Twin Disc, Incorporated

Welcome to the TwinDIS, Inc. Fiscal Fourth Quarter and Full Year 2024 Conference Call. We will begin with introductory remarks from Jeff Knutson, TwinDIS CFO. Please go ahead.

Good morning, and thank you for joining us today to discuss our Fiscal 2024 Fourth Quarter and Full Year results. On the call with me today is John Batten, TwinDIS' 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 the release to you. Now I'll turn the call over to John. Good morning, everyone, and welcome to our fiscal 2024 fourth quarter conference call. To begin with, I'd like to walk through some of the quarter's highlights. We again delivered solid results in the fourth quarter, capping a year of consistent performance, which supported our execution of several key strategic priorities. As we continue to capture healthy demand for our products across end markets, sales increased 0.6% year-over-year for the fourth quarter and increased 6.6% year-over-year for fiscal 2024. We are also seeing the ongoing benefit from disciplined working capital management and other operational enhancements we've implemented across our businesses in recent years, helping drive historically strong cash generation for both the fourth quarter and full year. Critically, in the fourth quarter, we completed the acquisition of Kata OID, a leading manufacturer of high-quality power transmission components and gearboxes. We are confident that the addition of Kata will both broaden our global reach and accelerate cross-selling opportunities across our business. Backed by our strong balance sheet and flexible financial profile, we will continue to focus on expanding our portfolio through strategic opportunities that will drive TwinDisk forward. Shifting to our product segment results, Our marine and propulsion systems saw continued demand through the year with our global commercial and market showing sustained activity. Despite a challenging year-over-year comparison and softer demand in both the Canadian fishing market and pleasure craft business, we delivered a 3% increase in sales in the fourth quarter. As noted last quarter, we continue to see a rise in government defense spending driven by recent geopolitical turmoil resulting in a surge of patrol boat projects. We saw a slight decrease in VET backlog as we worked through inventory to meet consistently solid demand. VET continues to be an integral part of our marina propulsion system segment. VET's collaboration with ROLIS and the development of our elite thruster for yacht propulsion has also been performing well due to the strength in the luxury boating market during the quarter. So they're highlighting the importance of our strategic partnerships that have allowed us to tap into new markets and enhance our product offerings. The demand we have seen for workboat marine transmissions continued this quarter with strength in the Asia-Pacific market, partially driven by the need for coal tugboats in the transport of raw materials from Indonesia to China. On the land-based side of our business, sales increased 9.3% year over year, driven largely by ARF. Our ARF transmission demand remains robust, reaching record levels of backlog in the quarter. Exports to oil and gas markets were flat, However, we continue to see meaningful activity both in Asia and North America. In the industrial segment, sales declined 8.9% year over year. While demand has been largely sluggish through the year, we saw a slight recovery during the fourth quarter. We continue to see lower agriculture and construction demand resulting in a weak market with softer demand for commoditized products. While more commoditized products have been experiencing decline, continued weakness, demand for higher content, more sophisticated products remains resilient. As we move into fiscal 2025, we remain focused on what we can control, advancing partnerships with original equipment manufacturers and efforts to penetrate new markets in line with our long-term strategy. In terms of our backlog, I am proud to say that we continue to increase our six-month backlog both sequentially and year-over-year while simultaneously reducing inventory. This uptick comes with the addition of Casa Oil, which represented $12.6 million in backlog growth. Our continued trend of declining inventories percentage of backlog highlights both the impact of our disciplined inventory management and the resilience of our business in capturing sustained demand despite lingering macroeconomic uncertainty. In closing, I'd also like to address our long-term strategy before Jeff takes us through our financial overview. We aim to become a leading provider of hybrid and electrification solutions for marine and off-highway land-based applications, driven by deep relationships and close collaboration with major OEMs. That reach continues to expand on a global scale, supported by the successful collaboration with Volvo. We are also continuing to rationalize and modernize our business, delivering improved shipments by lowering inventory costs, improving lead times, and creating better results for all stakeholders. Our focus remains on controls and systems integration, shifting our business into new avenues that will bring us profitable growth. With regards to M&A, we are actively looking into the industrial marine technology sectors, both of which have 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 $84.4 million for the quarter, up half a million or 0.6% from the prior year, as overall demand continued to remain solid across our market. Sales for fiscal 2024 were $295.1 million, up 6.6% from fiscal 2023. Adjusting for the divestiture of the BCS business in 2024, full-year 2024 revenue increased $26 million or 9.5% over the prior year. I'd like to note that operating income for the full year was impacted by a $3.1 million non-cash loss on the sale of the boat management system product line and related inventory in the third quarter of this year. Additionally, we recorded a $4.1 million gain on the sale of a Belgian facility in 2023. Adjusting for those two items, full year 24 operating income was actually $2.7 million higher than the prior year. Net income attributable to TwinDIS for the fourth quarter was $7.4 million or 53 cents per diluted share compared to $8.6 million or 62 cents per diluted share in the fourth quarter of fiscal 23. Full year net income of $11 million or 79 cents per diluted share is up from net income of $10.4 million or 75 cents per diluted share in the prior year. Gross profit margin increased to 29.7% compared to 29.5% during the prior year period. and gross profit dollars increased 1.4% to $25.1 million. This increase is due to the benefits of incremental volume, a favorable product mix, and the positive impact of cost reduction and operational efficiency initiatives. While we saw sequential growth in each of our product groups, we saw consistent demand in both marine and propulsion systems and land-based transmissions throughout the year, supporting overall growth. As John mentioned, we also saw an improvement in the industrial segment that has been pressured by a softer market over the last few quarters. Across our geographies, we saw another quarter of sales increase in our Asia Pacific and Middle Eastern markets and a pullback in North America. Strength in the Middle Eastern markets was supported by shipments to an ARP manufacturer in Dubai. We remain committed to strengthening our balance sheet over the course of fiscal 24. TwinDisk has maintained a net debt around $5.7 million despite a near-term increase in total debt due to the cost of acquisition. We ended the year with a cash balance of $20.1 million, 51.1% higher than the prior year. We also improved the EBITDA by 2.9% to $26.5 million, generated positive free cash flow of $25 million, and maintained a net leverage ratio of 0.2 times. As we enter fiscal 25 with a strong balance sheet, we are well positioned to navigate macroeconomic uncertainty prudently. With a healthy level of debt, we continue to monitor suitable bolt-on M&A opportunities that align with our objectives of enhancing our innovative excellence and product offerings. Gross margin increased approximately 150 basis points from the prior quarter period, primarily due to cost reduction activity, the impact of operational efficiencies, and favorable product mix. Moving into fiscal 25, we remain focused on maintaining this momentum as we further enhance profitability. Our capital allocation priorities remain unchanged. With strong cash generation supporting a healthy balance sheet and low debt leverage, we are well positioned to act upon M&A opportunities that fit into our strategic framework. The priority for our business is driving innovation in the marine technology, industrial, and hydroelectric sectors to enhance our product portfolio. We are also making internal investments to drive organic growth, including investments in R&D, geographic diversification and expansion, and marketing. For us, this framework strikes an important balance toward maintaining financial prudence and flexibility while driving long-term growth. As we enter the 2025 fiscal year, we are in a great position to update our medium-term targets and establish new growth goals for TwinDisc. By 2030, we believe that consistent execution of our long-term strategy will deliver revenues of approximately $500 million with gross margins of 30%. We also expect to deliver consistent pre-cash flow conversion of at least 60%. I'd now like to turn the call back to John to review our updated targets and share some closing remarks. Overall, the fourth quarter continued the trend of performance that we carried through the year. I am very proud of our team's ability to deliver robust cash generation and solid margin expansion. As we enter 2025, the demand strength and sales momentum we experienced in the fourth quarter provides a solid foundation as evidenced by our healthy backlog giving us encouragement for the year ahead. We expect the market conditions to remain largely consistent with what we saw throughout 2024. With a robust balance sheet strengthened by steady profitable growth and effective working capital management, we are well equipped to handle any market uncertainties and capitalize on strategic growth opportunities well into the future. That concludes our prepared remarks, and now Jeff and I will be happy to answer your questions.

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 1 again. We'll pause just a moment to assemble the queue. And we will go first to Simon Wong at Belly Funds.

Good morning, John and Jeff.

Hey, Simon. Good morning, Simon.

Morning. Just want to get an update on your EFRAC offering. Can you, I mean, any traction there in terms of your new offering there?

So, we're still, I would say, in testing and waiting mode with the 7600. Again, I remain hopeful that we'll have an order for the first spread this calendar year. but a lot of it has gone back to traditional. They're rebuilding just traditional diesel engine frack rigs right now. So we've seen an uptick again in spare parts for diesel rigs. There are 8,500 and 7,600 that are used conventionally. I'm trying to remain hopeful. Everyone down the line says that it's probably going to happen. It's just a question of when.

Okay. On that note, can you provide, I mean, how much of this quarter's revenue was to the oil and gas sector? And then if you can break that down between equipment and consumer, would that be great, too?

Yeah, that's a good question, Simon. I think it's been pretty consistent with previous quarters, and maybe that's something I can give you a little bit more detail offline. But I would say in terms of the mix between forward market, aftermarket, and transmission units, it's been really consistent with primarily shipments into China for new units and North America with aftermarket at a consistent level.

Okay. For the overall company, is there anything in the R&D pipeline that you can talk about?

No, I would say not. I would say the most notable thing that came out this past fiscal year was the hybrid system that Manitowoc debuted at a show earlier this year for a hybrid electric crane. There's other projects like that with OEMs, but it's too soon. to announce because they have to go through their prototype testing. But as far as, you know, what we're working on internally, I would say there are more, there's the elite thrusters that we, that Rola and that worked on together for the mega yacht market, primarily in Italy, but it's now, we're gaining success with the German and the Dutch yard. I would see, you know, things that we're working on expanding that range And then really what we're doing, Simon, right now, our engineers were focused on CASA and some of the products that they had under development and how they fit into our line. So I would say what you'd see from us in the next 18 to 24 months would be an expansion of the VET line, the elite thrusters. It would be some industrial components. and transmission drop boxes coming out of COPSA to the global front. So that's what we're focused on right now. And then we continue to develop the PTI, the gearboxes that go on our marine transmissions to make them hybrid ready or electric. So that's really what we're working on in a broad sense. But you'll see, I think you'll see in the next, year to two years, a lot more specific models coming out, expanding our range in those areas.

Okay. Speaking of COTSA, how much revenue did they contribute to this quarter's results? Yeah, none really, Simon.

It was essentially closed right at the end of the quarter. So the only impact COTSA brought in to the quarter was their opening balance sheet. and some costs related to closing and obviously costs related to the acquisition, but no P&O impact for the operation. Okay.

I see you guiding 25 to be in line with 24. Is that both on the revenue and EBITDA line?

Sorry, I didn't... Yeah, that's a traditional twin deck. They give you similar revenue and EBITDA diversity.

Okay. But does it include contribution from CAATSA?

No, COPSA will take us up. I mean, when you add COPSA in, we're obviously expecting a growth year on the revenue line.

Okay, all right. Thanks for clarifying that. And then one more for me, the last one. Our CapEx, what's your CapEx outlook for 2025?

It's going to be similar, probably, hopefully a little bit higher than what we were able to do this year. Again, we struggled just a little bit with lead times as we invest in more significant machine tools. So something around $10 million is what we're we're targeting.

All right, great. Thanks, guys.

Thanks, Simon.

As a reminder, if you would like to ask a question, please press star 1. We'll move next to Barry Himes at Sage Asset Management.

Thanks very much. I had a couple questions. One is, just on the $25 million free cash flow, which is a great number, Was any of that non-recurring? And if so, could you just identify kind of what's recurring, what's non-recurring? That's the first question, but I had a couple more.

Yeah, not really. I mean, I think what we benefited from a little bit, quite honestly, is a little bit of over inventory levels at a level higher than we would have liked historically. So some low-hanging fruit in terms of bringing inventory down, but really no... no true one-off adjustments that we would point to that were not recurring.

So was the inventory right-sizing, just to size it, was that $5 million, $10 million, just ballpark?

Yeah, something like that, in that range. And I think we do still have some more room to improve on the inventory level and I think we've started to get good traction through the year and actually accelerating as we close out the year. So we're hopeful that while the fruit isn't hanging as low as it was, maybe we still have some good opportunity there.

Okay, great. Second question is I'm assuming industrial for the new fiscal year is probably going to be down. Correct me if you think I'm wrong on that. And if so, where do you see the positive offsets that would get you to flat or better, as you point out, maybe with the cost of business?

Yeah, Barry, this is John. I would say that, you know, I would say flat would be the worst case scenario. Certainly the overall markets could be down again. But we have been getting traction. So I would say, as I mentioned in my comments, It's more of the smaller mechanical PTOs that are used in irrigation and some pretty basic construction and ag equipment. But we've been getting a lot of good traction with our more expensive HPTOs, and we have some hybrid systems that for us are industrial. So we think that we have an opportunity to grow just our traditional core, comparing apples to apples to what we did in 24. But certainly when you add COTSA in and we're broadening our industrial line. And again, may not register in sales this year, but we think we have a chance to speed up our growth curve in industrial. Obviously with adding COTSA, which is about probably a third of their business, let's just say for a round number of $40 million, a third of their business is industrial. So and almost 100% in the northern European market. So certainly taking their product line around the world is going to help us accelerate our industrial growth.

Got it. And then just last question. Within Marine, could you just segment the customers a little bit? So if commercial, you mentioned the high-end yacht, and if there are any other big buckets, what's just you know, rough, if we did the pie chart on that segment, what would that look like? Thanks so much.

So I would, so if you take it as 100% pie chart, you know, commercial marine is going to be the biggest bucket. And it's depending upon the year or the quarter, one and two for us are going to be North America and Asia. and a smaller percentage of that is going to be Europe. And then the next biggest bucket now in its growing is, I would say, pleasure crafts with Vets expansion into the mega yacht market. And then, you know, again, that can flip-flop based on the quarters with military and government. So those are, you know, the three biggest markets biggest market, but commercial, revenue-generating vessels by far and away are number one market in marine, whether it's marine transmissions that we build, traditional twin discs, or vest thrusters. Revenue-generating vessels are the number one market.

Right, and is the pleasure craft just at the very high end, or does it go up and down in terms of size?

It goes up and down. We probably start... You know, our... The bottom end of our pleasure craft market is probably going to be in a 50-foot yacht, twin-engine diesel. Everything below that is pretty much now outboard or Volvo IPS. And, you know, as you go up from 50 feet, we just get stronger and stronger as you get up, you know, 50 to 80 feet to 100 feet. That's our core business. And it could be sport fish boats built in the out... Outer banks, it could be folks like Meritimo and Riviera in Australia, Grand Banks, things that are in that 50 to 70 foot range and above.

That's our sweet spot. Great. Thanks so much. Good luck in the new fiscal. Thank you very much.

And this concludes the question and answer session and today's conference call. Thank you for your participation. You may now disconnect.