Joe Nolan

Joe Nolan from Longbow Research requested an update on military orders and the underlying strength driving the 18% sequential increase in the defense-related backlog.

Answer

CEO John Batten reiterated the robust growth in defense, primarily driven by increased orders for unmanned vessels for the U.S. Navy and 6x6/8x8 vehicles for NATO countries, with a strong focus on ensuring adequate production capacity for these growing programs.

Joe Nolan from Longbow Research inquired about Twin Disc's top-line growth expectations for the second half of fiscal 2026, considering challenging prior-year comparisons and shipment delays. He also asked for a detailed breakdown of the sequential gross margin bridge from Q1 2026, including impacts from tariffs, operational issues, and warranty costs. Furthermore, Nolan sought an update on tariff mitigation efforts and their expected impact, Veth Propulsion's margin performance and growth confidence, the observed improvements in international oil and gas demand in China, and the continued strength and capacity plans for military orders, particularly the 18% sequential backlog increase.

Answer

CFO Jeff Knutson explained that while tariffs are unpredictable, the company anticipates good revenue growth in the second half of fiscal 2026, with Q3 and Q4 being stronger, despite Q2's 'noise.' He detailed the Q1 to Q2 gross margin bridge, citing tariff expense diluting margin by 50-60 basis points, operational delays in Finland, an isolated quality issue (combined 60 bps impact), and unfavorable product mix due to delayed higher-margin aftermarket shipments and Veth project-related revenue. CEO John Batten elaborated on tariff mitigation, noting that while 232 tariffs on steel/aluminum persist, the product mix will shift to less affected items. He highlighted the strategic move of ARFF transmission assembly to Lufkin (a free trade zone) for fiscal 2027, expecting a 10 percentage point gross margin improvement on those units. Batten expressed confidence in Veth Propulsion's margins, attributing it to improved cost estimation, pricing discipline, and leveraging the India supply chain. Regarding international oil and gas, he noted a significant order from China that exceeded fiscal 2026 budget expectations, coinciding with geopolitical events. Finally, Batten confirmed strong military order growth, specifically for unmanned Navy vessels and NATO land-based vehicles (6x6 and 8x8s from Katsa/Finland), and emphasized the focus on expanding capacity to meet anticipated future demand.

Joe Nolan, on behalf of David MacGregor, inquired about Stanley Black & Decker's plans to invest in the CRAFTSMAN and STANLEY brands following debt reduction from the aerospace fastener business sale, and how share gains and margin improvement are expected in 2026, especially if the DIY market remains soft.

Answer

EVP, CFO, and Chief Administrative Officer Pat Hallinan stated that proceeds from the CAM sale will reduce debt, aiming for a sub-2x net debt to LTM EBITDA ratio, freeing up capital for potential share repurchases. He noted an incremental $75M-$100M investment in brands for 2026. President and CEO Chris Nelson added that significant new product launches for CRAFTSMAN V20 and a refreshed STANLEY lineup are underway. He highlighted dedicated sales efforts for STANLEY in Europe and increased social media spend, expecting STANLEY to inflect sooner than CRAFTSMAN, which is anticipated in the second half of 2026.

Joe Nolan, on behalf of David MacGregor of Longbow Research, inquired about Stanley Black & Decker's plans to invest in the Craftsman and Stanley brands following the debt paydown from the Aerospace Fasteners business sale. He asked how the company expects to achieve share gains and margin improvement for these brands in 2026, particularly if the DIY market remains soft.

Answer

Pat Hallinan, EVP, CFO, and Chief Administrative Officer, outlined the financial strategy, including debt paydown and potential share repurchases, while committing to an incremental $75 million-$100 million investment in brands for 2026. Chris Nelson, President and CEO, detailed the brand-specific initiatives, highlighting significant new product launches for Craftsman V20 and a refreshed Stanley lineup in 2026. He noted that dedicated sales efforts for Stanley in the European hand tools market are already yielding results, and the company plans to significantly increase social media spending for both brands. Nelson anticipates Stanley will show an inflection sooner, with Craftsman following in the back half of the year.

Joe Nolan asked for a directional breakdown of the drivers behind the year-over-year gross margin decline, specifically the impact of mix versus promotional activity. He also inquired about the cadence of same-store sales through the quarter and into January, and the current state of acquisition valuations and pipeline.

Answer

CFO Michael McLamb attributed the biggest driver of gross margin decline to promotional activity and lower boat margins compared to the prior year. He described October as a good month, with November and December aided by the Fort Lauderdale Boat Show, and January expected to finish with positive same-store sales. Regarding acquisitions, he noted a robust pipeline but challenges with valuations due to weak earnings for many targets, often leading to postponements rather than lost opportunities.

Joe Nolan with Longbow Research inquired about the specific drivers of the year-over-year gross margin decline, the cadence of same-store sales throughout the quarter and into January, and the current state of acquisition valuations and the company's pipeline.

Answer

CFO Michael McLamb attributed the gross margin decline primarily to promotional activity and lower boat margins compared to the previous year, with mix playing a secondary role. He noted strong same-store sales throughout the quarter, aided by the Fort Lauderdale Boat Show, and positive trends continuing into January. Regarding acquisitions, he stated that while the pipeline is robust, current low earnings for many targets make valuation discussions challenging, though MarineMax typically postpones rather than loses targets.

Joe Nolan inquired about the acceleration in public infrastructure contract awards, asking for a breakdown in key markets and details on fiscal year 2026 DOT budgets.

Answer

Tom Hill, Chairman and CEO, stated public demand is widespread and improving, with state DOTs maturing into increased federal and state funding. All top 10 DOTs are up for FY2026, and only 40% of IIJA funds have been spent, indicating a long tail. Ronnie Pruitt, COO, added that reauthorization historically results in larger bills, ensuring continued public strength.

Joe Nolan asked about the drivers of growth in the fitness business, specifically advanced wearables, and an update on new user growth. He also inquired if the Q4 promotional environment is expected to be comparable to last year, and any associated puts and takes.

Answer

Cliff Pemble, President and CEO, indicated growth across both running and advanced wellness products in fitness, with strong double-digit growth in new user registrations across all wearables, primarily from new users. He stated that the Q4 promotional environment is expected to be comparable to previous years, with strong promotions planned across a broad product lineup.

Joe Nolan inquired about the drivers of growth in the Fitness business, specifically regarding advanced wearables and any updates on new user growth. He also asked if the Q4 promotional environment for the holiday season is expected to be comparable to last year.

Answer

President and CEO Cliff Pemble stated that Fitness growth was seen across both running and advanced wellness products, with strong double-digit growth in registrations and new products year-over-year, primarily driven by new users. He expects the Q4 promotional environment to be comparable to previous years, with strong promotions planned across a broad product offering.

Joe Nolan inquired about the success of the Polaris Factory Authorized Clearance (FAC) program, seeking an update on promotional activity from competitors and how that might evolve into Q4 and 2026. He also asked for an update on competitor channel inventories.

Answer

CEO Mike Speetzen stated that Polaris and its next largest competitor have similar DSOs and current/non-current inventory levels, which is beneficial for the industry. He noted that Japanese competitors are moving in the right direction, with large, one-time promotional incentives largely slowing down or exiting the market. Speetzen expects the promotional environment to remain relatively flat year-over-year into 2026, assuming dealer inventories continue to improve across competitors. CFO Bob Mack added that while there's talk of lower promo, behaviors haven't demonstrated it yet, and current views suggest promo will remain flat, with potential normalization in mid-2026 if interest rates decline.