管理層發言
Thank you for your patience. I would like to welcome everyone to the Twin Disc Inc. Fiscal Fourth Quarter and Full Year 2025 Conference Call. I will now turn the call over to Jeff Knutson. You may begin.
Good morning, and thank you for joining us today to discuss our fiscal 2025 fourth quarter and full year 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. Now I'll turn the call over to John.
Good morning, everyone, and welcome to our fiscal 2025 fourth quarter conference call. We closed out the fiscal year with our strongest quarter, an outcome that reflects our team's consistent execution and resilience in dynamic markets. I'm incredibly proud of how our global organization continues to deliver even in the ongoing global uncertainty, including tariff-related pressures and shifting demand patterns. For the full year, we delivered top line growth of 15.5%, with sales reaching $340.7 million, supported by broad-based demand and strong order activity across our portfolio. Although EBITDA margins were hampered by the impacts of nonoperating and noncash items, such as currency translation loss and stock-based compensation, we continue to generate consistent free cash flow of $8.8 million. In addition to our strong performance, this year marked a pivotal step forward in modernizing our operating model.
We now manage the business across 4 product line business units led by Tim Batten in his new role as Executive Vice President, where he'll be leading our global business operations. This supports our agile global manufacturing and supply chain structure that allows us to scale effectively, seamlessly integrate acquisitions, all without expanding our fixed infrastructure. We also made meaningful progress on our strategic priorities including the integration of Katsa and Kobelt. The acquisitions have expanded our capabilities, broadened our customer base, and strengthened our long term platform for growth. I am pleased with our progress to date and look forward to reaping the full benefit from this combined platform. Turning to the fourth quarter. We closed the year with our strongest performance in the fiscal year as sales grew 14.5% year-over-year to $96.7 million. While organic net sales declined due to reduced activity in oil and gas markets, this was more than offset by continued strength in Marine and Propulsion Systems as well as ongoing demand for higher content transmissions.
Order momentum remained healthy, and our 6-month backlog increased to $150.5 million, reflecting strength in government and hybrid marine programs. Looking ahead, we remain confident in our growth trajectory, particularly in the defense market. We are well positioned to capture robust end market demand, fueled by increased defense spending across both U.S. and NATO budgets. Given this increased activity, we are seeing strong momentum for our marine transmissions, controls, and steering systems, propulsion systems, gearboxes, and transfer case products across geographies as we serve as an approved supplier to end users such as the U.S. Army, U.S. Navy, and NATO. This is well illustrated in our total backlog as orders related to defense products grew approximately 45% versus fiscal '24, now making up nearly 15% of our total backlog. With $50 million to $75 million in defense-related pipeline, we have significant runway for growth.
As we further capitalize on end market strength, execute on our clear path to broaden geographic reach, and remain committed to a disciplined capital deployment strategy, we are poised to build on this year's momentum and continue delivering value for our shareholders. Let me walk you through the segment performance. In Marine and Propulsion Systems, sales grew 12.2% in the fourth quarter to $53 million, supported by robust activity in workboats, government contracts, and Veth's ELITE thruster products. Notably, we are seeing strong momentum for orders for unmanned U.S. Navy vessels in the 300- to 400-foot range, autonomous platforms built for extended patrol periods. These orders signal a meaningful shift towards larger, persistent defense platforms and validate the investments that we've made in our marine transmissions and controls technology. Our backlog for Veth thrusters in the U.S. continues to grow both in the Workboat and Cruise vessel segments.
Kobelt contributed as expected in this quarter, primarily within our commercial marine controls business, which is now fully integrated into our systems offering. Marine aftermarket also remained strong, driven by continued utilization of military and commercial fleets. Aftermarket revenue for the quarter totaled $4.7 million in Marine alone with a margin contribution exceeding 60%. In land-based transmissions, revenue rose 4.5% year-over-year to $26.1 million in the fourth quarter. While oil and gas shipments into China declined, activity in North America and Asia remains stable. ARFF demand stayed strong. In addition, we continue to see action on our new E-frac systems with our first meaningful order for this segment, representing 14 units totaling $2.3 million. This validates our technical offering and supports a more optimistic medium-term outlook. Aftermarket sales in this segment were down year-over-year at $3 million compared to $5.5 million in the fourth quarter of fiscal '24, reflecting lower rebuild volumes tied to idle fleets.
Our Industrial segment saw strong sequential growth, with fourth quarter sales rising 35% sequentially to $13.1 million. Year-over-year, our industrial products grew 82% in the fourth quarter. The improvement was broad-based across customers and supported by strength in Katsa's industrial parts business. Excluding this acquisition, the Industrial segment grew 13% compared to the prior year period. Lufkin also had a strong quarter, shipping $4.1 million in the fourth quarter versus a $3.1 million average run rate. While the recovery is still early, we're encouraged by positive order trends and share gains. Our 6-month backlog rose to $150.5 million, up both sequentially and year-over-year. This reflects healthy demand and the benefit of the Katsa and Kobelt acquisitions. At the same time, we have continued to reduce inventory levels as a percentage of backlog, highlighting our focus on working capital discipline.
In closing, I'd like to also address our long-term strategy before Jeff takes us through the financial overview. I remain committed to our strategy built on global footprint optimization, operational excellence, and targeted acquisitions. Our recent purchases of Katsa and Kobelt are clear examples of how we're broadening engineering capabilities and market reach by unlocking meaningful synergies across our operations. These strategic additions complement our core expertise and accelerate our entry into higher-value uses, reinforcing our ability to deliver sustainable growth for customers, employees, and shareholders. A second cornerstone of our plan is to lead the industry in hybrid and electrification solutions. We are intensifying investment in controls and systems integration because these technologies multiply both content and margin potential on every vessel or vehicle we serve. Growing customer interest in hybrid and fully electric propulsion, particularly within marine applications, positions us to capture new opportunities, and our advanced Veth and Katsa platforms give us a tangible head start.
We are already winning hybrid projects in commercial and defense markets and ongoing R&D and investment will ensure we remain the partner of choice as sustainability requirements tighten worldwide. Operational resilience is equally critical. Our flexible global manufacturing network and organizational streamlining allows us to shift production swiftly in response to geopolitical dynamics and tariff regimes, preserving both service levels and cost competitiveness. We have quantified tariff exposure of roughly 1% of the cost of goods sold and have pricing actions, alternative sourcing, and surcharge mechanisms in place to offset any further impact. At the same time, a robust backlog of approximately $150 million provides clear visibility while continued inventory discipline and efficiency projects underpin margin expansion. Looking further ahead, we remain steadfast in achieving our 2030 objectives of about $500 million in revenue, 30% gross margins, and consistent free cash flow conversion of at least 60%.
The cash we generate will be reinvested in organic growth and further bolt-on acquisitions, ensuring we stay on the front foot while maintaining a prudent balance sheet. With that, I'd like to now turn it over to Jeff to discuss the financials.
Thanks, John. Good morning, everyone. During the quarter, we delivered $96.7 million in sales for Q4, up 14.5% from $84.4 million in the prior year period. As John mentioned earlier, fiscal 2025 sales totaled $340.7 million compared to $295.1 million last year, an increase of 15.5%. On an organic basis, adjusting for M&A and FX, revenue declined approximately 8.4% in Q4, driven by reduced oil and gas activity, particularly in China. As a reminder, our fiscal fourth quarter factored in the full impact of the Kobelt acquisition. For the full year, revenue increased 1% on an organic basis, driven by strength in the company's land-based transmission markets with healthy demand in marine and propulsion systems. Fourth quarter gross profit rose 19.7% to $30 million, and gross margin improved 130 basis points to 31%, supported by a favorable product mix and one-time cost capitalization adjustments in our Katsa inventory.
Excluding the impact from this one-time inventory adjustment, gross margin was 28% for the quarter. For the full year, gross profit was $92.7 million or 27.2% of sales. ME&A expenses were $24.6 million in Q4 compared to $20.4 million last year. The increase reflects the addition of Katsa and Kobelt as well as ongoing wage and professional services inflation. Fiscal full year ME&A was $82.4 million versus $71.6 million in fiscal year '24. Net income attributable to Twin Disc for the quarter was $1.4 million or $0.10 per diluted share compared to $7.4 million or $0.53 per diluted share last year. Full year net loss was $1.9 million or $0.14 per share compared to net income of $11 million or $0.79 per share in fiscal '24. EBITDA was $7 million for the fourth quarter and $19 million for the full year versus $11.8 million and $26.5 million respectively in the prior year. This fiscal 2025 full year EBITDA swing reflects nonoperating or noncash impacts of currency translation losses, stock-based compensation, inventory adjustments, defined pension, amortization, and other items as shown in our press release issued earlier today.
From a geographic perspective, sequential sales growth was led by the North American market, where strong demand from Veth products contributed to an increased share of quarterly sales. On a year-over-year basis, the European market captured a greater proportion of total sales, reflecting the contributions from our recent acquisitions. For the full year, we delivered double-digit growth in both European and Asia Pacific regions. The overall sales mix shifted towards Europe, while Asia Pacific represented a smaller proportion of total sales compared to the prior year, in part due to regional market dynamics and our targeted expansion efforts in Europe. We remain focused on disciplined capital management throughout fiscal '25. Net debt increased to $15.3 million, primarily reflecting our strategic acquisition of Kobelt. We ended the year with a cash balance of $16.1 million, down 19.7% from the prior year.
We generated positive free cash flow of $8.8 million for the year and maintain a conservative net leverage ratio of 0.8x in a challenging environment. Entering fiscal '26, we are well positioned to navigate macroeconomic uncertainty with flexibility and discipline. Our balance sheet supports our ongoing evaluation of targeted bolt-on acquisitions that complement our innovation strategies and expand our product portfolio. As stated previously, gross margin improved by approximately 130 basis points to 31% in the fourth quarter when compared to the prior year period, driven by the continued benefits of cost reduction initiatives, enhanced operational efficiencies, and a more favorable product mix. When removing an inventory adjustment for Katsa, we achieved gross margin of 28%, demonstrating sequential improvement. As we enter fiscal '26, we remain focused on sustaining this positive momentum by further optimizing our cost structure and driving margin-accretive growth across our portfolio.
Strengthening profitability remains a key priority as we execute on our strategic initiatives. Our capital allocation priorities remain unchanged, grounded in a balanced approach to growth and value creation. We continue to pursue disciplined M&A opportunities that align with our core strengths in marine and industrial technologies, while also investing in organic initiatives such as R&D, geographic expansion, and innovation, particularly in hybrid and electrification solutions. With a healthy net leverage position and a clear strategic focus, we are well positioned to drive long-term sustainable growth. I'll now turn the call back to John for his closing remarks.
As we look ahead to fiscal 2026, I'm encouraged by the foundation we've built. Our backlog is strong. Our global operations are aligned, and our leadership team is focused. We're beginning to see the returns on our efforts to streamline and modernize our business across commercial, operational, and strategic dimensions. Demand in global defense, transmissions, and hybrid solutions continue to outpace expectations. Our ongoing collaboration with major OEMs and system integrators places us at the forefront of next-generation propulsion and power solutions. Our focus remains on disciplined execution, profitable growth, and long-term value creation for all stakeholders. That concludes our prepared remarks. Jeff and I are now happy to take your questions.
分析師問答
And your first question comes from David MacGregor with Longbow Research.
Can I just start with the backlog? Obviously, very strong $150 million. You talked about the acquisitions as a contributing factor, you talked about defense. Can you just walk us through maybe where else across the mix we may be seeing particular strength? Is it broad-based, or is it particularly in these two verticals? And just a little more detail there would be helpful.
Yes. I think it's at the two biggest. I think there's strength across the portfolio. I think even within oil and gas, we're starting to see some good improvements. I think we noted it's not in the year-end backlog, but we did get some initial E-frac orders as we rolled into fiscal '26. So quarter-over-quarter, most of that improvement was in the markets that you point out, so defense. Propulsion continues to be really strong globally. Pleasure craft, the Veth operation continues to look at sort of record levels quarter-over-quarter. So yes, a lot of strength in the markets.
David, I'd like to add that the area that has really picked up in the last quarter is defense. For us, this has been notable in the marine sector in the U.S. and in land-based transmission products in Europe, particularly for NATO's all-wheel drive vehicles.
And just maybe can you elaborate a little further around the defense? And I realize it's historically been maybe a smaller part of the overall business, but it sounds like the growth prospects there are improving rather dramatically. Just talk about how you plan to manage that, and what the potential could look like?
We are focused on ensuring we have the capacity to meet demand. After acquiring Katsa, the geopolitical situation changed with Finland and Sweden joining NATO, and we are fortunate to have an approved supplier that supports many NATO trucks, and those programs are expanding. Our primary goal is to meet the demand in Finland for these vehicles. This will involve leveraging Katsa's capabilities and product line, which includes their excellent machining ability, although they were just starting to supply finished products like gearboxes. It’s a crucial time for us. We need to determine how we can utilize resources from Finland and assemble products in various locations to ensure we have the necessary capacity, which we do. There is significant growth potential as more vehicles are built and more contracts come in. Our strategy will involve offloading production depending on the specific product and tariff structure, allowing us to move assembly to places like Belgium, Italy, or Texas to meet this demand, including for U.S. Navy marine transmissions. We currently believe we have the capacity in Racine, but we can easily transfer some operations to Lufkin if needed.
Good. Sounds pretty encouraging. I wanted to maybe just ask you, you talked about some of the commercial synergies and the cross-selling. You noted in the press release that integration efforts are creating more commercial opportunities. I was just wondering if you could expand on that.
Yes. There are two different scenarios with Veth. When we acquired Veth, they had sales agents globally but lacked dedicated distributors like those in our industry, such as Twin Disc, Caterpillar, or Cummins, who have trained mechanics and spare parts readily available. We provided that structure to Veth. Initially, we faced delays in growth due to COVID and supply chain issues, but now those challenges are largely behind us, and we're beginning to see the Veth product gain traction in various regions. Currently, North America is either first or second in their backlog, which includes river cruise ships and workboats. It took some time, but we are starting to see momentum build, particularly in Asia and with projects in Australia. We're approaching Katsa in a similar manner, having started with just one external agent and now focusing on providing global support for their product line, which includes integrating one of their hydraulic PTOs into our offerings.
Katsa also lacked a comprehensive global distribution network. In contrast, Kobelt has an extensive dealer network, which presents a different integration and synergy opportunity, as some of their dealers could significantly assist in selling our products. Conversely, we believe that in regions where we have company-owned subsidiaries in Asia and Australia, we can effectively grow their product lines. We're excited about both acquisitions, which bring new products and customers, and we see a strong potential for integration, particularly with Kobelt's industrial brake line, which has experienced success in parts of North America and various applications, and we believe we can expand that business globally.
We talked before about, as you sort of enter some of these new markets, there's pressures on margins just associated with getting the brand and the product and the engineering reputation seeded in that market. But the expectation, of course, was that once you were in that market, you established yourselves that you'd start to see some margin improvement. Do you feel like at sort of an inflection point there, and as you enter into 2026, these businesses sounds like they're getting well seeded and well situated that you're going to see that margin improvement, or is that maybe a little longer to come?
Yes, I do. I think the supply chain disruption has persisted due to suppliers not being able to deliver in various regions, requiring us to adapt quickly. It's more about necessity than price; we need these parts, and we will pay what is necessary to obtain them so we can ship the product. This situation is starting to improve. Additionally, we have a significant portion of our supply sourced from India, and we are transitioning to different suppliers there to achieve lower costs. The acquisition in Katsa is definitely assisting us in optimizing gear manufacturing, which is a more efficient process using bar stock and internal heat treatment. We are learning from this, and they are supplying more of our internal gear needs for other operations. I believe we are at a turning point. We are also becoming more selective about products we no longer wish to manufacture and are working to remove them from our portfolio, as any product has its time to exit. We are being more proactive in this regard and concentrating on products where we can thrive and achieve higher margins.
Just a couple more for me quickly. The marketing, engineering, and administration that was up in the quarter. I'm mindful that some of this is variable, of course, but what level of revenue growth can you support with the existing ME&A spend?
I believe our infrastructure can handle over $400 million without requiring significant additional investment. The recent increase during the quarter was mainly due to the full run rate of Kobelt, along with some purchase accounting amortization affecting the figures. Therefore, I expect that Q4 will not reflect what we anticipate as a future run rate. We expect our run rate to support revenue between $400 million and $500 million without any meaningful increases.
Good, good. And then I guess, just looking forward to 2026, your sort of high-level thoughts around the balance sheet and free cash flow. How are you thinking about leverage, how are you thinking about cash flow conversion in '26?
Yes. I mean, we stated our target is to deliver 60% of EBITDA to free cash flow. I think we've done a reasonable job in the second half of fiscal '25, getting back on track in terms of generating free cash flow. I think we have inventory at a pretty high level as we enter fiscal '26 given the orders on the books and the demand that we've got coming at us. I don't see that continuing to grow. I think we'll get some good cash flow coming out of inventory as we work through the year. Maybe it stays flat, maybe it comes down. But I think we're on a good growth pattern. So I think operating cash will improve in the year. We like to see our leverage ratio come down because we want to do more Katsa and Kobelt type of actions. We've seen what that can do for the company. So that's a priority for us. Part of that is getting the balance sheet back to a position where we can do that comfortably.
I guess that sort of begs the question, is '26 a year of integration or additional acquisitions possible?
I think they can both happen, right? I think our integration team is well along the path of all the activities that John mentioned, getting the training done, getting the product in the right channels with the right partners. But in the meantime, I think we continue to look for what the next step is. I wouldn't say we're going to continue to do two acquisitions a year. That was a bit of an acceleration for us. But I think we want to continue working that side of the equation and making sure we're developing both sides of the growth puzzle.
Yes, David, let me provide some additional detail. We have structured our businesses into verticals. The industrial sector is being managed by someone from Katsa, while the transmission sector is overseen by an individual from Racine, where the majority of transmissions are produced. The marine sector is under the guidance of someone who oversees multiple products but does not report directly to him; he manages products from various plants in Propulsion and has the entire plant there. Currently, Kobelt is operated as a separate business unit as we have only just started the integration process. Historically, we haven't made many acquisitions. When we acquired Veth, we quickly faced challenges due to COVID, which complicated integration efforts. However, once we navigated through that, the integration moved forward smoothly. I believe we have effectively integrated Katsa over the past year, focusing on SEC reporting and IT systems. I am genuinely impressed with how swiftly we’ve been able to integrate operationally. Now, we have one individual overseeing our industrial business, while another is in charge of traditional manufacturing operations, specifically the Twin Disc operations in Finland. Overall, this has been a significant success for us with Katsa.
And we have another question from Simon Wong of Gabelli Funds.
Looks like between the two acquisitions and the growth in defense, you've done a good job in diversifying away from the oil and gas business. So I guess my first question is how big is your oil and gas business now for the company?
Yes, it was a challenging year, particularly with demand from China declining for various reasons. Revenue from that market fell to about 8% of total revenue for the year, which is roughly half of what it was a few years ago. This decline is partly due to growth in other revenue segments, but revenue in that specific market also decreased year-over-year.
Yes, it's definitely been a challenging year. It's encouraging to hear that you've received your first order for the E-frac. If I remember correctly, your E-frac offering is quite unique compared to what's available in the market. Could you remind me about your E-frac offering?
Yes. We utilized our standard geared transmission, modified for 7600. The key difference is that we employ a regular electric motor and adjust the speed using our transmission instead of a variable frequency drive. We believe our solution not only reduces costs but is also more durable and has a longer lifespan. It is a superior method for powering the pump. Fortunately, we worked diligently on this and received our first spread order after the end of the fiscal year. Additionally, Simon, we have been adapting the 7600 to be compatible with some pure natural gas engines, which we believe presents a significant opportunity for us in the upcoming fiscal year, especially in fiscal '27. Overall, we anticipate that fiscal '26 will likely represent our lowest year for oil and gas as a share of total sales, considering both past performance and future expectations.
Would you think oil and gas can go back to as a percentage of total?
I could see it getting back to 15%.
Okay. Great.
Yes, there's a lot more activity. We have orders for North America, South America, and China. We believe the outlook is certainly better than it was in fiscal '26.
Okay. All right. And then just a housekeeping question really quick. What's your CapEx for '26?
Yes. I think with the additional acquisitions and Katsa being a very machine-intensive kind of operation, it will be a little bit higher than what we've been seeing. So I think in the $12 million to $14 million range.
And another follow-up question from David MacGregor with Longbow Research.
Yes. Can you hear me okay?
Yes.
Yes, David.
I just wanted to come back on with one quick one, and we've talked before about some of the businesses in North America that maybe are playing at a lower margin level, but that there's a fairly good opportunity to improve margins there? And I guess I'm just thinking 2026, it sounds like you've got very strong order book across a lot of these businesses. Is the margin improvement at this point really just volume-related and the order book would portend a pretty substantial improvement there, or are there other factors that we should be thinking through?
Yes, it is definitely related to volume. Katsa has demonstrated greater effectiveness in certain gear production costs, which means we're shifting gears to Katsa and concentrating more on lower-cost countries while also working with suppliers in India. We're implementing all of these strategies. Additionally, we have made capital expenditures in TwinCo, our North American operations, and in Belgium. It all contributes to our focus on efficiency and part quality. There are multiple initiatives underway, but volume is crucial, and it significantly contributes to our progress.
I'm seeing no further questions. I would now like to turn the call back over to John Batten for closing remarks.
Thanks, Demi. And again, thank you for your continued interest in Twin Disc. If you have any follow-up questions, please contact either Jeff or myself, and we look forward to speaking with you in November for our fiscal '26 first quarter call. And Demi, we'll turn it back over to you.
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.