BGG
#Good morning, and welcome to the Briggs & Stratton fiscal 2016 first quarter earnings conference call.
I am <UNK> <UNK>, Chief Financial Officer, joining me today is <UNK> <UNK>, our Chairman, President, and Chief Executive Officer.
Today's presentation and our answers to your questions include forward-looking statements.
These statements are based on our current assessment of the markets we operate in.
Actual results could differ materially from any stated or implied projections, due to changes in one or more of the factors described in the Safe Harbor section of yesterday's earnings release, as well as our filings with the SEC.
We also make reference to certain non-GAAP financial measures during today's call.
Additional information regarding these financial measures, including reconciliations to comparable US GAAP amounts, is available in our earnings release and in our SEC filings.
This conference call will be made available on our website or by phone replay, approximately two hours after the end of this call.
Now here's <UNK>.
Good morning everyone.
Thank you for joining us today.
As you saw in our earnings release, first quarter consolidated net sales were $290 million,a decrease of $3 million, or approximately 1% from the same quarter last year.
As we had expected, the strengthening of the US dollar had a significant impact on our year-over-year sales in the first quarter.
Net of offsetting price increases, the weakening of foreign currencies negatively impacted net sales by approximately $11 million in the first quarter.
Excluding currency impacts, net sales increased by $8 million, or 2.6%.
This increase was driven by acquisitions we completed last year, as well as a solid late season demand in our major lawn and garden markets, particularly in the US.
The improved late season helped drive increased sales of small walk mower engines to OEMs, as well as high end residential and commercial lawn and garden equipment through our North American dealer channel.
Somewhat offsetting the increase were lower sales in certain international markets.
The consolidated adjusted net loss for the first quarter was $15.2 million, an increase from the adjusted net loss of $9.3 million in the first quarter of fiscal 2015.
The adjusted net loss excludes restructuring charges, and certain other charges, as described in yesterday evening's earnings release.
The adjusted diluted loss per share for the quarter was $0.35, higher than last year's adjusted diluted loss per share of $0.21, but beating our expectations.
The higher adjusted net loss for the quarter reflects several factors we discussed during our last quarterly conference call.
First, production volumes were lower in our engines and products businesses.
Last year, we had accelerated manufacturing into the first quarter, in order to build inventory to facilitate the closure of the McDonough plant, and to launch our new EXI engine.
Second, the strengthening of the US dollar had an unfavorable impact on adjusted net income of approximately $1.2 million.
Third, our pension plan expense increased by approximately $1 million related to the implementation of new mortality tables.
Despite these anticipated headwinds in the first quarter, we're very encouraged by the sustained, improved profitability of our products business.
While we are not yet satisfied with the results, the business continues to head in the right direction.
A large driver of the profitability improvement was the incremental restructuring savings as a result of closing the McDonough plant.
A lot of hard work has done into transitioning production to our Wauwatosa, Wisconsin, and Munnsville, New York, plants.
In September, we began riding mower production in Wauwatosa, which was the final product line to be transitioned.
While there is more work to be done to complete the project, we're very pleased with the early results.
I would like to thank all of our employees who made this possible through their great efforts.
In conjunction with right-sizing the footprint and related cost structure of the products business, we have been focusing on selling higher margin products, the addition of Billy Goats, specialty turf care products which are geared toward the professional landscaper and rental markets, played a part in improving our product segment margins in the first quarter.
Similar to our Ferris commercial cutting equipment, the sales of Billy Goat equipment benefited from the strong, late season.
The integration of Billy Goat is proceeding very well.
The innovation that the Billy Goat team launched this fall is outstanding.
We have even more in the pipeline which fits well with the innovation culture of our Company.
I would like to thank our team for the hard work that is allowing Billy Goat to be a key part of Briggs & Stratton.
It was a year ago in the first quarter that we entered the job site products category with our acquisition of Allmand Brothers.
At the time, a large portion of Allmand's business sold into the domestic oil and gas industry.
With the significant decline in oil prices over the last year to below $50 per barrel, capital spending of domestic and oil gas companies has reduced considerably.
While this headwind has had the near-term impact of reducing Allmand sales and profitability, we continue to be impressed by the strength of the Allmand brand, and the long-term opportunity presented by the job site category.
We have been working diligently this past year to further diversify Allmand sales into domestic construction and infrastructure markets, as well as into many of the international markets which Briggs & Stratton has served for many years.
In addition, this past quarter, we added a new portable heater product line to our Allmand branded portfolio through a small asset acquisition.
This new product line offers a flameless heating solution to improve safety on the job site, and helps expand our Allmand product offering.
I'll turn it back over to <UNK>, to walk through our financial results for the first quarter of fiscal 2016.
Thanks <UNK>.
As <UNK> noted, our first quarter consolidated net sales were $200 million,a decrease of approximately $3 million, or 1% consolidated net sales in the first quarter of last year.
First quarter consolidated net loss on a GAAP basis was $18.2 million,a decrease of $3 million from a GAAP net loss of $15.3 million one year ago.
As a reminder, we typically report a net loss in our first fiscal quarter, due to the seasonal nature of our engines business, and the related lawn and garden portion of our products business.
In the first quarter, we incurred restructuring charges of $2 million pre-tax related to executing the restructuring actions we announced last year, with respect to narrowing our lower margin Snapper product lineup, and closing our McDonough, Georgia, facility within our product segment.
We incurred approximately $300,000 of purchase accounting charges in the first quarter of 2016 related to the acquisition of Billy Goat this past May.
We also incurred approximately $1.4 million of restructuring charges in our engine segment.
These charges related to a reduction in force at our plant in Chongquing, China to offset lower production of engines used on snow throwers, and changes to certain salary positions in the US.
The engine segment also incurred an $850,000 litigation settlement charge in the first quarter.
Excluding these restructuring, purchase accounting, and litigation expenses, the adjusted net loss for the first quarter was $15.2 million, or $0.35 per share, an increase from the adjusted net loss of $9.3 million, or $0.21 per diluted share in the first quarter of fiscal 2015.
Engine segment sales for the first quarter were $150 million, a decrease of $3 million, or 2% compared to the prior year.
Unfavorable foreign currency net of offsetting price increases, negatively impacted net sales by approximately $5 million,largely due to the weakening of the euro.
Total engine shipments were higher than last year by approximately 6%.
This was largely due to higher shipments of small engine used on walk mowers, due to the improved lawn and garden markets in North America and Europe this past season.
Partially offsetting the increase were due shipments of engines used on snow throwers, due to adequate channel inventories in Europe, as well as lower placement in North America.
Sales of engines used on our pressure washers were also lower, as last year at this time we were building water pressure inventory in order to facilitate the closure of the McDonough plant.
Following the late season sales, we believe the channel inventories of lawn and garden equipment are at a normal level heading into the fall and winter season.
For the first quarter, the engines adjusted segment loss was $18.6 million, a decrease of $4.9 million from the adjusted engine segment loss last year of $13.7 million.
The engine segment adjusted gross profit rate was 16.2%, a 200 basis point increase from 18.2% in the prior year.
The gross profit rate decreased by 250 basis points due to unfavorable foreign currencies, particularly the weakening of the euro.
Units produced in the quarter decreased by 7% to approximately 1.6 million units.
As <UNK> mentioned, last year we increased first quarter engine production to have adequate inventories in advance of changing over to our new EXI small engine platform, and to support the closure of the McDonough plant.
Total engine inventories at the end of the quarter were approximately $1.7 million units, which is a decrease of approximately 360,000 units compared to the end of the first quarter of 2015.
We continue to anticipate that fiscal 2016 year end inventories will be slightly lower than fiscal 2015 year end inventories.
Partially offsetting the reduced gross margin rate was the benefit of improved plant efficiencies, and slightly lower material costs.
Engine segment ESG&A had a modest increase in the first quarter of 2016, due to higher pension costs, offset by the benefit of weaker foreign currency rates.
In the product segment, sales for the first quarter were $163 million, a decrease of approximately $4 million, or 2% from the prior year.
Unfavorable foreign currency net of offsetting price increases, negatively impacted net sales by approximately $6 million,primarily related to the weakening of the Australian Dollar and Brazilian Real.
Excluding currencies, products net sales increased by $2 million, or a little over 1%.
This increase was primarily driven by higher sales of lawn and garden equipment through our North America dealer channel, and the results of acquisitions we completed in fiscal 2015,particularly Billy Goat, which we acquired in the fourth quarter of last year.
We owned Allmand for roughly 30 days of the first quarter last year, during a time period when the oil and gas sector was more robust.
Partially offsetting the increase in net sales, were lower shipments of snow throwers into Europe, following two seasons of below average snowfall, as well as lower sales overall in Latin America, due to economic instability in the region.
Sales were also lower due to reduced sales of generator, as the market continues to decline given no major power outages in the US over the last few years.
Our planned actions to narrow the assortment of lower priced Snapper consumer lawn and garden equipment also resulted in lower sales.
Inventory of lawn and garden equipment in the dealer channel is consistent with last year.
We have seen dealers in North America stocking up for the snow season, after their inventories were largely sold through during last winter here in the US.
In Europe, we believe the channel inventory of snow stores are adequate, given relatively little snowfall in Europe the last two seasons.
Excluding pre-tax prestructuring charges of $2 million, and Billy Goat purchase accounting charges of approximately $300,000, the product segment had adjusted segment income of $2.4 million in the quarter,an increase of $1.5 million from the first quarter last year.
Product segment adjusted gross profit margin of 18.1% increased by 160 basis points from the prior year.
The improvement in gross profit was related to incremental restructuring cost savings, and improved manufacturing efficiency, which contributed 180 basis points.
Favorable sales mix also drove higher gross margins, as we continue to focus on selling higher margin products through the dealer channel and the addition of Billy Goat.
Partially offsetting the improved gross margins was a 90 basis point headwind due to lower production levels.
In the prior year, we had accelerated production in the first quarter to facilitate moving production from the McDonough plant to Wauwatosa.
Product segment ESG&A expenses increased slightly in the first quarter of 2016, due to the ESG&A associated with the Allmand and Billy Goat acquisitions, partially offset by the benefit of lower foreign currency rates, mainly in Australia and Brazil.
Turning to the balance sheet, net debt at the end of the first fiscal quarter was approximately $209 million,an increase of approximately $46 million for the first quarter of fiscal 2015.
The majority of the increase was due to cash used to purchase Billy Goat in the fourth quarter of fiscal 2015, as well as slightly higher additions to plant and equipment.
The end of the quarter we had $38 million drawn on our $500 million revolving credit facility.
Cash used on operating activities for the quarter was $83 million,primarily related to seasonal build of inventory levels, and reduction of Accounts Receivable in the quarter.
Last 12-month cash provided by operating activities was $114 million, and last 12-month free cash flow was approximately $38 million.
Depreciation for the quarter of $12 million was consistent with capital expenditures for the quarter.
Last 12-month average leverage and last 12-month EBITDA as defined by our credit agreement in place at the end of the quarter were $271 million and $146 million respectively,resulting in a leverage ratio of 1.86 times, which is well within our covenants.
That concludes what we wanted to say about the first quarter financial results.
So I'll turn it back to <UNK> for his concluding remarks.
Well our first quarter results were better than our expectations, as we said earlier.
Our first quarter is typically our lowest in terms of sales and profitability, due to the seasonal nature of our business.
Normal levels of lawn and garden channel inventory this time of year are encouraging for the upcoming season.
However, we are increasingly cautious about the global economy, and its potential impact of further weakening foreign currencies, and continued weakness in the oil and gas market.
For these reasons, we're reaffirming our fiscal year 2016 projections for net income to be in the range of $54 million to $61 million, or $1.20 to $1.36 per diluted share, prior to the impact of any share repurchase activity, and costs relate to the our announced restructuring programs.
Our fiscal 2016 forecast contemplates the US and European lawn and garden markets being higher by 1% to 3%, assuming a normal start to the selling season.
As a reminder, our second quarter sales tend to be slightly more weighted toward international regions, and therefore we're more exposed to currency headwinds in this quarter.
Discussions with our customers regarding product lineups for the 2016 spring and summer selling season are wrapping up in the coming weeks, and we'll be in a position to provide an update on placement fornext season, during our fiscal 2016 second quarter conference call in January.
Consolidated operating margins are forecasted to be in the range of 4.8% to 5.2%.
Interest expense which is projected to be approximately $21 million is increased from fiscal 2015, due to expected higher seasonal borrowing levels in fiscal 2016.
That concludes our prepared comments.
I would like to open the call up for questions.
Good morning.
So let me start with kind of how the quarter progressed, <UNK>.
And try to go through the different aspects of your question.
If I miss anything, let me know.
That is okay.
The quarter progressed, as you look through the quarter, it was a little bit slow early on in July and August,especially here in the US and in Europe.
Because the weather was a bit drier, and so we started to see a bit of a slowdown, if you will, in shipments July and August.
Once we got into September, we started to see improved weather here in the US, across the country, as well as over in Europe, and we did see then an uptick with regards to lawn mowers and commercial mowers especially.
It continued very strongthrough the month of September.
When you look at that.
That was a little bit better than net/net, to where we thought it was going to be.
We knew that there were going to be some headwinds, as it related to the currencies and the pension and the other things we had talked about, so all-in-all, the way the quarter ended up, it was better than what we had anticipated.
Now when you go to the inventory levels, so in terms of share pickup, or anything like that, I would tell you that it was our share was our share throughout the season, and because the market seemed to pick up here a little bit later on, that's where we started to see a few more sales into the OEMs.
I would not characterize that as share gain.
I would characterize that as they continue to produce to supply then as needed to the retailers.
With regards to what's normal anymore in inventories, you are right.
We have been through about four abnormal years, simply because we had the drought going all the way back to 2012.
That has a couple of year impact.
I would tell you as we look at inventories, historically, we think that they're pretty normal.
When we say historical, we go well beyond the last four years.
And so when you lock at inventories where they would have been coming out of a drought year, for example, coming out of the year after the drought, for example, they're lower.
We believe they're lower.
We don't have full visibility throughout the channel.
But based on what we know, we believe that they are lower than they would have been the last few years.
And approaching levels as to where they would have been say six, seven, eight years ago on a little longer term view.
So I would tell you that i think sequentially, if you think about the year-over-year, I think certainly inventories are, we believe inventories are in a better position now than they would have been any time over the last say three years.
Yes, things really start to slow down in October, <UNK>.
So it is one of those things where I wouldn't tell you that, it seems to be pretty normal.
Well, on the engine margin front, what we work on in improving margins is number one, the new products we've come out with, and attempting to achieve higher margin rates than the products that we've replaced.
And we also work on efficiency gains in our plants, and we always enter the year with a sizable amount of cost reduction takeout that we want to have.
Those are the upsides.
The challenge that we have as we came into the year mainly has to do with the foreign exchange rates, which are significant impact, particularly as you look at the year-over-year and its impact on our engine.
So you've got to think about those things net together, as you think about the overall profitability change in the engine business year-over-year.
In acquisitions, we haven't broken that out specifically.
We've commented on Allmand has essentially $60 million in net sales, and Billy Goat has approximately $30 million in net sales.
So if you break that out, doing the math, that should get you in the neighborhood of what the impact is.
With the little bit of color that we've added here, that we've got some caution on the Allmand business given its historic, heavier weight to the oil and gas sector.
And it is really important from a strategic perspective that we help diversify the revenue stream of that business into the construction and infrastructure markets, as well as international.
To the extent, the speed of which we can diversify that, will depend on whether we can maintain that approximate historical sales volume level, as clearly oil and gas at $45 a barrel presents quite a headwind.
Thank you.
Doing well, <UNK>.
How are you.
No.
We haven't changed anything.
Dave's comments were more in context to the midpoint of our range.
That was a lot of our discussion around how we laid forth the outlook for next year.
But the 4.8% to 5.2% range is very much in line with the net income and EPS guidance that we gave back in August.
Now, the additional factors of caution that we added this quarter was the continued impact of foreign exchange, and some of the difficulties in the global markets, particularly Latin America, and we're keeping a close eye to see how those markets progress as we go throughout the year.
As I just mentioned, oil and gas is clearly a challenge in our Allmand business that we need to work against.
The other thing we added into the information was more information on interest expense, which is going to be a little bit higher year-over-year because of the acquisition levels we did last year, as well as a little bit higher capital spend.
And we're also projecting a little bit lower other income from our joint ventures, as that just tends to vary year to year.
300,000.
What we said is we intend to take out working capital of up to $20 million of the total Company year-on-year, as we come to the end of the fiscal year.
The other thing to keep in mind is we came into the year quite a bit lower inventory-wise.
And then the impact in first quarter impacting inventory.
Last year we were a little bit high, as we were ramping up to launch the EXI engine, as well as the transition.
So indeed, I think you're on the right track.
Last year inventory was a little bit high.
But i wouldn't tell you that it's a one for one as to how it will track through the rest of the year.
Not at this time.
No.
I don't have that real handy.
The snow tends to be a smaller part of our overall business though, is the context I would provide to that.
Thank you for joining today's conference call.
Our next quarterly earnings conference call will be in January.
Have a great day.
