Ladies and gentlemen, thank you for standing by, and welcome to the Twin Disc, Inc. Third Quarter Fiscal 2012 Financial Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. [Operator Instructions] I would now like to turn the conference over to Stan Berger of SM Berger. Please go ahead.

Thank you, Toedl. On behalf of the management of Twin Disc, we’re 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 2012 third quarter and 9 month 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 states management’s 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 10-K, 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 Mianake 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 Chris Eperjesy, the company’s Vice President of Finance, Chief Financial Officer and Treasurer. At this time, I will turn the call over to Mike Batten. Mike?

Thank you, Stan, and good day, everyone. Welcome to our third quarter fiscal 2012 conference call. I will begin with a brief statement and then John, Chris and I will be ready to take your questions. Twin Disc had another solid quarter with year-over-year net earnings up over a 100% and on a 25% increase in revenues. We are on track to have another record year. Looking at our results, sales for the third fiscal quarter of 2012 improved to $95 million from $76 million for the same 3 months a year ago. Strong demand from our oil and gas markets along with stable or increased demand from our other end markets including land-based industrial and transmission and marine-based military and commercial sectors contributed to the improved performance. Pleasure craft activity remains at depressed levels. Year-to-date sales were $260 million compared to $213 million for the first 9 months of fiscal 2011. Gross margins for the 2012 third quarter was 34.6% compared to 36.3% a year ago and a 35.6% last quarter. The differences in gross margins were created by a change in the mix of sales. Year-to-date gross margin was 36% compared to 33.6% for the same period last year. Marketing, engineering and administrative expenses as a percentage of sales were 18.6% compared to 22.3% for the same 3 months last year. Stock-based compensation decreased $1.4 million in the quarter reflecting the decline in our share price. Year-to-date ME&A expenses were 20.7% compared to 23.7% for the first 9 months of fiscal 2011. Stock-based compensation expense decreased by $1.3 million for the period. Movements in foreign exchange rates increased ME&A expenses by $900,000 compared to the first 9 months of fiscal 2011. Net earnings attributed to Twin Disc for the third fiscal quarter of 2012 were $9.4 million or…

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Peter Lisnic with Robert W. Baird.

I guess first question just to kind of close the loop on the fiscal '13 comments that you made, in terms of it not being another record year or I guess being down from '12. Can you give us a little bit more color on kind of exactly what that means, does that mean revenue down or EPS down or just kind of how you’re thinking about preliminarily 2013 would be helpful?

Well, Pete it’s John. We’re pretty optimistic about most of our markets being stable or up going into next year. The one caveat is the North American pressure pumping market, it has been such a big component of our growth in '11 and '12 and we see that market moderating right now and into '13. So, it would be pretty hard for us that have an increase on a record year without that market being pretty strong for our next fiscal year and we are going to see a little bit of a pause in the North American pressure pumping market.

Okay. When you say a little bit of a pause, down I guess would be the way to read that for '15.

Correct, in North America, yes.

And that’s any....

Sorry go ahead Pete.

I was going to say, I know it’s going to be hard to guess, but is there any order of magnitude that you can give us, given what you - what your customers are telling you and what you might know about what sort of inventories out in the marketplace now?

We’re not getting I guess to that level of detail about how much of an oversupply they have. We remain optimistic; I know the international markets for us are doing very well for pressure pumping, so I think we may see a shift in some of the existing fleet of the ideal fleet to markets like China and to some places in South America, Australia. So, that hopefully will speed up any activity for new equipment in North America as gas prices start to come and go up, supply comes down and it returns, but right now I just - if we look at fiscal '13 without the strong build schedule that we’ve had the last 2 years, it’s going to be hard for us to improve upon this year.

All right that’s fair on that. And then, I’m wondering if we could get some updated commentary on the progress with EJS and Cat just where that stands, have you started to ship on that?

Sure.

And then, kind of what the - at what point do you really start to fill inventory that would be helpful?

Okay. They are working through the initial applications with their dealers and we have orders, existing orders that all of our factories that supply components and those have started to ship. It would be a pretty small impact maybe this quarter and next quarter, but I see it begins towards the end of the calendar year, it will start to have a bigger impact, but the forecast that we’re getting from the market, from Cat and from Cat dealers and their customers is very encouraging.

And that is factored in into the thought that next year is down I guess from fiscal '12, correct?

Correct, yes.

Okay, that is helpful. I will jump back in queue.

Our next question is from the line of Jon Braatz with Kansas City Capital.

A couple of questions sort of along the lines of the prior question. Your business is tailing off a little bit in the frac-ing area, but how much is that being mitigated maybe by what you are seeing overseas and in international business and maybe the fact that you have both the 8500 and 7500 Series now, how much of a mitigating factor do you think those 2 items have been?

Jon it’s John here. The international component is going to be a big mitigator. We said at the last call that the backlog for overseas was at about 25%. The percentage of the backlog for overseas is bigger than that now, so that’s what you’ve - that’s a big change from this pause in the North American market business last time. I mean the backlog for China specifically was very low in the last downturn in oil and gas, much higher now. So, we’re very optimistic there and as well as some other countries. So - and then, with the 7500 still not nearly as strong in the sales as the 8500, but there is opportunity there. Unfortunately, in North America we’ve been hit, when everything goes into a pause, everything goes into a pause. So, that is a smaller I guess mitigating factor than the overseas component right now.

When you talk to your customers, do they have any thoughts on what price natural gas needs to return to, to un-pause activity so to speak?

Yes, I’ve asked the question. The more of the overriding factor in North America right now is just the sheer oversupply of gas. They are running out of places to put it. So, until we work through the oversupply of the gas, which I think as we do the prices will start to come back up, there will be more activity in frac-ing. But, right now I think the single biggest factor is just the sheer amount of the gas.

And with things slowing down a little bit, can you talk a little bit about maybe sort of a disinvestment that you need to make in your working capital and I think I read where - I think I saw where you have invested $41 million in working capital this year, but as things begin to slow down, we should return some of that to cash should we not?

Absolutely, and you will see the inventory start to - at the end, when we have the call at the end of next quarter, certainly. But we’re going to be very smart about the invested capital as it relates to oil and gas in the 8500 and 7500 as we saw the last time when it comes back, it comes back quickly. But we will obviously turn some of that into cash, but we want to be ready for the return of the market too.

So with that - are you suggesting that as cash begins to build that it would be unlikely for you to return that necessarily to the shareholders in the form of a dividend or share repurchase or anything like that?

John this is Mike. I think on that score, we continue to be active on an acquisition front, and there could be a use for that cash that’s returned from working capital in that area. So, in terms of the special dividend, probably not a special dividend per se.

Yes, near-term.

Our long-term policy is to increase the dividend consistent with our earnings to cash flow and outlook. With respect to CapEx, we will see some moderation of CapEx going forward, but still at reasonably high levels.

Our next question is from the line of Joe Giamichael with Global Hunter Securities.

In regard to backlog, you talked about the impact from past due backlog, which is not something I saw in your previous Qs or Ks, but it might have been something you discussed on previous calls. Could you just explain how you define past due backlog, what the dollar value of it is, and whether or not that value had been included in your quarterly discussions of backlog levels?

Hey Joe it’s John here. We discussed it at the last call and I believe the last quarter and then, I believe the quarter previous to that. We had just some background, we had some supplier issues in the summer of last calendar year that caused our past due backlog to rise to historically high levels. We continued to work through the first 2 quarters of the year, the first 3 quarters now, is to reduce that amount significantly and it was primarily in our industrial business and our transmission business getting 8500 out to customers that were waiting for them. The 20 we’re talking about the past due backlog. It was a - it always reported in our backlog whether in the 6-month backlog and it is defined, the past due is defined for us as when a customer, when we accept the orders of the customer what our published lead times are or what the agreed upon lead time is at the customer. So, we were past due and it made significant progress in the first 6 months of the year and then again really in the third quarter made a big dent into it. So, that was a significant component of the backlog coming down, but as we said in the press release, the other - the major component of that was just the tail-off in backlog in the last 2 months on oil and gas.

Got it. Thank you, that’s very helpful. The way that you present your segment contribution makes it somewhat difficult to quantify the impact from frac rig demand slowing. Could you give us a little more color on the revenue contribution in the quarter or the backlog contribution - comp position from an end-market perspective of sort of an energy versus a more broadly defined vessel market?

Yes, Joe this is Chris. As you know from prior conversations that’s not something we really give out that level of detail by those different end markets.

Our next question is from the line of Andrea Sharkey with Gabelli & Company.

I was wondering if you could give us any sense of - you’ve done the Express Joystick and you have the agreement with Caterpillar, you’ve introduced the 7500 and I guess because of the slowdown in the frac market maybe not getting as much traction there as initially anticipated, but are there any new products or new things that you guys are looking into or working on maybe in different end markets or what else are you looking at doing?

Andrea, this is Mike and you’re right, we have introduced the 7500 and the EJS and in both cases we look forward in the coming year and beyond to accelerating performance from those products. Obviously, the 7500 may be a little bit slower in coming, because as you pointed out, the issue in the North American gas market. In the pleasure craft market, obviously we have a low performance level in pleasure craft. However, the EJS is expected to take share and the kinds of applications and where we’re making our headway is just precisely that. We’re taking share of market in a down market and we fully expect that this will be very helpful when the pleasure craft market begins to turn back up. With respect to other products that we’re looking at, we are, but at this point we’re not prepared to discuss them publically as to what products and what markets we’ll be going into, but we do have significant programs underway to develop organic growth in the business as well as acquisitive growth that we spoke to in another question earlier. So, while we would like to be responsive specifically at this point, we can’t Andrea, but rest assured we have got other pipelines underway bringing new product to market.

Okay, that’s helpful and I’ll look forward to hearing about your new products. So - and then, I guess next question. In terms of margin impact, I know I think you’ve spoken in the past about how the oil and gas end-market transitions tend to be a little bit higher margin, so as that kind of tails off, I would expect to see, maybe some margin decline and maybe you can help us, walk us through what you see happening there, combination of mixed shift and then, also maybe just overhead issues as you maybe are producing less of the frac transmissions?

Again it’s Mike, Andrea. And the response to that question is, we will not be specific to what we expect into our gross margins, but given the decline in oil and gas, we do expect to see some moderation in our gross margin, probably not down to 2008, '09 levels that one saw when the oil and gas market went totally away. We do expect that we will maintain a certain level of activity in oil and gas and that will help from a mixed point of view keep our gross margins up, but nevertheless the absence of volume will affect us. On the other side, our management team has been working hard at improving margins in other areas to try and get much more in the way of margin expansion in our products. And we have been active through the year in looking and executing on cost reduction, especially in our fixed expenses as it relates to our European operation.

And then one last question from me and then I’ll turn it back. Any thought given or to maybe doing share repurchases?

Andrea, again Mike. We have an active authorization from the board and we deliberate on that subject periodically. We won’t rule them out and it will be a question of, do we have a lot of excess cash to use if we’re not in a situation where we have an acquisition or a capital expenditure plan. I don’t see us, as I mentioned earlier, doing a special dividend. I don’t - all the counsel that I’ve received over the years is that the market really doesn’t reward for special dividends. So, I think yes, it’s an option that’s on the table that is looked at and could be something that we could do in terms of share repurchase.

Our next question is from the line of Greg Garner with Singular Research.

A couple of items, on the backlog is there any contribution from the 7500, can you give us any kind of detail, is there ramping up a little bit or level of interest there or maybe there is more interest from international versus domestic, can you give us some flavor?

Yes Greg, it’s John. There is - 7500 does have - as far as it is one product, a very good representation in our backlog, but it was not immune to kind of the oil and gas effect - the North American oil and gas effect of the last 2 months. Having said that, we do have opportunities overseas for the 7500 just like the 8500. It’s a little bit more work for us, because we’re growing, each application is a new one. I mean, we have repeat applications in China for the 8500. So, it’s a little bit more investment for us in time and people to bring those applications online, but we do have applications overseas for the 7500.

So, is it safe to say then without the 7500 the backlog would be weaker?

Correct. Without the 7500, the existing backlog would be weaker.

And do you still see the 7500 really fulfills a unique niche and need there that competitive transmissions are even the 8500 can’t meet due to the size and does that still [indiscernible] see getting the response?

Yes, the market still sees the need for the 7500 as a competitive product to the existing player, absolutely.

And regarding to backlog, I’ll ask just one last question there, I know that you’ve talked about how it’s changing, but is there any sense - can you provide on what the oil and gas business, is it declined like 20%, is it declined more like 30%, 40%. It seems like it’s probably more in that 15% to 25% range, is that about right or...

I would say Greg, hard to answer specifically. It depends upon the timeline, I would say, yes looking forward into next year that’s probably correct. But there could be quarters here and there where the impact is different. But this is again a very different situation than 3 or 4 years ago. When the shock was driven by something other than the dynamics in the oil and gas market, so, I don’t see it being as dramatic as it was back in 2008, 2009.

Are you seeing more interest overseas, I mean they don’t have the natural gas pricing issues that we have here in the states? So it seems that, that market may improve.

Absolutely, the offshore markets, I mean offshore - not offshore oil, but the China, the international markets are going to improve for us in the next 12 months, no question about it.

And are you seeing that your percentage revenue from offshore as you describe it, oil and gas is going to be greater than in the next year or 2?

Yes, correct. Absolutely, our percentage of sales and backlog for international markets is going to increase in the next 12 months.

And as well as in real terms.

In real terms, yes in real terms, not just percentage.

And I presume that it wasn’t that great of a contributor, the international market for oil and gas prior to the 7500 being introduced, is that correct?

Well it was, I would say, if we go back to the last ramp up in 2006, '07 and '08, the international markets were hardly a component at all. They are a significant component now primarily driven as the rest of the market as of late with the 8500, but the 7500 is going to be a player in that market as well.

All right, that helps give me a flavor on that. In the pleasure craft market, in prior quarters you mentioned how that’s been and has been improving. And I’m not seeing that in your characterization of it for this third quarter, is there something - is it becoming - is it getting a little flatter now and I thought that might, because I had thought it might continue to improve in anticipation of the summer season?

It’s a tough one. Overall, I would say the market, the pleasure craft market bounces around and some regions do better than others. In the last year or so, Australia has been a little bit better than North America and Europe. The Italian yards continue to struggle. There is optimism a little bit in Australia and North America. Having said that, our percentage of - we are gaining market share in the pleasure craft market. We are doing our sales in the pleasure craft with the EJS components and our transmission continues to increase at very small levels, but the market is so depressed. That it is not having a big impact yet. I remain optimistic that once Cat and their 360 product comes on full stream that will have a bigger impact in our overall shipment into the market.

And the timing for that?

Well, probably starting in the second half of this calendar year, the first couple of quarters fiscal '13.

That’s why you say towards the end of the calendar...

Correct, yes.

And given the - as I remember, first of all, CapEx was increasing to double the production capacity for the oil and gas 8500 and the 7500 in the past year to - and does that mean you’re going to scale back on some of that production capacity?

The same machines that we are adding to double our oil and gas capacity also worked to increase our capacity for commercial marine transmissions. And we’re seeing a very big ramp up in demand for those, so the same assets are going to be used for our commercial marine product.

And is there anything meaningful in the backlog beyond 6 months at this point, I know you probably focus...

Sorry Greg, you tapered out a little bit, I didn’t hear the last part of your question.

Well, you’ve always focused on the backlog for 6 months; I’m just wondering is there anything that you can see beyond 6 months that has some meaningful value in the backlog?

It’s typically Greg, this is Mike, it’s typically transmission, a longer lead time product that is out beyond 6 months. So - and some marine, so our industrial products tend to have shorter lead times and certain marine products have shorter lead times. So, the segment you are looking at beyond 6 months is definitely filled with transmission product. So that would be oil and gas, it would be ARFF vehicles, airport rescue and fire fighting vehicles and the like. So, there what we have reported with respect to oil and gas in the 6-month backlog is consistent out in the beyond 6 months, okay. And if that’s your question, is there a... Yes, is there a similar decline in backlog out beyond 6 months, and the answer is yes.

[Operator Instructions] Our next question is from the line of Shawn Boyd with Westcliff Capital Management.

Just a couple here. Stock-based comp I know was down I believe you said almost $1.4 million, does that get it below about $500,000 for the quarter? What’s the absolute level on the quarter?

It was actually, I guess you could it income, of about just under $400,000.

And going on back to the past due backlog, so we’ve got a pretty good drop now quarter-to-quarter, 2 quarters in a row, so it would really help us just understand a little bit more on that. So, if we look at the backlog down, let’s call it $33 million since September '11 quarter over that 2-quarter period, just roughly how much of that is the past due backlog?

From the 165 to the 131?

Yes.

It’s probably a third.

And so 2/3 is the drop in oil and gas?

There is other stuff, because there been - yes, there would be other stuff, but it would include - oil and gas would be a big component of it, correct.

Okay, that’s helpful. And, would you say that past due backlog is kind of normalized at this point with - are you at a level that I would assume people are getting - recons are probably down now and getting what they need?

We’re about at normalized level. Correct.

And on the gross margin impact, with oil and gas - mixed shift away from oil and gas as we go forward here a little bit and I know it’s just a pause, but running 35% gross margins, we have had a - we have had quite a fluctuation the '08, '09 lows were 27%, 28%. Here we are at 35%, we expect them to moderate, but would you - I would assume we are probably talking several percentage points, even if we just go to halfway back to the lows, is that the way to think about it or is that more just, no its 50 bps to 100 bps again like the last quarter?

I admire your analysis. This is Mike. And I don’t think we’re going to be in a position to quantify what you would like to hear us quantify, but I - we’re going to see some moderation. A lot depends upon what happens in our mix, so it’s not something that we have an awful lot of control over ourselves. So, I think I’m sorry to put it this way, but we’re going to have to wait and see as to what happens with our gross margins. We’re doing everything we can possibly do to expand other margins and to get them up to levels that we would like to continue at or even beyond. But, at this point for us to try and make a prediction for your model, that’s difficult for us to do.

Fair enough, I appreciate that. And maybe, just one other thought and this could be just directional only. When we think about gross margin within oil and gas, I would think that we are probably - is the gross margin on new business booked now lower than 2 quarters ago, maybe that’s the question I’m trying to ask?

I lost that.

Within oil and gas, forgetting about mixed shift for a second?

Definitely. Could you repeat the question again, I’m not sure that we caught the question in its entirety.

If we get away from the mixed shift issue and we think about just within oil and gas, gross margin on new business you’re booking-today, is that at a lower margin than what we were seeing a couple of quarters ago when things were so...?

No.

No, no.

No, so that stays fairly constant.

Yes.

Yes right.

We don’t see - just so we understand the question, we don’t see a modulating price structure on our transmission equipment. It’s a constant - more or less constant margin, but it doesn’t - fluctuate with the demand cycle.

So, the issue is really, are they booking orders or not?

Correct.

That’s right.

And just a last thing, in terms of capacity utilization we haven’t talked about that in a little while and we were off peak a couple of quarters now. So, what’s going on there, are you - can you give us roughly what your percentage of capacity utilization is now, are you still increasing shifts, decreasing how does that - just give us anything you can in terms of color on where you stand on your manufacturing?

Sure, I would say - we’re going to go by facility, but I am not going to drag you through all that, but I just, we are still shipping at extremely high levels, so the capacity that we’ve added with the Makino centers to increase oil and gas, which is going to play into commercial marine. We are still operating primarily here in Racine at very high levels, we’re still 3 shifts, 6 days a week and we see that continuing, because of the demand of commercial marine. At some point, if the oil and gas continues at depressed levels for North America, we have flexibility and we have temps, so we can modulate our cost structure depending upon the demand. But we’re still in North America very high capacity utilizations, lower in Europe. The European markets are not nearly as strong as North America, so we have capacity there. And we still have additional capacity opportunity in Racine, but it’s going to be based more on outsourcing and working with our - working with our partners here in the Midwest.

Our next question is a follow-up from the line of Joe Giamichael with Global Hunter Securities.

Could you just share with us how you view leverage? You talked about using the cash, the anticipated cash flows to reduce debt, but sort of, given cost to capital, is there an ability to use the cash flow or use additional leverage to augment shareholder value around these prices?

Joe, we’re a Midwestern company that’s more or less adverse to a great deal of leverage, primarily because we’re in a cyclical business. We think that we use leverage well, we’re not opposed to using financial leverage, but we don’t see us leveraging ourselves up with a lot of bank debt and then, going into a downturn of - you’ve put it, whether it’s a 2008, '09 kind of downturn or whether it’s 1983 kind of downturn. The fact that we’re 93 years old attests to the fact that we use leverage when we feel it’s important to use it. And then, in certain instances, we will cut back on it. So, I don’t know if that answers your question, but we use it and we’re not going to go overboard on it.

I just wanted a better sense at sort of how you view it, so that was a good answer.

And our next question is also a follow-up from the line of Jon Braatz with Kansas City Capital.

We talked quite a bit about the oil and gas market, but usually it centers around gas. How much exposure do you have to the oil markets?

Well that - I mean the frac rigs including our transmissions can be used in dry gas, wet gas and pure oil, but the sliding scale is, is it’s much more intensive, you need more horsepower for dry gas and shale, a little bit less in wet gas and not nearly as much in oil. So, that’s what’s happening. The rigs are being redeployed, the wet gas and then into oil, but you just need less horsepower therefore, fewer rigs so... That’s kind of been the shift in most of the fleets

Any mix that you here -proportions that you can give us in terms of where your transmissions are going?

I would - it is different and each company is different, each operator, but if I had to guess I think most of the 3000 horsepower rigs are probably still in wet gas where there is the drilling for oil and there is a natural gas component or vice versa. But the problem is that even in wet gas right now, the gender there is no place to put the gas. So, that’s why we’re thinking that some of these fleets, some of the rigs could be headed offshore. To other markets.

Going back to cash flow, what would you at this point maybe think about your CapEx plans for next year?

We’re actually in the process of putting together our business plans and so, they haven’t been finalized, but we’re looking at basically a CapEx program down slightly from where we were this past year.

And this year is what are we at - going to be at this year?

We’ve said we’re going to be in the $15 million to $20 million range. We’ll probably be closer to the 15.

Our next question is a follow-up from the line of Shawn Boyd with Westcliff Capital Management.

Hi, just one more and it’s kind of following off that last call, I mean that last question. Not just CapEx, but overall operating expenses, if we come in, we’re probably going to be very flat for this fiscal year in the low $70 million, $73 million, $72 million for the year. I know it’s real early here, but just a preliminary look out on fiscal 2013 directionally, would you expect to keep bringing those down a little or increasing for further growth?

I’m not sure with the number you’re quoting, are you talking about our ME&A?

I am exactly.

With the caveat that of course with this stock-based comp components that’s always in there. And certainly, there could be some opportunity for it to come down just given overall incentive comp next year, but I wouldn’t expect a significant change.

And I’m showing no additional questions. Please continue with any closing remarks.

Fine Toedl, thank you. Thank you again everyone for joining our conference call today. We appreciate your continuing interest in Twin Disc and hope that we’ve answered all of your questions. If you have any follow-on questions please feel free to call Chris or John or me. And we look forward to speaking with you again in August following the close of our fiscal year and fourth quarter. Thank you, Toedl.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.