Twin Disc Inc (TWIN) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Twin Disc Incorporated fiscal 2011 fourth-quarter financial results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Tuesday, August 2, 2011. I would like to turn the conference over to Mr. Stan Berger. Go ahead, Sir.

Thank you, Jo. On behalf of the management of 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 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 who 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 Mainaki at 262-638-4000, and she will send a 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 Chris 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 fourth-quarter and fiscal 2011 year-end conference call. I will begin with a brief summary statement, and then John, Chris and I will be ready to take your questions.

We assume that you already seen our press release, so I will be brief. As you all know, Twin Disc is benefiting from a strong surge in demand from the oil and gas industry. This has resulted from 3 factors -- first, the improving macro outlook for unconventional drilling around the world; second, the increasing service intensity of the fracturing process; and third, the acceptance of our transmission as the new high horsepower standard of reliability and durability in the industry. Demand for our 8500 series transmission has been very strong, and our new 7500 series transmission entered production at the end of the fourth quarter. We are very encouraged about the prospects for these innovative products going forward.

As you have seen from our press release, net earnings rose exponentially on a 36% increase in sales for fiscal year 2011, as a result of the operating leverage gained by the volume increase, improved manufacturing efficiencies and absorption, as well as the favorable mix of business. Gross margins improved year-over-year to 34.7% from 26.6% the year before. Net earnings attributable to Twin Disc for the fiscal year 2011 were $18.8 million or $1.64 per diluted share compared to $597,000 or $0.05 per diluted share for fiscal 2010. Net sales rose to $97.4 million for the fourth quarter compared to $64.3 million for the same period a year ago. Gross margins rose to 37.1% in the 3 month period up from 30.2% recorded in the same period a year ago.

Net earnings for the current fourth quarter reached $7.6 million or $0.66 per diluted share compared to $2 million or $0.18 per diluted share last year. EBITDA for the fiscal year 2011 was a strong $43.5 million or 14% of sales compared to $13.7 million for fiscal 2010 or 6% of sales. During the fourth quarter, EBITDA was $16.3 million or 17% of sales compared to $7.4 million or 12% of sales for the same 3 months of the previous year. As indicated above, our strong year and fourth quarter were in large measure driven by the strength of the oil and gas industry. However, we have seen some more modest improvements in our other selected market areas, namely industrial, marine and military sectors.

Our 6 month backlog has risen to another record level of $147 million compared to $140 million in March and $84 million last year. Our product market and geographic diversity continues to help us weather the softer demand of the many -- of many of the world economies and we remain confident in our design differentiation and new product innovation to continue our growth outlook.

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

(Operator Instructions). Our first question comes from the line of Peter Lisnic with Robert W. Baird. Go ahead, please.

Good afternoon, everyone.

Hi, Peter.

I guess the first question on backlog, the number up sequentially and at a record level, you just help us understand what the components of that increase were? I know you mentioned oil and gas, but I'm particularly interested in what sort of impact the 7500 now that you are producing it and shipping it, what that may have had impact-wise on the backlog.

Well, Pete, first part, all of our products were up in the fourth quarter in the back log. We had a nice increase in industrial and marine particularly. The 7500, we shipped a handful of units in the fourth quarter. Those actually got in and out of the backlog. So the units we have on order now are not reflected in that backlog. Those will be in the first part of this fiscal year.

Okay, so those are not in the current disclosed backlog?

Correct.

Can you give us an anecdotal feel for what the product reception for the 7500 has been? What we might look for in terms of demand for that product?

I would say that the testing in the field has gone well. The customers are anxious to get their hands on it so I would anticipate as far as any one product, it will have obviously the most impact as one product because it rights now as we last reported it was zero in the fourth quarter. It will have a nice impact going forward.

Okay. Perfect. And then I guess maybe this one is for Chris. Chris, you sort of running in what I call unchartered gross margin territory, as we look forward to continued sales growth which you pointed out in the press release, how should we think about two things? One would be the gross margin leverage in the next fiscal year and then the leverage on the ME&A line, which I know is impacted by variable comp cost this year. Kind of what should those two things look like as we grow forward and the top line continues to grow?

Pete, this is Mike. I will take that one, if you don't mind. Basically we were very encouraged by the factors that brought together the gross margin of the fourth quarter. It was very reassuring to be able to see that number.

But as we look forward to the balance of the year or the new year, I should say, we are going to be little more cautious in responding to your question, in that we do anticipate a recovery of our more traditional products and markets, which don't share the same gross margin that some of the products that are presently shipping. So we have responded in the past that gross margins in the middle 30s are where we target ourselves and if we are able to from quarter to quarter exceed that, we will be very happy. But in looking out, say through the balance of this year, with recovery coming from a number of different sectors, I think something in the middle 30s is probably better to plan on and then if we were able to do better we will report that.

Pete, on your ME&A question, 2011 was a year when we restored the incentive compensation plan, 2010 there wasn't one, we came close to the full pattern of those awards so I wouldn't expect a big increase year-over-year there. On the stock based comp, within the ME&A, there are were a number of things that happened there. One, the awards were the in money, so to speak, but more importantly there was a significant increase in the share price. I think it started out the fiscal year just over $11 and finished right around $40. So I wouldn't anticipate that the number would be as great. It will probably be a little bit lower in 2011. So I guess the answer to your question, there should be an increased sales and some opportunity for leverage on that ME&A line.

That is perfect, I will jump back into queue and nice quarter.

Our next question comes from the line of Neal Miller with Fidelity. Go ahead, sir.

Michael long distance here. Three energy-related questions, if I could. The first was the reference you made to reliability and durability. And yet, what I was thinking about as your part of an overall truck component structure and what I'm wondering about is I had heard that the uptime or the repair cycle used to be seven years and now it's maybe one year, and what that leads me to is question about whether the -- what full utilization is -- in other words, if you are part of something else that's down, and then people want the same level of horsepower then they have to have more redundancy or more gadgets. Any comment there?

Hi, Neal, good to talk to you again. The uptime on frac rigs is a big concern for all users and it is -- we have to be concerned about our part in that activity. I mean, obviously, we are only one component on many several components that are utilized on the rigs. So we are focused on maintaining the highest reliability and durability that we can, and uptime that we can, in the transmission side of the equation. We have been anecdotally, and from market experience, seen that our transmissions are lasting longer than others in the field. And so we are encouraged by that kind of a reputation that we get in the marketplace. So that's good news for Twin Disc.

I can't speak to other components in the system, but we are looking at what we can do, as I said on the transmission. The higher intensity of the service required for unconventional drilling, which is where the market is going rapidly, really brings to bear, as you point out in your question, the issue of how quickly these units are used up, so to speak, because of the kind of usage that they are getting. Far greater than ever before. So the market is looking for reliability and durability, and that is one of the factors that we see, what we can bring to the market both with the 8500 and the 7500 as it makes its way into the market this year. So I hope that answers your question.

That's really helpful. Second question, kind of getting at the same area in a different way, is the backlog for pressure pumping equipment in the sense that the Bakken, in every picture you see of Minot, North Dakota, is below water and the severity of the winter and snow pack plus the runoff have delayed an awful lot going on in that area which is a hot bed for unconventional drilling. So is there any sense here as to the, in essence a backlog was created on the seasonal basis, that overall is much more equipment that the world needs than is being met?

Well, I think clearly the market itself, the macro outlook for unconventional drilling around the world is growing significantly. So it's not just in one play. It is around North America, and it is going to Europe to a lesser extent, but also, we see developments in China and elsewhere in the Asian theater. So a lot of the rigs that are being built are, A, being built to replace the equipment is that worn out. They are being built to add to the existing stock of equipment that is out there, because the demand, some of the figures we've seen is looking at increasing the capability from 6 million-horsepower to 9 million-horsepower during this period of time. So in fracking rigs, so there are multiple demand structures. To the extent that the Bakken may be somewhat of a soft area and a drag on demand, if we are not seeing it impacting our backlog at this point in time, because there are many other applications that will take these transmissions.

Sure, appreciate that. Last question would be on capacity utilization, and your operations, how long -- can you discuss how long it takes or what sort of time cycle there is that's in your backlog to meet?

Well, typically our backlog have run out as far as nine months. But we have been adding capacity selectively to accommodate the demand in this area. The fact that we have been able to run up our shipments over the past year and will continue to grow those shipments both 8500 and now the 7500, we have adequate physical capacity to accomplish the task ahead.

Now having said that, John and I both would be -- have to say that in supply chain could always be an issue. We don't see that at the moment. We have an extensive supply chain and one never knows. That would be the caveat on the other side. We are feeling pretty comfortable about our ability to ramp up to the demand that we are seeing and we project in the marketplace.

Great quarter. Thank you so much.

Thank you, Neal.

And our next question comes from the line of Greg Garner with Singular Research. Go ahead, sir.

Thank you for taking my question. First of all, congratulations on a nice quarter.

Thank you, Greg.

Sure. One item I remember last quarter was mentioned there was a $5 million or $7 million push out due to some supply constraints as I recall. I just want to be certain, were these recorded in the fourth quarter and was there any push out for the fourth quarter?

Most of the $7 million made it into the fourth quarter. And there really, the magnitude of a push out from the fourth quarter first quarter was a lot smaller. As you can guess from the sale of the revenue line, the factories pushed out everything they could.

And in the capacity expansion plans for next year, is this -- can you characterize the product that you are focusing on? Is it safe to assume for the 7500?

That would be a safe assumption. The capacity expansion also would affect the commercial marine units here in Racine, and other land-based transmission products.

And the fact that there is not 7500 is in the backlog, is that because you haven't been actively marketing it until you could deliver it? Is that how that works?

What we did was we went through the field test process and then those applications that were approved, we took orders for some of those and we actually shipped. So the order and shipment happened in the same quarter, so it didn't register in the backlog. But we now have orders that were placed this fiscal year that will show up in the Q1 backlog.

Okay. And any sense on the demand for this relative to the 8500 because in the last -- there has been a movement for a higher demand for the 8500 than anticipated, say a year ago, and now that the 7500 there, what is your read on the 7500 versus 8500 market size or demand?

I think overall the market potential for the 7500 is still larger than the 8500 given its size and weight, and being able to get on frac rigs that don't need special permits to move and smaller frac rigs for Asia and eastern Europe. So I'm still confident the 7500 has a bigger market potential than the 8500. Customers are anxious to get it. It's still going to be when we get into production, as we are now, the lead times on this unit are going to be a lot shorter than any other frac transmission because we have availability of inventory and capacity to produce.

And due to size, does that make it more amicable to European and Asian --

Absolutely. It can fit on a body load frac rig, which is a non-tractor trailer arrangement and fit on smaller horsepower frac rigs that don't need permits to move around the US or Canada.

And to the joy stick, can you characterize where that is? As I remember there were initial orders to boat yards and just want to get a sense for that marine market.

Sure. It is in production and has been for just about six months now. And it is doing very well at some of our targeted customer areas. We have a lot of projects going on in Australia, Asia, some of the builders in Taiwan, Europe and the US So there is a lengthy application review in process to get all of the components and decide what the system is. You will see that ramp up during this fiscal year, with number of applications orders and then shipments.

And just back to the question about the capacity utilization increasing with this huge increase in expenditure plan for next fiscal year. There is any way to quantify the total capacity increase, or the increase for oil and gas or anything along those lines you could share?

No, we typically don't give out those types of numbers. But it is -- I mean it has a significant impact in the amount that we can ship specifically in oil and gas.

Okay. Particularly if you could turn it and have a quick turnaround on orders.

Exactly.

Okay. Thank you very much.

Thank you.

And our next question comes from the line of Jon Braatz with Kansas City Capital. Go ahead, sir.

Good afternoon, gentlemen.

Hi, Jon.

There's a well defined seasonality to your business. First quarter is always the softest. But with business being so good, the 7500 coming in on stream, will we have the seasonality? Would you expect the seasonality to be similar in 2012, that you have seen in prior years?

John, this is Mike, and I guess that we could anticipate that seasonality in general will continue to exist, but that the variation between the quarters probably will be narrower because I think we were going to see a better first quarter.

Okay. Okay. What is the lead time on the 8500? If I order one today when do I get it? And because the lead time I assume is going to be longer for the 8500, have you seen any cancellations of 8500s and replacements with 7500 orders?

No. To answer the first part, it would be about nine months.

Okay.

And as we increase capacity, we are hoping to always bring that down. And we have not seen any 8500 cancellations for the 7500. That's not to say that it won't happen going forward in this quarter, but a lot of the attitude is don't fix what isn't broken. We have converted new customers in this latest run up to 8500. Specifically people that we have targeted for the 7500. They never used that model before and now they are using the 8500 and they are looking to add capacity with the addition of the 7500.

Okay. Okay.

And yet, yes, the 7500 the lead times starting out will be shorter than the nine months for the 8500.

Okay. Going back to the joy stick, I believe it's more of a an OEM product. Is there any retrofit applications for the joy stick, or is it principally OEM?

It's principally OEM. If -- it's possible to retrofit any vessel but that's very cost prohibitive. If you have our control system and our put shift transmissions already in the boat, that is a much easier proposition than if you have somebody else's control system and/or somebody else's transmission. You are pulling all of that stuff out and replacing it new, and there is -- a lot of the labor involvement in that is very expensive.

Is it a big enough market and a big enough opportunity for -- it's going to be tough with the explosion of sales in the oil and gas area. Is it enough for us to move the needle so to speak and for us to see it?

I think if you look at the overall marine market going forward and the possibilities for the EJS and our marine sales, I think you will see it move the needle in a very stagnant down market.

Okay. One last question. You did reference in your press release new product development during the last three or four years. You didn't back off that and we are seeing the fruits of your work. What can you tell us maybe, in what you are currently looking at and doing, in terms of new products are there other applications, particularly in the oil and gas area that you are working on?

Well, I will take that one, Jon, and the issue is this. We are working on incremental developments to EJS controls and the like. And so we aren't ready to come public with it. There will be enhancements that will happen there and will be working in other market areas, other than just pleasure craft at the moment, to apply those EJS controls. So that will be more or less incremental kind of development. We are working on some other longer-range activities that we are not going to talk about as a little bit premature to be talking about the activities that we are working on, either in terms of organic development or external acquisitive development.

Thank you very much.

And we have a follow-up question from the line of Peter Lisnic with Robert W. Baird. Go ahead, sir.

All right, I will try to be quick. Can you give us a sense with all of the activity in oil and gas, just what the after market business there is looking like, demand trends and do you see the after market being a bigger part of the business than maybe previous historical metrics would suggest?

Pete, it's John. I think specifically back to three, four years ago, the after market was a bigger piece. This time around there was a lot of maintenance on those rigs that were built a few years ago. I think if you talk to anybody in the industry, I think this time around, there is a lot more preventative maintenance on the rigs. And to an earlier question, 7,000 hours down to 1,000 hours. That's more or less in line with what we are hearing is just unconventional drilling, the utilization rates and number of hours per day are way up. So that brings the time down, so rather than wait until something breaks, they will go in and doing a lot of maintenance and scheduling it in advance. We see the after market part being a bigger part this time than it was last time, and it will be going forward. It's a growing part of the business.

And is there a way of maybe estimating or sizing that opportunity for you, or giving us context relative to what it used to be. Or is it just too vague at this point?

Pete, it's a little too vague at this point. The last run up, it was a pretty small part, because the run up was so quick and so short. So you almost never got around to it. So I don't want to -- I know a lot of the stuff that's ordered now was really to go after the existing fleet. But certainly there is a lot more attention to the after market component of it now.

Okay. And then, the marine, comments have been better getting better and the back log was up in the quarter. Can you give us a little color on sort of the individual pieces of marine patrol work, pleasure and give us a sense what's happening demand-wise in each of those?

Demand, pleasure craft continues limited improvement. We were seeing orders that are directly attributable to EJS in the work boat areas. I think for us, commercial all has been improving very nicely. I would say one of the caveats is that the activity in the gulf coast with respect to offshore oil and gas is still pretty slow. The number of rigs out there and the new permits are way down, but orders in Asia are growing. We are seeing activity in Europe and certainly the brown water, the river traffic here in the US is doing very nicely. Very good to see the year-over-year improvements, and particularly in the fourth quarter in the backlog.

Okay. All right, that is it for me. Thanks again for your time.

Thanks, Pete.

And our next question comes from the line of Adriano Almeida with Cramer Rosenthal. Go ahead, please.

Hey, gentlemen, how are you?

How you doing?

Pretty good. A lot of people have asked questions already so I don't have too many incremental ones and I did miss the front end of the call. Maybe you mentioned this, have you guys been able to exercise pricing power on the oil and gas side beyond what your cost inflation is?

We have been -- Adriano, it's Mike. We have been able to pass along inflationary increases each year as we move forward. We are mindful of our position in the market and don't want to get too far out ahead in a demand opportunity. Our mission here is to provide solid products to our customers for the long term and we are going to keep our pricing with respect to inflation intact but not go beyond that.

Okay. There has been inflation, right, on the input costs so it's fair to assume that the price you're quoting today is higher than what you were quoting say six months ago for the equipment?

Six months ago? No, six months ago, six months ago the pricing would be the same but we might not have the same answer three months from now.

Okay.

Adriano, we don't want to kid around here. The issue is that we basically set annual pricing unless there is going to be a huge inflationary requirement. So what John is saying is that our prices were effective October 1.

Correct. The prices are higher now than they were six months ago. We just tripped over the line.

All right. And another thing I was wondering about is in terms of anecdotal evidence, I know it's very murky for especially folks on the outside of the industry to really understand market share shifts, but I think it's reasonable to assume you have gained share in this upturn. Do you see evidence, say in the after market, for instance, where your guys are going out and delivering or selling a transmission that was previously an Alison or a Cat transmission that's being replaced by a Twin. Is there evidence of that?

I would say more of the evidence has been just the shift in the new construction to the higher horsepower. And I think we have benefited significantly from that and I think Cat has benefited to some extent because they had the other 3000-horsepower transmission. That -- it's just a huge shift to that horsepower level.

Okay.

More than replacing one with the other.

That plays to your strength.

Yes.

Okay. I have one more here. Now just putting my, kind of trying to think about potential problems head on. I assumed the two CNC machines you installed are up in and running and already producing product. Is that correct?

That is correct.

Now when you -- as you ramp up the 7500, there is a piece of the manufacturing that actually is more labor intensive and requires some skill. Are you going to have to hire new people? Is there kind of a training bottleneck here in terms of getting guys? There are other people in the space that have kind of stumbled in terms of responding to the big ramp up in demand that you are all seeing.

To answer that question, we do need more people and we actually have hired most of them. We are up just in the work force out in the shop about 10%. And significant other temps in, which is allowing us to free up the skilled labor for just this activity. We have been working on that over the course of the year.

Okay. So in terms of the capacity ramp up, the 7500 that you delivered in the quarter, they went through that kind of the whole manufacturing footprint, that will deliver the rest or there is more buildup?

Again, don't completely understand but we did use the fourth quarter, the small shipments of the 7500 were basically used as the final prove out of our manufacturing process for it. So just everything from the machining to assembly.

But you delivered those in the fourth quarter, right?

Right.

They aren't in back log.

Yes.

And I'm just wondering to what extent those were actually -- because my understanding is that the certification happened right in the final days of the quarter.

Correct.

And so what did you come around and make ten transmissions in a couple of days? I just want to understand how that happened? How you could deliver in June?

There is engineering release and manufacturing and lease. So we had the design and the prototype design and we had engineering sign off and so we are able to ship, because there weren't any major changes, we were able to ship units we had the inventory for.

Okay. Okay. And the ones that were out in the field as part of the field test, the proofing, are those -- what happens to those? Do they get sold to the customer?

No. Those are still -- we are continuing to test, even though we are in production, so we are finishing all of those field tests and we will bring these units back for inspection, and then there is different arrangements that we have with the customers for those units, but assuming there is nothing wrong with those units, those will probably be around the oil patches swing unit.

Great. Thank you very much, guys. Good job.

Thank you.

And our next question is a follow-up question from the line of Neal Miller with Fidelity. Go ahead, please.

Yes. Picking up on the last questioner's comment on the competitive environment, I'm wondering about your advantages. As I recall, your transmissions are somewhat dedicated, where as Caterpillar can use the transmission that they produce in multiple ways, but the question I have is, with all of the make up going on with standby power around the world and that sort of thing, is Caterpillar and those sorts of competitors more focused on their base markets as opposed to the energy market? I'm just kind of wondering about the competitive environment from that angle.

I guess, Neal, we wouldn't comment on our good competitors in what their plans are or what they are trying to do. I think what we can talk about is what we are trying to accomplish in our markets, and how we see our advantages. And you are right. I think that our design approach here, and being in the market with the 8500 at a very propitious time when the market wanted to go to 3000-horsepower, found a transmission that could handle it, and it was suited to the ratio selections that were necessary, and hitting sort of the big wave of unconventional gas demand, where the market wants a paradigm shift going from 1500 to 2250 to 3000-horsepower, we got very fortunate in being there with the right product and establishing a nice share position with a good product. So, yes, other people are in the market with differing approaches to their transmissions. I think we have been fortunate to have good timing, good product and exceptional quality to be where we are at the present time.

Great. Thanks.

Okay.

And our next question is also a follow-up question from the line of Jon Braatz with Kansas City Capital. Go ahead, sir.

Sort of a follow-up to the last question. It sounds like one of your competitors, Alison, really has been sort of left out of the high horsepower market. And I don't want you to comment on whether you think they will enter it or not. If they made a decision to build a higher horsepower transmission, from that decision to a product, how long does it take, do you think, to have something commercially available?

Well, that's a good question, Jon. A lot depends upon how much they are willing to devote to the design phase. How much resource they would put in from a design point of view. If you are starting with a clean sheet of paper, it could be as many as four years to get a product into the marketplace. If you are looking at some other approach, it might be less. It takes a while to take one of these transmissions from a clean sheet of paper and bring it through the design phase, the test phase, and then finally get it into production. As many as four years and they might be able to do it in fewer years, I wouldn't want to comment.

Okay. Did it take you four years with the 7500?

It took us the better part of it when you consider the design work that was done, alternative design. We have been in test for the better part of a year. We have been talking about the 3500 publicly for over a year, probably five quarters. And anyway, and we are now just now in production. We are a conservative bunch. Someone might not take it the same way.

Okay. Chris, I have a cash flow question. What type of investment in working capital, what level of investment and working capital will you anticipate as the volumes strengthen, if you want to say that? Looks like it's going to be a good year next year. What type of investment would you anticipate in the working capital? Especially inventory?

Right. That's a tough question to answer because a lot of the build in investment and working capital you saw this year was in anticipation of the 7500 release now in 2012. There is some base level of increase that was anticipated for that buildup that potentially could be relieved. Clearly if there is a significant increase in sales, it will be an increase in working capital but I think net-net it will be a positive in terms of operating cash flow.

Okay. Great. Thank you.

Yes.

And our next question comes from the line of Shawn Boyd with Westcliff Capital Management. Go ahead, sir.

Good afternoon and congrats on the quarter.

Thank you, Shawn.

Just a couple, if I may. On the non-oil and gas for a second. Great to hear that we are hearing some of these additional markets improving. Can you maybe walk us through the markets for a second, and talk about where we are in terms of sort of current revenues versus previous peak back in 2008?

Shawn, we don't normally comment on the size of the markets that we are talking about, that we participate in. But John can give you an update on sort of the directional move of what these spaces are doing. John?

Yes, Shawn, just starting with marine, the two obviously going into the recession, transmission, with oil and gas and big component, marine and industrial, all took a big hit. And transmissions driven by oil and gas rebounded very quickly. The other component of that business, military and the art business, stayed very steady through the whole downturn. So that part of the business for us as a whole, fared much better, rebounded very quickly.

Marine and industrial, depending on the market with pleasure craft, marine saw 60% decline in the market side. That has been a longer recovery period, and that recovery is being driven by commercial activity in southeast Asia, India, China and the Gulf Coast when you look at the river traffic. And I would say we aren't back to where we were, but we got a nice recovery going.

Industrial took a similar hit, and our industrial business is driven by activity in Europe and North America. That didn't take quite the punishment that the marine markets did. But that has shown some pretty good recovery, and I would say we are better off on the comparison you are looking at there than we are in marine but marine is starting to come back a little bit stronger now. All in all, if you go back to our peak, $332 million obviously, we are not back to that peak as a whole company yet. But what's really driving us in the last 12 months has been transmissions in oil and gas. The others are starting to pick up now too.

That's the reason for the question. I understand you don't break it out in terms of revenues, but understanding where we are versus peak is helpful, so those comments are great. On the industrial side, and perhaps on commercial marine, in terms of the weakness that we are seeing in Europe, and then also little bit of the macro slowdown that we were starting to see here in the US, any of that filtering through and slowing this recovery at all?

I would say right now certainly the situation in Europe is just been a much longer situation that we are dealing with, and the growth rates there are not as strong as they are in other parts of the world. Too early to tell on the macro situation right here in the US But a lot of our business, more and more as a percentage, is being driven by Asia. Specifically India, China, Indonesia, Malaysia. So all-in-all, we are still doing pretty well there. I think it's too early to tell on the macro-economic situation in the US. Obviously we like the situation there to be better.

Sure. Okay. In terms of the growth rates, if we think about -- let's hold off on that. If we think of the growth rate over oil and gas and what you had in this past year and again, I understand you want to keep breakouts away from the conversation, but is the growth or the ramp in the 7500 that is now starting to really take hold, and will in the coming quarters, is that enough to allow you keep your current growth rate in the oil and gas segment in fiscal 2012?

That's one I don't know I can answer right now. It certainly will allow us to continue to grow. Whether or not it's at same rate, I would say no. Just because the 8500, the entire supply chain was proven out four and five years ago. And a lot of the 7500 suppliers that are similar, we share some with the 8500. Some are new. And so there is going to be a learning curve here on the 7500 that was not here for the last year on the 8500 as we were expanding production. So we continue to grow but it's going to be a slower pace.

Got it. Okay. That's helpful. And then in terms of the overall Cap Ex build, two questions on that. If the business now were looking closely at making sure we can handle both the 8500 and 3500 on the oil and gas, is that -- what chunk of that budget? Is that budget spread evenly throughout the entire company or is it heavily weighted to the oil and gas segment?

It's John, again. It's spread pretty evenly. A lot of the Cap Ex will be in domestic operations and some of the European operations, and they are doing manufacturing for the oil and gas products. But other products as well, industrial and marine.

Okay. And thinking about revenue capacity. That increase again being pretty substantial, is that sufficient to handle another very high growth year? Another 35%, 36% kind of revenue growth sort of year?

Yes.

Okay. Last question from me is on ME&A, if I look at that kind of two ways, saying let's just back out the incentive comp and bonus expense for a second, and say what are the core operating expenses of this company, we hit $18 million for the fourth quarter and about $62 million on the year. Again, just keeping stock-based comp and bonus expenses out of the way for a minute. Is that $18 million a quarter a sufficient level for you guys as you grow into 2012? That's a step up from where we have been the previous couple quarters but looking at that CapEx coming up and the growth of the company and trying to use some sort of a mark here. Can you help me on that?

That's not a bad analysis to do. Clearly the growth that may occur in sales will not be similar in ME&A. We have given a much smaller percentage. From quarter to quarter, there may be particular projects we're working on that May either create a spike or a downturn in ME&A but that's a reasonable number to use.

Got it. Okay. That's it from me. Thanks and congratulations on the quarter, guys.

Thank you.

Thank you.

And our next question comes from the line of [George Gaspar], private investor. Go ahead, sir.

Good afternoon. Follow on question on your marketing horizon on the 8500 unit and 7500 units. As you look across the review the deliveries that you made recently in the last say, six months, and your backlog that you have currently, can you, in terms of your marketing can you track the geographical areas in the United States where the majority of this equipment is going or does it just go to central sites and feed out from there? Or do you spend the time trying to track where the equipment is actually being deployed at any specific point? Then secondly, is there in terms of the 7500, is there a geographically better horizon for that in certain area of the United States versus others? Can you talk at all about this?

Sure. We do track where the transmissions are going. We don't release that information but we do know obviously where the initial shipment goes to the original rig manufacturer and then each rig manufacturer tends to have an operating hub in each one of the shale plays, and so we know where the fleet is, and then pretty much know where -- which fields are going to be operating at. Certainly our distributors, the guys at the service techs know exactly what field they are in.

On the second part, the 7500 is going to do much better in places like the Marcellus Shale and the eastern US and Pennsylvania. Smaller tighter roads. Then if you just play that out on a global level eastern Europe, northern India, China where the infrastructure isn't as good and roads aren't as wide, that is where the 7500 will have more of an impact on us than say the 8500.

Okay. Interesting. Thank you. Additional question. There was some indication on employment discussion here. My question regarding manufacturing employment, can you give us a number as to what you had in manufacturing employment, say, six months ago? Where you were at the end of the fiscal year here and where you might see yourselves out at calendar year in 2011?

Not going to change. It won't have changed much in that time horizon. We don't give out the specific numbers in manufacturing, but a lot of the adds I was talking about happened in the first part of this fiscal year anticipating -- well, not anticipating, reacting to the huge surge at that point of just the 8500. But now with the 7500 coming on, and just the increase in volume in our marine transmission products, we had to add people at the beginning of the year. That -- those adds have become stable over the last six months, and we don't anticipate a big increase going forward in the next six months.

Would you say that with that comment you're making improvements in your manufacturing processes to effectively be able to produce more with product with similar employment?

Correct. Increase in Cap Ex and a lot of the extra volume that comes in will be at our supply base.

I see. Okay. Thank you.

Thank you.

And we have another follow-up question from Jon Braatz with Kansas City Capital. Go ahead, sir.

If I have done the arithmetic correctly, your cash balance could rise quite sharply here over the next 12 months. What are your thoughts -- I know you are a cyclical business or can be a cyclical business. What are your thoughts about returning that cash maybe to the shareholders either in the form of I suppose not just share repurchases but dividends at this time?

Jon, yes, we are seeing a buildup in cash. Part of that will be used of course with CapEx. And typically the discussion of dividends is considered by the Board at our January meeting so I wouldn't want to comment on that subject any more than to give you that information at this time. Also we are involved in an active acquisition program, and of course the use of cash would be helpful in that activity, were we to come to agreement on an acquisition. We typically are following a number of different opportunities, and as you know, you never can predict what is going to come when. So, but, we will talk more about your dividend question later on in the year.

Okay. No problem. Thank you very much.

Thank you, Jon.

And there are no further questions at this time. I will turn it back to management for any closing remarks.

Thank you, Jo. Again, we thank you all for joining the conference call today and we appreciate your continuing interest in Twin Disc and we hope that we answered all of your questions. It's been a lively engagement and I'm pleased that you had that many questions. If you have any follow on questions, please feel free to call Chris or John or myself here at the office. We will be around, and we look forward to speaking with you again in October, following the close of our first quarter. Jo, we turn it back to you now.

Thank you, sir. Ladies and gentlemen, that does conclude the Twin Disc, Incorporated fiscal 2011 fourth-quarter financial results call. Thank you for your participation. You may now disconnect.