Twin Disc, Incorporated (TWIN) Earnings Call Transcript & Summary

Good day, and welcome to the Twin Disc, Inc. Business Update Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Stan Berger. Please go ahead.

Thank you, Matt. On behalf of the management of Twin Disc, we're extremely pleased that you've taken the time to participate in our call, and thank you for joining us to discuss the business update relating to the COVID-19 pandemic and our business trends. Before I introduce 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 company's actual results could differ materially from those projected and discussed related to the COVID-19 crisis as well as other 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. Hosting today's call 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?

Thanks, Stan, and good morning, everyone, and thanks for joining us on our business update call. When we scheduled this call, at the third quarter call, we had anticipated that this would be the close of our PPP funds and that we would probably be announcing some actions based -- to address our cost structure. But as all of you know, PPP funds were extended now through July. In which case, we still have everyone here in our North American operations back at full time with full pay, full wages. Happy to update, though, with respect to COVID. We have just had a handful of cases. Three here in the U.S. All were contracted while they were out of the facility. So we yet to have a case in the facility. All of the cases that we had in Europe, primarily in Belgium have recovered and are back at work. Here in the North American operations we were seeing, we have not had to shut down because of any PPP -- sorry, PPP -- we not had to shut down operations because of COVID-19. And our facility, the best facility in the Netherlands, also never shut down. However, we did have to shut down in the fourth quarter in Belgium, the 2 plants in Italy and one in Switzerland. The COVID activity certainly has had another impact on our incoming order rates. As we talked about at the end of the third quarter, order rates had dropped significantly on a non-oil and gas business. That trend has continued since we talked in May. We don't anticipate anything really changing in the next month. So actions that we are considering to take at the end of the PPP fund at the end of June, where most likely, we'll be talking about those at our fourth quarter conference call coming up in August. Looking at our order rates globally, I would say the market, the geographic market that has been impacted the most is North America. This is after oil and gas, which was down significantly, obviously, from last year but just a normal marine and industrial and other transmission order rates for the U.S. And Canada were down significantly. I'd say that order rates have recovered in Europe after that initial COVID panic, I would say. Industrial and marine are doing nicely. We have service work out of our plants in Italy and a very healthy service order board from the Veth facility in the Netherlands. In talking to some of our distributor principles and end customers here in the U.S., it's obvious that our customers here are working through inventory to generate cash flow. And we've been saying, as we discussed at the end of the third quarter, order rates that seem to be half of what they were a year ago, and that trend has continued. Obviously, we still have a very good backlog to work off of here in North America. So it's not panic yet, but we are definitely pushing for every order that we can here in North America. And it's comforting to see that inventory is coming down in our distribution partners. So those order rates should increase in the near future. We are working extremely hard on a lot of our electrification projects, both in marine, oil and gas and in industrial. And you'll see more of those roll out through the year. We are committed to keeping our product development and electrification efforts on schedule, albeit there may be -- again, on our efforts, they may slow down to some of our customers based on their incoming order rates. But we have healthy projects, both in the marine and the land-based area. That's all I have really right now for prepared comments. And if anybody has specific questions on our PPP or anything else, Jeff and I are available for comments. So Matt, could you open the line up for questions?

[Operator Instructions] First question will come from Noah Kaye with Oppenheimer.

John, thanks for giving us the update here. And I'm glad to hear that cases have been sparse and contained. I guess couple of questions. First, you mentioned a lot of distributors are managing for cash flow. Can you talk about cash collections? Are you seeing any meaningful lag in payments? And in general, kind of how are you managing the cash position here?

Yes. I can take that one, Noah. Yes, we've been, I think, really pleased with collection levels through the last quarter. Really no unusual delays, all of our key distribution partners have been paying on time. So it's been really positive to this point. And like John said, I think hopefully, for us, that's a sign that they are moving product and generating cash, and there will be a -- what we're experiencing right now is kind of a pause in order activity that hopefully comes back as they work through that inventory. We're doing everything I think everybody else is doing, knowing that the uncertainty going forward in terms of cash. We're maximizing our availability. We're managing our payments. We're timing CapEx to only those things that are critical and looking at every cost that we have. So yes, I don't know if that answers your question entirely. But right now, we feel pretty comfortable where we are as we close out the year with liquidity and collections and limited risk in -- on the AR list.

Okay. That's very helpful. And then you talked about order trend rates. So it's a two-parter here. One, is that kind of net order rates, how have cancellations backlog been trending? And two, I guess, just it's tough to have a crystal ball, given how uncertain things are. And as you talk with your distributors, how close do you think we are to a point at which restocking is going to start to occur and your order rates will start to inflect back up again? Is that -- does it feel like a month, a quarter or just too early to tell?

I -- Noah, it's John. I feel it's kind of a 2 to 3 month. We'll -- I think the first -- our first quarter is going to be tough. I think we're going to bounce along the bottom here. And it will start to improve this fall. That's my gut. And then just going on kind of our normal -- our normal base business is kind of repeat. It's not necessarily project specific. It's what they hold in inventory for things that pop up, replacement units for marine, replacement units for industrial, spare parts service work. My gut is that still got about 2 to 3 months to go kind of through the summer and get back into the fall. That's just kind of on that. And again, that's talking to a handful of our really good customers and what they're seeing.

Next, we will hear from Tim Wojs with Baird.

Maybe just to dovetail on the last question. How are you -- or I guess, how are your order rates kind of -- if you look at maybe the oil and gas business and you look at maybe new equipment, parts and service and maybe refurbishments, have you seen any improvement on the parts side or refurbishment side that would suggest that the inventories being used and you can start seeing new transmission orders?

Yes. I guess what's happened since the last call, I would say, our distributors had a lot of inventory on parts, I would say, for the first 5, 6 months of the year, and we weren't getting calls because they were working off of their inventory and parts on the refurbishments that they were doing. I'd say in the last month, we have gotten calls for quotes on some new units and some spare parts. So they're working through their inventory. I think equipment is still getting used in the field, obviously. Again, rigs are being -- older rigs are being cut up. It doesn't matter to make you the engine of the transmission, the old stuff is getting cut up and they're focusing on their newer product in the field. And they are taking care of it. The customers who are going to survive are taking care of it. So I still think it's going to be, again, a couple of quarters at least before you see new spreads being built. There'll be the odd here there sole brand new, to take care of some rigs here and there. But I still think we're 6 months away from new equipment being purchased. But I still think you're going to see some improving rebuild activity on the rigs that are still in operation.

Okay. Okay. That makes sense. And then on Europe, the improvement there kind of getting things back to kind of -- it sounds like pre-COVID levels. Is that just a big bounce back in marine?

Well, I think it's pent-up demand for service work and some stuff that wasn't happening in April, May and part of June. I'm very pleased at how quickly the Veth group has recovered and bounced back and Technodrive, primarily industrial business out of Italy. They have bounced back nicely. Again, serving their markets. The markets have bounced back. Again, though, for Veth and the Technodrive business, it's primarily direct to the OEMs. So there isn't as much inventory built up in the system like you have here in North America. There's just more inventory for any market in North America. So that's why I feel it hasn't bounced back as quickly because people, again, are working down their inventory. So as those levels come down, that's why 3 months-ish, I feel that those order rates will improve here in the U.S.

Okay. Okay. That's helpful. And then from a profitability standpoint, if we just maybe think about EBITDA, where do you feel comfortable thinking that we can maybe kind of get back to positive EBITDA growth? Or is this just a positive EBITDA?

Yes. That's a good question. Obviously, that all depends upon the recovery in order rates. I think at quarter -- at current levels, it will be a challenge. I think we would -- we're striving to get to breakeven EBITDA in Q1. So our hope is that, that order rates recover, we can get there. But it's not an easy road.

Next we will hear from Douglas Dethy with DC Capital Partners.