Q2 2025 Twin Disc Inc Earnings Call
Speaker Change: Welcome to the TwinDisc, Inc. Fiscal Second Quarter 2025 Conference Call.
Speaker Change: We will begin with introductory remarks from Jeff Knutson, Twin Disks CFO.
Jeff Knutson: Good morning, and thank you for joining us today to discuss our fiscal 2025 second quarter results. On the call with me today is John Batten, TwinDisc CEO. I would like to remind everyone that certain statements made during this conference call, especially statements expressing hopes, beliefs, expectations, or predictions for the future, are forward-looking statements.
Speaker Change: 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, copies of which may be obtained by contacting either the company or the FCC.
Speaker Change: 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.
Speaker Change: 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 a copy, please call our office at 262-638-4000 and we will send a release to you.
Now I'll turn the call over to John.
John Batten: Good morning everyone and welcome to our fiscal 2025 second quarter conference call. I appreciate you joining us today.
John Batten: We are pleased to report another quarter of strong double-digit sales growth, with second quarter sales of $89.3 million, reflecting a 23.2% year-over-year increase as we close out a successful first half of the fiscal year.
John Batten: We continue to see meaningful contributions from Kata'oi, which is allowing us to extend our global footprint and deepen our engineering capabilities, particularly in Europe and North America.
John Batten: We remain committed to ensuring seamless integration of CASA and are excited to unlock its full potential.
John Batten: Our focus is on capitalizing on cross-selling opportunities, optimizing shared cost efficiencies, streamlining our business lines, and maintaining strong execution.
John Batten: At the same time, we are pleased to see continued strength in shipments of VET products, meeting the robust demand for cutting-edge electric, hybrid, and conventional propulsion systems.
John Batten: We are maintaining a healthy backlog across all of our end markets and are encouraged by the continued stabilization with our industrial business over the quarter.
Shifting to the product segment.
John Batten: Sales in our marine propulsion segment grew 23.9% year-over-year. This performance was driven by ongoing strength in our VET product line, which once again delivered record orders as demand remains consistent globally.
John Batten: Incoming orders were driven in part by demand from both new North American projects within commercial applications in the luxury yacht market, supported by our FETROLA partnership.
John Batten: Meanwhile, increased government defense spending has sustained demand for patrol boat projects, mainly driven by evolving market dynamics surrounding ongoing geopolitical conflicts in Southeast Asia and Europe.
John Batten: The integration of VET continues to yield meaningful synergy, positioning us to capture market opportunities in conventional electric and hybrid propulsion applications with our hybrid marine transmissions and control systems.
John Batten: We remain focused on leveraging these synergies to address evolving customer needs, particularly around sustainability and electrification.
John Batten: In our land-based transmissions, sales increased 19.8% year-over-year, reflecting continued momentum in our airport rescue and firefighting transmission business.
John Batten: where we shipped a significant volume of units this quarter. As we mentioned last quarter, demand for our vehicles remains strong, driven by our advanced configurations, unique torque capabilities, and innovative power-dividing systems, which continue to position us as the supplier of choice.
Turning to oil and gas.
John Batten: Exports were down during the ongoing macroeconomic headwinds in the Asia-Pacific region and subdued new builds in North America.
John Batten: However, we anticipate momentum will begin to build as we have seen recent uptick in quoting activity. Aftermarket demand for replacement parts in oil and gas applications remains stable, underscoring the resilience of both our install base and the demand driven by North American usage trends.
John Batten: As fleets continue to age through the replacement cycle, this indicates the potential for new builds and sustained growth for the business.
John Batten: Our industrial segment grew 44.8% year-over-year, driven by both the addition of CASA and a rebound in our Lufkin orders.
John Batten: We are seeing a continued stabilization sequentially within this segment as order momentum from our Luskin facility has picked up. Overall, segment demand has improved, particularly for higher-end content industrial products.
John Batten: We believe our continued engineering focus positions us to capture, share, and market the demand for specialized solutions, whether that's agricultural equipment, construction, machinery, or other high-torque applications.
John Batten: To conclude my comments, I'd like to address the significant progress we have made to date in executing our long-term strategy.
John Batten: Over the past several quarters, we have maintained strong focus on our long-term strategy and our recent acquisitions underscore that commitment.
John Batten: the successful integration of CASA expanded our engineering capabilities and market reach, particularly in Europe and North America. By enhancing our portfolio with CASA's specialized solutions, we are capturing share in industrial end markets that value customization and technical expertise.
John Batten: From an operational perspective, we have made significant progress in integration, rationalizing inventory, aligning product lines,
John Batten: and leveraging cross-selling opportunities to enhance customer experience. At the same time, we continue to optimize costs through improved supply sourcing, Kaizen-driven facility enhancement, and strategic inventory management, positioning us for sustained margin expansion.
John Batten: Looking ahead, we will remain disciplined in executing our operational initiatives and exploring additional strategic acquisitions that complement our core expertise.
John Batten: By steadily improving efficiency, enhancing profitability, and strengthening our technology portfolio, we believe we are well positioned to deliver sustainable, long-term value for our customers, employees, and shareholders. With that, I will now turn it over to Jeff to discuss the financials. Jeff?
Jeff Knutson: Thanks John. Good morning everyone. In the second quarter we delivered sales of $89.9 million for the quarter up $15.9 million or 23.2% from the prior year, driven by a $10 million incremental benefit from CASA.
Jeff Knutson: On an organic basis, which excludes the impact of acquisitions and foreign currency exchange, revenue increased 10.1% as demand in our global markets remained healthy.
Jeff Knutson: Net income attributable to Twin Disc for the second quarter was $900,000, or 7 cents per diluted share, compared to a net loss of $900,000, or 7 cents per diluted share in the second quarter of fiscal 24.
Jeff Knutson: Earnings per share were impacted by an increase in other expenses related to interest expense and additional pension amortization in the quarter.
Jeff Knutson: Gross profit margin decreased to 24.1% compared to 28.3% during the prior year period, and gross profit increased 5% to $21.7 million.
Jeff Knutson: The decline in gross profit margins was driven by a $1.6 million inventory write-down related to the CASA acquisition as we eliminated redundant inventory along with a $300,000 purchase accounting amortization expense tied to the acquisition and unfavorable product mix in the quarter.
Jeff Knutson: Looking at Pathline Sales Distribution, we deliver double-digit growth in all three of the marine and propulsion systems, land-based transmission, and industrial segments.
Jeff Knutson: This was mainly driven by ongoing healthy market demand and geographic expansion, including the additional benefit of the cost acquisition and the continued stabilization in the industrial segment, which fostered strong year-over-year growth.
Jeff Knutson: Touching on geographic distribution, we again saw increased sales in Europe as a result of our acquisition of CASA, as well as a larger proportion of sales from North American markets on strength in the VET projects in the region.
Jeff Knutson: Compared to the second fiscal quarter of 2024, net debt increased $12.3 million to $9 million in the quarter, primarily driven by an increase in total debt due to the cost of acquisition.
Jeff Knutson: We ended the quarter with a cash balance of $15.9 million, 24.3% lower than the prior year. Operating cash generation of $4.3 million was strong in the quarter and EBITDA increased to $6.3 million in the second quarter, up 13.5% compared to the second quarter of fiscal 24.
Jeff Knutson: Growth margin decreased approximately 420 basis points from the prior year period, largely reflecting the impact of inventory rationalization in our industrial segment as we continued to integrate HASA and eliminated redundant inventory. Additionally, we saw an unfavorable mix in the quarter which further pressured margins.
Jeff Knutson: As we move through the year, we are taking a disciplined approach by streamlining operations, optimizing our cost structure, and driving efficiency across our supply chain. At the same time, we continue to prioritize higher margin products and services while maintaining a strong focus on pricing discipline.
Jeff Knutson: In terms of inflationary and supply chain challenges, we have seen near-term shipment delays that impacted the prior quarter largely subside.
Jeff Knutson: On capital allocation, our priorities remain the same. We are committed to generating consistent cash flow in order to maintain leverage within a comfortable range. Our primary focus for acquisition is on businesses that complement our expertise in industrial and marine technology, allowing us to accelerate growth in these key markets while enhancing our value proposition to customers.
Jeff Knutson: Equally important is our commitment to fueling organic growth. This means investing in research and development to push the boundaries of innovation, expanding our presence in underpenetrated geographies, and advancing market efforts to deepen customer engagement and capture new opportunities.
Jeff Knutson: By balancing disciplined external investments with thoughtful internal initiatives, we are ensuring that TwinDisc is positioned for sustained growth and shareholder value creation both now and in the future.
John Batten: And now I'd like to turn the call back to John to share some closing remarks.
Thanks, Jeff.
Speaker Change: In summary, we delivered another strong quarter of top-line growth, buoyed by robust demand in marine and propulsion, and recovery in industrial, along with ongoing integration successes with Cognizant.
Speaker Change: While we navigated margin headwinds from product mix, we have made proactive steps to right-size our inventory rationalization and enhance profitability.
Speaker Change: Our backlog, albeit lower sequentially due to FX, remains at a healthy level and cash flow has improved significantly as a result of inventory management.
Speaker Change: We believe we are well-positioned for long-term growth thanks to our expanding portfolio of higher content, high-value solutions and increasingly diversified global footprint and a strategic focus on electrification and hybrid systems.
Speaker Change: We are committed to delivering value to our customers, employees, and shareholders through consistent execution and strategic investment. That concludes our prepared remarks and now Jeff and I will be happy to answer your questions.
Thank you.
Speaker Change: As a reminder, if you'd like to ask a question, please press star and the number 1 on your telephone keypad.
Speaker Change: And our first question comes from the line of Simon Long from Gabelli Fluntz.
The line is open.
Jeff, John, good morning.
Speaker Change: Hey, Simon, just a quick note. John, unfortunately, wasn't able to join us for the Q&A session today, but I'm happy to take your question and anybody's question.
Speaker Change: Okay, no problem. Just a quick question on oil and gas. You talked about export being down. Can you quantify how much your oil and gas business is this quarter?
And how much was it down you over here
Speaker Change: Yeah, good question and I was prepared for that question, Simon. Yeah, it was down, it was about a little under 8% of revenue for the quarter and down compared to the prior year Q2 down about 24%.
Speaker Change: Okay, in your prepared remark, you talk about quoting activity remains high. Is that North American quoting activity or is that Asian quoting activity?
Speaker Change: It's both. It's North America, it's Asia, and also some South American activity as well.
South America or
Speaker Change: It sounds like the ordering trend or activity from the oil and gas customers in light of the change in administration, you're seeing them getting back to work. Is that correct? Is that a correct statement?
Speaker Change: I think maybe it's a little bit early to say that. I think what we've seen is, yeah, increased level of activity, some new calls, some new potential projects. So it feels like, yeah, we would say
Speaker Change: It's kind of a renewed level of activity in that market.
Speaker Change: Okay, great. And then, can you just refresh your CapEx Outlook for the year and then on the free cash flow, are you still targeting to convert 60% of your EBITDA to free cash flow?
Speaker Change: Yeah, I mean, that's certainly our goal, right, and we, as we talked about after Q1, we had a difficult Q1 for a variety of reasons in terms of free cash flow, bounced back nicely in Q2, you know, free cash flow in Q2 of about $6.4 million.
Speaker Change: So, yeah, we're still targeting to get to that 60% of EBITDA. I think it's a bit of a stretch this year given the difficult Q1, but we're on a good trend now following Q2. In terms of CapEx,
Speaker Change: I think no big change there. I would say a little bit behind pace. We've spent something like $5 million through the first half of the year. We have some bigger projects coming through in the second half. I think in the range of $12 to $14 million is probably where I'd peg it right now.
Speaker Change: Okay, if I could squeeze one more in if I can. You talk about R&D, investing in R&D to expand the market or to capture growth in the market, anything that you can talk about that's being commercialized this year that will contribute to growth?
Speaker Change: No, I don't think there's anything that we're ready to talk about specifically in terms of new products or new technologies. I think, you know, we continue to focus on
Speaker Change: The Hybrid Electric Market, and that's an ongoing development. We continue to get more and more traction there, more orders, more interest, more activity, and we continue to expand our...
Speaker Change: capabilities in that market and that's a big focus for growth for us.
Perfect. Thank you.
Thank you.
Speaker Change: And our question comes back from the line of Simon Wong from the Belly Funds.
Speaker Change: Please go ahead. Jeff, since no one is asking questions, let me get one more in. The electric frack fleet that you are piloting about two, three quarters ago, any uptake on that product?
Speaker Change: Yeah, I would say it's stable. You know, it's ongoing. I wouldn't say there's anything newsworthy in the quarter that we could share. It's just an ongoing process for us.
Okay, thank you.
Thank you.