Twin Disc Inc (TWIN) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Twin Disc, Incorporated 2011 third quarter financial relations conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Tuesday, April 19, 2011.

I would now like to turn the conference over to our host, Mr. Sam Berger of SM Berger. Please go ahead, sir.

Thank you, Christina. On behalf of the management at Twin Disc we are 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 2011 third quarter and nine-month 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 positions 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 Mainaki at 262-638-4000 and she will send a copy to you. Hosting the call today are Michael Batten, Twin Disc's 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 third quarter 2011 conference call. I will start with a brief statement and then John, Chris and I will be ready to your questions. We assume that you have already seen our press release, as Stan has indicated, so I will try to be brief.

Twin Disc posted financial results that continue to show sequential and year-over-year improvement. Diluted earnings per share of $0.40 per share was up 14% sequentially, and more than tripled the $0.13 per share for the year-ago quarter. Our backlog is at an all-time high, up 18% sequentially. And we expect improved results in our fourth fiscal quarter ending June 30.

Sales for the third quarter of fiscal 2011 totaled $76 million, compared to $61 million for the same three months in fiscal 2010. Year-to-date sales rose to $213 million, compared to $163 million for the first nine months of fiscal 2010. Again, most of the increased volume came from the oil and gas markets, although we did experience modest growth from our after-market and industrial product areas. We also saw stable demand in our other market areas. We recorded gross margins, 36.3% in the current third fiscal quarter, resulting from increased volumes, improved manufacturing efficiencies and absorption, and a more profitable mix of business. This compares to 31.6% in the second fiscal quarter of 2011, and 27.1% for the same quarter a year ago. Year-to-date gross margins were 33.6% compared to 25.1% for the first nine months of fiscal 2010.

Turning to ME&A, our marketing, engineering and administrative expenses, as a percentage of sales were 22.3%, compared to 23.9% for the same quarter last year. While quarterly ME&A expenses rose $2.5 million year-over-year, the majority of the increase was due to stock-based compensation due to a higher share price and bonus expense, both of which were largely absent from the fiscal 2010 third quarter. Year-to-date ME&A expenses rose primarily for the same reason.

Looking at taxes, the effective tax rate for the first nine months of fiscal 2011 was 40.4%, significantly lower than 52.4% for the prior year. The current year rate benefited from previously announced favorable second quarter adjustment to the deferred tax asset related to the pension liability, as well as a favorable impact of the second quarter reinstatement of the R&D credit. These adjustments were offset by an unfavorable third quarter deferred tax valuation allowance recorded at one of the Company's foreign jurisdictions. Chris will be available during the Q&A session to elaborate further on this latter item.

Net earnings for the third fiscal quarter of 2011 were $4.5 million or $0.40 per diluted share, compared to $1.5 million or $0.13 per diluted share for the same quarter last year. Net earnings were negatively impacted by the aforementioned $2.4 million valuation allowance or $0.21 per diluted share. Year-to-date net earnings totaled $11.2 million, or $0.98 per diluted share, compared to a net loss of $1.4 million or $0.13 per diluted share for the same period a year ago.

Looking at our financial condition, we continue to maintain a strong balance sheet. Working capital at the end of the current quarter stood at $111 million, compared to $84 million at the same time last year, reflecting the build-up in inventories, primarily to support robust demand from the oil and gas sector. Total debt net of cash totaled $12.3 million, up $6 million from December, and about equal to that of 2010, the June month of 2010.

Looking at our outlook now, our backlog of orders to be shipped in the next six months was $140 million at the end of the third quarter, compared to $118 million at the end of December 2010, and $73 million a year ago. We continue to benefit from very positive demand from oil and gas exploration and development, as well as modest growth in orders from several of our other end markets. Looking forward, we are optimistic the favorable oil and gas market fundamentals will continue as backlog and shipments of the 8500 series remain at record levels. The 7500 transmission is in field testing and results to date are encouraging. We continue to believe we will be shipping initial units in the fiscal 2011 fourth quarter. We remain optimistic that the Company is positioned to achieve very good fiscal 2011 financial results, and that the outlook for fiscal 2012 is encouraging.

That concludes my prepared remarks. And now John, Chris and I will be happy to take your questions. Christina, will you please open the line for questions?

Thank you. (Operator Instructions). Peter Lisnic with Robert W Baird.

First question, if we could talk about gross margin a bit. Sequential gross margin up something on the order of 470 basis points, and your revenue number's up $1.3 million. Then if I look at that gross margin of 36.3% compared to volume in the past, it's significantly higher than previous peak quarter where you had $90 million of revenue or so and the gross margin was 300 basis points lower. So, first question, A, what drove that gross margin upside, if you can give us details on mix, volume, price? And then B, how do we think about that in the context of, as we go forward, what new peaks on the gross margin line might be?

Hi, Pete. I'll address the first part. The significant increase in gross margin really was driven by mix. Higher percentage of oil and gas, both transmission and now some of the industrial shipments. But the other piece would be an after-market and parts increase in the third quarter. In some instances, maybe at the expense of unit shipments. So just the mix to oil and gas and then another mix towards after-market and spare parts was really the difference in the quarter as far as the sales. We've also had the first quarter of the Racine plant consolidation where we've moved all of the manufacturing operations in Racine into one plant. So we've had one quarter of that under our belt, and so the domestic operation saw an improved efficiency in the third quarter, as well.

Okay. And then longer term, let's say the revenue line progresses closer to that previous peak of $90 million in a quarter, should we think about the same sorts of incrementals as we progress there, implying gross margins that could approach or exceed 40%? Or is there anything that could cap off gross margins?

Pete, we've set a very high bar now for us. I will say that. We're looking -- it's going to be -- this is a result that even surprised ourselves. I don't see it going up in the fourth quarter any farther than that. Just a very, very favorable mix that we had in the third quarter.

Okay. So mix gets a little worse in the fourth quarter, end of fiscal 2012?

Yes.

Okay. And so that would mean that what you're seeing in backlog is growth not only in oil and gas but marine and ARFF and some of the other end markets, correct?

The backlog in every market increased in the third quarter, so correct. The backlog -- oil and gas still is a very large percentage of our backlog, but it's not the only growing piece.

When you say it grew, does that mean year-over-year or sequentially?

Both.

Both. Okay, fine. All right. And then last question, if I could, just on that backlog number, more than double or close to doubling year-over-year. But outside of that six month window can you give us a sense as to what the commentary or chatter is from customers, what you're seeing longer term than that six-month window?

Again, we said it in last quarter's call. We see fiscal '12, our fiscal '12, being another good year. And I don't see any of our markets going down. I see only improvement in all of them. So the issue is going to be getting everything out that is on demand for fiscal '12.

And to this point I would assume you have not had any issues getting anything out. Are there any supply chain bottlenecks that you're dealing with or no?

I'd differ a little bit. Steel, specialty, high grade steel, getting castings and forgings, bar stock is becoming an issue. There is a tightening in the supply, definitely. And we've had some issues with some specific suppliers on purchased products like bearings and clutch plates, getting supplies from them as they've moved manufacturing locations. So there have been some pinch points and we're through most of those now. They did affect the third quarter but we see those being resolved going into the fourth quarter and fiscal '12.

Can you guess on the revenue impact in the third quarter, if there was any, from supply chain?

Yes. It probably would have been in the order, -- what I spoke of, the plant moves, specific suppliers, and then just the difficulty in getting castings, forgings and bar stock, it was in the neighborhood of $5 million to $7 million.

Thank you. Neal Miller with Fidelity Investments.

Hi, Michael. Good to say hi. I would sure like to get a little better orientation on some of your horsepower fracking equipment. And first question is, is your customer base fragmented or concentrated?

Hi, Neal. It's Mike. Basically, when you say concentrated or fragmented, I'm not quite sure what you mean.

In other words, there are maybe three main companies in the horsepower area, Halliburton, Schlumberger and Baker Hughes -- or BJs, excuse me. Just wondering whether those are your customers or whether you're dealing with independent fleets that are out there.

We're dealing with a great number of the frac builders, not necessarily including all of Halliburton, though we have some under way there. But John, why don't you point out some of the customer base that we have.

Yes, I would say right now our largest would be Frac Tech, Cisco High-Lift, Trican. And then some of the independent builders who build for them, as well -- Enerflow, M.G. Bryan in Texas. I would say are the large ones right now. And also BJ and Baker Hughes is also a customer. I'm sorry, I skipped over them.

Appreciate that. The next question would be, how does the growth in the number of stagings, and the length of the laterals, impact the horsepower requirement? In other words, I think Halliburton has been even dreaming, perhaps, of 96 stages, Whiting Petroleum in the Bakken is currently pursuing 41 stages. How does that impact the horsepower requirement?

In short, it increases the horsepower requirement, both in total horsepower at the site and the horsepower per frac rig.

Appreciate it. The final question I've got is that there seems to be what I would call proprietary trends that everyone wants to differentiate their service. Schlumberger, for instance, is very proud of this approach that they have called the HiWAY which is all-encompassing. That is, if you don't use their frac, their chemicals, their blah, blah, blah, you can't get people to join in. In other words, it's all Schlumberger, it's none of Schlumberger in that product line. Is that a concerning trend in the frac business for you all?

Not really. It's Mike again, Neal. Basically, we're just seeing unprecedented demand and the demand for our higher horsepower 8500 is clearly winning the game in the marketplace. So we see that more stages and higher horsepower play into the product offering that we have, especially given the reliability that we have associated with our product line. And of course with the 7500 coming on-stream, that is going to play down the reliability, is going to play down into the horsepower segment. So while there has been a definite paradigm shift from the 1500 to 2200-horsepower range to the 2200 to 3,000-horsepower, just because of the availability of the equipment to do that, we still see an attractive market in that lower horsepower range with our 7500. So all in all, we've got the market covered with a reliable transmission and one that hits the peak horsepower, which, as you're describing, more and more of the servicers are using higher horsepower as a part of their service plan.

Greg Garner with Singular Research.

Thank you for taking my question. As a follow-up to that last question about the 7500 versus the 8500, with the demand for this higher horsepower, what's your sense of how the market for the 8500 may be changing versus your original expectations for the market for the 7500?

It's Mike again. And basically what we see is, as I've just mentioned, is a paradigm shift. That, given the availability of higher horsepower equipment, many of the rig users are going upstream. But that doesn't mean that the lower horsepower market is being knocked out entirely, because the larger rigs require roading permits and equipment that physically is larger than can be brought into certain areas. The Marcellus, for example, needs to have roadable rigs of a certain dimension. And so those kinds of consideration still maintain a nice market opportunity for us.

I will say that, as we've discussed at these calls in the past, that our outlook in the market has shifted. We used to see a greater number of units in the lower horsepower range than were in the upper horsepower range. That has tended now to equalize. So we aren't seeing as many units as an opportunity in the lower horsepower range that we originally did but we're capturing a large percentage of the higher horsepower, and we're still coming into the market in the lower. So we still see a nice opportunity.

Okay. And the way you mentioned with this shift towards the higher horsepower market, is this because there's not as much lower horsepower equipment even available? Or is it just more the need for the drilling, or the fracking characteristics are requiring higher horsepower?

You have a situation here where the historic market has been largely in the 1500 to 2200, 2250 size market. It's only been in the last four or five years that the 3,000-horsepower opened up, specifically with our 8500 series transmission. So the market was, at that time, three or five years ago, six to 10 or before that, was largely dominated by the lower horsepower range. So you have that population out in the marketplace that's been existing for a long period of time. So you have those units, some of which are being retired and replaced with 3,000-horsepower product. Some of them will be replaced with 1500 to 2200 product, because of the location of where they're going to work. So there is a market in both areas.

I think we're in a sweet spot of supplying the high horsepower, plus having a more reliable transmission, and more suited transmission, in the lower horsepower. So we see that we're in a good spot for the future, especially given the expansion of the total market. There are more areas in the world that can do unconventional gas drilling and fracking now than there were known to be earlier. So with this technology, we see the opportunities unfolding a great deal for us.

Greg, it's John. Just to add to that. We don't want to minimize what we see as the market potential for the 7500, because if you think of mountainous terrain in Pennsylvania or eastern Europe or in India and parts of Asia, a tractor-trailer, a big semi rig with a 3,000-horsepower engine and transmission, it's just not going to fit into a lot of these areas. The road and infrastructure doesn't exist. So a smaller, flatbed style body load frac rig is going to be the frac rig of choice, solely because of the size. So they'll take more smaller horsepower rigs out to a site to get the same effective horsepower. So unless you're in west Texas and the plains of the US or in Western Canada or parts of China, you just don't have the physical room to maneuver the large 3,000-horsepower rigs.

Okay, thank you. I appreciate that clarity. Are they any 7500s in the backlog right now?

Not in the six months.

None of those are in the six month?

Correct.

And the testing still leads you to believe that the first order will be delivered towards the end of this fiscal year, I suppose?

Correct. We're finishing up field tests right now. Based on the hours per week that we're getting, we should be done in the second week of June, which allows us to bring the transmissions back for the engineering sign-off. And we should be able to ship the first units the last couple weeks of the quarter.

And just one last question, just regarding capacity utilization for the 8500 and the 7500. Can you talk about where you are with the utilization on the 8500, and what capacity you have for the 7500, and what kind of capital expenditures may be associated there?

Yes, I would put it like this. From where we were three years ago, in our [max] peak, we have effectively reached double our capacity from three years ago. We're continuing to add capacity through capital investments, specifically right now for housing. We've added additional assembly lines. And we've added additional testing capacity. And we're also obviously adding more assembly lines and more testing areas for the 7500. So, as the 7500 comes on, we will be expanding the capacity of the two in total, additionally, in the fourth quarter and into next fiscal year. So we're continuing to add capacity, but just as a benchmark of where we were three years ago, we're at double our capacity of where we were.

Any sense on your utilization rate in the last quarter?

Had we had some key parts from some suppliers, we would have been able to ship more. But we're probably 85% to 90%. As soon as we create additional capacity, we utilize it pretty quickly, because the demand -- the customers aren't bashful. They're calling us for the units.

Could you just refresh my memory on the CapEx plans for the next year?

This is Chris. Next year we're looking close to the $15 million range. And I think on the last call Mike and John both talked about the investment that's being made in the fourth quarter which John was just alluding to doubling the capacity. That's investment that's being made this year with the new Makino that's coming in.

(Operator Instructions). Jon Braatz with Kansas City Capital.

Good afternoon, gentlemen. Couple questions. What about pricing within the 8500 market? Have you been raising prices?

Jon, it's John. We raised prices last fall, and we'll be going out with another round of pricing here in the next month and-a-half. Next fall, effective essentially second quarter of next fiscal year.

Two things. Number one, regarding pricing, is it to recapture some higher costs or is it going to reflect just higher demand and you'd have the ability to raise prices?

It's going to affect the higher cost and the trend of the surcharges that we are beginning to see in the last part of the third quarter, and what we've already seen which is now the fourth quarter. The materials seem to have -- usually we see the surcharges in concert with the shortage of -- the difficulty in getting castings and forgings. We saw the difficulty in actually getting the supply before the surcharges started to mirror that. And now with the rising fuel prices, we're hearing from our suppliers that the surcharges and the price increases are going to start to come in, in the fourth quarter.

Do you think you will be able to pass all these costs on in a timely manner?

Yes.

Okay. And what type of price increase are we talking about? Are you willing to say that now?

We won't give it now. But it will cover what we're seeing in the cost increases.

Okay. Secondly, in your press release you noted that you're seeing increased orders for industrial products. The industrial sector's been pretty strong for the last year, year and-a-half. What markets are those products going into, those transmissions -- I assume they're transmission systems. Am I correct?

No, they're small PTOs, small gear boxes in Italy, pump drives. It's really a reflection of all the markets having bottomed out inventory and the entire chain being drained down, and the market in general just starting to pick up, whether it's been in Europe or here in North America.

Okay. And then lastly, I think some of the new capital equipment that you are installing is coming from Japan. Am I correct?

Yes, the Makino. When we signed the purchase order, it was already in-country. It was in the US.

Okay. So you had no issues with the earthquake over in Japan?

No.

Shawn Boyd with Westcliff Capital Management. Please go ahead.

Good afternoon. If we can go back for a second on the 7500 launch, as you start to ship those initial units, does this help or hurt gross margin?

We expect the margin to be reflective of oil and gas, but the first year of production of any new model is typically a lower gross margin than once you get up and running. So the first year, the gross margin is not going to be where we expect it to be in the second year or the third year. So the initial ramp-up of the 7500 would hurt gross margin. We don't see it having a huge impact on the gross margin, though.

Okay. As you start shipping units, it's not like you're going to have such a big bolus of first units that go out, it wouldn't be a significant headwind.

Correct. We're not going to be up at the 8500 production levels in the first quarter or two at all.

Got it. Okay. And on industrial and after-market, correct me, but is this the first quarter where we've talked about those products picking up and helping here on the revenue line?

Yes, we've had some good order months in previous quarters, and I think I've spoken to that, but this, I would say, would be the first sustained quarter where we can say that the trends are definitely improving.

Okay. And just can you give us anything here on how broad and how sustainable that feels to you, Michael?

How broad and sustainable that the industrial markets are going to be?

Yes, in terms of industrial and after-market. And maybe we could talk about revenue levels, just are we at 50% of previous peak? Are we at 20%? Where are we versus peak and trough here? We're just starting to see this business improve.

Yes, we're coming off the bottom. And clearly -- I think there are two segments that are happening here, and John referred to both of them, but I'll elaborate. The service part reflects equipment getting back to work. And that, generally speaking, is the bellwether sign that as service parts business picking up, that is a good sign that the equipment that has been shut down or parked is now getting back to work, and we're seeing the beginnings of a recovery.

The demand increase in the general industrial products can be both a combination of -- and this is what it is -- a combination of our distributors and/or end customers having worked down their inventories, are now at a point where they've got to order on a selective basis or somewhat broader basis to begin satisfying and improving demand. And to the extent that some of this is restocking or reflecting pass-through demand, I'm not sure that we have a good read on right at the moment because we're right at the beginning of that process.

Given another quarter or so, we'll get a better reflection of what is happening. Is it restocking or is it full reflection of final demand coming back. You have to think that equipment that is being used in housing related markets and light construction has got a long way to go. And so what we're probably seeing is outside of that area of activity. And I think that's about where we are on that.

Got it. Very helpful. And same question here on gross margin. It sounds like that picking up, from your commentary earlier, actually helped you, gave you a little bit of a tailwind on gross margin in this quarter. Would you expect that to continue here?

Yes, we would expect that the combination of our industrial business and the after-market both would help our gross margins going forward.

Got it. Okay. And going back to the question about capacity utilization, if I heard you right, you mentioned that you've doubled the capacity of three years ago. So three years ago this Company ran peak revenues in the $90 million a quarter range. Should the take-away here be you think you can outrun $180 million a quarter?

No. This is Chris. John's answer to the question was specific to the oil and gas transmission. So if you go back to what you were talking about, that included a pleasure craft business that was at all-time highs, and that's one of the markets that's near its bottom right now. So John was specifically addressing the capacity for the oil and gas transmission.

Got it. Okay. Appreciate the clarification. And last question from me is, in terms of the issue on high grade steel and that being tight in the quarter -- but it sounds like maybe that's eased since then. But let's just broaden this out and let me give you an open ended question here. What are the biggest bottlenecks for you or where is the biggest tightness that holds back you being able to deliver on that backlog?

For next quarter and going into the fiscal year, number one would be raw material supply. And the second would be if demand continues to grow, contract machining. It's really the supply of the raw material, one, and then the machined parts and stuff to go along and to meet our growing demands are the two biggest ones.

And the tightness there is just due to the strength in the overall economy and things picking up as opposed to particular supply chain issues out of Japan?

Correct, yes. Japan's -- thankfully -- a terrible situation but it does not seem it's going to affect us for the next three to six months, maybe longer term as they sort out all of the problems there. But really you have a sector of the economy going after the same suppliers. We share our steel suppliers, castings, forgings, with a lot of the people who make construction equipment, mining, and we're all battling for the same raw material supply.

Got it. Okay. And actually I lied, one last one I'm going to throw in here. On just oil and gas, are lead times still increasing and how long are they right now?

I would say they haven't increased since the last quarter. We're somewhere between nine to 11 months, but that's about where we are right now.

On oil and gas.

On oil and gas.

Neal Miller with Fidelity Investments.

Hi. A follow-up question, and that is, how do you plan to deal with the ups and downs of the fracking in the oil service business? I'm just wondering. The management of Schlumberger, everyone seems to be on record that it goes until it doesn't go and then you have a pause and prices go down, et cetera. How do you plan to deal with that inevitable correction? And just as a backdrop, everyone's saying for the next 12 months, all the horsepower's sold out. I'm not trying to anticipate anything near term.

Neal, it's Mike again. And yes, the oil and gas industry is historically cyclical. And there's a possibility, a probability that at some point we will see a softening. I think at this point we're positioned certainly in the higher horsepower segment, we're coming to position ourselves in the lower horsepower segment. And the question is going to be how broad is this market growing within the total oil and gas market. And where is it growing and is it going to continue?

There are two aspects of your question. One is the aspect relating to the capacity of fracturing rigs to the marketplace. Is the demand greater than the supply? And then is the supply greater than the demand? That's one question.

The other question is, the broader market question is, what is the real demand in terms of opening up new territories, such as John spoke about in Europe or in Asia, and will that demand continue to offer opportunities that dampen, perhaps not eliminate, the volatility of the cycle that you point to. We're trying to get as good a read as we possibly can on that. And of course we have seen a softening in this market before. Just a couple years ago there was a softening and we rode that down and it has come back up. We would be prepared as a Company to do that as the market goes through its cycle.

From our planning point of view, obviously we are looking at other areas of our business, other than oil and gas, to pick up. One, by either natural recovery of the market, such as marine business, which is another cyclical business off the cycle of oil and gas. And, at the same time, doing our corporate development work, either internally by releasing new products that have an impact on our market, or other corporate development work that adds revenue and gross margin in a different business or in a different geography. So these are the things that we're working with. Much of the conversation today has been really zeroed in on oil and gas. But I thank you for the question because it does allow us to speak to the fact that oil and gas is not our only focus. And we are working in several different areas of the business to, in a way, protect ourselves from any kind of a softening in oil and gas.

Sure appreciate that comprehensive answer. I'll just add there is another component which is that the development of shale liquids and gas, we really haven't tested yet re-fracking, and that might renew. In other words, we could duplicate what we've already done, so that the old areas are still a frontier in that sense.

Yes

Adriano Almeida with Cramer Rosenthal.

A couple of my questions were stolen already. But one, I wanted to just understand a little more what this after-market business is. Is this after-market in transmissions?

It's after-market, it's our service parts for all of our products.

Now, I would imagine, just like the pressure pumps, I read a lot about them getting chewed up pretty quickly. Does the transmission participate in that chewing up process?

Yes, it implies after-market for marine transmissions, frac transmissions, ARFF transmissions, PTO clutches. Absolutely.

So no particular strength in oil and gas end markets for after-market?

No different than any other market. There's a healthy after-market component in all of ours.

What's the installed base of your 8500? How many of these things are out there?

We don't disclose that information.

Okay. Yes, I'm still learning the ropes of what you do disclose here. What's your percentage of revenues in oil and gas? Is that another one you don't disclose?

Yes, sorry Adriano.

All right. What was the currency impact in the quarter?

When it's material, I list it. So it wasn't material. I'm just going on recollection here. To sales, it was less than $0.5 million.

Okay. And then conceptually here, just in terms of this conversation about horsepower, what's the bottleneck in these pressure pumping systems? Is it the case where the majority of the high-end pressure pumping can actually take the 7500, can step down a little bit on horsepower because they're over-speced from the transmission perspective, or is that not the case?

I'm not sure that I'm reading the question right, but the --

Last conference call you mentioned that there was no transmission designed specifically for pressure pumping, so I assume they're going into transmissions that exist for other heavy duty applications.

Right.

So when they buy an 8500, are you giving them more horsepower than they need for their application?

Now I understand your question. I think going back to last quarter, the bottleneck was -- for fracking in general right now, the bottleneck, depending upon what the customer is, where they're going, it could be an engine, it could be a transmission or it could be a pump. The three main components of a frac rig. In transmission and engines, most transmissions and all of the engines obviously can be used in other markets, whether it's mining, rail, construction. So depending upon the manufacturer of the engine or the transmission, there's competing interest and demand for those components.

Our 8500 now only goes into the frac market and the 7500 was designed for the frac market. So these transmissions don't have a competing interest, other than they're going into fracking. And the pumps, by and large, are only for fracking. My comment last time was that engines and other transmissions have a competing interest. They could be going into vehicles where our transmissions are not going into vehicles.

To piggyback on John's comment, all of the other transmissions that are presented for use in the frac rig market are typically transmissions that were designed for a different use, different application. They've been designed as truck transmissions. And so what makes ours different is that a truck transmission is designed to spend so many hours in first gear. Very few, in fact, because you're just overcoming the inertia of the truck and then you're shifting into second gear and third gear. And the purpose of the transmission is to move a truck from A to B over a period of time.

A frac transmission is used in a different way. The guys who are using a frac transmission are pumping, and what they're doing is they're matching the horsepower to the pressure that's needed to go down the hole. And depending upon how the frac rig is set up, they may want to use third gear, fourth gear or fifth gear, and it could be different in each application. It could be all six gears. But, typically they'll use one gear and then they'll just run the hell out of that rig 100% of the time in that gear.

Okay. Another question, moving on. So pressure pumping capacity is pretty much sold out for the next year. That read is coming from all different directions. You guys are talking about a nine to 11 month lead time on your transmissions. I assume that applies to the 8500 for oil and gas.

Right.

So while you don't disclose backlog beyond six months, it's safe to assume that there is a backlog beyond six months, right?

Yes.

Okay, fine. And then I have one more on this. The trends in SG&A -- I guess you guys call it something different -- but ex- the stock compensation, which is partly driven by the stock having gone up so much, how is that cost trending? How did it trend sequentially? Are you still adding people? Because that was a big discussion on the last call, as well.

No. If you go back, Adriano, to the June quarter of '09, we went through a pretty extensive cost cutting effort in preparation to what we knew was going to be a challenging fiscal 2010. So we were at what I would call lean ME&A levels or SG&A levels. What you're seeing in terms of an increase really represents -- although I would say we did keep things that were forward-looking, engineering, R&D activities and things like that, but we haven't really added any heads, to speak of, certainly nothing significant. So you're primarily seeing year-over-year types of cost of living increases, restoration of wages and salaries, and then the stock-based compensation and the bonus expense. Those are the primary increases in the ME&A. We're not adding people back. We're not significantly changing our -- it's primarily the restoration that has been taken away almost two years ago now.

All right. And the commentary last call, someone asked about whether it was unreasonable if revenues keep trending higher, that the SG&A would go back down to 20% of revenues. That still holds, right? Nothing's really changed in the model?

That still holds, yes.

Okay. I have one final one, if I may here. This is also more conceptual as how the model works. So you're developing the 6500, and I assume there's some added costs in these field tests and so forth that are not being covered by the revenues of the 7500. So, is there a little bit of a margin gain? I understand how it goes in with lower margin because you're still ramping up. But the fact that this is incremental revenue, shouldn't it have an overhead absorption effect there that helps your margins?

The answer is yes. I wouldn't say that those costs that you're alluding to are significant. So you're not talking about a significant number.

Greg Garner with Singular Research.

Thank you. I just wanted to ask about the marine transmission business. In your comments on the backlog you mentioned increases in all businesses. How would you characterize that? Is it still just bouncing along bottom or is there any other flavor you could provide?

The marine market, the marine backlog did increase last quarter at all manufacturing locations. So the pleasure craft market is still down at very low levels but we see the trend improving. The commercial markets, which we see mostly here in Racine with the backlog, they had a very good quarter of incoming orders. We released to production to the market the joystick system at Miami in February. And we have good orders out of Australia. And we have a lot of projects going on both in Europe and North America for customers. So we're seeing, even in a down market, we're seeing a demand for our components which are hydraulic -- bow and stern thrusters and transmissions and controls. So it was actually, in retrospect, a very good quarter for marine as far as -- the overall markets aren't that great but we saw our incoming orders doing pretty well in the quarter.

Could you clarify, what do you mean by projects are ongoing? Is this the joystick transmission?

Developing customers for the EJS system. Going through the initial installation of the first boat at specific yards.

You may want to think of it in terms of applications.

Yes, first applications at different customers.

Rather than a product project.

Okay. So then this would be used as a -- I'm thinking of the word pilot, but really more of a sample live demonstratable product?

Correct. At each one of the -- at different yards.

As each boat yard comes on and begins to apply this product, it takes a project for us to work with them to install -- apply and install this new product on their boat and they get comfortable with it and so on. Once several of those installations have been made, then we back off and they take over themselves.

And how long is that process, do you expect it to occur until you do that back-off? Is that a couple months or a couple quarters?

I would say each one, you've got -- for each yard you have to budget about six months' worth of the time. It's not that many hours of work. It's just coordinating schedules, really, to get it done.

It's not incremental cost. It's some cost. It's what we do normally. And so we're just out there assisting our customers in the application of a new product. So that's the way it works.

Okay. So the timing if that end market demand were to increase, that product really wouldn't be available for delivery for at least six months or so. That's what I'm reading into that. Is that a correct way of looking at that?

No, we can deliver the product before that. It's just getting with the different boat builders, getting the system designed into their vessel, and the first system installed in one of their vessels for them to test. Products come quicker. It's just getting the sign off and the approval at each different boat yard.

Shawn Boyd with Westcliff Capital Management.

Hello. I know we're getting long here, so just a quick follow-up. You mentioned earlier the tightness in steel probably impacted revenues by about $5 million to $7 million in the quarter. Were there any other pushouts or anything incremental besides that, that impacted the quarter?

Nothing out of the ordinary shipyards being behind, building on a patrol boat schedule. But those are, I would say they're normal quarter to quarter. But really nothing. Those were, I would say, the highlights of the quarter.

Okay. And the $5 million to $7 million that you mentioned, I would assume that business was not lost and that it probably snaps back this quarter.

No, the customers are still waiting for those products.

Got it. Okay. So if all works like it ought to, then hopefully we see that get shipped this quarter.

Correct.

And last question from me is, I know you don't release orders and you certainly have business that turns within the quarter. But we have to work off the information we're given. And you can look at an implied order number just as one thing to look at on the growth of the Company. Bottom line is, orders are growing 50% year-over-year for the last four quarters here. And I'm talking overall Company here, not just oil and gas. On a combined corporate basis we've had a very high level of order growth. And my question is are you seeing any signs -- I'm hearing an awful lot on the call of things picking up even further. Are you seeing any signs of this slowing?

No.

No.

No.

Adriano Almeida with Cramer Rosenthal.

A follow-up from me. Again referring back to the last conference call, when you were talking of the 7500, you said that you had stockpiled some forgings and some inventory to be able to deliver quickly on those once those orders flowed in.

Correct.

So, I'm thinking here, just connecting the dots, you've had no orders on the 7500 yet. Obviously you anticipate them.

We have orders. We haven't brought them into our six month backlog until we signed off on the units for production. So when we sign off on it -- I'm anticipating when we sign off in June, the orders that were six months out we will bring in to when the customers want them and there will be some coming immediately into the six month backlog.

Okay. My question was, given that you're sitting there, ready to deliver, the lead time on the 7500 is going to be significantly shorter, right, than the nine to 11 months?

For the first units, you are correct, they will be significantly shorter. Actually, some leads times could be three weeks.

Three weeks. Okay. Now, that will actually let you gain some share, right, to the extent someone needs the transmission, if it's what they need from a specification standpoint. They would much rather take it from someone who could deliver in three weeks than in 11 months.

That is absolutely the case.

And I'm showing no further audio questions at this time. I'll now turn the call back over to management.

Okay. Thank you, Christina. Again, everyone, we thank you all again 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, and you have any follow-on questions, please feel free to give Chris, John or myself a call. We look forward to speaking with you again in July, following the close of our fourth quarter. That's it, Christina, and we'll turn the call back to you.

Ladies and gentlemen, that does conclude our conference for today. If you would like to listen to a replay of today's presentation, please dial 1-877-870-5176, and enter the access code 4432000. We would like to thank you for your participation. You may now disconnect.