Good day and welcome to the Twin Disc Incorporated Fiscal Fourth Quarter 2017 Investor Conference Call. Today's conference is being recorded. At this time, I would 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 2017 fourth quarter and full year 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 are 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 the copy to you. Hosting the call today are John Batten, Twin Disc President and Chief Executive Officer; and Jeff Knutson, the company’s Vice President of Finance, Chief Financial Officer, Treasurer and Secretary. At this time, I will turn the call over to John Batten. John?

Thank you, Stan, and good morning everyone. Welcome to our fiscal 2017 fourth quarter and year-end conference call. As usual we will begin with a short summary statement and then Jeff and I will be happy to take your questions. Before Jeff goes over the fourth quarter and year-end results, I'd like to just take a few moments to go over some of the operational highlights from the quarter and fiscal year. No doubt many of you seen the improved results already reported by other industrial and energy companies for the latest quarter which is a good indication that some of our markets are headed in the right direction. The main drivers for Twin continued to be an increased demand for oil field power transmission. Our marine products for the global patrol boat market and a general surge in demand for our aftermarket parts. While the global offshore market remains at depressed levels with at least 25% of the FSVs and OSVs taken out of service, we did see some increased quoting activity for newbuilds. Globally, our industrial markets continued with steady but depressed demand for units but a strong search in demand for the aftermarket parts. As we discussed in the third quarter call, we have finally begun to see newbuild and replacement activity in the North American pressure pumping fleet. A broad generalized statement would be this; this was absolutely needed. Available usable horsepower was at a critical level with nothing left in reserve for any increase in activity. Demand for both units and parts for oilfield transmissions continued at a very strong level in the quarter and the demand spread to more of our customer base. Operationally, our fiscal fourth quarter was the best that we've seen in many quarters. Over 50 million in sales, gross margins…

Thanks John and good morning everyone. I'll run to the numbers in a little more detail for what turned out to be a very nice ending to our fiscal year. Sales of $53.6 million for the fourth fiscal quarter were up almost $11 million or approximately 26% from the prior year fourth quarter and $8.5 million or nearly 19% sequentially. This followed 9% growth in the third fiscal quarter giving us two consecutive growth quarters for the first time since fiscal 2012. Fourth quarter sales represented the highest quarterly sales levels since the fourth quarter of fiscal 2015. Primary drivers as John stated for improved revenue in the quarter was continuing shipments for oil and gas transmissions into North America along with improved North American aftermarket demand, also led by oilfield activity. Full-year sales finished $1.9 million or just 1% ahead of fiscal 2016 reflecting a nice second half volume recovery. Through the first half, we were 15% below the fiscal 2016 sales level but exceeded the second half by 17% to edge over the prior full-year. Year-over-year results reflect the second half recovery in North American oil and gas demand offsetting reduced activity in the Asian market for the company's commercial marine products and general softness in the global industrial market. Our gross margin percent for the fourth quarter improved by 520 basis points to 31.4% compared to 26.2% in the prior year fourth quarter. This is the first time in the history of the company that we achieved a 30% margin result on sales less than 60 million, reflecting the reduced cost structure and improved productivity we have been creating with the many actions we have taken over the past several quarters. For the full-year, our margin percent has improved by 430 basis points to 28.7% compared to…

Thanks Jeff. Just to have a quick comment on the outlook. While our 6-month backlog did drop about $2.5 million from our third quarter, it is up 30% from year ago levels and we feel that overall we're in a much better position with our markets than we were at the end of fiscal 2016. Orders in July continued the strong trend that we saw on the first half of calendar 2016. Our two biggest market concerns going forward remain the global offshore market and the overall Asian marine market. While there has been steady aftermarket demand from both areas, it is too soon to try to anticipate a growing demand for any newbuild. That concludes my prepared remarks. Now, Jeff and I'll be happy to take your questions. Jim, could you please open the line for questions.

[Operator Instructions] We'll take our first question from Tim Wojs from Baird.

Nice job on returning to profitability. I guess maybe the first question I have, was maybe just on backlog. I know you had booked a pretty large order in the third quarter, and so I am just curious, how much of that order have you kind of burned through in backlog and I am just trying to understand maybe what the underlying backlog number might look like, just maybe ex that order because you did mention in your prepared remarks that you were seeing broader order activity from your customer base?

Wojs, I would say about two-thirds of the way through that initial order, the two main orders, and I would say that we shipped more 8500s in the fourth quarter than we took orders for. That's going to result in almost all of the decline, aftermarket was still strong, other orders helped offset that, but this is going to be kind of a numbers game in some of the quarters because these -- the orders come in chunks, - we can take an order for more in a week than we can deliver in a week. So it’s going to become up and down, but I would just say Tim that the demand going forward for the 8500s is a strong - is the orders that we took in the third quarter and fourth quarter. So, you know I suspect that you might see that backlog number reverse fairly quickly here coming out of the first quarter if everything goes well. So I am not overly concerned about that $2.5 million drop, that's why I mentioned in my comments, I feel much better about the 30% improvement over last year, and I still think that we have growth. Now, our operational guys will tell you they don’t want the backlog number to grow. As soon as they get an order, they want to be able to ship it. I would say that $2.5 million drop was not a reflection on anything in our market’s weakening, particularly in oil and gas.

Yes, that’s why I was just trying to ask that question because I know some of the shifts that order may be normalizing a little bit, okay got it. And then on the – maybe just on fiscal 2018, is it from maybe a guidance perspective, I’m not sure if you want to comment on it, but do you expect that 2018 should be of positive EBITDA contribution for the whole year. And then, kind of - on that, I think the CapEx is kind of up-ticking next year, how should we think of free cash flow in fiscal 2018?

I'll let Jeff answer the second one, but the first one, if I would say clearly we’re starting fiscal 2018 in a much better position than 2017. A lot’s going to have to do with continued decision anywhere - say a boom demand from oil and gas, but it's a nice uptick. We had good aftermarket spare parts growth and we've seen again some coding activity in marine that we didn't see kind of for the last six months. So if we have sales levels near that $50 million mark, quarter, quarter, quarter, than yes, I think you can safely say that’s what we’re shooting for is to be profitable for all of fiscal 2018 and to be profitable quite frankly in each quarter. Now historically the first quarter is the hardest just because we have shut, every plant had a shut down during the first quarter. So, we just struggled with the number of shipping days. Yes, Tim, we’re shooting for profitability and profitability in each quarter, and really the key metric is how close to 50 million are we in each quarter on the topline. And I'll let Jeff answer the second one.

On the free cash flow I think we’ll try to be positive. I wouldn’t predict a full year that’s a significant positive free cash flow, I think we might find ourselves investing in a little more capital this year. I think there is a little bit of pent-up demand, in particular if volumes come back. We have some capital that we’ll need to spend and I think we might find a little more working capital lending on the balance sheet as volumes come back, but I think we're in a good position right now generating cash in the quarter and I think we have got a good cadence and a good pace, and we feel good about how in particular inventory is setup for this coming year with the volume that’s in front of us. So, I think the good goal for us is just to stay positive quarter-to-quarter and for the full year.

The other thing I would add is on the topic of ME&A while structurally, I mean as far as headcount, a lot of that we’re going to try to hold again at the levels that we have achieved, but we are beginning our 100th year. So in September of 2018, it will be a 100th anniversary. So we have some, some marketing spend that we will do in calendar 2018, it’ll kind of spill between fiscal '18 and fiscal '19. Again over the past couple of years, we've maybe done half of the distributor meetings that we've done in the past as our distributors look to cut costs and we’re cutting costs, but kind of all comes back together where we’re going to have a global distribution meeting here in Racine and some other activities that we are going to try to also put into a marketing campaign just on general awareness. So those are some costs that will be in next calendar year 2018, but that will be kind of straddled on fiscal 2018 and 2019.

Okay, that I should give you my next question just as may be revenue comes back how much of the M&A, kind of keep compressed versus how much just kind of grow or so? And then maybe the last question from me, just on the gross margin in the quarter anywhere there kind of parse out how much was volume mix and maybe structural cost improvement?

This is a tough one.

I know it’s not quite enough…

I believe the answer this - it's kind of relative even spread, I mean the mix was very good, clearly with aftermarket in oil and gas. But we're seeing productivity level that we haven't seen in a long time in our Racine operation.

So I would say just visually Tim, again most of the volume as I mentioned - most of the hit came in our domestic operations here in Racine. So a lot of recovery we've been able to see has been there because that's where the down graph was, but what’s they delivered in the fourth quarter and the third quarter and I look at the number of people let's say did it with the rest - the lowest level of employees. You would have to go back three, four years when they had 25%, 30% more employees. And so they're delivering a topline with - they are operating more efficiently. So, yes a lot of it was the market coming back and having to demand so you’re able to produce a transmission, but they are doing it more efficiently and with fewer people. So a lot of it is really with efficiency improvements in the cost structure here in Racine.

Let me ask it in different way, I think the incremental gross margins in the quarter were 50% is that - does that kind of tail off a little bit in 2018 or do you think that’ s an appropriate number kind of mix neutral?

I think that would be probably something we might target to the first half. Again what’s next - theoretically improving through the first half year-over-year, I think when we get to the second half that tails off.

We'll take our next question from Walter Liptak from Seaport Global.

Hi, this is Steve on for Walter. So now we’ve seen some of the data out of the U.S. docs and many of the PBS empires are complaining about frank equipment charges. Are you guys seeing increased close in orders for the [indiscernible] and also how long does the process takes from an order unit to get to the field and produce?

The answer to, Steve, is, yes. We’re seeing a broadening of the inquiry. So the number of customers coming in, requesting quotes on new units and aftermarket parts and that orders are increasing from the number of customers. We absolutely see that there is a shortage. And right now I would say, we’re kind of in that 14 to 16 week lead time to get new units. Maybe a little bit shorter and then certainly, I think there's a rush, there’s a tier change. If you can get Tier 2 engines before the end of the calendar year and you can get everything bolted up and assembled, you can use Tier 2 engines as opposed to Tier 4. So I think there’s a push to get as many of the Tier 2 -- they’re less expensive to build before the end of the year. So right now, we can certainly deliver units to those wanting to build before the end of the year. But I would use about 16 weeks for us right now.

And then just one more. Do you guys discuss the volatility around oil prices and adding new frac capacity?

Yes, we talked about it in the last few calls. I think there was, certainly when we were down to 20s and low 30s, the cash flow was severely constrained. Even though the equipment needed to be upgraded overhauled, they replaced. I think you're seeing it even in the 40s. There is enough cash flow that people are rebuilding their equipment and overhauling it and replacing really old units with new units. So I think that we’re in a pretty good spot for the frac fleet as least as we add the horsepower that we need to. Certainly, $50 and higher would help, maybe spur more activity. Really what we’re seeing the price of oil kind of have the most sobering effect, it’s really on the offshore fleet. And that's with the number of OSBs and FSBs that are doc, and just total constraint on new construction. So if we see the price of oil affecting anything right now, it is the global offshore fleet, not the North American pressure pumping fleet.

And just one more before I - [indiscernible] cost have gone up. I am not sure if you can discuss the pricing around the 8,500 unit. And do you plan on increased prices in the future? What is the outlook with that?

Steve, it’s pretty competitive pricing. I mean, with each order that we’re getting, we’re being pitted against the competition. We have again started to see material prices increase which is going to everyone equally. So I would just say that each order, each quote is a competition. I would say that the price pressure has not been as great as you would think. So it really what’s winning the day more often than not right now as your reputation on reliability. Can they get access to spare parts and when can you deliver. So if you can deliver quickly, you stand a much better chance of holding your current pricing and pricing that had back in 2012 and '13.

[Operator Instructions] And gentlemen, at this time it appears there are no further questions. My apology, you do have a question from George Gaspar, a Private Investor.

A quick one on the 8,500 outlook, I assume that 8,500 push that you had recently is due to the more extensive horizontal that are going out further on a well to well basis. And do you see that continuing? I assume that you keep trying to sense the market and if you listen to the sand producer, reports are all pretty bullish about the amount of sand going in and I keep thinking of Twin Disc when I hear that sort of saying that there should be a pretty good market out there. So is there something that is beyond the 8,500 that could evolve in the marketplace or not?

So you’re absolutely right. The correlation of the amount of sand being used is a fantastic predictor of hopefully the capital spend, it is predicted equipment is being used and that there’s pressure pumping going on and the amount of stand being used certainly tells you that the laterals are a lot longer. And that leads you to higher pressure, higher horsepower. So the 8,500 is extremely well-positioned for that. There’ve been a lot of - not a lot. There's been over the years, looking at what’s the next level, is there a 3,000, to 3,500, 4,000 horsepower. So the weight of those engines and the size just making it moving over the road is just impractical. So as it’s right now when you take the size and weight, you’re kind of at the Cat Cummins MTU engines that are in that 3,000 horsepower range. So this is where we are today and then the landfill - answer that demand with just multiple engines. But certainly, we see the trend continuing at that higher horsepower level with 8,500, it’s well positioned.

And just because just what you're saying kind of was highlighted this morning with the Chesapeake Energy report. They’ve made tremendous progress in the first six months here and they're well count in the Eagle Ford, the Permian, they’re all moving up pretty good. So it looks like there is a lot more opportunity for you.

I think we will see the number of customers and operators start to redo their fleet for sure. As I mentioned in the beginning, people were very judicious with their maintenance spend and their CapEx spend over the last two to three years. And at this discontinued activity level, there needs to be a lot of maintenance and replacement in the fleet.

[Operator Instructions] And again, gentlemen, there are no further questions in the queue.

Thank you, Jim. And, everyone, thank you 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 not, please feel free to call Jeff or myself. And we look forward to speaking with you again in October at the close of our fiscal 2018 first quarter. Jim, I’ll now turn the call back to you.

Certainly. And at this time, this will conclude today's conference. We thank everyone for their participation. You may now disconnect.