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Date

Wednesday, Nov. 5, 2025, at 9 a.m. ET

Call participants

  • President and Chief Executive Officer — John H. Batten
  • Vice President and Chief Financial Officer — Jeffrey S. Knutson

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Risks

  • Tariff impacts — Jeffrey S. Knutson said, "we remain mindful of potential tariff developments and expect a 1% to 3% tariff impact on second-quarter cost of sales versus roughly 1% previously," with a specific increase indicated for fiscal Q2 2026 (period ended Dec. 31, 2025).
  • Inventory-driven cash outflows — Mr. Knutson stated that free cash flow in fiscal Q1 2026 (period ended Sept. 30, 2025) was negatively affected due to "We had some inventory growth with the demand With, you know, some payouts that that naturally follow our Q4. the increase in backlog, maybe some pre-buys with anticipation of tariffs," highlighting a drag on near-term cash flow.

Takeaways

  • Revenue -- $80 million in sales, up 9.7% year over year, led by marine and propulsion product group growth, and acquisition contributions.
  • Organic net sales growth -- 1.1% increase, adjusted for acquisition and foreign currency impacts.
  • Gross profit -- $22.9 million, reflecting an 18.7% increase over the previous year.
  • Gross margin -- 28.7%, an expansion of 220 basis points year over year, attributed to volume and margin improvement initiatives.
  • EBITDA -- $4.7 million, representing a 172% year-over-year increase.
  • Net loss attributable to Twin Disc -- $518,000, or $0.04 per diluted share, improved from a loss of $2.8 million, or $0.20 per share, in the prior year.
  • Backlog -- $163.3 million at quarter end, up 13% year over year and 9% sequentially, with defense orders rising $4 million sequentially and accounting for 15% of total backlog.
  • Marine and propulsion sales -- $48.2 million, up 14.6% year over year, driven by government workboat activity, autonomy, and demand for VETS elite thrusters.
  • Industrial business sales -- up 13.2% year over year, supported by broad customer activity and acquisitions.
  • Land based transmission sales -- $17.6 million, up 1.6% year over year, reflecting stabilization in North America and offsetting declines in China.
  • Aftermarket sales -- Remained flat compared to the prior year, with steady utilization in military and commercial fleets.
  • Initial e-frac order -- 14 units totaling $2.3 million secured for next-generation solutions.
  • Cash balance -- $14.2 million at quarter end, down 14.8% from the previous year, impacted by net working capital and inventory dynamics.
  • Net debt -- Rose slightly, primarily due to seasonal revolver usage.
  • Targeted free cash flow conversion -- Mr. Knutson stated a continued goal of "60% free cash flow as a percent of EBITDA" for the full year.
  • EBITDA margin target -- 11% EBITDA margin target for this year, with a long-term goal of reaching 15%, as stated by Mr. Knutson.
  • Tariff cost outlook -- Cost of sales in fiscal Q2 2026 is expected to see a 1%-3% tariff impact, returning to 1% for the remainder of fiscal 2026.
  • Capital expenditure focus -- John H. Batten said incremental capital spending in defense will center on "test stands and assembly fixtures" rather than machining capacity.
  • Operational efficiency -- Integration of CATSA and Cobalt continues ahead of plan, producing synergy benefits and margin improvements.

Summary

Twin Disc (TWIN +1.46%) reported significantly higher revenue, gross profit, and margin metrics for fiscal Q1 2026 (period ended Sept. 30, 2025), driven by robust demand in marine, defense, and industrial applications, along with continued acquisition integration. The defense segment saw a sequential $4 million backlog increase, now at 15% of the total, with multiyear contracts linked to NATO and U.S. Navy platforms supporting future revenue visibility. Management reasserted a focus on inventory optimization and margin expansion while signaling upcoming tariff-related cost headwinds for cost of sales in the next quarter. The company highlighted a healthy balance sheet, with an emphasis on prudent capital deployment, deleveraging, and M&A targeting innovation and productivity-focused growth. Cash generation targets remain unchanged, despite temporary inventory and tariff-linked working capital pressures.

  • John H. Batten outlined that autonomous vessel and NATO defense programs are expected to post "on average, at least for the next couple years, 50% growth in each program," though this trajectory may require future capital allocation to production facilities, as discussed during the fiscal Q1 2026 earnings call.
  • The marine and propulsion business posted record new unit orders in September valued at $20 million, marking a new monthly high for the company and supporting favorable near-term backlog trends.
  • John H. Batten indicated that gross margin improvement is supported by operational flexibility, specifically "being able to move product and assemble and test in different regions is definitely a competitive advantage for us."
  • Management described the flat aftermarket sales as a sign of ongoing resilience in both military and commercial fleet utilization.

Industry glossary

  • VETS: Abbreviation for Veth Propulsion, a Twin Disc subsidiary specializing in thrusters and marine propulsion systems.
  • E-frac: Electric hydraulic fracturing equipment, an emerging technology for lower-emission oil and gas operations.
  • CATSA: Twin Disc-acquired business providing marine engineering and transmission solutions, referenced for integration and synergy benefits.
  • Cobalt: Recently acquired company whose operations contributed to top-line and margin growth as highlighted by management.
  • ARF: Likely refers to a specific applications group or product line related to power transmissions supporting high utilization rates; context-specific to Twin Disc's portfolio.

Full Conference Call Transcript

John H. Batten: Good morning, everyone, and welcome to our fiscal 2026 first quarter conference call. We begin the year with strong momentum, delivering another quarter of profitable growth and meaningful progress on our strategic priorities. Sales and margins improved year over year, supported by steady execution across our global operations, with healthy demand across all three core product groups contributing to our robust backlog. Our performance this quarter underscores the strength of our diversified portfolio and the operational discipline that continues to define our success. As we move through fiscal 2026, we are encouraged by the resilience of our end markets and by the growing contribution from areas such as defense and hybrid propulsion.

These growth vectors position us well to sustain outperformance and deliver strong profitability amid an evolving macroeconomic environment.

Jeffrey S. Knutson: That said, we remain mindful of potential tariff developments and expect a 1% to 3% tariff impact on second-quarter cost of sales versus roughly 1% previously. This increase is temporary and will not affect the remainder of the year. As such, we expect the tariff impact to return to roughly 1% of cost of sales in the second half of the fiscal year. Now let me take you through the quarter's highlights.

Sales grew 9.7% year over year to $80 million, marking another quarter of steady top-line growth led by our marine and propulsion business along with the integration of CATSA and Cobalt, which continues to advance ahead of plan and together are broadening our capabilities and expanding global reach while driving meaningful synergies. On an organic basis, net sales increased 1.1%, which excludes the impacts of acquisitions and foreign currency exchange. We continued to streamline operations in the quarter, efforts that effectively help us deliver 220 basis points of gross margin expansion year over year as gross margins increased to 28.7% for the quarter.

EBITDA margins remained strong despite the impacts of non-operating and non-cash items such as defined benefit pension amortization, stock-based compensation, and currency translation loss in addition to costs from recent acquisitions.

John H. Batten: We also delivered a robust six-month backlog of $163.3 million driven by sustained demand across our end markets, illustrating a strong start to fiscal 2026. Defense momentum remains exceptionally strong. Orders continue to accelerate during the quarter, and defense-related projects continue to represent a growing share of the total backlog, increasing by $4 million sequentially and up 45% year over year, comprising 15% of the total backlog. In the U.S. and Europe, we are actively supporting multiyear government initiatives to modernize both marine and land-based platforms, while our recent acquisition of COTSE continues to generate strong demand in Europe. Our work includes contracts tied to NATO vehicle programs and U.S.

Navy patrol vessels, where we are serving as a trusted propulsion and systems partner. With a defense-related pipeline that continues to expand, we see significant runway ahead supported by elevated government budgets and increased focus on marine hybrid applications. Now let me walk you through product group performance. Our marine and propulsion business continues to perform exceptionally well, and sales increased 14.6% year over year to $48.2 million, driven by workboat activity, government programs, and demand for VETS elite thrusters. Record new unit bookings combined with the growing demand for hybrid and autonomous vessel solutions continue to underscore the strength of our products and market position. In September alone, we booked $20 million in new unit orders, surpassing previous records.

Orders supporting the unmanned U.S. Navy platforms class continued to build, and we are excited about our entry into the new class of autonomous patrol vessels, extending our presence on higher-value platforms. In addition, we are seeing traction with the U.S. Vestas thruster market, with backlogs increasing across workboat and cruise applications. Lastly, aftermarket remains resilient with steady utilization of military and commercial fleets. We were flat when compared to a year ago. Within Land Based Transmission, sales were stable, up 1.6% year over year to $17.6 million. Oil and gas shipments were nearly flat as China continued to decline. North American customers also remain cautious with a focus on rebuilds and refurbishments.

However, we are seeing an emerging tailwind as the rebuild cycle matures and replacement demand begins to materialize. ARF demand remains strong, and we continue to advance next-generation e-frac solutions, securing an initial order during the quarter representing 14 units totaling $2.3 million. Overall, we continue to remain well-positioned to capture emerging opportunities as activity improves. Our Industrial business grew 13.2% year over year, with growth supported by acquisitions and broad-based customer activity. Steady demand for higher content solutions is reinforcing our mix, helping sustain momentum as we extend CASA's engineering and parts capability across the portfolio. Our backlog of $163.3 million, up 13% year over year and 9% sequentially, provides solid visibility for the balance of fiscal 2026.

Inventory is up slightly because of our strong demand in pre-buys. As we look at the remainder of the year, we remain focused on further optimizing inventory levels with delivery schedules as we convert our backlog and maintain flexibility across our manufacturing footprint to support demand while protecting margins. As we look to the balance of the year and beyond, I want to reaffirm our strategy centered on global footprint optimization, operational excellence, and disciplined capital allocation. Our near-term priority remains reducing debt and strengthening our balance sheet while continuing to invest in targeted organic initiatives that enhance productivity and margin expansion.

We have made great progress streamlining our business into a more agile and globally integrated operating model, one that breaks down silos, drives collaboration across our end business units, and goes to market as one consolidated company, which leverages our scale and shows the power of our consolidated platform. This starts with the business units and their leadership, which is now reporting through Tim Batten, our Executive Vice President. These efforts are improving execution speed, driving margin improvement, and laying the foundation for sustainable growth.

With these ongoing efficiency and integration initiatives, Twin Disc is well-positioned to deliver strong results through the remainder of the year and to achieve our long-term targets, driving sustained profitability and lasting value for our shareholders. With that, I'll now turn the call over to Jeff to discuss our financial results in greater detail.

Jeffrey S. Knutson: Thanks, John. Good morning, everyone. During the quarter, we delivered $80 million in sales, up 9.7% from $73 million in the prior year period, which was primarily driven by strength in the marine and industrial product groups and supported by the addition of Cobalt. On an organic basis, adjusted for M&A and FX, revenue increased approximately 1.1% in the first quarter. First-quarter gross profit rose 18.7% to $22.9 million, and gross margin increased 220 basis points to 28.7%, reflecting the benefit of incremental volume and successful margin improvement initiatives. In addition to improved mix in the marine propulsion product groups, specifically within vet products. ME&A expenses were $20.7 million in the first quarter compared to $19.5 million last year.

The increase reflects the addition of CoBelt as well as ongoing wage and professional services inflation. We continue to focus on cost discipline and operational efficiencies to support long-term margin expansion. Net loss attributable to Twin Disc for the quarter was $518,000 or $0.04 per diluted share compared to a loss of $2.8 million or $0.20 last year. Year-over-year improvement reflects higher operating income and lower expenses driven by reduced currency losses, partially offset by higher pension-related amortization. EBITDA was $4.7 million for the first quarter, representing a 172% increase versus the prior year as expanded sales and profitability together drove strong results.

From a geographic standpoint, sales growth was driven primarily by North America, where continued demand for vet products and contributions from our recent acquisitions supported a higher share of quarterly revenue. The overall mix shifted toward North America, while Asia Pacific and The Middle East accounted for a smaller portion of total sales, reflecting the impact of order and shipment timing of our customers. Net debt increased slightly in the first quarter, primarily due to seasonal usage of our revolver. We ended the quarter with a cash balance of $14.2 million, down 14.8% from the prior year.

As expected, cash flows during Q1 are seasonally lower due to net working capital dynamics and slightly elevated inventory levels, as John described, heading into the year to satisfy robust demand. We continue to maintain a conservative net leverage ratio of 1.3 times. Our strong financial position provides flexibility to navigate the current macroeconomic environment with discipline while continuing to evaluate targeted bolt-on acquisitions that align with our innovation strategy and broaden our product portfolio. As noted earlier, gross margin expanded by roughly 220 basis points year over year to 28.7% in the first quarter, reflecting the ongoing benefits of our cost reduction initiatives, improved operational execution, and higher sales volumes.

We continue to build on this momentum by sharpening our cost to and pursuing margin accretive growth opportunities across our portfolio. Enhancing profitability remains central to our strategic priorities. Our capital allocation strategy remains on balancing growth investments with disciplined financial management. We maintain a focus on prudent capital deployment, pursuing targeted M&A that strengthens our marine and industrial technology platforms alongside organic investments in R&D, geographic expansion, and hybrid electrification innovation. Supported by a healthy balance sheet and clear strategic priorities, we are positioned to deliver sustainable growth and long-term value creation. I'll now turn the call back to John for his closing remarks.

John H. Batten: Thanks, Jeff. In closing, I'm encouraged by the strong start to fiscal 2026 and the consistent execution across our global organization. Our teams continue to demonstrate focus, adaptability, and discipline in navigating complex market conditions while delivering measurable progress on our strategic priorities. With the robust backlog, a solid balance sheet, and a clear roadmap toward our long-term objectives, Twin Disc is well-positioned to drive profitable growth and strengthen its leadership across core and emerging markets. I remain confident in our ability to sustain this momentum and deliver lasting value for our customers, employees, and shareholders. These conclude our prepared remarks, and we are now prepared to take questions.

Operator: Thank you. And if you'd like to address your question or your question has been answered, please press 1 again. Thank you. We'll pause for just a moment to compile the roster. We will take our first question from David Sutherland MacGregor from Longbow Research.

David Sutherland MacGregor: Please go ahead.

John H. Batten: Yes, good morning, everyone. Congratulations on the results. Strong quarter. Thank you, Happy to the year.

David Sutherland MacGregor: Let's start off with military just because you really called that out. And I appreciate the detail behind the strength and kind of how that is evolving. Can you just help us with the timing of shipment acceleration here as well as the expected margin impact?

John H. Batten: Yes. So it's John, David. I'll start with just the expected shipment. I would say we've, in Finland, for the NATO vehicles, really very much early in the beginning. I would expect that business for us, you know, let's just say that we're in the, you know, 150 unit range right now that in a year from now, that'll be doubled. And then we'll continue to grow from there. And then in the US, it's primarily the one that's driving it, are the autonomous vessels. And I think whatever volume we have this year, again, will be double in '27. So you know, it's it's and continuing from there.

So I don't want to say it's these the two main programs are going to be doubling every year. But that's kind of the pace that we're on is that, you know, I we can expect high I would say, you know, on average, at least for the next couple years, 50% growth in each program. And do you have sort of the capacity to support that kind of a ramp right now, or would that require a pickup in incremental CapEx spending? It would let's just say it would reevaluate our CapEx spend, excuse me, CapEx spending We certainly have the capability here in The US to meet the demand for the U. S. Navy. Shuffling some stuff around.

And we're working on the plan. We certainly I would say we have we're we're and in Europe, we're probably good with everything the way it is for the next eighteen to twenty four months. But, yeah, we're looking at what we do in the facilities at Europe so that we can capture that demand and maybe do some of that volume in one of our other facilities in Europe and not just all in Finland. But the answer is yes, And the CapEx, it's it's more focusing on test stands and assembly fixtures. And so, thankfully, it's not machining capability. Longer lead time, pieces of equipment. It's more on assembly and test fixtures.

David Sutherland MacGregor: Alright. Cool. That's all very encouraging. Let me turn to the oil and gas business. I know you're less dependent on oil and gas now than you've been in the past. But can you just talk about what you may be seeing in the way of changes in business conditions and order activity? And given what you've been working on in the way of costs, productivity, and pricing, do you need a volume recovery in '26 in order to see year-over-year upside in profitability?

John H. Batten: So the answer is no, but it would make it a lot nicer. Yeah. It's a very it's a very good part of the business, but, you know, thankfully, this David, it goes back to you know, the last, I would say, downturn for us in oil and gas kind of coming off the 2018-2019 high going into COVID that it was a conscious decision to accelerate our move away diversify away from oil and gas. It's still a very good business. I think China the tariffs just happened, I think, to coincide with again, China tends to at times, overbuild, and they have to absorb the volume that they have.

And, you know, I think there was a slowdown They didn't need as much equipment, and most of the equipment comes from The US. So it was also a double a double reason for them to slow down on purchases. We see that demand you know, I can see the ray of light there where that demand is gonna start to come back. And then the rebuild activity in The US has been still pretty good. It was down in '25. So I don't think it's gonna be hard to surpass that in '26. And as we mentioned, we've got the e-frac orders coming online. I don't think you know, those are the first couple spreads.

I think that will take us through this year. But I imagine that sometime during this fiscal year, we'll get follow-on orders for '27. And I'm cautiously optimistic on some natural gas opportunity. But the macro, David, the macro levels and again, I would say most of our units that go out in The US and North America are heavily weighted towards gas, whether it's wet gas or dry gas. And the demand for gas I mean, everything you read about data centers and what's gonna power them, natural gas plants, are one of the most likely options. I still think we're years away from nuclear being deployed.

And, you know, I just don't think renewables can keep up with the concentrated demand of what you need near the near the ANI, data center. So AI data center. So I'm I'm pretty optimistic on the macro level, and I think we're well positioned to capture growing demand.

David Sutherland MacGregor: Interesting. Thank you for that. I wanted to ask you about land-based transmissions because double-digit growth in marine and propulsion and industrial but relatively flat in the land-based transmissions. Can you just talk about the puts and takes within that business that led to the relatively flat top line?

John H. Batten: Yeah. I would say it's again, it's steady. I would say it's it's it's it's fairly steady. You know, in ARF, the demand, we're full. Our customers are, you know, kind of at their capacity. That's been full year over year. And really, the puts and takes have been you know, small projects with different outside of ARF Some are falling in, like, railway maintenance. Things. We're we're folding in some of the products, at CASA fall into the transmission business, and oil and gas has been I would say, some of it like, we've traded some unit volume in China for unit volume in North America. So I Jeff, I don't if you have any more Yeah. No.

I think that's right. David. You know, oil and gas in general was Down a couple percent from last year's Q1. And then there's just timing of our shipments you know, it's it's a steady you know, demand that we have, for several months and even years in front of us. But there's some shift between quarters depending on the customer's schedule, etcetera. Yeah, pretty steady demand, I would say.

David Sutherland MacGregor: Okay. Good. I wanted to ask you about gross margins. We normally see kind of seasonal pressures with European shutdowns. Can you bridge the first-quarter gross margins of 28.7%? You were up 220 basis points, I think. Maybe separate seasonal versus the incremental volume versus the margin improvement initiatives that you referenced, Jeff? And also, I'm guessing investments were a factor. Maybe the mix of businesses as well, I guess, because you talked about the strength in call out that. So just help me kind of proportion-wise how I should think about those various factors.

Jeffrey S. Knutson: Yeah, I think the good news for us, and we've talked about this on previous calls that the vet business wasn't delivering the kind of margin that we were expecting. And there were some definite drags on their margin coming out of that. Yeah. The trust of the trust of business. Right? So coming out of COVID, they were carrying a backlog that had pretty low margins in it, very competitive project, bidding during COVID where there wasn't a lot of activity. And we worked through that over the course of the few years coming out of COVID and really focused them on driving profitability, operational discipline, etcetera, pricing.

And so they delivered their best margin quarter since we've since we've acquired them. So it was really two things. It was the incremental volume at kind of our normal incremental drop through. So we look at around 40% drop through on incremental volume on a global basis. And then incremental to that, driving the probably about another $1.2 million of favorable margin was Vet delivering better margin results than they had in prior years. Yeah, David, I'll just add a little bit of color on vet too.

It's one of the things coming out of COVID and the Russia Ukraine war was you know, our supplier of, permanent magnet motors for l drives Those Our supplier had almost all of their supply base for raw material in Ukraine or Russia And what we what they couldn't get from Russia was destroyed in Ukraine. So we had some pretty heavy surcharges and cost increases as they were just scrambling to get us motors that unfortunately, we had contract pricing and couldn't pass that on.

The vet team has worked tirelessly for almost two years to develop different suppliers And so we're starting to see those suppliers come on online and go back to, you know, the pricing when we were quoting these projects. So they've done an they've done a great job on lean principles and finding new suppliers. If there's one entity that drove the improvement, really gonna be that. But then everybody else is just working on their constant, you know, continuous improvement projects. And it all came together. It was it was a very nice bump in the first quarter, which is which is typically a very hard one for us just on shutdowns and available days of shipping.

David Sutherland MacGregor: Great. And so how much of that 220 basis points do you think is sustainable going forward, John?

John H. Batten: Yeah. I mean, if we can you know, it's the same mix. I think I think we can do that on a on a trend line. As I mentioned, mentioned in the call, one of the tough things that we're dealing with in quarter, and thankfully we've gotten some relief, is first shipments in the in the Trump two thirty two tariffs of 50% We were we got in containers of marine transmissions from Europe and from Japan and those were tariffed at 50%. After feverish activity and explaining to Department of Commerce and anybody else and our codes. Thankfully, those have come down to 15%.

So have to deal with that, like, in the sec you know, that happened in the first month of the second quarter. But I think once we can get through the initial negotiation of tariffs with customers, I think the trend line, I think we can sustain that. I think the second quarter right now, given massive jump in tariffs that were impacted passing it on you know, I'd be happy to maintain that in the second quarter for sure. But, you know, the trend line going forward, the team and the mix and what they've done it's it's it's all it's all very positive.

And our flexibility of being able to move product and assemble and test in different regions is definitely a competitive advantage for us.

David Sutherland MacGregor: Yeah. Very encouraging. Last question for me is really on free cash flow for this year. And you talked about your plans for inventory and you've made a couple of comments around But how are you thinking about kind of conversion? Either EBITDA conversion or net income conversion, however you want to look it.

Jeffrey S. Knutson: Sorry. I get I well, I'll I'll answer the question I think you're asking, David, and maybe you can clarify. So I think the way we look at, you know, profitability as we drive growth is delivering in our sort of benchmark is 40% like I said. We expect as volume grows, we're delivering 40% Right now we're tracking you know, our target is to get you know, double-digit EBITDA. So say 11% EBITDA would be, I think, a target for us this year. Some improvement from where we've been. But as we grow, I think what we have in our minds is to get to that 15% EBITDA margin level.

And that's going to take additional volume and additional margin improvements as we delivered this quarter. So I think we're on a good on a good trend to get to some of those targets.

David Sutherland MacGregor: Right. And so can you help us at all in terms of the free cash flow model for the year in terms of what that might ultimately look like?

Jeffrey S. Knutson: Yes. Free cash flow is yeah. Certainly, it was a difficult Q1 for a variety of reasons. You know, we have a typical step back in Q1 with We had some inventory growth with the demand With, you know, some payouts that naturally follow our Q4. the increase in backlog, maybe some pre-buys with anticipation of tariffs. So difficult Q1 but we still were targeting you know, 60% free cash flow as a percent of EBITDA. That's that's our target. That's our goal. Think that's still deliverable We would hope to get close to breakeven you know, and recover that Q1, in Q2. So we're we're focused on you know, managing that incoming inventory in light of the growing demand.

I think you know, we what we don't want to do is in any way hamper our ability to grow and disappoint customers, let's say, as we're as we're delivering that this volume growth we have in front of us. So Yeah, that was sort of the drag on Q1.

David Sutherland MacGregor: Yeah. No. That makes sense. Thank you very much, gentlemen. Congratulations on all the progress.

John H. Batten: Thanks, David. Thank you. Again, if you have any questions, please press star.

Operator: And the number one on your cell phone keypad. And we have not received any questions from the audience. I'll be turning the callback over to our CEO, John Batten, for closing remarks.

John H. Batten: Thanks, Dustin. And thank you for your risk. If you have any follow-on questions, contact either Jeff or myself And we look forward to speaking with you in February after our second-quarter call. Justin, I'll turn it back to you.

Operator: Thank you. The meeting has now concluded. Thank you all for joining. You may now disconnect.