Twin Disc, Incorporated Price & Performance (TWIN)

During today's call, management will also discuss certain non GAAP financial [indiscernible] For a definition of non GAAP financial measures, 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. Good morning, everyone, and welcome to our fiscal twenty twenty five second quarter conference call. I appreciate you joining us today. We are pleased to report another quarter of strong double digit sales growth with second quarter sales of $89,300,000 reflecting a 23.2% year over year increase as we close out a successful first half of the fiscal year. We continue to see meaningful contributions from Cata Oi, which is allowing us to extend our global footprint and deepen our engineering capabilities. Particularly in Europe and North America. We remain committed to ensuring seamless integration of Casa and are excited to unlock its full potential. Our focus is on capitalizing on cross selling opportunities optimizing shared cost efficiencies, streamlining our business lines and maintaining strong execution.

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. 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 segments. Sales in our 23.9% year over year.

This performance was driven by ongoing strength in our Vets product line, which once again delivered record orders as demand remains consistent globally. Incoming orders were driven in part by demand from both new North American projects within commercial applications in the luxury yacht markets. Supported by our Roll Up partnership. Meanwhile, increased government defense spending has sustained demand for patrol boat projects mainly driven by evolving market dynamics surrounding ongoing geopolitical [indiscernible] in Southeast Asia and Europe. The integration of VET continues to yield meaningful synergies positioning us to capture market opportunities in conventional electric and hybrid propulsion applications with our hybrid marine transmissions and control systems. We remain focused on leveraging these synergies to address evolving customer needs particularly around sustainability and electrification. In our land based transmission, sales increased 19.8% year over year, reflecting continued momentum in our Airport Rescue and Firefighting transmission business. Where we shipped a significant volume of units this quarter As we mentioned last quarter, demand for ARF vehicles remained strong driven by our advanced configurations, unique torque capabilities, and innovative power dividing systems, which continue to position us as the supplier of choice. This trend persists as we benefit from growing international airport development, the replacement of aging fleet and the global shift towards emissions compliant transmission.

Turning to oil and gas. Exports were down during the ongoing macroeconomic headwinds Twin the Asia Pacific region and subdued new builds in North America.

However, we anticipate momentum will begin to build as we have seen recent uptick in quoting activity. Aftermarket demand for replacement parts and oil and gas applications remained stable underscoring the resilience of both our installed base and the demand driven by North American usage trends. As fleets continue to age through the replacement cycle, this indicates the potential for new builds into sustained growth for the business. Our Industrial segment grew 44.8% year over year driven by both the addition of Casa and a rebound in our are seeing a continued stabilization sequentially within this segment as order momentum from our Lufton facility has picked up. Overall segment demand has improved particularly for higher end We believe our continued engineering focus positions us to capture share in markets that demand specialized solutions whether that's agricultural equipment, construction machinery or other high torque applications. Our backlog remains healthy and we are encouraged by the rate sustained order momentum across our portfolio.

As we executed during the quarter, our six month backlog is lower both sequentially and year over year due to high shipments. Foreign exchange also accounted for $11,500,000 versus the prior year [indiscernible] As we move through the year, we remain committed to disciplined inventory management, optimizing to lower inventories compared to the backlog.

To conclude my comments, I'd like to address the significant progress we have made to date in executing our long term strategy. Over the past several quarters, we have maintained strong focus on our long term strategy, and our recent acquisitions underscore that commitment. The successful integration of Casa expanded our engineering capabilities and market reach, particularly in Europe and North America. By enhancing our portfolio with TASTA's specialized solutions, are capturing share in industrial end markets that value customization and technical expertise. From an operational perspective, we have made significant progress in integration, rationalizing inventory, aligning product lines, and leveraging across selling opportunities to enhance customer experience. At the same time, we continue to optimize cost through improved supply sourcing, Kaizen driven facility enhancement and strategic inventory management positioning us for sustained margin expansion. Looking ahead, we will remain disciplined in executing our operational initiatives and exploring additional strategic acquisitions that complement our core expertise. 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. [indiscernible] Thanks, John.

Good morning, everyone. In the second quarter, we delivered sales of 89,900,000.0 Twin percent from the prior year. Driven by a $10,000,000 incremental benefit from CASM, On an organic basis, which excludes the impact of of acquisitions and foreign currency exchange, revenue increased 10.1% as demand in our global end markets remained healthy. Net income attributable to Twin Disc for the second quarter was $900,000 or $0.07 per diluted share compared to a net loss of $900,000 or $0.07 per diluted share in the second quarter of fiscal Twin twenty four. Earnings per share were impacted by an increase in other expenses related to interest expense and additional pension amortization in the quarter. Gross profit margin decreased to 24.1% compared to 28.3% during the prior year period. And gross profit increased 5% to $21,700,000 The decline in gross profit margins was driven by a $1,600,000 inventory write down related to the Casa acquisition as we eliminated redundant inventory along with the $300,000 purchase accounting amortization expense tied to the acquisition and unfavorable product mix in the quarter. Looking at top line sales distribution, we delivered double digit growth in all three of the Marine and propulsion systems Land Based Transmission and Industrial segment.

This was mainly driven by ongoing healthy market demand and geographic expansion including the additional benefit of the Costa acquisition and the continued stabilization in the Industrial segment. Which fostered strong year over year growth. Touching on geographic distribution, we again saw increased sales in Europe as a result of our acquisition of Casa as well as the larger proportion of sales from North American markets, unstrengthened the VET projects in the region. Compared to the second fiscal quarter of twenty twenty four, net debt increased $12,300,000 to $9,000,000 in the quarter, primarily driven by an increase in total debt due to the Costa acquisition We ended the quarter with a cash balance of $15,900,000 24.3% lower than the prior year. Operating cash generation of $4,300,000 was strong in the quarter and EBITDA increased to $6,300,000 in the second quarter, up 13.5% compared to the second quarter of twenty Twin. Gross margin decreased approximately four twenty basis points from the prior year period, largely reflecting the impact of inventory rationalization in our Industrial segment as we continue to integrate Casa and eliminate redundant inventory. Additionally, we saw unfavorable mix in the quarter, which further pressured margins. 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. In terms of inflationary and supply chain challenges, we have seen near term shipment delays that impacted the prior quarter largely subside. On capital allocation, our priorities remain same. We are committed to generating consistent cash flow in order to maintain leverage within a comfortable range. Our primary focus for acquisitions is on businesses that allowing us to accelerate growth in these key markets while enhancing our value proposition to customers. 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.

By balancing disciplined external investments with thoughtful internal [indiscernible] and shareholder value creation both now and in the future.

I'd now like to turn the call back to John to share some closing remarks. Thanks, Jeff.

In summary, we delivered another strong quarter of top line growth. Robust demand in marine and propulsion, and recovery in industrial along with ongoing integration successes with Costa.

While we navigated margin headwinds from product mix, we have made proactive steps to right size our inventory rationalization and enhance profitability. 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. 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. 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. As a reminder, to compile the roster. And our first question comes from the line of Simon Wong from Gabelli Fuentes. The line is open. Jeff, John, good morning. Hey, Simon. Just a quick note. John, unfortunately wasn't able to join us for the Q and A session today, but I'm happy to take your question and anybody's question. Okay. No problem. Just quick question on the oil and gas. You talked about export being down. Can you quantify how much your oil and gas businesses this quarter? And how much was it down year over year?

Yes, good question and I was prepared for that question. A little under 8% of revenue for the quarter and down compared to the prior year Q2, down about 24% Twin.

Okay. In your prepared remarks, you talked about quarter activity remains high. Is that North America quoting activity or is that Asian quoting activity?

It's both. It's North America, it's Asia and also some South American activity as well.

South America or [indiscernible] Okay. And then it sounds like ordering trend or activity from the oil and gas customers in light of the change in administration you're seeing seeing them getting back to work. Is Is that correct? Statement?

I think maybe it's a little bit early to to say that I think what we've seen is yes, increase level of activity, some new calls, some new potential projects So it feels like, yes, we would say it kind of a renewed level of activity in that market 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?

Yes. I mean that's certainly our goal, right? And 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. Free cash flow in Q2 of about $6,400,000 So, yes, we're still targeting to get to that 6% 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, I think no big change there.

We were, I would say, a little bit behind pace. We've spent something like $5,000,000 through the first half of the year. We have some bigger projects coming through in the second half I think in the range of $12,000,000 to $14,000,000 is is probably where I'd peg it right now. Okay. If I could squeeze one more in if I can. You talked about R and D, investing in R and D to expand the market or to capture growth in market. Anything that you can talk about that's being commercialized year that will contribute to growth?

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 we can the hybrid electric market and that's an ongoing development. We get we continue to get more and more traction there. More orders, more interest, more activity and capabilities in that market and that's a big focus growth Perfect. Thank you.

Thank you. Again, And our question comes back from the line of Simon Wong from The Belly Funds. Please go ahead. Jeff, since no one is asking questions, can we get one more in? The electric frac fleet that you are piloting two, three quarters ago, any uptick on on that product?

Yes, I would say it's stable. It's ongoing. I wouldn't 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. Seems like there are no more questions in the queue. That concludes our question and answer session. It also concludes [indiscernible] conference call Thank you for joining. You may now Please wait. The conference will begin shortly.