Twin Disc, Incorporated (NASDAQ:TWIN) Q4 2024 Earnings Call Transcript

Twin Disc, Incorporated (NASDAQ:TWIN) Q4 2024 Earnings Call Transcript August 15, 2024

Operator: Welcome to the Twin Disc Inc. Fiscal Fourth Quarter and Full Year 2024 Conference Call. We will begin with introductory remarks from Jeff Knutson, Twin Disc’s CFO. Please go ahead.

Jeff Knutson: Good morning, and thank you for joining us today to discuss our fiscal 2024 fourth quarter and full year 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 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 4th quarter conference call. To begin with, I’d like to walk through some of the quarter’s highlights. We again delivered solid results in the fourth quarter, capping a year of consistent performance, which supported our execution of several key strategic priorities. As we continue to capture healthy demand for our products across end markets, sales increased 0.6% year-over-year for the fourth quarter and increased 6.6% year-over-year for fiscal 2024. We are also seeing the ongoing benefit from disciplined working capital management and other operational enhancements we’ve implemented across our businesses in recent years, helping drive historically strong cash generation for both the fourth quarter and full year.

Critically, in the fourth quarter, we completed the acquisition of Katsa Oy, a leading manufacturer of high-quality power transmission components and gearboxes. We are confident that the addition of Katsa Oy will both broaden our global reach and accelerate cross-selling opportunities across our business. Backed by our strong balance sheet and flexible financial profile, we will continue to focus on expanding our portfolio through strategic opportunities that will drive Twin Disc forward. Shifting to our product segment results. Our Marine and Propulsion Systems saw continued demand through the fourth — through the year with our global commercial end markets showing sustained activity. Despite a challenging year-over-year comparison and softer demand in both the Canadian fishing market and pleasure graft business, we delivered a 3% increase in sales in the fourth quarter.

Q&A Session

As noted last quarter, we continue to see a rise in government defense spending driven by recent geopolitical turmoil resulting in a surge of patrol boat project. We saw a slight decrease in backlog as we work through inventory to meet consistently solid demand. That continues to be an integral part of our Marine and Propulsion Systems segment. Veth’s collaboration with Rolla and the development of our ELITE thruster for yacht propulsion has also been performing well due to the strength in the luxury boating market during the quarter, further highlighting the importance of our strategic partnerships that have allowed us to tap into new and enhance our product offering. The demand we have seen for workboat marine transmissions continued this quarter with strength in the Asia Pacific market, partially driven by the need for cold sub boats in the transport of raw materials from Indonesia to China.

On the land-based side of our business sales increased 9.3% year-over-year driven largely by RF. Our RF transmission demand remains robust, reaching record levels of backlog in the quarter. Exports to oil and gas markets were flat. However, we continue to see meaningful activity both in Asia and North America. In the Industrial segment, sales declined 8.9% year-over-year. While demand has been largely sluggish through the year, we saw a slight recovery during the fourth quarter. We can just see lower agriculture and construction demand resulting in a weak market with after demand for commoditized products. While more commoditized products have been experiencing continued weakness, demand for higher content, more sophisticated products remains resilient.

As we move into fiscal 2025, we remain focused on what we can control. Advancing partnerships with the original equipment manufacturers and efforts to penetrate new markets in line with our long-term strategy. In terms of our backlog, I am proud to say that we continue to increase our six-month backlog, both sequentially and year-over-year, while simultaneously reducing inventories. This uptick comes with the addition of Katsa Oy, which represented $12.6 million of backlog growth. Our continued trend of declining inventory as a percentage of backlog highlights both the impact of our disciplined inventory management and the resilience of our business in capturing sustained demand despite lingering macroeconomic uncertainty. In closing, I’d also like to address our long-term strategy before Jeff takes us through our financial overview.

We aim to become a leading provider of hybrid and electrification solutions for marine or off-highway land-based applications, driven by deep relationships and close collaboration with major OEMs. That reach continues to expand on a global scale, supported by the successful creation with Rollo. We are also continuing to rationalize and modernize our business delivering improved shipments by lowering inventory costs, improving lead times and creating better results for all stakeholders. Our focus remains on controls and systems integration, shifting our business into new avenues that will bring us profitable growth. With regard to M&A, we are actively looking into the industrial marine technology sectors, both of which have 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 $84.4 million for the quarter, up $0.5 million or 0.6% from the prior year as overall demand continued to remain solid across our markets. Sales for fiscal 2024 were $295.1 million, up 6.6% from fiscal 2023. Adjusting for the divestiture of the DCS business in 2024, full year 2024 revenue increased $26 million or 9.5% over the prior year. I’d like to note that operating income for the full year was impacted by a $3.1 million non-cash loss on the sale of the boat management system product line and related inventory in the third quarter of this year. Additionally, we recorded a $4.1 million gain on the sale of the Belgian facility in 2023. Adjusting for those two items, full year 2024 operating income was actually $2.7 million higher than the prior year.

Net income attributable to Twin Disc for the fourth quarter was $7.4 million or $0.53 per diluted share compared to $8.6 million or $0.62 per diluted share in the fourth quarter of fiscal 2023. Full year net income of $11 million or $0.79 per diluted share is up from net income of $10.4 million or $0.75 per diluted share in the prior year. Gross profit margin increased to 29.7% compared to 29.5% during the prior year period, and gross profit dollars increased 1.4% to $25.1 million. This increase is due to the benefits of incremental volume, a favorable product mix and a positive impact of cost reduction and operational efficiency initiatives. While we saw sequential growth in each of our product groups, we saw consistent demand in both Marine and Propulsion Systems and land-based transmissions throughout the year, supporting overall growth.

As John mentioned, we also saw an improvement in the Industrial segment that has been pressured by a softer market over the last few quarters. Across our geographies, we saw another quarter of sales increase in our Asia Pacific and Middle Eastern markets and a pullback in North America. Strength in the Middle Eastern markets was supported by shipments to an RF manufacturer in Dubai. We remain committed to strengthening our balance sheet over the course of fiscal 2024. Twin Disc as maintained a net debt around $5.7 million despite a near-term increase in total debt due to the Katsa acquisition. We ended the year with a cash balance of $20.1 million, 51.1% higher than the prior year. We also improved the EBITDA by 2.9% to $26.5 million, generating positive free cash flow of $25 million and maintained a net leverage ratio of 0.2 times.

As we enter fiscal 2025 with a strong balance sheet, we are well positioned to navigate macroeconomic uncertainty prudently. With a healthy level of debt, we continue to monitor suitable bolt-on M&A opportunities that align with our objectives of enhancing our innovative excellence and product offerings. Gross margin increased approximately 150 basis points from the prior quarter period primarily due to cost reduction activities, the impact of operational efficiencies and favorable product mix. Moving into fiscal 2025, we remain focused on maintaining this momentum as we further enhance profitability. Our capital allocation priorities remain unchanged with strong cash generation supporting a healthy balance sheet and low debt leverage we are well positioned to act upon M&A opportunities that fit into our strategic framework.

The priority for our business is driving innovation in the marine technology, industrial and hybrid electric sectors to enhance our product portfolio. We are also making internal investments to drive organic growth, including investments in R&D, geographic diversification and expansion and marketing. For us, this framework strikes an important balance towards maintaining financial prudence and flexibility while driving long-term growth. As we enter the 2025 fiscal year, we are in a great position to update our medium-term targets and establish new growth goals for Twin Disc. By 2030, we believe the consistent execution of our long-term strategy will deliver revenues of approximately $500 million with gross margins of 30%. We also expect to deliver consistent free cash flow conversion of at least 60%.

I’d now like to turn the call back to John to review our updated targets and share some closing remarks.

John Batten: Overall, the fourth quarter continued the trend of performance that we carried through the year. I am very proud of our team’s ability to deliver robust cash generation and solid margin expansion. As we enter 2025, the demand strength and sales momentum we experienced in the fourth quarter provides a solid foundation as evidenced by our healthy backlog giving us encouragement for the year ahead. We expect the market conditions to remain largely consistent with what we saw throughout 2024 with a robust balance sheet strengthened by steady profitable growth and effective working capital management, we are well-equipped to handle any market uncertainties and capitalize on strategic growth opportunities well into the future. That concludes our prepared remarks. And now Jeff and I will be happy to answer your questions.

Operator: [Operator Instructions] And we will go first to Simon Wong of Gabelli Funds.

Simon Wong: Good morning, John and Jeff.

John Batten: Hey, Simon.

Jeff Knutson: Good morning, Simon.

Simon Wong: Good morning. Just want to get an update on your EFAC offering. Can you — I mean, any traction there in terms of the — of your new offering there?

John Batten: So, well, we’re still — it’s, I would say, in testing and waiting mode with the 7,600. Again, I remain hopeful that we’ll have an order for the first spread this calendar year. But a lot of it has gone back to traditional — they’re building just traditional diesel engine frac rigs right now. So we’ve seen an uptick again in spare parts for diesel rigs. There are 8,500 and 7,600 that are used conventionally. Simon, I remain hopeful. Everyone down the line says that it’s probably — it’s going to happen. It’s just a question of when.

Simon Wong: On that note, can you provide — I mean, how much of this revenue — quarter’s revenue was to the oil and gas sector? And then if you can break that down between equipment and consumer, that would be great, too.

Jeff Knutson: Yes. That’s a good question, Simon. I think it’s been pretty consistent with previous quarters. And maybe that’s something I can give you a little bit more detail off-line. But I would say in terms of the mix between forward market, aftermarket and transmission units, it’s been really consistent with primarily shipments into China for new units and North America with aftermarket at a consistent level.

Simon Wong: Okay. Okay. And the — for the overall company, is there anything in the R&D pipeline that you can talk about?

John Batten: No, I would say not — I would say the most notable thing that came out in the past — this past fiscal year was the hybrid system that Manitowoc showed — debuted at a show earlier this year for a hybrid electric crane, we have other — there’s other projects like that with OEMs that it’s just — it’s too soon to announce because they have to go through their prototype testing. But as far as what we’re working on internally, I would say they’re more — the elite thrusters that we — that Rolla and that worked on together for the mega yacht market, primarily in Italy, but it’s now — we’re gaining success with the German and the Dutch yard. I would see things that we’re working on expanding that range and then really what we’re doing, Simon, right now, our engineers were focused on Katsa and some of the products that they had under development and how they fit into our line.

So, I would say, what you’d see from us in the next 18 to 24 months would be an expansion of the Veth line, the ELITE thrusters. It would be some industrial components and transmission drop boxes coming out of Katsa to the global front. So that’s what we’re focused on right now. And then we continue to develop the PTI, the gearboxes that go on our marine transmissions to make them hybrid-ready or electric. So that’s really what we’re working on in a broad sense. But you’ll see — I think you’ll see in the next year to two years, a lot more specific models coming out, expanding our range in those areas.

Simon Wong: Okay. While speaking of Katsa, how much revenue did they contribute to this quarter’s results?

Jeff Knutson: Yes, none, really, Simon. It was essentially close at the end of the quarter. So the only impact Katsa brought into the quarter was their opening balance sheet and some costs related to closing and obviously costs related to the acquisition, but no P&L impact for the operation.

Jeff Knutson: Okay. I see that you’re guiding 2025 to be in line with 2024. Is that both on the revenue and EBITDA line?

John Batten: Sorry, I didn’t…

Jeff Knutson: Yes, yes, so traditional point that similar revenue and EBITDA coverage.

Simon Wong: Okay. But does it include contribution from Katsa?

John Batten: No. Katsa will take us up. I mean, if you — when you add Katsa in, we’re obviously expecting a growth year on the revenue line.

Simon Wong: Okay. All right. Yes. Thanks for clarifying that. And then one more for me, the last one. Our capex, capex outlook for 2025?

Jeff Knutson: It’s going to be similar, probably, hopefully, a little bit higher than what we were able this year, again, we struggle just a little bit with lead times as we invest in more significant machine tools. So something around $10 million is what we’re targeting.

Simon Wong: All right, great. Thanks, guys.

Operator: [Operator Instructions] We’ll move next to Barry Haimes at Sage Asset Management.

Barry Haimes: Thanks very much. I had a couple of questions. One is just on the $25 million free cash flow, which is a great number, was any of that nonrecurring? And if so, could you just identify kind of what’s recurring, what’s nonrecurring? That’s the first question, but I had a couple more.

Jeff Knutson: Yes, not really — I mean, I think what we benefited from a little bit quickly is a little bit of over inventory levels at a level higher than we would have liked historically. So some low-hanging fruit in terms of bringing inventory down. But really no true one-off adjustments that we would point to that were nonrecurring.

Barry Haimes: So was the inventory rightsizing just the size it was at $5 million, $10 million just ballpark?

Jeff Knutson: Yes, something like that around, yes, in that range. And I think we do still have some more room to improve on the inventory level and I think we started to get good traction through the year and actually accelerating as we close out the year. So we’re hopeful that — while the fruit isn’t hanging as low as it was, maybe we still have some good opportunity there.

Barry Haimes: Okay, great. Second question is, I’m assuming Industrial for the new fiscal year is probably going to be down, correct me if you think I’m wrong on that. And if so, where do you see the positive offsets that would get you to flat or better as you point out, maybe with the Katsa business?

John Batten: Yes. Barry, this is John. I would say that — I would say flat would be of the worst-case scenario. Certainly, the overall markets could be down again. But we have been getting traction. So I would say, as I mentioned in my comments, it’s more of the smaller mechanical PTOs that are used in irrigation in some pretty basic construction and ag equipment, but we’ve been getting a lot of good traction with our more expenses HPTOs and we have some hybrid systems that for us are industrial. So we think that we have an opportunity to grow just our traditional core comparing apples-to-apples to what we did in 2024. But certainly, when you add Katsa in, and we’re broadening our industrial line and again, may not register in sales this year, but we think we have a chance to speed up our growth curve in industrial.

Obviously, with adding Katsa, which is about their — probably a third of their business, let’s just say for a round number of $40 million, a third of their business is industrial. So — and almost 100% in the Northern European market. So certainly, taking their product line around the world is going to help us accelerate our industrial growth.

Barry Haimes: Got it. And then just last question. Within Marine, could you just segment the customers a little bit. So if commercial, you mentioned the high-end yacht and if there are any other big buckets, what’s just rough — if we did the pie chart on that segment, what would that look like? Thanks so much.

John Batten: So I would — so if you take the 100% pie chart, Commercial Marine is going to be the biggest bucket and it’s depending upon the year or the quarter, one and two for us are going to be North America and Asia and a smaller percentage of that is going to be Europe. And then the next biggest bucket now and it’s grown is, I would say, pleasure crafts with West expansion into the mega yacht market. And then again, that can flip flop based on the quarters with military and government. So those are our — the three biggest markets, but commercial revenue-generating vessels by far and away our number one market in marine, whether it’s marine transmissions that we build traditional Twin Disc for best thrusters. Revenue-generating vessels are the number one market.

Barry Haimes: Right. And is the pleasure craft just at the very high end or is it go and down in terms of size?

John Batten: It goes up and down, we probably start our — the bottom end of our pleasure craft market is probably going to be in a 50-foot yacht, twin engine diesel, everything below that is pretty much now outboard for Volvo IPS and as you go up from 50 feet, we just get stronger and stronger as you get up to 50 to 80 feet to 100 feet, that’s our core business. And it could be sport fish boats built in the outer banks, it could be folks like Maratimo and Riviera in Australia, Grand Banks, things that are in that 50 to 70-foot range and above, that’s our sweet spot.

Barry Haimes: Great, thanks so much. Good luck in the new fiscal.

John Batten: Thank you very much.

Operator: And this concludes the question-and-answer session and today’s conference call. Thank you for your participation. You may now disconnect.