Ladies and gentlemen, thank you for standing by. Welcome to the Twin Disc Third Quarter Fiscal 2013 Financial Results Conference Call. At this time all participants are in a listen-only mode. Following the presentation we will conduct the question-and-answer session. Instructions will be provided at that time. (Operator Instructions) I would now turn the conference over to Stan Berger. Please go ahead, sir.

Thank you, Angel. On behalf of the management of Twin Disc, we are extremely pleased that you have taken a time to participate in our call and thank you for joining us to discuss the company’s fiscal 2013 third quarter and nine months 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 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 Mianecki at 262-638-4000 and she will send a copy to you. Hosting the call today are Michael Batten, Twin Disc 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 Michael Batten. Mike?

Thank you, Stan, and good day, everyone. Welcome to our fiscal 2013 third quarter conference call. I will begin with a brief summary statement and then John, Chris and I will be ready to take your question. As previously forecast, our third quarter results reflect continuing weakness from the oil and gas industry in North America and general market demand in Europe. These soft markets have been offset somewhat by improving conditions for pressure pumping application in Asia and continuing demand in the global commercial marine market. Our near-term outlook remains challenging as we work through the bottom of the energy cycle. Although, we anticipate that demand will resume for fiscal 2014. Sales for the third fiscal quarter of 2013 were $68 million, down from a record $95 million for the same period a year ago. Sales for the first nine months were $209 million, compared to a record $260 million the prior year. The decrease in sales was primarily the result of lower demand and customers in the pressure pumping sector of the North American oil and gas market. Offsetting weakness in this market was higher demand for our pressure pumping, transmissions from China, as well as continuing demand from customers in the North American and Asian commercial marine markets. Sales to customers serving the global mega yacht market remained at historic lows in the quarter, while demand remained steady for equipment used in the airport rescue and fire fighting and legacy military markets. As previously forecast, gross margin for the third fiscal quarter was lower at 25.9%, compared to 34.6% in the same three months last fiscal year and 30.8% in the fiscal 2013 fiscal second quarter. The anticipated decline in gross margin was the result of lower sales volumes and a less profitable mix of business. Year-to-date,…

Thank you. (Operator Instructions) And your first question will come from the line of Mr. Peter Lisnic from Robert W. Baird. Please go ahead.

Good morning, gentlemen.

Good morning, Pete.

First question just on gross margin. If we look at the year-over-year decline or sequential, however you want to do it, just wondering if you can give us a feel or flavor for how much of that decline was mixed versus volumes, I think year-over-year you were down almost 900 basis points? So just a little bit of color on mixed versus volume.

It’s going to be -- this is Chris, Pete. It’s going to be equal if I suppose. I think both will have a significant impact. The volume decline -- I would say they were probably roughly equal.

Okay. All right. And should we expect the mixed to kind of be awake, as we go into the fourth quarter and the fiscal ’14, or we kind of troughed out on the mixed impact?

I think we’ve troughed out on the mixed impact. You should see, I think in the release and in the Mike’s comments, we talked little bit about what’s going in Asia for oil and gas. You may start to see the benefit of that from the first quarter. So, I think the answer is we troughed out to March.

Okay. All right. And then, when you talk about the 7500 and 8500 recovery I guess in fiscal ’14 in those, in last bit of prepared comments, can you give us a sense as to how much of that potential recovery that you are talking about are staying could be just a function of replacement demand, i.e. things wearing out, needing to be replaced versus what I described at new fleet or few rigs?

Pete, this is John. I would say any demand in the first half of our fiscal ’14, or the second half of calendar ’13 will be more replacement and I don't anticipate new rig demand until calendar 2014. But having said that, we have seen improved orders for China for those transmissions, which are new builds for China, so North America replacement, I think will be kind of the next six months. I don’t see any new solid rig activity, frac rig construction until calendar 2014.

Okay. So North America replacement, China, new fleet is kind of what we will have.

Correct.

Summarize that. Okay. And then just, can give us a little flavor for Europe exactly, where the end market weakness there is exactly?

Pete, this is John again. With the exception of some of the industrial markets, the small construction equipment, I would say most of our markets in Europe are very weak and it’s across the board. Most of the commercial marine activities that we are seeing is North America, South America and Asia. Certainly, a lot of our market in Europe historically has been pleasure craft and cushing vessels and government vessels. And a lot of that activity has slowed down to a complete trickle. So, Europe, as a whole with the exception of some of our industrial market is not doing very well.

Okay. All right. I will get back in line. Thanks for the color.

Thanks, Pete.

And your next question comes from the line of Mr. Brian Uhlmer from Global Hunter. Please go ahead.

Hey, good morning.

Good morning, Brian.

I had a couple of quick follow-ups. I think I got a lot of good stuff out the way. Just down with those questions, but just curious on, to what extent when you talk about replacement, to what extent of our work was kind of after market repair business in the North American oil and gas business versus new kind of one of replacements transmissions?

This is John. I believe as a percentage, it hasn’t really changed the fiscal year. So about 25% of what we've done this year in North American oil and gas has been repair, replacement. And that was all in, primarily the first four months of the fiscal year. So we have not seen a lot of after market activity in rebuild in the last four months. We know our rigs have been working. We just haven’t had a whole lot of issues.

Okay.

Brian, this is Mike and that’s a good news, bad news situation.

You are going to do well.

Well, we like to hear that and that I think the key takeaway here is that our product is lasting longer that what oilfield is historically is used for seeing. And so that’s good news for our reputation and for follow-on new business. But we aren’t seeing the same rate of after-market part supply that’s, maybe some of others would see in the similar market.

Perfect. Perfect. And I guess, the case is that couple of big guys came out in the last couple of days and said there is actually more stuff on 44-hour operations, so that should accelerate somewhat in the next few months. Have you start to see more indications of interest or discussions as those start to pickup a little bit here or still too early for that?

It’s still too early but I think what -- there has been some utilization of inventory on the floor. So that is good. And I’m sure, that’s been going into replacing other rigs in the field. I just don’t see -- I guess, I should clarify. I don’t see new orders on us for new unit until calendar 2014. I think some of the big guys are going to be pulling new rigs out in the field but it’s going to be inventory of completed rigs that they have sitting idle or engine transmissions in inventory they have. And they will assemble and put out in the field.

Right. Okay.

Just to clarify what I said before. I don’t see new orders on our shipments until calendar 2014.

Okay. Calendar 2014?

Yeah.

Okay.

For shipments.

For shipments.

For shipments. Okay.

Orders would be coming in between now and then.

Yeah. Perfect. Now, can we talk a little bit about China? So who are you selling -- are you selling this transmission to existing customers from North America or is it a new customer base over there that local Chinese companies there…

The local Chinese companies were selling to SJ Petros in China. We’re also selling to some of the Chinese companies that have offered us here in the U.S. and then they are shipping products back over to China. So it’s going -- the sale is happening in two ways but they are all Chinese rig manufacturers operating for the Chinese oil companies, state oil companies.

Okay. And based on what’s, excuse me -- based on what you’re seeing on the field, I don’t think that your product is really that there is equality for reverse engineering and manufacturing by our local Chinese. Is that how you feel as well?

Brian, first I’m tapping on wood gear. I just -- our volume is so low that I just don’t think it would be worth the effort. The economies of scale aren’t there to reverse engineer.

Perfect. Thank you very much. I’ll turn over.

And our next question comes from the line of Ms. Andrea Sharkey from Gabelli & Company. Please go ahead.

Hi. Good morning.

Good morning, Andrea.

Good morning, Andrea.

So I’m just curious with the CapEx spending. You have spent about $5 million already this year. You said you’re going to trend a little bit less than $10 million for this full year but you only have one quarter left. So I’m just curious what the big spend in Q4 is going to be for and then maybe if you have any preliminary thoughts about spending for fiscal 2014?

Andrea, this is Chris. I guess, the caveat in the fourth quarter spending always is whether we’re able to get the equipment and before the end of the quarter. So the answer to your question is, it could be closer to $7.5 million and $8 million range. We don’t get everything in. So let me answer the first question. If we get everything in, it could be closer to the $10 million. Regarding next year, I think it will be more back in the $15 million plus range is what we have in our plans for next year but as we always do, we’ll react like the environment we are in.

Okay. When you say what you did in the quarter, I mean, what is that going to, are you expanding the capacity in a particular product line or is it just replacement equipment in your facility. What is that leading for?

Andrea, it’s John. It’s sum of both. It’s new equipment to replace older equipment for carving stuff on our industrial and marine product lines. So it’s really -- a lot of it is fundamentally -- when the machines come in and when we get them up and running.

Okay. Great. That’s helpful. And then, I’m just curious what happened, the backlog appears to be bottoming but it did come back a little -- come down a little bit sequentially. And I think in the last quarter call, you guys thought that it had already bottomed because it started to come back up. Was there another lag down in March and I guess, how is April trending in terms of orders and what you think your backlog is going to look like?

Andrea, it’s John. I’m the one who discussed that. So I’ll take the question now. We did -- the backlog kind of seesawed through the second quarter. And I had thought that we had potentially hit the bottom but it seesawed again in the third quarter and came up with March. The best months of orders have been February, March and April. And overall, our backlog held very steady. It was just six months or so. And that was a combination of -- I didn’t foresee some of the shipments from -- our facility shipped a little bit more than I had forecasted. The European backlog came down a little bit more than I thought but the backlog for North American and Asian customers did come up quite nicely. So I feel pretty good where we are today.

Okay. That’s good news. I’ll turn it back.

Thanks Andrea.

And your next question comes from the line of Rand Gesing from Neuberger Berman. Please go ahead.

Hey guys. How are you?

Hey Rand.

Hey Rand.

I guess, I just wanted to talk about, you’re trying to reduce some inventories, assuming that’s in pressure pumping or maybe not. What are the areas where you’re trying, you have inventories where you are bit high?

Well, I guess, the inventories were very high, not necessarily oil and gas. I mean, we do -- we'd like to reduce it by shipping more and getting the orders. We really can’t do much with that until we get new orders where we are reducing some of our more standard product line, some of our marine, transmissions, industrial where we had had supplier issues last fiscal year and into this fiscal year where we had a little bit too much safety stock. We’re working that through. We don’t necessarily want to push out our oil and gas. We haven’t been adding to it. You'll notice that our inventory has come down in the last quarter but we want to be ready for the next surge in North American oil and gas.

Right.

And we’re in a very good position this time around.

Yeah. I was just trying to get a feel for -- the extent that you are under utilizing capacity, and the impact. I mean the impact that had on the last quarter and the next couple?

Maybe some modest reduction of inventories and so the capacity isn’t being underutilized, of course, there is current demand by that much but…

Great. And then maybe just at our to the inventory question so, right now, Asia is the market that continues to being growing at record levels. So some of that inventory is either in production unopposed or rising there that will shift in the fourth quarter and beyond. So that’s part of the natural reduction of inventory. Regarding your question the third quarter, just looking at the volume year-over-year, it clearly was down significantly versus last year. So there is some impact on the absorption, the best one we’re referring to.

Yeah.

There is, in fact, the ramp-up and orders come in. You’re right, there fed-ups.

Okay. So, but you sort of view this as still continuing in Q4, and then as we move into the new fiscal year that will be less of an issue?

Yeah.

Okay. The free cash flow for the first few quarter sort of -- $6 million or like that that. Were you guys in the fourth quarter would take inventory out of that? Will you grow that level of free cash flow or how should we think of the first quarter in terms of our free cash flow for the year?

That’s are expectation, Rand, yeah.

Okay. And then so if I understand Europe, it’s sounds like it’s been a weak market but it’s still sort of ticking down in terms of level of activity?

Yeah. And I should clarify. Thanks for bringing that up again. We -- our European factories don’t -- just don't ship to Europe. So what’s keeping them going is their export market back here in North America, South America and Asia. And we just have to keep focusing on export for them and underlying on the traditional whole market. Because I -- it’s going to be a long recovery for the European market.

Right. Do you have to -- you have to at some point start thinking about restructuring that which is difficult to do but…

We’re always thinking about that Rand.

Yeah. Okay. All right. Thanks for your time.

Thanks Rand.

And our next question comes from the line of Ben Mackovak from Cavalier Capital. Please go ahead.

Hi, guys. Thanks for taking my call.

Hi. Ben.

So should we expect a sequential increase in the backlog next quarter?

That is -- Ben, that is the $1 million question. It’s really -- if I look at the incoming order rate, I would say yeah. But traditionally the fourth quarter is also the strongest shipping months. So it’s going to be factor of how much comes in and can be shipped in the fourth quarter. But I think it’s not going to get significantly worse to any worse but we ship quite a bit in the fourth quarter, historically our best quarter. But I see the demand in the Asia and North America. It’s just -- it’s more of a function of how much the factory is going to ship.

Okay. Great.

And then it’s hard to predict

Of course. Of course, I appreciate the color. Can you comment on any potential new customers out there, and just how the pipeline looks for them?

I would say for new customers really the success story has been the Chinese rig manufacturers that our servicing SJ Petros, Sinopec in this Statoil companies in China. And then we’re always working on, those are kind of like the home runs and the grand slams. But our sales guys have been hitting some singles in the U.S. getting new industrial customers. And that’s really where we’re focusing. Yeah. In the 70 -- in China, it’s been getting 7500 and the 8500 in getting them accepted at the beginning of the market. That is -- that's a very good question because that’s how we’re challenging our sales guys now is finding the new customers because a lot of the customers particularly the ones in Europe, we’ve seen the market shrink and through consolidation. But we’ve also seen some of the customers disappear. And so we’re having to find more customers everywhere.

Okay. Great. Thanks a lot.

And gentlemen, there are no further questions at this time, please continue.

Well, thank you again for joining our conference call today. We appreciate your continuing interest Twin Disc and hope that we’ve answered all of your questions. If not, please feel free to call Chris or John or me. We look forward to speaking with you again in July, following the close of our fourth quarter. Angel, you can turn it back to you now.

Okay. Ladies and gentlemen, this does concludes the conference call for today. Thank you for your participation. And please disconnect your lines.