Q2 2022 Twin Disc Inc Earnings Call

Speaker 1: Greetings. Welcome to the TwinDisk Inc. fiscal second quarter 2022 earnings conference. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Greetings and welcome to the Twin disc Inc. Fiscal second quarter 2022 earnings conference. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please.

Speaker 1: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note...

Please note. This conference is being recorded I will now turn the conference over to your host Stan Berger you may begin.

Speaker 1: I'll now turn the conference over to your host, Stan Burger. You may be good.

Thank you Mollie.

Speaker 2: Thank you, Somali. On behalf of the management of TwinDisk, we are extremely pleased that you have taken the time to participate in our call.

On behalf of the management of twin disc. We're extremely pleased that you have taken the time to participate in our call and thank you for joining us to discuss the company's fiscal 2022 second quarter and first half financial results and business outlook.

Speaker 2: Thank you for joining us to discuss the company's fiscal 2022 set in quarter and first half financial results and business out.

Speaker 2: Before introducing management, I would like to remind everyone that certain statements made during this conference.

Before introducing management I would like to remind everyone that certain statements made during this conference call.

Speaker 2: especially those statements that represents intentions, hopes, beliefs, expectations or predictions for the future or for a looking state.

Especially those statements.

That represents intentions hopes beliefs expectations or predictions for the future are forward looking statements.

Speaker 2: It is important to remember that the company's actual results could differ materially from those projected in such forward-looking states.

Do you remember that the company's actual results could differ materially from those projected in such forward looking statements information.

Speaker 2: Information concerning factors that could cause actual results to differ materially from those in the four looking statements are contained in the company's annual report on form 10K, copies of which may be obtained by contacting either the company or the SEC. By now you should have received a copy of the news release, which was issued this morning, before the market opened.

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 .

Which may be obtained by contacting either the company or the SEC.

By now you Should've received a copy of the news release, which was issued this morning before the market opened if you have not received a copy please call me.

Speaker 2: If you have not received the copy, please call Annette Mayenaki at 262-638-4000 and she will send the copy to you. Hosting the call today are John Batten, Twin Disk Chief Executive Officer, and Jeff Knudsen, the company's Vice President of Finance, Chief Financial Officer, Treasurer, and Secretary. At this time, I will now turn the call over to John Batten. John ?

Nike at 2626, 384000, and she will send the copy to you.

Hosting the call today are John Batten Twin <unk>, Chief Executive Officer, and Jeff Knudson, The company's Vice President of Finance, Chief Financial Officer, Treasurer, and Secretary at this time I will now turn the call over to John Batten John .

Thank you Stan and good morning, everyone welcome to our fiscal 2022 second quarter conference call as usual, we will begin with a short summary statement and then Jeff and I'll be happy to take your questions before we go over the results I'll touch on some of the operational highlights from the quarter looking at demand.

Speaker 3: Thank you, Stan, and good morning, everyone. Welcome to our fiscal 2022 Second Quarter Conference call. As usual, we will begin with a short summary statement, and then, Jeff and I will be happy to take your question.

Speaker 3: Before we go over the results, I'll touch on some of the operational highlights from the quarter. Looking at demand, as we mentioned in the press release, demand improved nicely across most of our markets. The biggest impact we saw was that our North American operations, where our orders improved in industrial and transmission product lines. Our global marine demand for our North American produce.

As we mentioned in the press release demand improved nicely across most of our markets. The biggest impact we saw was that our north American operations, where our orders improved in industrial and transmission product lines are.

Our global Marine demand for North American produced models remain flat at the factory as we still work through some of the inventory are at or distribute it or distributors.

Speaker 3: Models remain flat at the factory as we still work through some of the inventory or their distributors. But the market activity in our marine product line improved nicely in the quarter and we saw significant new orders at our European operations for those models.

But the market activity in the in our marine product line.

Prove nicely in the quarter and we saw significant new orders at our European operations for those models.

Speaker 3: We also saw looking at a market in particular, continued elevated high demand in the Australian marine market, particularly pleasure craft, nice unit orders for our marine transmissions and some other product lines that they sell into the market. And as I mentioned, we had a growing number of projects in the Asian European and North American workboat markets.

We also saw looking at a market in particular continued elevated high demand in the Australian Marine market, particularly pleasure craft Nice unit orders for our marine transmission and some other product lines that they sell into the market.

And as I mentioned, we had a growing number of projects.

Asian European and North American work bulk markets.

Speaker 3: continued application growth for our vet product line. Primarily in some new markets for them, the expedition style, Megiyats, that activity increased. The one activity, the one market that still is a little slow is the inland passenger vessel market, but as COVID wanes, we should see that market start to pick up in the calendar year.

Continued application growth for our <unk> product line.

<unk> and in some new markets for them the expedition style Mega yachts that activity increased one activity. The one market that still is a little slow as the inland passenger vessel market, but as Covid wanes, we shouldn't see that market starting to pick up in the calendar year.

Speaker 3: We did see some initial inquiries for some offshore vessels in Asia. That would be the first time in a long time that we've seen new project activity in any offshore market. And as...

We did see some initial inquiries for some offshore vessels in Asia and that would be the first time in a long time that we've seen new project activity in any offshore market and as you shouldn't be surprised the steady flow of hybrid and electric electrification projects for our marine transmissions with re.

Speaker 3: You shouldn't be surprised. A steady flow of hybrid and electric electrification projects for our marine transmission.

Speaker 3: With respect to oil and gas, we received good unit orders from Asia for both the 7,600 and the 8,500, and a significant amount of aftermarket parts order for the North American fleet. Quoting activity for new units also improved in December and January , and we believe that new rig construction should improve this calendar year.

Back to oil and gas we received good unit orders from Asia for both the 7600 in the 8500 and a significant amount of aftermarket parts order for the North American fleet.

Quoting activity for new units also improved in December and January and we believe that new rig construction should improve this calendar year.

Speaker 3: Our operation in Lufkin, whether it's significant supply chain issues on parts coming from India and has turned the quarter on past due, their past due amount. And we've continued to see significant growth in demand on new unit orders for our industrial products based in Lufkin.

Our operation in Lufkin weathered significant supply chain issues on parts coming from India and has turned the quarter on past due their past due amount and we've continued to see significant growth in demand on new unit orders for our industrial products based in in Lufkin.

Speaker 3: supply chain continues to be a challenge as you should not be surprised. Lead times have extended significantly, but they're more predictable. In the quarter, we saw significant inflationary cost increases from our suppliers, and those are reflected in our second quarter margins, and Jeff will cover that. The most significant increases came from castings, forgings, and machine parts. Anything related to steel prices continued to rise in the second quarter. The momentum of these increases continued throughout the quarter.

Our supply chain continues to be a challenge as you should not be surprised lead times have extended significantly but they are more predictable.

In the quarter, we saw significant significant inflationary cost increases from our suppliers and those are reflected in our second quarter margins and Jeff will cover that the most significant increases came from castings forgings and machine parts anything related to steel prices continued to rise in the second quarter. The momentum of these increases continued throughout the quarter.

<unk>.

Speaker 3: We had previously announced a 4.5% price increase on July 1, 2021. And this fall, we announced a 5.5 increase effective January 1. But we've also implemented a 4.9 surcharge on product shipping after July , after sorry, after January 1 to combat some of these inflationary increases that we've seen.

We had previously announced a 4.5% price increase on July 1st 2021 and this fall we announced the $5 five increase effective January 1st, but we've also implemented a 4.9 surcharge on product shipping after July after sorry. After January one to combat some of these inflationary increases that we've seen.

<unk>.

Speaker 3: In this quarter, we'll be evaluating every inflationary input and deciding on future increases to be implemented in the fourth quarter.

And this quarter, we will be evaluating every inflationary important deciding on future increases to be implemented implemented in the fourth quarter.

Speaker 3: One of the other things that we had to deal with as did everyone in the quarter was the COVID impact. Certainly had a demand impact from some of our customers, but it was also the most significant in supply chain. Many parts were delayed from suppliers due to labor shortages, and we had a noticeable impact in December due to illnesses and corn.

One of the other things that we had to deal with as did everyone. In the quarter was the Covid impact certainly had an end demand impact from some of our customers, but it was also the most significant and supply chain. Many parts were delayed from suppliers due to labor shortages and we had a noticeable impact in December due to illnesses and corn.

Teens thankfully the situation has improved in January we're hopeful that that trend continues throughout the balance of the calendar year and now I'll turn it over to Jeff to talk about the financials.

Speaker 3: Thankfully, this situation has improved in January , but hopeful that that trend continues throughout the balance of the calendar year. And I'll turn it over to Jeff to talk about the finance.

Speaker 4: Thanks John , good morning everyone. I'll briefly run through the fiscal 22nd quarter and year-to-date numbers. Sales of just under 60 million for the quarter were up 11.3 million or 23.3% from the prior year 2nd quarter and up 12.1 million or 25.4% from the previous quarter.

John Good morning, everyone I'll briefly run through the fiscal 'twenty, two second quarter and year to date numbers sales of just under $60 million for the quarter were up $11 3 million or 23, 3% from the prior year second quarter and up $12 1 million or 25, 4% from the previous quarter.

The sales increase reflects continued growth in demand across our markets as John mentioned with shipment performance limited somewhat by supply chain challenges across all all of our locations.

Speaker 4: The sales increased reflex continued growth and demand across the markets. As John mentioned with shipment performance, limited somewhat by supply chain challenges across all our location.

Speaker 4: As noted last quarter, we've experienced a significant increase in lead times from our suppliers, unpredictable vendor delivery performance, and difficulty in getting shipping.

As noted last quarter, we've experienced a significant increase in lead times from our suppliers unpredictable vendor delivery performance and difficulty in getting shipping containers.

Speaker 4: Despite supply chain challenges, strong demand and improved operational performance have resulted in a 46% increase in industrial product shipments, a 14.5% increase in marine and propulsion shipments, and a 13.4% increase in off highway transmission sales for the second quarter.

Despite supply chain challenges strong demand and improved operational performance have resulted in a 46% increase in industrial product shipments a 14, 5% increase in marine and propulsion shipments and a 13, 4% increase in off highway transmission sales for the second quarter.

Speaker 4: By region, sales in North America were up 30%, sales in Asia Pacific were up 17%, and sales in Europe up 5%.

By region sales in North America were up 30% sales in Asia Pacific were up 17% in sales into Europe up 5%.

Speaker 4: uh... well for currency exchange of the net negative million-dollar impact to sales of the fact

While foreign currency exchange was a net negative million dollar impact to sales in the second quarter.

Speaker 4: Through the first half, we are now 13.6% or 12.9 million ahead of the priori.

Through the first half we are now 13, 6% or $12 9 million ahead of the prior year.

Speaker 4: The second quarter margin percent was 22.5% compared to 18.3% in the prior year's second quarter. The improved margin in the current year is the result of increased revenue and a more profitable mix of product, partially offset by the impact of inflationary pressures on cost, as we have seen significant price increases across our supply base.

The second quarter margin percent was 22, 5% compared to 18, 3% in the prior year second quarter. The improved margin in the current year as a result of increased revenue and a more profitable mix of product, partially offset by the impact of the inflationary pressures on cost as we have seen significant price increases across our supply base.

Speaker 4: We have taken action as John detailed to implement price increases in surcharges to offset these inflationary pressures going forward. And we'll continue to monitor this area very closely to identify any additional required pricing acts.

We have taken actions as John detailed to implement price increases and surcharges to offset these inflationary pressures going forward.

And we'll continue to monitor this area very closely to identify any additional required pricing actions.

Speaker 4: Spending on marketing, engineering, and administrative costs for the fiscal 22 second quarter increased $1.9 million, or 14%, compared to fiscal 21. The increase in the quarter is primarily due to increased salaries and benefits, the return of a global bonus program, professional fees, marketing expenses, and other inflationary increases, essentially a return to a somewhat normalized level of spending in areas of activity that had been dormant for some time.

Spending on marketing engineering and administrative costs for the fiscal 'twenty, two second quarter increased $1 9 million or 14% compared to fiscal 'twenty. One the increase in the quarter is primarily due to increased salaries and benefits. The return of a global bonus program professional fees marketing expenses.

And other inflationary increases essentially a return to a somewhat normalized level of spending in areas of activity that had been dormant for some time.

Speaker 4: These increases partially offset by the favorable impact of a Dutch COVID relief subsidy recorded in the quarter.

These increases partially offset by the favorable impact of a Dutch COVID-19 relief subsidy recorded in the quarter.

Speaker 4: The percent of revenue for the second quarter ME&A expenses were 25.5% compared to 27.5% in the prior year's second quarter, and for the first half, ME&A expenses were 26.3% of revenue compared to 27.2% in the first half.

As a percent of revenue for the second quarter <unk> expenses were 25, 5% compared to 27, 5% in the prior year second quarter and for the first half I mean, M&A expenses were 26, 3% of revenue compared to 27, 2% in the first half of fiscal 'twenty one.

Speaker 4: We recorded restructuring charges of $1.2 million during the quarter, primarily related to the final negotiated settlement related to the Belgian restructuring program announced this past June . The total cost of this program is now approximately $3.3 million and is expected to drive annualized savings of approximately $1.6 million.

We recorded restructuring charges of $1 2 million during the quarter, primarily related to the final negotiated settlement related to the Belgian restructuring program announced this past June the total cost of this program is now approximately $3 3 million and is expected to drive annualized savings of approximately $1 6 million once complete.

Speaker 4: Including the restructuring charge, the operating loss for the quarter was $3 million compared to an operating loss of $4.6 million.

Including the restructuring charges the operating loss for the quarter was 3 million compared to an operating loss of $4 6 million in the prior year second quarter. The first half operating income of 200000, which includes a $2 $9 million gain on the sale of our Swiss facility recorded in the first quarter is nearly $8 million.

Speaker 4: the prior year's second quarter, the first half operating income of $200,000, which includes a $2.9 million gain on the sale of our Swiss facility recorded in the first quarter, is nearly $8 million improved from the fiscal 2021 first half.

For the fiscal 2021 first half.

Speaker 4: The effective tax rate for the first half of fiscal 22 was negative 131% compared to 30.3% in the prior year first half.

The effective tax rate for the first half of fiscal 'twenty, two was negative 131% compared to 33% in the prior year first half.

Speaker 4: The current year rate is quite unusual and was impacted by the domestic full valuation allowance which results in no tax benefits being recognized on current domestic losses.

The current year rate, it's quite unusual and was impacted by the domestic full valuation allowance, which resulted in no tax benefits being recognized on current domestic losses.

Speaker 4: The net loss for the second quarter of fiscal 22 is $3.8 million or $0.29 per diluted share compared to a net loss of $4.3 million or $0.33 per diluted share in the prior year first half.

The net loss for the second quarter of fiscal 'twenty, two of $3 8 million or 29 cents per diluted share compared to a net loss of $4 3 million or 33 cents per diluted share in the prior year first half.

Speaker 4: EBITDA of $200 million for the quarter was improved from a loss of $3.6 million in the prior year's second quarter, and for the first half EBITDA improved by $10.4 million from the prior year from an EBITDA loss of $5.2 million to positive EBITDA of $5.2 million.

EBITDA of 200 million for the quarter was improved from a loss of $3 6 million in the prior year second quarter and for the first half EBITDA improved by $10 4 million for the prior year from an EBITDA loss of $5 2 million to positive EBITDA of $5 2 million in the current year.

Speaker 4: Turning to the balance sheet, inventory was up $9 million in the first half, driven primarily by supply chain imbalance.

Turning to the balance sheet inventory was up $9 million in the first half driven primarily by supply chain imbalances. Despite a significant increase in inventory operating cash was only slightly negative at 1 million.

Speaker 4: Despite a significant increase in inventory, operating cash was only slightly negative at $1 million.

Speaker 4: Capital spending at 1.8 million for the half is well behind schedule impacted by the lead times on on machine

Capital spending at $1.8 million for the half as well behind schedule impacted by the lead times on on machine tools, given the slower start and capital spending we now anticipate that we will invest in the $7 million to $10 million range in fiscal 'twenty two.

Speaker 4: Given this slower start in capital spending, we now anticipate that we will invest in the $7 to $10 million range in fiscal 2020.

Speaker 3: And with that, I'll turn it back to John for some final comments. Thanks, Jeff. And now I'll just spend a quick moment on the Outlook.

And with that I'll turn it back to John for some final comments.

Thanks, Jeff and I'll, just spend a quick moment on the outlook.

Speaker 3: Obviously, our backlog and project activity has improved significantly both year over year and sequentially versus the first quarter and the end of the prior fiscal year. We are also anticipating improving conditions in North American oil and gas. Our challenge will be to match our internal and supply chain capacity to meet this improving demand. We have the inventory to meet the improving oil and gas trends in North American. We'll be building in advance when possible to get ahead of this wave.

Obviously, our backlog and project activity has improved significantly both year over year and sequentially versus the first quarter and the end of the prior fiscal year. We are also anticipating improving conditions in north American oil and gas our challenge will be to match, our internal and supply chain capacity to meet this improving demand we have the inventory.

To meet the improving oil and gas trends in North America, and we will we will be building in advance when possible to get ahead of this wave.

Speaker 3: Hopefully in one of the next calls we can highlight more hybrid and electrification applications that we've been working on with our customer base as they are testing it in their prototype process. The R&D and engineering activity has continued in earnest this fiscal year and we are extremely excited about the future developments in all of our markets with respect to hybridization and electrification.

Hopefully in one of the next calls we can highlight more hybrid and electrification applications that we've been working on with our customer base as they are testing it in their prototype process. The R&D and engineering activity has continued in earnest. This fiscal year and we are extremely excited about the future developments in all of our markets with respect to hybrid.

<unk> and electrification.

Speaker 1: That concludes our prepared remarks, and now Jeff and I will be happy to take your questions. Shamali, can you open up the line for questions now? Thanks. Sure. And at this time, we'll be conducting a question and answer session.

That concludes our prepared remarks, and now Jeff and I'll be happy to take your questions. Shambolic can you open up the line for questions now.

Sure and at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

Speaker 1: If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question key.

Speaker 1: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Speaker 1: And our first question comes from the line of Josh Han would be heard.

And our first question comes from the line of Josh Chan with Baird. Please proceed with your question.

Good morning, John and Jeff Thanks for taking my questions.

Thanks, Jeff.

Speaker 5: I guess first question on oil and gas, clearly the backdrop has improved, but I think this CapEx discipline is kind of the phrase for the industry this cycle. And so I guess I was wondering, John , if you could talk about sort of the conversations that you're having with the customers and how you think about the trajectory of when you might see orders within this calendar year.

Right I guess, the first question on the oil and gas clearly the backdrop has improved but I think.

This capex discipline is kind of the the phrase for the industry. This cycle and so I guess I was wondering John if you could talk about sort of the.

The conversations that you're having with the customers and how you'd think about the trajectory of when you might see orders are within this calendar year.

Speaker 3: Yeah, so the conversations and the quoting activity with the OEMs is going on. And certainly, before we've ever historically looked back at every cycle, before we've had new rig construction, there's been a rebuild. And why we had seen a trickle of spare parts orders last.

Yeah. So.

You know the conversations and the quoting activity with the Oems is going on and certainly before we've ever historically look back at every cycle before we've had new new rig construction theres been a rebuilt and why we why we had seen a trickle of spare parts orders last year.

Speaker 3: you know, I would say the first quarter of this fiscal year and in fiscal 21, that activity has clearly picked up in the last couple of months. So if I go by empirical evidence from prior cycles, that would mean that there would be new unit orders and building in the next three to six months.

I would say that the first quarter of this fiscal year and in fiscal 'twenty one.

That activity has clearly picked up in the last couple of months. So if I go by if I go by empirical evidence from prior cycles that would mean that there would be new unit.

Orders and building in the next three to six months and I think that we should you know what I would expect to see new new unit orders this fiscal year for us whether or not they come soon enough that we deliver them or the units are going to to Asia. This this fiscal year, but certainly I see well, we will see orders in <unk>.

Speaker 3: And I think that we should, you know, I would expect to see new unit orders this fiscal year for us. Whether or not they come soon enough that we deliver them or the units are going to Asia this fiscal year, but certainly I see what we will see orders improving.

Proving.

Within a quarter or two.

Speaker 3: Okay, that's encouraging. And I think you mentioned in the press release that you have some completed products, right? So I guess, would you be able to serve some demand immediately? Or how does that, how does that work? Yeah, we would we would be able to, you know, for the first

Okay.

That's encouraging and then I think you mentioned in the press release that you have some completed products right. So I guess would you be able to serve some demand immediately or how does that how does that work.

Yeah, we would we would be able to you know for the first.

First few dozen Josh we would be able to react very quickly.

Speaker 3: First few dozen, Josh, we would be able to react very quickly. Because we have somewhat of a very balanced inventory. Once we get out, you know, the lead times, that they won't go to 12 months, but there'll be a few months lead time. Once we get past the initial amount.

Because we have somewhat of a very balanced inventory once we get out you know the lead times that they won't go to 12 months, but there'll be a few months lead time once we get past the initial amount.

Speaker 3: But it's, you know, that as orders are improving in China, that that that ability to react quickly in North America is, is, you know, it won't be a month or weeks. It'll be, it'll be a couple months on lead.

But it's you know that as orders are improving in China that that that ability to react quickly in North America. As you know it wont be a months or weeks it'll be it'll be a couple of months on lead times.

Speaker 3: And that really Josh is driven by our internal capacity here on assembly and test And some parts we need from suppliers, but we are on top of it

Sure.

Josh is driven by our internal our internal capacity here on assembly and test and in some parts, we need from suppliers, but we're on top of it.

Speaker 5: Absolutely, that's encouraging. I guess on the price increase and the search hard side, historically we haven't talked too much about it. So, you just talk about how that works. Is it broadly across all your portfolio that's it hit immediately? And then maybe if you could fold in how much impact do you think that can have on your growth market improvement in the second half that you can at a little bit too?

Yes.

Totally yeah, that's encouraging.

I guess on the price increase and the surcharge side historically, we haven't talked too much about it. So could you just talk about how that works do you know there isn't broadly across all your portfolio. That's a hit immediately and then maybe if you could fold in.

You know how how much impact do you think that can have on on your gross margin improvement in the second half that you kind of alluded to it.

So typically you know historically for its for anyone I would say 60 or under its an annual price increase you know we're no different than anyone we have one price increase per year you'd have to go back to the early eighties to find something similar where you are raising prices multiple times per.

Speaker 3: So typically, historically, for anyone, I would say 60 or under, it's an annual price increase. We're no different than anyone. We have one price increase per year. You'd have to go back to the early 80s to find something similar where you are raising prices multiple times per year.

Year, typically we like to do it and give everyone advance notice that you know are two months notice that our our price is going to go up July one so we would announce that by may 1st.

Speaker 3: Typically we like to do it and give everyone advanced notice that you know our you know a two month

Speaker 3: notice that our our price is gonna go up July one so we would announce that by May 1st.

Speaker 3: We did that this year for a price increase in July . I think like many people we thought that that, what we announced.

We did that this year for a price increase in July .

Like many people, we thought that what we announced.

Speaker 3: two months ahead of time for July would be enough, but it became obvious in August , September that

Two months ahead of time for July would be enough.

But it became obvious in August September that.

Speaker 3: Inflationary pressures had increased past that, so we had announced in

Inflationary pressures had increased pass that so we had.

Announced in.

Speaker 3: I think it was October time frame that we'd have another price increase in January . But really in that November time frame and into early December , the increases, particularly anything related, you know, a lot of our obviously is steel, whether it's forgings, castings, parts that we outsource, you know, steel prices went up dramatically. So in that October .

I think it was October time frame that we'd have another price increase in January .

But really in that November time frame and into early December the increases, particularly anything related.

A lot of obviously of steel whether its forgings castings.

Parts of it we outsource you know steel prices went up dramatically so in that October .

Speaker 3: Jan, October , November timeframe, we were getting, you know, more increases from parts, suppliers that are providing us things that are just 100 percent metal that are high double digit. And that clearly had, and it was effective on time of shipment. So it was basically, we're getting it with a surcharge or a price increase. And you saw the impact of the timing of that in our second quarter. So our surcharge was effective on shipments as of...

October and November time frame, we were getting more increases from parts suppliers that are providing us things that are just 100% metal.

That are high double digit and that clearly had and it was effective on time of shipments. So it was basically we're getting it with a surcharge or a price increase and you saw the impact of the timing of that in our second quarter. So our surcharge was effective on shipments as of January one.

Speaker 3: January one and I know that that is a bit of a shock Because that's coming on top of another price increase, but The inflationary pressure starting from steel mills the people who are making bearings clutch plates supplying us forging or castings You know they're getting steel increases they have inflationary pressures. They're passing them on to us We have to pass them on honestly Josh what we've done

And I know that that is it's a bit of a shock because that's coming on top of another price increase but.

<unk> pressure starting from steel mills to people, who are making bearings clutch plates supplying as forgings or castings.

Theyre getting steel increases they have inflationary pressures, they're passing them on to US we have to pass them on honestly, Josh what we've done.

Speaker 3: What we've implemented is basically to get us to, you know, that gross margin, I would say neutral. So our desire is that what we have passed on to our customers gets us back to where we were on those gross margins prior to the, I would say rapid inflation that we saw in the middle to the late 2021.

What we've implemented is basically to get us to that gross margin I would say neutral. So our desire is that what we have passed onto our customers.

Gets us back to where we were on those those gross margins prior to being.

I would say rapid inflation that we saw in the middle to late 2021.

Speaker 3: It's imperfect and that's why we're evaluating it. And I will never say never that we won't do something additionally in the fourth quarter sometime in the beginning of the fiscal year.

It's it's imperfect and that's that's why we're we're evaluating it and I will never say never that we won't do something Additionally, in the fourth quarter sometime in the beginning of of the fiscal year.

Beginning of next fiscal year, so they're definitely Josh they'll definitely be one for the beginning of fiscal 2023. The question is will it come sooner because it's one of these.

Speaker 3: beginning of next fiscal year. So they're definitely, Josh, there'll definitely be one for the beginning of fiscal 2023. The question is, will it come sooner? Because it's one of these

Speaker 3: It was one of these things that you, you know, for the past, whatever, however many years you, you would evaluate the cost increases coming in over your fiscal year and you'd implement depending, historically, in North America, it would be July 1, or October 1, historically in Europe , it would be January 1. And you'd have one price increase in a year to catch the inflation.

It was one of these things that you you know for the past whatever however, many years you would evaluate the cost increases coming in over your fiscal year and you'd implement dependent you historically in North America would be July one or October one historically in Europe . It would be January one and you'd have one one price increase at a year.

To get to catch the inflation that.

Speaker 3: Right now, that's out the window. We're looking at it quarterly now, and we'll have to make adjustments because steel mills and our suppliers are keeping their margins in check by passing on increases to us. We need to make sure that those increases are shared everywhere, and it's just not us taking the punishments.

Right now that's out the window, we're looking at it quarterly now and we'll have to make adjustments because steel steel mills and our suppliers are keeping their margins in check by passing on increases to us we need to make sure that those increases are shared.

Everywhere and it's just not us taking the the punishment.

Right right that makes sense, so that so the 4.5% surcharge does that.

Speaker 5: Right, right, that makes sense. So the four and a half percent storage charge, does that...

Speaker 4: Mathematica get you back to the sort of the mid to high, maybe 20% growth margin in the back half is that is a reasonable guess? Yeah, that's what we're looking, Josh, right? Is that we should be north of 25 the rest of the year. Obviously, you know, the inflationary pressures will continue. So John said we'll need to continue to react to that, but that's what we're looking at is to get back to the

Mathematically get you back to the sort of the mid to high maybe 20% gross margin in the back half is that is that a reasonable guess.

Yeah, I mean, that's what we're looking Josh right is that we should be north of 25, the rest of the year. Obviously you know the inflationary pressures will continue so like John said, we will need to continue to react to that but that's what we're looking at is to get back to the.

Speaker 4: uh... uh... you know certainly north of twenty five in the twenty six twenty three

The certainly north of 25, and the 26 28 range for the rest of the year, Yeah, and Josh It's it's a.

Speaker 3: Yeah, and Josh, it's, you know, some of the increases coming in, it's not, what we've implemented is, I would say, somewhat broad-based and, you know, surcharges on everything. I think we will be looking at specific product lines because the increases, it hasn't been on average. You know, some product lines have been hit harder than others. So we will be addressing that, too, in the next couple months.

You know some of the increases coming in it's not a what we've implemented is I would say somewhat broad based and surcharges on everything I think we will be we will be looking at specific product lines because the increases if it hasnt been on average you know some.

Some product lines have been hit harder than others. So we will be addressing that too in the next couple of months.

Right that's great. Thanks for calling in thanks for that guys.

Speaker 6: Thanks, Josh.

Thanks, Josh.

Speaker 1: And as a reminder, if anyone has any questions, you may press star 1 to join the question

And as a reminder, if anyone has any questions you May press star one to join the question queue. Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.

Speaker 1: Our next question comes from the line of Noah Kay with Oppenheimer, please proceed with

Speaker 5: Thanks for taking the questions. So just following up on price-cost commentary, you look at the six-month backlog.

Thanks for taking the questions. So just following up on price cost commentary.

When you look at the six month backlog.

Speaker 7: What is the price cost for that? Is that a headwind to margins? Is it, you know, about neutral? And if you assume that sort of pricing initiatives you put in place are generally retained throughout the year, when does price cost turn positive?

What is the price cost.

That is that a headwind to margins is it about neutral.

And if you do assume that sort of pricing initiatives you put in place are generally retained throughout the year as windows price cost and positive.

Speaker 4: Yeah, well, I think one thing to remember is that, so what's in the backlog or what's the reported backlog doesn't reflect the price increase. But when those products are shipped...

Yeah, well I think one thing to remember is that so what's in the backlog or whats the reported backlog doesn't reflect the price increase but when those products are shipped.

Speaker 4: price increase will be impacting that shipment. So it, you know, technically that backlog is going to be shipped at a higher price as of, you know, the 1231 backlog will be shipped at a higher price. So, you know, I think generally the backlog that we have is, is, is, would be a positive impact to current margins. You know, it'll, it'll be a...

Price increase will be impacting that shipments. So it you know.

Technically that backlog is going to be shipped at a higher price as of the 12 31 backlog will be shipped at a higher price. So you know I think generally the backlog that we have is is.

As would be a positive impact to current margins.

It'll be it's trending up.

Once that starts shipping right.

Right and I said look I mean steel prices are elevated year over year. It started to back off a little bit when when would you start to see potentially just based off of what we're watching with commodity indices. When would you start to see it.

Speaker 7: Right. And so look, I mean, steel prices are elevated year over year. They've started to back off a little bit. When would you start to see potentially, just based off of what we're watching with commodity indices, when would you start to see

Speaker 7: potentially a little bit of relief or at least stability on some of your key input costs.

Essentially a little bit of a relief or at least stability in some of your key input costs I mean, maybe maybe just given all the supply chain constraints suppliers.

Speaker 7: I mean, maybe, you know, just given other supply chain constraints.

Speaker 7: Suppliers may not be cutting prices, but certainly.

Suppliers may not be cutting prices, but certainly.

Speaker 7: you know, if the raw input prices are starting to back off a little bit, what would that mean for kind of your cost profile? Yeah, no.

If the raw input prices are starting to back off a little bit what would that are high profile.

Yeah, No I think we've.

And I'm crossing my fingers and knocking on wood I'm hopeful that the increases have stabilized and that were flat and I agree with you what I've been reading is that you know hopefully that steel prices will start to steal and fuel may start to back off a little bit and that we'll see some but I still.

Speaker 3: I'm crossing my fingers and knocking on wood. I'm hopeful that the increases have stabilized and that we're flat. And I agree with you. What I've been reading is that, you know, hopefully that steel prices will start to – steel and fuel may start to back off a little bit and that we'll see some. But I still – I haven't seen evidence.

I haven't seen evidence of any price decreases or I should say surcharge easing for us.

Speaker 3: of any price decreases or I should say surcharge easing for us.

Speaker 3: Haven't seen that yet, but and that's why a surcharge for us. It's the first time in memory

Haven't seen that yet, but and that's why a surcharge for us its the first time in memory that we've done a surcharge, we typically just do pricing but.

Speaker 3: done a surcharge. We typically just do pricing, but I think we recognize that.

I think we recognize that some of this some of these inflationary costs, maybe easing in calendar 2022. So that's why we elected to go with a surcharge if I can get it might turn back but you know so.

Speaker 3: Some of these inflationary costs may be easing in calendar 2022, so that's why we elected to go with the surcharge. We're thinking that it might turn back, but, you know, so we have that variable that we can ratchet back as we start to see those inflationary prices ease on us. But we've seen it stabilize, Noah. We haven't seen it improve as far as actual dollar costs coming down.

We we have that variable that we can ratchet back as we start to see those inflationary prices ease on us, but we've seen it stabilize though we haven't seen it we haven't seen it improve as far as actual dollar costs coming down.

Great helpful. And then I guess, just maybe a little bit of historical context around you know taxes spend in the oil and gas market in North America, particularly would be would be maybe helpful. For folks here you know you you've seen over the cycle, obviously, a varying mix of newbuild versus.

Speaker 7: Great. Helpful. And then, I guess, Chad, maybe a little bit of historical context around, you know, types of spend in the oil and gas market in North America, particularly would be maybe helpful for folks here. You know, you've seen over the cycles, obviously, a varying mix of new bills versus, you know, repair versus replace in the field.

You know repair versus replace in the field.

Speaker 7: Obviously, we got to some points over the past cycle where there was almost no new construction related activity. How do you see the mix of spend trending as you're looking at these improving activity levels, and how does that compare to past periods?

You know obviously, we got to some points over this past cycle, where there was almost no new construction.

Related activity.

I guess, just how how do you see kind of the mix of spend.

You know trending as you're as you're looking at to.

Improving activity levels, and how does that compare to last period.

Well.

Speaker 3: Well, I would say anecdotally, we have been told by several customers in different regions that

I would say anecdotally we.

We have been told by several customers in different regions that.

Speaker 3: They like to rebuild, let's just say in that 25 to 30 percent.

They like to rebuilds, let's just say in that 25 to 30.

Percents range of of of their fleet. So if they're buying let's say they buy if they're gonna be 100 rigs being built they want a repair 25 to 30.

Speaker 3: of their fleet. So if they're buying, let's say they're buying, if there's going to be 100 rigs being built, they want to repair 25 to 30.

Speaker 3: That's, I think, in an ideal situation we've heard that. I don't know if we've ever seen that because we see the rebuild activity start and then a wave of new rig construction because it's faster, they're spending time and dollars on something that's brand new.

That that's I think in an ideal situation, we've heard that I don't know if we've ever seen that because we see the rebuild activity start and then a wave of new rig construction because.

It's faster, it's they're spending time and dollars on something that's brand new.

Speaker 3: So we'll see this time. I mean, whatever the percentage is, it's very good to see.

So we will see this type of I mean, if it's whatever the percentage is a it's very good to see.

Speaker 3: the rapid increase in aftermarket parts, that means that they are bringing rigs back online that were sitting idle, and we'll see. Usually what happens is that demand of getting sidelined rigs back online is not enough capacity for what's needed. In my sense.

The rapid increase in aftermarket parts that means that they are bringing rigs back online that were sitting idle.

And we will see you usually what happens is they that demand of getting sidelined rigs back online is not enough capacity for what's needed in my sense. My sense is that that's going to happen again, what is what's the amplifier from our aftermarket parts order to what our new <unk>.

Speaker 3: My sense is that that's going to happen again. What is, what's the amplifier from our aftermarket parts order to what our new rig orders

Rig orders.

I don't want to predict it but but it's certainly when you're coming off of you know several quarters of no new units going into North America. You know that this rebuild activity is signaling that they're going to be ordering new units soon for for new rig construction.

Speaker 8: I don't want to predict it, but it's certainly when you're coming off of, you know, several quarters of no new units going into North America, you know that this rebuild activity is signaling that they're going to be ordering new units soon for new rig construction. Right. Helpful. Thanks so much.

Right.

That's helpful. Thanks, so much.

Thanks Noah.

Yeah.

And our next question comes from the line of Robert <unk>, who is a private investor. Please proceed with your question.

Good morning.

Speaker 9: If you can just elaborate on that last comment, what is your content for new rigs just in general ballpark?

If you could just elaborate on that last comment what is your content per new rig just in general ballpark.

Speaker 3: So if a rig is a million to a million two, and there's probably, I'm going from a year ago, so we're gonna have inflationary pressure in there, a pressure pumping transmission is gonna be 175 to 200,000 of that. So not quite 20%, but you know, the big components are the engine, the pump, the engine, the cooling system, the pump, and then the transmission.

So if if a rig is a million to a million too and there's probably and I'm going from a year ago. So we're gonna have inflationary pressure in there a pressure pumping transmission is gonna be 175 to 200000 of that so not quite 20%, but you know.

It's the big components or the engine the pump the engine the cooling system to pump and then the transmission.

Okay can you talk also generally are about the transition in product lines serving various.

Speaker 9: Can you talk also generally about the transition in your product line serving various end markets of the transition from diesel to electric and what the opportunity is there or is it cannibalizing some of the diesel products to a greater extent?

And markets of the transition from diesel to electric and.

And what the opportunity is there or is it cannibalizing some of the diesel products and to a greater extent.

Speaker 3: Um, so, you know, we're, we're exclusively off highway. Um, so it's, it's.

So you know, we're we're exclusively off highway.

So it's it's.

The the challenge for us in the hybrid and electrification is just the number of projects that you have to do to satisfy that so we're not like an automotive manufacturer, where you can design, one electric powertrain or hybrid powertrain for a number of different vehicles. So what.

What we do for one OEM on a crane the.

Speaker 3: The solution may be different for what we do for a different OEM on a crane, and those will be 10 to 12 per year. And then what we do for one boat manufacturer is going to be different for A, B, and C. So there's a lot more engineering and effort required to get it.

The solution may be different for what we do for a different OEM on a crane and those will be 10 10 to 12 per year and then what we do for one boat manufacturers going be different for a b and C. So there's a lot more engineering and effort required to get it.

Speaker 3: So, but the opportunity is, Robert, the opportunity is huge because our markets have been doing.

So, but the opportunity is Robert there the opportunity is huge because our markets have been doing.

Speaker 3: same thing relatively the same way for for decades. A diesel engine, a gearbox.

The same thing relatively the same way for for decades, a diesel engine.

Gearbox, the gearbox could be Emmanuel gearbox with the clutch it could be an automatic transmission with a torque converter.

But by and large it's been a diesel engine or transmission clutch torque converter and then the driveline.

And then the engine has been the primary focus of whatever application. It is what's different now is.

And we'll see where the market takes us but now it's you know the diesel engine for hybrid is still a significant part of it being able to generate the power and the electricity.

But the other components are equally as important so the gearbox has to take multiple inputs.

Whether it's from an electric motor a battery pack for an engine. The control system is more complicated to manage all of that.

So it's exciting it's it's real it's redesigning the commercial off highway markets and marine markets.

But it's challenging because there's only so many motor suppliers, there's only so many battery suppliers and.

Automotive is just driving.

They're there, they're driving the demand and taking that up a lot. So.

It's developing supply chains.

To take care of the off highway markets developing the control systems.

But it's it's it's it's a big opportunity for companies like twin disc or in the power transmission business because.

Effectively you are rethinking every type of application.

And if we develop the right partnerships and the right system solution. Our content would you know for a crane that has just diesel driven by a diesel engine and transmission and one of our products the potential for our content goes up is if we go into hybrid and electrification some of the.

As we face our you know what are the markets ready to handle that extra cost because one of the trade you have lower emission with hybrid and electrification, but the cost of providing that is is higher than that of traditional application. So there's a big demand out there and it's just.

Trying to shake that through the SR and figure out what markets will take off first and when and how it's all going to happen, but it's a huge opportunity for twin disc.

Understood with your broad customer base, though do they pay you for the.

Engineering for products that may be custom to their needs yeah. Robert it's it's it's different in each market a lot of a lot of it right now and that's a model that you're trying to perfect is how how you get paid for that.

Some of the first.

I would say we've been all over the map, but we've been paid for engineering a lot of these initial applications there their joint development projects. So we're learning as the OEM is learning.

And so you know whether it depends on the application if there's significant volume on the back side. You know you just amortize those engineering costs over you know what what what you ship, but one of US one of the things. That's also important as you know picking the right customer you got it.

Pick the winners.

So you got to pick no our customers know our markets and know it would be able to analyze what they're trying to do and and work with the customers and the Oems and their products that you know, we're gonna be a market success.

So that's also one of the challenges that that everyone's facing right. Now is is the timing of when certain markets will accept the increased cost of these hybrid and electric systems.

Did you did you mentioned what level of cash flow you expect this year and next.

You know, where we've been trying to stay.

Stay free cash flow positive.

The quarter. The second quarter was it was a little short of that year to date, we're a little short of that so we expect to be cash flow positive.

Free cash flow positive in the second half despite what should be a ramp up of of of capital spending as some of the things that are on order to start to arrive. So you know in the single digit millions free cash flow positive.

In the next few quarters.

Is it.

I was going to say everybody is working capital and a great like.

Greatest pressure on on how much is free or not in the next.

12 18 months.

A lot has to do with that number could get significantly better depending on.

The level of a north American or 8500 demand for fracking rigs in and transmissions. We we can liquidate and turned a lot of inventory into cash.

If that demand ramps up right, where we have demand.

The demand we have would support what I I just projected but yeah inventory is really the one lever that can make that number better.

And should you begin to approach a couple of turns of inventory and annually again.

Yes, yes, certainly as we exit this year I think we should be there.

And do you have a.

Variable outlook related to your U S versus non U S business.

You know it they're they're they're they're such different businesses, it's hard to.

It's hard to give a quick answer to that I mean, they're all they're very different markets. Obviously, the you know that.

The Asian oil and gas market has been stable and consistent through the last two years, probably our most stable market Australia is.

The Australia in pleasure craft market has been growing I think it was up 40% over the prior year. So it's it's a little bit.

<unk>.

A little bit all over the map I think but everything is going in the right direction just at varying degrees I think the North American Marine is probably the one that isn't hitting where we think it should be yet I think because of the buildup of inventory.

At our distribution locations, but I think we expect that to start catching up as well I don't know if that answered your question okay.

Yeah, that's great outside of oil and gas kind of what what kind of end markets do you feel that Stan who are most visible about and as you kind of look out in the intermediate term.

Okay.

I would say you know the most positive just our global Marine markets are orders on our European operations improved significantly both in the first quarter in the second quarter industrial with the operation in Lufkin has seen a tremendous.

Tremendous increase in new unit orders and we have a team down there focused on that market. So feeling you know Robert feeling good about all our markets. The one that and I mentioned it at the beginning is just offshore offshore oil and gas has been very very slow.

But I'm, hoping to see some activity and then there's been an announcement of some wind farm activity.

Down in the Gulf. So you know, it's I'm hopeful that there'll be <unk>.

Activity there for vessels going out so you know I just.

Every day it Jeff said it everything is pointing in the right direction. It's just some are moving faster than others, but I would say most confident in the recovery of our.

Marine market.

Just beyond the transmissions that are produced here in North America, our industrial business is.

We're seeing strong demand growth and I do think we're gonna there'll be another wave of North American oil and gas sometime this calendar year, so feeling good about that.

Okay, just last two questions.

Should we expecting growth in the next year or two DB principally are suddenly organic.

Okay.

I would certainly in the next.

I would say in this fiscal this fiscal year and the next few quarters the growth will be almost exclusively organic and by organic I could also things that we're buying from partners to include in our hybrid and electrification systems. So beyond just an organic.

We don't manufactured inside but it's part of the system that were buying and reselling. Thank.

Thank you might have to go out beyond that window, a little bit to see something more on the M&A activity.

Okay and lastly, just on the labor front are there constraints to your growth either at the manufacturing or at the Se admin and engineering level.

Say, it's definitely a concern as being able to grow the workforce here in Racine, that's been in southeastern Wisconsin, finding sometimes we feel like a duck swimming upstream there's a lot of activity on the feet.

Underneath the water just replacing retirements here, but we also have lufkin.

Yeah. It's.

The challenge than the ones that are just one step removed is I can't overestimate or just it's hard to express the.

The supply chain issues with with quarantines and people being out sick everything.

Finding out last minute I think that's getting better Robert.

But if there's one.

Yeah. The one that we have to work on the hardest is making sure that we have the people in the shop to make it all happen and get product out the door.

And that that will be in it and it's really being sure that we have everyone available.

100% of the time once and I think we've I think we've crested there and that's getting better at being able to add workforce, both here and in lufkin doesn't seem to be as much of an issue at our at our global operations its been obvious.

Honestly more of an impact here in North America than it has been in and other parts of the world.

Okay, and I guess I wasn't honest I got one more question.

You guys have been quite cyclical over the years, but can your assets and staff can you largely support.

Sales and revenue levels that you've had any time in the last 10 15 years without meaningful capital spend.

It will take.

They'll say not bad.

If we can get the machine tools that we've planned for this year and next year I think our capital spend can do it we were spending more time on developing supply chain strategies on partners outside of our four walls to supply key components.

But to support growth back to our prior level and that it is a very good question.

We will need more internal capacity on assembly and test.

And you know and primarily in North America. So.

So we'll need to find those resources either in Racine or in Lufkin to.

To get back so yeah, we need to increase both capital and we need to increase head count within our four walls are two things that we have to do.

I appreciate your Frank responses. Thank you very much.

Thanks Robert.

And we have reached the end of the question and answer session I'll now turn the call back over to CEO , John <unk> for closing remarks.

Thank you sure Molly and thank you everyone for joining our conference call today, we truly appreciate your continuing interest in twin disc and hope that we've answered all of your questions. If not please feel free to call either Jeff or myself and we'll get we'll get your question answered as quickly as possible.

We look forward to speaking with you again following the close of our fiscal 2022 third quarter Shomali I'll turn the call back to you.

Thank you John This concludes today's conference and you may disconnect your lines at this time.

You for your participation.

[music].

Okay.

[music].

Portfolio insurance for them.

They are at the moment.

[music].

Looks like you've been doing research on.

Okay.