Twin Disc , Incorporated (NASDAQ:TWIN), a global leader in power transmission technology, reported solid financial results for the fiscal 2024 third quarter, with a focus on margin expansion and strong free cash flow. The company's acquisition of Katsa Oy is set to bolster its Industrial and Marine Technology market presence. Strong demand in the commercial and government defense sectors led to a 3% increase in marine and propulsion systems sales, while the land-based transmission business saw a 3% decrease, and industrial segment sales dropped by 15%.
Despite these mixed results, Twin Disc's backlog continues to grow, and the company is optimistic about its inventory reduction going into the fourth quarter. With a reported net income of $3.8 million on sales of $74.2 million, and a gross profit margin of 28.2%, Twin Disc is in a strong financial position. The company reduced its debt by $24.1 million and ended the quarter with a cash balance of $23.8 million. Looking ahead, Twin Disc plans to invest in R&D, pursue strategic M&A opportunities, and return capital to shareholders through dividends and share repurchases.
Key Takeaways
- Twin Disc reported a net income of $3.8 million on $74.2 million in sales for the fiscal 2024 third quarter.
- Gross profit margin increased to 28.2%, with strong EBITDA of $7 million.
- The company announced the acquisition of Katsa Oy to expand in the Industrial and Marine Technology markets.
- Sales increased in the marine and propulsion systems by 3% but decreased in the land-based transmission and industrial segments by 3% and 15%, respectively.
- Debt was reduced by $24.1 million, and the company ended the quarter with $23.8 million in cash.
- Twin Disc's long-term strategy includes a focus on hybrid and electrification solutions and strategic partnerships.
- The Katsa acquisition is expected to close within 30 to 40 days.
Company Outlook
- Continued growth and value generation for shareholders is a primary focus.
- Inventory levels are expected to continue decreasing.
- The company is optimistic about further progress in inventory reduction in the fourth quarter.
Bearish Highlights
- Sales in the land-based transmission business and industrial segment declined by 3% and 15%, respectively.
Bullish Highlights
- Twin Disc's backlog continues to grow on a sequential and year-over-year basis.
- Strong demand in the commercial and government defense sectors drove marine and propulsion systems sales growth.
Misses
- No specific misses were highlighted in the provided context.
Q&A Highlights
- Approximately 10-15% of the quarter's revenue came from oil and gas customers, with an even split between consumables and units.
- An uptick in new spare parts orders from North American frac customers was noted.
- Executives expect increased market activity due to events in the Middle East and Asia.
- Improvement in order numbers for the industrial segment and opportunities in the hybrid and electrification markets were discussed.
In summary, Twin Disc's fiscal 2024 third quarter results show a company successfully navigating market challenges while positioning itself for future growth through strategic acquisitions and a focus on emerging technology markets. The acquisition of Katsa Oy is a clear step toward expanding Twin Disc's footprint in the Industrial and Marine Technology sectors. With a solid financial standing and a clear strategic direction, Twin Disc appears well-equipped to capitalize on opportunities in the evolving landscape of power transmission technology.
InvestingPro Insights
Twin Disc's recent performance showcases its financial resilience and strategic positioning in the power transmission technology industry. The company's commitment to margin expansion and strong free cash flow is reflected in the key InvestingPro Data metrics. With a market capitalization of $225.05 million and a healthy Price/Earnings (P/E) ratio of 21.7, Twin Disc is maintaining a competitive stance in the market. The adjusted P/E ratio for the last twelve months as of Q2 2024 stands at 18.28, indicating a favorable earnings outlook relative to the stock price.
The company's revenue growth is also noteworthy, with a 15.6% increase over the last twelve months as of Q2 2024. This growth is consistent with the company's reported sales increase in the marine and propulsion systems sector. Furthermore, Twin Disc's gross profit margin of 28.68% aligns closely with the reported 28.2% in their fiscal 2024 third-quarter results, underscoring their ability to manage costs effectively.
InvestingPro Tips for Twin Disc suggest a positive financial outlook. The company's liquid assets exceed its short-term obligations, indicating a strong liquidity position. Additionally, Twin Disc operates with a moderate level of debt, which is a reassuring sign for investors concerned about financial stability. Analysts predict that Twin Disc will be profitable this year, and the company has already been profitable over the last twelve months, reinforcing the optimistic sentiment expressed in the company's outlook.
For readers interested in further insights and analysis, there are additional InvestingPro Tips available on Twin Disc's profile at https://www.investing.com/pro/TWIN. To access these tips and gain a deeper understanding of Twin Disc's financial health and market potential, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
Full transcript - Twin Disc (TWIN) Q3 2024:
Operator: Thank you for standing by. My name is Alex, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fiscal 2024 Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Jeff Knutson, Chief Financial Officer. Please go ahead.
Jeff Knutson: Good morning, and thank you for joining us today to discuss our Fiscal 2024 Third 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 forward-looking statements are contained in the company's Annual Report on Form 10-K, copies of which may be obtained by contacting you to 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 third quarter conference call. Let's begin today's call with some highlights. We delivered solid results in the third quarter, continuing the trends seen throughout the year. As we continue to capture healthy end-market demand, we achieved another quarter of margin expansion, as well as robust free cash flow generation. These consistent results underscore the long-term impact of operational improvements we've made throughout our business in recent years, as well as ongoing tailwinds provided by disciplined working capital management to support overall performance. In-line with our strategic focus on expanding our presence in the Industrial and Marine Technology markets, we are pleased to have announced our recent agreement to acquire Katsa Oy, a leading manufacturer of high quality power transmission components and gearboxes based in Finland. This acquisition will broaden Katsa's global reach as we leveraged Twin Disc global sales, distribution and service network, while also generating cross-selling opportunities through Katsa's existing customer base as we tap into its long-standing relationships with leading European OEMs, similar to the dynamics we've achieved with that. With our strong balance sheet and flexible financial profile, we will continue to explore similar strategic opportunities to drive sustained growth for Twin Disc. Moving on to results by product. Sales in marine and propulsion systems increased 3% year-over-year. The global commercial markets have remained active, providing a strong foundation for sustained demand. We continue to see an uptick in government defense spending, tied to recent geopolitical turmoil, leading to an increase in patrol boat projects and other activities linked to fleet readiness. [Veth] (ph) continues to perform well, supporting overall growth in Marine and Propulsion as the mega yacht market remains strong. We saw a solid 16% sequential increase in six month backlog, driving the recent inventory build to support rising demand. This uptick underscores the enduring strength of the Veth and Rolla partnership which has created an additional competitive edge for Twin Disc by unlocking additional growth opportunities within both new and established markets. We also continue to capture increased demand for workboat marine transmissions, particularly in the Asia Pacific region due to the resurgence of projects for inland tugs in the region. A portion of this business is being driven by solid demand for coal tugboats utilized for transporting raw materials and coal from Indonesia to China. We will continue to focus on tapping into these regional opportunities to position the business for further growth. On to the land-based transmission business. Sales decreased 3% year-over-year, driven in part by sustained exports to the Asian oil and gas market. That said, even if sustainable energy is still a focus globally, oil and gas exploration activity remains strong, and we are encouraged by demand in the North American oil and gas market. Additionally, the increasing [ARP] (ph) demand remains quite strong, which we will be even better positioned to capture with the addition of Katsa. Similar to last quarter, sales in our Industrial segment remained off, declining 15% year-over-year. This dip can largely be attributed to reduced demand from our lower horsepower range of our offer. Additionally, while commoditized products have experienced continued weakness, demand for more sophisticated higher content products has been relatively more resilient. We remain focused on advancing our OEM partnerships, which are crucial for our long-term growth strategy and allow us to leverage synergies and reach new markets effectively. Next, I'll speak to inventory and backlog. One of the key indicators for our company's strength in into our backlog, which has been steadily increasing over the past six months. We are pleased to report that our backlog continues to grow both sequentially and on a year-over-year basis. Critically, inventory as a percentage of backlog has continued to trend downwards as well, reflecting our commitment to ongoing operational efficiency. Looking ahead, we anticipate further progress in inventory reduction during the fourth quarter of 2024, as we continue to work through our backlog supporting continued cash generation. I'd like to briefly address our long-term strategy before Jeff takes us through the financial details. Our commitment to innovation and adaptation is at the forefront of our long-term strategy. We are steadfast in our mission to expand our presence in the hybrid and electrification solutions for marine and land-based applications. As demonstrated by our agreement to acquire Katsa, we are committed to our efforts not only to develop but also acquire cutting-edge technologies that meet the demands of customers in our global markets. Our recent success in expanding the Veth product line into untapped markets and regions also underscore our dedication to broadening our reach and solidifying our position as an industry leader. Moreover, our operational initiatives are geared towards enhancing efficiency and responsiveness, exemplified by the ongoing rationalization of our global footprint. By streamlining operations, we not only boost our competitive edge, but also strengthen our ability to cater to our customers' needs. With a keen focus on industrial and marine technology sectors and protecting those with a hybrid centric focus we are poised to capitalize on emerging opportunities and further augment our portfolio. In closing, our unwavering dedication to innovation, operational excellence and strategic partnerships will continue to drive our success and deliver value to all our stakeholders. With that, I will now turn it over to Jeff to discuss the financials. Jeff?
Jeff Knutson: Thanks, John. Good morning, everyone. We delivered sales of $74.2 million for the quarter, up $389,000 or 50 basis points from the prior year period as overall demand remains solid. Net income attributable to Twin Disc for the third quarter was $3.8 million or $0.27 per diluted share compared to $3.3 million or $0.24 per diluted share in the third quarter of fiscal 2023. Gross profit margin increased to 28.2% compared to 26.1% during the prior year period, and gross profit increased 8.7% to $20.9 million. This improvement reflects the realization of previous price increases, continued easing of supply chain headwinds and successfully executing our operational playbook. Marine & Propulsion Systems reported 3% growth, while land-based transmission and industrial sales reported a year over sales declines of 3% and 15%, respectively. Looking at top-line distribution across geographies, sales continue to increase across the Asia Pacific and European regions compared to the prior year, supported by robust demand, while the proportion of sales in North American markets declined. We also saw a notable increase in sales within the Middle East, in particular, Turkey, which drove sales up $2.2 million year-over-year with increased best sales for offshore wind projects. We continue to strengthen our balance sheet due to solid cash generation delivered in the third quarter. We reduced debt by $24.1 million to negative $6.8 million compared to the prior year period. And ended the quarter with a cash balance of $23.8 million, approximately $9.8 million higher versus the prior year period. EBITDA remained strong at $7 million compared to the same amount during the prior year period. We continue to decrease our leverage ratio this quarter to negative [0.3 times] (ph), putting us in an excellent position to invest in our business while executing inorganic growth opportunities. As noted earlier, gross profit margin for the third quarter increased to 28.2%, expanding approximately 210 basis points from the prior year period, again, due to cost reduction initiatives and the impacts of operational efficiency. Looking towards the fourth quarter, we expect challenging year-over-year comparison due to the historically strong results delivered in the prior year period. That said, we do anticipate continued strength in margins and cash generation. Now on to capital allocation. With our solid balance sheet strengthened by ample cash generation, we continue to explore strategic opportunities for M&A, particularly in those areas that align with our vision for the future. Our focus on marine technology, industrial and the hybrid electric sector underscores their dedication to staying at the forefront of innovation, and these areas present significant upside potential and complement our existing capabilities and expertise. Simultaneously, we are allocating capital towards internal investments aimed at driving organic growth and operational excellence. This includes substantial investments in R&D to foster innovation expansion into the geographic markets to capitalize on emerging opportunities and the continued strengthening of our marketing efforts to drive market penetration. Furthermore, we remain committed to consistently return capital to shareholders through share repurchases and dividend payments. Overall, our capital allocation strategy reflects a balanced approach aimed at driving sustainable growth and fostering innovation while maintaining financial prudence and flexibility. I'd like to now turn the call back over to John to share his 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. Our third quarter performance highlights our continued operational excellence, marked by a notable margin expansion and robust cash generation. Our strong balance sheet, bolstered by consistent profitable growth and solid working capital management positions us favorably to navigate market uncertainties and take advantage of strategic growth opportunities. Looking ahead, we maintain our cautiously optimistic outlook driven by sustained demand dynamics. Our resilient amid external challenges reaffirms our agility and adaptability in capturing market opportunities, and our performance not only reflects our operational prowess, but also underscores our commitment to delivering long-term value to shareholders. I'd like to thank all of our teams for their continued hard work and dedication to supporting our business this quarter. As we approach the end of the fiscal year, we look forward to continuing our growth journey as we drive Twin Disc forward and generate long-term value for our shareholders. That concludes our prepared remarks. Jeff and I will be happy to answer your questions.
Operator: Thank you, we will now begin the question-and-answer session. [Operator Instructions] And we have one question that comes from the line of Simon Wong with Gabelli Funds. Please go ahead.
Unidentified Analyst: Hi, this is [Rita] (ph) filling in for Simon today. Maybe just my first question here. I guess how much of this quarter's revenue is derived from oil and gas customers? And I guess what is the break that down between new equipment and consumables.
Jeff Knutson: Yes, it's a good question. I would say it's been a pretty normal quarter for oil and gas. In terms of percentage of revenue for the quarter. I'm doing some quick math probably around 10% to 15% kind of evenly split between consumables and units.
Unidentified Analyst: Okay. Thanks. And then -- and maybe my second question, I guess, what are you seeing -- well, I guess what is the company seeing in terms of North American frac customers?
John Batten: I would say -- this is John. I'd say we've seen an uptick in the calendar year in new spare parts orders and we have some limited units going out. But I’d say that, I mean, our outlook is that will probably pick up through the rest of the calendar year, just given what's happening in the Middle East, I think we are going to see some more activity here at home as well as in Asia.
Unidentified Analyst: Okay. Thanks. And then I guess you're working down your inventory for 4Q -- fiscal year 4Q '24. How should we think about inventory as a percentage of backlog for next quarter?
Jeff Knutson: I think it's going to keep -- continue to ratchet down. We are not going to have incredible shift. I think we'll see a trajectory kind of like what we've seen in the last few quarters.
Unidentified Analyst: Okay. And then just my last question here. I guess any update on the timing of closing of the Katsa acquisition? And does the acquisition need approval from Finland's Economic Minister to close?
John Batten: Yes. So we did get that approval this week, and we should be closing, I would say, around the end of the month within 30 days to 40 days will be closed.
Unidentified Analyst: Okay, thank you, that’s all my question.
John Batten: Thank you.
Operator: Your next question comes from the line of Will Nasgovitz with Heartland. Please go ahead.
Will Nasgovitz: Good morning. Thanks for taking my questions. And congratulations on a strong quarter, particularly on the free cash flow generation. It's great to see. I'm just curious on the industrial side. just on industrial, I know you commented in your opening remarks -- are you seeing signs of stabilization there? You had a kind of sequential pickup in broader ordering in some of that in the industrial bucket, just overall thoughts on the Industrial segment would be helpful.
John Batten: Yes, I’d say that this past quarter has been the best order quarter in a few quarters. And it's been broad-based as far as the lower horsepower range, both in Europe and in the US, and in Australia, I would kind of be the big markets for us. But we've seen it pick up a little bit. Again, this past quarter was a much better order quarter. And we have some of the higher -- some of the gearboxes with electronic controls that have been on order. So again, it's looking up, but it's still -- we got a ways to go to get back to where we were.
Will Nasgovitz: Okay. And then the acquisition, as I recall, maybe it was $30 million in revenue or something around that level. Can you just provide any additional perspective on just like the margin profile of the company? And is it a new end market, new customers? And just some additional color would be useful.
Jeff Knutson: Sure. So I would say the margin profile is really -- it kind of falls right in-line with where we are. Depending upon the product line, it's going to bounce around high 20s to low 30s. But it's -- there's so much there, Will. They're going to be a great supplier for us on gears for our product that we build in the US in the Netherlands, in Italy and their product -- they started off as a component supplier, so they're heavily invested in very complex machining centers to do gears. They were I would say the last-third of their life, they've been getting into the gearbox business, whether it's in the industrial space and specialty marine gears, they do transfer cases for all-wheel drive military vehicles. Until recently, it was just Finland. But then again, as Finland has joined Mato, they've gotten orders from Germany and Sweden. So we see some good market expansion. And again, if you look at the horsepower range where they have product, it's pretty much right on top of Twin Disc. These are all customers and markets that we understand, but they have just been so heavily focused on the European market and the Scandinavian market that we feel that there's a real potential to bring them out into the global market. So all of our guys, whether they are in the Marine business, the industrial business or the transmission business, they are chomping at the bit to get a hold of the Katsa products and introduce them to the global customers.
Will Nasgovitz: Thanks for that elaboration. I guess my final one here is just back to our opening comments, John, on the end you before you hand it off to Jeff, just talking about innovation, electrification, hybrid, et cetera. I'm just wondering if you could just frame for us the opportunity. Obviously, you steeped in know-how and traditional transmission -- can you just frame for us any perspective on the opportunity as you continue to take this technology, there's now how to apply to the hybrid and electrification markets? Thank you.
John Batten: Yes. So Will, there is a huge opportunity and it really is in our space, off-highway, whether it's marine or construction or RF, it's putting the package together for the OEM to help them. So we have -- if you think about our mechanical product, whether it's a pump drive or transmission, it's kind of the heart of hybrid. So it allows for an ICE (NYSE:ICE) engine propulsion system, but then also has input for electric motor coming from a battery. And our control system is the brain. And there are a lot of other parts that we put in -- put together in the system, the inverter, all sorts of other things, the wiring. But it's the content, one crane application we would sell a gearbox, let us just say, the $20,000. The hybrid system can be $160,000 to $200,000. That's a big multiplier. But again, we are relying on that OEM to be able to sell that hybrid crane for a considerable premium over a traditional crane. We look at some of the marine applications that we are doing. We are quoting systems that are $500,000 to $1 million, depending upon if it's single or [Twin’s crew] (ph). And just a few years ago, that would have been almost the cost of the entire vessel. So we're proving to ourselves and our customers that we have the technological solution. Now we're just waiting for these things to get through testing and seeing how they play out in the market. If the market is willing to spend extra for this type of performance in this type of, I would say, just profile as far as emissions. Now in some cases, in California, they're mandating that some of these government-funded vessels go completely electric or hybrid. So we see some wins coming up very quickly. In some of the other markets, whether it is construction or other things, it is a wait and see. They are building the equipment and then seeing how well they are accepted in the market. But just to answer your question, it's a big -- our content can easily can go up from 4 times to 8 times pretty quickly.
Will Nasgovitz: Well, thanks for that elaboration and again congrats on the great quarter and best of luck in your fourth quarter. Thanks so much for the time.
John Batten: Thanks Will.
Operator: That concludes our Q&A session. I will now turn the conference back over to John Batten for closing remarks.
John Batten: Thanks, Alex. Again, we'd like to thank you for participating in our Q3 call and look forward to speaking with you in August for our Q4 and Fiscal Year End '24 Conference Call. Thank you, everyone.
Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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