Welcome everyone to Noble Capital Markets Basic Industries Virtual Equity Conference, and thank you for joining us today. I am Mark Reichman, a senior research analyst at Noble. It is my pleasure to introduce Mr. John Batten, President and Chief Executive Officer, and a director, and Jeff Knutson, Vice President of Finance, Chief Financial Officer, Treasurer, and Secretary of Twin Disc Incorporated. Twin Disc, headquartered in Wisconsin, is an international manufacturer and worldwide distributor of heavy-duty off-highway and marine power transmission equipment and related products. The company's shares trade on the NASDAQ under the symbol TWIN. Welcome, John and Jeff.
Thank you, Mark. My name is Jeff, and John, and we'll walk you through a little bit of the background of Twin Disc. Starting with the normal Safe Harbor discussion, I'll leave that ceremonially for a second, but focusing on initially what the investment highlights as we see them for Twin Disc, really five, I think, unique things in regards to the company and the timing. We're in a position where our backlog is historically strong, and we have healthy demand across all of our product groups. Our technology, innovative technology continues to gain traction in our niche markets, in particular in the marine and industrial markets.
We have been executing on our strategic playbook to increase margin and increase cash flow generation, which has allowed us to take some strategic actions for example, the Katsa acquisition just recently. We have accelerating growth through our end markets, both in industrial and marine technology, M&A opportunities as we look forward. And you know, where we are strong, our niche capabilities in product groups that allow us to really capitalize on our global reach and our technology. A brief overview of the company. Twin Disc is over a hundred years old, a hundred and six years old, headquartered today in Milwaukee, Wisconsin, with about eight hundred employees worldwide. Revenue last year of just under $300 million, and EBITDA margin at about 9%.
A relatively healthy mix of revenue, both by product and geography, balanced between land-based and water-based applications and geography. Europe is actually now our strongest market. Most of our revenue, 33%, are the biggest piece of our revenue going into Europe, and then evenly split between North America and Asia Pacific. With that, I'll turn it over to John for some historical looks.
Yeah, just looking back at our hundred and six years of history, really, the first eighty years were fairly organic growth, and some product line acquisitions in the early nineties, and it really wasn't until nineteen ninety-nine that we started into some acquisitions of some companies in Europe, three companies in Europe, Technodrive, BCS, and Rolla. Then we really didn't do many acquisitions for about the next fifteen years, but in twenty eighteen, we did our largest acquisition ever, Veth Propulsion, out of the Netherlands, a hundred percent marine-focused company. Then just this year, we did our second-largest acquisition, Katsa Oy, in Finland. Asset heavy, excellent producer of gears and gearboxes. Both Katsa and Veth had a very strong Europe-focused only customer base.
We've done an excellent job taking Veth out to the rest of the world, and we're anticipating doing that with Katsa as well, as we go into fiscal twenty-five and beyond. So when you look at our product groups, we really... We separate ourselves into marine and propulsion systems and land-based. And in the land-based ones, we have our vehicular transmissions and pressure pumping transmissions in our industrial products. And in marine, we have our marine transmissions, our azimuth thrusters that we produce in the Netherlands. In Veth, we have our Arneson Surface Drives, and Rolla P ropellers, and then the controls that go with it. So they each have unique channels to market, whether it's distribution or OEM-focused.
But all of these products, as you'll see coming up on the next slide, are transitioning from traditional internal combustion engines into both hybrid and fully electronic projects. So, it's very exciting. It's the first time in our history where everything is being rethought in the off-highway markets, which also includes marine. But we have substantial business in each one of these areas, and there are active projects going on for either fully electric or fully hybrid applications. Taking a moment to look at our strategy, just following on with that hybrid electric, it is our mission to become the leading supplier of hybrid electric solutions in our markets, off-highway and marine.
We've had a lot of successes early on, more early on in the marine area, where it is a smaller market in terms of the number of participants, the number of markets, the number of players. Around the world, you know, in the global market, we are recognized as a leader in marine transmission and propulsion technology. So we've had a lot more wins there first, and it's been easier to work with some customers and get things going. But we have projects going on in our transmission business, as well as our industrial business, to expand into that hybrid electric space.
As I mentioned with Veth P ropulsion when we acquired them, they were almost 100% European focused, and now we've had some great growth in the Asia Pacific markets and in North America, and we helped introduce them to a new market in Europe, the mega yacht market, where that's currently probably, as far as backlog goes, their second largest market as of right now. With acquiring Veth and Katsa, we have new footprints, and we've been rethinking all of our global footprint for, you know, efficiency and customer response. Veth's growth has allowed us to use up some vacant space both in North America and Asia and Europe, as we retool plants to help with that product's growth.
We also have on the bottom there, whether it's hybridization, electrification, we started out being known for our clutch capability, whether it was in a PTO or a transmission. It soon became apparent that our ability with our electronic controls and design of that, the control of clutches, that's now what we're known for, our controls technology, whether it's in marine, transmission, or industrial. So even if applications aren't going electric or hybrid, they're absolutely moving into systems where everyone wants the fewer number of suppliers, the better, and they're looking for us to bundle products and sell those as one package to the customer. And then again, the focus has been, in the last five to six years, balanced with some strong push to organic growth.
And we've been much more active in the M&A space, with both Veth and Katsa, and have active projects to continue that growth in the very near future. So in terms of our targets, it's something that we've started to do, somewhat recently, is share where we think we're headed, where our medium-term targets are. And we've actually increased our revenue target just recently following the acquisition of Katsa, to $500 million of revenue by fiscal 2030.
We expect to achieve that through, as John said, becoming the hybrid and electric application leader in our markets, continue to expand the Veth product line around the world, focus on the growth of our industrial product line, which would include the Katsa integration of the Katsa business, and then likely further M&A in the next few years. With that, we would like to consistently deliver gross margins at or above 30%. It's been a focus of ours for some time. We've achieved 30% historically. It's been typically a matter of mix within our volumes.
But as we go forward, we're looking at rationalizing some of our European cost structure, driving further operational efficiencies, and trying to maximize margin coming through that hybrid electric channel, which will be more of a more pass-through content than typically we would have in our normal base business. And while we're delivering that additional revenue and gross margin, continuing to deliver free cash flow at 60% of EBITDA, that's how we look at it. It's a conversion of 60% free cash flow of EBITDA. And, you know, it's something that we've done very well recently. The last, say, eighteen months have been essentially record levels of cash flow for the company. I think we still have a nice runway ahead of us in terms of the ability to generate cash.
Focus heavily right now on our supply chain processes, rationalizing our manufacturing footprint, and really being smart about what we do with our capital balance. And, yeah, I think that's the last slide. So, we'll open it now for questions.
Thank you, John and Jeff. So I guess I'd lead off by asking: How does Twin Disc differentiate itself from competitors?
I'll take this one. It's John. I think the number one way we differentiate ourselves from our competitors really is in a couple areas. One is our controls technology, which I mentioned in the presentation. The ability to control the input speed into our product and the output speed, and with that, not just the speed, but the torque. We've got over a hundred years of taking horsepower, turning it into torque from a prime mover, mostly been a diesel engine. But with our controls technology, we can take either one input or two inputs, so a diesel engine or internal combustion engine and an electric motor, and still control the output and make the application as efficient as possible, whether it's in a vessel or military vehicle, farm tractor, or piece of construction equipment.
And then I think what sets us apart for a company our size and our niche markets is the support after the fact. After it's been delivered and the piece of equipment goes anywhere in the world, I really would put our support, our distribution and dealer network around the world is second to none. About the only other one that I think is comparable in our markets would be Caterpillar who sets the bar very high. But we're in every major country, every major marine market, every major industrial market. We're there to take care of our product and our customer products after it's been delivered.
Those are the, I think, the two things: our technical capability, our ability to use that in creating a good application for our customer, and then taking care of it after it's in the field.
Now, what do you see as the main drivers of growth that will propel you to meet your medium-term goals?
So two things. One is, as more and more of our customers turn to hybrid or electric, there's just no secret that the cost of the piece of equipment is getting more expensive. So for a traditional crane, where we would sell a $25,000 pump drive or torque converter, we're now selling a $160,000 hybrid system to the same crane. Now, the crane is more expensive, but we're getting a lot more content. So as we see the trend picking up of more cranes, more pieces of equipment going hybrid or electric, we're gonna see our revenue tick up. That, coupled with a concerted effort at M&A to add products and technology and geographies, I think that's what's gonna accelerate our growth more than what we've experienced in the last ten to twenty years.
You mentioned you've had pretty strong results recently. What do you think the company needs to do to sustain the profitability or even, you know, increase margins?
Well, a couple things. One, it's controlling our internal costs, and that means, working very hard, to bring down or control the costs, the input costs on material. Finding competitive sources, whether they're in low-cost countries like India, Mexico, but continually challenging our cost basis, but then also not letting our M&A or SG&A costs, grow linearly, with our top line. If we do those two things, I think not only will our top line growth accelerate, but our margin growth will accelerate as well.
What are your capital allocation priorities over the near term?
Yeah. So I think it still remains M&A for me. I think we'll continue to support the dividend at least at the current level. So after several years of a hiatus, we brought the dividend back last year-
Right
... and based on our strong cash flow performance and outlook. We continue to support that, continue to support capital spending on, you know, machine tools for efficiency, for volume, but really focusing on M&A that can deliver profitable growth and drive us to that $500 million revenue line. Things similar to the Katsa type of acquisition. For us, as you know, a relatively conservative financially run company, you know, we would never over-lever, let's say. We would always be looking at, not going too far over a 3-to-1 leverage ratio and trying to get back under 2-to-1 shortly after any action. A lot will be driven by our ability to generate cash.
Speaking of acquisitions, I mean, what are you focused on in terms of, you know, acquisitions in 2025? And maybe you could just elaborate on your investment criteria.
So I'll take the first part of that. I think two areas jump out continually. One is if it's metal products. For our portfolio, I would still like to focus on industrial products. That's the area of our business, when I went over the first slide, that's not a $100 million business. Our marine market is, our propulsion market is getting close to that. Our transmission on-land transmission business is over $100 million. And so finding products that would get that industrial business up to an equal stature within the portfolio of $100 million, that would be one.
Two, would be any technology, controls technology, battery, something for the hybrid system that will go across all of our businesses, that we could leverage across all of them. That would be also a priority. So those two, metal products, actual components for industrial or technologies, batteries, motors that would go across the whole portfolio, would be the two things that I would stress from an actual product or type of company we'd look at.
Yeah, I guess I would just add that, in terms of our criteria, you know, from a financial perspective, you know, we have kind of a sweet spot in size, so we would be looking in the, say, $20 million-$50 million range. We would be looking for something that's accretive to our EBITDA margin, so something north of 10% EBITDA. But probably, more importantly, or at least as importantly, as John said, something that fits into that strategic vision for the growth of the company and something that fits our culture. I think that's been really, you know, a strength of both the Veth acquisition and, to this point anyway, the Katsa acquisition. Just a very similar mindset around the quality of the product, the approach to serving customers. That worked well for us.
I was just kind of curious, you know, how do you source these acquisitions? The ones that you've done, do you feel like you've got the process down pretty well in terms of integration and being able to realize the accretion pretty immediately?
So, to the first part, the process, we've been very lucky, in that almost every acquisition we've done has been based on a personal relationship with the company. Smaller, privately owned, sometimes one family, often two, and we've known them from just being in the same business for years. And as they, the last, the current family member or the existing one is looking to exit the business, they knock on our door, or give us a call, or send us an email. So we've been very lucky that we have not had to compete in the book, you know, the bidding process. We've been involved in those. We've lost some. But we've lost all of them.
So we've been very lucky in that the companies that we've brought on board, we've known them, and more importantly, our employees have known each other, so it's been culturally very easy. No question that when Veth, after we acquired Veth in 2018, COVID certainly set us back a little bit on momentum of integrating and. But we've seen the synergies take off from 2020 on, as far as the growth of the backlog, the growth on their top line. And so we're just beginning that same thing with Katsa. We've known them for not as many years as we knew Veth or some other ones, but they were a supplier.
We've been very deliberate in getting, you know, all parts of the organization together to find those synergies and begin to work together. We're by no means expert on it, but I would just say that we've been very fortunate because every acquisition we've done, we've known the company, you know, at least for a decade.
What are you most excited about heading into 2025?
So for me, it's a couple things. One, just where we are right now relative to some others. You know, a lot of our markets and suppliers and competitors have been going through, I would say, a cycle that looks very recessionary, where their sales have gone backwards, backlogs are down, and we haven't seen that. And we have been, you know, very fortunate with our conscious shift away from oil and gas with the acquisition of Veth. That business has been growing. We acquired Katsa at the right time. Their backlog is growing. And, you know, some of the areas where we've seen some sluggishness, we've been able to push through that with other parts of the business growing.
So you could say five or six years ago, certainly without Katsa, definitely without Veth, we would be very different. We'd be looking at a cycle that is in the downturn, but we haven't seen that, and the excitement is around having those new products from Katsa in Finland and Veth in the Netherlands, that we're poised again for another year of growth, where in a different scenario, we'd be facing recession like many in our market.
Well, John and Jeff, thank you so much for joining us today.
Thank you.
I appreciate it. Thank you, Mark.