Q2 2023 Twin Disc Inc Earnings Call
Speaker 2: Greetings and welcome to TwinDisk Inc. fiscal second quarter 2023 earnings conference call. At this time, all participants are on a listen only mode. A question and answer session will follow the formal presentation.
Speaker 3: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
Speaker 4: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Berger. Thank you. You may begin.
Speaker 5: Thank you, Doug. On behalf of the management of TwinDisk, we are 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 2023 second quarter and first half financial results in business outlook.
Speaker 6: Before introducing management, I would like to remind everyone that certain statements made during this conference call, especially those statements,
Speaker 7: Introductions, hopes, beliefs, expectations, or predictions for the future are forward-looking.
Speaker 8: It is important to remember that the company's actual results could differ materially from those projected in such forward-looking statements.
Speaker 9: Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are contained in the company's annual report on Form 10-K , copies of which may be obtained by contacting either the company or the SEC. By now you should have received the news release, which was issued this morning, before the market opened. Rigid sweep
Speaker 10: If you have not received the copy, please call our office at 262-842-7200.
Speaker 11: Just 3-8, 4,000 and we will send a release to you. Posting the call today are John Baton, who in this chief executive officer, and Jeff Knudson, the company's vice president of the financial officer, pressure and secretary. At this time, I will turn the call over to John Baton. John ?
Speaker 12: Thank you Stan and good morning everyone. Welcome to our fiscal 2023 second quarter conference call. As usual, we will begin with a short summary statement and then we'll be happy to take your questions.
Speaker 13: Given the inflationary pressures and supply constraints that we saw in the first quarter, we think our teams around the world did a very good job making improvement in almost every area to deliver a better year over year in sequential quarter. On the top line and holding a constant currency, sales improved almost 15%.
Speaker 14: Jeff will cover the details, but most of that growth came in North America with a very healthy improvement in oil and gas rebuild activity.
Speaker 15: Global marine and industrial shipments also improved more than at what stated in some percentages once you take the currency into account. Half of each business is produced in euros.
Speaker 16: The late summer and fall months of 2022 delivered another round of cost increases that we had to pass on with new pricing in January . That should further improve gross margins as we finish Fiscal 23. Activity in all of our markets was robust. VES backlog increased nicely and they had very strong shipments in the quarter.
Speaker 17: Additionally, many of their lower margin projects have now shipped. There was a noticeable improvement quarter over quarter in their results.
Speaker 18: Shipments in Asia declined slightly as demand slowed during some COVID lockdowns, and we also had units waiting for control harnesses and displays. This should improve in the second half of the year. Much of our inventory increase in the quarter can be attributed to this pause in shipments, but we expect this to improve in the second half. Again, other causes and increase inventory remain late deliveries on key components.
Speaker 19: 3,000 horsepower enviro-frac electric frac rig with our 7,600 transmission on it. I suspect that you will see this deployed in the field later this calendar year.
Speaker 20: Other new hybrid and electric applications that have come to the market include
Speaker 21: The research vessel resilience to be built by Snow and Company in Seattle for the Pacific Northwest National Laboratory.
Speaker 22: The RV Resilience is a 50-foot catamaran that is both diesel and electric motor driven through our master clutches and marine transmissions. This should be in the water by the end of the fiscal year. I encourage everyone to visit our website for the latest updates on all of our hybrid and electric applications.
Speaker 23: In the quarter, you notice that we recorded the gain on the sale of our Belgian facility.
Speaker 24: Through years of supply chain consolidation and our decision to focus mainly on gear production and assembly and test, we are looking for a new, smaller, and more efficient building for this facility. This process is well underway. Similarly, we are looking to do this with our Italian operations. We look to be more efficient, both with our organizational and footprint structures.
Speaker 25: And now I'll turn it over to Jeff to talk about the financials.
Speaker 26: Thanks John , good morning everyone. I'll briefly run through the fiscal 23 second quarter and your-to-date results.
Speaker 27: Sales of $63.4 million for the quarter up $3.5 million or 5.8% from the prior year second quarter.
Speaker 28: The sales increase reflects improved demand in the company's global oil and gas, industrial and marine markets.
Speaker 29: Shipments in the quarter were somewhat limited by the ongoing supply chain constraints mentioned in previous quarters, with electric components remaining the most challenging area to find reliable and predictable supply.
Speaker 30: With help from improving North American demand for pressure pumping equipment compared to the prior year second quarter, our transmission product sales improved by 10%.
Speaker 31: Sales and industrial products showed a slight decline of 2.5% while marine and propulsion products sales grew by 2.7%.
Speaker 32: By region, sales into North America were up 32% while sales into Europe were up 3.7%.
sales in the Asia-Pacific market declined by 8.3 percent due primarily to a temporary pause in the shipment of certain oil and gas related products into China.
Foreign currency exchange was a net negative 5 million impact to sales in the quarter and 9.9 million for the first half. On a constant currency basis, second quarter sales increased 14.2% and 20% for the first half.
The second quarter margin percent of 26.9% improves compared to the 22.5% in the prior year second quarter. This improvement in the current year is a function of improved volume, a favorable product mix.
operating efficiencies, and a reduced inflationary impact thanks to proactive pricing actions.
For the first half, gross margin is now 25.4% compared to 25.0 for the fiscal 22 first half.
Spending on marketing, engineering and administrative costs for the fiscal 23 second quarter increased 700,000 or 4.7% compared to fiscal 22. The increase in the quarter is primarily due to the impact of prior year COVID subsidies in the Netherlands totaling 700,000. The increase in the quarter is mainly due to the impact of prior year COVID subsidies in the Netherlands totaling 700,000. The increase in the quarter is primarily due to the impact of prior year COVID subsidies
inflationary impact and a return to more normal spending activity in areas such as marketing, travel, salaries and professional fees which totaled $1.5 million. These increases were partially offset by a foreign currency translation impact of $800,000.
As a percent of revenue for the second quarter, M&A expenses were 25.2% compared to 25.5% in the prior year's second quarter. For the first half, M&A expenses were 26% of revenue compared to 26.3% in the first half of fiscal 22.
During the second fiscal quarter we recorded a $4.2 million non-operaing gain related to the sale and lease back of our budget thousands of facility as John noted.
Similarly, during the prior year, first quarter, we recorded a $2.9 million non-operating game related to the sale release back of our Swiss facility.
The effective tax rate for the first half of fiscal 23 was 175.9% compared to a negative 131.1% in the prior year first half.
The wide disparity in rates is a function of the full domestic valuation allowance along with the mix of foreign earnings by jurisdiction.
Net profit for the second quarter of fiscal 23 was 1.1 million or 8 cents per deluded share compared to a net loss of 3.8 million or 29 cents per deluded share for the fiscal 22 second quarter and for the first half of fiscal 23 we had a net loss of 900,000 or 7 cents per deluded share compared to a net loss of 1.9 million.
or 14 cents per diluted share in the prior year first half.
EBITDA of $6.4 million for the quarter was greatly improved from a slight loss in the prior year, second quarter, and for the year to date, EBITDA of $6.3 million is 22% improved from the prior year first half of $5.2 million.
Turning to the balance sheet, inventory was up 9.7 million for the year impacted by a currency-driven decline of 1.5 million.
The significant increase, excluding the translation impact, is a result of the temporary delay in shipment of certain oil and gas products into China, continued supply chain imbalances, customer delayed shipments, and the timing of shipments through our distribution operations.
We anticipate significant improvement in our second half as we continue to focus on and refine inventory planning and sourcing strategies that will drive progress.
With the increase in inventory offsetting improved operating results, operating cash was slightly positive for the first half. Capital spending of $4.7 million for the first half was focused on the modernization of our machine tools, and we expect a similar quarterly run rate in capital spending for the remainder of the year totaling $4.7 million.
in the $9 to $11 million dollar range for the full year.
the $9 to $11 million range for the full year. Now I'll turn it back to John for some final comments.
Thanks Jeff, and I'll take a quick moment on our outlook. Looking at the backlog and market conditions heading into the second half of the year, we think that we can have a very strong finish to fiscal 23. As we mentioned, we had to implement another round of pricing to offset the additional increases that we saw in Q1 and Q2.
Many of the bottlenecks that we have been dealing with are starting to improve. The most significant improvement has come in our electronic control supply, which covers all of our marine, arph, and frack transmissions. Additionally, we see demand for oil and gas spare parts continuing throughout 2023.
That concludes our prepared remarks and now Jeff and I will be happy to take your questions. Doug, could you please open the line for questions?
Thank you. Ladies and gentlemen, at this time we will begin to question an answer session. If you would like to ask a question you may press star one on your telephone keypad. A confirmation tunnel indicate your line is in the question queue.
You may press star 2 if you would 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 key.
One moment while we poll for questions.
Once again, ladies and gentlemen, it is star one to ask a question.
There are no questions in the queue at this time. I'd like to hand the call back to management.
Thank you, Doug, and thank you for joining our conference call today. We appreciate your continuing interest in TwinDisk and hope that if you do have questions, that you will call either Jeff or myself and we will try to answer them as quickly as possible.
We look forward to speaking to you again following the close of our fiscal 2023 third quarter. Doug now turn the call back to you
Thank you. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.