Twin Disc, Incorporated Q4 FY2025 earnings call

Management Statement and Operational Highlights

• Closed the fiscal year with the strongest quarter, achieving top line growth of 15.5% with sales reaching $340.7 million. Despite EBITDA margins being hampered by nonoperating and noncash items, free cash flow was $8.8 million.
• Modernized the operating model with 4 product line business units, supporting agile global manufacturing and supply chain structure. Progressed on strategic priorities including the integration of Katsa and Kobelt, expanding capabilities and customer base.
• Fourth quarter sales grew 14.5% year-over-year to $96.7 million. Organic net sales declined due to reduced oil and gas activity, but Marine and Propulsion Systems remained strong, and backlog increased to $150.5 million.
• Confident in growth trajectory, particularly in the defense market, with defense-related orders up ~45% versus fiscal '24 and a $50 million to $75 million defense-related pipeline.
• Long-term strategy includes global footprint optimization, operational excellence, and targeted acquisitions. Focus on hybrid and electrification solutions, and operational resilience with flexible manufacturing and tariff offset mechanisms.

Segment Performance

• Marine and Propulsion Systems: Fourth quarter sales grew 12.2% to $53 million, supported by workboats, government contracts, and Veth's ELITE thrusters. Backlog for Veth thrusters in the U.S. is growing in workboat and cruise vessel segments. Aftermarket revenue for the quarter totaled $4.7 million in Marine with a margin contribution exceeding 60%.
• Land-based transmissions: Fourth quarter revenue rose 4.5% year-over-year to $26.1 million. While oil and gas shipments into China declined, activity in North America and Asia remained stable. ARFF demand was strong, and there was a first meaningful order for E-frac systems (14 units totaling $2.3 million). Aftermarket sales in this segment were down year-over-year.
• Industrial segment: Fourth quarter sales rose 35% sequentially to $13.1 million, and year-over-year industrial products grew 82%. The improvement was broad-based, supported by the Katsa industrial parts business. Excluding the acquisition, the Industrial segment grew 13%, and Lufkin had a strong quarter with $4.1 million shipped in the fourth quarter.

Guidance

• Well positioned to navigate macroeconomic uncertainty in fiscal 2026, with a balance sheet supporting targeted acquisitions. Focus on sustaining margin improvement and optimizing cost structure.
• Target to deliver 60% of EBITDA to free cash flow. CapEx is预计 to be in the range of $12 million to $14 million due to additional acquisitions and Katsa's machine-intensive operations.

Risks

• Global uncertainty including tariff-related pressures and shifting demand patterns.
• Impact of nonoperating and noncash items on EBITDA margins.

Q: David MacGregor asks about backlog strength across the mix.

A: Jeffrey S. Knutson states there's strength across the portfolio, with defense and propulsion strong, and Veth in pleasure craft showing record levels quarter-over-quarter. John Batten adds defense picked up in the last quarter, with land-based transmission products strong in Europe for NATO.

Q: David MacGregor inquires about defense growth prospects.

A: John Batten talks about ensuring capacity to meet demand, leveraging Katsa's capability, and moving assembly to different locations like Belgium, Italy, and Texas to meet defense product demand.

Q: David MacGregor asks about commercial synergies and cross-selling.

A: John Batten discusses Veth's distribution expansion, Katsa's global support integration, and Kobelt's dealer network integration to drive commercial opportunities.

Q: David MacGregor asks about margin improvement.

A: John Batten says there's an inflection point, with supply chain issues dissipating, Katsa helping reduce costs, and focus on high-margin products.

Q: David MacGregor asks about ME&A spend and revenue growth.

A: Jeffrey S. Knutson says existing ME&A spend can support over $400 million in revenue, with Q4 not reflective of the full run rate going forward.

Q: David MacGregor asks about balance sheet and free cash flow in 2026.

A: Jeffrey S. Knutson mentions target 60% EBITDA to free cash flow, inventory will improve cash flow, and aim to reduce leverage.

Q: Simon Wong asks about the size of the oil and gas business.

A: Jeffrey S. Knutson states oil and gas was ~8% of revenue, down from previous years.

Q: Simon Wong asks about the E-frac offering.

A: John Batten explains the E-frac uses a standard geared transmission, is more robust and less expensive than variable frequency drive.

Q: Simon Wong asks about CapEx for 2026.

A: Jeffrey S. Knutson says CapEx is预计 to be in the range of $12 million to $14 million.

Q: David MacGregor asks about margin improvement and order book.

A: John Batten says margin improvement is volume related, with initiatives like Katsa's gear production cost reduction and CapEx in operations contributing to margin growth.