TWIN DISC INC Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Acquisition: Completed acquisition of Katsa Oy, a leading manufacturer of power transmission components and gearboxes, expected to broaden global reach and accelerate cross-selling.
• Financial Performance: Fourth quarter sales up 0.6% Y/Y to $84.4M, full year 2024 sales $295.1M up 6.6% Y/Y. Adjusting for divestiture and asset sales, operating income improved. Strong cash generation, EBITDA up 2.9% to $26.5M, free cash flow $25M, and net leverage ratio 0.2 times.
• Strategic Focus: Focus on innovation in marine technology, industrial, and hybrid electric sectors. Investing in R&D, geographic diversification, and marketing. Aim to expand portfolio via strategic M&A opportunities, with active look into industrial marine technology sectors.
• Long-term Targets: By 2030, aim for $500M revenue with 30% gross margin and at least 60% free cash flow conversion.

Segment Performance

• Marine and Propulsion Systems: Fourth quarter sales up 3% despite challenging Y/Y comparison and softer demand in Canadian fishing and pleasure craft. Saw demand in global commercial end markets, government defense spending-driven patrol boat projects, and Veth's collaboration with Rolla for ELITE thruster performing well due to luxury boating market strength. Backlog slightly decreased as inventory is worked through. Asia Pacific workboat marine transmissions showed strength.
• Land-based transmissions: Sales up 9.3% Y/Y, largely driven by RF with record backlog. Exports to oil and gas markets flat but activity in Asia and North America remains meaningful.
• Industrial: Sales down 8.9% Y/Y, sluggish through the year but slight recovery in Q4. Lower agriculture and construction demand for commoditized products, but higher content/sophisticated products remain resilient.

Guidance

• Fiscal 2025 guidance is in line with 2024 in terms of revenue and EBITDA, but expects growth with the addition of Katsa Oy. Capex target around $10M. By 2030, targets $500M revenue, 30% gross margin, and at least 60% free cash flow conversion.

Risks

• No specific risks explicitly detailed, but general macroeconomic uncertainty and potential supply chain challenges could impact performance.

Q: Update on EFAC offering and revenue from oil and gas sector.

A: EFAC offering still in testing with hope for orders, but currently uptick in spare parts for diesel rigs. Revenue from oil and gas sector consistent with previous quarters, mix of forward market, aftermarket, and transmission units with shipments to China and North America.

Q: R&D pipeline.

A: Notable hybrid system for Manitowoc crane, ELITE thrusters for mega yacht market, and focus on expanding Veth line, industrial components from Katsa, and developing PTI gearboxes for hybrid/electric readiness.

Q: Katsa's revenue contribution to Q4 results.

A: Katsa had no P&L impact in Q4, only opening balance sheet and acquisition costs.

Q: Capex outlook for 2025.

A: Target around $10M, similar to previous year but hoping for a bit higher due to investing in machine tools.

Q: Free cash flow nonrecurring elements and inventory rightsizing.

A: No true one-off nonrecurring adjustments, inventory rightsizing in range of $5-10M with room for further improvement.

Q: Industrial segment outlook and Katsa's impact.

A: Industrial market could be flat, but Katsa's addition broadens industrial line and helps accelerate growth, with their industrial business around $40M and 1/3 of it being relevant to Twin Disc's industrial focus.

Q: Marine customer segmentation.

A: Commercial Marine is biggest bucket, followed by pleasure crafts (sweet spot 50-100 feet) and military/government, with Commercial Marine being revenue-generating vessels as the number one market.