Twin Disc Q2 2024 Earnings Call Transcript

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Provided by Quartr
February 7, 2024

There are 5 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. I would like to welcome everyone to the Twin Disc Incorporated Fiscal Second Quarter 20 24 Conference Call. At this time, 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.

Operator

I will now hand the call over to Mr. Geoff Knottson, Chief Financial Officer. You may begin your conference.

Speaker 1

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, 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 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 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 the market opens. 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.

Speaker 2

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 2nd 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.

Speaker 2

We also delivered solid gross margin expansion, which improved 140 basis to 28.3%. We're also seeing continued backlog growth as our teams work to capture stable end market demand. One particular highlight has been significant increase in orders for work boat 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 mix. Sales in Marine and Propulsion Systems increased 29%, driven by growing activity in global commercial markets.

Speaker 2

We are seeing further increases in defense spending driving patrol boat projects, which we expect to continue given current geopolitical turmoil. Veth backlog remains at record levels, rising 6% sequentially And supported by the success of the Veth Enroller Partnership, Veth 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 1st new unit orders in North America within oil and gas and expect further strength for this part of the business in the coming quarters.

Speaker 2

ARFF 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 Q1. Our Industrial segment has remained pressured by softness amongst industrial OEM with sales declining 13% versus the prior year. We have continued to see sluggish demand for lower content to monetize product, 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.

Speaker 2

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 improvement made over the past year to enable faster shipment deliveries. We are also seeing a temporary increase in inventory as a percentage of backlog, mainly due to the near term increase in vet 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 inventory as 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.

Speaker 2

We aim to position Twin Disc 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 and 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.

Speaker 2

Jeff?

Speaker 1

Thanks, John. Good morning, everyone. We delivered sales of $73,000,000 for the quarter, up $9,600,000 or 15.2 percent from the prior year period, as overall demand remains strong. Net income attributable to Twin Disc for the 2nd quarter was $900,000 or $7 per diluted share compared to $1,800,000 or $0.13 per diluted share in the Q2 of fiscal 2023. Gross profit margin increased to 28.3% compared to 26.9% during the prior year period and gross profit increased 21.3 percent to $20,700,000 This improvement reflects the benefit higher pricing actions, continued easing of supply chain headwinds, a favorable product mix and successfully executing our operational playbook.

Speaker 1

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 geographies, 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 sheet through the solid cash generation delivered in the Q2. We reduced net debt by $21,700,000 to negative $3,300,000 compared to the prior year period and ended the quarter with a cash balance of $21,000,000 approximately $7,500,000 higher versus the prior year period. EBITDA decreased to $5,500,000 from $7,000,000 during the prior year period due to a $4,200,000 prior year gain on the sale of the facility recorded in the Q2 of 2023.

Speaker 1

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 margin for the Q2 increased to 28.3 percent, expanding approximately 140 basis points from the prior year period. Again, due to the benefit of pricing actions, continuing 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 and A.

Speaker 1

That being said, while M and A spend has increased nominally, it has decreased as a percentage of sales as we continue to grow our business. Now on to capital allocation. In line with the additional priorities specified in our capital allocation framework, given our low debt level, We are exploring M and 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.

Speaker 1

We will continue to evaluate our capital allocation strategy and priorities adjusting the changes in the economic landscape and their operating environment as they 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 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.

Speaker 2

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 Twindus 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.

Operator

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

Speaker 3

Good morning, guys.

Speaker 2

Hey, Simon. Good morning, Simon.

Speaker 3

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

Speaker 1

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

Speaker 3

So 5050, so about 7000000 dollars 8000000 dollars

Speaker 1

I think that's about right, yes.

Speaker 3

Okay. Now you say you mentioned that you saw higher activity or you received your first new equipment order from the North America. Is that for the new e frac or is that for the diesel base transmission?

Speaker 2

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

Speaker 3

Okay. Now That $8,000,000 from the oil patch, is that mostly I mean, you did mention some new units going to Asia. Is that more than geotoxic and consumables or how is that breakdown between consumable and new equipment?

Speaker 2

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.

Speaker 3

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

Speaker 2

The feedback has been great. It's been the testing has gone extremely well. 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 We remain ready and we're geared up for production.

Speaker 2

We could react very quickly.

Speaker 3

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

Speaker 2

Quite a bit. There's I mean, we've just scratched the surface in North America and Asia. We had shipments to Australia Last fiscal year, actually trying to think that might have been the Q1. But again, Just scratching the surface, particularly in the Elite product line, the combination of the roller design thruster and Propeller. The mega yacht market, they don't just build in Europe, they build around the world.

Speaker 2

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.

Speaker 2

It's production wise, capacity wise.

Speaker 3

Okay. All right. A couple of questions for Jeff. We saw gross margin expand nicely year over year, but Did you take a step back from the Q1? How do you see gross margin progressing for the rest of the year?

Speaker 1

Yes. I think it's going to be right around the range between Q1 and Q2 and it's depending on mix. 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.

Speaker 1

So I think it's going to be in range and kind of what we've said before, in the high 20s, trying to get to 30 is what we would expect.

Speaker 3

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

Speaker 1

Yes. I think $10,000,000 We've been pretty consistently targeting $10,000,000 I think we've got attract run rate so far, I think it's pretty close. So unlike maybe some previous years where It was really back end loaded. I think we've got orders in place to get us right around that $10,000,000,000 maybe a little bit less.

Speaker 2

Okay. Thank you, guys. Yes. There's more on order, but the lead times for machine tools, gear grinders, they're still out over 12 months. So we have big machine tools on order, but they're not coming in until next fiscal year.

Speaker 2

Okay, got

Speaker 3

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

Speaker 2

Thanks, Simon.

Operator

Our next question comes from the line of Mike Green from Neuberger. Please go ahead.

Speaker 4

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

Speaker 1

Hey, Rand.

Speaker 2

Hey, Rand. Hey, Rand.

Speaker 4

How are you? Great. So look, if you use the Q2 Like $5,500,000 of EBITDA, how would you guys expect sort of the second half quarters to behave? So we'll get more top, additional top lines?

Speaker 1

Yes. I think we'll be up. I think We've been hovering around $30,000,000 trailing 12 month EBITDA. I think we'll growth through the second half, so getting through the second half back up to like 7,500,000 to 8,000,000

Speaker 4

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

Speaker 2

Yes. Rand, it's John. I think we've given our backlog and What we saw in orders in the Q2 and some feedback we're getting in the Q1, 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 unforeseen surprises in the supply chain, things taking longer to get to us because of concerns in the Middle East and shipping taking longer.

Speaker 2

But the backlog is there to have a very nice second quarter. We're reading everything that you're reading about soft landing recession In our market, the second half of the year, beginning of our next fiscal year, so far, Ran, our orders And what we're hearing from our customers, there's a little bit of that, but we're also seeing some optimism in markets that had been quiet for a long And I mentioned in my comments, the Asian marine market, particularly, tugs, whether for mining seem to be doing very well. So I think it's for us, it's too soon to tell, but We're probably a little bit more optimistic than most going into our fiscal 2025.

Speaker 4

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.

Speaker 2

All right. Thanks, Rand.

Operator

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

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Key Takeaways

  • The company delivered 15.2% year-over-year revenue growth in Q2 to $73 million, expanded gross margin by 140 basis points to 28.3%, generated historically high cash from operations and reduced net debt by $21.7 million.
  • Marine & Propulsion Systems sales rose 29% driven by global commercial markets, increased defense spending on patrol boats and a rebound in Asia Pacific work-boat transmission orders, with Veth backlog at record levels.
  • Land-based transmissions grew 8% on rising oil & gas and ARFF demand, while Industrial segment sales declined 13% amid sluggish lower-content OEM orders, offset by steady demand for higher-content products.
  • Backlog continued to increase on stable end-market demand and supply-chain improvements; inventory rose temporarily to support Veth production but is expected to fall in the second half of fiscal 2024.
  • The long-term strategy emphasizes hybrid and electrification solutions for marine and off-highway applications, operational modernization and selective M&A in marine technology, industrial and hydroelectric sectors.
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Earnings Conference Call
Twin Disc Q2 2024
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