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.

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.

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…

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…

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 Instructions] Our first question comes from the line of Simon Wong from Gabelli Funds.

Look, first question, you saw some nice growth in your Land-Based Transmissions business. How much of that was from the oil patch?

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.

So 50-50, so about $7 million, $8 million?

I think that's about right, yes.

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?

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.

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?

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.

Okay. And then your E-frac offering, you're still waiting for the first purchase order. What's been the feedback from your customers?

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.

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?

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.

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?

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.

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?

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.

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 Instructions] Our next question comes from the line of Mike Greene from Neuberger.

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.

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.

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?

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.

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.

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.