Twin Disc, Incorporated (NASDAQ:TWIN) Q3 2024 Earnings Call Transcript

Twin Disc, Incorporated (NASDAQ:TWIN) Q3 2024 Earnings Call Transcript April 30, 2024

Twin Disc, Incorporated  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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 Results 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. [Operator Instructions] I would now like to turn the call over to Jeff Knutson, Chief Financial Officer. Please go ahead.

Jeff Knutson: 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, 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 actual results to differ materially from those forward-looking statements are contained in the company’s Annual Report on Form 10-K, copies of which may be obtained by contacting you to 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.

John Batten: 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 Katsa Oy, a leading manufacturer of high quality power transmission components and gearboxes based in Finland.

This acquisition will broaden Katsa’s global reach as we leveraged Twin Disc global sales, distribution and service network, while also generating cross-selling opportunities through Katsa’s existing customer base as we tap into its long-standing relationships with leading European OEMs, similar to the dynamics we’ve achieved with that. With our strong balance sheet and flexible financial profile, we will continue to explore similar strategic opportunities to drive sustained growth for Twin Disc. Moving on to results by product. 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.

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Q&A Session

[Veth] (ph) continues to perform well, supporting overall growth in Marine and Propulsion as the mega yacht market remains strong. We saw a solid 16% sequential increase in six month backlog, driving the recent inventory build to support rising demand. This uptick underscores the enduring strength of the Veth and Rolla partnership which has created an additional competitive edge for Twin Disc 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 market. 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 [ARP] (ph) demand remains quite strong, which we will be even better positioned to capture with the addition of Katsa. 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 offer.

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 in into 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 in the hybrid and electrification solutions for marine and land-based applications. As demonstrated by our agreement to acquire Katsa, 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 Veth 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?

Jeff Knutson: Thanks, John. Good morning, everyone. We delivered sales of $74.2 million for the quarter, up $389,000 or 50 basis points from the prior year period as overall demand remains solid. Net income attributable to Twin Disc for the third quarter was $3.8 million or $0.27 per diluted share compared to $3.3 million or $0.24 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 & Propulsion Systems reported 3% growth, while land-based transmission and industrial sales reported a year over sales declines of 3% and 15%, respectively.

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 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 best sales for offshore wind projects. We continue to strengthen our balance sheet due to 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 [0.3 times] (ph), 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 impacts of operational efficiency. Looking towards the fourth quarter, we expect challenging year-over-year comparison 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 those areas that align with our vision for the future. Our focus on marine technology, industrial and the hybrid electric sector underscores their 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 the geographic markets to capitalize on emerging opportunities and the continued strengthening of our marketing efforts to drive market penetration.