Twin Disc, Incorporated 17th Annual Midwest IDEAS Conference

Good afternoon, everyone. I'm Jacopo with Freeport Advisors. Next up, we have Twin Disc, trading as TWIN on the Nasdaq Exchange. I would now like to introduce Jeff Knutson, Chief Financial Officer.

Hey, everybody. Yeah, so I'm Jeff Knutson. We're Twin Disc, traded on Nasdaq. A company that is a little bit complicated to understand for what everybody would agree is a pretty small public company, so I'll try to hit the highlights, obviously ask questions. We're in a lot of markets, we're in a lot of regions, we're around the world. Highlights as we get into it for us right now, defense, global defense, and the wave of business we see coming at us. But we're land-based, we're marine-based in a lot of markets around the world. So, in terms of highlights, power transmission technology is where we excel. We've been doing it for, again, 105-ish years. Started as a clutch manufacturer for tractors in Wisconsin and got into the marine business. We did the transmission on the landing craft for D-Day.

That brought us into marine and brought us into Europe in a big way, with those vessels surviving the war and becoming commercial vessels around Europe, and therefore brought us and our product around the world. Right now, healthy backlog, record backlog, huge pipeline, in particular in defense. Almost all of our markets are doing as well as they ever have, and we'll get into some of those. We continue to drive and see progress on improving our margin performance. We've done some really nice acquisitions over the last few years, and we'll touch on that a little bit. And financially, we've been generating good cash, supporting the business, throwing off good free cash flow, and the balance sheet has been sort of retooled at this point. Again, always conservative, but we've done a few acquisitions.

We brought that down, ready to now again invest in certainly the growth in front of us and, hopefully, in the not-too-distant future, another acquisition. So in terms of our markets, where we play around the world, marine propulsion is now 60% of our business. The acquisitions that we've done in the last five or six years have been somewhat specific to marine propulsion. It's, again, supported by our worldwide distribution network, so a lot of markets. It's commercial, it's tugboats, it's fishing boats, it's mega yachts, it's patrol craft, it's ferries. It's everything. The way we describe it, just about any vessel that is too big to go on a trailer and pulled behind a truck, but too small to go across an ocean. Anything in between there is likely within our range. On the land-based transmission side, we really have three products.

We do the frac transmission for fracking. That has historically been the most interesting thing we've done. In these conferences, it's the question that we always got, "What are you hearing in frac?" What we're hearing today in frac is steady as she goes, essentially, not nearly as cyclical as it has been historically. We do the transmission for ARFF vehicles. That's airport rescue and firefighting. So when you see, hopefully never, a plane coming down that maybe has problems with its landing gear or whatever, the runway will be lined with ARFF vehicles. We do the transmissions for those, and we also do a military transmission. Then industrial, we do sort of the nuts and bolts of the global economy, irrigation, agriculture, road construction, recycling, wood chippers.

Your Vermeer wood chipper in your neighborhood that's picking up after a storm all the trees that fell down, we do components on those. We're quite global for, again, a $380 million public company. We're headquartered in Milwaukee, Wisconsin, manufacturing in Racine, also in Texas, also in Vancouver. We have manufacturing in Finland, Belgium, the Netherlands, Italy, Switzerland. Distribution offices in Singapore, New Zealand, Australia, a couple of locations in Australia, a sales office in China. So, quite global, and today most of our business is actually coming out of Europe. I mentioned the acquisitions that we've done. Here's the three recent acquisitions, Veth, Katsa, and Kobelt. Veth we acquired just before COVID, which was not ideal timing. It resulted in a bit of a pause in their ability to grow. You can see here we paid about $60 million.

When we acquired them, they were about $55 million in revenue. They're up almost 100%. They're up about 80-plus percent from there, with still accelerating growth. They do an azimuth thruster. So it's a pod underneath the boat that articulates, and it's become a very popular means of propulsion for things like mega yachts, for riverboat cruises, the Viking cruises up and down European rivers. We do a lot of that. Katsa was a company we bought just a couple of years ago in Finland. They do both industrial and marine gearboxes, transmission components similar to what Twin Disc has done historically. The big story for them, and I'll have an image, is they have exposure to the Finnish military market, which has now become the European military market, as Europe and the NATO countries in Europe are spending more and more on their military assets.

They don't have the companies that produce those assets any longer. They haven't had to produce them for many years. Finland, thanks to their neighbor, Russia, has always built military transmissions. They're always conscious of having to defend themselves. A case in point, I just saw a picture of the new facility we're putting up in Finland this morning, and in one of the pictures, they pointed out the air raid shelter that they've put into their facility. So that's a way of life for them. They're always prepared to defend themselves. They do world-class military vehicles, and now they're in demand across Europe. Great story, great timing for us. Kobelt we bought shortly after that. It's a Vancouver industrial product company. They bring brakes to us, industrial brakes. A company that we've been interested in for a long time.

We are fortunate to take that opportunity right after the Katsa deal, and we are really confident that will provide a great growth engine for us. I kind of probably have addressed a lot of this stuff already. This vessel is actually a solar riverboat cruise vessel. We have got orders for four of those. One of the things that we are seeing more and more of is our markets, in particular the marine market, really exploring, pushing alternative fuels, solar, full electric, hybrid electric. We have done full electric ferries in Sydney. We did the Maid of the Mist. I do not know if anybody has been to Niagara Falls. The Maid of the Mist is the vessel that does the tour through the falls. That is a full electric vessel. It is charged by the falls, and the battery is charged by the falls, so it is a very green application.

What we have found is there are not many companies that are willing to spend the kind of intellectual horsepower it takes to get those things right for one or two vessels here or there. It is kind of in our sweet spot. Those projects are meaningful to us. They can be millions of dollars, and it adds to our ability to grow that part of the business, which, in particular marine, is only going to accelerate. On the land-based side, like I said, this is an ARFF vehicle. Demand for ARFF vehicles is kind of at an all-time high. New airports, in particular, in Europe and the Middle East, very strong demand, very strong backlog on that particular product. This is a picture of one of the Patria vehicles produced in Finland. Again, that for us is a very big part of our growth story is the global military demand.

Other areas of industrial, you can see them listed there, as I said. Everything that makes the economy go. I hate to say it, but natural disasters are sometimes good news for us. Recycling is a huge part. A hurricane requires a big recycling, wood chipping, rock crushing, all that stuff is a big part of our business. But like I said before, defense is, in terms of our history, this is kind of a—outside of World War II where we did the transmission for the landing craft, this is kind of a once in a generation or every other generation kind of event, the kind of spending that we are seeing in defense. The numbers you see here for us are really just kind of the tip of the iceberg. Defense as a percent of our backlog is around 17%.

You can call that between $30 million and $40 million-ish of what is in backlog today. It is up over 50%. The pipeline that our customers have sort of told us is coming is in that $30 million to $50 million range of projects they know about. What we think and what we believe and what our customers believe is it extends way beyond that. The U.S. military, the U.S. Navy in particular, is going to be spending billions of dollars to renew the naval fleet, which has not been invested in in many, many years. The U.S. military has really only invested in sort of desert warfare assets for the last several years and have found ourselves way behind China, in particular, in the naval vessel count. That is good news for us, right? A big part of that growth will be unmanned vessels.

And those vessels being built in the U.S. in our horsepower range. We are the only North American manufacturer and only U.S. manufacturer of transmissions in that horsepower range. All of that spending is opportunity for us. And while it is real today, and it is in our backlog, and we are starting to deliver those transmissions, we are right at the very beginning of that. We reported a record fourth quarter, a record quarter of revenue, a record year of revenue. And for us, the biggest story in our growth is this defense growth opportunity, and it was a very small part of that story in fiscal 2026. It becomes a bigger part of the story in fiscal 2027 and beyond. I mentioned this before. We have put a lot of energy into the hybrid and electric powertrains, mainly marine, but we have done a full electric crane for Manitowoc.

We have done some other hybrid electric industrial products. But the marine market is where it has probably got the most traction. There are a lot of marinas around the world, in Europe in particular, where you have to be full electric when you are in the marina. They do not want diesel fumes in Venice, for instance. It is becoming more and more of a requirement as opposed to a nice option. And what it does for us is it brings a lot more content. Instead of just providing the transmission and the controls, we are providing everything essentially behind the motor. All the controls, all the inverters, all the batteries, we do not produce all that. We package all that, but it is more content for us. And the opportunities are broad. We have done tugboats. We have done, I do not know if anybody knows Hinckley. Hinckley Yachts is a boat manufacturer. They do a Picnic Boat.