Aug 4, 2011
Executives
Dennis Bunday – EVP and CFO Pat Cavanagh – CEO
Analysts
John Nobile
Operator
Good afternoon. My name is Adrian and I will be your conference operator today.
At this time, I would like to welcome everyone to the Williams Controls Hosts Third Quarter 2011 Results Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions).
Dennis Bunday, Executive Vice President and Chief Financial Officer, you may begin your conference.
Dennis Bunday
Thank you and good afternoon everyone, and welcome to our third quarter 2011 conference call. Before we begin, you should note that the following discussions and responses to questions reflect management's views as of today, August 4, 2011, and may include forward-looking statements.
Actual results may differ materially from those projected in these 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 2010 Annual Report on Form 10-K, our 2011 quarterly reports on Form 10-Q, and our fiscal 2011 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 regulations, increased costs of materials and labor, and general economic conditions in the United States and abroad. I will now turn the call over to our CEO, Pat Cavanagh, for his comments on the quarter.
Pat Cavanagh
Thanks Dennis. Good afternoon, everyone, and welcome to our fiscal third quarter investor conference call.
Obviously it’s been a very interesting day in the market. This morning, we released our financial results for the third fiscal quarter of 2011.
Our sales for the third fiscal quarter were $16.8 million, up 22% over the same quarter last year. Sales for the first nine months of fiscal 2011 increased $7 million or 18%, to $45.1 million from the comparable period last year.
Net income in the third quarter was $1.5 million or $0.20 per diluted share compared to net income of $903,000, or $0.12 per diluted share for the corresponding quarter of fiscal 2010. Net income for the nine months ended June 30th, 2011 was $2.4 million or $0.32 per diluted share compared to net income of $866,000 or $0.12 per diluted share for the same nine-month period ending in fiscal 2010.
From a revenue standpoint compared to the first nine months of last year, our Asia Pacific sales were up 25%, our European sales were up 43%, and our North American sales were up 10%. Within Asia, China was up 13% and Indian sales were up a 140% from a small base, Japanese and Korean sales were also up as a result of new program wins last year.
Sales in India in fiscal 2011 should easily exceed $1 million, up from full-year 2010 sales of $609,000. As of this month, we’re now in serial production for three major Indian OEMs from our new facility in Pune, India.
While we remain optimistic for our growth prospects in China and India, these markets also remain highly competitive and very challenging. As it’s widely known the retail price of a new heavy truck in China or India is only a fraction of that of an equivalent truck in North America or Europe.
The specifications for our products and many other components in the truck reflect the lower cost of these vehicles. While it has not been officially announced, we expect the Chinese Government will delay implementation of the new Euro 4 emission standards in China until mid 2012 from the beginning of 2012.
In China, our truck sales were down year-to-date compared to last year by 25% due to a truck inventory overhang and slower truck sales in that market. In Europe, truck sales for the first nine months were up 76% from the same period last year.
And, in North America, our truck sales were up by 33% compared to last year. Our global off-highway sales were also up 16% from the record sales in this market last year.
At this point, approximately 30% of our business is tied to the North American heavy truck market, so I thought I’d make a couple of comments about the outlook in this market. Calendar year-to-date through June, net Class 8 orders have totaled a 163,000 units compared to 70,000 units during the same period last year.
The backlog at the end of June was over a 125,000 units and this backlog is a 142% higher than at the same time last year, and it’s at levels not seen since 2006. All of our North American customers are working hard to accelerate the build rates from the current levels.
As I am sure you have heard in the truck OEM investor calls, shortages of certain components are impacting truck production. I wanted to ensure, assure our investors that our proactive approach to component sourcing combined with our lean manufacturing philosophy has resulted in the highest level of on-time deliveries to our customers in the company’s history.
Current industry forecasts project an increase in daily build rates to 26% from now until the end of the calendar year. In the first six months of this year, a 114,000 Class 8 trucks were build.
The forecasted production rate for the second half of the year is a 136,000 units. This would result in Class 8 total production for calendar year 2011 of nearly 250,000 units.
In calendar year 2012, the industry is projected to build 290,000 units to 310,000 units, about a 20% improvement over this year’s levels. I think there is some risk in this number if the economy does not show some improvement in the second half of the year.
While the Class 8 market gets much of the attention, the Class 5 through Class 7 medium-duty truck market is also important to Williams. The medium-duty truck market in North America this year is showing a 43% year-over-year increase compared to 2010, but is projected to grow at a more muted rate of 5% in 2012.
To give you some perspective, in 2006, there were over 275,000 Class 5 through Class 7 trucks built in North America, whereas projections for this year are only for a 196,000 units. The Class 5 through Class 7 truck market is still affected by the deeply depressed residential housing and construction markets.
I will now turn the call over to Dennis Bunday to discuss our financial performance in the quarter. Dennis.
Dennis Bunday
Thank you, Pat. As Pat stated net income for the quarter was $1.5 million or $0.20 per diluted share compared to $903,000 or $0.12 per share in the third quarter of 2010.
And for the first nine months was $2.4 million or $0.32 per diluted share compared to $866,000 or $0.12 per share in the first nine months of last year. Although there were no one-time or unusual charges in the current third quarter, there were charges in the first nine months of 2011 as well as in the third quarter and first nine months of 2010.
As we discussed in last quarter’s call, the 2011 year-to-date numbers include an after-tax charge of approximately $395,000 or $0.05 per share related to a potential acquisition that we decided to terminate during the second quarter while in due diligence and a legal settlement of a long outstanding claim against the company. The 2010 third quarter and first nine months included an after-tax gain of approximately $290,000 or $0.04 per share from the sale of stock obtained in the settlement of an environmental claim.
For the nine months of 2010, this gain was more than offset by an after-tax charge of approximately $485,000 or $0.07 per share for the settlement of the Cuesta class action lawsuit. To summarize, when excluding all of these one-time items, third quarter 2011 diluted earnings per share of $0.20 with compared to 2010 third quarter EPS of $0.08.
On a year-to-date basis, the adjusted EPS would be $0.37 for 2011 or more than double the $0.14 for 2010. For the quarter, the basic EPS share count was 7,300,277 and the diluted EPS share count was 7,503,313.
At quarter-end, we had 7,302,339 shares outstanding. Third quarter 2011 gross profits were $5.7 million, a 40% improvement over last year’s $4.1 million.
For this year’s third quarter, gross margins were 33.7% sales compared to 29.4% in the third quarter of last year. For the first nine months, gross profits improved to $14.3 million or 31.8% gross margin on $45.1 million of sales compared to $11 million or 28.8% on $38.1 million of sales for the nine months of 2010.
The margin improvements for both the third quarter and first nine months were largely due to higher sales volumes to distribute fixed overhead costs, but also due to lower freight and warranty costs. You may recall that last year we were incurring higher freight costs as some suppliers had difficulty meeting accelerated delivery schedules.
Those issues were largely resolved this year. And, although sales volumes had increased, freight costs have actually decreased over $100,000 on a quarter-over-quarter basis.
Additionally, warranty costs decreased $42,000 and $417,000 for the third quarter and first nine months of 2011. The corresponding periods in 2010 included higher cost related to a specific warranty claim for one customer.
Overall, we consider the run rates we experience for freight and warranty during this third quarter to be at more normal level as compared with the higher amounts incurred last year. We were starting to see some pricing pressure on raw materials.
However, we have been able to manage this situation and overall material pricing had a small negative impact on the quarter. Some components such as rare-earth magnets have increased rapidly and significantly.
We feel that ultimately worldwide supplies of the material used to produce these magnets will improve and the pricing will return to more normal ranges. But in the meantime to partially buffer against this spike, we have secured up to a nine-month safety stock of critical components at lower prices.
Overhead costs increased for both the third quarter and first nine months of 2011. As we expected directly variable overhead items such as shipping and production supply and volume related business interruption and insurance premiums generally increased in line with sales.
Additionally, India start-up expenses and the higher labor cost to fill positions left vacant during the economic downturn contributed to the increase. Health insurance premiums are also higher than last year.
Overall, overhead expenses were up on a dollar-for-dollar basis for the quarter and first nine months of fiscal 2011, but were lower in each period on a percentage of sale basis. Engineering, sales and administrative expenses during the quarter were up $306,000 from the third quarter of 2010 and up $616,000 for the first nine months, excluding the $600,000 in one-time acquisition and legal costs in the year-to-date numbers.
The increases in both periods were primarily due to start-up costs for our India facility and increased headcounts for new engineering positions to meet new customer and program demands and to fill some open positions that were left vacated during the economic downturn. As an example of our increased number of programs, we have more off-road customers and programs worldwide than at anytime in our history and our off-road sales this quarter were a record for the company.
Now, turning to the balance sheet and cash flow, our net cash position was essentially at a breakeven at the end of the third quarter with cash of $1 million offset by $900,000 outstanding on our revolver. EBITDA which consists of operating income, depreciation and the noncash charge for stock option expense contributed $4.7 million in the first nine months of fiscal 2011.
On a net cash flow basis, this year which is total cash receipt less cash disbursements, we have used approximately $3 million of cash. Cash uses included increases in accounts receivables and inventory, payments to our pension plans, capital expenditures, and payment of the quarterly cash dividend of $0.12 per share.
Accounts receivable increased $1.8 million primarily due to the higher sales volume within the quarter with cash collections and day sales outstanding remaining constant. Inventories increased $3.1 million during the first nine months of fiscal 2011.
In addition to inventories increasing in line with the increased sales, we are also selectively increasing crucial inventory items to ensure continuity of deliveries for our customers as orders ramp up. Lastly, inventories have increased from approximately $600,000 at our India facility ahead of the start of regular production.
Accrued expenses were down from the end of fiscal 2010 primarily due to the payment of a previously accrued warranty item with one customer. Depreciation and amortization for the third quarter was $598,000 and noncash stock option expense was $214,000.
CapEx for the quarter was $581,000 and $2.2 million year-to-date. We anticipate our capital spending to be approximately $3 million for the fiscal 2011.
We paid our first-ever quarterly dividend of $0.12 per share in May of this year, and today we announced the third quarter regular and quarterly dividend of $0.12 per share payable on August 25 to shareholders of record as of August 18. This concludes our formal comments.
We would now like to turn the meeting over to questions.
Operator
(Operator Instructions). The first question comes from the line of John Nobile.
Your line is open.
John Nobile
Well, good afternoon, everyone.
Pat Cavanagh
Hi John.
Dennis Bunday
Good afternoon, John.
John Nobile
Hi. We had a crazy day in the markets today, although your stock held up rather well considering [inaudible].
But I wanted to ask you why – you had mentioned that the China Euro 4 standards being implemented in China was not until now mid 2012, and I think they were actually enforce since about 2005, I guess China is taking a while. But usually there is pre-buying ahead of the enforcement of emission standards.
Pat Cavanagh
Right.
John Nobile
Do you anticipate obviously pre-buying in the China market before mid 2012? And if you do like a quarter or two ahead or could we even start seeing it now?
Pat Cavanagh
Well, first of all, John, I’d like to say that it hasn’t been officially announced. Our sales team over there has indications from some of the OEMs that this is a likely change that they’re going to move it out to mid 2012 and it’s been moved several times as you know.
I think that if the customer base in China believes that it’s really going to happen, I would expect that there will be some pre-buy. I don’t think it’s going to be large however, but I think yet there will be some.
John Nobile
Okay.
Pat Cavanagh
And I would expect it would probably start somewhere between five months and six months before they actually believe it’s going to happen. But if they think it’s going to move – it’s going to move to the end of 2012, all bets are off.
John Nobile
All right, it’s been moved already.
Pat Cavanagh
Yes, it’s been moved several times.
John Nobile
Okay. And, I’m fully aware; I think we brought this up in the last call about the part shortages.
I know that there is no problem at Williams at meeting any anticipated demand, but my question is how much longer do you believe the NAFTA truck market will be constrained with the part shortages? I mean there still is a constraint on that and I’m not sure if we’re just about over that or do you anticipate another quarter or two of this?
Pat Cavanagh
Well, the projection remains as I said in the call, there is an increase in the second half of the year and the OEMs still ramping up. We expected that by the end of the year the daily production rate is going to be up about 26% from where it is today and that’s what we’re seeing in a lot of the forecast.
But I don’t expect that – I think it’s going to take at least six months to remove some of the constraints in the system.
John Nobile
Okay. But that that obviously wouldn’t be in concert with the 26% increase.
I mean you feel that maybe we might not see a 26% increase over the –
Pat Cavanagh
Well, I’m saying this John, I think my comments were that we expected in the second half of the year to see about – the production rate through the first half I think what did I say was a 114,000 units were built in the first half of the year Class 8. And the second half we’re expecting about 136,000 units.
And during that period you’re going to start seeing higher daily build rates what we expect that we’re up at the end of the year about 26% higher than we are today so. And next year, in 2012, we’re looking at somewhere around – assuming the economy holds which is the big question mark at this point, we’re expecting 290,000 units to 310,000 units.
So there is going to have to be a continued building, but I don’t think we’re going to get up to a full production rates for six months or so.
John Nobile
Okay. Just one other question, I was curious if you can give us a sense of how significant that two new India programs are?
I know you didn’t put any numbers in there, but I was hoping you might hint to what this actually means in that market.
Pat Cavanagh
Well, I would guess – the two programs together will obviously be over $1 million. I don’t want to speculate $1 million a year.
I don’t want to speculate on the total volume. I know some of our competitors do that, but I’ll just say they are significant programs with significant manufacturers, and we expect sales with those programs as they ramp up to over $1 million a year.
John Nobile
And currently you’re at about $1 million pace in India, I believe?
Pat Cavanagh
Probably higher than that, but we will do $1 million there this year with only – with not full production. Remember John, we only started production over there I think in May – April, May, and we’ve got new programs since then, and it’s on a ramp right now, and – but we’ll finish this year at $1 million or more.
John Nobile
Okay. So it’s relatively significant obviously what we’re looking at as far as the two new Indian programs.
Pat Cavanagh
Yes, it’s going to take us –
John Nobile
At the levels right now I’m seeing. Yes.
Pat Cavanagh
Yes, it’s going to take us two, three years to get to full production over there for all the programs. We’ve been very successful over there and our plant is a real show place.
I had one of our Board members over there for the grand opening that we had and customers were doing a lot of customer tours and it’s gotten a lot of reviews. It’s a real first-grade manufacturing facility and we were quite pleased with it, and it’s been a pretty smooth transition to the production over there.
John Nobile
I’m sure it’s going to be a relatively big market in the short time. And this is again the extra million from the two new awards we’re talking about beginning in 2013, correct?
Pat Cavanagh
I think that’s right.
John Nobile
Okay, thank you very much.
Pat Cavanagh
Thanks John.
Operator
(Operator Instructions). And we have a question from Peter Knitz [ph], who is a stockholder.
Your line is open.
Peter Knitz
Gentlemen, I recognize the opening of both China and India, do you still have significant manufacturing capacity in the United States?
Pat Cavanagh
Yes, we do.
Peter Knitz
Second question –
Pat Cavanagh
Our approach Peter is primarily to serve the Asian customers from our manufacturing facility in China, and the Indian base from our Indian plant.
Peter Knitz
Okay. If you had some sort of economic or social catastrophe type problem in any one of your three plants, could you ramp up the other two to cover your needs?
Pat Cavanagh
Absolutely. That’s been our plan from the get-go.
Peter Knitz
Okay.
Pat Cavanagh
We have capacity in the United States and we have capacity in China. Not as much capacity in India, because it’s relatively new.
I think that we have four cells in that plant right now. And it probably couldn’t carry the load of either one of these plants, but obviously it would take some time, but we have the capability of doing this.
Peter Knitz
Thank you.
Dennis Bunday
And I might also see Peter that our manufacturing processes, methodologies are exactly the same at all three of our plants, all of our testing equipment, our management equipment, everything is all tied in with one central computer. So if we lost for example Suzhou we could bring that up in Portland in very, very short order vice-versa this type of thing.
So we are – we do have a real advantage in that. Although for a small company we do have redundant productive capacity without a doubt.
Pat Cavanagh
It is part of our sales philosophy when we’re talking to customers that we have this kind of capability to be able to serve them either from Asia, or India, or the United States.
Peter Knitz
That’s excellent. Last question I had was, I looked back at the financial highlights of ‘05, ’06, and ’07, and it appears that the net income in relationship to sales were significantly higher on a percentage basis than it is – it looks like it’s going to be this year.
Is there some reason for that or –?
Pat Cavanagh
Well, first of all, there is some one-time charges that Dennis outlined in his earlier comments in the first and second quarter. I think it was almost $500,000 that we had in a acquisition that we terminated in due diligence along with the settlement of an employee claim that had been outstanding for about seven years.
And there has been some trends in the marketplace. I mean when I talked earlier about the Class 5, Class 6 and Class 7, that market – I mean the volumes in Class 6 were much, much higher than they are now.
I mean we’re looking at in the Class 5, Class 6 and Class 7 market which is important to us also about a 150,000 units compared to – boy it was 300,000 units in 2006 in addition to the 368,000 units in the US market. Where we’ve grown our business has been in with new customers and new regions in China and India and others.
In many of those cases, as I said, the trucks are at half the price that they are in the United States and Europe, and the prices of the components that go in are much less. So all of those combined, obviously our margins are similar, but the margin dollars are not when you’re producing that many more products in those markets.
Peter Knitz
Thank you.
Operator
(Operator Instructions). And there are no further questions at this time.
I’ll turn the call back over to the presenters.
Dennis Bunday
Well, thank you. This concludes our third quarter conference call.
We’d like to thank everyone for attending today. Bye now.
Pat Cavanagh
Thank you.
Operator
This concludes today’s conference call. You may now disconnect.