revenues grew by 16% year-over-year. In late 2008, we plan to establish an assembly plant in Pune, India to support our Indian customers as they move to new emission compliant vehicles. India represents the market opportunity of over 250,000 units a year.

Our international growth was also strong in Asia, where we leveraged our China sales and manufacturing operation to expand sales throughout the Asian region by 15% to $5.7 million. Sales in China specifically doubled, fueled by the strong economy, expanding infrastructure, and the preparations by the heavy truck manufacturers to implement Euro 3 emission regulations

Since we opened our operation in Suzhou in 2005, our employment in China has risen to more than 100 people. We now have agreements in place to supply a number of leading truck, bus and engine manufacturers, and we expect this business to grow significantly as production ramps up to meet evermore stringent emission standards.

Worldwide, our off-road market grew by nearly 9% to $12.7 million. In the United States particularly, our off-road sales grew by 16%. These sales are the results of more stringent emission standards for off-highway vehicles, particularly in the United States and New York.

In the off-road markets, we are introducing a number of new innovative products such as our new 4.5-inch side-to-side rocker pedals for use of small industrial and construction equipment. In addition, we are introducing new hand control products that incorporate Williams' latest sensor technology. Several of these parts are in their final stage of their customer evaluation and will be in production for several manufacturers in 2008.

We began production of our contact and non-contact sensors in late 2006 in China. At this point, we've delivered over 500,000 units. Currently, we are working on integrating these sensors into our hand controls and our new off-road product designs.

I thought it would be helpful to give you some perspective on the overall NAFTA heavy truck market going forward. In our last fiscal year, the Class 8 heavy production was down 28.7% to 260,000 units, while medium duty truck production was down 12.6% to 223,000 units from the comparable year ago period.

Combined medium and heavy truck production totaled 484,000 units at our last fiscal year, down from 621,000 units in the comparable 2006 fiscal year. I think it's important to point out that we have not lost any market share in the NAFTA truck market during 2007, and incrementally, we have gained share in this market from a competitor. I mentioned earlier the NAFTA heavy truck markets in our first and second quarters of fiscal 2007 were strong, while the third and fourth quarters were very weak, but we don’t give guidance.

The currently available heavy truck market information shows that in our fiscal 2008 volumes will be lower than in our fiscal 2007, because of an anticipated delay in production ramp-up before the 2000 emission standards. Some estimates indicate that the class 5, 6, 7 and 8 markets could be in the low 400,000 range from 484,000 in our fiscal 2007.

We will continue to maintain our commitment to the NAFTA market and move forward with our strategy to grow our business in the international and off-road markets in the coming year. Our realignment efforts announced in March 2006 were completed at the end of September.

You may recall we outsourced our die-casting and machining operations and moved six pneumatic assembly cells to our facility at Suzhou, China. We now have all of the production cells validated and the components parts sourced from our operation in Suzhou.

At the end of September, we have eliminated 52 positions in Portland, 50 hourly and 2 salaried and eliminated 12 temporary positions. As we move forward, we will continue to look for ways to optimize our operations worldwide to best service our worldwide customer base. We spent $1.5 million on the restructuring.

At this point, I will turn the meeting over to Dennis Bunday to provide you with some financial detail on the quarter and year-to-date financial picture for the company. Dennis?

Dennis Bunday

Thank you, Pat. Sales for the 2007 fourth quarter were $16.4 million compared to $19.8 million of the fourth quarter of last year. The deeper than expected decline in NAFTA truck build rates led to a $4.5 million reduction in sales for our NAFTA truck customers compared to last year's fourth quarter. This 57% NAFTA decline was entirely the result of volume declines and some mixed changes.

There were no significant per unit price changes or changes in our share of this market driving this decline. Offsetting the lower sales to our NAFTA truck customers was 9% higher sales in Asia and Europe, 21% higher NAFTA off-road sales and 26% higher sales to our NAFTA bus customers.

Full year sales were $68.9 million, down 7.7% from the record $74.6 million in 2006. As was the case in the fourth quarter, the year-over-year sales decline was entirely the result of volume declines and mixed changes to our NAFTA truck customers. Sales to this group declined $10.5 million for the full year.

On a positive side, as was the case in the fourth quarter, sales in all of our other primary markets were up on a year-over-year basis. Asian sales were up 15.4% with sales to China alone almost doubling. European sales were also up 15.4% on generally higher truck sales and some market share gains by our customers.

Additionally, NAFTA off-road sales were up 15.6% and sales for our US bus applications rose 17% due to the penetration of our adjustable pedals into this market. Overall the non-NAFTA truck sales gains offset about half of the decline from NAFTA truck.

Net income for 2007 fourth quarter was $1.5 million of $0.20 per diluted share, down from $2.8 million or 37% per diluted share in the fourth quarter of 2006. In the quarter, the basic EPS share count was 7,487,904 fully diluted shares versus 7,751,216. And at quarter-end, we had 7,495,482 shares outstanding.

For the full year, net income was $7.9 million or $1.03 per diluted share, down from $9.5 million or $1.25 per diluted share in 2006.

Fourth quarter gross profits were $5.6 million or 34.5% of sales compared to $7.2 million or 36.6% of sales in the fourth quarter of last year. For the full year, gross profits were $23.8 million or 34.5% of sales compared to $26.5 million or 35.5% of sales in 2006.

Just as was the case for the lower sales level, the margin decline for both the quarter and full year is the result of the lower sales to our NAFTA truck customers. Offsetting this significant NAFTA truck margin decline were contributions from our higher sales volumes in Asia, Europe off-road and bus.

Also, our component resourcing and changing from outside purchased sensors to our internally produced sensors improved margins in both the quarter and full year.

Fourth quarter results were negatively impacted approximately $300,000 due to some one-time scrap and rework cost, resulting from completing our operations realignment. As our realignment was not complete until late in the year, we did not see significant savings at this area in 2007.

Looking at operating costs, which consist of research and development, selling and administrative expenses and the cost from our realignment, in the fourth quarter, we recorded in administrative expenses an additional $500,000 for the potential cost of completing the environmental cleanup of the Portland facility.

We now have slightly over $1 million recruit for the Portland environmental remediation. Even with this additional $500,000 accrual, operating expenses were down to slightly to $3.1 million in the fourth quarter compared to last year's $3.2 million. For the full year, operating costs were $11.9 million compared to $11.7 million for 2006.

Legal expenses were down significantly for the quarter and the year as we were successful in reducing the costs to defend against our class action lawsuit.

Research and development expenses were down 20% in the quarter and 8% for the year. Part of the lower costs were due to the timing of various projects. However, during the year, we completed our conceptual development center, which lowers our product development costs and at the same time allows us to provide our customers with samples and prototypes on a faster basis.

This year was our first year of having to comply with Sarbanes-Oxley, which drove our public company cost up significantly. Our best estimate is that it cost Williams approximately $400,000 to comply with SOX in this first year. We were able to mitigate a portion of these higher costs by changing auditors during the year. Our SOX audit has been completed, and it does not contain any material weaknesses.

We completed our realignment of operations in late fiscal 2007 and recognized expense of $93,000 in the quarter and $737,000 for the full year for the realignment. Overall, we spent approximately $1.5 million on the realignment over two years, which consisted of termination benefits for the 50 employees terminated, supplier and parts qualifications, accelerated write-off of certain assets, refurbishment of fixed assets and travel and other costs. We do not expect any additional realignment charges after 2007.

Our effective tax rate for the fourth quarter of 2007 was 38.5% for the quarter and 35.2% for the full year. I anticipate that for 2008, our tax rate will be approximately 35%.

Now, turning to the cash flow and balance sheet. Our primary focus this year has been to balance our inventory levels with our expanded geographic presence, although, we made progress in 2007 reducing inventories by approximately $800,000, we have been cautious to maintain adequate inventories to ensure deliveries to our customers. As we progress through 2008 we will reduce inventories as it is prudent to do so. One area where we will most likely see some net increase in inventory levels is to support growth of our European OEM and distributor network.

Other receivables were higher due to the timing of our tax deposits. We will be able to use approximately $700,000 of these deposits to reduce our first quarter 2008 deposit requirements and reducing our cash needs in 2008.

Accounts payable are down in proportion to our lower sales volume and also due to writing-off $890,000 of old accounts payable during the year from old defunct subsidiaries. The lower payable levels does not represent a change in our payable payment policy.

At September 30, 2007 we have paid-off all but $1 million of our long-term debt, which is now classified as current obligations and have no balance outstanding on our revolver.

Depreciation and amortization for the fourth quarter was $553,000 and $2 million for the full year. Included in the depreciation amount is an accelerated depreciation of our die-cast machines and machine tools as part of our realignment program of approximately $26,000 for the quarter and $146,000 for the full year.

Non-cash stock option expense was $124,000 for the quarter and $537,000 for the full year. Overall, cash generated by operations for the year was $8.4 million. Of that, $2 million was generated in the fourth quarter.

CapEx for the quarter was $530,000 and for the full year was $2.2 million.

In conclusion, 2007 was probably the most difficult NAFTA truck market in recent memory. However, our repositioning efforts over the last three years significantly helped in offsetting the NAFTA impacts and helped to better strategically position the business. Sales towards NAFTA to our truck customers were down 36% for fiscal year and 57% in the fourth quarter. While we expect on a long-term basis this market will recover and it has, have an effect on this year.

Even with the difficult NAFTA truck market, sales were down only 7.7% and our net income was still over $1 per share for the year. As a percent of sales net income was 9.3% in the fourth quarter, and 11.5% for the full year. We generated $10.5 million from net income, plus non-cash charges for depreciation and stock options, and used that cash to improve our operations worldwide and to pay down debt.

We have reached the settlement with [Dana and Blought] on the cost sharing for the cleanup of the Portland facility. Although this agreement still needs to be confirmed by the bankruptcy court, and we need to work through the final disposition in bankruptcy, the settlement should go a long way to help fund the cleanup of our environmental situation in Portland.

Finally, our $17.2 million of stockholder's equity is more than double the equities last year.

This concludes our formal comments. We would now like to turn the meeting over to questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of John Nobile with Taglich Brothers.

John Nobile - Taglich Brothers

Good afternoon and I just want to thank you, lot of my questions are actually, already in your comments, but in regard to the manufacturing plant in India, which I believe you said was in late 2008, you anticipated being completed. What type of CapEx can we expect from this project?

Pat Cavanagh

John, we're going to start out by leasing our facility there. And as we go forward we'll decide on final strategy, but right now I think the CapEx is going to be minimal.

John Nobile - Taglich Brothers

All right. And leasing could continue for many years going forward?

Pat Cavanagh

Well, it depends on how the market develops. We're quite excited about the Indian market. We think that we're in real south position there right now. And our production equipments and that kind of thing would be brought into that plant. Production volumes will be lower, obviously than what we're doing in China right now. So, it's not going to be a large CapEx expenditure, but we will lease for a while and then make final determination on what we think we're going to need. I could absolutely see us leasing for two years.

John Nobile - Taglich Brothers

Okay. I just wanted to back up to earlier comments: did you say that industry estimates were calling for NAFTA sales in 2008, I believe calendar or is that your fiscal year?

Pat Cavanagh

John, what I typically do is I put all of those kinds of figures in our fiscal year format. And if you go look at 2007, we had at the end of 2006, which was very, very strong and the carry over into the first quarter of 2007, so the first half of our fiscal year was very, very strong, the second half was lower than any of the analyst had predicted, it was quite a difficult time, the last two quarters of our 2007. And if I look forward, the current estimate, and some of these are very recent, show that they do not expect to rebound, of any significance in 2008, for the truck market. So, we expect that in our fiscal year, if the current estimate fall in, and they are estimates, it could be in a low 400,000 range from around 400 and we figured in our fiscal 2007 we had 484,000 heavy trucks build, we think in 2008 it’s probably going to be in the low 400,000 range.

John Nobile - Taglich Brothers

Okay, thank you.


(Operator Instructions) We have no questions at this time.

Pat Cavanagh

Okay. Well if there are no other questions, this concludes our year-end conference call. And I would like to thank everyone for attending today.

Dennis Bunday

Thank you. Happy holidays.


This concludes today's conference call. You may now disconnect.

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