Twin Disc, Incorporated

Ladies and gentlemen, thank you for standing by. I would like to welcome everyone to the Twin Disc Incorporated Fiscal Second Quarter 2024 Conference Call. At this time, all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press the star followed by the number 1 on your telephone keypad. If you'd like to withdraw your question, please press the star followed by the 1 once again. Thank you. I will now hand the call over to Mr. Jeff Knudson, Chief Financial Officer.

You may begin your conference.

Good morning, and thank you for joining us today to discuss our fiscal 2024 second quarter results. On the call with me today is John Batten, TwinDisc's CEO. I would like to remind everyone that certain statements made during this conference call, especially statements expressing 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. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are contained in the company's annual report on Form 10-K, copies of which may be obtained by contacting either the company or the SEC. Any forward-looking statements that are made during this call are based on assumptions as of today and the company undertakes no obligation to publicly update or revise these statements to reflect subsequent events or new information. During today's call, management will also discuss certain non-GAAP financial measures. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. By now, you should have received the news release, which was issued this morning before the market opened. If you have not received a copy, please call our office at 262 638-4000, and we will send a release to you. Now I'll turn the call over to John.

Good morning, everyone, and welcome to our fiscal 2024 second quarter conference call. Let's begin today's call with some highlights. We continued our solid momentum in the second quarter, delivering profitable growth by generating historically high cash from operations. These results were driven in large part by strong operational execution by our teams, coupled with our continued focus on working capital improvement. We are seeing ongoing strength, both in marine and propulsion and land-based transmission, supporting 15.2% year-over-year sales growth to continue our trend of double-digit top-line expansion in fiscal 2024. We also delivered solid gross margin expansion, which improved 140 basis points to 28.3%. We're also seeing continued backlog growth as our teams work to capture stable and market demand. One particular highlight has been significant increase in orders for workboat marine transmissions in Asia Pacific, a return to activity in a market after cyclical softness in the offshore Asian market. Moving on to results by product sales in marine and propulsion systems increased 29% driven by growing activity in global commercial markets. We are seeing further increases in defense spending driving patrol boat projects, which we expect to continue given current geopolitical turmoil. VET backlog remains at record levels, rising 6% sequentially and supported by the success of the VET Enrollment Partnership. VET inventory has increased in the near term as we prepare to meet increased demand heading into the second half of the fiscal year. On to the land-based transmission business. Sales grew 8% year-over-year, driven by rising activity in the oil and gas markets. We're encouraged to see our first new unit orders in North America within oil and gas and expect further strength for this part of the business in the coming quarters. ARF has also performed well with a strong demand for these transmissions, supporting continued trajectory of backlog growth. Looking broadly at the segment, orders are continuing to trend upwards, and we have seen early signs of improvement in spare parts orders after previously reporting a pullback due to end market uncertainty in the first quarter. Our industrial segment has remained pressured by softness amongst industrial OEM customers, with sales declining 13% versus the prior year. We have continued to see sluggish demand for lower-content commoditized products, where demand has remained steady for sophisticated, higher-content products. Despite this near-term softness, we remain focused on capturing opportunities to partner with major domestic OEMs on a range of products. Next, I'll speak to inventory and backlog. Our backlog has continued to increase, driven by solid demand across our end markets, along with the impact of supply chain improvements made over the past year to enable faster shipment deliveries. We are also seeing a temporary increase in inventories percentage of backlog, mainly due to the near-term increase in inventories mentioned earlier. That said, we expect to see inventories fall in the second half of the fiscal year as we work through our current backlog and remain focused on driving inventories percentage of backlog lower in the coming quarters. I'd like to briefly address our long-term strategy before Jeff takes us through the financial details. We aim to position TwinDisc as a leading provider of hybrid and electrification solutions for marine and off-highway land-based applications. In recent quarters, we have made great strides in rationalizing and modernizing our business, helping deliver improved shipments while lowering inventory costs and lead times to create better results for all stakeholders. We are maintaining our focus on controls and systems integration, shifting our business into new avenues that will bring us profitable growth. With the support of our strong balance sheet, we are also continuously evaluating M&A opportunities to grow our business within the industrial and marine technology sectors, both of which ample opportunities for us to expand our offerings in the hybrid and electrification space. With that, I'll now turn it over to Jeff to discuss the financials.

Jeff? Thanks, John. Good morning, everyone. We delivered sales of 73 million for the quarter up 9.6 million or 15.2% from the prior year period as overall demand remains strong. Net income attributable between this for the second quarter was 900,000 or 7 cents per diluted share compared to 1.8 million or 13 cents per diluted share in the second quarter of fiscal 23. Gross profit margin increased 28.3% compared to 26.9% during the prior year period, and gross profit increased 21.3% to $20.7 million. This improvement reflects the benefit of prior pricing actions, continued easing of supply chain headwinds, a favorable product mix, and successfully executing our operational playbook. Marine and propulsion systems reported double-digit growth, and land-based transmissions reported 8% growth, while industrial sales declined compared to the prior year period Looking at top line distribution across geography, sales continue to increase across the Asia Pacific and European regions compared to the prior year, supported by robust demand, while North American sales declined. We continue to strengthen our balance sheets through the solid cash generation delivered in the second quarter. We reduced net debt by $21.7 million to negative $3.3 million compared to the prior year period. and ended the quarter with a cash balance of $21 million, approximately $7.5 million higher versus the prior year period. EBITDA decreased to $5.5 million from $7 million during the prior year period due to a $4.2 million prior year gain on the sale of a facility recorded in the second quarter of 2023. We continue to decrease our leverage ratio this quarter to below negative 0.6x, putting us in an excellent position to invest in our business while executing inorganic growth opportunities. As noted earlier, gross profit margins for the second quarter increased to 28.3%, expanding approximately 140 basis points from the prior year period. Again, due to the benefit of pricing actions, continued easing of supply chain headwinds, a favorable product mix, and successful execution of our operational playbook. Our improved supply chain has continued to enable stronger shipments, However, we have faced some currency headwinds and higher labor costs within ME&A. That being said, while ME&A spend has increased nominally, it has decreased as a percentage of sales as we continue to grow our business. Now onto capital allocation. In line with the additional priorities specified in our capital allocation framework, given our low debt level, we are exploring ME&A opportunities with a specific emphasis on marine technology, industrial, and the hydroelectric sector, as John mentioned. Simultaneously, we are making strategic investments within the company, including research and development, expansion into new geographic areas, and continued strengthening of our marketing efforts. As always, we are pleased to consistently return capital to shareholders through repurchases and dividend payments. We will continue to evaluate our capital allocation strategy and priorities, adjusting the changes in the economic landscape and our operating environment as they evolve. I'd like to now turn the call back over to John to share some closing remarks. Thanks, Jeff.

Before we open the line for questions, I'd like to highlight a few key takeaways from our quarterly results. In summary, we're seeing stable end market demand, advancing our momentum of double-digit revenue growth, robust margin expansion, and cash generation. We are focused on maintaining the operational improvements that have supported these results, including disciplined working capital management. Despite lingering macroeconomic uncertainty, we hold a cautiously optimistic outlook towards the remainder of our fiscal year, given strengthening demand levels in our end markets. Our consistent performance will continue to strengthen our financial profile, giving us the ability to work through potential challenges while pursuing growth opportunities. I'd like to thank all of our teams for their hard work and commitment to supporting our business this quarter. We look forward to sustaining this progress as we drive TwinDIS forward and generate long-term value for our shareholders. That concludes our prepared remarks. Jeff and I will now be happy to answer your questions.

At this time, I would like to remind our teleconference participants in order to ask a question, please press the star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Thank you. Our first question comes from the line of Simon Wong from Gabelli Funds.

Please go ahead.

Good morning, guys.

Hey, Simon. Good morning, Simon.

First question, you saw some nice growth in your land-based transmission business. How much of that was from the oil patch?

I would say the oil patch was relatively consistent. I think it was probably split between our ARF and our oil patch on the transmission side.

So, 50-50, so about $7 million, $8 million?

I think that's about right, yeah.

Okay. Now, you mentioned that you saw higher activity or you received your first new equipment order from North America. Is that Is that for the new EFRAC or is that for the diesel-based transmission?

Yes, Simon, the new unit orders were for traditional diesel FRAC. We are still awaiting the first PO for the EFRAC. I'm hoping that happens yet this quarter. But, you know, so far all the new unit orders and obviously all the spare parts orders remain for North America and Asia. Our business in Asia keeps chugging along at a very good rate this quarter compared to a year ago.

Okay. Now, that $8 million from the oil patch, is that mostly – I mean, you did mention some new units going to Asia. Is that more geared toward consumables, or how does that break down between consumable and new equipment?

So I would say in the quarter, the revenue growth was more in new units to Asia and a little bit less on spare parts. So the mix of new units, spare parts was higher in the second quarter than it had been in the previous quarters. So we saw a little bit of slowdown in rebuild activity and an uptick in new unit activity.

Okay. And then your EFAC offering, you're still waiting for the first purchase order. What's been the feedback from your customers?

The feedback has been great. The testing has gone extremely well. I'll be honest, I'm surprised we haven't had the order yet, but I think we're just working out some details and some financing for the customer, and that's where we stand. But, you know, we remain ready and we're geared up for production. We could react very quickly.

Okay, got it. And then in VET, you saw some really nice geographic expansion growth, or growth in geographic expansion last year. It looks like it continued this quarter. How much more room is there to expand geographically?

Quite a bit. I mean, we've just scratched the surface in North America and Asia. We had shipments to Australia last fiscal year that actually – That might have been the first quarter. But again, just scratching the surface, particularly in the elite product line, the combination of the roll of design, thruster and propeller, the mega yacht market, they don't just build in Europe, they build around the world. So we're looking to expand that. So we have actually, we do have some, just some plight, I would say production constraints in the Netherlands that we're trying to solve here in the U.S. So once we get that behind us, I think we'll see some more geographic expansion as well. But we've got some things to work out so that we can grow the top line. It's production-wise, capacity-wise.

Okay. All right. A couple questions for Jeff. We saw gross margin expand nicely year over year, but it did take a step back from the first quarter. How do you see gross margin progressing for the rest of the year?

Yeah, I think it's going to be right around the range between Q1 and Q2, and it's depending on mix. You know, like John mentioned, our aftermarket mix, especially oil and gas aftermarket in Q2 was a little bit lower than we've seen in previous quarters, and that has a little bit of a drag on margin. We did see an uptick in orders as we closed out the quarter, so that was a positive sign. So I think it's going to be in this range and kind of what we've said before, you know, in the high 20s, you know, trying to get to 30 is what we would expect.

Okay. One more question, if I can speak one more in. What's your CapEx for the full year, CapEx outlook for the full year?

Yeah, I think 10 million. We've been pretty consistently, you know, targeting 10 million. I think we've got

uh attract a run rate so far they guess it's pretty close so unlike maybe some previous years where it was really back and loaded i think we've got orders in place to get us right around that 10 million maybe a little bit less okay yeah there's more on order but the lead times for machine tools um gear grinders uh they're still um still out over 12 months so we we have we have big machine tools on order but they're not coming in until next fiscal year

Okay, got it. All right, great. Thank you, guys.

Thanks, Simon. As a reminder, if you'd like to ask a question, please press the star followed by the one on your telephone.

Our next question comes online on Mike Green from Neuberger. Please go ahead.

Hey, it's Do you hear me, guys? It's actually Rand. Hey, Rand.

Oh, hey, Rand. Yeah. How are you?

Great. So, look, if we use the Q2, like, five and a half million of EBITDA, how would you guys expect sort of the second half quarters to behave? I'm assuming we'll get additional top lines.

Yeah, I think we'll be up. You know, I think we've been hovering around you know, $30 million, trillion, 12 months, EBITDA, I think, you know, I think will grow through the second half. So getting, you know, through the second half back up to like $7.5 to $8 million.

Okay, great. And given the backlog and what you're hearing about in markets, do you guys, I'm assuming you feel pretty good about the second half, you know, having growth revenues year-over-year, is that the case? I was wondering about, you know, looking into next year, if you have any sort of visibility on continued top-line growth year-over-year.

Yeah, Rand, it's John. I think we, given our backlog and what we're, you know, what we saw in the orders in the second quarter and some feedback we're getting in the first quarter, I think we're obviously pretty optimistic. The backlog is there for the second half. do very well it's just a question of the you know unforeseen surprises in the supply chain things taking longer to get to us uh because of concerns in the middle east and shipping taking longer um but the backlog's there to have a very nice second quarter um you know we're reading everything that you're reading about you know soft landing recession in the you know in our market the second half of the year the beginning of our next fiscal year so far ran our orders um And what we're hearing from our customers, there's a little bit of that, but we're also seeing, you know, some optimism in markets that had been quiet for a long time. And I mentioned in my comments, you know, the Asian marine market, particularly tugs, you know, whether it's for mining, seem to be doing very well. So I think for us it's too soon to tell, but we're probably a little bit more optimistic now

than most going into our fiscal 25. Okay, great.

Let's leave it there. I'm still trying to get out and visit with you guys when the weather gets a little better. But great work on repositioning the company.

All right. Thanks, Rand. Thank you, ladies and gentlemen. As we have no further questions at this time, we will conclude today's conference call.

We thank you for participating and you may now disconnect.