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Edited Transcript of TWIN earnings conference call or presentation 1-May-20 3:00pm GMT

Q3 2020 Twin Disc Inc Earnings Call

RACINE May 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Twin Disc Inc earnings conference call or presentation Friday, May 1, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey S. Knutson

Twin Disc, Incorporated - VP of Finance, CFO, Treasurer & Secretary

* John H. Batten

Twin Disc, Incorporated - CEO & Director

* Stanley Berger

SM Berger & Company, Inc. - President

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Conference Call Participants

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* Kai Shun Chan

Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst

* Noah Duke Kaye

Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst

* Tze-Kiang Wong

Morgan Group Holding Co. - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Twin Disc, Inc. Fiscal Third Quarter 2020 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Stan Berger. Please go ahead, sir.

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Stanley Berger, SM Berger & Company, Inc. - President [2]

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Thank you, Valerie. On behalf of the management of Twin Disc, we are extremely pleased that you have taken the time to participate in our call. And thank you for joining us to discuss the company's fiscal 2020 third quarter and 9-month financial results and business outlook.

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 in such forward-looking statement. Additional factors that could also cause actual results to differ materially related to global COVID-19 crisis. 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 a 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. John?

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John H. Batten, Twin Disc, Incorporated - CEO & Director [3]

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Thank you, Stan, and good morning, everyone. Before I shall get -- begin, just in case you hear a random dog barking or person walking by, I apologize, but we're in the new world of operating remotely. Before I turn it over to Jeff to go over the financials, just a couple of comments on the quarter.

The third quarter, in very many ways, was very good operationally. We made a lot of headway in cost reduction on products that we'd identified in previous calls in the transmission and marine area. And if it were not for the continuing performance issues on our 8500 frac transmission, our gross margins would have had more sequential improvement, although operationally, there was improvement. We also made quite a bit of headway in developing new projects and customers in North America for our Veth products and a lot of new applications for our industrial products.

In very many ways, too, the third quarter started off very normally. Our 8500s were working extremely hard in the field, and that led to the increased charge. The issue is, as the transmission becomes out of alignment or the rig becomes -- is used more and more hours, we have a steel issue, and we need to change that before we have a leak and then a clutch failure. So what was happening in the third quarter is, the transmissions were using -- being used very, very hard. We couldn't get to oil them as quickly as we should, so there was the belief that there has been more clutch failures. That has pretty much changed dramatically as everything has come to a rapid halt, and I'll come back to what we're doing there. But again, in late March, with -- yes, with everyone, everything, all the good things that were happening in the quarter came to a rapid halt. In late March and extending into April, outside of North America, all of our operations, whether they're factories or distribution operations in Singapore and Australia, basically had to shut down at some point, depending upon the country, for a minimum of a week, sometimes longer up to 2 weeks; in Belgium, it's 2 weeks; Italy, rotated 2 weeks. But we are -- all of our operations, with the exception of Singapore right now is starting a slow open back up. We're back working in Italy, back working in Belgium, coming up slowly as we see what suppliers are up and how many hours we need to ship that is on order.

All of our employees globally that can work remotely are working remotely, that includes Jeff and me today. We started back in our North American corporate offices in March before it was deemed necessary by ramping up 25%, 55%, 75% and then everyone that could operate remotely. Very happy to say that we have had very low COVID-19 infection rates. To date, the only one that -- the only place we know for certain is in Belgium, 5 cases and all are recovering nicely. The Racine plant, North American operations never shut down. We operated with a smaller crew and much fewer people, only people necessary in the office, albeit at a lower shipment rate. And we've also put -- the Lufkin facility has been paused probably for 3 months because we couldn't finish up the construction there, but that should be back on track later this summer.

In April, we applied and received a PPP loan. I think most of you have seen that press release. Do we think that other small businesses should have gotten the PPP funding? Yes. Did we follow the rules laid out in the CARES Act? Yes, and we acted absolutely in good faith. Are we prepared for the audit afterwards? Absolutely. Do we think that this process could be vastly improved? Definitely.

Finally, we reviewed our good faith certification process with legal advisers, financial advisers and our Board after researching all other funding options. With the PPP funds we have received, we've brought people back in the scene, and some of those are working on the 8500. So part of that charge that we took in the third quarter is reflective of doing the repair work with our distribution service tech. More of this work is going to be done internally with people that are not necessarily needed for production and in other areas, and we are going to be doing the repairs internally. We also recognize that this loan is temporary and that we fully understand that we need to have a cost structure in place once this loan -- this funding ends in late June.

Jeff, with that, I turn it over to you right now.

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Jeffrey S. Knutson, Twin Disc, Incorporated - VP of Finance, CFO, Treasurer & Secretary [4]

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Thanks, John. Good morning, everyone. I'll briefly run through the fiscal '20 third quarter numbers. Sales of $68.6 million for the quarter were up $9.1 million or 15 -- just over 15% from Q2, but down $8.8 million or 11.3% from the prior year's third quarter. The quarter declined from the prior year primarily as a result of the significant reduction in new build and aftermarket activity in the North American fracking market, along with the softening in the global marine and industrial market. The oil and gas decline accounted for approximately $10 million of the third quarter reduction in sales and as a continuation of the slowdown we've seen, which really started towards the end of fiscal 2019.

Through the first 3 quarters, sales are now down $42.8 million or 18.6% compared to the prior year, with foreign currency exchange contributing $2.9 million to the decrease. The third quarter margin percent was 24.1% compared to 29.9% in the prior year third quarter. Our gross margin performance for the quarter was, again, severely impacted by a continuation of the unfavorable product mix, which began in the fiscal '19 fourth quarter with lower fracking demand for new rig construction and reduced aftermarket demand being the primary drivers.

In addition, we recorded an additional $2.2 million charge related to the product performance issue initially identified in the first fiscal quarter. Adjusting for this charge, the gross margin percent would have been 27.4% for the third quarter, which would mark the third consecutive quarter of sequential gross margin performance improvement. This improving operating trend is the result of targeted cost reduction actions on key products and overall focus on cost containment and production efficiencies.

As we discussed in the year-end fiscal '19 earnings call, we anticipated the continuation of this difficult sales mix and have been focusing on cost reduction and pricing actions to drive margin improvement. Spending on marketing, engineering and administrative costs for the fiscal '20 third quarter decreased $2 million or nearly 12% compared to fiscal '19. The decrease is a result of reduced bonus, marketing spending, stock-based compensation and professional fees along with the impact of the Mill Log sale, which happened during the third quarter of last fiscal year.

With the oil and gas market struggling over the past 4 quarters, along with the anticipated downturn associated with COVID-19, we have aggressively pursued cost reduction opportunities to compensate for the decline in gross profit. A restructuring charge of $500,000 was recorded in the third quarter, primarily related to ongoing cost reduction and productivity actions at our European operations.

With the unprecedented combination of the COVID-19 uncertainty and the decline in global oil prices, we accelerated our impairment review into the third quarter, which resulted in a noncash impairment charge totaling $27.6 million recorded in our third fiscal quarter. With the third -- with the reduced third quarter volume, challenging product mix and a significant impairment charge, we reported an operating loss of $26.9 million in the quarter compared to a $7 million operating profit in the fiscal '19 third quarter. Adjusting for the impairment charge, operating profit would have been a positive $1.3 million in the quarter.

Through the first 3 quarters, operating profit has declined by $57.3 million to an operating loss of $38.7 million from an operating profit of $18.5 million in the fiscal '19 first 3 quarter. Fiscal '20 year-to-date result includes $4.9 million of restructuring charges, a $6.1 million product performance charge and the $27.6 million impairment. Adjusting for these items, the year-to-date operating income would have been roughly breakeven or a $19 million decrease from the fiscal '19 third -- 3 quarter on a $43 million reduction in sales.

The effective tax rate for fiscal '20 to date was just 8.9%, significantly lower than the prior year rate of 24.6%. The current year rate was significantly impacted by the $27.6 million impairment charge recorded in the third quarter, which resulted in a 13.8% decrease for the current year effective rate. The current year rate was also impacted by the GILTI provisions of Tax Cuts and Jobs Act, which requires the inclusion of foreign income, but prohibits certain foreign deductions and credit when in a domestic loss position. The GILTI inclusion increased (sic) [decreased] year-to-date effective rate by 2.7%. The net loss for the third quarter of fiscal '20 was $25.2 million or $1.92 per diluted share compared to a net profit of $4.6 million or $0.34 per diluted share from prior year's third quarter.

Year-to-date, the net loss of $38.1 million or $2.89 per share compared to a net profit of $11.5 million or $0.90 per share in fiscal '19. Negative EBITDA of $24.9 million for the quarter is down from a positive EBITDA of $10 million in the prior year third quarter. Again, adjusting for the $27.6 million impairment charge, EBITDA for the quarter would have been a positive $2.7 million or a $4.7 million improvement from the previous quarter.

For the first 3 quarters, EBITDA is now negative $31.5 million compared to $27.1 million, positive EBITDA in the fiscal '19 first 3 quarters. As we reported during the call last quarter, we were able to complete the third amendment to our credit agreement with BMO on January 28. This amendment was intended to provide temporary covenant relief as we worked through the market challenges we were facing at that time. Our third quarter results were in compliance with the revised covenant levels with the debt-to-EBITDA ratio of 4.56, which is within the revised covenant requirement of 5.0. With the recent market development and even more challenging outlook, we will be reviewing alternative covenant arrangements with BMO for our fourth fiscal quarter and beyond. Those discussions are ongoing and has been very encouraging. Inventory was down $7 million in the quarter as reduction efforts started to gain traction. With solid inventory improvement and good working capital results, free cash flow was positive $2.9 million in the quarter, contributing to a $9.6 million decrease in debt in the third quarter. 6-month backlog finished the quarter at $87.4 million, which is down 8% from the previous quarter and 12% from the end of fiscal '19.

Operating cash flow was positive $5.3 million in the quarter and year-to-date $17.5 million better than the prior year first 3 quarters despite significantly reduced earnings. CapEx levels remained relatively high in the quarter, similar to prior year levels as we execute on some key investments in machinery and equipment. Most ongoing CapEx had been approved several quarters ago and is nearing completion. We continue to expect to spend between $11 million and $13 million this year. But given the current market outlook, we are reviewing all capital projects and deferring all nonessential capital spending.

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

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John H. Batten, Twin Disc, Incorporated - CEO & Director [5]

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Thanks, Jeff. Looking out into the next couple of quarters, we feel that the next 6 months will be very challenging and unpredictable. We know that customers and distributors are actively working down on their inventory as well as we are. So markets -- our end markets, it could be down 20%, could mean a short-term downturn for us to 40% in the next couple of quarters, looking at the incoming order rate.

We're continuing aggressively to follow our strategic objectives of market diversification through our Veth acquisition and our Lufkin investment and focusing our industrial products on this one team.

And just a final comment on the impairment at Veth. This is in no way indicative of our confidence that Veth was absolutely a right acquisition at the right time for us. Just given the uncertainty of market recovery and the length of the COVID-19 pandemic, the impairment charge was the right decision.

Finally, before I turn it over for questions, we feel like things are changing so fast. We have regular calls with customers, with our distributors. We have regular calls, update calls with the Board. Management feels that it's only appropriate that we try to have another call with you, our investors, sometime between now and our fourth quarter results call, which would probably be in the first week of August. So Jeff and I will be sending out a press release probably in the next month or so on the timing, but we're anticipating somewhere around late June, early July. Obviously, we'll stay away from the 4th of July weekend. We feel that things are changing so fast, we don't know exactly what we'll be talking about, but I'm sure we'd have something to be talking about. We won't be going over any audited financial results, it would be more on market conditions and what we're seeing.

So with that, Valerie, we'll open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from the line of Noah Kaye of Oppenheimer.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [2]

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First of all, it's very good to hear that you and your employees are in good health. And of course, we hope that those who have gotten the infection, continue on their path to recovery. So let me just say that...

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John H. Batten, Twin Disc, Incorporated - CEO & Director [3]

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Thank you, Noah. We have been extremely lucky. I -- we recognize how lucky we've been so far.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [4]

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Quick question to start us off. Just so we have it right. What was the actual EPS impact of the impairment charge net of tax? I guess, it was $1.87, but just wanted to get that figure for everyone.

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Jeffrey S. Knutson, Twin Disc, Incorporated - VP of Finance, CFO, Treasurer & Secretary [5]

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Yes. The net was -- I think we had a $1.8 million tax impact on $27.6 million so 24.8, so about $1.86.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [6]

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Okay. You commented on the impairment not being indicative of any change in your confidence in the acquired business. Can you maybe just help how year-to-date -- how are Veth sales -- if you could give actual figures, that'd be great -- relative to prior years, and kind of what drove the impairment? What were the considerations in that?

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Jeffrey S. Knutson, Twin Disc, Incorporated - VP of Finance, CFO, Treasurer & Secretary [7]

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Yes. I guess I can take some of that, Noah. Veth through Q3 has been performing very well. It's sales are, I would say, essentially flat with the prior year, up from pre-acquisition. So we've seen growth in their sales. They've had a lot of very strong market acceptance in North America. That is sort of incremental to the business since acquisition. So the strategy was -- it's very strong and performing. I think what we faced was all of that doesn't really play into the impairment analysis, right? So -- and when we look at impairment, we're looking at market conditions going forward and our best estimate of what those might be. And in the environment that we're in, and particularly in a goodwill impairment, it can become a very conservative exercise. So you're really looking at forward market conditions through a different lens, maybe then you -- then we evaluate that strategy on an ongoing basis. So it's kind of 2 different views of it. But certainly, we feel very strongly that, that strategy and that company is performing very well and they will continue despite what might be a difficult 4, 6, 8 quarters in front of them in terms of demand.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [8]

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Right. So just following up on that. There may be some demand challenges. Can you just talk about your expectations for their overall resiliency, say, compared to some of the more cyclical parts of the business?

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John H. Batten, Twin Disc, Incorporated - CEO & Director [9]

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It's -- Noah, it's John. I think they're well positioned within the company to be the -- kind of the product line to be the most resilient. They also -- I should add, they were the other exceptional, I apologize. They remained open the entire time as well. They had some reductions in force, meaning not everyone was coming in, but they also stayed open. It's -- again -- and so I never would have dreamed, and Jeff would -- we never would have been dreamed taking any impairment charge on Veth until COVID-19. And really, the exercise was the uncertainty on the length and the depth of this recession led to that and taking the full amount. But as far as acceptance in North America, really -- we're going to be very aggressive to take market share. We just don't -- it's how long is it going to take, what customers -- I mean we definitely see -- we've seen some slowdown in project and activity, with things that are like sightseeing vessels. So we just did a vessel in -- for Niagara Falls, and all electric vessels. It's just markets like that, that are relying on tourism or people coming together, ferries. We think that those markets are going to be hit for an undetermined amount of time. But overall, with the hybrid strategy, the all-electric, I think they have an incredibly bright future with us and we're very positive on that.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [10]

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Just thinking about sort of original goals for the year to kind of get to at least positive free cash flow and you commented in the press release as well. If we kind of come at the low end of CapEx, basically, you -- look like you generate, what is it, $6 million to $7 million of operating cash flow in the fourth quarter, you'll get for breakeven. So just talk about kind of confidence in ability to flex down working capital if you need to get there. What are you doing right now to make sure that [you have capital].

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Jeffrey S. Knutson, Twin Disc, Incorporated - VP of Finance, CFO, Treasurer & Secretary [11]

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Yes. I can take at least part of that one, Noah. Yes, obviously, in this environment, we're hyper focused on liquidity and generating cash. I think the third quarter was the start of good momentum in terms of inventory reduction. We -- with our markets down, and we expect, in particular, North American oil and gas to be down significantly, that puts a little more challenge on inventory reduction, but we're still confident we'll see inventory reduction through our fourth quarter. What's hard to know is what kind of volume impact we'll see in Q4. Our projection right now would be that we have continued positive free cash in Q4. But obviously, that's a very difficult forecast to make with the uncertainty around what customers might be pushing out orders, what suppliers might be slow in getting us products. So a lot more uncertainty in variables in Q4 than normal. But we're certainly -- we're pushing for continuing to see black numbers in free cash flow.

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John H. Batten, Twin Disc, Incorporated - CEO & Director [12]

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Yes. Noah, it's John. We...

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [13]

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Sorry, go ahead, John. Go ahead with that.

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John H. Batten, Twin Disc, Incorporated - CEO & Director [14]

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Yes. We're, again, hyper focused. We should see continued inventory reduction from the plant, and that will continue. So we feel pretty comfortable that we'll be able to, maybe not replicate what we did in the third quarter, but we'll have a pretty good result.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [15]

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Yes. Yes. And that's with -- unless I missed it, I think you were saying kind of initial thoughts that the quarter, next quarter to be down about 40%. Although please feel free to correct me if I mischaracterized that. But I guess just last question on the liquidity situation then. You gave a leverage number. First is for purposes of calculating leverage impairment, included or excluded. And then you mentioned that you're having some constructive dialogue on kind of leading to amend the agreement further as needed. Can you talk about understanding the discussion ongoing and expectations for what that ultimately might be just in terms of, say, increased interest expense for a period of time? And any other options that might make sense for you just as you're thinking about further increasing liquidity optionality between companies doing bridge facilities and things like that?

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Jeffrey S. Knutson, Twin Disc, Incorporated - VP of Finance, CFO, Treasurer & Secretary [16]

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Yes. All right. Yes, the quarter -- the EBITDA does add back the impairment. So the 4.56% debt-to-EBITDA assumes the add-back of that impairment. Our covenant relief steps down from a 5:1 ratio in Q3 to a 4:1 ratio in Q4. So yes, we recognize that with our market conditions, what is happening in the world today, we're probably not going to operationally get to that. So we have had initial discussions. I really don't have enough detail to -- I would say we're not deep enough into it to give you any guidance on whether that would result in an interest increase or what kind of covenant might make sense. I think it's something that all bankers are working through right now. And I'm quite confident that BMO will work with us, and we'll come to some -- a solution that works for both sides. They've been great with us. The relationship is very strong, and I couldn't be happier with where we are in our banking right now.

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John H. Batten, Twin Disc, Incorporated - CEO & Director [17]

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Yes. I just wanted to add. So when I said that if markets are down, we could be down 40%. I don't have any concrete evidence of that yet. That was just to say that we need to be ready with plans and a cost structure in place if that happens. If we see that happening, we will react to that in reality.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [18]

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Yes. And I would point now as well that you guys are managing the balance sheet and the working capital positioning to be able to generate something close to positive free cash flow. Coming at the other side of it, there should be flexibility. So appreciate all the updates and good luck, obviously.

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Operator [19]

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(Operator Instructions) We'll take our next question from the line of Josh Chan of Baird.

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Kai Shun Chan, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [20]

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Just if I can start off with the quarter itself. Did I hear correctly that oil and gas contributed $10 million of revenue decline in the quarter?

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Jeffrey S. Knutson, Twin Disc, Incorporated - VP of Finance, CFO, Treasurer & Secretary [21]

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Yes. Yes, compared to the [previous year] quarter.

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Kai Shun Chan, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [22]

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Right. So I guess that means the rest of your business actually did fairly well, at least within the quarter. So could you talk about kind of -- I know Veth was pretty good, but areas that were a little bit more stable or even had some strength, relative strength?

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John H. Batten, Twin Disc, Incorporated - CEO & Director [23]

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Sure. I think the brown water applications in North America, the push boats along the river with units and spare parts and then also similar type push boats in Asia did fairly well. And again, aftermarket has been a fairly strong component in industrial. And then our ARFF market had remained stable and has an uptick in our military legacy transmission sales. So as I said in the -- really, Josh, until you got into March, we were feeling pretty good about the quarter, and we still had oil and gas, and we still have smaller now though, oil and gas shipments into Asia. So the third quarter, 2.5 months, was going along as planned or better than planned until everything changed in mid-March.

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Kai Shun Chan, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [24]

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Right. Yes, definitely that makes sense. So you mentioned some order cancellations, I think, in the press release. I mean are those limited to oil and gas? Or was it more broad based in that as we got into April time frame?

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John H. Batten, Twin Disc, Incorporated - CEO & Director [25]

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It was more broad based. Certainly, there were some oil and gas third party order cancellations, some unit push out. But a lot of it, I think, was buying in advance of projects, primarily in marine, some industrial, but I would say most of it is in marine. And again, customers and distributors deciding to work off -- work down their inventory and not replace it. So a lot of the projects will still go on, but our distributors may not replace the units whether they sell-out the inventory with new units. So in many cases, Josh, those orders could come back in a quarter or 2. But yes, I can't point to any 1 market other than a lot of our distribution partners deciding to work down their inventory.

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Kai Shun Chan, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [26]

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Right. So I guess the 40% potential decline, would you handicap certain verticals or geographies being worst or better than others?

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John H. Batten, Twin Disc, Incorporated - CEO & Director [27]

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I -- Yes, I would say most of the activity North America and Asia, but also quickly to come back. That's -- what our concern is you see order cancellations, you see push out or you don't see new orders, just the orders come in. So you're like, well, the markets are down 20. History has shown that, that potentially could mean double for us. So you resize and staff for that, but it's short-lived. We got caught in it back in '16 and '17. And it wasn't just oil and -- North America oil and gas that came rolling back, we had some other markets coming back too. So -- and that's why we continue to have our regular calls with our distribution principals and other customers because we want to know what they're doing. So we don't overreact one way on the downside, and we're not there for them on the upside. So the unknown, Josh, and it's unknown for everyone. I certainly don't think this is a V. I don't know if it's a U, because I don't know if that recovery on the right side of the U will be great as the contraction on the left side. But we just -- we're trying to get clarity in -- like how long is that bottom going to be. And I think -- is there a chance that we have 1 quarter, like if it's a first quarter next year or second quarter. Is there a quarter that could compare 40% down from a year ago comparable, there's absolutely that chance. But I don't think it will be 4 quarters in a row or anything like that. But we just -- we're trying to make decisions on our cost structure based on our best guess at what the next 6 to 8 quarters are going to look like.

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Kai Shun Chan, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [28]

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Yes. So we appreciate the dynamic environment there. I guess the last question I have. I mean we covered some ground on the liquidity side, but how low can CapEx be next year if you kind of really limit sort of the discretionary spending there?

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Jeffrey S. Knutson, Twin Disc, Incorporated - VP of Finance, CFO, Treasurer & Secretary [29]

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I think we've been as low as in the $5 million to $6 million range. I think that's about where we would expect we would drive to.

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Operator [30]

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We'll take our next question from Simon Wong of G. Research.

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Tze-Kiang Wong, Morgan Group Holding Co. - Research Analyst [31]

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It looks like oil and gas down $10 million year-over-year that puts your oil and gas revenue at $8 million for this quarter. How much of that is new equipment versus consumable?

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John H. Batten, Twin Disc, Incorporated - CEO & Director [32]

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Yes. I don't have the numbers in front of me, 80-20, 90-10.

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Jeffrey S. Knutson, Twin Disc, Incorporated - VP of Finance, CFO, Treasurer & Secretary [33]

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Yes. We're making through -- how many units we deliver to Asia, right, that would be the new equipment. So yes, something in that, maybe 75-25.

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John H. Batten, Twin Disc, Incorporated - CEO & Director [34]

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Yes. And again, Simon, we still, in the quarter, had pretty healthy shipments to Asia.

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Tze-Kiang Wong, Morgan Group Holding Co. - Research Analyst [35]

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Okay. Okay. And then in terms of -- to gauge, how much long you have to incur these extra costs related to the pressure pumping customers as having issues? How big is the fleet and how far along are you in the repairs?

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John H. Batten, Twin Disc, Incorporated - CEO & Director [36]

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I would say we are closer to 75%, and it just got a lot easier because everything has pretty much come to a stop. So our goal is to get to as many of the -- that you can do on the rig in a couple of hours, to get that all buttoned up here pretty quickly. But we still have, again, the repairs that need (inaudible) to bring out the clutch, you got to take the transition off the rig. We're going to do as much of that work internally as possible with the people that we brought back from PPP.

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Tze-Kiang Wong, Morgan Group Holding Co. - Research Analyst [37]

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Okay. So it should be wrapped up in the fourth quarter or so?

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John H. Batten, Twin Disc, Incorporated - CEO & Director [38]

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No. No. Other than -- no, just paying labor charges. Just -- it's man hours now, and that's been accrued for.

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Tze-Kiang Wong, Morgan Group Holding Co. - Research Analyst [39]

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Okay. And then with the latest frac spread down -- count down to about 85, probably going to get the -- after this week or next down from 485 a year ago. There's a lot of spreads that's parked and inactive for maybe 2 quarters. What's the process for them to return to work in terms of consumable business that's opportunity per rig -- opportunity...

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John H. Batten, Twin Disc, Incorporated - CEO & Director [40]

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Yes. It's all over the map, Simon. I think you're going to see or read a lot of stories about people cutting up in the older frac spreads and only maintaining the ones that are relatively more. So my hope, which is -- which didn't necessarily happen 4 years ago, 5 years ago now, where they were not stored in the best manners that people have the cash available to do the right preventative maintenance and putting them away. So could we get some overhaul and maintenance work on the front end? The answer is, yes, but it's not significant. It's all stuff that you can do on the outside, maybe oil -- changing oil, just -- but I don't see anything where they're breaking apart to do any maintenance ahead of time. I wish people would because it just pushes it then to the beginning of a cycle down the road where everyone wants new units and overhaul work. But I don't have a number. I can't begin to predict, but I know that a significant amount of what is considered available horsepower will be scrapped this calendar year.

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Tze-Kiang Wong, Morgan Group Holding Co. - Research Analyst [41]

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Okay. And then my final question's related to CARES Act, any opportunity for tax credit coming back to you?

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Jeffrey S. Knutson, Twin Disc, Incorporated - VP of Finance, CFO, Treasurer & Secretary [42]

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Yes. We're certainly -- we're reviewing all of that, Simon, and there are opportunities. I think we're still working through what they are and how they might impact us. There's some interplay between the different programs. For instance, in terms of deferring payroll withholding taxes, you can't do that if you're going to request forgiveness of a PPP loan. So there -- we're trying to balance the interplay between the different programs and making sure that -- and even not just the U.S. CARES Act and the benefits there, but also there are programs in all of our foreign jurisdictions that we're pursuing. So I feel like we're spending a lot of time and getting some good assistance from our advisers to make sure we're taking advantage wherever possible. I can't really quantify it for you, though, at this point.

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Operator [43]

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(Operator Instructions) It appears that there are no further questions at this time. I'd like to turn it back to the presenters for any additional or closing remarks.

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John H. Batten, Twin Disc, Incorporated - CEO & Director [44]

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All right. Thank you, Valerie, and thank you, everyone, today for taking your valuable time to join us on the call. Like I said earlier, we'll be sending out notification to have a mid-Q4 call, late June, early July, to talk about the issues in the markets that we're seeing. Won't have -- again, won't have any audited financial results to go over, just what we're seeing in our end markets with our suppliers in different regions of the world. So thank you very much, and we look forward to talking to you late June, early July.

Valerie, I'll turn it back over to you.

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Operator [45]

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Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.