Q2 2024 Twin Disc Inc Earnings Call
Participants
Jeff Knutson; CFO, VP - Finance, Treasurer, and Secretary; Twin Disc Inc
John Batten; President, CEO, and Director; Twin Disc Inc
Simon Wong; Analyst; Gabelli & Company
Michael Greene; Analyst; Neuberger Berman
Presentation
Operator
Ladies and gentlemen, thank you for standing by, but would like to welcome everyone to the Twin Disc Inc. Fiscal Second Quarter 2024 conference call. At this time, all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you'd like to withdraw your question, please press the star followed by the one. Once again. Thank you I will now hand the call over to Mr. Jeff Knudson, Chief Financial Officer. You may begin your conference.
Jeff Knutson
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 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 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 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 two six two six three eight 4,000, 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 second quarter conference call. Let's begin today's call with some highlights. We continued our solid momentum in the second quarter, delivering profitable growth by generating historically high cash from operations. These results are 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 transmissions, supporting 15.2% year over year sales growth to continue our trend of double digit top line expansion in fiscal 2024. We also delivered solid gross margin expansion, which improved 140 basis points to 28.3%. We are 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 that Asia-Pacific a return to activity in a market after cyclical softness in the offshore Asian markets.
Moving on to results by product group, sales in marine and propulsion systems increased 29%, driven by growing activity in global commercial markets. We are seeing further increases in defense spending driving patrol boat projects, which we expect to continue given current geopolitical turmoil. That backlog remains at record levels, rising 6% sequentially and supported by the success of the debt and role of partnership. That inventory has increased in the near term.
As we prepare to meet increased demand heading into the second half of the fiscal year.
Onto 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 first new unit orders in North America within oil and gas and expect further strength for this part of the business in the coming quarters. Arc has also performed well with strong demand for these transmission 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 and pull back to the end market uncertainty in the first quarter, our industrial segment has remained pressured by softness amongst industrial OEM customers with sales declining 13% versus the prior year. We have continued to see sluggish demand for lower content commoditized 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.
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 chains and improvements 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 that inventory. As 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 a percentage 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, we aim to position twin. This is 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&A opportunities to grow our business within the industrial and marine technology sectors, both of which are ample opportunities for us to expand our offerings in the hybrid and electrification space.
With that, I'll now turn it over to Jack to discuss the financials.Jeff?
Jeff Knutson
Thanks, John. Good morning, everyone. We delivered sales of $73 million for the quarter, up $9.6 million or 15.2% from the prior year period as overall demand remained strong. Net income attributable to Autodesk for the second quarter was $900,000 or $0.07 per diluted share compared to $1.8 million or $0.13 per diluted share in the second quarter of fiscal 23. Gross profit margin increased to 28.3% compared to 26.9% during the prior year period.
And gross profit increased 21.3% to $20.7 million. This improvement reflects the benefit of prior pricing actions, continued easing of supply chain headwinds, a favorable product mix and successfully executing our operational playbook for Marine and propulsion systems reported double digit growth in land based transmissions reported 8% growth, while industrial sales declined compared to the prior year period.
Looking at top line distribution across geographies. Sales continued to increase across the Asia-Pacific and European regions compared to the prior year, supported by robust demand from North American sales declined. See we continued to strengthen our balance sheet through the solid cash generation delivered in the second quarter, we reduced net debt by $21.7 million to negative $3.3 million compared to the prior year period and ended the quarter with a cash balance of $21 million, approximately $7.5 million higher versus the prior year period. Ebitda decreased to $5.5 million from $7 million during the prior year period due to a $4.2 million prior year gain on the sale of a facility recorded in the second quarter of 2023. 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 second quarter increased to 28.3%, expanding approximately 140 basis points from the prior year period, again due to the benefit of pricing actions, continued 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 SG&A. That being said, while in the days that has decreased nominally, it has decreased as a percentage of sales as we continue to grow our business from now on to capital allocation, in line with the additional priority specified in our capital allocation framework, given our dose low debt level, we are exploring M&A opportunities with a specific emphasis on marine technology, industrial and the hybrid electric 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. We will continue to evaluate our capital allocation strategy and priorities adjusting to changes in the economic landscape and our operating environment as they evolve.
I'd like to now turn the call back over to John to share some closing remarks.
John Batten
Thanks, Joe. 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 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. 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 to win this 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.
Question and Answer Session
Operator
At this time, I would like to remind to teleconference participants in order to ask a question, please press the star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Thank you.
Our first question comes from the line of Simon Wong from Gabelli Fund. Please go ahead.
Simon Wong
Good morning, guys.
Jeff Knutson
Thanks.
Simon Wong
I had a morning time pick up first questions on. Yes, and you've also had some nice growth in your land-based transmission business. How much of that was oil was from the oil patch?
John Batten
And I would say the oil patch was relatively consistent and I think I think it was probably split between our in our in our oil patch from the transmission side.
Simon Wong
So 50-50, so about $7 million to $8 million
John Batten
I think that's about right, yes.
Simon Wong
Okay. Now you say you mentioned that you saw higher activity or you see a first our new equipment order from the North America. Is that is that for the new e-frac, was that for the diesel diesel base transmission?
Jeff Knutson
Yes, Simon, the new unit orders were for traditional diesel frac. Some we are still awaiting the first PO for the e-frac. I'm hoping that happens yet this quarter. But so far, all the new unit orders and obviously all the spare parts orders remain for North America in Asia and our business in Asia keeps keeps keeps chugging along at a very at a very good rate this quarter compared to a year ago.
Simon Wong
Okay. Now, does that $8 million from the from the oil patch. Is that is that mostly up? Because I mean, you did mention some new units going to Asia. Is that more? Yes, you have to consumables or or how does that break down between consumable and new equipment?
Jeff Knutson
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 and new unit activity.
Simon Wong
Okay. And then your new fact, your e-frac offering, are you still within your for the first purchase order was what's been the feedback from your customers and the feedback has been great.
Jeff Knutson
It's been it's the testing has gone extremely well. I'll 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. That's and that's where we stand today and we remain ready and we're in we're geared up for production We could react very quickly after we
Simon Wong
got it in denim and that you saw some really nice geographic expansion growth, cross media traffic dispatching last year. It looks like it continued this quarter. How much more room is there to try to expand geographically?
John Batten
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 to actually find. I think that might have been the first quarter. But again, just scratching the surface, particularly in the lead product line, the combination of the role, the design, a thruster and Propeller on the mega yacht market, they don't just build in Europe they build around the world.
So we're looking to expand that. So we have actually we do have some just some, like, I would say, production constraints in the Netherlands that we're trying to solve here in the US. 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 is production-wise, capacity-wise.
Simon Wong
Okay. All right. A couple of questions for Jeff. We saw our gross margin expand nicely year over year, but it did take a step back from the first quarter? And how does how do you see gross margin progressing for the rest of the year?
Jeff Knutson
Yes. I think it's going to be right around the range between Q1 and Q2. And it's depending on mix. You know, 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 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 on. So I think it's going to be in this range and kind of what we've said before, you know, in the high 20s you're trying to get to 30 is what we would expect.
Simon Wong
Okay. One more question. If I could sneak one more in. What's your CapEx for the full year on CapEx outlook for the full year?
Jeff Knutson
Yes, I think well, the $10 million. We've been pretty consistently targeting $10 million. I think we've got I track a run rate so far that gets 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 it right around that $10 million, maybe a little mid-month, if you have timing, you guys.
John Batten
Yes, there's more on order, but the lead times for machine tools, gear grinders, there's still some still out over 12 months. So we have we have big machine tools on order, but they're not coming in until next fiscal year.
Simon Wong
Okay, great.
Thank you, guys.
Jeff Knutson
Thanks, Simon.
Operator
As a reminder, if you'd like to ask a question, please press star followed by the one on your telephone.
Our next question comes from the line of Mike Greene from Neuburger. Please go ahead.
Michael Greene
If you hear me guys, that actually ran Vari-L there and yet I think so if you use the or the Q2 like $5.5 million of EBITDA, how would you guys expect for the second half quarters to behave and to get?
No, obviously, no, additional top lines?
Jeff Knutson
Yes, I think we will, I think, will be up. I think we've been hovering around $30 million trailing 12 months EBITDA. I think I think we'll grow through the second half. So getting to the second half backup facility, $7.5 million to $8 million.
Michael Greene
Okay, great. And given the backlog of what you're hearing about end markets, you guys I'm assuming you feel pretty good about the second half. You have a growth in revenues year over year basis. Just wondering about it an extra if you have any sort of visibility of continued top line growth year-over-year?
John Batten
Yes, Randy, it's John. I think we given our backlog and what we're what we saw in orders in the second quarter and some feedback we're getting in the first quarter, obviously, pretty optimistic. The backlog is there for the second half do very well. It's just a question of unforeseen surprises in the supply chain, things taking longer to get to us because of concerns in the Middle East and shipping taking longer. But the backlogs there to have a very nice second quarter and we're reading everything that you're reading about a soft landing session in either in our market, the second half of the year, the beginning of our next fiscal year. So far I ran our orders from 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 time. And I mentioned in my comments, you know, the Asian marine market, particularly tugs, whether it's 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 25.
Michael Greene
Okay. 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.
John Batten
Thanks, Randy.
Operator
Thank you. Ladies and gentlemen, as we have no further questions at this time, we will conclude today's conference call. We thank you for participating, and you may now.
