Welcome to the Twin Disc, Inc. Second Quarter Fiscal 2015 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Stan Berger of SM Berger. Please go ahead, sir.

Thank you, Jim. 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 2015 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 management's intentions, hopes, beliefs and 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 John Batten, Twin Disc's Chief Executive Officer and President; Christopher Eperjesy, the Company's Vice President of Finance and Chief Financial Officer and Treasurer. Now at this time, I will turn the call over to John Batten. John?

Thank you, Stan and good morning, everyone. Welcome to our fiscal 2015 second quarter conference call. As usual, we will begin with a short summary statement and then Chris and I will be happy to take your questions. Looking at our second quarter results, sales for the 2015 fiscal second quarter were $72.7 million, up 15% from $63.2 million for the same period a year ago. The increase in sales year-over-year came primarily from our North American manufacturing and distribution operations, where we saw improved demand in most of our end product markets; reflecting moderating demand from our Asian commercial marine and oil and gas customers, partially offset the increase. Overall demand from our European market remains weak. Looking at our broader product markets, the North American sales increase was driven by improved oil and gas shipments, including a strong aftermarket component, continued strength in the commercial marine markets; and improved sales in our industrial products. Continuing the improvement trend, our second quarter sales into our industrial markets increased when compared to last year. The majority of this improvement was again driven by an increase in demand for North American market sectors, including oil and gas, irrigation, recycling and construction. We anticipate this trend continuing throughout the fiscal year. Sales into our transmission markets improves versus the fiscal 2014 second quarter levels, again driven by the strong shipments into our North American oil and gas markets. Shipments into our global marine markets in the second quarter improved year-over-year as a result of the higher demand from our North American customers. The increase in the second quarter was enough to offset the decline we saw in the first quarter and we're now essentially flat to fiscal 2014 levels year-to-date. Gross margins for the quarter were 30.4% compared to 29.3% a year…

[Operator Instructions]. And we will take our first question from Tim Wojs from Baird.

I wanted to start a little bit with just the outlook. Maybe just a little color on maybe some of the discussions you've had with your customers, I guess. Is there a way to put a percentage on how much of your customer base has communicated their CapEx budgets with you at this point?

No. I would say most of the conversations have been probably very similar to what you've experienced other places, is what's going on? Is this really temporary? Is this a six months, a quarter, two quarter phenomenon? Or is it a 12 month or beyond? And as you've seen in the press, it is pretty split. But from what our customers are saying, my gut is telling me that it's more of a shorter term phenomenon than a longer-term phenomenon. So I honestly think that it's where prices of oil are going in the next six months. I think as we start to see some strengthening, there will be more investment in new equipment. Certainly as I said in the first quarter and it continued through the second quarter, the amount of rigs that we're seeing being rebuilt on units that we supplied back in 2011 and 2012 and actually earlier, the '08 run-up, the rigs are getting used, certainly the big guys. They are getting used and they are getting rebuilt, so that is a good sign, that's continuing. But there has definitely been a pause and a hesitation on CapEx because when you go $100 down to $50, that's $50 a barrel of oil that you don't have to invest in equipment. So overall, I'm still very bullish on the whole market. It looks like there's been a pause and thankfully, the next CapEx run-up - most of the budgets start in the fall, so there is still time. But there is definitely a wait-and-see attitude right now. And hard to put a percentage on it.

Yes, no, I understand. It's not fully - you are kind of a victim of the market too.

Yes. And what I would add is, as non-receptive as Washington is to oil and gas extraction, they've been less receptive concurrent to doing anything for coal. The underlying demand for energy for the power plants is still natural gas, so it is still very positive in that respect.

Okay. And then I guess just on the backlog, what drove the decline in some of the non-oil and gas and marine markets? Is that something that was one-off? Or is there some incremental deterioration in those markets to be aware of?

Part of it I think is really in that second quarter, in that time frame of oil coming down, I think it just made a lot of the industrial markets, certainly a lot of the marine market, crew boat, a little bit hesitant on - and ARFF. We have some ARFF projects that were a lot lower than last year, but those have been cyclical. But I think, in general if I had to say a trend in the second half of the second quarter as people throw up and really in December, end of November - definitely, a pause in some ordering trends just to wait and see what happens.

Okay. And then as we think about - I know you expressed some optimism in the press release around revenue and EPS being up for the year. But as we look at the back half of the year, just from a modeling perspective, can revenue and earnings be up in the second half of the year in fiscal 2015 versus fiscal 2014, the back half of that year?

Yes. I think, sitting here today, Chris and I feel for sure that we're in a better position entering the second half of the fiscal year than we were last year. Certainly at this time last year, we didn't predict the exact timing of that little spike in North American oil and gas for the fourth quarter. That was still 3 to 4 months away from when that happened. Today, we're in a much better position heading into the second half of the year than we were last year.

Moving on we will take our next question from Walter Liptak from Global Hunter.

Wanted to try and dig a little bit further into the O&G. You mentioned that the backlog is up year-over-year for O&G, but if I'm remembering this right in your December quarter last year, North America was basically at zero orders and it was all China. And I wonder if you can provide some color on the kind of order activity you had during the quarter in North America and then China too. Is China up year-over-year?

Yes. [Inaudible] the backlog has slipped again. So now the majority of it is North America and to a lesser extent, China. But I believe China is up actually year-over-year too on backlog for oil and gas and North America, obviously - when you come off something that's almost zero, any increase is significant. But it's good, it's a combination of units and aftermarket. And I just again, the aftermarket component in North America has not been something that we've seen sustained for quite a long time. So we're finally getting into some rebuild activity, so we know everything is being used. China has been cyclical, but it's not the boom-or-bust. So the backlog goes up orders go up and they come down a little bit. It seems that they're maintaining their slow and steady development of the capital for their market. Again, feel much better here - well, it's February, it was January last year. But feel much better right now heading into the second half last year because there is that North American component and a good sign that stuff is being used.

Okay. And along those lines, you mentioned that there were no cancellations. But are you seeing - with this pause, are you seeing any delays in shipments for the O&G backlog or are the customers taking the product -

No, what we've, I mean everything that these - there haven't been any firm orders canceled. But we've definitely heard discussion about projects that hadn't been ordered yet, moving out a little bit. Kind of a wait-and-see.

Typically what we see is that type of activity happens beyond the six-month backlog that we report. So there may be orders that were out there 7, 8, 9 months that got pushed out. But typically the six-month backlog, you don't see that, but usually when those orders are within six months, they tend to be pretty high likelihood that they are going to ship.

Okay. And then on the unit orders that you're getting in aftermarket, how is pricing looking on those incoming orders? Are you able to maintain price in this environment? I imagine the aftermarket is better margin on the rebuilds.

Yes. So far, on that side, we have been able to maintain margin. We'll wait and see. If anything, where it starts is with the operators and the day rates and it begins to work its way back. But we have not seen that here yet at the company.

Okay. On the industrial side, the pause that you saw in November and December, was that on marine or was it industrial or was that both? And again, in January - or is it picking up again, as we move-?

Yes, mostly it's been in some of the marine units. Industrial is, I would say on comparables to the last year and the previous year is doing better, and so both order rates at better. Marine was the one that took a little bit of a pause. And again, a lot of that is driven in Asia, just the slowdown in China. We need less coal, so there is less marine transmissions going into the coal tubs coming up from Indonesia. So that's a bit of a wait-and-see and hoping that that trend starts to reverse here in the next couple of quarters.

Okay. And maybe the last one on foreign currency. What kind of headwind? It doesn't seem like it was that big of a negative for you, the $1.5 million, but are you hedged or can you hedge anything? What are you doing to try and offset some of the foreign currency or what do you think the impacts will be?

This is Chris. From a margin standpoint, we didn't really have a significant impact on profitability because we're somewhat naturally hedged. As an example, our Belgian operation which has euro costs, ships into North America and sells into the U.S. in dollars, so that would be a good guy. In other cases, from a translation standpoint it's negative. So when you mix that all up, margin had a relatively small impact year-to-date. So from a margin standpoint - the answer to your question is yes we look at hedging various currencies. But typically these movements don't have a significant impact other than translation on the top line.

[Operator Instructions]. Moving along, we will take our next question from Brian Sponheimer from Gabelli & Company.

Just a conceptual question. When in the past have you seen your orders that are more related to the oil and gas market come off? And what would make you get more concerned as we're looking into the next 6 to 12 months?

Boy. What conditions would make us more concerned?

Yes.

I guess if there were some more macroeconomic events with the overall economy coming way down globally all regions. The concerns that we have certainly China is not performing how they have in the recent past. Europe continues to be weak, at least - and I'm speaking for our markets. And really what's been driving, I would say the last four quarters has been an improving North American economy and market. I think we would have had a lot more orders, all of us in the equipment industry had there not been the huge ramp-up and let's just say over-purchase of oil and gas equipment and the 20% overcapacity. But fundamentally, I still feel that natural gas and our ability as a North American continent to produce our own energy is important and those fleets are going to be maintained. I just think that if the oil price stays low in the $40s, $50s, even $60s, it is going to slow the investment. But those who are making money are going to continue to operate and it will just be more of a rebuild activity. And it will just delay the new units, the new rig purchases into the future. And what it's going to cause, as it typically does, is it's going to cause a ramp-up where everyone has delayed CapEx spending and everyone tries to do it at the same time. What's nice about that now though, is we're getting that aftermarket component before any ramp-up in new builds. When we go back to 2010 and 2011, everybody tried to rebuild everything at the same time, add new equipment and it just created havoc on the lead times and everything went from six months to 12 to 15 months very quickly. So I guess, Brian, my number one concern would be is if there is a global recession something like 2008 in 2009 which just slows activity and the demand for oil reduces sharply, then that would be a concern. But if we stay at stable demand, I think we can weather through this pretty well.

If you're thinking about the six months backlog within your energy markets, what's first fit versus aftermarket just from a split perspective? And where was that six months ago say?

I would say it's slightly more shifted towards units than aftermarket, but I will preface that that a lot of the after - the new units have a six-month lead time, 4 to 6 month lead time and they are all [inaudible] aftermarket parts within three weeks. So I would roughly, if not quite 50-50, but it's not that far off.

And just relative to maybe where it is, in times where we had $90 oil?

Yes, I would say at that point, you're down more in the like the 20%, 25% aftermarket and the balance in new units.

Just to give you a number, with sales being up 15% year-over-year, service and parts business this quarter was about 37%, give or take 0.5%, 37% of overall revenue. Last year it was slightly less than 34%. So even on that higher revenue, it represented a larger percentage. Obviously a much larger dollar, but larger percentage of overall and that's on a consolidated across all markets.

Yes and I would - certainly we've had, Brian in the last couple of years, maybe going back to fiscal 2013 and I would say most of fiscal 2014, the aftermarket component in oil and gas was extremely low. And that was a - saying directly to us that we're using up the excess capacity in the field before we're going to spend money on rebuilding. And when you go from almost nothing, 5%, 10% up to that high 30s to 40%, tells you that they're - that excess capacity is not out there anymore and they need to rebuild units that they're using. So that in itself is a good indicator for the North American market.

And just one last one for me, just on the inventory side. How comfortable are you with the balance sheet? And are there any adjustments you think you need to make as we go into the next 3, 6 months?

No. I think we're in a good position for any scenario that-.

If you mean in terms of any potential issues with access inventory or obsolete inventory or anything like that, the answer is no. The answer is no. We don't see anything like that. I mean if anything, as John had mentioned in his introductory comments and in the press release is our balance sheet obviously is well-positioned to do things which can include potential acquisitions.

I would like to be here, Brian, saying to you Chris and I both would, that our debt is higher and that we've made an acquisition. So we continue to focus on that for sure and want to make sure that we have the ability to do it.

Yes, no, I'm not worried about the leverage at all. I'm just curious and the concern is always in markets that could go off a cliff, that you're left with a stranded working capital. But if that's not the case, that's not the case.

Brian, at least now we have people that have been here for 10 years and experienced one of those cliff events and there are still people that have been here for 40 years and experienced a couple of them. We will be ready for that.

And at this time, it appears there are no further questions. I would like to turn the conference back over to Chris for any additional or closing remarks.

Thank you, Jim and thank you for joining our conference call today. We appreciate your continuing interest in Twin Disc and hope that we have answered all of your questions. If not, please feel free to call Chris or myself. We look forward to speaking with you again in April, following the close of our fiscal third quarter. Jim, now I will turn the call back to you.

Thank you. And again that will conclude today's conference. We thank everyone for their participation. You may now disconnect.