Twin Disc Q3 2025 Earnings Call Transcript

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Provided by Quartr
May 7, 2025

There are 5 speakers on the call.

Operator

Thank you for standing by. My name is Alex, and I will be your conference operator today. At this time, I would like to welcome everyone to the Twin Disc, Inc. Fiscal Third Quarter twenty twenty five Conference Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. Thank you. I would now like to turn the conference over to Mr. Jeff Knudson. You may begin.

Speaker 1

Good morning and thank you for joining us today to discuss our fiscal twenty twenty five third 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 ks, copies of which may be obtained by contacting either the company or the SEC.

Speaker 1

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 262638400 and we will send a release to you.

Speaker 1

Now I'll turn the call

Speaker 2

over to John. Good morning, everyone, and welcome to our fiscal twenty twenty five third quarter conference call. We appreciate you joining us today. We are pleased to report solid results for the quarter, delivering sales of $81,200,000 up approximately 10% over the prior period and achieving strong gross margins reaching 26.7%. On an organic basis, which excludes the impacts of acquisitions and foreign currency exchange, revenue increased 1.7% on continued strength in the Veth product, offset by softened oil and gas shipments into China.

Speaker 2

While revenue improved marginally compared to last quarter, we saw significant month over month improvement throughout the third quarter, reflecting strong operational execution and continued healthy market conditions. Our recent acquisition of Cobalt is off to a solid start despite some initial headwinds related to tariff uncertainties and we remain committed to fully leveraging synergies from both the Covelt and CASA integrations as we look ahead. The robust performance in our marine and propulsion business continues, driven by sustained global demand, notably in commercial marine and luxury yacht markets. We are encouraged by ongoing stabilization in our industrial business and maintain a healthy backlog entering the fourth quarter. Given that tariffs are top of mind for many and conditions continue to evolve rapidly, I'd like to briefly highlight our company's relative installation from direct impacts on our cost structure.

Speaker 2

As it stands today, we estimate approximately $500,000 of tariff related impact for the upcoming fourth quarter, representing roughly 1% of our cost of goods sold. This impact primarily results from our sourcing activities in India, The European Union and Japan with only a negligible contribution from China. Despite this modest exposure, we anticipate successfully mitigating much of these incremental costs through strategic pricing actions and targeted surcharges. Additionally, as a part of our ongoing risk management, we consistently evaluate alternative sourcing options to further limit potential exposure. We will continue monitoring develop closely, maintaining flexibility to optimize performance and mitigate any evolving risks.

Speaker 2

Turning to our Marine and Propulsion segment, sales increased by 10.7% largely due to the acquisitions of CASA and CoVelt, while demand remained robust as we continue to benefit from consistent strength in our product line. We saw notable strength in the commercial marine market in North America, riverboat vessels and European luxury yachts, underscoring the global appeal of our propulsion solutions. Customers increasingly recognize the unique design advantage of VEST azimuth drives, which offer compact efficient propulsion solutions that maximize onboard space, which has proven to be a key differentiator driving substantial growth in the pleasure craft market. Turning to government defense spending, we continue to see sustained demand for patrol boat applications driven by persistent geopolitical dynamics. Given the strong demand, we are supplementing production using our existing Belgium and Texas facilities to support and relieve near term capacity constraints, particularly given prolonged lead times driven by sustained order momentum.

Speaker 2

In addition, integration efforts continue to pay dividends, particularly within our European operations where margins improved substantially. Overall, we remain strategically positioned to capitalize on growing customer interest in electrification and hybrid propulsion systems, furthering our leadership in sustainable marine technologies. In land based transmission, remains strong, driven primarily by the airport and firefighting market. Our specialized pump and roll transmission technology continues to be a compelling differentiator, supporting substantial backlog growth as global airport expansion and fleet renewal initiatives advance. In oil and gas, North American newbuild activity remains muted as customers maintain capital discipline and focus on rebuilding and extending the life of existing equipment.

Speaker 2

However, our aftermarket business remains resilient, supported by fleet aging and ongoing maintenance needs. In China, volumes have remained stable. However, tariff uncertainties have led to a more measured pace in new build activity even as long term fundamentals remain strong. Our Industrial segment showed stable performance underpinned by positive contributions from CASA and initial contributions from COBELT. COBELT specialized brake products broaden our industrial portfolio and we are actively working to enhance their global market penetration by leveraging our international sales and service network as part of our ongoing integration efforts.

Speaker 2

Similarly, Casa continues expanding its reach with innovative solutions benefiting from our global service capabilities. Overall, the industrial markets remain steady with continued engineering driven demand for specialized higher content solutions across diverse markets. Our backlog strengthened sequentially to approximately $134,000,000 indicating sustained robust demand across our product lines. Operational improvements, disciplined inventory management and increased production efficiency drove positive cash flow during the quarter, and we anticipate continued positive free cash flow moving forward. Despite currency headwinds, we remain focused on maintaining operational discipline and delivering inventory efficiencies relative to our backlog.

Speaker 2

In conclusion, we continue executing our long term strategy of global footprint optimization, operational excellence and strategic acquisitions. Our recent acquisitions of Katsa and Cobalt exemplify our commitment to expanding engineering capabilities, enhancing market reach and driving synergies across our global operations. Our flexible global manufacturing strategy positions us well to navigate potential tariff impacts, enabling strategic adjustments in production locations based on customer demand and geopolitical dynamics. Also, our long term strategic initiatives in hybrid electric propulsion system position us well for future market shifts. Although adoption rates vary across end markets, we're uniquely suited to serve applications requiring specialized high performance solutions and we're increasingly recognized as a trusted technology partner for operators transitioning to sustainable solutions.

Speaker 2

While supply chain stability remains critical, particularly for specialized components such as motors and batteries, we continue to take a proactive approach focusing on sourcing strategies to ensure reliability for our customers. Looking forward, our priorities remain clear through disciplined execution, margin enhancement and proactive market leadership in sustainable propulsion solutions. Additionally, we are taking steps to streamline our reporting structures in ways that bring decision making closer to the operating businesses while freeing up the corporate team to focus more intently on growth strategy and synergy capture. These changes which are expected to take effect at the start of fiscal twenty twenty six are designed to enhance accountability, improve execution and position our organization for long term success and we look forward to sharing more details and provide a fuller update during our end of year results call. Overall, we remain confident that our strategic initiatives and strong operational focus will deliver long term sustainable value for our customers, employees and shareholders.

Speaker 2

With that, I'll now turn it over to Jeff to discuss our financial performance in greater detail. Jeff?

Speaker 1

Thanks, John. Good morning, everyone. For the third quarter, we delivered sales of $81,200,000 up $7,000,000 or 9.5% from the prior year, primarily driven by contributions from our recent acquisitions and steady demand across most of our global markets. On an organic basis, excluding the impact of acquisitions in foreign currency, revenue increased 1.7% reflecting sustained momentum in key product segments. Net loss attributable to Twindisc for the quarter was $1,500,000 or a loss of $0.11 per diluted share compared to net income of $3,800,000 or $0.27 per diluted share in the prior year period.

Speaker 1

Earnings per share were impacted by $1,600,000 in other expenses primarily due to currency translation impacts. Gross profit margin improved sequentially to 26.7%, up from 24.1% last quarter, reflecting a favorable comparison due to inventory write down in the previous quarter and enhanced operational efficiencies with an improved product mix. Gross profit for the quarter totaled $21,700,000 Looking at top line sales distribution, we delivered stable performance across our marine and propulsion systems, land based transmissions and industrial segments. Geographic sales growth was notable in our European markets benefiting from a recent acquisition and continued strength in marine related projects. Compared to the prior year quarter, net debt increased to $24,500,000 largely reflecting the recent acquisitions of Costa and Covelt.

Speaker 1

We ended the quarter with a cash balance of $16,200,000 maintaining adequate liquidity. Operating cash flow generation was positive totaling approximately $3,400,000 driven by working capital timing related to receivables and the phasing of sales shipped during the quarter, positioning us for a strong fourth quarter. EBITDA for the third quarter was approximately $4,000,000 Gross margins remained strong, driven by operational efficiencies and improved product mix. Moving forward, we remain disciplined in our approach to managing inventory, optimizing our cost structure and maintaining pricing discipline to mitigate potential currency and tariff impacts. We anticipate continued positive margin trends driven by product mix and ongoing operational improvements.

Speaker 1

Our capital allocation priorities remain consistent. We remain committed to disciplined acquisitions that complement our existing expertise, particularly in marine and industrial technologies. Equally important is our ongoing investment in organic growth, including targeted research and development, geographic expansion and enhanced marketing initiatives, ensuring sustained long term growth and value creation for shareholders. I'll now turn the call back to John for his closing remarks.

Speaker 2

To wrap up, we delivered a solid quarter highlighted by strong gross margins, positive operational momentum and continued strength across key end markets, notably in marine and propulsion systems and industrial segments. Our strategic acquisitions and organic growth initiatives continue to drive our business forward, enhancing our competitive position and global reach. Looking ahead, we remain vigilant and proactive in managing potential tariff impacts and global market uncertainties, leveraging our operational flexibility and strong global infrastructure. We are confident in our long term growth trajectory underpinned by our robust backlog, disciplined capital allocation and ongoing investments in technology and innovation driving sustainable growth for our customers, employees and stakeholders. That concludes our prepared remarks.

Speaker 2

Jeff and I will now be happy to answer your questions.

Operator

Thank you. We will now begin the question and answer simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of David MacGregor with Longbow Research. Please go ahead.

Speaker 3

Yes. Good morning, everyone. I apologize in advance for the background noise. I'm in an airport. But I want to start off, just given all the concern that seems to be, occurring these days around the macro, just talking about order patterns.

Speaker 3

And, noted your order backlog was up, looks like about, if my math is correct, about 8%, which was pretty much where you were last quarter as well. So it seems to be fairly stable at those levels. Are we seeing order growth normalizing here in that kind of range? Or maybe talk about to what extent you're seeing any order cancellations or deferrals? I know third quarter is normally an important quarter for marine in terms of maintenance work and that seemed to come through as well.

Speaker 3

But did you see any evidence of cyclical pressures on, like operators deferring maintenance or anything like that? Just trying to get a feel for what you're seeing in the macro.

Speaker 2

So David, it's interesting. I would say we haven't really been affected as far as cancellations in marine. A lot of these projects are in the pipeline. Ships are being built, transmissions are coming in. I would say the order rates, if anything, are in the strengthening trend right now.

Speaker 2

We have a lot of marine orders, whether it's for marine transmissions or the Vet Azimuth thrusters in Europe, produced in Europe. So those seem to be doing very well. In North America, the marine backlog, I would say, is only going to be increasing. And what's happened again right now, just in the macro level, with all the uncertainty around, I would say, security again, We see trends increasing for patrol boat and military, certainly within Europe, but also within North America. The plan right now is that going forward, since nineeleven, defense spending has been primarily devoted to land based type stuff and also planes and other technology.

Speaker 2

But the focus has definitely switched into marine, and a lot of vessels coming up in our horsepower range. So that trend looks good. Europe looks good. North American work boat looks good. I would say what I would expect to see some softness is, and it's a much smaller part of our backlog in business, is you could see some pleasure crafts, some yachts, I would say a pause in orders or just some wait and see because there's a lot of American customers buying yachts in Europe, and those are going to be tariff 10%.

Speaker 2

A lot of yachts are built in Australia and Taiwan, so there'll be some tariff rates there. If anything out near term that might have a little bit of delay, it's gonna be in the pleasure craft space, in kind of that yacht and megayacht segment, but it's a much smaller component to what we're seeing as far as strengthening in work boat and government defense.

Speaker 3

Right, right. That's good color. Thank you for that. One second question just to ask Jeff had given some color on the tariff exposure, so I appreciate that. But can you talk about the mitigating circumstances and particularly the initiatives around pricing?

Speaker 3

And we had a May 1 price increase. Are you getting immediate traction on that or is there going to be some risk in fourth quarter margins around just a lag in price contraction versus the immediate implementation of tariffs?

Speaker 4

Yeah, think we're pretty proactive on this one, David. I think we went out with the price release, our price increase with some anticipation of what was happening. We're doing a lot of work around where we're sourcing from, what the tariff impact would be, what products that goes into. So yeah, there could be some fallout. Certainly there's some market dynamics that might have some impact, but I don't think there will be a significant impact to margins in Q4.

Speaker 4

You know, we're also looking at sourcing strategies and making sure we're getting it from the right place. So it's not all price. We're looking at all the levers there to make sure we're doing the best we can on the cost side, but I don't expect a big impact on Q4 margins.

Speaker 3

Okay. Good to hear. And then I wanted to ask you about CoBelt. Maybe just it's early, you've just completed that acquisition, but what are your thoughts so far in terms of your ability to sort of replicate the Veth playbook here by scaling globally by leveraging your system and maybe any ongoing observations around CATCo as well.

Speaker 2

So it's interesting, it's a great question. We're all here in Milwaukee for our global business meeting, so it's the first time that we've gotten the leader of COBELT, the leaders of CASA in the cycle of doing the business plan. I've been incredibly happy with the opportunity that we see to do the same thing that we've done with both companies. When we acquired Totsa last year, they were very much OEM direct and primarily Northern European customers, primarily Scandinavia. Very successful in that model of engineer to engineer from Katza to the engineering center, but didn't really have a global support, dealer network, distribution network.

Speaker 2

They have come up with some market designs, markets, an industrial hydraulic clutch, which we're releasing later this year. The other products that are gonna be coming out that are a marine transmission line that is basically not designed specifically for an OEM, but for the broader market. Fantastic designs, have been very well received by initial sampling in the market. Cobalt comes with us with a global dealer network, but it's, I would say, very uneven. We would recognize some of the dealers are a lot like a twin distributor, where they have a lot of people who turn wrenches and support the market on the ground.

Speaker 2

Some of them aren't. So I think there's a lot of work to do, and it's going to be a full time job for someone here very quickly, to sort that out and how we bring these two networks together. I would say the biggest opportunity right now in front of us are the co belt brakes that are used in they started off as just a shaft brake in marine applications to secure a propeller shaft. But they are in oil and gas, they're in paper, they're in steel, they're in wind, they're in marine applications on ships other than shaft breaks. So we've just scratched the surface there.

Speaker 2

So I think there's, unfortunately with that, COVID got in the way for a lot traction of growth and synergies, so it was delayed through that. But I think you'll see a lot quicker expansion of revenue for COTSA and COBELT, given that we don't have a global pandemic, but we have a global tariff issue right now, but I don't see much of an impact on slowing that down. Again, right now what we see in front of us, a lot of COTS' growth potential is within the EU, so no tariff impact there. But there's things that we can do with COVELT to go across borders if we have to, if tariffs become an issue.

Speaker 3

Right. That's great color. Thanks. And then last question for me. I just wanted to go back to a comment that Jeff made with regard to the gross margins, and he talked about enhanced operational efficiencies.

Speaker 3

I know you've got a lot going on in that bucket, but maybe you could just talk about some of the bigger gains that you were able to achieve just for the enhanced operational efficiencies.

Speaker 4

Yeah, so I think there's a big focus on some of our high volume or higher volume products, in particular the transmission that goes into the ARP application, the airport rescue firefighting vehicles. A lot of work's been done there, both in the factory, Kaizen events to drive an efficient assembly process, to drive better quality, and then on the sourcing side to really look at, you know, globally where's the best solution, you know, total landed cost including quality aspects. And then from a design perspective, you know, having engineering review the drawings, review the design of that product to make sure that we can continue to drive improved profitability in that particular product because it is something that we have high demand for, and it goes out a couple of years at this point. So a real good opportunity for us to move the needle on margins.

Speaker 2

Yeah, David, I would also add that you never have steady state for all products at all facilities. And right now, we're seeing some product lines in different facilities where we're bursting at the seams. And we've done a lot of analysis on what it would take to move production around so we have where it makes sense to move product out of one facility into another, what's required, what CapEx is needed. It's mostly test stands and assembly fixtures. Say we were ready to pull the trigger, but right now, we continue with the planning and doing the studying.

Speaker 2

One of the variables of the spreadsheet is what's the tariff impact going to be if we make these moves. So I think we'll probably just pause and just wait and see where the ninety day window's coming up this summer, see where it is. But I think after that, once we have a clear answer on where tariffs are gonna be for a few years, another ninety days, but hopefully something stable, we can start to make these moves and relieve some facilities that are bursting at the seams and get them into some of our other facilities where we have skilled labor that can help right away. And so we don't have to add bricks and mortar or additional shifts at certain facilities.

Speaker 3

Got it. Makes sense. Congratulations on all the progress. Thank you.

Speaker 4

All right. Thanks,

Operator

There are no questions asked. That concludes our Q and A session. I will now turn the conference back over to John Betten for closing remarks.

Speaker 2

Thank you, Alex, and thank all of you for joining us for our fiscal twenty twenty five third quarter conference call and your continued interest in Twin Disc. If you have any further questions, please contact either Jeff or myself, and we look forward to speaking with you at our fiscal twenty five fourth quarter and end of year call in August. Thank you, everyone.

Operator

This concludes today's conference call. You may now disconnect.

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Key Takeaways

  • Q3 sales rose approximately 10% year-over-year to $81.2 million, with organic revenue up 1.7% and gross margins improving to 26.7%, while a net loss of $1.5 million reflected currency translation headwinds.
  • The Marine & Propulsion segment delivered a 10.7% sales increase, driven by strong global demand for Veth azimuth drives in commercial vessels, luxury yachts and defense patrol boats.
  • Estimated fourth-quarter tariff exposure of ~$500,000 (about 1% of COGS) will be largely mitigated through May price increases, targeted surcharges and alternative sourcing strategies.
  • Recent acquisitions of CASA and Cobalt are integrating well, expanding Twin Disc’s industrial product portfolio and leveraging its global sales and service network to capture synergies.
  • Backlog climbed to roughly $134 million, and disciplined inventory management and efficiency gains generated $3.4 million of positive operating cash flow, positioning the company for continued free cash flow.
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Earnings Conference Call
Twin Disc Q3 2025
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