Twin Disc, Inc. (NASDAQ:TWIN) Q3 2021 Results Conference Call April 30, 2021 11:00 AM ET
Stan Berger - President, SM Berger & Company
John Batten - Chief Executive Officer
Jeff Knutson - Vice President of Finance, Chief Financial Officer, Treasurer & Secretary
Conference Call Participants
Josh Chan - Baird
Noah Kaye - Oppenheimer
Good day, and welcome to the Twin Disc Inc. Fiscal Third Quarter 2021 Earnings Conference Call. Today's conference is being recorded.
At this time, I'd like to turn the conference over to Stan Berger. Please go ahead.
Thank you, Christina. On behalf of the management of Twin Disc, we are extremely pleased that you have taken the time to participate in our call. Thank you for joining us to discuss the Company's fiscal 2021 third quarter and nine months financial results and business outlook.
Before introducing management, I would like to remind everyone that certain statements made during this conference call, especially those that states 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, copies of which may be obtained by contacting either the Company or the SEC. By now, you should have 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 Annette Mianecki at 262-638-4000 and she will send the copy to you.
Hosting the call today are John Batten, Twin Disc's 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 2021 third quarter conference call. As usual, we'll begin with a short summary statement and then Jeff and I will be happy to take your questions. Before Jeff goes over the quarterly results, I'll touch on some of the operational highlights in the quarter. Our global team continued to do a great job keeping our employees and their families safe, while continuing to operate the business.
More so than in North America, we saw significant challenges both in Asia and Europe as COVID cases road and in office work became more restrictive. Our teams in those two regions did a fantastic job, keeping the facilities running, employees safe, and product moving to the customer.
As you can imagine, Twin Disc along with everyone else faced several COVID-related supply chain issues in the quarter, especially with respect to container ships inbound from India and container ships outbound to China. Unfortunately, we expect that this will continue to linger through mid-summer until things get back into full swing and ships are moving more freely.
As I mentioned at the last quarter conference call, our facility in Lufkin came online in late November and early December. It is now in full production of our mechanical clutches and PTO and we continue to staff the location for the future, sourcing and planning, employees engineering and sales are all being added as we speak.
In the fourth quarter, we'll be moving our remote actuated PTOs and then followed by our hydraulically actuated PTOs in our fiscal '22. Orders in the third quarter started off strong and seem to take a spring break vacation with the rest of the country in late March. I'm happy to report that April orders are back in line with what we were seeing in January and February continuing the quarter-over-quarter improvements that we've seen since last summer.
As I've been mentioning in previous calls, our R&D and project activity in hybrid and electrification continues to increase and we rolled out the goal electric portion of our website that layout our product development plan for future products in our global and off highway markets. We continue to work through the inventory, and our distribution partners and new unit orders on the factories continues to improve. We saw this improvement first in Europe before we saw it in North America, but we're starting to see that trend in North America as well.
Happy to also report that we're starting to see rebuild activities for our North American frac rigs at our distribution both in Canada and the U.S. Our new oil and gas unit shipments to Asia remained steady and should increase later in this fiscal year and into fiscal '22. And our projects and global marine markets remained strong and we should start to see improving orders, continued improving orders and shipments throughout the remainder of the year.
With that, I'll turn it over to Jeff for some comments before I come back on the outlook.
Thanks, John, and good morning everyone. I'll again briefly run through fiscal '21 third quarter numbers. Sales of $57.6 million for the quarter were down $11 million, or 16% from the priority or third quarter. The quarter declined from the prior year was the result of the generally weak global economy due to the ongoing effects of the COVID-19 pandemic. Compared to the prior year third quarter, transmission sales were down 13.4%, industrial sales down 14.8%, marine and propulsion down 23.2%.
Looking by region, sales in North America were down 29% while sales into Europe were down 10% and sales in Asia Pacific were down 6%. Foreign currency exchange was a net positive $3.9 million impact to sales in third quarter. And through the first three quarters, sales are note down $24.2 million or 20.4% compared to the prior year. Foreign currency translation contributing a positive impact of $7.5 million compared to the prior year first three quarters.
The third quarter margin percent was 24.2% compared to 24.1% in the prior year third quarter. The third quarter benefited from the employee retention credit which contributed $1.2 million to the gross profit for the quarter adjusting for this benefit. Gross profit would have been 22.1%, a sequential improvement and reflecting an overall continuation of a less profitable mix of revenues, with declines in aftermarket volume and shipments into the North American oil and gas markets.
Gross profit for the first nine months finished at 21.4% compared to 22.3% for the fiscal '20 nine months. Spending on marketing, engineering and administrative costs for the fiscal '21 third quarter decreased $2.2 million or 14% compared to fiscal '20. The decrease is primarily the result of reduced payroll costs, amortization expense and marketing activities as well as a $600,000 favorable impact from the employee retention credit I just noted.
We continue to aggressively pursue cost reduction opportunities to compensate for the decline in revenues. As a percent of revenue for the third quarter MD&A expenses were 22.9% compared to 22.4% in the party or third quarter. And for the first nine months MD&A spending is down $9.1 million or nearly 19%, finishing at 25.6% of revenue compared to 25.7% for the same period last year.
Our restructuring charges $251,000 was recorded in the third fiscal quarter, primarily related to actions to adjust the cost structure and our domestic operation and ongoing cost reduction and productivity actions at our European operations. The prior year third quarter operating income was impacted by $27.6 million impairment charge excluding this charge operating income was essentially level with the prior year and reduced volume of nearly $11 million.
For the first nine months, the operating loss of 7.2 million reflects that $3.9 million improvement over the fiscal '21 nine months exclusive of that prior impairment charge. The effective tax rate for fiscal '21 nine months was 28.9% compared to just 8.9% from the same period last fiscal year. The impairment loss reported in fiscal '20 resulted in a decrease to the prior year rate of 13.8%.
During the current fiscal year, the Company was able to take advantage of the newly enacted high tax exemption regulations resulting in an increase to the rate. The net profit for the third quarter of fiscal '21 was 100,000, or $0.01 per diluted share compared to a net loss of 25.2 million or $1.92 per diluted share in the prior year third quarter.
Through the first nine months, we've reported a net loss of 8.2 million or $0.62 per diluted share, compared to 38.1 million or $2.89 per diluted share in the prior year comparable periods. EBITDA of 3.8 million for the quarter was improved from negative 24.9 million in the prior year, third quarter. For the year so far EBITDA of 1.3 million is over $30 million improved over the prior year.
Turning to the balance sheet, inventory was down 5.5 million in the quarter and 3.9 million year to date despite the $3.2 million currency translation driven increased. With a focus on liquidity and cash flow, we were able to generate 2.2 million of operating cash flow in the quarter and bringing free cash flow deposit of 1.2 million for the first nine months. Capital spending at 1.1 million for the quarter and 3.9 million year-to-date hasn't focused on the new Lufkin facility and modern machine tools and testing equipment.
It has been remained in a very challenging market environment we continue to defer all non-essential capital spending and continued to expect to invest roughly $5 million to $7 million during the fiscal year.
And with that, I'll turn it back to John for some final comments.
Thanks, Jeff. Now just spend a couple moments on the outlook. As we've mentioned earlier in the call, April orders rebounded from a little bit of a March low, which continues our thought that our market shares are going to be improving throughout the calendar year. We've seen upticks in order and spare parts new units. And we've seen some activity in North American oil and gas rebuilds, so optimistic that our markets continue to improve from their lows late last calendar year.
During the last 12 months, as everyone has been analyzing how we do business and as travel continues to open up, we'll begin to implement some of the changes that we've been planning with respect to facilities for the cost reduction activities and new sourcing initiatives. As you can imagine, much of this has been difficult to do via e-mail or video conference. One of the first things that you'll see is, as I've mentioned in calls, our corporate headquarters in our with the original plants here in Racine about 186,000 square feet represents about 30% of our square footage in the Racine area.
Given work from home, modernizing the plant to 21st Street taking old machine tools out, we have room to fit almost everyone from this facility into our larger plants across town and in our aftermarket facility. We may need to lease some office space, but we'll see us winding out of this facility throughout the calendar year and expect to see some other changes in facilities in the coming future.
Finally, we continue to invest heavily in electrification efforts both in sys products, systems and the data security, and we are very optimistic in our ability to bring competitive solutions into our global off highway markets. And as we come into further conference calls, hopefully we'll have some customer information in detail that we can share with you, but nothing that we can share at this point.
So with that, Christina, that completes our prepared remarks, we'll be happy to take questions at this time.
[Operator Instructions] We'll take our first question from Josh Chan with Baird.
Oil and gas are you mentioned some kind of improved rebuild activity. When do you think that you'd see kind of a more pronounced type of uptake including kind of new equipment? Is there still kind of several quarters away or do you see that becoming a little bit more clear at this point?
I think we'll see the rebuild activity can probably continue for the next quarter. I would anticipate units maybe late summer, early fall would be my guess at this point.
And then same on oil and gas, if end customers, they have the desire eventually for sort of a hybrid or electric type tracking equipment. Do you or will you have kind of products that is able to serve that particular desire?
Yes. And I would hope that maybe the next call or the one after that, I'll actually be talking about one.
Last question that I have is what kind of incremental gross margins can be expected in point two, assuming that the market recovers? I guess I'm just wondering, offer these more levels? How do you see gross margin improving over the next year so or the end market improve?
Josh, this is Jeff. So, we're heavily mixed impacted company based upon, what's happening in North American oil and gas and aftermarket. I think we would look for incremental to be in the mid 30s, as the markets recover. It can be a little bit higher than that, if it's heavily weighted towards North American oil and gas, a little bit lower, if it's, some of our lower margin products. But we've been very successful over the last 12 months in driving cost reductions into some of our key products. We're seeing that margin improvement, start at the P&L now. So, I think mid 30s, on the incremental as we work through into fiscal '22.
[Operator Instructions] We'll go to our next question from Noah Kaye with Oppenheimer.
I think in the prepared remarks you talked a bit about some of the supply chain issues and any industrial companies going through that this quarter. So I don't think there's a huge surprise and it will continue as you said in future quarters. Can you first sort of dimension for us, if you can imagine headwinds impact of some of those supply chain issues? Do they actually manifest more in things like premium freight materials cost inflation? What was the margin drag in the quarter?
No, that is a good question. I'm trying to quantify it quickly in my head. I think our team did a very good job mitigating. I know, we had some airfreight coming on parts from India. I would say, to be honest, Noah, the impact probably wasn't that great in the quarter. I think it's things that are the bills that we'll be paying this month and next month. So, I will try to get an answer. I don't want to throw something out there is going to be wrong, but it hasn't been -- I wouldn't say you'd see it in the P&L yet.
It's something that we're mitigating and we've announced price increases, effective July 1 in that 4% to 5% range based on what we've seen in steel surcharges, steel pricing and increased freight. So, we've kind of anticipated that it's going to be that the impact going forward is in that 3% range and that's so 3 to 4. And so depending on the products, we're in that that 4 plus percent pricing range, hope that helps.
Yes. So, it sounds like you do expect [indiscernible] in this quarter and beyond that there or do you think that you'll be able to compare to this quarter and then we have about price increases that we [indiscernible].
Sorry, [indiscernible] digital little bit, but today just was I hearing, you think it's going to be impacted in this quarter, but we're mitigating in quarters going forward.
Right. So, you'll be positive price cost for the September quarter, but you may have to drag in this next quarter. Is that a fair?
Yes. Yes, exactly.
All right. Sorry for the digital entertainment. And then just to make sure we're in terms of any supply chains were you able to produce to end market demand this quarter? And do you anticipate any issues with that on any of that kind of SKUs or we feel [indiscernible]?
So, we -- the products that were affected most of the industrial products that we produce in Lufkin because a lot of their parts come from India. The team in Texas and here seen scrambled and worked very hard with the shipping companies to get stuffs we were caught behind the evergreen or the [indiscernible] ship, but that they've got that in, they airfreight some parts in.
So, we look good right now through most of the fourth quarter, we have container ships that are due in, that are scheduled to be due in late May. If anything, we may lose a little bit of industrial, so the revenue dollars won't be big, but whatever we missed in the fourth quarter, we certainly made up in the first quarter.
The other parts that we have coming in from India, as Jeff was alluding to some of our cost reduction initiatives. So, they were actually just bringing a lot of those parts in and trials we have, we already have parts here in North America. So, I think the impact it may -- there may be an impact in the fourth quarter, at this point, I don't think it'll be significant results.
Yes, that's helpful. So well done on generating the positive free cash flow for the fourth quarter here any working capital headwinds to be aware of or do you feel pretty comfortable that you'll be positive for the year additionally?
I'm not aware of any headwinds. Noah, I think, we'll continue the sort of the discipline that we've had through the year. Hope that again be marginally positive free cash flow in the fourth quarter operationally. And yes hope to continue that that trend and then come out. As volumes comes back to maintain that discipline in the working capital area and continue to focus on that as we grow.
Great. And if I could just make one last point in, we talk about kind of taking an industry when it's down but and the California fracking ban, that's being proposed to start in 2024, something that some investors have noticed. I guess just maybe helpful for investors to better understand that your regional exposure with your North American oil and gas business whether that announcement was something that concerns you, and if not why?
Noah, it's john. Not really, there wasn't a whole lot of activity going on there. So, our exposure is, as the industry exposure, really, we're in the Marcellus, we're in and around Texas, and all the southern and Canada and the Dakotas. So, New York and California don't really play into the dollars of the number of units at all. So, I guess the short answer is no, it doesn't really concern us.
I'm sorry having been you to cut you off, you're essential.
No, I just say that, as I amazed, we are a strong believer in natural gas for the future. As our markets continue, the hybridization and electrification we need. This country needs to generate electricity, and we need to upgrade the grid, generate electricity. And it's great to see solar and wind and more of a percentage, but we definitely feel that natural gas is that replacement energy sources as compared to coal. So, again, that plays right into our 7,600 and 8,500 for the foreseeable future.
[Operator Instructions] As it appears are no questions at this time, I'll turn the call back to Mr. Berger, for any additional or closing remarks.
Thank you, Christina. 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 contact Jeff or myself. And we look forward to speaking with you again at the close of our fiscal 2021 quarter in August.
Christina, I'll turn the call back to you.
This concludes today's call. Thank you for your participation. You may now disconnect.