Good day and welcome to the Twin Disc, Inc. Third 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. Andy Berger of SM Berger. Please go ahead, sir.

Thanks, Andrea. 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 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 John Batten, Twin Disc’s Chief Executive Officer, President and Chief Operating Officer; and Jeff Knutson, Vice President of Finance, interim Chief Financial Officer, Corporate Controller, interim Treasurer and Secretary. At this time, I will turn the call over to John Batten. John?

Thank you, Andy, and good morning, everyone. Welcome to our fiscal 2015 third quarter conference call. As usual, we will begin with a short summary statement and then Jeff and I will be happy to take your questions. Looking at our third quarter results, sales for the 2015 fiscal third quarter were essentially flat at $60.9 million versus $60.7 million a year ago. The general conditions in our geographic markets remained unchanged. When compared to previous year levels, our North American manufacturing and distribution operations showed good growth in the quarter in most product end markets, but that growth was offset by moderating markets in Asia and continued low demand from Europe. When we look at our broader product end markets, the growth that we saw in North America was not enough to offset the lower levels of activity in Asia, north of 5% or $3.2 million negative impact of foreign currency translation, primarily from Europe. Our third quarter sales into our industrial markets were essentially flat year over year, with slightly higher shipments in North America offset by currency translations in our European operations. Most of our North American market sectors including oil and gas, irrigation, recycling and construction were relatively stable during the quarter. With the exception of oil and gas, we anticipate this trend continuing throughout the fiscal year. Sales into our transmission markets improved versus the fiscal 2014 third quarter levels, again driven by the relatively strong shipments into our North American oil and gas end markets. Compared to the previous quarter and sequential quarter, our transmission shipments were down, primarily driven by lower level of shipments to Asia. After second quarter shipments that rebounded nicely from a relatively weak first quarter, our global marine markets declined when compared both to the second quarter and previous…

[Operator Instructions] We will go to Tim Wojs with Robert Baird.

I guess first question just on, I was wondering if you can just maybe add a little bit of color around just the oil and gas order activity, how that trended through the quarter, maybe how it looks in April and then just maybe add on how the aftermarket also kind of trended through the quarter?

I would say the order activity for units, particularly for North America, was very quiet in the quarter. Thankfully, as far as spare parts, that continued, but not at the level that we saw in the second quarter. So the service activity for North America will I think slow down through the – we are in the fourth quarter right now, that will slow down, still some work to do that we have on the books, but with the excess capacity, I think we are going to see a lot of the operators rotating rigs and not repairing right away if they don’t have to. So anything as far as order activity, we’ve seen a switch from past years were primarily North American shipping, then that trended in 2013 and 2014 where a lot of it was to Asia. And this year, it was primarily back to North America, but I think going forward we will see a higher percentage going back to Asia for the time being.

Just on Asia, how has that played out through the quarter, has that continued to weaken or is there been a little bit of strengthening in that market?

It depends. I would say the marine part, as far as where we started in the beginning of the year, the marine part has gotten slightly better, but oil and gas has stayed at a relatively weak position compared to where it was a year ago. So that really hasn’t improved very much. But it doesn’t wayward down, it’s not down as significantly as North America looks to be for the next couple of quarters.

And then I guess just on the outlook, I guess we’re closer to fiscal 2016 now, should we think about revenue and I guess EBIT being flat to down-ish next year, is that probably the best view at this point?

I would say that certainly our toughest quarter of this fiscal year is going to be the fourth quarter and that usually have the mirror going into – coming out. So certainly the toughest quarters for us for fiscal 2016 are going to be the first couple of quarters. It’s going to take some recovery in the price of oil and the number of rigs to at least stabilize, stop producing, and then I think we’ll see some improvement in trends.

And then you highlighted the balance sheet in your prepared remarks and I know the end markets have been choppy, I guess today versus maybe three or six months ago, are you more willing to do an acquisition now or would you rather wait to see visibility improve a bit?

If it’s strategic, I definitely have the capacity and the desire to do one, I think our balance sheet can handle an acquisition and some choppy markets, if it’s the right one.

And we will go next to Steve McManus with Sidoti & Company LLC.

I guess just to stay on the topic of the aftermarket and new rig activity, what has the mix been at the end of this quarter versus the last couple and where do you see that moving forward?

I would say I believe that as far as aftermarket as a percentage of the sales was probably the highest in the third quarter, driven by aftermarket staying at similar levels throughout the fiscal year, but the unit sales being down. And I see that as general activity still being very good for the next few quarters. The trends look good in not just oil and gas, but marine, industrial, just general activity. A lot of the rigs are still being used, so there’s going to be some repair work and a lot of our equipment out there is still being used, there’s going to be repair work. So that part, I’m pretty confident in. We can be as low as 30% and as high as 40% and right now we’re in that just touching close to that 40% ranges, aftermarket and service as a percentage of sales.

And then there’s been a bit of a ramp up in CapEx, can you discuss the allocation a bit and do you think the spending levels are going to remain at this level through fiscal 2016?

That depends, we’ve had some projects, some plant activity here working on the facilities here, we have a project in the fourth quarter, one of our European operations for the some general facilities. So from the outside that will look like the spending will probably be up, but we are going to be mindful of what’s happening in the markets and certainly mindful of any acquisition opportunity and spend where it is needed, but be cautious.

And then the last one from me, I know the effective tax rate was impacted by a series of adjustments, do you guys have a fair run rate moving forward that we can expect?

I think the rate is going to stay in that 35%, 36% range, given where earnings look to be coming from. I think the face of the P&L is always going to be a little bit challenging just because of the adjustments and like we call out the – some of our entities with the valuation allowance. But I think as a run rate, we would look at that 35% to 36%.

And we will go next to Walter Liptak with Global Hunter.

Want to ask one on the pressure pumping business, I think you said that the units were down during the quarter, but it sounds like you’re still getting some orders, was that right, in North America?

I would say the units were down versus the second quarter, but up versus the third quarter of last year. The orders, I would say, that’s a firming up of the scheduling in Asia, there really haven’t been any net new orders for North America in the quarter for units. Any order has been for aftermarket, yes.

And along those lines, the delta in backlog from December through March is about $10 million, and I wondered if we can get a little bit more description, I think you went through some of it already, but – and we can imagine where some of it is coming down, but I wondered if we can get some more detail?

Besides the FX translation, there was about $1 million, it is pretty much going to be an oil and gas story. For every six of it, oil and gas, which will be the pressure pumping, about $1 million I think was translation and the balance is probably weighted mostly in marine and again trending towards what would be offshore oil and gas. So 10% currency translation, 90% oil and gas related, and primarily obviously – the obvious, extreme cautiousness over the price of oil.

And you did mention that prices, and I think a theme that we’ve been hearing throughout the quarter which is the pricing pressure, I wonder if you were getting any of that on either units or parts for pressure pumping?

I would say we are starting to see certainly at the distribution level there is pressure on pricing as far as service, its service and repair work and we are feeling that too certainly on any new coding activity as far as new units, particularly so far we’ve seen it mostly on the marine side, not to say that there wouldn’t be able to build to the pressure on oil and gas. In this quarter, there hasn’t been a lot of coding activity for new equipment. Walt, you’ve seen what oil services companies have been able to do just as far as efficiency on labor, they are producing as much oil right now with dramatically fewer rigs. And so a lot of the efficiency gains has been how does servicing and staging, the fracing and other activities. So I do think that frac operators have gotten significantly more cost competitive or brought the cost down in the whole scheme of things.

And you mentioned the marine, I want to make sure I got this right, it sounds like it’s trending a little bit better than it was in your comments last quarter. And if that’s right, is it work boats or is it coast guard or something that were getting better?

General work boat activity pushed folks along the river, moving commerce, whether it’s in North America or Asia, with the exception of coal barges in Indonesia and for China. That is doing okay. It’s really the offshore where we see as the crew boaters delivered, there’s not necessarily one coming in behind it or if someone drops out and a big guy takes that spot, again slight behind him is not being filled for the moment. So it’s just generally cautious right now, very cautious.

And in Europe, the pleasure craft, is there anything improving there?

Actually I would say in different parts of the market, yes, I would say, beside that we don’t serve the trailer boat market, that’s definitely getting better, but we are seeing some improved activity in North America with our Joystick System, certain new orders, Australia as well. So that is actually in the backlog, but I think some of it is outside the backlog with their schedule. So that is one area in marine that’s been a benefit of a highlight.

And then just a last one from me on industrial, how are you seeing the industrial part of the business early in 2015?

Thankfully very stable, good in North America, not as good in Asia or Europe right now, but hopefully that’s a trend that continued and doesn’t suffer a little decline like we’re seeing in oil and gas. But overall, those markets have been, for us at least, pretty good, pretty stable and we’re optimistic. We have some new products coming out, so that is one area heading into next fiscal year that there is at least a ray of optimism.

[Operator Instructions] We will go next to Doug Dyer with Heartland Advisors.

With some of the pressure pumping equipment that has been stacked, has any of that ideal equipment ever become competition for your parts business or is that – since you’re stacking at least productive equipment that doesn’t enter into the equation?

Good question and that is one that’s going to change. The answer I mean it’s going to change depending upon who the fleet operator is. Most likely, if there is a problem on a rig, they will swap it out with a new rig and just parse the rig and then rebuild the rig at some later date. We don’t see or hear as much as them cannibalizing parts from a transmission and something at the system of the whole frac, and that is something that they can get at easily. So it’s going to depend by operator. But by and large, they will swap out if the rig is not – if the frac is not working, they’ll just replace it with a different frac leg and then attend to the problem either immediately or some time down the line. But to answer your question, yes, it can provide a competitor because it delays either a replacement or a rebuild.

It appears there are no further questions at this time. I’d like to turn the conference back over to management for any additional or closing remarks.

Thank you, Andrea. Thank you for joining us on the 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 Jeff or myself. We look forward to speaking with you again in August, following the close of our fourth quarter and end of fiscal year 2015. Andrea, I will now turn the call back to you.

Thank you. That does conclude our conference. Thank you for your participation.