Twin Disc, Incorporated
Q1 2016 Earnings Call Transcript

Published: 27 Oct 2015

[Operator:]

Please standby, we are about to begin. Good day, everyone. And welcome to the Twin Disc, Inc. First Quarter 2016 Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Stan Berger of SM Berger. Please go ahead, sir.

[Stan Berger:]

Thank you, Anthony. On behalf of the management of Twin Disc, we’re 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 2016, I am sorry, first quarter and full -- and -- first quarter results and business outlook. Before I introduce management, I would like to remind everyone that certain statements made during the course of this conference call, especially those that state management’s intention, 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 statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company’s annual report or 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 [phone] and she will send a copy to you. Hosting the call today are John Batten, Twin Disc’s Chief Executive Officer, President and Chief Operating 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?

[John Batten:]

Thank you, Stan, and good morning, everyone. Welcome to our fiscal 2016 first quarter conference call. As usual, we will begin with a short summary statement, and then Jeff and I will be happy to take your questions. Looking at the first quarter results, sales for the 2016 fiscal first quarter were $37.4 million versus $64.8 million a year ago, decrease of about 42%. You may recall from our last call, we had a number of customers moving up shipments in advanced of our July and August shutdown. Our largest plant here in Racine shutdown for the entire month of July due to a very light demand. Many of the orders pulled up or shipped throughout the quarter not just in July. This movement in orders coupled with the sharp decrease in demand in new order and extended shutdown help explain the significant difference in sales levels. Looking at the end product market, the North American oil and gas market and the Asian oil and gas and marine markets had by far the worst comparable year-over-year. This is the first quarter in over a decade that there were no forward market sales into the global pressure pumping market. The oil and gas aftermarket activity also saw significant reductions versus last year than previous quarters. Looking at the Asian end market, the Chinese domestic oil and gas sector experienced sharp sudden pullback as activities slowed and inventory grew. The slowdown in Chinese economy also significantly impacted the regional marine market, both offshore oil and gas vessels and tug and cold barge activity in Indonesia. Sales into our other marine markets and industrial markets were down about 25% compared to last year in the previous quarter. Sales into our transmission markets declined versus fiscal 2015 first quarter levels by about 75%. This fall off is directly attributed to the extreme low levels of oil and gas shipment. Gross margins for the quarter were 21.9%, compared to 34.5% a year ago and 29% the previous quarter. Comparatively, poor mix due to the extreme low level of oil and gas shipment, and increase shutdown at our North American production facility were the primary drivers in the gross margin decline. First quarter spending in marketing, engineering and administrative or ME&A expenses decreased by $670,000 versus the same period last year from $15.9 million to $15.2 million, which was our lowest first quarter ME&A spending since fiscal 2011. As we mentioned in the press release, the year-over-year reduction is due to cost containment, currency fluctuation and reduced bonus expenses, but were offset by increases in stock compensation, pension expenses and corporate development activity. During the quarter we sold our assets and the distribution rights Twin Disc products in the Southeast territory of United States for approximately $4.1 million, which resulted in a net gain of $500,000. I will come back to this sale later in the call. The net loss for the quarter was $4.3 million or $0.39 per share, compared to net earnings of $4 million or $0.36 per share a year ago. Looking at the balance sheet, we ended the quarter with total debt of $14.3 million, up $500,000 from that ended the prior fiscal year and cash of $23 million, which was flat from the prior quarter and an end result and net cash position of $8.7 million. Mindful of the lower revenue levels, we are looking -- we are working to keep our working capital in line with those -- with these lower levels. Inventories of 21% lower than year ago levels and down 4% from the prior quarter, and this quarter our working capital reduced 13% from $112.8 million to $97.5 million. These reduction activities will continue for the foreseeable future. Our six-month backlog increased from $34.4 million to $37.5 million. While we are pleased to see the increase, we remained cautious and contribute part of the increase to the prolonged shutdown during the quarter. General market conditions remain very weak, just a few pockets of relative strength, such as the European Marine markets, the North American industrial market, especially aftermarket activity and the global art market. Turning back to the sale of our distribution entity for the -- for the moment, we have worked over the last few years to keep our balance sheet in position to make a key strategic acquisition for the weather sudden and steep downturn, but not both at the same time. It is becoming evermore clear that the return of North American oil and gas is increasingly unpredictable and unlikely to happen in the next few quarters. As a company we have to be profitable assuming oil and gas forward market sale are zero. This will force us to make hard capital allocation decisions like the sale of Twin Disc Southeast. In selling the distribution entity to one of our independent North American distribution partners, we can use this capital for increase product development and other growth initiatives. Our global footprint, especially the manufacturing footprint is a result of growth investments in markets like the European pleasure craft market and the global oil and gas markets that are under extreme pressure. Until this quarter, we have had the volume of other product markets in addition to certain minimum in oil and gas to maintain acceptable margins. In addition to the $6 million of cost reductions announced in the fiscal 2015 fourth quarter, we have identified another $4 million of annualized savings across the company that will be implemented in the second quarter. Looking specifically at our manufacturing entities, we're targeting at 15% reduction in our cost structure through a variety of action, which will be rolled out over the next few quarters. Given the uncertainty in many of our traditional markets, reliance on Asia and other emerging markets for growth and the ability of macroeconomic forces like OPEC will have such an impact on key markets like oil and gas. Management recognizes that we need to simplify to reduce the complexity of the company if we are to be profitable without a forward market oil and gas component but to remain capable delivering when that demand return. Turning quickly to the outlook, on the last call we talked about how the first two fiscal quarters of 2016 will be the most challenging. This has only become more apparent as we saw orders pushed out during late August and September. Thankfully, the trend has become somewhat better in October but it’s still too early to tell if this is a flip or real inflection point. This doesn't change our short-term plan to address our cost structure for the new reality of $50 oil. That concludes my prepared remarks and now Jeff and I'll be happy to take your question. Anthony, please open the line for questions.

[Operator:]

Thank you. [Operator Instructions] And it appears our first question comes from Walter Liptak with Seaport Global.

[Walter Liptak:]

Hi. Thanks. Good morning guys.

[John Batten:]

Hi Walter.

[Walter Liptak:]

Want to ask about the oil and gas markets and I guess, it’s completely understandable that there would be no pressure pumping sales in the quarter. But wonder if we maybe get two data points from here, one, what are you hearing from your salespeople and what are they hearing from customers regarding when the excess inventory of equipment will be consumed and I now wonder if you could comment on part sales during the quarter?

[John Batten:]

Well, first, let’s see, I think if there is going to be any returned forward market activity, I believe for us anyway it'll happen in China first just because they don't have -- be it the dollars and the unit excess inventory that here in North American and certainly as a percentage of the fleet, there is not the same level of excess. So I could see forward market units to Asia continue resuming in the next couple of quarters. That’s not on the realm of possibility at all. North America is just another conundrum. I would have said that a year ago we were at that point, where by and large all of the excess capacity had been consumed than we saw that with new orders. Now with the level of operators in distress and by and large of the fleets that we’re in, those operators I don't think are the ones who are in much distress but they do have excess capacity. Now that’s coupled with ones who are in distress and there is a lot of excess capacity. And I've read, applied the same things you have that could be anywhere from again 25% to 40% which puts us back in North America where we were a couple years ago with a lot of excess inventory. The difficult part, Walter, one that is hard to predict is, how will that excess capacity find its way into the hands of the people who are not interested to use it. That’s the million-dollar question and we just don't know, is that two quarters, is that a year. And so that that's why we remain cautious that we think our stuff is being used but there is an aftermarket component. But when our new units is going to come back in North America. I think it’s going to be very specific and very targeted. They will replace a spread here or spread there or we’ll get to do a retrofit. But I just don’t know the answer to that, Walter. I think we’re at a minimum. This is another year to two years of North America shaking out the excess inventory and then with respect to, you asked about, aftermarket, the aftermarket component, the rebuild drop significantly. It didn't go to zero but my guess is two thirds, 50% of two thirds of what we're doing a year ago this past quarter.

[Walter Liptak:]

Okay. Given that, it may take a year or two with that sort of an outlook, I guess, kind of, getting to the cost-cutting aspect of it, what kind of timing can we think about for getting to that breakeven level, either this year, next year and then maybe -- and then if that’s too difficult to address, maybe what kind of revenue level overall are you at breakeven?

[John Batten:]

Okay. Those are all good question. What we are looking at and what we’re addressing, starting this quarter and really the remainder of the fiscal year is we’re going to assume forward market oil and gas reserve. And we’re going to organize ourselves so that we are profitable at that level. Will we be able to get to that run rate by the end of the fiscal year? That I don't know but it’s, that is where we're headed. And certainly if there is an oil and gas component, our breakeven level is much more attractive. If there isn't then just the margin than that are higher. But it’s -- now we've been -- spend one year -- one pause of about 2.5 years of real strong forward market activity in North America, but we had the Asian component, which was certainly enough to keep us with good margins and profitable. Now with the Asian component going on and off overlapping North America, it’s just not a very comfortable picture. So we're going to position ourselves that we can be profitable without oil and gas forward market. So it’s going to take a few quarters well to view that, but we will get there.

[Walter Liptak:]

Okay. Good. Yeah, good luck with that. It looks obviously a major undertaking. I want to also ask a question about the sale of the distribution asset. And what started the strategy for selling distribution, maybe thoughts around how -- is this -- how much more do we have to go, how much money can be raised if you exit that?

[John Batten:]

Well, it wasn’t -- part of it was done to maintain a clean balance sheet, but it was also done -- it’s just what are we going to -- our strategy on how we allocate capital, what we use our capital, and then I wouldn’t necessarily jump to conclusion that we are under a strategy to sell all distribution entity, that's not the case. But if we can find a partner within the Twin Disc family, they can do the job that we’re doing, or I would add probably do it better, because in certain areas they'll have more product lines and they could make -- actually make that entity stronger. It seems best for Twin Disc and products if someone else handles the sales in that territory. We take that capital and we either can invest in reducing our cost structure, new product development and engineering, gear a plan or we can go out and buy a product line that we can then spread throughout the entire Twin Disc organization. So we’ve actually embarked on this transaction before the dramatic turndown in the first quarter. But in the middle of the first quarter it became very apparent that that would impact the good decision that we can use that cash, use that capital and invest it in other places knowing that the Twin Disc product in that territory will be taken care of as well or better than what we’re doing. So it is a strategist recognizing that what is our core competency, what can we do here with Twin Disc management for our customers, should we be investing that $4 million in the distribution at the southeast territory of the United States, or should we be investing in new product for the global Twin Disc family?

[Walter Liptak:]

Okay. So should we look at the southeast asset sales like a one-off, or should we expect that there is going to be more quarter-to-quarter?

[John Batten:]

I would say that we’re taking -- you’ve been -- you take the assumption that we’re taking that we have no oil and gas forward market, it forces you to make difficult decisions about capital allocation. And I wouldn't -- it's distribution businesses, it is manufacturing subsidiaries, it is product lines. So we said that there are lot of options on the table to realign our cost structure and this decision was just one step along with the mid-Atlantic region which was a much smaller territory that we did last fiscal year.

[Walter Liptak:]

Okay. Great. Thanks. I will get back in queue.

[John Batten:]

Thanks, Walter.

[Operator:]

Our next question comes from Josh Chan with Baird.

[Josh Chan:]

Hi, good morning, John and Jeff.

[John Batten:]

Good morning, Josh.

[Josh Chan:]

Hi. If you can just go around your different end markets, certainly it was the tough quarter, but I was curious to hear how that market compare versus kind of your expectations coming into the quarter?

[John Batten:]

Yeah, I guess overall say 42% down. I would say by and large that we had expected to come down. We’re 65 million roughly a year ago that our expectations given the plant closures, we’re probably more in line with being at 50. So this was again double what we what we had anticipated being down and really, really driven by one area with the effect on one plant and it was. We knew that North America oil and gas was going to be down, the aftermarket component surprised us a bit, but we’re surprised at how quickly things turned off in China, really kind of in late August in the September, so that wasn't anticipated. China oil and gas going to zero, the Marine activity in the region going down so significantly, so that really was the surprise that I guess that’s taking us from 65 to 50. We’ve figured that that was going to happen, but going from 50 to 35 really was the unexpected severity in China.

[Josh Chan:]

Okay. And then the somewhat of a rebound I guess, I don’t know if you want to call it rebound in October, but improvement I guess, was that in China as well or where are you seeing the slightly better trends in October versus those two months?

[John Batten:]

Actually I would say so far the blip has been mostly in North America.

[Josh Chan:]

Okay.

[John Batten:]

That's been driving. And I think that’s holding steady in Europe, but kind of the improvement over what we saw at the end of the first quarter, typically second quarter really I would say is driven by North America, but not oil and gas.

[Josh Chan:]

All right. And then on the gross margin line, is there way to ballpark how much impact the production shutdown affected the quarter? I guess to ask another way, what would normal gross margin have been like at the lower demand levels, excluding the shutdown?

[John Batten:]

Hey, Josh. Assuming that say volume, without that shutdown, gross profit would have been lower, potentially even than lower. So really what you have to do, I guess is model what sales would have been in the quarter. If we hadn’t announced this shutdown, it would have been marginally higher. I think there is probably a few million related to under absorption at facilities that was driven and we weren’t able to recover from the shutdown but it still would have been very, very difficult quarter.

[Josh Chan:]

Right. Okay. And then on the cost savings you announced a $4 million cost savings initiatives and then you also talked about the 15% manufacturing cost reduction. Are they -- should we look at those as different programs, are they related somehow?

[John Batten:]

They are related. I would say, of the $4 million, about slightly more than half of that would be cost of goods sold related.

[Josh Chan:]

Okay. Okay. That makes sense. And then is there a way for ME&A expenses to come down beyond the portion that’s attributable from the $4 million, or how should we think about that line relative as revenue comes down potentially?

[Jeff Knutson:]

Yes. I think that’s a good question. Obviously, there are lot of sort of fixed costs in that layer and that’s what we are trying to attack as we look at our structure around the world. I think as John pointed out, it was a relatively low quarter for ME&A compared to our previous several years. It was the lowest quarter since the first quarter of fiscal ’11. That’s the extent, we know that that’s an area that we need to try to drive some cost savings then. And that’s what we will be looking at over the next weeks and quarter.

[Josh Chan:]

And the last question is on -- we've heard John’s comments about capital allocation. So, am I reading it right that with the proceeds that you are receiving, John, from the sale of distribution or whatever else that you might do, you're looking at new product development organically to try to accelerate that growth lever?

[Jeff Knutson:]

Both Josh. I’d not take off the table -- corporate development activities, acquisition, whether it’s product line, a company or internal product development.

[Josh Chan:]

Okay. So it could be a combination of all of those?

[Jeff Knutson:]

Yeah. It could be a combination of all those. But realistically as I mentioned, we've been maintaining the balance sheet the way we have to get back key strategic acquisition or to weather downturn. But certainly right now with the severity of the downturn, the primary focus is on the existing business at hand and making that profitable. But we do not want to lose sight of growth initiatives whether it's, again organic product line or company.

[Josh Chan:]

Great. Understood. Thanks so much for you time.

[Jeff Knutson:]

All right. Thanks, Josh.

[Operator:]

Our next question comes from Rand Gesing with Neuberger.

[Rand Gesing:]

Hey, guys.

[John Batten:]

Hey, Rand.

[Jeff Knutson:]

Hello, Rand.

[Rand Gesing:]

Can you give us a sense for sort of what’s left as it relates to distribution?

[John Batten:]

Sure. We have Mill-Log Equipment, which is in the Pacific Northwest of the United States, so that would be Oregon, Washington and then it also extends to the Canada with British Columbia, Alberta and Manitoba. And then we own our distribution facility for Australia and we have our master distributor in Singapore, which handles all of our Asian dealers. And then our company Twin Disc Srl is our distributor for Italy. So those would be the distribution companies that are left.

[Rand Gesing:]

Okay. So, those who are trying to think about just in terms of revenues, both grew, have you sort of sold, maybe almost half of your distribution by these two pieces?

[John Batten:]

No, I would -- on a sales level, it would probably be, boy! Not even 10%. Between 5% and 10%, yeah.

[Rand Gesing:]

Okay. Okay. Okay.

[John Batten:]

And the entities just remain are significantly larger in revenue than the Twin Disc Southeast or the territories that was above them.

[Rand Gesing:]

Okay. All right. I guess I would infer back and into a little is sort of piggybank there, what’s in the piggybank? I mean, in terms of proceeds you could potentially do, obviously you are not going to do all of them because you are not going to get the good partner fit but is there anything we should think about in that map of what you've done $5 million versus -- obviously, it’s not going to be -- I’m not going to take exact numbers. Obviously, you are not trying to but I’m just trying to understand little about if you do transacts couple of these, what could sort of be monotype? So, I guess what I’m asking is Southeast -- is the Southeast business, or is there something incredibly attractive about that, or profitable that it would've me that flog of revenues much higher multiple to you guys and Twin?

[John Batten:]

No. I would say that there were couple -- again, we embarked on this activity last fiscal year, when we were having a great year. So this wasn’t -- it wasn’t a distressed move so to say.

[Rand Gesing:]

Right. Right.

[John Batten:]

But it was looking at it, the territory of the Southeast United States. For us, it was the least profitable to distribution entity.

[Rand Gesing:]

Okay.

[John Batten:]

And typically what happened is we acquired this territory over 20 years ago, before I started with the company, so basically 20 years ago.

[Rand Gesing:]

Yeah.

[John Batten:]

And overtime, this distribution we had migrated to just between this product line. So, our industrial products and our marine products.

[Rand Gesing:]

Okay.

[John Batten:]

It didn't have a whole lot of other line. Typically what happened or what can happen, not necessary, but what can happen is if we own a distribution territory, the other line, the other companies that are represented, for whatever reason maybe we don't focus on it as much or they pull, but that line because they think that we’re competitors.

[Rand Gesing:]

Right.

[John Batten:]

So you end up doubling down on cyclicality.

[Rand Gesing:]

Right.

[John Batten:]

And in the Southeast territory of the United States, it has been very heavily pleasure craft, obviously Florida, Georgia territory.

[Rand Gesing:]

Yeah.

[John Batten:]

So it became more challenging for us. Great Lakes power products the company that acquired it has a lot more lines that they can bring to the territory and help fund the activity there. And they’re right next door to us, so it was an adjacent territory, it made sense. They can leverage their cost and their management system. So it really just seems -- in all honesty when we started out, how do we better serve the customers and our products in the territory, who can do it better than we can, because we’re struggling with this and we don't want to invest more time and more capital in it, how do we invest less time, less capital and do a better job. And then it became obvious that we returned to one of our neighboring partner. So that’s how it came about. Okay, the timing was pretty good, actually they have conclude in the first quarter, because it was nice to get that capital back and keep it drive for something else that we think will benefit the entire Twin Disc family, not just the customers and the Southeast territory.

[Rand Gesing:]

Right. Okay. Okay. I think it make sense. I think it make good sense.

[John Batten:]

Yeah.

[Rand Gesing:]

Just it -- wasn’t fall any quickly enough. In your prepared remarks you said something and then you laid out Euro Marine, North American industrial and Global art, I wasn’t sure whether you were seeing some transition there or what you…

[John Batten:]

No. I would say those -- the comments on those markets were the once that have the best comparables two year ago.

[Rand Gesing:]

Okay.

[John Batten:]

So hadn’t fall at 25%. So and there’s just a few pocket that really didn’t. Pretty much everywhere we look this year versus last year the comparisons were negative. The exceptions were -- the European Marine markets sounds counterintuitive but comparatively they -- that did well, aftermarket for North American industrial was, okay, than the art market.

[Rand Gesing:]

Okay.

[John Batten:]

But anywhere else it was not nearly as good comparison.

[Rand Gesing:]

Okay. What do you sort of feel to the degree you have any sense, Asian non-oil and gas, the work boats and things of that nature? Is that -- given the sort of negative news we’re hearing deceleration in China, should we sort of feel like that market is going to be sort of soft for you guys over the near term?

[John Batten:]

I think it will be at least a quarter or two.

[Rand Gesing:]

Yeah.

[John Batten:]

Again, I’m confident that that activity will recover somewhat by the end of the fiscal year. There’s just a lot of activity in this. It’s a lot of wins and losses, but we will get out there and through the remainder of the year get more wins and losses. But no, it was a -- Ryan, I can’t say, it was a sharp contraction in the middle of the -- well, towards the end of the first quarter.

[Rand Gesing:]

Right. Okay. And I guess my last question is, it sounds like you guys are pretty well along in terms of the things you’re thinking about doing and leverage you’re thinking about pulling to bring the cost structure down. But it sounds pretty dramatic to me. And I'm just wondering how sure are you that you’re not going to cut into some bone here, or are you willing to do that because that’s pretty draconian to say, hey, one of the key markets that we had high margin oil and gas we can’t rely on in the plan and so we’re going to side the business for that? So just your comments there would be helpful.

[John Batten:]

Sure. I didn’t mean it sounds draconian, but we have to accelerate some of the decisions we were considering making just given going from at the peak of oil and gas in 2012, $350 million, down to $265 million. Now currency play the big impact on, the $265 million last year was much better than the $265 million the year before. But the numbers of units, they’re still utilizing the temporary layoffs in Europe, [indiscernible], the recognition that the marine markets is pleasure craft aren’t in return to peak levels. Some of our plans have been able to transition and serve patrol boat in commercial markets, others haven’t been successful with their product lines. So Ryan, it’s not draconian, they are just logical decisions given that you can’t -- we can't rely on -- we were able to rely on since 2011, a base business of -- but we assume fiscal '12 was a 100% oil and gas, that was like the maximum. We had been quite happy with that 20% to 25% level and that's what Asia was going to give us in the lower level of North America. But now we have to be prepared that we could go multiple quarters with it actually being 0%. And then we do have -- that takes us to -- that takes us from an acceptable absorption level to an unacceptable absorption level. So again -- and your comment on cutting to the bone, I certainly don't want to make decisions that when oil and gas comes back, we are unequipped to react. That will be -- that will be truly an unacceptable result. So that’s why we’re not announcing everything now or rushing into, we want to make very informed decisions on how we want to be positioned in the future. But we have to be less complex because just the volume in oil and gas and the margin is not there to cover up necessarily any inefficiencies with. If the number of facilities were $350 million and the cost structure is one thing. If you stay now at $200 million, you can afford that same cost structure.

[Rand Gesing:]

All right. Okay. Great. I appreciate it. Look forward to seeing you soon.

[John Batten:]

Bye. Thanks Ryan.

[Operator:]

[Operator Instruction] We’re pleased to have a follow-up question from Walter Liptak with Seaport Global.

[Walter Liptak:]

Based on the last question, I started thinking about what the revenue run rate might be for the next quarter. And I know you don't give guidance, but I mean just directionally your backlog is at $37 million. You saw your order trends in the quarter. Are you thinking that next quarter is going to be flat from where you were this quarter or is it going to be down in that difficult comp?

[John Batten:]

Walter, it will be a better quarter. Sales will be up as there won't be just fewer shutdown days but more shipping days. The mix as far as the product, we still assuming zero oil and gas. So it’s going to make it difficult that way. But I think you’ll see higher shipment levels. I don't expect it -- will it be enough to get us to breakeven unless we can cram a lot more oil and gas in the end as far as aftermarket. I don't think so. But historically we don't have oil and gas component, we're going back to the historical quarterly performance of Twin Disc. I will not add a lot, I want to say that. But the first quarter is by far the worst quarter of the year, second quarter is better, third quarter is better, fourth quarter is better, and it is basically kind of track the number of shipping date throughout the year in each quarter, the number of shipping days in each quarter and just the seasonality of low order activity in the summer. I see that trend now continuing where each successive quarter of the year will be better. Where do we cross the breakeven point? Is it the second quarter, or one of the second half quarters? I’ll be honest, Walt. I don’t want to make any promises, but it will be difficult to do in the second quarter just given taking some points. We are taking cost reduction activities kind of in the middle of the quarter.

[Walter Liptak:]

Okay. All right. Great. Good luck guys.

[John Batten:]

Thanks, Walt.

[Operator:]

Our next question comes from Ryan Curdy with Pacific Ridge.

[Ryan Curdy:]

Hi. Good morning.

[John Batten:]

Good morning.

[Ryan Curdy:]

Earlier, you mentioned expectations of reducing net working capital. Can you just kind of walk us through that, what your CapEx plans are and also, I think in the last call you guided to $10 million for the year. Your balance sheet is already pretty light compared to where it was say five years gone in the last downturn. Just kind of what are your thoughts are in terms of your cash flow for the year?

[Jeff Knutson:]

Yeah. We are looking at -- obviously, working capital in terms of inventory, driving that down. But at the same time as John said, we prepared for our recovery in oil and gas. That’s the component that we are very mindful of that. We need to be ready and be poised for that recovery. CapEx, you're right. Historically, we are in the $8 million to $11 million range. I think we're very good at being flexible and identifying those key components that we’ve need to spend on and possibly delaying some of the discretionary spending as we work through a difficult period. So, I think we would probably estimate today between $5 million to $8 million in CapEx, primarily some maintenance type items and some high payback machine tools.

[Ryan Curdy:]

Got it. Thank you.

[Operator:]

And it appears, we have no further questions in the queue at this time.

[John Batten:]

All right. Thanks, Anthony. Thank you for joining our conference call today. We appreciate your continuing interest in Twin Disc and hope that we have answered all of your questions. If not, please feel free to call, Jeff or myself. We look forward to speaking with you again in January, following the close of our fiscal 2016 second quarter. Anthony, I’ll now turn the call back to you.

[Operator:]

That does conclude today’s conference. Thank you for your participation.