Twin Disc , Inc. (NASDAQ:TWIN) has reported a strong performance in the second quarter of fiscal year 2024, with a significant 15.2% increase in sales compared to the same period last year. The company's gross margin has also expanded by 140 basis points, reaching 28.3%. A notable sales surge in the Marine and Propulsion Systems segment, largely attributed to heightened global commercial activities and increased defense spending, has contributed to this growth. The Land-Based Transmissions sector also experienced an 8% rise in sales due to more activity in the oil and gas markets. Despite these gains, the Industrial segment saw a 13% decrease in sales. Twin Disc's backlog has continued to expand, bolstered by strong demand and supply chain enhancements. The company is actively seeking to cement its position as a leader in hybrid and electrification solutions and is looking into merger and acquisition opportunities within the marine technology and industrial fields. Additionally, Twin Disc has successfully reduced its net debt, ending the quarter with a cash balance of $21 million.
Key Takeaways
- Twin Disc reports a 15.2% year-over-year increase in sales for Q2 fiscal year 2024.
- Gross margin expanded to 28.3%, a growth of 140 basis points.
- Marine and Propulsion Systems segment sales grew by 29%.
- Land-Based Transmissions business saw an 8% increase in sales.
- Industrial segment sales declined by 13%.
- Company backlog grew due to solid demand and supply chain improvements.
- Twin Disc is exploring M&A opportunities and aims to lead in hybrid and electrification solutions.
- Net debt reduced, with a closing cash balance of $21 million.
Company Outlook
- Twin Disc expects gross margin to remain in the high 20s to 30% for the remainder of the year.
- CapEx target set at $10 million for the fiscal year.
- Optimism for growth in the second half of the year and the following fiscal year due to strong backlog and market feedback.
- EBITDA forecasted to be in the high 20s, with a goal of reaching $7.5 to $8 million.
Bearish Highlights
- Industrial segment faced a 13% sales decline.
- Supply chain uncertainties and Middle East concerns may affect delivery times.
Bullish Highlights
- Revenue growth driven by new unit sales to Asia, particularly in the oil patch sector.
- Positive customer feedback for the E-frac offering, despite awaiting the first purchase order.
- Geographic expansion in North America and Asia, especially for the ELITE product line.
- Efforts to resolve production constraints in the Netherlands to support further growth.
Misses
- No first purchase order received yet for the E-frac offering.
Q&A Highlights
- The conference call concluded without any questions, indicating clarity on the presented information.
Twin Disc's second-quarter earnings call highlighted the company's robust performance and future growth strategies. While the Industrial segment lagged, the overall sales growth and gross margin expansion are promising signs for the company. Their strategic focus on hybrid and electrification solutions, coupled with the pursuit of M&A opportunities, signals a forward-thinking approach that may well position Twin Disc for sustained success in the evolving markets. Despite some headwinds from supply chain uncertainties and regional concerns, the company's optimistic outlook, underscored by a strong backlog and positive market feedback, suggests a confident path ahead.
InvestingPro Insights
Twin Disc, Inc. (TWIN) has demonstrated a notable financial performance in its latest quarterly report, with a robust increase in sales and an expanding gross margin. Delving into the financial health and market performance of TWIN, InvestingPro data and tips provide additional insights into the company's current valuation and future prospects.
InvestingPro Data highlights a market capitalization of $209.97M USD, which reflects the company's size and market value as of the last reported period. The P/E ratio, a key indicator of how much investors are willing to pay for a dollar of earnings, stands at 20.55, suggesting that TWIN is trading at a price that reflects its earnings potential. The PEG ratio, which is a more nuanced valuation metric that takes growth into account, is particularly impressive at 0.44, indicating that the company's earnings growth rate is favorable when compared to its P/E ratio.
Two InvestingPro Tips particularly stand out in the context of TWIN's recent performance. Firstly, TWIN is trading at a low P/E ratio relative to near-term earnings growth, which could be appealing to value investors looking for growth potential at reasonable prices. Secondly, analysts predict the company will be profitable this year, which aligns with the positive earnings and revenue growth trends the company has reported.
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Full transcript - Twin Disc (TWIN) Q2 2024:
Operator: Ladies and gentlemen, thank you for standing by. I would like to welcome everyone to the Twin Disc, Inc. Fiscal Second Quarter 2024 Conference Call. [Operator Instructions]. Thank you. I will now hand the call over to Mr. Jeff Knutson, Chief Financial Officer. You may begin your conference.
Jeff Knutson: Good morning, and thank you for joining us today to discuss our fiscal 2024 second quarter results. On the call with me today is John Batten, Twin Disc's 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. It is important to remember that the company's actual results could differ materially from those projected in such forward-looking statements. 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. 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. 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 the release to you. Now I'll turn the call over to John.
John Batten: Good morning, everyone, and welcome to our fiscal 2024 second quarter conference call. Let's begin today's call with some highlights. We continued our solid momentum in the second quarter, delivering profitable growth by generating historically high cash from operations. These results were driven in large part by strong operational execution by our teams, coupled with our continued focus on working capital improvement. We are seeing ongoing strength both in Marine and Propulsion and Land-Based Transmission supporting 15.2% year-over-year sales growth to continue our trend of double-digit top line expansion in fiscal 2024. We also delivered solid gross margin expansion, which improved 140 basis points to 28.3%. We're also seeing continued backlog growth as our teams work to capture stable end market demand. One particular highlight has been significant increase in orders for workboat marine transmissions at Asia Pacific, a return to activity in a market after cyclical softness in the offshore Asian market. Moving on to results by product group. Sales in Marine and Propulsion Systems increased 29%, driven by growing activity in global commercial markets. We are seeing further increases in defense spending, driving patrol boat projects, which we expect to continue given current geopolitical turmoil. Veth backlog remained at record levels, rising 6% sequentially and supported by the success of the Veth and Rolla partnership. Veth inventory has increased in the near term as we prepare to meet increased demand heading into the second half of the fiscal year. On to the Land-Based Transmissions business. Sales grew 8% year-over-year, driven by rising activity in the oil and gas markets. We're encouraged to see our first new unit orders in North America within oil and gas and expect further strength for this part of the business in the coming quarters. ARFF has also performed well with a strong demand for these transmissions supporting continued trajectory of backlog growth. Looking broadly at the segment, orders are continuing to trend upwards, and we have seen early signs of improvement in spare parts orders after previously reporting a pullback due to end market uncertainty in the first quarter. Our Industrial segment has remained pressured by softness amongst industrial OEM customers with sales declining 13% versus the prior year. We have continued to see sluggish demand for lower-content commoditized product where demand has remained steady for sophisticated higher-content products. Despite this near-term softness, we remain focused on capturing opportunities to partner with major domestic OEMs on a range of products. Next, I'll speak to inventory and backlog. Our backlog has continued to increase, driven by solid demand across our end markets, along with the impact of supply chain improvements made over the past year to enable faster shipment deliveries. We are also seeing a temporary increase in inventory as a percentage of backlog, mainly due to the near-term increase in Veth inventories mentioned earlier. That said, we expect to see inventories fall in the second half of the fiscal year as we work through our current backlog and remain focused on driving inventory as a percentage of backlog lower in the coming quarters. I'd like to briefly address our long-term strategy before Jeff takes us through the financial detail. We aim to position Twin Disc as a leading provider of hybrid and electrification solutions for marine and off-highway land-based applications. In recent quarters, we have made great strides in rationalizing and modernizing our business, helping deliver improved shipments while lowering inventory cost and lead times to create better results for all stakeholders. We are maintaining our focus on controls and systems integration, shifting our business into new avenues that will bring us profitable growth. With the support of our strong balance sheet, we are also continuously evaluating M&A opportunities to grow our business within the industrial and marine technology sectors, both of which ample opportunities for us to expand our offerings in the hybrid and electrification space. With that, I'll now turn it over to Jeff to discuss the financials. Jeff?
Jeff Knutson: Thanks, John. Good morning, everyone. We delivered sales of $73 million for the quarter, up $9.6 million or 15.2% from the prior year period as overall demand remained strong. Net income attributable to Twin Disc for the second quarter was $900,000 or $0.07 per diluted share compared to $1.8 million or $0.13 per diluted share in the second quarter of fiscal '23. Gross profit margin increased to 28.3% compared to 26.9% during the prior year period, and gross profit increased 21.3% to $20.7 million. This improvement reflects the benefit of prior pricing actions, continued easing of supply chain headwinds, a favorable product mix and successfully executing our operational playbook. Marine and Propulsion Systems reported double-digit growth and Land-Based Transmissions reported 8% growth, while Industrial sales declined compared to the prior year period. Looking at top line distribution across geographies. Sales continued to increase across the Asia Pacific and European regions compared to the prior year, supported by robust demand, while North American sales declined. We continued to strengthen our balance sheet through the solid cash generation delivered in the second quarter. We reduced net debt by $21.7 million to negative $3.3 million compared to the prior year period and ended the quarter with a cash balance of $21 million, approximately $7.5 million higher versus the prior year period. EBITDA decreased to $5.5 million from $7 million during the prior year period due to a $4.2 million prior year gain on the sale of a facility recorded in the second quarter of 2023. We continued to decrease our leverage ratio this quarter to below negative 0.6x, putting us in an excellent position to invest in our business while executing inorganic growth opportunities. As noted earlier, gross profit margin for the second quarter increased to 28.3%, expanding approximately 140 basis points from the prior year period, again, due to the benefit of pricing actions, continued easing of supply chain headwinds, a favorable product mix and successful execution of our operational playbook. Our improved supply chain has continued to enable stronger shipments. However, we have faced some currency headwinds and higher labor costs within ME&A. That being said, while ME&A spend has increased nominally, it has decreased as a percentage of sales as we continue to grow our business. Now on to capital allocation. In line with the additional priorities specified in our capital allocation framework, given our low debt level, we are exploring M&A opportunities with a specific emphasis on marine technology, industrial and the hybrid electric sector, as John mentioned. Simultaneously, we are making strategic investments within the company, including research and development, expansion into new geographic areas and continued strengthening of our marketing efforts. As always, we are pleased to consistently return capital to shareholders through repurchases and dividend payments. We will continue to evaluate our capital allocation strategy and priorities, adjusting to changes in the economic landscape in their operating environment as they evolve. I'd like to now turn the call back over to John to share some closing remarks.
John Batten: Thanks, Jeff. Before we open the line for questions, I'd like to highlight a few key takeaways from our quarterly results. In summary, we're seeing stable end market demand, advancing our momentum of double-digit revenue growth, robust margin expansion and cash generation. We are focused on maintaining the operational improvements that have supported these results, including disciplined working capital management. Despite lingering macroeconomic uncertainty, we hold a cautiously optimistic outlook towards the remainder of our fiscal year, given strengthening demand levels in our end markets. Our consistent performance will continue to strengthen our financial profile, giving us the ability to work through potential challenges while pursuing growth opportunities. I'd like to thank all of our teams for their hard work and commitment to supporting our business this quarter. We look forward to sustaining this progress as we drive Twin Disc forward and generate long-term value for our shareholders. That concludes our prepared remarks. Jeff and I will now be happy to answer your questions.
Operator: [Operator Instructions] Our first question comes from the line of Simon Wong from Gabelli Funds.
Simon Wong: Look, first question, you saw some nice growth in your Land-Based Transmissions business. How much of that was from the oil patch?
Jeff Knutson: I would say the oil patch was relatively consistent. I think it was probably split between our ARFF and our oil patch on the Transmissions side.
Simon Wong: So 50-50, so about $7 million, $8 million?
Jeff Knutson: I think that's about right, yes.
Simon Wong: Okay. Now you say -- you mentioned that you saw higher activity or you received your first new equipment order from the North America. Is that for the new E-frac? Or was that for the diesel-based transmission?
John Batten: Yes, Simon, the new unit orders were for traditional diesel frac. We are still awaiting the first PO for the E-frac. I'm hoping that happens yet this quarter. But so far, all the new unit orders and obviously, all the spare parts orders remain for North America and Asia. And our business in Asia keeps chugging along at a very good rate this quarter compared to a year ago.
Simon Wong: Okay. Now that $8 million from the oil patch, is that mostly because -- I mean, you did mention some new units going to Asia. Is that more due to consumables? Or I mean, how does that break down between consumable and new equipment?
John Batten: So I would say in the quarter, the revenue growth was more in new units to Asia and a little bit less on spare parts. So the mix of new units, spare parts was higher in the second quarter than it had been in the previous quarters. So we saw a little bit of slowdown in rebuild activity and an uptick and new unit activity.
Simon Wong: Okay. And then your E-frac offering, you're still waiting for the first purchase order. What's been the feedback from your customers?
John Batten: The feedback has been great. It's been -- it's -- the testing has gone extremely well. I'll be honest, I'm surprised we haven't had the order yet, but I think we're just working out some details and some financing for the customer. And that's where we stand. But we remain ready and we're geared up for production. We could react very quickly.
Simon Wong: Okay. Got it. And then in Veth, you saw some really nice geographic expansion growth -- or growth in geographic expansion last year. It looks like it continued this quarter. How much more room is there to expand geographically?
John Batten: Quite a bit. There's -- I mean, we've just scratched the surface in North America and Asia. We had shipments to Australia last fiscal year -- or actually, trying to think, that might have been the first quarter. But again, just scratching the surface, particularly in the ELITE product line, the combination of the Rolla-designed thruster and propeller. The mega yacht market, they don't just build in Europe, they build around the world. So we're looking to expand that. So we have -- actually, we do have some -- just supply, I would say, production constraints in the Netherlands that we're trying to solve here in the U.S. So once we get that behind us, I think we'll see some more geographic expansion as well. But we've got some things to work out so that we can grow the top line. It's production-wise, capacity-wise.
Simon Wong: Okay. All right. A couple of questions for Jeff. We saw gross margin expand nicely year-over-year, but it did take a step back from the first quarter. How do you see gross margin progressing for the rest of the year?
Jeff Knutson: Yes. I think it's going to be right around the range between Q1 and Q2, depending on mix. Like John mentioned, our aftermarket mix, especially oil and gas aftermarket, in Q2 was a little bit lower than we've seen in previous quarters and that has a little bit of a drag on margin. We did see an uptick in orders as we closed out the quarter. So that was a positive sign. So I think it's going to be in this range and kind of what we've said before, in the high 20s, trying to get to 30% is what we would expect.
Simon Wong: Okay. One more question, if I could sneak one more in. What's your CapEx for the full year -- CapEx outlook for the full year?
Jeff Knutson: Yes. I think $10 million. We've been pretty consistently targeting $10 million. I think we've got a run rate so far, I guess, that's pretty close. So unlike maybe some previous years where it was really back end loaded, I think we've got orders in place to get us right around that $10 million, maybe a little bit less.
John Batten: Yes, Simon. Yes, there’s more on order, but the lead times for machine tools, gear grinders, they’re still out over 12 months. So we have big machine tools on order, but they’re not coming in until next fiscal year.
Operator: [Operator Instructions] Our next question comes from the line of Mike Greene from Neuberger.
Rand Gesing: Do you hear me guys? This is actually Rand. Great. So look, if we use the Q2 like $5.5 million of EBITDA, how would you guys expect sort of the second half quarters to behave so we get to -- we see additional top line.
Jeff Knutson: Yes. I think we'll be up. I think we've been hovering around $30 million trailing 12-month EBITDA. I think we'll grow through the second half. So getting through the second half back up to like $7.5 million to $8 million.
Rand Gesing: Okay. Great. And given the backlog plus what you're hearing about end markets, you guys -- I'm assuming you feel pretty good about the second half, having growth revenues year-over-year. Is that the case? And I was wondering about next year if you have any sort of visibility on continued top line growth year-over-year?
John Batten: Yes. Rand, it's John. I think we've -- given our backlog and what we're -- what we saw in orders in the second quarter and some feedback we're getting in the first quarter, we're obviously pretty optimistic. The backlog is there for the second half do very well. It's just a question of the unforeseen surprises in the supply chain, things taking longer to get to us because of concerns in the Middle East and shipping taking longer. But the backlog is there to have a very nice second quarter. We're reading everything that you're reading about soft landing, recession in our market in the second half of the year, the beginning of our next fiscal year. So far, Rand, our orders and what we're hearing from our customers, there's a little bit of that, but we're also seeing some optimism in markets that had been quiet for a long time. And I mentioned in my comments, the Asian marine market, particularly tugs, whether it's for mining, seem to be doing very well. So I think, for us, it's too soon to tell, but we're probably a little bit more optimistic than most going into our fiscal '25.
Rand Gesing: Okay. Great. Let’s leave it there. I’m still trying to get out and visit with you guys when the weather gets a little better. But great work on repositioning the company.
Operator: Thank you, ladies and gentlemen. As we have no further questions at this time, we will conclude today's conference call. We thank you for participating, and you may now disconnect.
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