Q4 2024 Twin Disc Inc Earnings Call
Jeff Knutson: Welcome to the Twin Disks, Inc. fiscal fourth quarter and full year 2024 conference call. We will begin with introductory remarks from Jeff Knutson, Twin Disks CFO. Please go ahead.
John Batten: Good morning and thank you for joining us today to discuss our fiscal 2024 fourth quarter and full year results. On the call with me today is John Batten, TwinDisc CEO.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Copies of which may be obtained by contacting either the company or the SEC. Any forward-looking statements that are made during this call are based on assumptions as of today, and the company undertakes no obligation to publicly update or revise these statements to reflect subsequent events or new information.
Speaker Change: 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.
Speaker Change: By now you should have received the news release which was issued this morning before the market opened. If you have not received the copy, please call our office at 262-638-4000 and we will send the release to you.
Speaker Change: Now I'll turn the call over to John. Good morning, everyone, and welcome to our fiscal 2024 fourth quarter conference call. To begin with, I'd like to walk through some of the quarter's highlights.
John Batten: We again delivered solid results in the fourth quarter, capping a year of consistent performance, which supported our execution of several key strategic priorities.
John Batten: As we continue to capture healthy demand for our products across end markets, sales increased 0.6% year-over-year for the fourth quarter and increased 6.6% year-over-year for fiscal 2024.
John Batten: We're also seeing the ongoing benefit from disciplined working capital management and other operational enhancements we've implemented across our businesses in recent years.
John Batten: helping drive historically strong cash generation for both the fourth quarter and full year.
John Batten: Critically, in the fourth quarter, we completed the acquisition of KasaOy, a leading manufacturer of high-quality power transmission components and gearboxes. We are confident that the addition of Kasa will both broaden our global reach and accelerate cross-selling opportunities across our business.
John Batten: Backed by our strong balance sheet and flexible financial profile, we will continue to focus on expanding our portfolio through strategic opportunities that will drive TwinDisc forward.
John Batten: Shifting to our product segment results.
John Batten: Our marine and propulsion systems saw continued demand through the year with our global commercial and market showing sustained activity.
John Batten: Despite a challenging year-over-year comparison and softer demand in both the Canadian fishing market and pleasure graft business, we delivered a 3% increase in sales in the fourth quarter. As noted last quarter, we continue to see a rise in government defense spending driven by recent geopolitical turmoil, resulting in a surge of patrol boat projects.
John Batten: We saw a slight decrease in backlog as we worked through inventory to meet consistently solid demand.
John Batten: That continues to be an integral part of our marine and propulsion systems segment. That's collaboration with ROLIF and the development of our elite thruster for yacht propulsion has also been performing well due to the strength in the luxury boating market during the quarter.
John Batten: So they're highlighting the importance of our strategic partnerships that have allowed us to tap into new markets and enhance our product offering.
John Batten: The demand we have seen for workboat marine transmissions continued this quarter with strength in the Asia-Pacific market, partially driven by the need for coal subboats and the transport of raw materials from Indonesia to China.
John Batten: On the land-based side of our business, sales increased 9.3% year-over-year, driven largely by ARF.
John Batten: Our ARF transmission demand remains robust, reaching record levels of backlog in the quarter. Exports to oil and gas markets were flat, however we continue to see meaningful activity both in Asia and North America.
John Batten: In the industrial segment, sales declined 8.9% year-over-year. While demand has been largely sluggish through the year, we saw a slight recovery during the fourth quarter. We continue to see lower agriculture and construction demand resulting in a weak market, with softer demand for commoditized products.
John Batten: While more commoditized products have been experiencing continued weakness, demand for higher content, more sophisticated products remains resilient.
John Batten: As we move into fiscal 2025, we remain focused on what we can control, advancing partnerships with original equipment manufacturers in efforts to penetrate new markets in line with our long-term strategy.
John Batten: In terms of our backlog, I am proud to say that we continue to increase our six-month backlog both sequentially and year-over-year, while simultaneously reducing inventory. This uptick comes with the addition of CASA Oil, which represented $12.6 million of backlog growth.
John Batten: Our continued trend of declining inventories percentage of backlog highlights both the impact of our disciplined inventory management and the resilience of our business in capturing sustained demand despite lingering macroeconomic uncertainty.
John Batten: In closing, I'd also like to address our long-term strategy before Jeff takes us through our financial overview.
Speaker Change: We aim to become a leading provider of hybrid and electrification solutions for marine and off-highway land-based applications, driven by deep relationships and close collaboration with major OEMs.
Speaker Change: VET-REACH continues to expand on a global scale, supported by the successful collaboration with Willow. We are also continuing to rationalize and modernize our business, delivering improved shipments by lowering inventory costs, improving lead times, and creating better results for all stakeholders.
Speaker Change: Our focus remains on controls and systems integration, shifting our business into new avenues that will bring us profitable growth.
Speaker Change: With regards to M&A, we are actively looking into the industrial marine technology sectors, both of which have ample opportunities for us to expand our offerings of the hybrid and electrification space. With that, I'll now turn it over to Jeff to discuss the financials. Yes.
Jeff Knutson: Thanks, John. Good morning, everyone. We delivered sales of $84.4 million for the quarter, up half a million or 0.6% from the prior year, as overall demand continued to remain solid across our market.
Jeff Knutson: Sales for fiscal 2024 were $295.1 million, up 6.6% from fiscal 2023. Adjusting for the divestiture of the BCS business in 2024, full year 2024 revenue increased $26 million, or 9.5% over the prior year.
Jeff Knutson: I'd like to note that operating income for the pull year was impacted by a $3.1 million non-cash loss on the sale of the Boat Management System product line.
Jeff Knutson: and Related Inventory in the third quarter of this year. Additionally, we recorded a $4.1 million gain on the sale of a Belgium facility in 2023. Adjusting for those two items, full year 24 operating income was actually $2.7 million higher than the prior year.
Jeff Knutson: Net income attributable to TwinDisc for the fourth quarter was $7.4 million or $0.53 cents per diluted share compared to $8.6 million or $0.62 cents per diluted share in the fourth quarter of fiscal 23.
Jeff Knutson: Full year net income of $11 million or $0.79 per diluted share is up from net income of $10.4 million or $0.75 per diluted share in the prior year.
Jeff Knutson: Gross profit margin increased to 29.7% compared to 29.5% during the prior year period. And gross profit dollars increased 1.4% to $25.1 million.
Speaker Change: This increase is due to the benefits of incremental volume, a favorable product mix, and the positive impact of cost reduction and operational efficiency initiatives.
Speaker Change: While we saw sequential growth in each of our product groups, we saw consistent demand in both marine and propulsion systems and land-based transmissions throughout the year, supporting overall growth. As John mentioned, we also saw an improvement in the industrial segment that has been pressured by a softer market over the last few quarters.
John Batten: Across our geography, we saw another quarter of sales increase in our Asia-Pacific and Middle Eastern markets and a pullback in North America. Strength in the Middle Eastern markets was supported by shipments to an ARPA manufacturer in Dubai.
Speaker Change: We remain committed to strengthening our balance sheet over the course of fiscal 24. Twin Disc has maintained a net debt around $5.7 million despite a near-term increase in total debt due to the cost of acquisition.
Speaker Change: We ended the year with a cash balance of $20.1 million, 51.1% higher than the prior year. We also improved EBITDA by 2.9% to $26.5 million, generated positive free cash flow of $25 million, and maintained a net leverage ratio of 0.2 times.
Speaker Change: As we enter Fiscal 25 with a strong balance sheet, we are well positioned to navigate macroeconomic uncertainty prudently. With a healthy level of debt, we continue to monitor suitable bolt-on M&A opportunities that align with our objectives of enhancing our innovative excellence and product offerings.
Speaker Change: Gross Margin increased approximately 150 basis points from the prior quarter period, primarily due to cost reduction activities, the impact of operational efficiencies, and favorable product mix. Moving into Fiscal 25, we remain focused on maintaining this momentum as we further enhance profitability.
Speaker Change: Our capital allocation priorities remain unchanged. With strong cash generation supporting a healthy balance sheet and low debt leverage, we are well positioned to act upon M&A opportunities that fit into our strategic framework.
Speaker Change: The priority for our business is driving innovation in the marine technology, industrial, and hydroelectric sectors to enhance our product portfolio.
Speaker Change: We are also making internal investments to drive organic growth, including investments in R&D, geographic diversification and expansion, and marketing. For us, this framework strikes an important balance toward maintaining financial prudence and flexibility while driving long-term growth.
Speaker Change: As we enter the 2025 fiscal year, we are in a great position to update our medium-term targets and establish new growth goals for Twin Disc.
Speaker Change: By 2030, we believe that consistent execution of our long-term strategy will deliver revenues of approximately $500 million with gross margins of 30%. We also expect to deliver consistent pre-cash flow conversion of at least 60%.
Speaker Change: I'd now like to turn the call back to John to review our updated targets and share some closing remarks.
John Batten: Overall, the fourth quarter continued the trend of performance that we carried through the year. I am very proud of our team's ability to deliver robust cash generation and solid margin expansion.
Speaker Change: As we enter 2025, the demand strength and sales momentum we experienced in the fourth quarter provides a solid foundation, as evidenced by our healthy backlog, giving us encouragement for the year ahead.
Speaker Change: We expect the market conditions to remain largely consistent with what we saw throughout 2024. With a robust balance sheet, strengthened by steady profitable growth and effective working capital management, we are well equipped to handle any market uncertainties and capitalize on strategic growth opportunities well into the future.
Speaker Change: That concludes our prepared remarks and now Jeff and I will be happy to answer your questions.
Jeff Knutson: Episode 2
Speaker Change: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again.
Speaker Change: We'll pause just a moment to assemble the cue.
Speaker Change: And we will go first to Simon Wong and Billy Sons.
Speaker Change: Morning, John and Jeff.
Salmon: Hey Simon. Morning Simon.
Speaker Change: Morning. I just want to get an update on your eFrac offering. Can you, I mean, any traction there in terms of your new offering there?
Salmon: So, we're still, I would say, in testing and waiting mode with the 7600. Again, I remain hopeful that...
Speaker Change: will have an order for the first spread this calendar year, but a lot of it has gone back to traditional, they're rebuilding just traditional
Speaker Change: diesel engine frack rigs right now. So we've seen, you know, an uptick again in spare parts for
Speaker Change: for diesel rigs. There are 8,500 and 7,600 that are used conventionally. Simon, I remain hopeful. Everyone down the line says that it's probably, it's going to happen. It's just a question of when.
Speaker Change: Okay, on that note, can you provide, I mean, how much of this revenue was to the oil and gas sector?
Speaker Change: And then if you can break that down between equipment and consumer, that would be great too.
Speaker Change: Episode 2
Speaker Change: Yeah, that's a good question, Simon. I think it's been pretty consistent with previous quarters, and maybe that's something I can give you a little bit more detail offline.
Speaker Change: But I would say in terms of the mix between forward market, aftermarket, and transmission units, it's been really consistent with primarily shipments into China for new units and North America with aftermarket at a consistent level.
Speaker Change: Okay. For the overall company, is there anything in the R&D pipeline that you can talk about?
Speaker Change: I would say that the most notable thing that came out in the past, you know, this past fiscal year was the hybrid system that Manitowoc showed, debuted at a show earlier this year for a hybrid electric crane.
Speaker Change: We have other, there's other projects like that with OEMs that it's just, it's too soon to announce because they have to go through their prototype testing.
Speaker Change: But as far as you know, what we're working on internally, I would say there are more there's the elite thrusters that we
Speaker Change: that Rola and Vette worked on together for the Megayacht Market, primarily in Italy, but it's now we're gaining success with the German and the Dutch yard.
Speaker Change: I would see, you know, things that we're working on expanding that range.
Speaker Change: And then really what we're doing, Simon, right now, our engineers were focused on Katsa and some of the products that they had under development and how they fit into our line. So I would say what you'd see from us
Speaker Change: in the next 18 to 24 months.
Speaker Change: would be an expansion of the VET line, the elite thrusters. It would be some industrial components.
Speaker Change: and transmission, you know, drop boxes coming out of CAATSA to the global front. So that that's what we're focused on right now. And then we continue to develop...
Speaker Change: The PTI, the gearboxes that go on our marine transmissions to make them hybrid ready or electric. So that's really what we're working on in a broad sense, but you'll see, I think you'll see in the next.
Speaker Change: year, two years, a lot more specific models coming out expanding our range in those areas.
Speaker Change: Okay, speaking of ACATSA, how much of revenue did they contribute to this quarter's results?
Simon Wong: Yeah, none really, Simon. It was essentially closed right at the end of the quarter. So the only impact TASTA brought in to the quarter was their opening balance sheet.
Speaker Change: and some costs related to closing and obviously costs related to the acquisition, but no P&O impact for the operation. Okay. I see you're guiding 25 to be in line with 24. Is that both on the revenue and EBITDA line?
Speaker Change: Sorry, I didn't hear you. Yeah, yeah, so traditional twin disks. They give you a similar revenue and even that diversity.
Speaker Change: Does it include contribution from CARTA?
Speaker Change: No, CAATSA will take us up. I mean, when you add CAATSA in, we're obviously expecting a growth year on the revenue line.
Speaker Change: Okay, all right. Yeah, thanks for clarifying that. And then one more for me, the last one. CapEx, what's your CapEx outlook for 2025?
Speaker Change: It's going to be similar, hopefully a little bit higher than what we were able to do this year. Again, we struggled just a little bit with lead times as we invest in more significant machine tools. So something around $10 million is what we're targeting.
Speaker Change: All right, great. Thanks guys.
Simon Wong: Thanks, Simon.
Speaker Change: As a reminder, if you would like to ask a question, please press star 1. We'll move next to Barry Himes at Sage Asset Management.
Barry Himes: Thanks very much. I had a couple of questions. One is, just on the $25 million free cash flow, which is a great number, was any of that non-recurring? And if so, could you just identify kind of what's recurring, what's non-recurring? That's the first question, but I had a couple more.
Speaker Change: Yeah, not really. I mean, I think what we've benefited from a little bit, quite honestly, is a little bit of over...
Speaker Change: inventory levels that are a level higher than...
Speaker Change: that we would have liked historically. So some low-hanging fruit in terms of bringing inventory down. But really no true one-off adjustments that we would point to that were non-recurring.
Speaker Change: So was the inventory right sizing just to size it was that
Speaker Change: $5 million, $10 million, just ballpark.
Speaker Change: Yeah, something like that, around, yeah, in that range.
Speaker Change: And I think, you know, we do still have some more room to improve on the inventory level.
Speaker Change: I think we started to get good traction through the year and actually accelerating as we closed out the year. So we're hopeful that, although the fruit isn't hanging as low as it was, maybe we still have some good opportunity there.
Speaker Change: Okay, great. Second question is, I'm assuming...
Speaker Change: industrial for the new fiscal year is probably gonna be down, correct me if you think I'm wrong on that. And if so, where do you see the positive offsets that would get you to flat or better, as you pointed out, maybe with the cost of business?
Speaker Change: Yeah, Barry, this is John. I would say that, you know, I would say flat would be
Speaker Change: of the worst-case scenarios, certainly the overall markets.
Speaker Change: could be down again.
Speaker Change: But we have been getting traction. So I would say this, as I mentioned in my comments,
Speaker Change: It's more of the smaller mechanical PTOs that are used in irrigation and some pretty basic construction and ag equipment, but we've been getting a lot of good traction with our more expensive
Speaker Change: HPTOs, and we have some hybrid systems that for us are industrial, so we think that we have an opportunity to grow just our traditional core, you know, comparing apples to apples to what we did in 24.
Speaker Change: but certainly when you add CAATSA in and you know we're broadening our industrial line.
Speaker Change: And again, may not register in sales this year, but we think we have a chance to speed up our growth curve in industrial, obviously with adding CAATSA, which is about
Speaker Change: you know, they're probably a third of their business, let's just say for a round number of $40 million, a third of their business is industrial. So, and almost 100%
Speaker Change: in the Northern European market. So certainly taking their product line around the world is going to help us accelerate our industrial growth.
Speaker Change: Got it. And then just last question.
Speaker Change: Within Marine, could you just segment the customers a little bit so if...
Speaker Change: commercial, you know, you mentioned the high-end yacht and if there are any other big buckets, let's just, you know, rough, if we did the pie chart on that segment, what would that look like? Thanks so much.
Speaker Change: So I would, so if you take it as a hundred percent pie chart, you know commercial marine
Speaker Change: is going to be the biggest bucket.
Speaker Change: It's depending upon the year or the quarter, one and two for us are going to be
Speaker Change: North America and Asia.
Speaker Change: And a smaller percentage of that is going to be Europe.
Speaker Change: And then the next biggest bucket now, and it's growing, is, I would say, Pleasure Crafts with Vets expansion into the mega-yacht market.
Speaker Change: And then, you know, again, that can flip-flop based on the quarters with military and government. So those are our, you know, the three biggest
Speaker Change: biggest markets, but commercial revenue-generating vessels by far and away are number one market in marine. Whether it's marine transmissions that we build, traditional twin discs, or vest thrusters, revenue-generating vessels are the number one market.
Speaker Change: Right, and is the pleasure craft just at the very high end or does it go up and down in terms of size? It goes up and down. We probably start, you know, our
Speaker Change: The bottom end of our Pleasurecraft market is probably going to be in a 50-foot yacht.
Speaker Change: Twin Engine, Diesel, everything below that is
Speaker Change: pretty much now outboard.
Speaker Change: for Volvo IPF.
Speaker Change: And, you know, as you go up from 50 feet, we just get stronger and stronger as you get up, you know, 50 to 80 feet to 100 feet. That's our core business. And it can be sport fish boats built in the out...
Speaker Change: Outer banks, it could be folks like Meritimo, Riviera of Australia, Grand Banks, things that are in that 50 to 70 foot range and above, that's our sweet spot.
Speaker Change: Great. Thanks so much. Good luck in the new fiscal.
Speaker Change: Thank you very much. Thank you.
Speaker Change: And this concludes the question and answer session and today's conference call. Thank you for your participation. You may now disconnect.