TWIN - Earnings call transcript Q4 2019

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Operator

Good day and welcome to the Twin Disc, Incorporated Fiscal Fourth Quarter 2019 Earnings Conference Call and Webcast. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Stanley Berger of SM Berger. Please go ahead, sir.

Stanley Berger

Ian. you, Thank discuss the outlook. that of in Twin we're financial us Disc, call quarter XXXX On full and have management taken pleased year to joining for you thank and participate company's the extremely fiscal and fourth business behalf results you of the time our to

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

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

should was the have of received copy morning By opened. market this now, the issued you a which release, news before

If Annette Chief she Knutson, Mianecki copy, copy are at please Officer; call John Vice Disc's Jeff company's you Finance, of Executive Officer, President Financial Treasurer call Batten, to and today and and send a Twin will a the XXX-XXX-XXXX, not Chief have Hosting you. the received Secretary.

I over time, to John will call this turn the At Batten. John?

John Batten

fourth Thank you, Stan, year and quarter XXXX conference to morning, end everyone. fiscal and good our call. Welcome

then statement your As and we'll questions. usual and will Jeff be with summary short to a I happy take begin

Before on the highlights will issues some touch Jeff of results, quarter. operational over and I goes the from quarter the

up not the on will but lower to keep and meet the our a chain we XXXXs order reflected at strain and challenges quarter several internal capacity on quality were other run not other demand cost. supply concern the to of face to details, fourth to vendors supply that continue supply because of color in demand ability with in base. the Jeff our move because to customers results, always a more lot the in provide primary wait. up continued affect to could We products our In Availability had our in

some faced focus who of markets. from shifted business away our or also We out suppliers went

been to lower a have cost parts working but and through way inventory. this, these on resource have our achieving We hard to to to some are supply we'll existing work

industrial of percentage supply, improved a through newer like working products Additionally, XXXX see and of XXXX to transmission, normal output, pricing the planetary throughout pre-production our new with products. higher RF XXXX prototype than products new trends We had lower QX still actions. inventory the many and of pricing. due should cost the and are our fiscal efficiency improving

last we half into and As affected fiscal which did first we obviously from mentioned XXXX, call, on the and have outs QX QX push mist. the gas the oil of

Internal of by in increased employees and training capacity and year. half was second the shift by declining affected dramatic in newer the efficiency mix partially a driven

or rig. from XXXX replacement increase The for is XXXX. almost demand oil XXXX the XXXX on rig and new an existing speed. an Almost new new our to of inventory the are to and all better continue exception by of to month We demands coming the with new Veth reacting the increased to on transmission and models in reconstruction our employees purely came a gas for the direct up get

meet have moment. do functional the Operational But sure demand. an North China for a America we make XXXX term of swap down been at been most of to inventory the demand near of happened. widely out to this is model. This used and that The have our changes and remains in a has bring excess in we competitive where made plan to

growth both a and our more fiscal at developments healthy heading positive XXXX. markets backlog year, saw the we industrial maintain marine in Looking global into and

turn Now Twin and in Veth, into be our with in year could moment, a finance, one first of of Most more engineering. we HR, not were finished for Disc couple family. efforts our year integration objectives progress we the of as the strategic pleased to a with our marketing

Our no Veth job the our shows together speed. delivered help finance major team SEC in approach the especially path coherent front. And up to team on us teams diversification to forward, did our we will collective path global great a greatly came a doubt trade a the that unified hybrid forge forward. and There's and going bringing at of engineering

been positive, North and sales coming markets good expect growth American we Asian in extremely the Our the and response has in years.

is Our be our fourth and expect products. of industrial quarter facility North produced American with in construction, under fiscal all we operational to Lufkin in our

We in will is team our dedicated solely have new focused beyond. industrial top portfolio XXXX for business. us fiscal growing and adding our priority products Developing a on a to and

financials. With over comments turn Jeff that, I'll some for the it on to

Jeffrey Knutson

quarter everyone. the fourth Sales morning, X.X% of million year were or quarter. brief run quarter million briefly good numbers. X.X through and the prior down fourth John Thanks, I'll for the from XX.X

result American activity our with marine reduction reduction and related in a Propulsion the market, activity in aftermarket activity. fracking the addition industrial of markets. in is Veth of activity partially and bill a by decrease along decline significant quarter offset This new The increased in was North

in some also challenges inventory. resulting supply and delayed Quarter was excess shipments impacted The chain by continued

and strength including positive market. see markets momentum global marine to commercial the continue in nearly all We patrol our industrial, craft and of

demand oil the for sales XX.X increase finished the up and improving sales in grew over year, along prior growth fiscal full industrial the year-over-year approximately the year. is the acquisition, For Adjusting million XX% for with Veth gas half of driven X%. This which organic product the of XX%. primarily or year first was by

the severely in prior XX.X% the reduced gross The performance Our for being margin percent the demand demand lower new reconstruction quarter. quarter unfavorable drivers. fourth margin with compared fracking and product an was quarter for aftermarket impacted XX.X% primary fourth by was mix to

John costs suppliers were to lose production impact addition in based the as to meet land higher to order of some of we growing In demand mixed transmission the the mentioned forced to system. our

fourth to impact and improved of purchase this pursuing quarter pricing already related acquisition The the issue. are alternative address accounting Veth the amortization. includes or vendors result We

Veth amortization, Excluding accounting approximately gross quarter. for non-cash was fourth profit purchase XX.X% the the

full 'XX at profit finished to in XX.X% on compared the fiscal would year the adjusting profit right gross amortization XX.X% Veth fiscal of For 'XX. XX%. the event Veth Again, acquisition, for gross

on second reduction and With the margin half cost year, are driving the pricing challenging we actions and focused to product performance. improve the of mix

engineering and is decreased and the administrative fees marketing, of sale offset to partially of or counting bonus quarter XX% fiscal fourth million 'XX and Mill the professional result by with on of X.X Spending purchase the reduced fiscal Veth compared for related costs impact amortization. along The decrease addition Propulsion the the Log the 'XX.

other year 'XX For in expenses two results and Included business are to on to X.X the relate Mill 'XX. adjustment items an full Propulsion acquisition. the with gain million. XX.X% Veth fell of associated $XXX,XXX an the ME&A fiscal $XXX,XXX assets These to fiscal and compared totaling for revenue XX.X% operating Log the to an accrual

fiscal fiscal full year tax and also XX.X tax was X.X challenging which legislation, essentially million results breakeven or higher 'XX. tax a the adjustments The fourth to 'XX benefit the your than liabilities. was year of related assets quarter and prior The in prior the new of rate XX.X% rate impacted re-measurement fiscal by performance, related impact the margin reflects 'XX. of midyear discrete full the operating to negatively for operating was effective rate year The enacted compared While current for were income on rate XX% to was the changes year. differed

EBITDA brings fiscal to X.X million The X.X per to quarter of prior million or year. per X.X in million prior full million an of over a or $X.XX the results is 'XX share a X.X the year the line quarter, diluted bottom for of prior by reflects 'XX X.X XX.X compared $X.XX improved share, year. fiscal decline profit to the full but million Positive improvement the XX.X fourth for million profit million the

the out and to and The balance inventory did as we remaining with the XX.X XX year, EBITDA close subsequent the inventory sheet customer quarter the for down in delays offering driven of come X.X headlines the million acquisition fourth delivery remains Veth XX million in impact Well, finished we hampered fiscal equity XXXX. million with to of 'XX million healthy debt, in debt X.XX. of quarter, debt fiscal ratio into XX.X% net of capital by reduction total efforts were the

the flow contributing from positive results the at down million finished X.X. cash the is free to in million Operating million, quarter flow capital for was with positive backlog and improving QX XX months fiscal quarter. Six fourth working the X.X level. which XXX million cash is numbers the quarter positive

final some for now turn it John to back And I'll comments.

John Batten

Thanks, Jeff.

spend the our lot that in was to put looking office did integration. management then on of functions, integration we Now, consolidate actions hold acquisition the were of at the A time on the and I'll Europe, quick moment XXXX. as back on fiscal a Veth in were spent particularly Many we of outlook.

number access to in will electric future. using been expand industrial mass line into And electrification us to we need to develop There's the with we in marine their continue build line. forward, to we the talk provides of we reduce Moving on trend and costs. current hybrid already rigs. efforts and as to this is our talent their variable relatively frack see a small, about critical our our European We're efforts the while these conjunction transmission team. look and a costs fixed efforts and material lot experience That a growing

wish for our will solutions customers to be who option. with We pursue ready this

as rejoined as the and footprint our beneficial our we also you knowledge a global products and after years May product Feiertag Jim's Disc rationalize our four our that of Jim spending Many facilities Chief Bemis very Officer will as Operating be and in Manufacturing. has intimate of release Executive Chief President press people, probably years coming saw of portfolios. in Officer Twin

convey to on the we and continues diversification management message want Finally, to growth. that focus

in industrial the to hybrid continue development. Even explore further our front to short-term business to our and opportunities we challenges we address as enhance us, will of margin grow

That now line will I concludes And to open the remarks. for be take and happy Ian, Jeff questions. please my your questions. prepared

Operator

Kaye [Operator Thank you. comes ahead. of Oppenheimer. from Please We'll our question, Noah go Instructions] take first

Noah Kaye

gentlemen. for the Good questions. Thanks morning, taking

base can little challenges, in First, on us mix other quarter? some if you detail number margins, you the we weigh more then can did give mix, a How the of this? a any much here, supply factors. you granularity on on bit of can And give on to factors pointed margins touch the

Jeffrey Knutson

Mix I Yeah, – on kind some that related, I one ways. guess, they're jump in was Noah. can of

the on So drove products sourcing result of a really low is issues that mix mix John margin the the negative – described. the that on the that

if – on drove the lower QX, line. comparing got of we're the newer we've transmission that unfavorable So products, the million impact X QX margin margin to products almost

that So we're that profile that's are really the mix that as driving was those well focused and on, those driver negative pricing products. on as products where the that of cost

Noah Kaye

the and the commented, margin Right, of margins business Veth I this low to is really, the they're around think kind you've XXs. typical previously XX legacy mid

I that that not drag So it a was right, if was not, margin? understand on

Jeffrey Knutson

drag, piece, finished amortization the was of That a excluding – little the they a year right. bit and I'm

So X the X.X year. million, was for million about the amortization

got that Excluding of full year. they've their for mix around project. a in as were well the little they bit XX% And

quarter challenging So a for particular, was margin in Veth. QX

Noah Kaye

Okay. And then,

John Batten

and exact if full suppliers, to numbers I I bit general suppliers, – shift at look having had went I the that X% looking the of in guess, products, where I front about of we could units a transmission if into don't a to add sense. color. little margin back those on based but, me, with shift in were to If different have by year their shifting makes – probably down Noah,

working So the which deteriorated supply year them now. margin that X% the are on right to reverse about probably gross with over we

Noah Kaye

with you coming get that? and to of that then, should back expect we of margin commented of over action, you roughly about kind typically levels expectations take Can Right, quarters stable number? should margin would the improve, a we more we sort just, think the as to that sequentially how

John Batten

down were to at – the minimum a to finding year combination we we're XXs, back on And go able it's approaching pricing. and of other shift we've being of end cycle a get bare looking during to – kind being gross that suppliers XX. suppliers to where were high begun mean, already a and for Absolutely, cost a back margins different lower of

our So though, lowest Europe. typically, usually the is the US first shutdowns margin because quarter quarter, and in of in

start So I see October. our expect September and of pricing to most actions in

quarter. second real that in be the probably think see So I the you'll improvement

Noah Kaye

Okay, helpful. that's very

John Batten

we So be should able to –

Noah Kaye

Sorry, to up. catch you mean

update you development And line remarks, markets. that us you [indiscernible] looking to development on how the of your seeing side marine see of Okay, we in of marine a what that's the then hybrid you end into adoption maybe think for just prepared your portfolio kind be the you're your products mentioned, and entering then should that of some bit very or helpful. the some on about little that other of for kind on product take hybrid the front, to might Can expecting

John Batten

running we're so of Yeah, we're we're particularly the mode but type in or areas the of able ferries canal Europe, demand in to urban then the gen seeing and a boats, hybrid what engines. batteries. of and running of set Europe. a fragmented. operate propulsion being gen it's And lot hybrid passenger seeing are low in marine off river not tugs, in seeing Certainly, lot for seeing on tugs in that in sense speed set these we're that for for of in for in diesel Asia. electric, from traffic US the the off seeing We're tugs, And

to happening wanted line, our a I V-drives the it we're seeing both it say application. application And tidal is. by product for wave. for transmission So so it's and It's marine current not

develop are this to across able logic to our We do as all controls one the working team of products. be

Noah Kaye

on a product? could how fracking just new then you And quickly introduce

John Batten

be on I now be that customers. But with say they're but right but sooner later. will And to We in can't we solutions but it I solution have I'd what are rather see can't something Noah, single won't right in this, to projects different probably one going I fiscal tailored different customers. they're than like it's you'd working year, development bank current say say on end field, this the now. to would when

Noah Kaye

very the color. much you I'll back. for thank Okay, jump

John Batten

thanks. Okay,

Operator

Thank you. Baird. of Please And we'll ahead. our Tim Wojs question, go next take comes from

Tim Wojs

morning. Good gentlemen. Hey,

John Batten

morning. Good

Jeffrey Knutson

morning, Good Tim.

Tim Wojs

So I here. kind right low that the do high kind on in kind to profit guess XXs can or gross for year gross the just of that's want of margin just I half more you first rate it year of thinking of you I cadence, make sure question exit than you the the think get back XXs, ballpark Were at? run next

John Batten

what That's think. I first. answer I'll Tim,

going the to year. For that's this we're year where exit

Tim Wojs

helpful. Okay, got you. That's

in the building expect – step to fourth Okay. And it then you up would in to kind of relative the half you the what would then then quarter and in we down much be, and in the saw probably QX into back a year. build more QX of

John Batten

Correct.

Tim Wojs

business Great, the then you. and housekeeping you're was a the that? oil just if say able American got Okay, to you. how question, North And gas in thank big quarter

John Batten

competitive almost I'll activity aftermarket all replacing in product that – the rigs let North – you rigs going numbers, American was give but taking or existing Jeff of the rigs our market. out units in into were

all was that almost that. I think

of handful a that the rigs maybe in few. had units new quarter, very we think I went into

Jeffrey Knutson

that's yeah. Yeah, right,

Tim Wojs

And about we capital free you just – should like at next you'll in release how kind inventory. think then it should sounds like of the working if for year, flow XXXX? estimate kind free ballpark about think cash cash first in – got we when flow the of and Jeff, capital could working think the half of kind Okay, year you. a maybe about of some look we what with just of How look

Jeffrey Knutson

know tough down. bringing an important and inventory to a certainly points. answer always we're focused Yeah, It's one I it's on

of market. that pointed in John growth part a inventory have out, We and oil our inventory, as gas big is

certainly and full but on and able we're market But positive what to of depends be to would the much through, the how the QX. flow we expect something for we're in dynamics cash we say on move free certainly a did So quarter-by-quarter – there lot order I year.

Tim Wojs

a quarterly saying? number you're For

Jeffrey Knutson

Yeah.

Tim Wojs

Okay, got you.

kind to you you're QX, of you then, in I John, question gas a bottom I the to And building would – thinking should think XXXX guess, Okay. and of had. that in start we you did rebuild in about year? expect I through last meaningful how think quarter, we think kind start is then guess of this When the market do into oil the you think quarter of more frame you new of – terms could How the more and kind of [indiscernible] way? when ship and kind first see kind activity actually in here

John Batten

– rig your XXXX. I construction way happening any will be meaningful with expected I start shipments for I'll us driving calendar quarter our oil first see like and expected for fourth until gas new I question – replacement. first. first bit personally to don't will be little think do it And last our – – the our I and for quarter. quarter a in better

for I in it quarter. that better because it's but to rework little the but is quarter, on replacement certainly be the I quarter. beholden the going it a first So fourth could the activity be to bit getting market quarter for rigs should ready easily that But could the rigs. some how – as doing But hope my the there think the be fourth same We're the that the transmission. on requires we growing they're same mean, that demand it's the it's better, yeah, be have as

Tim Wojs

luck. Good fiscal on Look Okay. Thanks guys. next year.

John Batten

you. Tim. Thanks, Thank

Operator

of Thank Please comes [ph]. now question, from ahead. you. Neuberger go And next Ran we'll take Giesing our

Unidentified Analyst

Hi, guys.

John Batten

Ran Hi,

Jeffrey Knutson

Hi, Ran

Unidentified Analyst

currently market sort third there, of the like E sort the players what's the On of available? you transmission are in guys

John Batten

ways – looking I mean, at. there well, two there's of are whole of bunch

again, – is very expensive, – for variable do a growing compared option. frack high drives and with but engine maintenance, DC E diesel it a frack, motor you are with we it transmission. to it can do can when Obviously, it's or You a frequency is

our I say avenue and the the avenues. So is into motor would pursuing pump. using transmission a are to control all we DC primary shaft But

think So of a have best I in providing of the on for Veth market. transmissions think for portfolio cost effective. are anything do three don't that have at this the that compelling who and players we are our we're years few most the the a we E the again, and expertise will team looking main changes Frank? building a with solution we we that to solution customers kind We But product very think in hash those out

Unidentified Analyst

Okay.

it – QX. was million to As over it quarter-on-quarter gross little profit like the almost XX relates looks a in down

mix million mentioned was the for issue. You X

sort confirm guess gross That's of down to of wanted I Just bulk profit. that? the the

John Batten

last Yeah. but for The numbers, of height incredible an It year the quarter quarter fourth was let last year, the was new do us rebuild. and probably I'll rig construction fourth Jeff quarter. of – a aftermarket was of shipments

Unidentified Analyst

Okay, perfect.

Jeffrey Knutson

was going a it. we different that printed knew we Yeah, when to comp be

So the big The is that's it. yeah, story. mix

Unidentified Analyst

and having sort – like Okay just it sort it year can what boarded fall in you're – we're how is meaningful I'm loss inefficiencies, was I of getting trying Obviously, from is it. of you understand I that. to where if think suppliers. just of guess

John Batten

is Supply a each factors. we're to factors external because internal base build not trying issue. can to are we're one we to month and the internal is Ran, get parts So suppliers it's there going in hand and twofold. Obviously, with efficiency knowing few mouth you're in what what

pivot. the So not get one to you're have parts, going you it inefficiency you product drives if all then to realize and building and you're

go build. hadn't XXs. you'd like people on the particularly that we a late I had while of and Secondly I since of hiring technical more added of trained new to in is the have early World Disc to scene when are to get prior new XXs don't when just a I probably War And to career. up that early started, It people, ramp a in a in XXs, that we back the most seen more or and factor, took Twin our up and or know started, we complicated months, some products in kind my – the to that lot amount post the II big I've XX speed,

have had six been all So employees under XX trained. I months improving, see months the have to their that belt

improving. find get start we So a improve and come see it, I you'll as our employee down. we steady efficiency, that suppliers But output see and stream bank and inventory more efficiency, efficiency alternate can on to

will believe see four quarters. do corner I you next the some we've So the improvement turned and throughout

Unidentified Analyst

we it's into is Okay. out head press about it think had you you last grower marine, like hoping called of a we your think The as question I XX% slice, release I – that was sort and 'XX. feel how if do I'm

sort like you sort think that, for to digit as the of grower a single that apples-to-apples a mid So Is we of 'XX? look acquisition. thinking

John Batten

drives, I think grower. propellers lines our and that a is the single marine mid think traditional product in line I product surface and transmission digit

Veth the I year. to America that product think opportunity we in with good opportunities and stable. provided line, remain in I have coming the growth Asia that beat the see Europe the in North markets

we I product So think the can line. Veth beat that with

Unidentified Analyst

other Okay. question And you and maybe? oil going sort do up. just popped you and XX or do got on that non too – manufacturing obviously, in have on I some rather the such add it next another of so guys Do pipeline, that do you things could gas, I see months guess

John Batten

take our mean, operation industrial impact believe with we out Veth believe the eye can into Street team, it'd of the it'll impactful I dedicated when a years this look Getting to acquisition an be to ball on the a few is from goal, acquisition. much – as management back dedicated our Twin want be now, to Twin XXst of was. as Disc think a have we Veth the off to Disc products facility I do facility and the not Lufkin want bring as That I that – personally the do as we does facility.

Unidentified Analyst

Okay, luck. update, for the guys. thanks Good alright. Great,

John Batten

Thanks Ran.

Operator

Gazelle Gamco next Thank from of ahead. Investors. question go our you. Please We'll now Mario take

Christina Bronec

dynamics just cycles? great? you What Bronec cycle to would Mr. sort I from Gabelli's on, had been of summarize have if couple question. It's a meeting. Mr. step be a that different actually Christina Hi, is could into previous Investors Gamco but from touched take know Bailey this to

John Batten

Christina gas I really the about you oil are talking cycle? and

Christina Bronec

Yes.

John Batten

time think one easy there America, oil the is a lot Well, that in wasn't activity. disappear we that this The Asia We this of rebuild cycle strong; of – the a price see North of last But products oil higher. Okay. changed being because and the lot of saw pricing I volume and difference is the replacing XXXX. equipment has weren't cycle. still price we is We competitive hard. is lot the with activity; a our of used remaining used see

So we see And order been continued for competitive never has rebuild horizon. activity on board product higher. the replace to our units

I of little that that So us mean cycle a cycle. this gives better that bit optimism be XXXX will XXXX, than

Christina Bronec

much. Great, so thanks

John Batten

Christina. Okay. Thank you,

Operator

questions. At Thank further you. Batten, [Operator have I'd you. Looks back we no we to no the hand further so call this Mr. time to like question, like Instructions] have

John Batten

myself If and joining you, following not, to closer continuing you or your I'll call free our hope the have XXXX all with Ian, back please questions. appreciate that turn first look again answered forward you. now fiscal call of conference thank to Alright, Jeff speaking Ian. we Twin we the today. for you feel Disc Thank your to call quarter. We interest in and

Operator

all This call. concludes for your participation. Thank today's you

may You now disconnect.

Twin Disc (TWIN) 9 Aug 192019 Q4 Earnings call transcript