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spk00: Thank you for standing by. My name is Alex, and I will be your conference operator today. At this time, I would like to welcome everyone to the fiscal 2024 third quarter result conference call. 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 would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. I would now like to turn the call over to Jeff Knudson, Chief Financial Officer. Please go ahead.
spk05: Good morning, and thank you for joining us today to discuss our fiscal 2024 third 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 of 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 SBC. 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, we'll also discuss certain non-GAAP financial measures. For a definition of non-GAAP financial financial measures, and a reconciliation of gaps and non-gap 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.
spk06: Good morning, everyone, and welcome to our fiscal 2024 third quarter conference call. Let's begin today's call with some highlights. We delivered solid results in the third quarter, continuing the trends seen throughout the year. As we continue to capture healthy end market demand, we achieved another quarter of margin expansion as well as robust free cash flow generation. These consistent results underscore the long-term impact of operational improvements we've made throughout our business in recent years, as well as ongoing tailwinds provided by disciplined working capital management to support overall performance. In line with our strategic focus on expanding our presence in the industrial and marine technology markets, we are pleased to have announced our recent agreement to acquire Kasa Oil, a leading manufacturer of high-quality power transmission components and gearboxes based in Finland. This acquisition will broaden Kasa's global reach as we've leveraged twin-disc global sales, distribution, and service network, while also generating cross-selling opportunities through Kasa's existing customer base as we tap into its long-standing relationships with leading European OEMs, similar to the dynamic we've achieved with VET. With our strong balance sheet and flexible financial profile, we will continue to explore similar strategic opportunities to drive sustained growth for TwinDisc. Moving on to results by product group, sales in marine and propulsion systems increased 3% year-over-year. The global commercial markets have remained active, providing a strong foundation for sustained demand. We continue to see an uptick in government defense spending tied to recent geopolitical turmoil, leading to an increase in patrol boat projects and other activities linked to fleet readiness. VET continues to perform well, supporting overall growth in marine propulsion as the mega yacht market remains strong. We saw a solid 16% sequential increase in six-month backlog, driving the recent inventory bill to support rising demand. This uptick underscores the enduring strength of the VET and ROLA partnership, which has created an additional competitive edge for TwinDIS by unlocking additional growth opportunities within both new and established markets. We also continue to capture increased demand for workboat marine transmissions, particularly in the Asia-Pacific region due to the resurgence of projects for inland tugs in the region. A portion of this business is being driven by solid demand for coal tugboats utilized for transporting raw materials and coal from Indonesia to China. We will continue to focus on tapping into these regional opportunities to position the business for further growth. On to the land-based transmission business. Sales decreased 3% year-over-year, driven in part by sustained exports to the Asian oil and gas markets. That said, even if sustainable energy is still a focus globally, oil and gas exploration activity remains strong, and we are encouraged by demand in the North American oil and gas market. Additionally, the increasing ARF demand remains quite strong, which we will be even better positioned to capture with the addition of COTSA. Similar to last quarter, sales in our industrial segment remained off, declining 15% year over year. This dip can largely be attributed to reduced demand from our lower horsepower range of our offerings. Additionally, while commoditized products have experienced continued weakness, demand for more sophisticated, higher-content products has been relatively more resilient. We remain focused on advancing our OEM partnerships, which are crucial for our long-term growth strategy and allow us to leverage synergies and reach new markets effectively. Next, I'll speak to inventory and backlog. One of the key indicators for our company's strength and resilience is our backlog, which has been steadily increasing over the past six months. We are pleased to report that our backlog continues to grow both sequentially and on a year-over-year basis. Critically, inventory as a percentage of backlog has continued to trend downwards as well, reflecting our commitment to ongoing operational efficiency. Looking ahead, we anticipate further progress in inventory reduction during the fourth quarter of 2024 as we continue to work through our backlog, supporting continued cash generation. I'd like to briefly address our long-term strategy before Jeff takes us through the financial details. Our commitment to innovation and adaptation is at the forefront of our long-term strategy. We are steadfast in our mission to expand our presence into hybrid and electrification solutions for marine and land-based applications. As demonstrated by our agreements to acquire COTSA, we are committed to our efforts not only to develop but also acquire cutting-edge technologies that meet the demands of customers in our global markets. Our recent success in expanding the VET product line into untapped markets and regions also underscore our dedication to broadening our reach and solidifying our position as an industry leader. Moreover, our operational initiatives are geared towards enhancing efficiency and responsiveness, exemplified by the ongoing rationalization of our global footprint. By streamlining operations, we not only boost our competitive edge, but also strengthen our ability to cater to our customers' needs. With a keen focus on industrial and marine technology sectors, and protecting those with a hybrid-centric focus, we are poised to capitalize on emerging opportunities and further augment our portfolio. In closing, our unwavering dedication to innovation, operational excellence, and strategic partnerships will continue to drive our success and deliver value to all our stakeholders. With that, I will now turn it over to Jeff to discuss the financials. Jeff.
spk05: Thanks, John. Good morning, everyone. We delivered sales of $74.2 million for the quarter, up $389,000.50 basis points from the prior year period, as overall demand remained solid. Net income attributable to TwinDisk for the third quarter was $3.8 million.27 per diluted share, compared to $3.3 million.24 per diluted share in the third quarter of fiscal 2023. Gross profit margin increased to 28.2% compared to 26.1% during the prior year period, and gross profit increased 8.7% to $20.9 million. This improvement reflects the realization of previous price increases, continued easing of supply chain headwinds, and successfully executing our operational playbook. Marine and propulsion systems reported 3% growth, while land-based transmission and industrial sales reported new-over-sales declines of 3% and 15% respectively. Looking at top-line distribution across geographies, sales continued to increase across the Asia-Pacific and European regions compared to the prior year, supported by robust demand, while the proportion of sales in North American markets declined. We also saw a notable increase in sales within the Middle East, in particular Turkey, which drove sales up $2.2 million year over year with increased vet sales for offshore wind projects. We continued to strengthen our balance sheets with the solid cash generation delivered in the third quarter. We reduced debt by $24.1 million to negative $6.8 million compared to the prior year period and ended the quarter with a cash balance of $23.8 million, approximately $9.8 million higher versus the prior year period. EBITDA remained strong at $7 million compared to the same amount during the prior year period. We continue to decrease our leverage ratio this quarter to negative 0.3x, putting us in an excellent position to invest in our business while executing inorganic growth opportunities. As noted earlier, gross profit margin for the third quarter increased to 28.2%, expanding approximately 210 basis points from the prior year period, again, due to cost reduction initiatives and the impact of operational efficiencies. Looking towards the fourth quarter, we expect challenging year-over-year comparisons due to the historically strong results delivered in the prior year period. That said, we do anticipate continued strength in margins and cash generation. Now on to capital allocation. With our solid balance sheet strengthened by ample cash generation, we continue to explore strategic opportunities for M&A, particularly in growth areas that align with our vision for the future. Our focus on marine technology, industrial, and the hydroelectric sector underscores our dedication to staying at the forefront of innovation, and these areas present significant upside potential and complement our existing capabilities and expertise. Simultaneously, we are allocating capital towards internal investments aimed at driving organic growth and operational excellence. This includes substantial investments in R&D to foster innovation expansion into new geographic markets to capitalize on emerging opportunities, and the continued strengthening of our marketing efforts to drive market penetration. Furthermore, we remain committed to consistently returning capital to shareholders through share repurchases and dividend payments. Overall, our capital allocation strategy reflects a balanced approach aimed at driving sustainable growth and fostering innovation while maintaining financial prudence and flexibility. I'd like to now turn the call back over to John to share some closing remarks. Thanks, Jeff.
spk06: Before we open the line for questions, I'd like to highlight a few key takeaways from our quarterly results. Our third quarter performance highlights our continued operational excellence marked by a notable margin expansion and robust cash generation. Our strong balance sheet bolstered by consistent profitable growth and solid working capital management positions us favorably to navigate market uncertainties and take advantage of strategic growth opportunities. Looking ahead, We maintain our cautiously optimistic outlook driven by sustained demand dynamics. Our resilience amid external challenges reaffirms our agility and adaptability in capturing market opportunities, and our performance not only reflects our operational prowess, but also underscores our commitment to delivering long-term value to shareholders. I'd like to thank all of our teams for their continued hard work and dedication to supporting our business this quarter. As we approach the end of the fiscal year, we look forward to continuing our growth journey as we drive 20 days forward and generate long-term value for our shareholders.
spk04: That concludes our prepared remarks. Jeff and I will be happy to answer your questions.
spk00: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question in our listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star one to join the queue. And we have one question that comes from the line of Simon Wong with Gabelli Funds. Please go ahead.
spk03: Hey, this is Ryuta filling in for Simon today. Maybe just my first question here. I guess how much of this quarter's revenue is derived from oil and gas customers? And I guess what is the breakdown between new equipment and consumables?
spk05: Yeah, it's a good question. I would say it's been a pretty normal quarter for oil and gas. In terms of percentage of revenue for the quarter, I'm just doing some quick math, probably around 10% to 15% kind of evenly split between consumable and unit.
spk03: Okay, thanks. And then maybe my second question, I guess, well, what are you seeing? Well, I guess, what is the company seeing in terms of North American SPAC customers?
spk06: I would say, this is John, I'd say we've seen an uptick in the calendar year in new spare parts orders, and we have some limited units going out, but I would say that, I mean, our outlook is that will probably pick up through the rest of the calendar year, just given what's happening in the Mideast. I think we're going to see some more activity here at home as well as in Asia.
spk03: Okay, thanks. I guess you're working down your inventory for fiscal year 4Q24. How should we think about inventory as a percentage of backlog for next quarter?
spk05: I think it's going to continue to ratchet down. We're not going to have an incredible shift. I think we'll see a trajectory kind of like what we've seen in the last few quarters. Okay.
spk03: And then just my last question here, I guess, any update on the timing of closing of the Katsa acquisition? And does the acquisition need approval from Finland's economic minister to close? Yes.
spk06: So we did get that approval this week. And we should be closing, I would say, around the end of the month within 30 to 40 days we'll be closed.
spk03: Okay. Thank you. That's all my questions. Thank you.
spk00: Your next question comes from the line of Will Nascovitz with Heartland. Please go ahead.
spk01: Good morning. Thanks for taking my questions, and congratulations on a strong quarter, particularly on the free cash flow generation. It's great to see. I'm just curious on the industrial side. You're welcome. Just industrially, I know you commented in your opening remarks Are you seeing signs of stabilization there? You had a kind of sequential pickup and broader ordering. Is some of that in the industrial bucket? Just overall thoughts on the industrial segment would be helpful.
spk06: Yeah, I would say that this past quarter has been the best order quarter in a few quarters. And it's been broad-based as far as the lower horsepower range, both in Europe and in the U.S. and in Australia. I would kind of be the big the big markets for us. But we've seen it pick up a little bit. Again, this past quarter was a much better order quarter. And we have some of the higher, you know, some of the gearboxes with electronic control that have been on order. So, again, it's looking up, but it's still, you know, we've got a ways to go to get back to where we were.
spk01: Okay, and then the acquisition, as I recall, maybe it was $30 million in revenue or somewhere on that level. Can you just provide any additional perspective on just like the margin profile of the company and is it new in market, new customers, just some additional color would be useful.
spk06: Sure. So I would say the margin profile is pretty – It kind of falls right in line with where we are. Depending upon the product line, it's going to bounce around high 20s to low 30s. But there's so much there, Will. They're going to be a great supplier for us on gears for our product that we build in the U.S., in the Netherlands, in Italy. And, you know, their product, they started off as a component supplier, so they're heavily invested in very complex machining centers to do gears. They were, you know, I would say the last third of their life, they've been getting into the gearbox business, whether it's in the industrial space and specialty marine gears. They do transfer cases for all-wheel drive military vehicles. You know, until recently, it was just Finland. But then again, as Finland has joined NATO. They've gotten orders from Germany and Sweden. So we see some good market expansion. And again, if you look at the horsepower range where they have product, it's pretty much right on top of TwinDip. These are all customers and markets that we understand, but they've just been so heavily focused on the European market and the Scandinavian market that we feel that there's a real potential to bring them out you know, into the global market. So, you know, all of our guys, whether they're in the marine business, the industrial business, or the transmission business, they're chomping at the bit to get a hold of the cost of products and introduce them to the global customers.
spk02: Thanks for that elaboration.
spk01: I guess my final one here is just back to your opening comments, John, at the end. Before you hand it off to Jeff, just talking about innovation, you know, electrification, hybrid, et cetera. I'm just wondering if you could just frame for us the opportunity. You're obviously steeped in know-how and traditional transmission. Can you just frame for us any perspective on the opportunity as you continue to take this technology, this know-how, and apply it to the hybrid and electrification markets? Thank you.
spk06: Yeah. So, Will, there's a huge opportunity, and it really is in our space off-highway, whether it's marine or construction or ARF, it's putting the package together for the OEM, you know, to help them. So we have, if you think about our mechanical product, whether it's a pump drive or transmission, it's kind of the heart of hybrid, you know. So it allows for, you know, an ice engine propulsion system, but then also has input for electric motor coming from a battery. And our control system is the brain. And there are a lot of other parts that we put together in the system, the inverter, all sorts of other things, the wiring. But it's the content. At one crane application, we would sell a gearbox, let's just say, to $20,000. The hybrid system can be $160,000 to $200,000. That's a big multiplier. But again, we're relying on that OEM to be able to sell that hybrid crane for a considerable premium over a traditional crane. We look at some of the marine applications that we're doing. We're quoting systems that are $500,000 to $1 million, depending upon if it's single or twin screw. And just a few years ago, that would have been almost the cost of the entire vessel. So we're proving to ourselves and our customers that we have, the technological solution, now we're just waiting for these things to get through testing and seeing how they play out in the market, if the market is willing to spend extra for this type of performance and this type of, I would say, you know, just profile as far as emissions. Now, in some cases, you know, in California, they're mandating that some of these government-funded vessels go completely electric or hybrid. So, you know, we see some winds coming up very quickly. In some of the other markets, whether it's construction or other things, it's a wait and see. They're building the equipment and then seeing how well they're accepted in the market. But just to answer your question, it's a big, you know, our content can easily, you know, can go up from four to eight times pretty quickly.
spk01: Well, thanks for that elaboration. And again, congrats on the great quarter and best of luck here in your fourth quarter. Thanks so much for the time.
spk05: Thanks. Thanks, Will.
spk00: That concludes our Q&A session. I will now turn the conference back over to John Batten for closing remarks.
spk06: Thanks, Alex. Again, we'd like to thank you for participating in our Q3 call and look forward to speaking with you in August for our Q4 and fiscal year-end 24 conference call. Thank you, everyone.
spk00: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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