Twin Disc(US:TWIN)2021-01-29 22:47Financial Data and Key Metrics Changes - Sales for the quarter were $48.4 million, down $11.1 million or 18.6% from the prior year second quarter, primarily due to the ongoing effects of the COVID-19 pandemic [11] - Gross profit margin for the second quarter was 19.6%, compared to 26.4% in the prior year second quarter, driven by reduced volume and unfavorable product mix [12] - Net loss for the second quarter was $4.3 million or $0.33 per diluted share, compared to a net loss of $6.5 million or $0.49 per diluted share in the prior year second quarter [15] Business Line Data and Key Metrics Changes - Transmission sales were down 28.7%, industrial sales down 8.2%, and marine and propulsion down 18.1% compared to the prior year second quarter [11] - Aftermarket parts, which typically have higher margins, saw a significant decline due to decreased activity, but trends began to reverse with improved incoming orders [7][8] Market Data and Key Metrics Changes - Sales in North America were down 35%, while sales in Europe were down 17%, and sales in the Asia-Pacific region were up 11% due to improving demand in Australia and stable demand in China [11] - Orders showed improvement in the quarter, with strong orders from the Veth subsidiary and good orders in Asia and Australia [8] Company Strategy and Development Direction - The company is focusing on diversification through growth in industrial markets outside of oil and gas, particularly with new products being developed at the Lufkin facility [21] - The strategy includes participation in hybrid and electrification projects, aiming to provide key components for these systems [21] Management Comments on Operating Environment and Future Outlook - Management expressed optimism about improving order rates and backlog, particularly in aftermarket spare parts orders, with expectations for core markets to improve throughout the year [20] - The company anticipates that oil and gas activity may improve in the latter half of the year, but overall demand recovery is tied to the general economy post-COVID [20][53] Other Important Information - The company entered into a forbearance agreement with BMO, relieving it of the EBITDA covenant through September 30, 2021, while reducing maximum capacity to $42.5 million [17] - Inventory increased by $1.6 million due to currency translation, but there was a significant reduction in North American operations [18] Q&A Session Summary Question: Transition and ramp-up at Lufkin - Management indicated that Lufkin is expected to ship $1 million to $1.5 million per month initially, with potential growth capacity up to $30 million to $50 million depending on unit value [25][26] Question: Strategy for growing industrial sales - The strategy involves working with existing customers and new OEMs, focusing on hybrid and electrification solutions [27][31] Question: Backlog improvement in oil and gas - Management noted that backlog improvement includes unit demand in Asia and spare parts demand in North America, with expectations for gradual replacement orders [33] Question: ME&A expense leverage - Management indicated that as market conditions normalize, ME&A expenses will likely return, but sustainable reductions have been made [34] Question: Free cash neutrality and working capital - The company aims to maintain cash neutrality, with inventory supporting demand that can quickly convert to cash [37] Question: Update on Racine headquarters sale - There has been little activity regarding the sale, with one interested party but no significant updates [40] Question: Euro-denominated liabilities - The liabilities are primarily related to debt taken on during the acquisition of a subsidiary, which is euro-denominated [47] Question: Oil and gas segment specifics - Currently, about 20% of the transmission segment is oil and gas related, but this can exceed 50% during peak periods [49] Question: North American oil and gas impact on gross margin - North American oil and gas activity is a significant driver of gross margin, with expectations for improvement tied to market recovery [51] Question: Future of oil and gas cycles - Management believes that while the next cycle may not be as large as previous ones, there will still be a need for equipment replacement and maintenance [56][58]