Thank you for standing by. At this time, I would like to welcome everyone to the Twin Disc Inc. Fiscal Fourth Quarter and Full Year 2025 Conference Call. [Operator Instructions] I would now like to turn your conference 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 a 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…

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 onetime cost capitalization adjustments in our Katsa inventory. Excluding the impact from this onetime 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.…

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 art 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.

[Operator Instructions] And your first question comes from the line of 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 maybe seeing particular strength? Is it broad- based, or is it particularly in these 2 verticals? And -- just a little more detail there would be helpful.

Yes. I think it's at the 2 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 only add, this is John, with the part that's beginning that's really picked up, I would say, in the last quarter is the defense. And it's -- for us, it's been in the marine -- for the U.S., it's been in the marine area. And in Europe, it's been in land-based transmission products. For NATO, 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?

Well, it is basically making sure that we have the capacity to meet the demand. When we acquired Kobelt -- sorry, when we acquired Katsa, in between the agreement and closing, Finland joined NATO and then Sweden joined NATO, and we've been blessed with approved supplier that is feeding a lot of the trucks in NATO and these programs are growing. So our #1 focus is making sure that we can meet the demand in Finland for these vehicles. And a lot of that's going to entail what products we brought -- when we acquired Katsa, it was for their capability and also their product line that they developed. They were a parts supplier. They had fantastic machining capability, but they were really in their infancy in supplying finished product like gearboxes. It's a big time now. So it's going to be what can we take from Finland and assemble and build other places to make sure that we have the capacity to meet that, and we do. And so that is -- it's exciting because there's a huge growth potential there as these vehicles -- as more and more of these vehicles are built and the more contracts coming. So it's going to be what do we offload, and we have facilities depending on what the product is, what the tariff structure is, but we can move assembly to Belgium, to Italy, to Texas to meet that demand. And same for the marine transmissions for the U.S. Navy. This is really ramping up. And we have -- right now, we have -- we believe we have the capacity in Racine, but that's easily something that we could offload into Lufkin if we need help.

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. So it's 2 different scenarios really with so Veth -- when we acquired Veth, they had sales agents around the world, didn't really have distributors, what we would think of as distributors in our industry, something like what Twin Disc would have or Caterpillar or Cummins, where you have dedicated workshops, train mechanics, spare parts on the shelf locally. And that's what we brought to Veth. And we had a delay in the growth because of COVID and then we had supply chain issues. But now that those are mostly behind us, we're really starting to see the Veth product take off in other geographies. And I think right now, North America might be, if it's not #1, it's #2 in their backlog. And it's across -- it's river cruise ships, it's workboats, and so -- it took some time, but now it's starting to happen, and we're starting to see that momentum build in Asia. We've had projects in Australia. It's the same thing we're going to do with Katsa, very similar, had 1 external agent, and so we're starting to bring that global support to their product line, and we'll be integrated 1 of their hydraulic PTOs into our product line. And so they had no real distribution around the world. Kobelt does have a lot of dealers around the world, and this is going to be a different integration and synergy because some of their dealers, we feel could be very influential in helping us sell some of our products. And vice versa, we think in some regions where we have company-owned subsidiaries in Asia and Australia. We think we're going to be very strong in growing their products in different regions. But we're really excited about both acquisitions, bring new products, new customers, but it's something that we can plug into our system, particularly with Kobelt. Their industrial brake line, which they've had some good success with in parts of North America and different applications, we think that we can really take 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 we've -- the supply chain disruption it lingered as far as suppliers not making it in different areas, and you're having to change quickly. And it's not really about the price, it's -- we just need this part. So we're going to pay what we have to pay to get the parts, so we can ship the product. That's starting to dissipate. We're also -- we have a large section of our supply in India, and we're moving suppliers in India to get a lower price. And so the acquisition in Katsa is absolutely helping us lower the way they manufacture gears is a very effective way to do it with the bar stock and internal heat treat. So that is something that we're learning. They're doing more of our internal gear supply for other operations. So I do think we're at an inflection point. We're also being a little bit more disciplined in products that we don't want to make any more and get those out of our portfolio and every product has the right to die and we're being more vigorous on that and focusing on the products with where we can succeed and have a higher margin.

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 think we have -- that infrastructure can support well north of $400 million. I think we don't see the need to add any significant investment at that layer. Most of what the increase within the quarter was sort of a full run rate of Kobelt. We have some purchase accounting amortization flowing through there. So I would say Q4 wouldn't be what we would expect a run rate to be going forward. And I think the run rate that we'll have will support from $400 million to $500 million without any really meaningful increase.

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 you're 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. And 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 mean 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 2 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, I guess, David, let me just follow on a little bit with some color. Yes, so when -- we have the businesses aligned in verticals. And the industrial business is being led by a guy from Katsa, and the transmission business is being run by a guy out of Racine, where most of the transmissions. Marine is being run by a gentleman, who -- he doesn't have any plans to reporting directly to him, but he has multiple products. He has products from multiple plants in Propulsion. He's got the whole plant there. And Kobelt right now is being run as a separate business unit as we really haven't just begun the integration. But I would say we haven't done a lot of acquisitions in our history. And when we did Veth, we quickly ran into COVID, and it was, I would say, a little bit more difficult integration. But once we got through that, it integrated pretty quickly. But my point is that we have -- we think we have Katsa pretty well integrated after a year of getting them on SEC reporting, getting the IT and everything buttoned up. But I'm really impressed with how quickly we've been able to integrate them operationally. And now we have 1 gentleman there who's running our industrial business. And the other person there is -- he has the traditional manufacturing operations, Twin Disc manufacturing operations reporting to him in Finland. So this 1 -- this has just been -- for us, I think, it's been a huge success, Katsa.

[Operator Instructions] And we have another question from Simon Wong of Gabelli Funds.

Looks like you -- between the 2 acquisition 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. I mean it was a difficult year as we -- I think we pointed out in terms of demand coming out of China for a variety of reasons. So it was down. As a percent of revenue for the year, it was around 8%, which compares -- that's about half of what it was a few years ago in terms of percent of total revenue. So part of that is growing, obviously, the other pieces of revenue, but revenue within that particular market was also down year-over-year.

Yes. It's definitely a difficult year. It's encouraging to see or hear that you got your first order for the E-frac. If I recall correctly, you were -- your offering in E-frac is pretty differentiated from what's on the market. Can you remind me what's your E-frac offering is?

Yes. So we used our standard geared transmission, spaced off to 7600. And the big difference is that -- so you have just a regular motor -- electric motor, and you shift the speed with our transmission versus doing a variable frequency drive. And we think that our solution is not only less expensive, it's more robust and will last longer. And it's a better solution to drive the pump. And yes, so we -- thankfully, we've worked very hard at this, and we got our first spread order after the fiscal year closed. But I'd also draw out, Simon, that we have -- we've been working on modifying the 7600 as well to work with some pure natural gas engines. So we think that that is also going to be a big opportunity for us in the coming fiscal year and particularly more in fiscal '27. But yes, we think this was probably the lowest -- looking back and looking forward, fiscal '26 is probably going to be our lowest year for oil and gas as a percentage of sales.

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 -- there's more activity. I mean, we have orders for North America. We have orders for South America. We have orders for China. So we think 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 1 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 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. Well, it's certainly volume related. It is -- as I've said, Katsa has shown that they are more effective in certain gear production costs, so moving gears to Katsa and lower -- more focus on different lower-cost countries and then moving within suppliers in India. So we have all of that going on. And then certainly, the CapEx that we've put in, in TwinCo, which is our North American operations and in Belgium. So it's a lot of everything. It's focused on lean, it's focused on part quality. There are several initiatives that are making that up. But certainly, volume -- there's no substitute for volume and that really helps.

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.