Q3 2024 Twin Disc Inc Earnings Call

Participants

Jeffrey Knutson; Chief Financial Officer, Vice President - Finance, Treasurer, Secretary; Twin Disc Inc

John Batten; President, Chief Executive Officer, Director; Twin Disc Inc

Will Nasgovitz; Analyst; Heartland Advisors, Inc.

Presentation

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. (Operator Instructions) I would now like to turn the call over to Jeff Knutsun, Chief Financial Officer. Please go ahead, sir.

Jeffrey Knutson

Good morning and thank you for joining us today to discuss our fiscal 2024 third quarter results. On the call with me today are 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 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 a release. 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 trend 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 Castle Oil, a leading manufacturer of high-quality power transmission components and gearboxes. Based in Finland. This acquisition will broaden the global reach because we leveraged twin this global sales distribution and service network while also generating cross-selling opportunities through captive existing customer base as we tap into its long-standing relationships with leading European OEMs.
Similar to the dynamic 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 with 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 activity boosted fleet readiness that continues to perform well, supporting overall growth in marine propulsion as the mega yacht market remained strong with 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 Belt and Road 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 work boat 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 material and coal from Indonesia to China. We will continue to focus on tapping into these regional opportunities to position the business for further growth and onto the land-based transmission business, sales decreased 3% year-over-year, driven in part by sustained exports to the Asian oil and gas markets. That said, even a 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, increasing our demand remains quite strong, which we will be even better positioned to capture with the addition of Casa. 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 offerings. 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 strength resources, 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 inventories 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 into hybrid and electrification solutions for marine and land-based applications, as demonstrated by our agreement to acquire concept. 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 that 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 marine technology sectors, and particularly those with a hybrid centric focus, we are poised to capitalize 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?

Jeffrey Knutson

Thanks, John, and 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 remained 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 and propulsion systems reported 3% growth, while land-based transmission and industrial sales reporting to over sales declines of 3% and 15% respectively.
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 the proportion of sales in North American markets declined. We also saw a notable increase in sales has been 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 continued to strengthen our balance sheet and 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, 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 against these cost reduction initiatives and the impacts of operational efficiencies.
Looking towards the fourth quarter, we expect challenging year-over-year comparisons 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 and continue to explore strategic opportunities for M&A, particularly in growth areas that align with our vision for the future. Our focus on marine technology, industrial and the hydroelectric sector underscores the 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 new geographic markets to capitalize on emerging opportunities and the continued strengthening of our marketing efforts to drive market penetration. Furthermore, we remain committed to consistently returning capital to shareholders through share repurchases and dividend payments. Overall, our capital allocation strategy reflects a balanced approach aimed at driving sustainable growth and fostering innovation while maintaining financial prudence and flexibility.
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. Our third quarter performance highlights our continued operational excellence marked by a notable margin expansion and robust cash generation. Our strong balance sheet, bolstered by consistent profitable growth and solid working capital management positions us favorably to navigate market uncertainties and take advantage of strategic growth opportunities.
Looking ahead, we maintain our cautiously optimistic outlook driven by sustained demand dynamics are resilient amid external challenges, reaffirms our agility and adaptability in capturing market opportunities and our performance not only reflects our operational prowess, but also underscores our commitment to delivering long-term value to shareholders. I'd like to thank all of our teams for their continued hard work and dedication to supporting our business this quarter as we approach the end of the fiscal year. And we look forward to continuing our growth journey as we drive to win this forward and generate long-term value for our shareholders.
That concludes our prepared remarks. Jeff and I will be happy to answer your questions.

Question and Answer Session

Operator

(Operator Instructions)
Simon Wong, Gabelli Funds.

Hey, this is [Miller] filling in for Simon today. Maybe just my first question here. I guess how much of this quarter's revenue is derived from oil and gas customers. And I guess what if you break that down between new equipment consumables?

Jeffrey Knutson

Yes, it's a good question. I would say it's been a pretty normal quarter for oil and gas in terms of percentage of revenue for the quarter, doing some quick math, probably around 10% to 15% kind of evenly split between consumable and units.

Okay. Thanks. And then on and then maybe my second question, I guess, what are you seeing -- I guess what is the company seeing in terms of North American frac customers?

John Batten

I would say -- this is John. I'd say we've seen an uptick in the calendar year in new spare part orders and we have some limited unit going out. But I would say that -- I mean, our outlook is that will probably pick up through the rest of the calendar year, just given what's happening in the Mideast is I think we're going to see some more activity here at home as well as in Asia.

Okay, thanks. And then on I guess, you're working down your inventory for fiscal year 4Q '24 how should we think about inventory as a percentage of backlog from that quarter?

Jeffrey Knutson

I think it's going to keep continue to ratchet down. You know, we're not going to have a I'd say an incredible shift. I think we'll see a trajectory kind of like what we've seen in the last two quarters.

Okay.
And then just my last question here. I guess any update on the timing of closing of the Katsa acquisition? And does the acquisition need approval from Finland's Economic Minister to close?

John Batten

Yes. So we did get that approval of the accounts and we should be closing, I would say around the end of the month within 30 to 40 days will be closed.

Okay. Thank you. That's all my questions.

John Batten

Thank you.

Operator

Will Nasgovitz, Heartland.

Will Nasgovitz

Good morning. Thanks for taking my questions and congratulations on a strong quarter, particularly in the free cash flow generation. It's great to see. I'm just curious on the industrial side, you're welcome. I'm just on industrial, I know you comment in your opening remarks, you're seeing signs of stabilization there. You had a kind of sequential pickup in broader order into some of that in the industrial bucket. Just overall thoughts on the industrial segment to be helpful.

John Batten

Yeah. I would say on this past quarter has been the best order quarter on in a few quarters. And it's been broad-based as far as the lower horsepower range, both in Europe and in the US and in Australia, I would kind of be the big the big markets for us. But we've seen we've seen it pick up a little bit again, this past quarter was a much better order quarter, and we have some of the higher, you know, some of the gearboxes with electronic controls that have been on order. So again, it's looking up, but it's still we got a ways to go to get back to where we were.

Will Nasgovitz

Okay. And then the acquisition I recall maybe is $30 million in revenue was around that level. Can you just provide any additional perspective on just the margin profile of the company? And in the new market, either new customers or is it, just some additional color would be useful there.

John Batten

So on, I would say the margin profile, really, it kind of falls right in line with where we are, depending upon the product line. It's going to bounce around, you know, high 20s to low 30s. But it's there's so much there Will. They're going to be a great supplier for us on gears for our product that we build in the US, in the Netherlands, in Italy. And their product -- they started off as a component supplier, so they're heavily invested in very complex machining centers to do gears.
They were, I would say, the last third of their life, they've been getting into the gearbox business, whether in the industrial space, some specialty marine gears, they do transfer cases for all-wheel drive military vehicles. Until recently, it was just Finland. But then again, Finland has joined NATO. They've gotten orders from Germany and Sweden. And so we see some good market expansion.
And again, if you look at the horsepower range where they have product and it's pretty much right on top of Twin Disc. These are all customers and markets that we understand, but they've just been so heavily focused on the European market and the Scandinavian market. So we feel that there's a real potential to bring them out into the global market. So all of our guys, whether they're in the marine business, the industrial business or the transmission business, how they're chomping at the bit to get a hold of Katsa products and introduce them to the global customers.

Will Nasgovitz

Thanks for that elaboration. I guess my final one here is just going back to your opening comments, John, in the end, you forget about the Jeff, just talking about innovation, electrification, hybrid, et cetera. I'm just wondering if you could just frame for us the opportunity you've obviously steeped in know-how in traditional transmission. Can you just frame for us any perspective on the opportunity as you continue to take this technology know-how and apply to the hybrid and electrification markets? Thank you.

John Batten

Yes.
So, Will, there's a huge opportunity in, it really is in our space, OffHighway, whether it's marine or construction for our own, it's putting the package together for the OEM to help them. So we have if you think about our mechanical product, whether it's a pump drive or transmission, it's kind of the heart of hybrid you know, still allows for in ICE engine propulsion system, but then also has input for electric motor coming from a battery. And our control system is the brain and there are a lot of other parts that we put in put together in the system, the inverter, all sorts of other thing, the wiring, but it's the content of one train application. We would sell a gearbox, let's just say the $20,000. The hybrid system, you know, can be $160,000 to $200,000.
That's a big multiplier. But again, we're relying on that OEM to be able to sell that hybrid crane for a considerable premium over a traditional crane. We look at some of the marine applications that we're doing field work quoting systems that are $500,000 to $1 million, depending upon if it's single or twin screw and just a few years ago, that would have been almost the cost of the entire vessels sold. You know, we're proving to ourselves and our customers that we have that technical logical solution. Now we're just waiting for these things to get through testing and seeing how they play out in the market if the market is willing to spend extra for this type of performance in this type of, I would say just profile as far as emissions.
Now in some cases in California, they're mandating that some of these government funded vessels go completely electric or hybrid. So we see some wins coming up very quickly in some of the other markets, whether it's construction or other things, it's a wait and see that they're building the equipment and then seeing how well they are accepted in the market. But just to answer your question, it's a big deal. Our content can easily can go up from four to eight times pretty quickly.

Will Nasgovitz

Well, thanks for that elaboration. And again, congrats on the great quarter and best of luck on your fourth quarter. Thanks for your time.

John Batten

Thanks, Will.

Operator

That concludes our Q&A session, but I will now turn the conference back over to John Batten for closing remarks.

John Batten

So thanks, Alex. Again, we'd like to thank you for participating in our Q3 call and look forward to speaking with you in August for our Q4 and fiscal year end '24 conference call. Thank you, everyone.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.