Dec 9, 2008
Executives
Patrick Cavanagh - President, Chief Executive Officer, Director Dennis Bunday - Executive Vice President, Chief Financial Officer and Secretary
Analysts
John Nobile - Taglich Brothers
Operator
Good afternoon my name is Kevin. I will be your conference operator today.
At this time, I would like to welcome everyone to the Williams Control to host Q4 2008 results. All lines have been placed on mute to prevent any background noise.
After the speaker’s remarks, there would be question and answer session. (Operator Instruction) I would like to turn the call now over to Mr.
Dennis Bunday, Chief Financial Officer. Sir, you may begin your conference.
Dennis Bunday
Thank you, and good afternoon everyone and welcome to our fourth quarter, fiscal 2008 and year end conference call. Before we begin, you should note that the following discussions and responses to questions reflect management's views as of today, December 09, 2008, and may include forward-looking statements.
Actual results may differ materially from those projected in the forward-looking statements. Information concerning risk factors and other factors that could cause actual results to differ materially is included in our filings with the SEC, including our 2008 annual report on Form 10-K, our fiscal 2008 quarterly reports on Form 10-Q, and our fiscal 2008 current reports on Form 8-K.
Specific factors that may cause such a difference include, but are not limited to availability of adequate working capital, domestic and international competitive pressures, increased governmental regulation, increased cost of material and labor and general economic conditions in the United States and abroad. I will now turn the call over to our CEO Patrick Cavanagh for his comments on the quarter and the full year.
Patrick Cavanagh
Thanks, Dennis. Good afternoon, everyone, and welcome to our fiscal fourth quarter and fiscal fourth quarter and year end conference call.
This morning we released our financial results for the fourth quarter and the fiscal year end. I would like to begin by making a few comments about fiscal 2008, and then I will comment on the current business environment.
As we stated in our press release, sales for the fourth quarter were up 5.1% from a year ago quarter at $17.2 million, but sales for full year, in the end September, were down 4.6% from fiscal 2007 at $65.8 million. Net income for fourth quarter was up 31.7% at $2 million or $0.26 per diluted share from the same quarter in fiscal 2007.
For the fiscal year end, net income was down 1.3% at $7.8 million or $1.01 per diluted share compared fiscal 2007. In fiscal 2008, Williams’ business outside of North America, accounted for more than $24 million in annual revenues or 36% of our world wide sales.
This represents the 22% increase over fiscal 2007 sales and 104% increase since we began our strategic focus on growing internationally four years ago. Since that time, our Asian business consistently achieved double digit growth, resulting in sales in fiscal 2008 of $8.6 million, which was 13% of our total sales.
This is a result of the move to more emission compliant engines in China, Korea and India. In our more mature European market, sales were up 8% on fiscal 2008 to $15.4 million or 23% of our total sales.
Sales in Europe were partially driven by Russia’s move to more emission engines, and European sales over the last several years have consistently shown five single digit percentage increases. Sales for our North American truck customers dropped $6.5 million or 34% compared to fiscal 2007.
And almost $17 million from fiscal 2006 when the heavy truck market peaked in front of the 2007 emission implementation. Several years ago, without our growth in Asia and Europe, these types of fluctuations in the North America market would have had an even greater impact on our business.
During fiscal 2008, we were able to secure a number of new contracts that will drive revenue in years to come. Most notably, we won business at two major OEMs to support their new truck platform.
In addition, we secured new heavy truck business in Japan, India, and Russia. We also secured new hand control and operator control business at two major off-road equipment manufacturers.
These applications all use our new sensor technology. In June, after less than two years in the market, we have delivered over a million sensors.
Currently, we have over 55 specific designs for heavy truck and off road equipment manufacturers. As a result of a quality and durability of our sensors, we were recently awarded Annual Business for over 200,000 stand alone position sensors for an existing vehicle management system starting in productions in mid 2009.
Much of the credit for our product wins in fiscal 2008 can be linked to our CDC or our Conceptual Development Center, which we started in March of 2006. While our investment in the CDC is close to a million dollars, it offers us a competitive advantage unmatched by our competition.
The CDC delivers prototypes, preproduction samples and validation models to customers in record time, which is typically less than 48 hours. To help them speed the design in testing of new vehicles.
It offers our customers the “what if capability” with new designs. In 2008, we added additional leading edge injection molding equipment, powder coating technology and advanced fabrication capability to further strengthen the CDC’s ability to support our customers.
Also in 2008, using Sic Sigma methodology, we streamlined our six-step process for product development. As part of the process, we implemented agile product documentation and development software worldwide.
These changes have resulted in a significant reduction in time to market of our new products. In January of 2008, we introduced an employee gain sharing program called Drive.
To promote operational improvement in cost reduction, efficiency, new product development, on time delivery, inventory reduction, product quality, and safety. Over the course of the year, we have seen significant improvements in all of these areas, which is increased shareholder value and rewarded employees.
We feel that our continued focus on our global business and improving our operations has increased the intrinsic value of the company over the last several years. In a very tough year, we maintained our gross profit margin in spite of reduced sales and higher energy and commodity cost.
We paid off our debt and increased shareholder equity to $26 million. In addition, we announced a buyback of $5 million of our stock.
In the last two weeks in September, we began to see reductions and rescheduling by a number of our large truck OEMs starting in Europe. Through October, November, and early December, we have seen the announcement – we have all seen the announcement of layout and a plant shut down for the major truck OEMs.
I do not think any of our customers have been immune. Some of the most recent North America industry forecasts in 2009 that will put out in November by ACT and FTR are not very encouraging.
They show widely divergent views on the North America truck production in 2009. In 2008, we expect class-A production to reach the 2,000 unit range, down slightly from last year.
In 2009, ACT is forecasting 222,000 units, while FTR is forecasting away 150,000 units. We believe result will be somewhere in between.
The truck OEMs are operating in an environment of declining ton miles as a result of the weak housing market and lower across the board spending in both the business and consumer sectors. With the significant inventory of used trucks, I believe that a prebuy in front of the 2010 emission change is going to be muted at very best.
In late October in response to what we were seeing with our customers, we went to one shift in fort Portland, Oregon and Suzhou, China, and substantially reduced all over time. We also eliminated the temporary employees and made other prudent expense reduction.
While our visibility of the future is poor at this point, the current run rate for the next several months is in the $3 million to $4 million amount range. This is essentially a break even level, depending on a product mix.
Obviously, this is shaping up to be a very difficult to be a very difficult year, but we feel that we are in a good position, as good condition is possible, considering the very rapid changes and circumstances we have experienced. If the situation worsens, we will make the changes necessary to ensure Williams is a viable business.
I will now turn the meeting over to Dennis for his comments on the financial
Dennis Bunday
Thank you, Pat. As Pat noted, sales for the 2008 fourth fiscal quarter were $17.2 million, 5.1% higher than the 2007 fourth quarter sales of $16.4 million.
Full year sales were $65.8 million, down 4.6% from the $60.9 million in 2007. Sales for our Asian customers were 38% higher quarter over quarter, and at $8.6 million for the full year, or 51% higher in 2008 than in 2007.
Strong markets in Europe and share gains by some of our European truck OEM customers, resulted in no sales, being 14% higher in the quarter, and 18% higher year over year. Sales to NAFTA truck OEMs in the fourth quarter were down 10.9% from an already depressed fourth quarter of 2007.
Overall, sales to NAFTA truck OEMs were down 34% year over year. On world wide basis, off road sales showed strength in the fourth quarter with sales of 4.3% quarter over quarter or have finished the year down $550,000 or 4.3% over the fiscal 2007 levels.
Net income for 2008 four quarter with $2.0 million or $0.26 per diluted share, up 31.7% from $1.5 million or $0.20 per diluted share in the fourth quarter of 2007. Net income as a percent of sales was 11.6% for the quarter.
For the full year, net income was $7.8 million or $1.01 per diluted share, down just slightly from $7.9 million or $1.03 per diluted share last year all on $3 million of lower sales. It should be noted that both years include one time or unusual gains of essentially equal amounts.
Fiscal 2008 pretax income has a one time $1.1 million gain for proceeds received from settlement of environmental claims for our Portland, Oregon facility. The fiscal 2007 result included $900,000 gain from writing off old payables from defunct subsidiaries.
Excluding these one time items, the differences between 2008 and 2007 is largely due to the lower sales levels in the first half of 2008 compared to 2007. For the quarter, the basic EPS share count was 7,534,384 shares.
Fully diluted shares were 7,722,416 shares. At year end, we have 7,534,642 shares outstanding.
Fourth quarter gross profits were $6.1 million, or 35.7% of sales, up $500,000 compared to $5.6 million or 34.5% of sales in the fourth quarter of last year. For the full year, gross profit margins were essentially unchanged from 2007 up 34.7% of sales.
Full year growth profits were $22.8 million in 2008 and $23.8 million in 2007. Although higher base material and energy prices worldwide put significant pressures on our costs, lower labor costs due to our realignment completed in 2007, lower warranty costs on sensors, due to improved performance of the Williams sensors over previously purchased sensors and a higher mix of foreign sales more than offset the higher material and energy cost.
Research and development, selling and administrative expenses for the quarter were $3.1 million compared to $3.0 million in the prior year’s fourth quarter and for the full year, were $12.1 million or $1 million higher than last year’s result. Our conceptual development center, which provides rapid response prototyping, is now on full operation.
With this facility, we are able to provide working sample of our new designs to customer within 48 hours of design confirmation and although this increases our development costs somewhat, we feel it is a significant competitive advantage and distinguishes us from our competition. We also continue to invest in expanded technical competencies in the sensor area.
As Pat mentioned, sales for our customers outside the United States are increasing. Our selling expenses reflect the increased international activity, including winning businesses with Asian and Eastern European truck OEMs.
Administrative expenses were down approximately $400,000 for both the quarter and full year. Legal costs were down for the quarter and the year as we were successful in reducing the costs to defend against our class action lawsuit.
Also in the fourth quarter of 2007, we recorded an additional $500,000 for the estimated cost of completing the environmental clean up of the Portland facility, which increased administrative cost in that year. Recruitment and relocation costs were higher in 2008, as we further expanded out engineering capabilities in both the United States and in Europe.
Our effective tax rate for the fourth quarter of 2008 was 35.2% for the quarter and 33.5% for the full year. Anticipate that for 2009, our tax rate will be approximately 34%.
Now turning to the cash flow and balance sheet. Net income plus non-cash charges for depreciation, deferred taxes and stock based compensation, generated cash for the year of $10.8 million.
Capital spending was $1.8 million and we used $1 million to pay down the last of the company’s debt. A small increase in working capital used $400,000 and overall, our cash balance increase $7.4 million to $9.1 million by the end of the fiscal year.
Accounts receivable have increased $2.4 million to $10.4 million since the beginning of the year. This is partly due to the higher sales in the 2008 fourth quarter than the 2007 fourth quarter.
Also, non-NAFTA customer receivables terms are often longer than in NAFTA, and as that portion of our business grows, our receivables will grow disproportionately. Depreciation and amortization for the fourth quarter was $456,000 and $1.8 million for the full year.
Non-cash stock option expense was $174,000 for the quarter and $672,000 for the full year. Overall, cash generated by operations for the year was $9.9million.
Of that, $2 million was generated in the fourth quarter. CapEx for the quarter was $676,000 and for the full year was $1.8 million.
This is a bit low for what we would normally expect to see and represents mostly timing differences. We will be investing in additional capacity in China, new product development, sensor production capacity, and process improvements in 2009 and I anticipate our capital spending for 2009 to be in the $3 million range.
In the first quarter of fiscal 2009, we announced the $5 million share repurchase program. So far, since the end of the fiscal year, we have repurchased approximately 69,000 shares for $770,000.
As you know, we announced earlier in the quarter that we have engaged DA Davidson to assist us in identifying bolt-on acquisition that would further solidify and expand our existing market position. We envision that we would use our existing facilities, engineering, and sales platforms to compliment our existing product lines.
We have had discussions with several potential candidates, but at this time, has not entered into any substitute discussions. This concludes our formal comments.
We would now like to turn the meeting over to questions.
Operator
(Operator Instructions) Your first question comes from the line of John Nobile – Taglich Brothers.
John Nobile – Taglich Brothers
Good afternoon. I am curious if, in your first quarter guidance, you are factoring in a weakening Asian market as part of your assumptions?
Patrick Cavanagh
Yes. Yes we are.
John Nobile – Taglich Brothers
Alright, because I know that the growth has been pretty strong there even in this quarter if I do the math that look like it was a very strong market. I am sure that there is going to be growth but it would be a slowing growth rate in the first quarter at least.
Patrick Cavanagh
Yes I think John, as we have talked about before in Asia. We have seen – it is been sporadic.
We have seen a flowing in some markets in a lot growth in others. We have factored all of our global business in and the kind of discussion that I had in my formal comment.
But, the Asian market for us tends to go in fits and spurs. It is very, very strong and then it can be weak for a couple of months and very, very strong again.
Some of the ordering patterns are a bit chaotic with some of our Asian customers.
John Nobile – Taglich Brothers
Okay. But I mean, even for the fiscal year, I would imagine there would be growth in this area.
However, not as strong as it has been in the past?
Patrick Cavanagh
Well, the visibility is not very good at this point neither in Asia nor in North America, and we are hopeful that there will be some growth. But I am not sure of that at this point.
John Nobile – Taglich Brothers
Okay. Earlier on the call, you mentioned forecast anywhere from 150,000 heavy trucks to, was it 220,000?
Patrick Cavanagh
Two hundred twenty two thousand, there is two competing forecast, John. One is put out by ACT.
Another one was putout but FTR. FTR showing a 150,000 for class-A in calendar year 2009, and ACT is saying 220,000.
John Nobile – Taglich Brothers
Okay and you have mentioned the 200,000 units. Was that forecast to 2008, which has --?
Patrick Cavanagh
Yes I think I have 2007 was about 212,000 units and they are predicting, we do not have all the numbers in yet for 2008 about somewhere between 196,000 to 207,000 or somehwere in that range.
John Nobile – Taglich Brothers
Okay. It could be some growth.
It could be at least looking at the NAFTA market now.
Patrick Cavanagh
Yes. That is the NAFTA Class-A market that –
John Nobile – Taglich Brothers
I know that in 2010, we are looking at emission legislation that is due that year. So, typically, there would be a pre-buying leading up to that I have seen in the past.
So, I am curious, if you feel that this would indeed help boost NAFTA sales? At least over what they were in fiscal 2008 year.
Patrick Cavanagh
Well, there is a lot of speculation on that, there are two competing technologies. There is the EGR solution and then there is the SCR solution.
The SCR solution provides slightly better fuel economy with the higher upfront cost. The EGR solution has lower upfront cost but lower fuel economy.
But I think, more that anything, there is a lot used trucks out there right now, and the freight tonnage has continued to ease and so, I am reluctant to say that there is going to be much of a pre-buy, I do not think many of the other people in the industry thinks that the pre-buy is going to be very strong. There is a possibility that it could be, but right now, with what we were saying, I would not expect any large pre-buy.
John Nobile – Taglich Brothers
In light of a weak economy, are you looking to cut costs in any specific areas?
Patrick Cavanagh
Well, we want to be really careful and I will tell you why, John, we have programs with many of the major OEMs with both truck and off-road equipment manufacturers. We are building products for many of their new platforms and designing those products now and we are going to be positioned so when the market comes back, we will see full advantage of that and it can really accelerate our growth.
So, we are very, very careful about what we cut but obviously we have to be a viable company and we will take prudent things that are necessary to make sure the business is well positioned and yield is economically viable. So, it is a carefully scripted thing and we want to make sure that we have future prospects.
John Nobile - Taglich Brothers
So, you have been doing a fine job so far. I just want…
Patrick Cavanagh
What I said, John, in the meeting though is went back to single shifts to both of our plants. We have reduced through attrition some number of direct labor individuals in our plant.
We have reduced temp complement here which was about 12 people. We work in one shift here.
We have limited overtime to just absolute necessity and those are the steps that reached to the near term that we are chasing.
John Nobile - Taglich Brothers
Okay, I mean, well most of these cost cutting measures in the December quarter or a lot of them had shown up already in the quarter that just ended with the September quarter?
Dennis Bunday
It is basically will be in the first fiscal quarter, John.
John Nobile - Taglich Brothers
Okay, so we are looking at the December quarter. One more question, in regard to gross margins and your breakeven guidance at least for Q1, I am just curious as to what level of gross margins you are using to achieve the breakeven level of Q1.
This is assuming on the level?
Patrick Cavanagh
We are pulling; it will go down, John. We were about 35% I would say that would probably go down to the 30% range, somewhere in that, yes.
But that is a little bit on product.
Dennis Bunday
Looking at it that depends on that plan, it depends on product mix and it is one of the things that…but that is a very good place to start.
John Nobile - Taglich Brothers
Okay. That is 30%, high 20s or low 30s in that area.
Patrick Cavanagh
Yes, low 30s might be pushed a little bit because you do have the cost in there and everything. So you have to factor that in.
Operator
(Operator Instructions) Sir, there are no other question. Thank you.
Patrick Cavanagh
Well, thank you very much. This concludes our yearend conference call and I would like to thank everybody for attending today.
Goodbye now. Thank you.
Operator
This concludes today's conference call. You may now all disconnect.