Welcome to the Twin Disc Incorporated 2010 second quarter financial results conference call. During today’s presentation all parties will be in a listen only mode. Following this presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Thursday, January 21, 2010 and now I would like to turn the conference over to Mr. Stan Berger.

On behalf of the management of Twin Disc we are extremely pleased that you have taken the time to participate in our call and thank you for joining us to discuss the company’s fiscal 2010 second quarter and first half financial results and business outlook. Before I introduce management I would like to remind everyone that certain statements made during the course of this conference call especially those that state managements’ intentions, 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. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company’s annual report on Form 10K copies of which may be obtained by contacting either the company or the SEC. By now you should have received a copy of the news release which was issued this morning before the market opened. If you have not received a copy, please call Annette [Mianecki] at 262-638-4000 and she will send a copy to you. Hosting the call today are Michael Batten, Twin Disc’s Chairman and Chief Executive Officer; John Batten, President and Chief Operating Officer; and Christopher Eperjesy, the company’s Vice President of Finance, Chief Financial Officer and Treasurer. At this time I will turn the call over to Michael Batten.

Welcome to our second quarter conference call. As Stan has indicated I will start with a brief statement and then John, Chris and I will be available to take questions. Before getting in to the details of our second quarter I would like to emphasize the following points. First, in line with expectations our financial results showed nice improvement sequentially from the first quarter. In addition, our operating cash flow reached $16 million for the first half of the fiscal year and we were able to reduce our debt by 18% during the first half to $41.6 million. Finally, our six month backlog has improved 15.6% since the beginning of the fiscal year. All of these results point to an improving trend for the company. Now, let’s turn to revenues. As just mentioned, while we experienced a sequential improvement in sales from the first to the second quarter, our comparisons to the near record levels hosted in fiscal year 2009 were unfavorable. Net sales for the second fiscal quarter of 2010 were $55.2 million compared with the near record level of $81.6 million for the same quarter a year ago. Year-to-date sales were $102.2 million compared to $154.3 million last year. Our revenues continue to be affected by the impact of the global recession specifically, customers in the mega yacht and industrial markets. Offsetting this weakness has been a stable demand from the airport rescue and firefighting, land and marine based military and Asia Pacific commercial marine markets. Sequential improvement was also seen between the first and second quarters of the current fiscal year from 20.7% to 26.8% in terms of gross margin for sales reflecting increased sales volumes and product mix. Comparing fiscal years, gross margin percent was 26.8% for the fiscal second quarter compared to 28.1% with the…

(Operator Instructions) Your first question comes from Paul Mammola – Sidoti & Company. Paul Mammola – Sidoti & Company: First in ME&A, I know you highlighted obviously down year-over-year but a pretty good jump sequentially. Could you flush that out a bit and is any of that associated with the development of the 7500 series?

It is largely attributable to timing in the fiscal year. Our first quarter generally is a lighter quarter in terms of ME&A. As you go back over the last several years I think we would see that. We continue to expect that our cost reductions will impact our spending and we don’t foresee any further significant increases in the coming quarters. Paul Mammola – Sidoti & Company: So a $15 million run rate for ME&A is about right you would say?

Plus or minus yes but, not a significant jump the way you saw in the first or second quarter. Paul Mammola – Sidoti & Company: Then on the 7500 series how much is that going to cost to produce and market? And, how much of the cost lay ahead?

As far as engineering expense and ME&A expense to develop the market? Paul Mammola – Sidoti & Company: Correct.

Well I guess the first answer is it is not going to greatly affect the balance of the year in the going quarters. It has been pretty much spread out. Most of the development expense is behind us and we have marketing expense ahead of us which is already factored in to our remainder of the year so it is not going to be a big impact from quarter-to-quarter.

Paul, if I could just come back to the ME&A, for the first quarter for Twin Disc, we don’t have any trade shows, they all start in the second quarter and we did have further development expense for the marine, the joystick control system which we previously mentioned and we have go live on some ERP in Europe which was some ramped up activity in the second quarter as well but that is pretty much the difference. Paul Mammola – Sidoti & Company: Has BJ Services given you guys a look at their 2010 cap ex budget yet?

The 2010 cap ex budget I have not seen it. We received some orders from the region on the 8500, I am not sure if that is related to the timing of their cap ex budget though. Paul Mammola – Sidoti & Company: Chris, you’re obviously generating good cash flow for the first half of the year, would you say that is probably the bottom for receivables and inventory at this point or do you think you have more room to go?

In terms of receivables obviously as we ramp up on sales there’s the potential that receivables would go up. I think we would all say that inventory continues to be something that we’re focusing on so I wouldn’t necessarily make the same comment with respect to inventory.

Your next question comes from Peter Lisnic – Robert W. Baird & Co. Peter Lisnic – Robert W. Baird & Co.: I just want to ask another follow up question on the ME&A side, if I look at the numbers and the percentage of sales it is about 27%, you traditionally run in the low 20s so I am wondering are we at the point from a sales level where that 27% kind of rate we’re basically at a fixed level or can you maybe quantify what some of the I’d call one time development expenses are in that number?

When we talk about the ME&A expense obviously with the reduce sales the percentages has gone higher so we expect that percentage to go down as we go forward as revenues pick back up. Clearly, you’ll see our order backlog trend growing and we expect good results out of those shipments primarily driven by oil and gas considerations. The ME&A side of things we expect to more or less continue at level rates as we go forward and the revenues reduce the percentage.

The ME&A expenses as dollars will not be growing at the rate of sales revenues going forward. Peter Lisnic – Robert W. Baird & Co.: In other words we should probably as the revenue line improves see a retreat back to that low 20% kind of level? In other words there is nothing structural here regarding the cost structure which I wouldn’t think there would be?

You are correct. Peter Lisnic – Robert W. Baird & Co.: Then in terms of the backlog you’ve given pretty good color commentary on that. I’m just wondering if you could paint us a little picture on maybe what we’re not seeing or numbers outside of backlog what you’re hearing from your customers in particular in end markets that wouldn’t be showing up in backlog in terms of order inquiries or how their order books might be shaping up or your order book might be shaping up relative to maybe not the next two quarters but a little bit further out from that because some of these businesses obviously are clearly longer cycle.

I guess just from a high level I would say that obviously the oil and gas industry is starting to pick up and we’re seeing that in our 8500 orders and inquiries for the 7500. As previously mentioned, in military projects both land based and marine base have been growing. Military is stable, our patrol boat markets have been growing and we see that going out past the next two quarters. Just a general comment on industrial and kind of the rest of the business certainly Asia as an overall market has been stronger it didn’t subside very much, it held pretty stable. We see some increase in activity both in orders and interest in quotes in North America. I would say that in Europe by in large for everything they have obviously a large pleasure craft and mega yacht industry and I would say that region would be the slowest in overall recovery in pick up.

Your next question comes from Sean Boyd – West Cliff Capital Management. Sean Boyd – West Cliff Capital Management: I wanted to come back to the ME&A expenses for just a second. If I am looking at this correctly the expenses were down about $3.5 million in the September quarter on a year-over-year basis then December down a little over $2 million. You made the point about the quarter-to-quarter timing so I am trying to understand can we take that $2 million drop and assume that kind of a year-over-year change again off the year ago March and June quarters as we think about the forward quarters here or do we need to be using this shifting $14.9 million run rate as more of an absolute level going forward? If you can clarify that it would be very helpful.

Unfortunately you can’t do that. One of the reasons you can’t is if you look at the third and fourth quarter of last year and go back and look at our announcements back then you’ll see that there is what I will call noise in there. There were some reversals of stock-based compensation expense and some incentive compensation so those numbers were artificially low. So, if adjusted for those I think then your analysis might be a little bit more on. I think a better statement is to say that we don’t see a significant move off of the levels of the second quarter for the balance of this year. In particular the fourth quarter of last year would have had a bunch of what I just described so it is artificially low. Sean Boyd – West Cliff Capital Management: Getting away from that for a minute, on the mega yacht if we could, can you give us a little more color on what it takes to get that business back and what I mean is, is there a ton of inventory out there on vessels that haven’t been built? Is it the fact that most inventory has been pretty much been burned through and we just need orders to pick up? What does it take to get that business going again to contribute to Twin Disc?

A little bit of everything you just said. There is still quite a bit of inventory in probably the 40 to 60 to 70 foot range and there’s a lot of inventory that still needs to be worked through. In the larger range, kind of in the 70 plus certainly above 100 feet there really is no inventory, everything was built to order and it is going to take realistically an increase of disposable income, the feeling of feeling you have the money to spend so stock markets coming back and an ability probably most importantly to finance it. Even people buying these boats are financing them and they need to have access to capital to do it. Sean Boyd – West Cliff Capital Management: So it sounds like that business is probably going to be pretty cold for a little while here?

I would say looking at the recovery of that market you’re measuring it in years not quarters/ Sean Boyd – West Cliff Capital Management: That is about 20% of sales?

No. Sean Boyd – West Cliff Capital Management: What was that historically?

Well the pleasure craft market not so far off in terms of 15% to 20%. If you recall we are also represented significantly in the commercial markets and the patrol boat markets around the world so that is an area that I think you’re close to the number there. Sean Boyd – West Cliff Capital Management: But just pleasure craft maybe 15% to 20%?

The comments that we’ve made and we’ve been talking about right now apply specifically to the pleasure craft market. When you go to commercial fishing, other workboat applications or the patrol boat, the patrol boat market is actually growing for us and the commercial markets are holding depending upon the region of the world you are talking about. Growing in Asia, holding in the US and Europe is particularly hit in this recession for a number of different marketplaces. That’s a little bit surprising this go around is how badly European markets have been hit. Sean Boyd – West Cliff Capital Management: Can we talk to the industrial in the same vein meaning industrial is kind of a fairly large catch all, what within that group is hurting the most here and what do we think on timing? My gut is that probably comes back a lot faster than something like the pleasure craft?

No question. There’s different parts, our products go in to construction equipment, irrigation for agriculture, some agriculture equipment, recycling, rock crushers, wood chippers, biomass, each one of those that I mentioned have been down. Which one would come back the soonest, I can’t say it is just by in large our clutches and [inaudible] have had increased order activity in the US, North America, not necessarily in Europe. But yes, I would foresee that coming back much quicker than pleasure craft and marine. Sean Boyd – West Cliff Capital Management: Moving to something I think a lot of us are much more interested or see as a potential contributor even quicker here, let’s just talk about the backlog growth one second on the existing 8500 series. How does that look to you, how sustainable does it feel? Is it fairly broad, is it one or two customers? Is it a particular geography? Any more detail that you can give us on that?

I would say compared to last time the geography is broader. It is the US, it is Canada, it is Asia and our customers now, the number of customers that have orders is more diverse than it was previously? Is it sustainable? I think so. I think there are other indicators out there that the overall economy is improving. I see it continuing for the next few quarters certainly and beyond. Sean Boyd – West Cliff Capital Management: With launch of the 7500 coming on can you remind us again as to the market size that you’re going to be able to tap with that 7500 versus the 8500 and then also any thoughts on what that initial order ramp or revenue ramp looks like?

The best estimate is that the size of market for the 7500 is 10 times that of the 8500. The 8500 really is 2700 horsepower to 3000 or 2600 to 3000. The 7500 can tackle really a market from 2500 down to 1500 and be competitive. The market for new builds is much greater and the market for retrofitted, there are just a lot more rigs out there that could be retrofitted with this unit. How quickly it ramps up to a sizeable market share? It’s a balance of doing retro fits, new construction and proving it in the field on different applications. We want to do it right and be prudent in the release but it will be significant player in the market that is for sure, a larger player than the 8500. Sean Boyd – West Cliff Capital Management: Would you expect to start actually taking orders in the June quarter on that?

I anticipate taking actually the first order sometime this fiscal quarter, the third quarter? Sean Boyd – West Cliff Capital Management: In the March quarter?

Yes. Sean Boyd – West Cliff Capital Management: So that starts coming in the backlog at that point?

I would anticipate not a huge amount but a sizeable amount for the 7500 in this quarter. Sean Boyd – West Cliff Capital Management: Just the last question on the pressure pumping, can you give us a feel for kind of the current size of the business? This is of course without the 7500, maybe just orders on the existing 8500 series versus what they were say in peak ’07 ’08 levels?

I would say right now we’re somewhere regarding new construction we’re somewhere in the 20% to 25% range maybe of what the build rate was two to two and a half years ago.

Your next question comes from Peter Lisnic – Robert W. Baird & Co. Peter Lisnic – Robert W. Baird & Co.: I just wanted to follow up on gross margin, if I look at the number this quarter the [inaudible] looked better than it had during the downturn I think period. So I am just wondering if maybe you can call that out a little bit in terms of what drove that in terms of either mix or some of the restructuring savings that you had put through, whether those had come through and are coming through according to play? What might be happening on the price costs or on the materials cost side as well?

I think Pete you hit them all. I think everything you identified is something that had an impact in that 600 and some basis point improvement. It was all those things, there was the mix as John was talking about some of the markets that were up in the quarter, there was clearly the impact of volume and absorption, we continued to see the ramp up on the savings effect both in cost of goods sold and ME&A. There were some bad guys in terms of the pension expenses we had announced that the beginning of the year that it was going to be up slightly but overall everything that you identified is something that we’re seeing the effects of in the second quarter. Peter Lisnic – Robert W. Baird & Co.: Is there a way to weight those in terms of which were bigger contributors than others?

From the first quarter to the second quarter? Peter Lisnic – Robert W. Baird & Co.: Either that or year-over-year.

First quarter to second quarter certainly the volume and the mix are going to be the two leading but I think a close third would be the savings initiatives.

The biggest impact is going to be here in North America the Racine operations had a four week shutdown, they had a one week in the second quarter. So for volume absorption that would be the biggest impact. And, we started shipping 8500s again in the second quarter. Peter Lisnic – Robert W. Baird & Co.: I think you were down 40% in the US in the first quarter or something like that if I remember correctly?

Yes. Peter Lisnic – Robert W. Baird & Co.: The one thing that we haven’t really I think talked about a whole lot is as you introduce some of these new products like the 7500 just sort of, and I know this will be sort of tricky, but what expectations might be in terms of margin contributions? Are these products where you expect the return profile to be comparable to what you’ve got in the portfolio now or is there a chance that these products turn out to be markedly higher return products for you?

The margins on the 7500 are going to be percentage basis comparable to other oil and gas kinds of margin. I would see that there’s leverage to be had as we go forward from all the products that are used in the oil and gas industry which would be the 8500, the 7500, we have some large air clutches and some other industrial products that go in to servicing equipment. By in large I think we will see some leverage there Peter.

Your next question comes from John Debs – Bodri Capital Management. John Debs – Bodri Capital Management: There is a push to replace diesel engines with natural gas engines going forward. Supposedly there’s a bill in Congress that would help this happen. Would that help or hurt your business or what impact if any would it have?

An increase in demand for natural gas will absolutely help the business. A lot of the pressure pumping activity is in natural gas and those prices as you know have not recovered as they have in oil so I see that as a plus. John Debs – Bodri Capital Management: What about vehicles though that you would supply transmissions or whatever for?

I think the vehicles would be benefitted from natural gas would be in the lower horsepower of automotive range rather than in the larger heavy duty construction or other highway equipment. It would take some time I think to have that develop as a market. But, having said that John, we’re not too concerned about what the power source is because we provide the products on the app end of the power source. John Debs – Bodri Capital Management: How important can pressure pumping be to you if the business comes back somewhat in terms of your overall sale?

It could be very helpful to us. As I mentioned in the previous question and response, we do get leverage from this particular industry, oil and gas so we would benefit more on the bottom line than necessarily on the top.

Your next question comes from Sean Boyd – West Cliff Capital Management. Sean Boyd – West Cliff Capital Management: I just wanted to come back to the margin structure of the company thinking about the answer on the ME&A expenses and some of the discussion there. The company in previous [inaudible] had gross margins over 30%, operating margins over 10% certainly. Are we still going back to that or is there a different kind of maybe medium term target that we should think about? Can you give us some sort of revenue run rate that we might be able to think about with Twin Disc going forward?

Well, we don’t do a lot of specific forecasting Sean but let’s go back to your original question on the margins and ME&A. Our targets would be to get back on an interim basis in the 30 kind of numbers and to work our way up to the mid 30s which is where we got. Now of course, the mid 30s reflected a lot of oil and gas business during those years starting 2007 and up to 2009. That was largely driven by mix but we had been focused on getting our overall run rate on margins 30% and above. That is where our target would be. As far as revenue run rate, we’ve got some mixed bags as markets have shown. Oil and gas is coming back, the Pacific Basin and Asia are growing nicely but we do have obviously some issues in the European market we’re having to deal with and we’re just pulling in to our planning process for fiscal ’11 and I wouldn’t want to be premature at this point to talk about a number until we’ve gotten through the scrubbing of our sales forecast for fiscal ’11. Looking at our outlook longer term, I am very encouraged by where we are positioned as a company in terms of the markets that we are serving and the technologies and the products that we’re bringing to the market on an annual basis that differentiate us from the competition and provide real value to our customers. So, I am looking with anticipation for the next three of four years because I think we’ve got a lot to offer as we go forward. Sean Boyd – West Cliff Capital Management: The question about the revenue run rate was in conjunction with the margins so for example, going back to an interim target of 30% with striving towards that 35%, hitting that 30% gross margin is there a particular revenue run rate level that you need to hit that?

It will depend upon the product mix because the various products that will get us there with higher margins could get us sooner than with others so a lot depends on how much of the oil and gas comes back as to how soon we get to the numbers. So if we see a good run in the global oil and gas markets it would be sooner rather than later. Sean Boyd – West Cliff Capital Management: I understand you’re not real interested in disclosing exactly what those margins are but from the commentary here I am guessing they are a lot more than 100 or 200 basis points above the corporate average, you make a significantly better margin on that oil and gas product?

You made the comments.

I am showing no further questions in the queue. Please continue with any closing remarks.

Again we would like to thank all of you who participated in today’s conference call. We appreciate your interest and attention to our company and the progress that we’re making going forward. Thank you for your insightful questions today and we look forward to sitting down with you again in 90 days after the March quarter in April. Thanks again and we’ll talk to you soon.