Twin Disc, Incorporated

Stan Berger – Investor Relations, SM Berger Michael Batten – Chairman and Chief Executive Officer John Batten – President and Chief Operating Officer Christopher Eperjesy – Vice President-Finance, Chief Financial Officer and Treasurer

Peter Resnick – Robert W. Baird Brian Uhmler – Global Hunter Securities Kevin Leary – Spitfire Capital Andrea Sharkey – Gabelli & Co.

Thank you, Ian. On behalf of the management of Twin Disc, we are extremely pleased that you have taken a time to participate in our call.

Thank you for joining us to discuss the company’s Fiscal 2013 First Quarter Financial Result 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 Mianecki at 262-638-4000 and she will send the 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 Christopher 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 Fiscal 2013 First-Quarter Conference call.

As usual I will begin with I will begin with a brief summary statement and then John, Chris and I will be ready to take your questions. Our First-Quarter results were significantly impacted by a challenging North American pressure-pumping market as rig operators continued to adjust to North American natural gas supply overhang and lower prices.

We remain conscious about this sector during the balance of Fiscal 2013. Sales for the First Quarter of Fiscal 2013, easily the weakest quarter of the fiscal year, declined to $68 million from a record performance of $81 million last year.

The decrease from sales was primarily the result of lower demand from customers in the pressure-pumping sector of the North American oil and gas market. The shortfall was partially offset by a higher demand from customers in the North American and Asian commercial marine markets while emands remained steady for equipment use in the industrial, airport, rescue and fire-fighting and military markets.

Sales to the global megayacht market remained at historic lows in the quarter. Gross margin for the quarter was 28.2% of sales compared to a record of 37.8% of the same three months a year ago.

The anticipated year-over-year decline in margin reflected lower sales volumes in a less profitable mix of business. ME&A expenses, our marketing, engineering and administrative expenses were 24.2% of sales compared to 19.6% last year.

ME&A expenses increased $711,000 versus the same three months last year primarily as a result of increased product development activities, wage inflation and additional headcount. The effect of cash rate for the first quarter of Fiscal 2013 was 45.6%, significantly higher than the previous year rate of 35.3%.

The current year rate was unfavorably impacted by an existing valuation allowance in certain foreign jurisdictions during the quarter. The remaining increase relates to the expiration of a credit for research in development and reduced domestic production activities present and a change the mixture of domestic and foreign earnings.

Net earnings attributable to Twin Disc for the First Quarter of Fiscal 2013 were $1.3 million or $0.11 per diluted share, compared to record earnings of $9.6 million or $0.83 per diluted share for the same period last year. EBITDA for the First Quarter was $5.3 million compared to $17.8 million for the same quarter a year ago.

Total debt net of cash was $18 million at the end of the quarter compared with $16 million last year. With a debt the capitalization ratio of 21.9%, our balance sheet provides us with the flexibility to withstand any near term utility and to continue to invest in forward business opportunity.

Looking at our outlook, our six-month backlog at the end of the First-Quarter was $82 million compared to $98 million at June 30, 2012 and $165 million at this time a year ago. The backlog reflects continued weakness in demand from the North American oil and gas market that we anticipate we’ll continue for the majority of Fiscal 2013.

While the decline in demand from this sector will have an obvious near-term impact on our business, we are well positioned to grow when the market rebounds.

That concludes my prepared remarks and now John, Chris and I will be happy take your questions. Ian, please open the lines for questions if you will.

Pete, are you there?

Can you hear me?

Yes. Now we can.

Yeah, good morning. Sorry about that.

I guess first question if we can talk a little bit about the oil and gas market and your market assumptions there. It sounds like 1Q very difficult obviously but maybe some visibility as things get better in the-- call it the back half of the year, maybe Fourth Quarter.

Can you give us a sense of a couple of things? One, just how you are thinking about the North American piece.

Does that effectively get better here on the later part of the year and then international as well? And then just kind of if you can maybe give us an aura of magnitude of what we might be seeing near term and in our immediate term that would be very helpful as well.

Okay, all right. And then as we see this volume decline, Chris, how should we think about the ME&A rate?

The first quarter looked like it was a little bit higher, at least than what we had modeled, but I’m just wondering how that piece of the cost structure should delever as we see the volume come down.

Right. Pete, one part of it, if you remember last year, the first quarter, there was a significant adjustment to stop these confrontation because of the stock price movement in Q1 of ‘12.

Right.

Okay. The first quarter sort of a fair-based run rate for that ME&As level on an absolute dollar basis?

It’s not far off of what I would have expected to be typical, but then with the caveat of movement and stock based compensation it’s difficult to predict.

Okay, yeah. I understand that.

All right. And then last question.

John, balance sheet in good shape. Sounds like you’re relatively comfortable that things maybe get a little bit better here in the later part of the year and into fiscal ’14, I guess.

What’s the thought process behind potential buyback activity with the stock obviously coming off a bit here and how do you think about capital allocation, given that backdrop, I should say?

Pete, it’s Mike. I’ll jump in here if I may.

And with respect to buyback, you see that we increased our ability to buy-back shares at the July board meeting up to $500,000. So we had that dry powder and quite frankly we see the stock prices where it is today as a buying opportunity.

So we’re bullish on the company long term and we will be prepared, without being specific to buy into the market at these levels.

Okay. And then I guess the natural follow up, is there anything in the acquisition pipeline that would maybe pre-empt that from the buyback activity from happening?

Nothing that is immediate such as the buyback opportunity. Our acquisition work or conclusion of any acquisitions would be a little bit further down the line.

Okay. All right, that is very helpful.

Thank you all for your help.

Hi, Good morning. I guess maybe talking about the margin a little bit.

Can you give me a sense of how much of the degradation either sequentially or year-over-year was due to the makeshift away from the oil and gas transmission because they have the higher margins?

The majority of this is going to be mixed and volume related to oil and gas, Andrea. So the majority of it will be driven by that.

Yeah. The rest, Angie, we have – it’s John.

Usually in the first quarters, we have shut down all of our manufacturing facilities in which case the first quarter is typically the lowest gross margin quarter of the year. Last year was a complete anomaly because we had a record shipment of 8500 in that quarter that we could not get out in the fourth quarter and customers were still clamoring.

So we did everything we could to pull them in from the second quarter. But typically, having the operations on shut-down both here in North America and Europe drives the gross margin down for the quarter.

And actually I guess quarter I know you guys actually talked about that, that the Q1 shut-downs would have an impact, but that overall you thought a good target for the year, maybe coming at Q1 with the 30% gross margin. Do you think that that’s still feasible or has that changed a bit given the maybe greater decline in the oil and gas transmission demand?

If the oil and gas does not improve, we’re probably looking at high 20. But if the oil and gas comes back obviously we would change our target.

Okay, sounds good. And then maybe just to give us some sense of you mentioned, the other end market is going to be bigger drivers now this year.

Can you refresh our memory on the military end market, what you’re selling into there and is there anything that we should be concerned about with potential sequestration that may happen January 1st?

Sure. Kind of two areas.

In the U.S our primary military business is the legacy military, the transmissions that we sell to BAE and TACOM for the M88 and the Hercules M88. That is very steady business.

We have not heard anything affecting that from sequestration. But I’m going to have to look into that, how that would be.

But we have orders out to 2016, nothing that couldn’t change in January, given what happens in Congress. The other part on more a global basis is the patrol boat and military, mostly marine type activities and that business is going very well.

The only caveat there is timing from quarter to quarter because building boats can sometimes be unpredictable on when they finish and when they need a product. But both of those markets there as of right now are going very well for us.

Okay, great. And then last question from me on CapEx.

Do you think your budget, I think last quarter you said $15million to $20 million for this year. Q1 seemed very light, so I was just curious if that was just a timing issue or if maybe you’re retrenching a bit on your CapEx plans?

Okay, great. Thanks a lot.

That was really helpful.

Brian, it’s John. We have looked at the gas turbines as far as how it relates to the frac market.

I don’t have any updates there other than it is an option that we’ve considered because we’ve had from several different sources that this is a consideration. As far as other product development, we’re investing all the time and looking at a lot of different products and technologies, but it’s too soon to announce anything at this point.

Okay. Now staying in that market, calendar Q2 basically the quarters dropped that at the end of that calendar quarter.

So our fiscal Q1 we just finished, would you see that as a drop in orders or do you think that there were still some excess inventory that was being bought? Or can we go down from here?

Was that pretty much the bottom in your view this quarter?

It’s John again. If I had to guess it would be, potentially it’s going to be the first quarter-- looking at our fiscal year, Q1, Q2, Q3 is going to be the bottom.

It’s hard to say. It will happen sometime in those months but I expect that it will start to come up in the next quarter or two.

The backlog – here is the problem, the backlog, the components of the backlog are changing with a lot of oil and gas transmissions out which are 12-month lead time-type items. They obviously are very good for the backlog.

But once you get into our aftermarket and clutch business PTO, those are three-week lead time items and so they’re in and out of the backlog before they can be reported so that is why there is a caveat. Certainly, our aftermarket business, industrial business and marine business look very good going forward.

It’s just hard to predict when the backlog is going to bottom out and start to come back up.

Okay. That makes perfect sense.

And one final question, were there any-- did you experience at any point in time any cancellations in the quarter?

Very small, but most of it was push out. The customers do not want to lose line for the transmissions that they had on order when the market comes back.

Everyone is very sensitive that when the ramp up occurs again, they want to be able to deliver.

It’s Chris. So those wouldn’t be the six-month backlog.

Yeah, they’d be beyond that.

Okay. Perfect.

Thanks for your help. Appreciate it.

Good morning guys.

Good morning Kevin.

First question on ME&A just thinking about maybe scenarios for the rest of the year. Under what scenario might you dial back your dollar spend on ME&A?

Let’s say that demand sort of stays down 15% range, would you look at that dialing back or would things have to get incrementally worse from here?

We’re already looking at our ME&A spending, kind of operational spending, both cost of goods sold and ME&A. And obviously, given what’s happened in the first quarter and the outlook of North American Oil and Gas, we’re being very prudent on how we spend.

I neglected to chime in, some of the ME&A adds that we’ve had, obviously we’re investing in people. In Asia the business is expanding there and we have a larger company-owned distribution territory now.

We have some additional people in the mid-Atlantic region. So that kind of the year-over-year increase in people.

Certainly if things were to change, we would be very aggressive as we’ve shown in the past at controlling and reducing cost. If it comes to that, that’s certainly not out of the realm of possibility.

Thanks, that’s helpful. And then just one cleanup.

On the statement of cash flows there is a $1.7 million of other cash outflow. What is that?

That’s a good question and I believe it was the stock buyback.

Do you guys have a number in front of you in terms of buybacks in the quarter?

You know Kevin and I apologize, I don’t.

Okay. We can follow up.

Great, that’s all I had.

Okay, thank you, Ian. Thank you all again for joining the conference call today.

We appreciate your continued interested in Twin Disc and hope that we’ve answered all of your questions. If not, please free to call Chris, John or me.

We look forward to speaking with you again in January following the close of our third quarter. Ian, I’ll turn it back to you now for the close.