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#Good morning, and welcome to the Briggs & Stratton Fiscal 2017 Third Quarter Earnings Conference Call.
I'm <UNK> <UNK>, Chief Financial Officer; and joining me today is <UNK> <UNK>, our Chairman, President and Chief Executive Officer.
Today's presentation and our answers to your questions will include forward-looking statements.
These statements are based on our current assessment of the markets in which we operate.
Actual results could differ materially from any stated or implied projections due to changes in one or more of the factors as described in the safe harbor section of yesterday's earnings release as well as in our filings with the SEC.
We will also refer to certain non-GAAP financial measures during today's call.
Additional information regarding these financial measures, including reconciliations to comparable U.S. GAAP measures, is available in our earnings release and in our SEC filings.
This conference call will be made available on our website approximately 2 hours after the end of this call.
A phone replay will also be available within a few hours of the completion of this call.
Now here's <UNK>.
Good morning, everyone, and thank you for joining us today.
Yesterday, we reported fiscal third quarter earnings of $0.83 per diluted share, up from adjusted earnings of $0.80 per diluted share a year ago.
While third quarter consolidated net sales decreased 1% from last year\
Thanks, <UNK>.
Engine segment sales for the third quarter were $391 million, a decrease of $25 million or 5.9% from the third quarter of last year.
Total engines shipped in the quarter were 2.73 million or approximately 8.8% lower than last year shipments in the quarter of 2.99 million units.
As <UNK> noted, we implemented new sales terms for engines shipped to overseas customers at the start of fiscal 2017.
This change, which helps simplify our business, resulted in earlier revenue recognition compared to the terms we used in previous years.
The change in sales terms caused our reported engine shipments and net sales to be lower by approximately 100,000 units and $10 million respectively in the third quarter of fiscal 2017.
Using comparable sales terms year-over-year, engine volumes shipped decreased by 5% or approximately 160,000 engines in the third quarter of fiscal 2017 compared with the third quarter of fiscal 2016.
Lower sales are mainly due to engine customers producing closer to the season this year.
Partially offsetting the decrease were higher sales of commercial engines.
Third quarter Engine segment income was $50.9 million, a decrease of $1.2 million from last year's segment income of $52.2 million.
Engine segment margin in the quarter was 13%, an increase of 50 basis points from a segment margin of 12.5% in the prior year.
Engines gross margin rates improved by 140 basis points to 25.3% from 23.9% in the prior year.
The increase was largely due to favorable sales mix as well as manufacturing efficiency improvements.
Favorable sales mix was driven by high sales of commercial engines as well as margin lift on new products.
Manufacturing efficiency is the result of great work by our team in constantly looking for ways to improve our processes.
Engine production in the third quarter was slightly decreased by 1% from the prior year to approximately 2.19 million engines.
ESG&A expanding in the Engine segment increased by approximately $700,000 compared with the prior year, primarily due to the investment in our ERP upgrade and higher pension costs.
On a fiscal year-to-date basis, the Engine's gross profit margin has improved to 23.7% from the adjusted gross profit margin rate last year of 22.9%.
This improvement is primarily due to margin expansion on new products and higher commercial sales as well as manufacturing efficiency improvements.
We have driven this profitability improvement despite the headwind off less engine production.
So far this fiscal year, we have produced approximately 5.6 million units, which is 5% less than last year, in order to reduce our inventory from the end of fiscal 2016.
In the Products segment, sales for the third quarter were $234 million, an increase of approximately $13 million or 6% from the prior year.
We saw sales increases in the quarter related to higher sales of commercial products, including Ferris mowers, Billy Goat turf care equipment, and Allmand job site equipment.
Third quarter Product segment income margin was 2.4%, an improvement of 190 basis points from last year's adjusted segment income of 0.5%.
Last year's third quarter results included total pretax restructuring charges of $700,000 and pretax write-down of $8 million related to goodwill associated with the Allmand acquisition.
In the last year, we executed a number of steps to improve the Allmand job site business in the face of some difficult economic headwinds.
These steps include our recent expansion of Allmand's product line to include towable generators and air compressors, which have been well received by the marketplace.
The steps we've taken position our commercial job site business for growth, and we remain optimistic regarding increased end market demand for these products to help address the infrastructure improvement needs of the country.
Products gross margins were 15% in the third quarter, an improvement of 230 basis points from last year's adjusted third quarter gross margins.
The increase was largely due to favorable sales mix on higher sales of commercial products and improved manufacturing efficiency.
Last year, our plant in Wauwatosa, Wisconsin, initiated production of riding lawnmowers which led to some start-up inefficiencies.
Through a lot of hard work, our team has managed to improve the productivity of this facility.
Manufacturing throughput was lower overall in the third quarter, largely due to lower production of residential riding lawnmowers and pressure washers.
Product segment ESG&A expenses were higher than the prior year by $2.3 million.
The increase was due to higher promotional expenses associated with the new product launches and our ERP upgrade.
On a fiscal year-to-date basis, Products net sales increased by $19 million and segment income increased by $2.3 million versus adjusted segment income a year ago.
Sales increased due to higher sales of generators following Hurricane Matthew and higher sales of commercial mowers offset by lower snow thrower sales earlier in the year.
The profitability improvement relates primarily to sales mix, with a higher proportion of sales comprised of commercial equipment in fiscal 2017.
Cash flows from operations and our balance sheet both continue to be strong.
Net debt at the end of the third quarter was $233 million, an increase of approximately $22 million from the third quarter of fiscal 2016.
Cash used in operating activities year-to-date was $28 million, primarily related to seasonal receivable levels and inventory buildup.
The major change between years is that we have increased accounts receivable at the end of the third quarter this year, largely due to the change in sales terms for international engine sales.
At the end of the third quarter of last year, accounts receivables would have been higher by approximately $14 million and inventory would have been lower by approximately $11 million had the new sales terms been in place.
After adjusting for the sales terms change impact, inventory was fairly comparable between years as of the end of the third quarter.
We continue to anticipate that inventory levels at the end of fiscal 2017 will be less than the end of fiscal 2016 if we endeavor to reduce overall working capital by approximately $10 million to $15 million.
Last 12-month cash provided by operating activities was $89 million.
Year-to-date depreciation and amortization of $42 million was less than capital expenditures of approximately $49 million.
Capital expenditures are higher in 2017 compared to 2016, largely due to our ERP upgrade project.
During the third quarter, we repurchased approximately $3 million or 129,000 shares of our outstanding common stock.
So far in fiscal 2017, we've repurchased $18 million of outstanding shares to reduce shares outstanding by 916,000 shares.
As of the end of the third quarter, we had approximately $32 million remaining on our share repurchase authorization, which runs through June 2018.
As of the end of the quarter, we had approximately $62 million drawn on our $500 million revolving credit agreement for working capital requirements.
Regarding debt covenants, last 12-month average funded debt and last 12-month EBITDA, as defined by our credit agreements, were $284 million and $161 million respectively, resulting in a modest leverage ratio of 1.77x, which is lower than our debt covenant of 3.5x.
That concludes our comments on the third quarter financial results.
Let me now turn the call back to <UNK> to discuss our outlook for the remainder of our fiscal 2017.
Thanks, <UNK>.
Recently, we've begun to see signs that retail sales of lawn and garden equipment are beginning to increase.
We estimate that channel inventory of residential mowers is modestly lower than it was a year ago due to more conservative ordering patterns following last year's lackluster spring selling season.
We stand ready to support our customers with a quick response time provided by our US-based manufacturing footprint as the season breaks.
We are encouraged by the improving traction and growth of our commercial product offerings.
Commercial markets present an attractive opportunity for several reasons: first, we estimate that there is about a 4 million ---+ $4 billion addressable market opportunity, of which we are currently holding only a 10% share; second, we project these markets to grow at twice the U.S. GDP rate; third, the margins on commercial products tend to be higher than what we earn on residential products for greater earning power; and fourth, many of the commercial markets enable us to diversify the business for enhanced earnings stability.
The recent growth in our commercial portfolio continues a trend that began several years ago.
Looking back over a longer period of time from fiscal 2012 through fiscal 2016, we grew commercial sales by $150 million.
This equates to a compound annual growth rate of approximately 12.5%.
We view our progress today as a good start to ---+ in executing against our strategy, and we will keep you appraised of the developments as we continue on the growth path.
Now with respect to our outlook for the remainder of our fiscal year, as you saw on yesterday's earnings release, our fiscal 2017 guidance on sales and earnings remains unchanged.
As I mentioned earlier, we continue to estimate the U.S. market for lawn and garden equipment will improve 1% to 4% in the current season, and our engine placement is consistent with our discussion at the end of our second fiscal quarter.
It is possible, however, that sales of lawn and garden products could shift to later in the season due to retail sales patterns, retailer reorders and OEM production schedules, causing some sales to shift to our fiscal 2018 rather than fiscal 2017.
Still, we remain confident in our competitive position and our ability to serve our customers on a timely basis.
Just a couple of things to keep in mind as you look at our ---+ at the fourth quarter this year.
First, as a reminder, regarding the new sales terms we implemented this year for engines shipped to overseas customers, we continue to estimate that the impact of this change is to negatively impact fourth quarter engine results by approximately $10 million of net sales compared to last year's fourth quarter.
In addition, given our goal of reducing inventory by the end of our fiscal year, combined with our ability to quickly react to changes in seasonal engine demand, it is possible that engine production is not significantly higher in the fourth quarter compared to a year ago.
Also as a reminder, we are anticipating higher ESG&A expenses in fiscal 2017 related to planned initiatives, including product innovation and the related promotional spending and other strategic priorities, including our ERP system upgrade.
We have projected that ESG&A ---+ that the ESG&A increase would be sequentially higher in the latter portion of the year.
Indeed, the increase in third quarter ESG&A accounted for approximately half of the $6 million increase in year-to-date spending.
Lastly, we have updated our anticipated capital expenditures for the year to be approximately $80 million to $90 million compared to previous guidance of $70 million to $80 million.
Our capital spending tends to be sequentially higher in the latter portion of our fiscal year as we wind down seasonal production and begin maintenance in our factories.
As we have evaluated general needs for our plants and product development activities for the upcoming quarter, we concluded it was appropriate to increase overall investments to continue to drive manufacturing efficiencies and product innovation while also investing in the important initiatives of upgrading our ERP system.
We expect that a substantial portion of our capital spending for the ERP upgrade will take place in fiscal 2017, with some residual spending remaining in fiscal 2018.
That concludes our prepared comments.
Now we'd like to open it up for question.
We commented quite a bit on the sales mix from a perspective of the commercial products versus the residential products, and we can earn as high as 500 basis points higher on the commercial products relatively ---+ relative to a lot of our residential portfolio.
So as <UNK> mentioned, with the 6% trailing 12-month increase in the commercial portfolio, it does help pretty nicely from a mix perspective.
The other comment we made was relative to ---+ in the product segment, a year ago we were still completing some of the shifts in our footprint changes, particularly related to our facility up here in Milwaukee that was taking on some on the riding mower production for the first time, as was our plan, and we indeed executed.
We've driven some efficiency improvements in year 2 of building riding tractors.
And then, lastly, we continue to work in our businesses ever year to improve both product design as well as our processes in order to take out costs at a faster pace than inflationary pressures, and we've had a very nice year of that, which then continued on in the third quarter as well.
You could see a little bit of that, perhaps where you would indeed expect to see a pretty high residential mix relative to what you saw in the previous 3 quarters, so I think that's fair, Tim.
Overall though, I would bring you back to, on a full year basis, we anticipate seeing overall margin improvement compared to last year.
Well, the low end, Tim, would contemplate a U.S. market ---+ I'll talk residential first, a U.S. market of 1% to 4%.
So the low end, we would obviously consider 1% up.
In Europe, we anticipate the low end to be kind of flattish, if you will, the high end would be slightly up on the residential side.
And then on the commercial side, we continue to see some pretty good sell-through in the commercial market along the way.
So Q4, as you point out, will be a little bit heavier mixed, we think, to residential, and so the goalpost, if you will, really contemplate that market being where it is.
Again, I'll reiterate, and we've seen this often, not all the time, but on occasion, I should say, probably a better way to characterize it.
We've seen where the ---+ we've got seasonal estimates that are out there.
Sometimes, it can go past the end of our fiscal year, like we saw a year ago.
But ultimately, that's what the guidepost would kind of show, 1% to 4% in the U.S. and kind of flattish in Europe and up slightly on the top end in Europe as well.
Yes, sequentially, we think that ESG&A will be heavier in the back half than the front half.
The other thing that <UNK> mentioned was what our investment in the ERP upgrade spend in the P&L in total.
And I'd tell you that that's up roughly about $4 million year-over-over and our guidance was to be up roughly $7 million to $9 million in total.
So hopefully, that also angles you in on the fact that a little bit heavier spending there in the fourth quarter, as you would expect, as you start to get closer and closer to the conclusion of the program.
Yes, I think it'll vary depending on the product portfolio and the ---+ also some of that with the maturity of our business in those areas.
For the commercial turf area, where we served in those markets for some time, we've got some newer products hitting the market this year, probably the most notable being the Oil Guard.
And so that's hitting the market, and that's something that we've been working on over the last couple years.
The other comment I'd make is related to our job site business with our towable generators as well as towable air compressors.
We were able to bring that to market fairly quickly.
We first bought Allmand in the beginning of our fiscal 2015.
Those products hadn't been contemplated previously, and so that's an example where, in a couple of years, we got that program up and running relatively quickly.
On the engine side, sometimes the tail will be slightly longer regarding the overall development of the product as there is just a little bit more engineering work and design that must go into those items.
With regards to labor cost, we don't see significant inflation in labor cost and upward pressure on wages.
One thing that, obviously, there exists throughout the U.S economy and, in some cases, around the world is a skills gap, where it's always a challenge as we go and put more automation into our factories to make sure that we have the right people with the right skills.
And so we do see tighter labor markets with regards to skilled labor, but we are able to recruit and develop people and we have a fairly robust ---+ we have very robust development programs to make sure that we have the right labor at the right time in the right place.
With regards to steel tariffs, it's just way too early with regards to what that's going to mean.
I know that the administration has spoken of it here recently, but it's difficult to understand without more specifics in terms of exactly what's going to happen.
And so it's something we certainly keep an eye on, but it's very difficult at this point to determine what, if any, kind of impact it will have.
Well, thank you for joining us on today's call.
Our next quarterly earnings conference call for our fourth fiscal quarter will be held in August.
Have a great day.
