Q1 2025 Twin Disc Inc Earnings Call

Thank you for stunning by my name is Andrea and I will be your conference operator today.

At this time, I would like to welcome everyone to the TwinDisk Incorporated Fiscal First Porter 2025 Conferenced Call.

All lines have been placed in the YouTube event any background noise.

After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I would like to turn the call over to Jeffrey Knutson to in this CFL tank you. Please go ahead.

Jeffrey Knutson: Good morning and thank you for joining us today to the Professor of the PIPPIL 2025 First Quarter Results.

Jeffrey Knutson: on the call with me today is John Batten, Twinsick CEO.

I would like to remind everyone that certain statements made during this conference call, especially statements expressing hopes to leave.

Jeffrey Knutson: Expectations or predictions for the future are forward-looking statements. It is important to remember that the company's actual results differ materially from those projected in such forward-looking statements.

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.

Jeffrey Knutson: During today's call, management will also discuss certain non-GAAP financial measures. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today.

By now, you should have received the news release which was issued this morning before the market opened.

If you have not received a copy, please call our office at 262-638-4000 and we will send a release to you.

Speaker Change: Now I'll turn the call over to John.

John Batten: Good morning, everyone, and welcome to our fiscal 2025 first quarter conference call. To begin, I'd like to walk through some of the quarter's highlights.

John: We are pleased to report a strong start to the year with double-digit revenue growth in the first quarter. We are making progress in advancing our long-term strategy, becoming a leading provider of hybrid electrification solutions as we deepen our relationships with major OEMs.

John: and have continued to expand VEST's reach on a global scale.

John: Our performance in the quarter was primarily driven by the impact of the acquisition of Kata'oi, along with growth in our marine and propulsion business, where demand for VET remains exceptionally strong.

John: As many of you recall, we took proactive steps in Fiscal 2024 to build up inventory within VEST in anticipation of increased demand, which has since materialized. And market demand in our industrial business is stabilizing, however, the business grew this quarter largely due to the addition of CASA.

Jeffrey Knutson: The integration of CASA, our second largest acquisition to date, is progressing ahead of schedule. The addition of CASA has broadened our global reach and opened up new cross-selling opportunities with leading European OEMs, which we expect to continue supporting our long-term performance.

Jeffrey Knutson: Sticking to our product segment results, sales in our marine and propulsion segment grew 22.9% year-over-year, driven by a sustained activity in commercial markets and the impact of the COTSA acquisition.

Jeffrey Knutson: Within the luxury yacht market, VET continues to expand on a global scale and its backlog grew sequentially by 19% in the quarter. Incoming orders for VET products reach an all-time high.

Jeffrey Knutson: All-Time Highs in October, driven in part by the demand for elite thrusters, which customers seek out for their increased fuel efficiency, added maneuverability, and low noise and vibration levels.

Jeffrey Knutson: We are gaining traction with elite thrusters in new geographic markets beyond Europe, and our largest North American distributor is already positioned to be one of Beth's largest customers, due in part to strong demand for this product.

Jeffrey Knutson: We are also capturing demand for customers that are converting to hybrid and electric marine systems.

Jeffrey Knutson: We recently won a hybrid system order for a site-seating vessel in the Northeast that enables us to supply ten times the content that would have been needed on a ship powered by an internal combustion engine, by adding content like batteries, motors, controls, converters and inverters.

Jeffrey Knutson: We also delivered multiple units for marine control drives, which drive large thrusters and hybrid systems for use in the Panama Canal. We will continue pursuing these types of growth opportunities as part of our strategic focus on expanding our offering in the hybrid and electrification space.

Jeffrey Knutson: As mentioned in the past few quarters, a long-term trend of heightened government defense spending has supported increased inquiries for patrol boat projects, which should drive additional growth in the near term.

Jeffrey Knutson: Turning to our land-based transmission business, we saw a 7% decline in sales, primarily due to the softness in the Asian Pacific region as oil and gas exports remain flat, reflecting the broader demand challenges in the region.

Jeffrey Knutson: Despite this, we're encouraged by record levels of backlog in our airport rescue and firefighting or ARF transmission business.

Jeffrey Knutson: which represented roughly half of our revenue within land-based transmissions in the quarter. ARF vehicles are essential for fire safety and prevention at any airport around the globe. Our ability to offer advanced configuration, unique torque capability, and innovative power dividing systems makes us the supplier of choice for ARF applications.

Jeffrey Knutson: Our ARP business has remained particularly robust. We are capturing increased demand for these vehicles as new airports are built internationally. Aging vehicle fleets need to be replaced, and tightening global emissions standards require fleet transmission to be updated.

Jeffrey Knutson: We are also meeting demand for replacement parts for military vehicles including transmissions and steering units Which we expect to continue supporting growth in the segment to the impact of ongoing geopolitical turmoil

Jeffrey Knutson: Sales in our industrial segment increased 61.3% year-over-year, primarily driven by the addition of CASA along with the general stabilization of end market demand.

Jeffrey Knutson: While demand remains softer for some commoditized products, demand for higher content products has been resilient. We received a notable order for hydraulic power takeoff, which efficiently allowed the conversion into hydraulic power with minimum vibration from an OEM in the agricultural space.

Jeffrey Knutson: Looking ahead to Q2, orders to our Lufkin facility, which manufactures power takeoffs and clutches for heavy-duty industrial equipment, also started to rise.

Jeffrey Knutson: We expect construction and agricultural markets to remain soft through fiscal 2025, but we will continue gaining share by leveraging our extensive engineering and applications experience to meet unique customer needs.

Jeffrey Knutson: Our backlog has reached historical levels. Six-month backlog grew both sequentially and year-over-year, supported by demand for vet products, as I mentioned earlier.

Jeffrey Knutson: Foreign Exchange accounted for 3.4 million of sequential backlog growth and inventory as a percentage of backlog increased to 99.7 percent. As we move through the year we remain committed to discipline inventory management to lower inventories compared to backlogs.

Jeffrey Knutson: To conclude my comments, I'd like to address our long-term strategy before Jeff takes us through our financial review.

Jeffrey Knutson: At the center of our strategy is the continued emphasis on controls and systems integration, which unlocks sales and margin potential to drive sustainable growth.

Jeffrey Knutson: This strategic shift is creating opportunities for us to explore and to capitalize on higher-margin solutions in both our core and emerging markets.

Jeffrey Knutson: With active projects focusing on fully electric and hybrid applications, we are well-positioned to capture growth as the industry moves towards innovative, sustainable technologies. Simultaneously, we are streamlining and modernizing operations to enhance shipments by reducing inventory costs, shortening lead times.

Jeffrey Knutson: and delivering improved outcomes for all stakeholders.

Jeffrey Knutson: Globally, we are already recognized as a leader in marine transmission and propulsion technology, underscored by VET's continued growth.

Speaker Change: Now our mission has become the leading supplier of hybrid and electrical solutions across each of our end markets. With that, I'll now turn it over to Jeff to discuss the financial. Jeff?

Jeff: Thanks John, good morning everyone. We delivered sales of 72.9 million dollars for the quarter up 9.3 million or 14.7 percent from the prior year driven by a 9.2 million dollar incremental benefit from CASA combined with healthy demand in our global market.

Jeff: Adjusting for the sale of the BTX business in 2024, first quarter revenue was $11.1 million or 18% higher than the prior year quarter.

Jeff: Net loss attributable to Twin Disks for the first quarter was $2.8 million, or $0.20 per diluted share, compared to net loss of $1.2 million, or $0.09 per diluted share, in the first quarter of fiscal 24.

Jeffrey Knutson: Earnings per share were impacted by an increase in other expense related to foreign currency loss, additional interest expense on the acquisition of CADSA, and additional pension amortization in the quarter.

Jeffrey Knutson: Gross profit margin increased to 26.5% compared to 26.2% during the prior year period and gross profit increased 16.1% to $19.3 million.

Jeffrey Knutson: Sales in the quarter were consistent with inherent seasonal trends of our business. We saw double-digit growth in both the marine and propulsion systems and industrial segments, driven by consistent market demand and geographic expansion and the additional benefit of the cost of acquisition.

Jeffrey Knutson: Net debt increased $11.9 million to $13.1 million in the quarter, primarily driven by an increase in total debt due to the VCASA acquisition.

Jeffrey Knutson: Operating cash generation was impacted by a near-term shift in order timing by certain customers along with increased inventories. EBITDA was 1.7 million in the first quarter down 23% compared to the first quarter of fiscal 24.

Jeffrey Knutson: Gross margin increased approximately 30 basis points from the prior year period, reflecting the benefit of incremental volume, partially offset by an unfavorable product mix due to reduced oil field shipments into China.

Jeffrey Knutson: We continue to focus on enhanced profitability by pursuing cost reduction activities as we move through the year, including product rationalization, manufacturing efficiencies, and advancing the cost of integration to deliver cost savings.

Jeffrey Knutson: Our capital allocation priorities remain unchanged. Although our leverage has increased due to the recent acquisition of CADSA, the structural improvements we have made to our business will help us reduce leverage through consistent cash generation.

Jeffrey Knutson: We continue to evaluate acquisitions which accelerate growth in our core industrial and marine technology markets. We also remain focused on making internal investments to drive organic growth, including investments in R&D, geographic diversification and expansion, and marketing.

Speaker Change: I'd now like to turn the call back to John to share some closing remarks.

John Batten: In closing, the first quarter was a solid start to the year.

John Batten: We've delivered strong sales growth and margin expansion driven by our strategic focus on innovation and operational excellence. Our steady backlog is supported by consistent demand across our end markets and we continue to reap the benefits of strategic decisions that have not only enhanced our global reach but diversified our product offerings.

John Batten: With our robust financial profile, we are confident in our ability to navigate through any economic uncertainties while executing our growth strategy to deliver long-term value to our shareholders.

John Batten: That concludes our prepared remarks. Jeff and I will be happy to answer your questions.

Speaker Change: Thank you. At this time, I would like to remind everyone in order to ask a question, press star then the number one in your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Speaker Change: Your first question comes from the line of Simon Wong with Gay Belief Fund. Thank you, please go ahead.

Simon Wong: Hi, good morning John and Jeff.

Simon Wong: Just a couple of questions here. First, on the free cash flow, pre-sizable negative free cash for generation this quarter, what's your outlook for the year?

Speaker Change: Yeah, I mean, it's still positive. I think we get back on inventory reduction.

Speaker Change: You know impacts in the quarter were significant, you know

Speaker Change: Year-end accrual payment

Speaker Change: have a shortfall in the quarter through the rest of the year.

Speaker Change: Okay and then the EFRAC offering that you introduced about two or three quarters ago, any update on that offering?

Speaker Change: It's still, the prototypes are still out there, but we have not had any takers yet on pulling the trigger to buy a fleet.

Speaker Change: We're getting more calls.

Speaker Change: for traditional rigs right now. That seems to be where everyone's.

Speaker Change: where our customers are focusing on our traditional spread.

Speaker Change: One final, quick one. What's the oil and gas business? How much did it contribute to this quarter?

Speaker Change: Yes, so oil and gas was a lower percentage of the quarter than we've seen in the past. It was about 10% of revenue for the quarter. If you compare that to last year's Q1, it was more like 15% of the quarter, so definitely down.

Speaker Change: in the quarter and contributed to the unfavorable mixed impact that we talked to.

Speaker Change: Thank you again. If you would like to ask a question, press star 1 on your telephone keypad.

Speaker Change: All right, Andrea, I guess if there's no further questions, we can stop the call and hope to see everyone at our second quarter call, which will be late January, early February of 2025.

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