Twin Disc Q1 2024 Earnings Call Transcript

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November 2, 2023

There are 3 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Twin Disc Incorporated for Fiscal First Quarter 2024 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. Jeff Knudson, you may begin your conference.

Speaker 1

Good morning, and thank you for joining us today to discuss our fiscal 2024 Q1 results. On the call with me today is John Batten, Twin Disc'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 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 ks, 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 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.

Speaker 1

For a definition of non GAAP financial measures and a reconciliation of GAAP 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.

Speaker 2

Good morning, everyone, and welcome to our fiscal 2024 Q1 conference call. Let's begin today's call with some highlights. We had an impressive start to the new fiscal year, building off the positive momentum generated in the 4th quarter to driving increased shipments and resulting in a 13.7% year over year sales growth. We also I am pleased to announce that the Board has approved reinstating a quarterly cash dividend in the amount of $0.04 per share. These results are largely due to hard work on the part of our team, taking a disciplined approach and executing on operational priorities.

Speaker 2

Our Singapore based sales team performed exceptionally well to drive growth and further expand our presence in Chinese market, especially the oil and gas one. We ended the quarter with continued backlog growth underscored by a record backlog in our airport rescue and firefighting transmission business, while inventories favorably declined. Veth also continued to perform strongly, driven by further growth beyond its core Northern European Markets into North America and the Asia Pacific region. Shifting to our product groups, we saw strong demand in our marine and propulsion systems with increased activity in global commercial markets driving 24% growth in sales. Production at our Belgium facility is already at capacity this fiscal year, with projects booked through August 2024.

Speaker 2

Patrol Boat Projects grew in line with increased government defense spending, a trend which we may continue due to ongoing geopolitical turmoil. An uptick in what is called fleet readiness typically supports the aftermarket business 17% sequentially. The collaboration between Vethanoler continues to be a highlight of the mega yacht market, representing a major long term growth driver and as sales trend higher. This partnership gives us a competitive edge and unlocks opportunities within both new and established markets. Onto the land based transmission business, sales grew 17% year over year, driven by higher demand from the oil and gas market.

Speaker 2

Within AARF, orders are coming in for our transmission built in the Racine facility, helped driving the record backlog I mentioned earlier. We are seeing a general increase in orders across the Land Based Transmission segment. That said, we started to see early indications of a pullback in spare parts orders indicating that customers might be taking a more cautious approach Amidst the uncertainties in the macro environment, demand has softened within the industrial product group, leading to a 19% decline in sales versus The prior year, despite sourcing and supply chain headwinds having eased, this sluggish demand is largely tied to lower content commoditized products, including construction and irrigation equipment. We are still seeing solid inquiries in demand for higher content, more sophisticated products, underscored by a new business award we received on a large shredder application with a major customer Vermeer. Despite some near term softness, we remain focused on capturing opportunities to partner with major domestic OEMs on a range of products.

Speaker 2

Now turning to our inventory and backlog. Throughout the quarter, the gradual alleviation of supply chain headwinds, coupled with solid Operational execution has helped us make significant progress driving increased shipments. These supply chain improvements have been a major factor in enabling us to complete and deliver shipments in a reasonable timeframe. We also continue to drive inventory lower during the quarter, driven in part by the asset sale I brought up earlier. Before I turn the call over to Jeff, I'd like to address our long term strategy.

Speaker 2

As we work to move our business forward, we are always focused on keeping our aligned with our strategic priorities. We aim to become a leading provider of hybrid and electrification solutions for marine and off highway land based applications as we advance our relationships and collaboration with major OEMs. Veth's reach continued to expand on a global scale, driven in part by the successful partnership with Rola. We are making Our focus remains on controls and systems integration, shifting our business into new avenues that will bring us profitable growth. And with regards to M and A, we are actively looking into the industrial and marine technology sectors, both of which have ample opportunities for us to expand our offerings in the hybrid and electrification space.

Speaker 2

In closing, while we are extremely encouraged by our results this quarter, it is important to note that broader macroeconomic environment remains Somewhat limiting our visibility into the coming quarters. With that in mind, our performance continues to strengthen our financial profile, bolstering our ability to work through potential challenges while we stay on track to drive long term growth. With that, I will now turn it over to Jeff to discuss the financials. Jeff?

Speaker 1

Thanks, John. Good morning, everyone. We delivered sales of $63,600,000 for the quarter, up $7,600,000 or 13.7 percent from the prior year as overall demand remained strong and shipments increased. Net loss attributable to Twin Disc for the quarter was $1,200,000 or 0 point 0 $9 per diluted share compared to a loss of $1,400,000 or 0 point 1 for the same period of fiscal 'twenty three. Gross profit was negatively impacted by a $3,100,000 non cash accounting item related to the sale of an asset during the quarter.

Speaker 1

Both Marine and Propulsion Systems and Land Based Transmissions reported a double digit growth, While Industrial sales declined, looking at top line distribution across geographies, sales increased significantly 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 sheet through Solid cash generation delivered in the Q1. We reduced net debt by approximately $4,100,000 to 1,200,000 and ended the quarter with a cash balance of $20,400,000 $7,200,000 higher versus the prior quarter end. EBITDA is up significantly to $2,300,000 from $600,000 during the same period last year due to higher revenues, favorable product mix, the impact of prior pricing actions and the successful execution of our operational playbook. Furthermore, we continued to decrease our leverage ratio this quarter to below on EBITDA.

Speaker 1

Gross profit margin of 26.2 percent increased approximately 240 basis points from the prior year period. Adjusting for the non cash impairment I previously mentioned, gross profit margin for the Q1 would be approximately 30%. This reflects the benefit of prior pricing actions, continued easing of supply chain headwinds, a favorable product mix and successful execution of our operational playbook. With regards to inflationary headwinds, commodities have largely stabilized and we have also seen some reductions in freight and fuel surcharges. As John highlighted, we are pleased to be in a position to resume paying a quarterly cash dividend in the amount of $0.04 per share this quarter payable on December 1st to shareholders of record on November 17.

Speaker 1

Consistent with the additional priorities outlined in our capital We are actively exploring acquisition opportunities focusing on marine technology, industrial and the hybrid electric space. And currently, we will continue to make investments within the business in the form of research and development, geographic diversification and enhancement of our marketing initiatives. We will continue to evaluate our capital allocation strategy and priorities as the economic backdrop in our operating environment continue to evolve. I'd like to now turn the call back over to John to share some closing remarks.

Speaker 2

Thanks, Jeff. Before we open the line for questions, I'd like to highlight a few key takeaways from our Q1 performance. In summary, we're seeing stable end market demand, supporting our robust margin expansion and strong cash generation that supported the reinstatement of our quarterly dividend. Operationally, we continue to increase backlog by taking a disciplined approach to inventory management, with inventory as a percentage of backlog declining. Supply chain headwinds have generally subsided largely due to effective actions taken by management over the prior quarters.

Speaker 2

With all of these factors combined, We have enhanced our financial profile and strengthened our balance sheet, giving us the flexibility to manage through any challenges that may come along in this uncertain operating environment. We continue to make progress towards our target, solidifying our financial position and driving long term value creation for our shareholders. That concludes our prepared remarks. Jeff and I will be happy to take your questions.

Operator

We'll pause for just a moment to compile any questions. There are currently no questions at this time. I'll turn the call back over to management for any remarks.

Speaker 2

Thanks, Josh. We hope that Jeff and I have answered all of your questions today. If not, Please feel free to reach out to us directly and we look forward to talking to you in February after the close

Speaker 1

of our Q3

Speaker 2

conference call. Thanks, Josh.

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Twin Disc Q1 2024
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