Twin Disc Q1 2025 Earnings Call Transcript

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Provided by Quartr
November 6, 2024

There are 3 speakers on the call.

Operator

Thank you for standing by. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Twin Disc Incorporated Fiscal First Quarter 2025 Conference Call.

Operator

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Jeff Perkinudson, Twin Disc's CFO. Thank you. Please go ahead.

Speaker 1

Good morning, and thank you for joining us today to discuss our fiscal 2025 Q1 results. On the call with me today is John Batten, Fintech'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 ks, copies of which may be obtained by contacting either the company or the SEC.

Speaker 1

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.

Speaker 1

Now, I'll turn the call over to John. Good morning, everyone, and welcome to our fiscal 2025 Q1 conference call. To begin, I'd like to walk through some of the quarter's highlights. We are pleased to report a strong start to the year with double digit revenue growth in the Q1. We are making progress in advancing our long term strategy becoming a leading provider of hybrid electrification solutions as we deepen our relationships with major OEMs and have continued to expand best reach on a global scale.

Speaker 1

Our performance in the quarter was primarily driven by the impact of the acquisition of Casa Oi, along with growth in our marine and propulsion business, where demand for Veth remains exceptionally strong. As many of you recall, we took proactive steps in fiscal 2024 to build up inventory within BEST in anticipation of increased demand, which has since materialized. End market demand in our industrial business is stabilizing. However, the business grew this quarter largely due to the addition of Casa. The integration of Casa, our 2nd largest acquisition to date, is progressing ahead of schedule.

Speaker 1

The addition of Casa has broadened our global reach and opened up new cross selling opportunities with leading European OEMs, which we expect to continue supporting our long term performance. Shifting to our product segment results. Sales in our Marine and Propulsion segment grew 22.9% year over year, driven by sustained activity in commercial markets and the impact of the Casa acquisition. Within the luxury yacht market, Vette continues to expand on a global scale and its backlog grew sequentially by 19% in the quarter. Incoming orders for Veth products reached an all time high in October, driven in part by the demand for our LEAP clusters, which customers seek out for their increased fuel efficiency, added maneuverability and low noise and vibration levels.

Speaker 1

We are gaining traction with Elite Thrusters in new geographic markets beyond Europe, and our largest North American distributor is already positioned to be one of Beth's largest customers due in part to strong demand for this product. We are also capturing demand for customers that are converting to hybrid and electric marine systems. We recently won a hybrid system order for a site seeking vessel in the Northeast that enables us to supply 10 times the content that would have been needed on a ship powered by internal combustion engine by adding content like batteries, motors, controls, converters and inverters. We also delivered multiple units of marine control drives, which drive large thrusters and hybrid systems for use in the Panama Canal. We will continue pursuing these types of growth opportunities as part of our strategic focus on expanding our offering in the hybrid and electrification space.

Speaker 1

As mentioned in the past few quarters, a long term trend of heightened government defense spending has supported increased inquiries for patrol boat projects, which should drive additional growth in the near term. Turning to our land based transmission business. We saw a 7% decline in sales, primarily due to the softness in the Asian Pacific region as oil and gas exports remained flat, reflecting the broader demand challenges in the region. Despite this, we're encouraged by record levels of backlog in our airport rescue and firefighting or ARFF transmission business, which represented roughly half of our revenue within land based transmissions in the quarter. ARFF vehicles are essential for fire safety and prevention at any airport around the globe.

Speaker 1

Our ability to offer advanced configuration, unique torque capability and innovative power dividing systems makes the supplier of choice for ARFF application. Our ARFF business has remained particularly robust. We are capturing increased demand for these vehicles as new airports are built internationally, aging vehicle fleets need to be replaced and tightening global emission standards require fleet transmission to be updated. We are also meeting demand for replacement parts for military vehicles, including transmissions and steering units, which we expect to continue supporting growth in the segment due to the impact of ongoing geopolitical turmoil. Sales in our Industrial segment increased 61.3% year over year, primarily driven by the addition of Casa along with the general stabilization of end market demand.

Speaker 1

While demand remains softer for some commoditized products, demand for higher content products has been resilient. We received a notable order for hydraulic power takeoff, which efficiently allow the conversion into hydraulic power with minimum vibration from an OEM in the agricultural space. Looking ahead to Q2, orders to our Lufkin facility, which manufactures power takeoffs and clutches for heavy duty industrial equipment, also started to rise. We expect construction and agricultural markets to remain soft through fiscal 2025, but we will continue gaining share by leveraging our extensive engineering and applications experience to meet unique customer needs. Our backlog has reached historical levels.

Speaker 1

6 month backlog grew both sequentially and year over year, supported by demand for vet products, as I mentioned earlier. Foreign exchange accounted for $3,400,000 of sequential backlog growth, and inventory as a percentage of backlog increased to 99.7%. As we move through the year, we remain committed to disciplined inventory management to lower inventory compared to backlog. To conclude my comments, I'd like to address our long term strategy before Jeff takes us through our financial review. At the center of our strategy is the continued emphasis on controls and systems integration, which unlock sales and margin potential to drive sustainable growth.

Speaker 1

This strategic shift is creating opportunities for us to explore and to capitalize on higher margin solutions in both our core and emerging markets. With active projects focusing on fully electric and hybrid applications, we are well positioned to capture growth as the industry moves towards innovative sustainable technologies. Simultaneously, we are streamlining and modernizing operations to enhance shipments by reducing inventory costs, shortening lead times and delivering improved outcomes for all stakeholders. Globally, we are already recognized as a leader in marine transmission and propulsion technology underscored by Veth's continued growth. Now our mission has become the leading supplier of hybrid and electrical solutions across each of our end markets.

Speaker 1

With that, I'll now turn it over to Jeff to discuss the financials. Jeff? Thanks, John. Good morning, everyone. We delivered sales of $72,900,000 for the quarter, up $9,300,000 or 14.7 percent from the prior year, driven by a $9,200,000 incremental benefit from Casa, combined with healthy demand in our global end market.

Speaker 1

Adjusting for the sale of the BCS business in 2024, Q1 revenue was $11,100,000 or 18 percent higher than the prior year quarter. Net loss attributable to Twin Disc for the Q1 was $2,800,000 or $0.20 per diluted share compared to net loss of $1,200,000 or $0.09 per diluted share in the Q1 of fiscal 2024. Earnings per share were impacted by an increase in other expense related to foreign currency loss, additional interest expense on the acquisition of Casa and additional pension amortization in the quarter. Gross profit margin increased to 26.5 percent compared to 26.2% during the prior year period and gross profit increased 16.1 percent to $19,300,000 Sales in the quarter were consistent with inherent seasonal trends of our business. We saw double digit growth in both the Marine and Propulsion Systems and Industrial segments, driven by consistent market demand and geographic expansion and the additional benefit of the Costa acquisition.

Speaker 1

The continued improvement in the Industrial segment further supported year over year sales growth. In terms of geographies, we saw increased sales in Europe as a result of our acquisition of Costa as well as continued growth in sales proportion for Middle Eastern markets. Net debt increased $11,900,000 to $13,100,000 in the quarter, primarily driven by an increase in total debt due to the Tecasta acquisition. We ended the quarter with a cash balance of $16,700,000 18.2 percent lower than prior year. Operating cash generation was impacted by a near term shift in order time by certain customers along with increased inventory.

Speaker 1

EBITDA was $1,700,000 in the Q1, down 23% compared to the Q1 of fiscal 2024. Gross margin increased approximately 30 basis points from the prior year period, reflecting the benefit of incremental volume, partially offset by an unfavorable product mix due to reduced oilfield shipments into China. We continue to focus on enhanced profitability by pursuing cost reduction activities as we move through the year, including product rationalization, manufacturing efficiencies and advancing the Casa integration to deliver cost savings. With regard to inflationary and supply chain challenges, we have seen near term shipment delays with a few of our suppliers and additional headwinds from unstable mix. We expect these headwinds to ease as we move through the fiscal year.

Speaker 1

Our capital allocation priorities remain unchanged. Although our leverage has increased due to the recent acquisition of Casa, the structural improvements we have made to our business will help us reduce leverage through consistent cash generation. We continue to evaluate acquisitions which accelerate growth in our core industrial and marine technology markets. We also remain focused on making internal investments to drive organic growth, including investments in R and D, geographic diversification and expansion in marketing. I'd now like to turn the call back to John to share some closing remarks.

Speaker 1

In closing, the Q1 was a solid start to the year. We delivered strong sales growth and margin expansion, driven by our strategic focus on innovation and operational excellence. Our steady backlog is supported by consistent demand across our end markets, and we continue to reap the benefits of strategic decisions that have not only enhanced our global reach, but diversified our product offering. With our robust financial profile, we are confident in our ability to navigate through any economic uncertainties, while executing our growth strategy to deliver long term value to our shareholders. That concludes our prepared remarks.

Speaker 1

Jeff and I will be happy to answer your questions.

Operator

Thank you. Your first question comes from the line of Simon Wong with Gabelli Funds. Thank you. Please go ahead.

Speaker 2

Hi. Good morning, John and Jeff.

Speaker 1

Good morning, Simon. Good morning, Simon. Just a couple of questions here.

Speaker 2

First on free cash flow, pretty sizable negative free cash flow generation this quarter. What's your outlook for the year?

Speaker 1

Yes. I mean, it's still positive. I think we get back on inventory reduction. The big impacts in the quarter were significant year end accrual payment. And then we had inventory jump up on us as we commented with some order push out.

Speaker 1

So we expect to jump back into generally positive 60% of the EBITDA level free cash flow for the rest of the year quarter by quarter, hopefully picking up some of the other shortfall in the quarter through the rest of the year.

Speaker 2

Okay. And then the eFAC offering that you introduced about 2 or 3 quarters ago, any update on the offering?

Speaker 1

It's still the prototypes are still out there, but we have not had any takers yet on pulling the trigger to buy a fleet. We're getting more calls for traditional rigs right now. That seems to be where everyone where our customers are focusing on our traditional spreads.

Speaker 2

Okay. One final quick one. What's the oil and gas business? How much did it contribute to this quarter?

Speaker 1

Yes. So oil and gas was a lower percentage of the quarter than we've seen in the past. It was about 10% of revenue for the quarter. If you compare that to last year's Q1, it was more like 15% of the quarter. So definitely down in the quarter and contributed to the unfavorable mix impact that we saw.

Speaker 2

Okay, great. Thank you.

Operator

Thank you. No questions at this time. Please continue.

Speaker 1

All right. Andrea, I guess if there are no further questions, we can stop the call and hope to see everyone at our Q2 call, which will be late January, early February 2025.

Operator

Thank you. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Earnings Conference Call
Twin Disc Q1 2025
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