Greetings, and welcome to Twin Disc, Inc. Fiscal Fourth Quarter 2022 FinancialConference. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stan Berger. Thank you. You may begin.

Thank you, Doug. On behalf of the management of Twin Disc, we are extremely pleased that you have taken the time to participate in our call, and thank you for joining us to discuss the company's fiscal 2022 fourth quarter financial results and business outlook. Before introducing management, I would like to remind everyone that certain statements made during this conference call, especially those that states management's intentions, 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. By now, you should have received a copy of the news release, which was issued this morning before the market opened. If you have not received a copy, please call Nancy Rasmussen at 262-638-4000, and she will send a copy to you. Hosting the call today are John Batten, Twin Disc's Chief Executive Officer; and Jeff Knutson, the company's Vice President of Finance, Chief Financial Officer, Treasurer, and Secretary. At this time, I will now turn the call over to John Batten. John?

Thank you, Stan, and good morning, everyone. Welcome to our fiscal 2022 fourth quarter and year-end conference call. As usual, we'll begin with a short summary statement, and then we'll be happy to take your question. Before Jeff goes over the quarter results, I will touch on some of the operational highlights from the quarter. Obviously, with demand, a lot went right in the fourth quarter, and our global operations team did a great job getting out as much as we did. The momentum built through the quarter as we got in a lot of the much-needed missing components, whether it was chips, wiring, harnesses, gears, or castings, and we were able to catch up on our backlog. We continued to see strong demand in Asia for oil and gas, but we also saw improving demand in our global marine markets, industrial markets, and our domestic oil and gas markets. We have received new unit orders for the domestic pressure pumping fleet, and we're optimistic that this will improve in fiscal ‘23. We have orders for both our 7600 and 8500 transmission series. Every facility, every product, did a great job delivering in the fourth quarter, but there was a tremendous push from the team here in Racine to catch up on past due products because of supply chain issues. Their ability to overcome parts shortages was impressive. Whether it was redesigns for alternate parts availability, or developing new sources, it all came together, this quarter. Their efforts also flowed down through the margin lines, with better mix, better efficiency, and quicker reactions to inflationary pressures. Operational performance was better across the board. During the quarter, we continued to work extensively with our supply chain to prioritize our order board and to take care of as many customers as possible.…

Thanks, John. Good morning, everyone. I'll briefly run through the fiscal ‘22 fourth quarter and year-to-date numbers. Sales of $76 million for the quarter were up almost $10 million, nearly 15% from the prior year fourth quarter, and up $16.7 million or 28.1% from the previous quarter. The sales increase reflects continuing growth and demand across our markets, along with the improved operational execution John was talking about, through the ongoing supply chain challenges. The operations teams managed to overcome many of the supply chain constraints that hampered production in previous quarters. However, these supply chain imbalances persist and will continue to challenge our operations team as we move into fiscal ’23. Electronic components remain the most challenging area to manage, as the industrial product line has the least exposure to the electrical component shortage. Sales of industrial products improved by nearly 42% compared to the prior year fourth quarter. With greater exposure to electrical components, off highway transmission sales grew by 21.4%, and marine propulsion sales were up by 6.7%. By region, sales in the North America were up 28%, Asia Pacific was up 40%, and Europe was down 15%. Foreign currency exchange was a net negative $5.1 million impact to sales in the fourth quarter, and negative $8.5 million for the full year. For the 12 months of fiscal ’22, sales finished ahead of the prior year by $24.3 million or 11.1%. The fourth quarter margin percent was 31.8%, compared to 27.7% in the prior year fourth quarter. The improved margin in the current year is a result of increased revenue, a more profitable mix of product, and the positive impact of pricing actions taken early in the second half to offset the impact of inflationary cost increases across our supply base. We continue to monitor the inflationary…

Thanks, Jeff. And I'll spend a quick moment on our outlook. Obviously, when you look at our backlog, up 40% versus a year ago, we are feeling proportionally better heading into fiscal ’23. New unit orders for North American oil and gas have started back up, and the fleet continues to be overhauled. And our backlog in marine and industrial is very strong as well. Our concerns continue to be everyone's concerns. Global supply chain issues and the situation in Europe and the toxic cocktail of the war in Ukraine, Russian national gas supply, and soaring energy prices in Europe. However, I hope many of you have had the chance to see the press releases on the Hinckley yacht, SilentJet. Our engineering team worked very closely with the team at Hinckley to develop a parallel hybrid system for their boats. The result is amazing and a glimpse into the future. This project helped us tremendously to develop our hybrid control system, which can be used for many, many different applications and many markets. I could not be more proud of our engineering team and the code processes and supply chain that they have developed and continue to develop. That concludes our prepared remarks. And now, Jeff and I, will be happy to take your questions. Doug, please open the line for questions.

Thank you, [Operator instructions]. Our first question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.

Hi. this is Jason Vernoff for Noah Kaye. Can you help us unpack how much of the gross margin improvement was price versus mix? And as you look around the backlog composition, do you foresee gross margins remaining above 30% in the next few quarters? Thank you.

Yes, I can answer that one for you. So, as we look at year-over-year Q4, about $3 million of the increased gross profit was volume, with another $2 million combination of mix and price. I would say of that remaining $2 million, about $1.5 million would've been mix-driven, with the remainder being price, just kind of high-level ballpark on that. As far as going forward, gross profit, I think it's going to be heavily volume-related. I think at a $75 million run rate, we would expect to stay over 30%. I think what we're seeing is, as John mentioned, everything really went right as far as operational execution in Q4. And we are now facing the return of supply chain challenges. I don't think we'll see a $75 million Q1. I think our Q1 will be more like volume levels we saw middle of last fiscal year. And I think we'll have a gross profit approaching 30%. I don't think we would indicate that we'll stay above 30% at what might be a lower volume level as we start fiscal ‘23.

Thank you. If I could just get one more question in. so, you highlighted the SilentJet launch with Hinckley. Can you discuss the impact of elevated fuel prices on your marine customers, demand preferences for diesel electric, hybrid, and full electric? Thank you.

Well, tough to say on the demand. I mean, just from a 50,000-foot level, obviously higher fuel prices, I think, would put a damper on the pleasure craft market. But I do see fuel prices coming down. I think everyone is trying to offer an option, whether it's a diesel, a hybrid system, or fully electric. And I think you're just going to see year after year, every boat builder is going to be developing an electric or a hybrid option, and then see where the market goes. But we're just basically in the very infancy of this market, but I think this is going to be a big growing part of the market. There's no doubt about that.

Thank you.

Our next question comes from the line of Robert Schultz with Robert W. Baird. Please proceed with your question.

Hey, good morning, guys. This is Bobby on for Josh. Last quarter, I think you guys noted some increased quoting activity in oil and gas and thought there could be deliveries sometime in Q1 or Q2 in 2023. Are you guys still comfortable with that timeline for deliveries there? Any updates?

Yes, we - actually, we delivered - we were able to take some orders and ship in the fourth quarter, and we've taken more orders, and we'll be shipping in the first quarter and second quarter as well.

Got it.

Yes. This is what helped actually having some excess inventory. We were able to react very quickly.

Got it. Thanks. And then maybe if we were to look at the 4Q results and annualize that for 2023, and maybe have around $300 million in revenue and maybe $40 million of EBITDA and over two bucks a share in EPS, what do you think the puts and takes are to doing that?

Well, I think - so, one, we're going to go - this year will be like most years, where we will - volume and margin should build through the year. So, Q1 will be the lowest sales and margin quarter. And it is again, just by days availability of shipping. We have shutdowns here in North America, but we have extended shutdowns in Europe. I'm going to - I will let Jeff answer on the FX component, but we're going to be looking at a dollar that is 15% stronger than it was a year ago. So, that's going to - that will affect the comparisons year-over-year significantly. But again, when we look at our backlog and we look at, in general, the supply chain should be getting better, particularly out of Asia, with fewer COVID shutdowns in China. I'm hoping that energy - the mix there, the wild card is, what happens to energy prices in Europe, and the availability of parts through Europe. But right now, with our backlog and our outlook and how strong our markets are, fiscal ‘23 should be better than our fiscal ‘22. What's hard to predict is when all the parts come in. I mean, our fourth quarter was amazing compared to the other quarters, but we really would've wished some of that volume were in Q3 and Q2. What's hard to predict is, will parts come in in enough time in September for us to ship in September, or are they shipping in October? And that's going to happen every month and every quarter, but on balance, fiscal ‘23 should be noticeably a better year than fiscal ‘22.

Got it. Thank you. And then just one more. For ‘23, what are you guys thinking from free cash flow, and what sort of debt paydown are you looking at?

Yes, it's a good question, right? So, we had a really good end of year volume push. Receivables were up. So, we should be driving some good collection activity through the first quarter. Inventory should continue to come down through the year. So, barring some sort of a strategic action, I think we'd be looking at something in the $3 million to $5 million of free cash flow. A lot will depend on our CapEx program and how much we're able to actually get into the year. I think we have some pent-up demand, given the low levels the last few years. So, that's a pretty big variable as well. We're looking at somewhere around the $14 million range in fiscal ‘23. So, yes, we'll see where it is. I think we're very confident we'll be positive in the $3 million to $5 million range.

Awesome. Thanks, guys. I'll leave it there.

Our next question comes from the line of Simon Wong with Gabelli Funds. Please proceed with your question.

Hi. good morning, John and Jeff Simon. The oil and gas business, how big was that in the quarter?

Good question, Simon. it was probably - we're trying - the problem we have is, the units are pretty straightforward, and then there's the aftermarket piece, which is a little less straightforward. It's kind of anecdotal what percentage of our overall aftermarket volume is going to the oil and gas market. Think about …

I'd say 20%, 25%.

I was going to say around - yes, say 20$ to 25% of the $75 million. So, $15 million to $18 million of the quarter was oil and gas related.

And how much of that is new equipment versus consumables? Because I would imagine that consumables is a big driver of your gross margin improvement, right?

Absolutely. Yes. Units are what, 30, 40 units? Yes, seven.

Yes, about seven, a little less than half would've been new units.

Okay, great. And then in terms of your pipeline for new equipment orders, what are - I mean, are you seeing the orders for rebuilds or is it more for reactivations, or what does the pipeline look like?

I would say it is a mix of - and so, there's new rig construction. There's also a lot of new - our new units for us going into rebuilding existing rigs. So, I'm just trying to come up with a percentage. It's probably - it's close to 50 - well, I would say it's a little bit stronger if they're replacing engines and transmissions on rigs and not building a complete new rig. So, a little bit more towards that, but they're putting in new units versus rebuilding again, because some of these units, the transmissions have 20,000 plus hours on them.

Yes. Can you tell, do you have rigs have been working or the rigs have been sitting on the sideline for the last three years, are they trying to bring back online?

Most of the ones that we've been doing have been working. Yes.

Okay, great. And then in terms of the trends, the pressure pumping, a lot of talk about e-frac and that orders for e-frac. Do you have anything in your pipeline that addresses that market?

Yes. Yes, we do. We have orders for e-frac rigs.

Oh, you do? Okay.

We do. It's the minority of them right now, but again, we're facing supply chain issues there as well as getting the motors for that. So, it's - we'll see what's the percentage - it's still a small - for us, it's a small percentage, but it's a growing percentage

Now, is that the 7600 or the 8500 that's going to e-frac? Was that a complete product?

It's just -it's a version of the 7600.

Okay, great. And then just to confirm, the cutbacks for 2022, we’re looking at $14 million. Is that correct? Did I hear - I just want to make sure I got that.

Yep. That's correct.

Okay, great. Thank you for your time.

There are no further questions in the queue. I'd like to hand call back to management for closing remarks.

Thank you, Doug. And thank you, everyone, for joining our conference call today. We appreciate your continuing interest in Twin Disc, and hope that we've answered all of your questions. If not, please feel free to call either Jeff or myself, and we will get to your question as quickly as possible. And we look forward to speaking with you again following the close of our fiscal ‘23 first quarter. Doug, now I'll turn it back to you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.