Twin Disc, Incorporated (NASDAQ:TWIN) Q2 2024 Earnings Call Transcript
Twin Disc, Incorporated (NASDAQ:TWIN) Q2 2024 Earnings Call Transcript February 7, 2024
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Operator: Ladies and gentlemen, thank you for standing by. I would like to welcome everyone to the Twin Disc, Inc. Fiscal Second Quarter 2024 Conference Call. [Operator Instructions]. Thank you. I will now hand the call over to Mr. Jeff Knutson, 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'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-K, 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 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 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 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. We also delivered solid gross margin expansion, which improved 140 basis points 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 workboat marine transmissions at Asia Pacific, a return to activity in a market after cyclical softness in the offshore Asian market. 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. Veth backlog remained at record levels, rising 6% sequentially and supported by the success of the Veth and Rolla 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 Transmissions 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. 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 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 chain 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 Veth 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 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 detail. 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 cost 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 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. 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 Twin Disc 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. 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 continued to increase across the Asia Pacific and European regions compared to the prior year, supported by robust demand, while North American sales declined. 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 continued 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 ME&A. That being said, while ME&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&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 in their 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, 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. 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 Twin Disc 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.
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