Welcome to the Twin Disc Inc. Fiscal Fourth Quarter and Full Year 2024 Conference Call. We will begin with introductory remarks from Jeff Knutson, Twin Disc's CFO. Please go ahead.

Good morning, and thank you for joining us today to discuss our fiscal 2024 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 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. 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 262-638-4000 and we will send the release to you. Now I'll turn the call over to John.

Good morning, everyone, and welcome to our fiscal 2024 4th quarter conference call. To begin with, I'd like to walk through some of the quarter's highlights. We again delivered solid results in the fourth quarter, capping a year of consistent performance, which supported our execution of several key strategic priorities. As we continue to capture healthy demand for our products across end markets, sales increased 0.6% year-over-year for the fourth quarter and increased 6.6% year-over-year for fiscal 2024. We are also seeing the ongoing benefit from disciplined working capital management and other operational enhancements we've implemented across our businesses in recent years, helping drive historically strong cash generation for both the fourth quarter and full year. Critically, in the fourth quarter, we completed the acquisition of Katsa Oy, a leading manufacturer of high-quality power transmission components and gearboxes. We are confident that the addition of Katsa Oy will both broaden our global reach and accelerate cross-selling opportunities across our business. Backed by our strong balance sheet and flexible financial profile, we will continue to focus on expanding our portfolio through strategic opportunities that will drive Twin Disc forward. Shifting to our product segment results. Our Marine and Propulsion Systems saw continued demand through the year with our global commercial end markets showing sustained activity. Despite a challenging year-over-year comparison and softer demand in both the Canadian fishing market and pleasure craft business, we delivered a 3% increase in sales in the fourth quarter. As noted last quarter, we continue to see a rise in government defense spending driven by recent geopolitical turmoil resulting in a surge of patrol boat projects. We saw a slight decrease in backlog as we work through inventory to meet consistently solid demand, which continues to be an integral part of our Marine and Propulsion Systems segment. Veth's collaboration with Rolla and the development of our ELITE thruster for yacht propulsion has also been performing well due to the strength in the luxury boating market during the quarter, further highlighting the importance of our strategic partnerships that have allowed us to tap into new markets and enhance our product offering. The demand we have seen for workboat marine transmissions continued this quarter with strength in the Asia-Pacific market, partially driven by the need for cold submersibles in the transport of raw materials from Indonesia to China. On the land-based side of our business, sales increased 9.3% year-over-year driven largely by RF. Our RF transmission demand remains robust, reaching record levels of backlog in the quarter. Exports to oil and gas markets were flat; however, we continue to see meaningful activity both in Asia and North America. In the Industrial segment, sales declined 8.9% year-over-year. While demand has been largely sluggish through the year, we saw a slight recovery during the fourth quarter. We can see lower agriculture and construction demand resulting in a weak market with reduced demand for commoditized products. While more commoditized products have been experiencing continued weakness, demand for higher content, more sophisticated products remains resilient. As we move into fiscal 2025, we remain focused on what we can control. Advancing partnerships with the original equipment manufacturers and efforts to penetrate new markets in line with our long-term strategy. In terms of our backlog, I am proud to say that we continue to increase our six-month backlog, both sequentially and year-over-year, while simultaneously reducing inventories. This uptick comes with the addition of Katsa Oy, which represented $12.6 million of backlog growth. Our continued trend of declining inventory as a percentage of backlog highlights both the impact of our disciplined inventory management and the resilience of our business in capturing sustained demand despite lingering macroeconomic uncertainty. In closing, I'd also like to address our long-term strategy before Jeff takes us through our financial overview. We aim to become a leading provider of hybrid and electrification solutions for marine or off-highway land-based applications, driven by deep relationships and close collaboration with major OEMs. That reach continues to expand on a global scale, supported by the successful collaboration with Rolla. We are also continuing to rationalize and modernize our business, delivering improved shipments by lowering inventory costs, improving lead times, and creating better results for all stakeholders. Our focus remains on controls and systems integration, shifting our business into new avenues that will bring us profitable growth. With regard to M&A, we are actively looking into the industrial marine technology sectors, both of which have ample opportunities for us to expand our offerings in the hybrid and electrification space. With that, I'll now turn it over to Jeff to discuss the financials.

Thanks, John. Good morning, everyone. We delivered sales of $84.4 million for the quarter, up $0.5 million or 0.6% from the prior year as overall demand continued to remain solid across our markets. Sales for fiscal 2024 were $295.1 million, up 6.6% from fiscal 2023. Adjusting for the divestiture of the DCS business in 2024, full year 2024 revenue increased $26 million or 9.5% over the prior year. I'd like to note that operating income for the full year was impacted by a $3.1 million non-cash loss on the sale of the boat management system product line and related inventory in the third quarter of this year. Additionally, we recorded a $4.1 million gain on the sale of the Belgian facility in 2023. Adjusting for those two items, full year 2024 operating income was actually $2.7 million higher than the prior year. Net income attributable to Twin Disc for the fourth quarter was $7.4 million or $0.53 per diluted share compared to $8.6 million or $0.62 per diluted share in the fourth quarter of fiscal 2023. Full year net income of $11 million or $0.79 per diluted share is up from net income of $10.4 million or $0.75 per diluted share in the prior year. Gross profit margin increased to 29.7% compared to 29.5% during the prior year period, and gross profit dollars increased 1.4% to $25.1 million. This increase is due to the benefits of incremental volume, a favorable product mix, and a positive impact of cost reduction and operational efficiency initiatives. While we saw sequential growth in each of our product groups, we saw consistent demand in both Marine and Propulsion Systems and land-based transmissions throughout the year supporting overall growth. As John mentioned, we also saw an improvement in the Industrial segment that has been pressured by a softer market over the last few quarters. Across our geographies, we saw another quarter of sales increase in our Asia Pacific and Middle Eastern markets and a pullback in North America. Strength in the Middle Eastern markets was supported by shipments to an RF manufacturer in Dubai. We remain committed to strengthening our balance sheet over the course of fiscal 2024. Twin Disc has maintained a net debt around $5.7 million despite a near-term increase in total debt due to the Katsa acquisition. We ended the year with a cash balance of $20.1 million, 51.1% higher than the prior year. We also improved the EBITDA by 2.9% to $26.5 million, generating positive free cash flow of $25 million and maintained a net leverage ratio of 0.2 times. As we enter fiscal 2025 with a strong balance sheet, we are well positioned to navigate macroeconomic uncertainty prudently. With a healthy level of debt, we continue to monitor suitable bolt-on M&A opportunities that align with our objectives of enhancing our innovative excellence and product offerings. Gross margin increased approximately 150 basis points from the prior quarter period, primarily due to cost reduction activities, the impact of operational efficiencies, and favorable product mix. Moving into fiscal 2025, we remain focused on maintaining this momentum as we further enhance profitability. Our capital allocation priorities remain unchanged with strong cash generation supporting a healthy balance sheet and low debt leverage. We are well positioned to act upon M&A opportunities that fit into our strategic framework. The priority for our business is driving innovation in the marine technology, industrial, and hybrid electric sectors to enhance our product portfolio. We are also making internal investments to drive organic growth, including investments in R&D, geographic diversification and expansion, and marketing. For us, this framework strikes an important balance towards maintaining financial prudence and flexibility while driving long-term growth. As we enter the 2025 fiscal year, we are in a great position to update our medium-term targets and establish new growth goals for Twin Disc. By 2030, we believe the consistent execution of our long-term strategy will deliver revenues of approximately $500 million with gross margins of 30%. We also expect to deliver consistent free cash flow conversion of at least 60%. I'd now like to turn the call back to John to review our updated targets and share some closing remarks.

Overall, the fourth quarter continued the trend of performance that we carried through the year. I am very proud of our team's ability to deliver robust cash generation and solid margin expansion. As we enter 2025, the demand strength and sales momentum we experienced in the fourth quarter provides a solid foundation as evidenced by our healthy backlog giving us encouragement for the year ahead. We expect the market conditions to remain largely consistent with what we saw throughout 2024. With a robust balance sheet strengthened by steady profitable growth and effective working capital management, we are well-equipped to handle any market uncertainties and capitalize on strategic growth opportunities well into the future. That concludes our prepared remarks. And now Jeff and I will be happy to answer your questions.

And we will go first to Simon Wong of Gabelli Funds.

Good morning, John and Jeff.

Hey, Simon.

Good morning, Simon.

Good morning. I would like to get an update on your EFAC offering. Can you share any progress regarding your new offering?

We are still in a testing and waiting phase with the 7,600. I remain optimistic that we'll receive an order for the first spread this calendar year. However, much of the focus has returned to traditional diesel engine frac rigs, leading to an increase in demand for spare parts for these diesel rigs. The 8,500 and 7,600 models are being used in conventional settings. I am hopeful and everyone involved believes it will happen; it's just a matter of when.

On that note, can you provide how much of this quarter's revenue was from the oil and gas sector? If possible, please break that down between equipment and consumer as well.

Yes. That's a good question, Simon. I think it's been pretty consistent with previous quarters. And maybe that's something I can give you a little bit more detail off-line. But I would say in terms of the mix between forward market, aftermarket, and transmission units, it's been really consistent with primarily shipments into China for new units and North America with aftermarket at a consistent level.

Okay. And for the overall company, is there anything in the R&D pipeline that you can talk about?

No, I would say not. The most notable thing that emerged in the past fiscal year was the hybrid system that Manitowoc introduced earlier this year for a hybrid electric crane. There are other projects with OEMs that we cannot announce yet as they are still in prototype testing. Internally, we are focused on the elite thrusters that Rolla and our team developed for the mega yacht market, primarily in Italy, but we are also seeing success with German and Dutch yards. We plan to expand that range further. Right now, our engineers are working on Katsa and evaluating how their products fit into our lineup. In the next 18 to 24 months, you can expect an expansion of the Veth line, including the ELITE thrusters, as well as some industrial components and transmission drop boxes from Katsa for the global market. Additionally, we continue to develop the PTI, which are the gearboxes for our marine transmissions to make them hybrid-ready or electric. So, in broad terms, that is our current focus, and you can anticipate many more specific models coming out in the next year or two, expanding our offerings in these areas.

Okay. While speaking of Katsa, how much revenue did they contribute to this quarter's results?

Yes, none, really, Simon. It was essentially closed at the end of the quarter. So the only impact Katsa brought into the quarter was their opening balance sheet and some costs related to closing and obviously costs related to the acquisition, but no P&L impact for the operation. Okay. I see that you're guiding 2025 to be in line with 2024. Is that both on the revenue and EBITDA line?

Sorry, I didn't...

Yes, yes, so traditional point that similar revenue and EBITDA coverage.

Okay. But does it include contribution from Katsa?

Katsa will contribute to our growth. When we include Katsa, we are certainly expecting an increase in revenue.

Okay. All right. Yes. Thanks for clarifying that. And then one more for me, the last one. Our capex, capex outlook for 2025?

It's going to be similar, probably, hopefully, a little bit higher than what we were able to achieve this year. Again, we struggled just a little bit with lead times as we invest in more significant machine tools. So something around $10 million is what we're targeting.

All right, great. Thanks, guys.

We'll move next to Barry Haimes at Sage Asset Management.

Thanks very much. I had a couple of questions. One is just on the $25 million free cash flow, which is a great number, was any of that nonrecurring? And if so, could you just identify kind of what's recurring, what's nonrecurring? That's the first question, but I had a couple more.

Yes, what we experienced was a slight benefit from over-inventory levels that were higher than we would have preferred historically. This allowed us some easy opportunities to reduce inventory. However, there were no significant one-time adjustments that we would consider nonrecurring.

So was the inventory rightsizing just the size it was at $5 million, $10 million just ballpark?

Yes, something like that in that range. I believe we still have some room for improvement on the inventory level, and we have started to gain good traction throughout the year, actually accelerating as we ended the year. We remain hopeful that, while the situation isn't as easy as it was before, there may still be some good opportunities ahead.

Okay, great. Second question is, I'm assuming Industrial for the new fiscal year is probably going to be down, correct me if you think I'm wrong on that. And if so, where do you see the positive offsets that would get you to flat or better as you point out, maybe with the Katsa business?

Yes, Barry, this is John. I would consider flat to be the worst-case scenario. The overall markets might decline again, but we have been making progress. As I mentioned earlier, the smaller mechanical PTOs for irrigation and basic construction and agricultural machinery have been performing well. Additionally, we are seeing good progress with our more expensive HPTOs, and we have some hybrid systems that are categorized as industrial for us. We believe we have the chance to grow our traditional core business compared to our performance in 2024. Adding Katsa into the mix and expanding our industrial line may not reflect in sales this year, but we anticipate that it can help accelerate our growth in the industrial sector. Katsa contributes about a third of their business, roughly $40 million, primarily focused in the Northern European market. Therefore, expanding their product line globally should aid in boosting our industrial growth.

Could you provide some segmentation of the Marine customers? You mentioned commercial and high-end yachts. What does the overall customer distribution look like in that segment? Thank you.

So if you consider the whole market, Commercial Marine will be the largest segment, with North America and Asia being the primary contributors depending on the year or quarter, while Europe will represent a smaller share. The next significant segment, which has been growing, is pleasure crafts, especially with the expansion into the mega yacht market. This can shift from quarter to quarter, influenced by military and government demand. Overall, our three largest markets are clear, but the leading market in marine remains commercial revenue-generating vessels, which includes marine transmissions that we manufacture, particularly the traditional Twin Disc for best thrusters. Revenue-generating vessels are by far our main focus in the marine sector.

Right. And is the pleasure craft just at the very high end or does it go down in terms of size?

The bottom end of our pleasure craft market is likely around a 50-foot yacht with twin engine diesel. Anything smaller is generally outboard for Volvo IPS. As we move up from 50 feet to 80 feet and even to 100 feet, our business strengthens. This includes sport fish boats manufactured in the Outer Banks, as well as brands like Maratimo, Riviera in Australia, and Grand Banks, all within that 50 to 70-foot range and above, which is where we excel.

Great, thanks so much. Good luck in the new fiscal.

Thank you very much.

And this concludes the question-and-answer session and today's conference call. Thank you for your participation. You may now disconnect.