Thank you for standing by, and welcome to the Twin Disc Inc. fiscal first quarter 2027 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad, and if you would like to withdraw your question, please press star one again. Thank you. I'd now like to turn the conference over to Jeff Knutson, Chief Financial Officer. Please go ahead.
Good morning, and thank you for joining us today to discuss our fiscal 2027 first quarter results. On the call with me today is John Batten, Twin Disc 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 2027 first quarter conference call. Our first quarter results continued to build on the strong momentum we established in fiscal 2026. Demand remained strong across our end markets, and our performance in the quarter drove solid revenue of $88.7 million, a 10.9% increase over the first quarter of last year, as well as a net income of $3.5 million, a 63% year-over-year increase in EBITDA, and free cash flow of $5.6 million. Importantly, defense continues to be a key growth driver supported by growing U.S. Navy and NATO demand. Katsa, our subsidiary in Finland, booked significant defense orders in the first quarter, and U.S. Navy orders related to their initial unmanned vessel program have begun to reach our order book. I'll say more about defense shortly.
While reported Land-Based Transmissions revenue was down, this is primarily related to a reclassification of revenue from transmission to industrial. Oil and gas demand was strong in the quarter, and we continue to see growing opportunities in eFrac, which carry a higher margin profile than both traditional fracking and our company-wide margins. Our first quarter results drove six-month backlog of $191 million, a 7% increase over the fourth quarter of fiscal 2026, and a company record. We expect to maintain a strong backlog level as we continue to see strong interest and sales momentum, supporting a robust project pipeline. Looking at our liquidity, we generated strong free cash flow compared to negative free cash flow a year ago, and we reduced our net debt even as we continue to increase capital expenditures to support our growth.
As we mentioned on last quarter's call, we also made the decision to increase our quarterly cash dividend by 25% to $0.05 per share, demonstrating the confidence that our board and management team have in the underlying strength of our business. Turning now to our operations. Defense remains one of our most important long-term growth opportunities, and today we serve two main groups of customers. In the U.S., we supply transmissions to shipbuilders for the U.S. Navy's unmanned and autonomous vessel programs, and in Europe, our Finnish subsidiary, Katsa, provides driveline components for military vehicles to NATO customers. To provide some context around the momentum we're seeing from defense, as of the end of the first quarter of fiscal 2027, defense accounted for approximately 24% of total backlog, compared with approximately 17% of total backlog at year-end, and total defense backlog increased approximately 104% year-over-year.
Marine and Propulsion Systems sales rose 14% from a year ago. Similar to last quarter, revenue in this segment was led by continued demand for Veth, Kobelt, and Twin Disc products, and continues to benefit from strong military demand for marine transmissions, better commercial maritime demand in Asia, and a generally strong market condition. Land-Based Transmissions sales declined 15% year-over-year. Before getting into Land-Based Transmissions and industrial segments, I'd like to note that starting at the beginning of fiscal year 2027, all Katsa sales previously classified in Land-Based Transmissions are now classified in industrial. Demand indicators in this segment remain constructive. Oil and gas is growing as a percentage of our backlog and is less volatile than in previous periods. Global demand for energy-related products and orders for energy applications have also increased.
Demand trends are strengthening across North America, Latin America, and China, and North American energy customers appear more inclined to invest in frac rigs, including rebuilds and new units. We also continue to advance next-generation electrified and natural gas solutions that support long-term demand. Industrial sales increased approximately 35% in the first quarter of fiscal 2027 when compared to the prior year. Katsa is a strong near-term growth driver through defense vehicle components in Europe, supported by a strong global military demand. The Kobelt product line continues to offer considerable market opportunity, and we are seeing steady demand from North American construction and recycling customers, along with stable underlying demand across industrial end markets. Katsa continues to make progress on the construction of its new 54,000 sq ft assembly plant in Finland.
The new plant is expected to be fully operational in May of 2027, and by 2028, Katsa expects to double its gearbox assembly capacity to meet rising global demand from the defense industry, as well as industrial power generation and heavy equipment. As we mentioned last quarter, Katsa is also benefiting from data center construction by providing components to major engine manufacturers who design and install backup power systems for these facilities. Overall, our business segments performed well, and we ended the first quarter of fiscal 2027 with a six-month backlog of approximately $190.6 million, up from $178.3 million at fiscal year end, and $163.3 million a year ago, and a record on a reported basis. Inventory as a percentage of backlog also improved, falling to 94% compared with 117% in the first quarter of fiscal 2026, and 100% at year end.
This trend represents our disciplined inventory management, which played a key role in the reduction of our net debt during the quarter. Jeff will provide more information on this in his prepared remarks. Our strategy is clear. We continue to position Twin Disc as a leading provider of hybrid and electric solutions for niche marine and land-based applications, and we are pursuing that through organic growth, acquisitions that open new markets and geographies, and a disciplined capital allocation across the enterprise. We have a strong team and plan in place to execute on all our strategic goals. With our visibility today, we remain confident in our 2030 target to $500 million in revenue, a 30% gross margin, and free cash flow conversion above 60%. With that, I will hand the call to Jeff to walk through the financial results in more detail.
Thanks, John. Good morning, everyone. Sales in the first quarter of fiscal 2027 totaled $88.7 million, a 10.9% increase over the first quarter of fiscal 2026. Revenue growth was primarily driven by strength in our Veth product line, expanding demand from the defense sector, improved oil and gas demand, and generally strong market conditions across the global enterprise. On an organic basis, which excludes the impact of acquisitions and foreign currency exchange, sales increased 11.8%. Gross profit increased 10.9% to $25.4 million compared to $22.9 million for the first quarter of fiscal 2026. First quarter gross margin was 28.7%, consistent with the prior year period. Marketing, engineering, and administrative, or ME&A expense, was $20.8 million, consistent with $20.7 million in the prior year quarter. The slight increase was primarily driven by an inflationary impact on wages and benefits, offset by ongoing expense control.
With ME&A roughly flat on higher sales, we saw stronger operating leverage in the quarter. Operating income more than doubled to $4.6 million compared with $2.2 million in the first quarter of fiscal 2026. Net income attributable to Twin Disc for the first quarter was $3.4 million, or $0.24 per diluted share, compared to a net loss of $518,000, or a loss of $0.04 per diluted share in the prior year period. The improvement was primarily driven by an increase in operating income and a decrease in interest expense and other expense. EBITDA was $7.7 million in the first quarter, an increase of 62.6% compared to the first quarter of fiscal 2026. Geographically, Europe accounted for 46% of sales in the first quarter, followed by North America at 26%, and Asia Pacific at 20%.
In the prior year period, Europe accounted for 39%, North America 33%, and Asia Pacific 18%. We delivered double-digit sales growth in both Europe and Asia Pacific. Increased sales in Europe were primarily driven by contributions from our acquisitions, mainly Katsa, which continues to benefit from increasing demand in the defense sector. As I noted before, gross margin was 28.7% in the first quarter of fiscal 2027, consistent with the prior year period. Our margin profile in the quarter reflects the strong growth we continue to see with Katsa and Veth, which operate at gross margins below the company average, but continue to improve. Margins were also impacted by favorable product mix in Land-Based Transmissions, including higher alternative fuel unit sales. We expect gross margins in fiscal 2027 to be broadly in line with fiscal 2026, and we remain confident in our longer-term target of 30% gross margin by 2030.
We generated free cash flow of $5.6 million in the quarter, compared with negative free cash flow of $11 million in the prior year period, and we reduced net debt due in large part to disciplined inventory management, despite increased capital expenditures in the quarter as we continue to invest in our future growth. Operating cash flow was $11.5 million, and capital expenditures were $5.8 million. While we expect long-term free cash flow conversion above 60%, it is important to remember that we are prioritizing investments in our growth in the near term. Therefore, while 60% free cash flow conversion represents a key long-term goal, we do not expect free cash flow conversion at this rate in fiscal 2027. We ended the quarter with cash of approximately $26.7 million. Total debt was $39.8 million, and net debt was $13.1 million, compared with $29.5 million in the prior year period.
Our net debt, coupled with trailing 12-month EBITDA of $32.9 million, provides us with a net leverage ratio of 0.4x as of September 25th, 2026, compared with a ratio of 1.3x in the prior year. Our capital allocation framework is unchanged. We continue to invest in organic growth, focusing on R&D, geographic extension, and marketing. On the M&A front, we remain selective on acquisitions, bolt-on or transformational, looking for a strategic fit, returns above our cost of capital, and the ability to strengthen our network and capabilities while further diversifying our offerings. We are also prioritizing returning capital to shareholders through our dividend, which was $0.05 per share in the quarter, as well as reducing our net debt. I will now turn the call back to John for his closing remarks.
Thanks, Jeff. To wrap up, the first quarter showed that the momentum from fiscal 2026 is carrying forward. Demand is healthy, our six-month backlog is at a record, and defense momentum continues to build in both backlog and pipeline, which supports our longer-term growth. We are confident that gross margins will improve over time as we diversify our end markets and benefit from greater operating leverage. In the meantime, we are investing for growth, including the expansion of our European footprint and the build-out of our manufacturing capabilities in Racine. We are doing so with a financial discipline that has strengthened our balance sheet. With a strong balance sheet and a robust backlog, our priorities for fiscal 2027 are to execute on our operational initiatives, optimize our global footprint, and invest in long-term growth by carefully allocating capital, which includes returning capital to our shareholders.
Operator, please open the call for questions.
Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, please press star one again. Your first question comes from the line of Max Michaelis with Lake Street Capital Markets. Please go ahead.
Hey, guys. Congrats on the quarter, and thanks for taking my questions.
Hey, Max. Thanks, Max.
Hey. First one from me. Backlog obviously up 104% on the defense side. Katsa, seems like it grew significantly in terms of backlog. If we look at the U.S. Navy portion of that, it sounds like orders are just starting to come in. Should we expect more of a ramp in the December quarter, or is that going to be pushed out towards the March quarter? How should we think about the unmanned vessel opportunity ramping as a portion of backlog?
Hi, thank you, Max. It's John. Thanks. I think, for the first 30 boats that are, I would say, the official orders from the U.S. Navy, I think you'll see some of those also came in in the second quarter, so you'll see a bump. I'm not sure you'll see the same bump in our third quarter. This will kind of get us to a level for the first 30 boats. Don't know when we will officially There are some orders in, but let's just say I don't know when that next bump would be. I think you'll see another-
Okay
another one this quarter, and then there'll probably be a pause for a few quarters.
Okay. For Katsa, I mean, is that just going to be sort of linear through Q2 and Q3, or is there going to be any sort of bump as there will be with the unmanned vessel opportunity?
Yeah, I think you will see another bump in this quarter. There are three dynamics going on. There is NATO, there is a customer in the Mideast with a program going, and then a new program in Asia. So they are kind of all coming online. Obviously, the biggest magnitude are the NATO trucks. I think you will see all three of those will have some impact on the second quarter in net new orders.
Okay, perfect. Last one for me, and I will take the rest of mine offline. You mentioned the data center build-out or data center opportunity with Katsa. I mean, is there I know this may be early on, early innings in terms of this opportunity, but is there any way you can help size this opportunity, or is it just too early to tell, I guess?
I would say it is too early. We do not sell the finished product, so we are basically selling components to-
Yeah
to OEMs in Europe that are the backup power gen sets for these. They are expensive components. It would be hard for me to put on the whole potential, but it is significant for Katsa. We are talking sales in the millions, which is for a $50 million business and growing, it is good business, for sure.
Yeah, I guess because the way I see it, you are already expanding capacity with Katsa in Finland.
Yes
That is primarily due to the defense opportunity. I mean, now that if this data center opportunity explodes, I was just curious if this 54,000 sq ft facility would be enough.
Max, since these are just one-off components, they would not be going through the assembly facility. They would not be putting the pressure on that facility, which is nice. It is just machining capacity.
Okay, perfect. Awesome, guys. Thanks for taking my questions.
Thanks, Max.
Your next question comes from the line of Simon Wong with Gabelli Funds. Please go ahead.
Good morning, gentlemen.
Hey, Simon.
Just continuing with Max's question on data center. How much revenue did you get from data center this quarter?
Yeah, that is a tough question. I think we are still early on in that ramping, so I would not call it a significant contributor in the quarter necessarily.
Yeah, Simon, I would not put the sales in this past quarter. It is probably right now still under $1 million.
But the orders are growing. So yeah, I think it is going to be more of a story going forward.
Got it. Okay. Oil and gas, what percentage of revenue was oil and gas this quarter, and how does it compare to last year?
Yeah, so it was just over 9% in the quarter, which is a little bit higher than last. Last year's Q1 was a little over 8%. So, in terms of just raw dollars, we were up about 22% in oil and gas year-over-year.
Okay. Now, you mentioned that it sounds like you sold some eFrac units in the quarter. Can you quantify how much eFrac unit that you sold?
Yeah, Simon, I think we have orders. I do not think actually anything for eFrac. We shipped some of the models that go into eFrac, but they were for natural gas applications. So, we shipped last fiscal year, and we have orders for this fiscal year. But what went out was actually natural gas and traditional diesel this quarter, as far as shipments.
Okay. All right. Looking at your slide on aerospace and defense, you still see a pipeline opportunity of $30 million-$50 million, despite booking some orders during the quarter.
Yes.
That was unchanged. Looking at the pipeline, it is unchanged sequentially quarter-to-quarter. Is that a rolling number, or are you seeing new opportunities?
Yeah, so it is good, Simon. From that pipeline that we identified, we definitely brought stuff in that are firm orders now, but the pipeline continues to grow, both with other navies for marine transmissions and, more importantly, land-based vehicles out of Katsa. Again, new business that is coming up in the Middle East and new business that is coming up in Asia. So, the pipeline continues to grow as well as converting what was in the pipeline into firm orders.
Okay, great. Last question from me. The free cash flow conversion, I know you are targeting 60% long term, but you do not expect to be at that level this year. What level are you, or should I be thinking about for 2027, or fiscal 2027?
Yeah, I think in the, let's say, between the 20%-40% range. I think, and a lot of that will depend on how successful we are in getting the CapEx in that we want to get in, right? Because there are a lot of variables there, both internal and external, lead times, et cetera. But we have a strong initiative to build out some capacity and capabilities, and that's probably one of the bigger variables in terms of what free cash flow turns out to be for the year.
And CapEx for this year is $25 million?
Yeah, I think we'll still get to around 25. That's, I think Q1 hopefully will be our lowest quarter at around 5.7, 5.8, I think. So hopefully we're ramping through the year.
Okay, great. Thank you.
Yep.
Once again, if you would like to ask a question, simply press star one on your telephone keypad. I am showing no further questions at this time. I would like to hand it back to John Batten for closing remarks.
Thank you, Priya, and thank you for joining us today and your continued interest in Twin Disc. If you have any further questions, please reach out either to Jeff or myself. We look forward to speaking with you in February after our fiscal 2027 second quarter call. Priya, I now turn the call back to you.
Thank you, presenters. This concludes today's conference call. Thank you all for joining. You may now disconnect.