Twin Disc Inc (TWIN) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen and thank you for standing by. Welcome to the Twin Disc Incorporated first quarter fiscal 2012 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 also being recorded today, Tuesday, October 25, 2011. I would now like to turn the conference over to our host Mr Stan Berger. Please go ahead, sir.

Thank you, Patricia. On behalf of the management of Twin Disc, we are extremely pleased that have you taken the time to participate in our call and thank you for joining us to discuss the Company's fiscal 2012 first quarter financial results and business outlook.

Before I introduce management, I would like to remind everyone that certain statements made during the course of this conference call, especially those that state management's intentions, hopes, beliefs, expectations, or predictions for the future, are forward-looking statements. It is important to remember that the Company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company's annual report on Form 10-K, copies of which may be obtained by contacting either the Company or the SEC.

By now, you should have received a copy of the news release which was issued this morning before the market opened. If you have not received a copy, please call Annette 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 first quarter fiscal '12 conference call. I will begin with a brief summary as usual and then John, Chris and I will be ready to take your questions. As you've already seen in our press release, Twin Disc had a great first quarter, with record net earnings on a 33% year-over-year increase in net sales. Our six-month backlog rose again to an all-time high. And we are encouraged that fiscal year '12 will be another strong year for the Company.

Turning to the numbers for the quarter, net sales improved to $81 million, from $61 million for the same three months a year ago. The key driver of the improvement in sales was strong demand from our oil and gas market. However, we also saw growing demand in our after-market industrial and arch sectors. Demand was stable at our land and marine-based military markets, and order activity in both the commercial and pleasure markets showed improved versus the year ago. Gross margin for the quarter was 37.8%, compared to 32.6% of the fiscal 2011 first quarter. The improvement was the result of continuing increased volumes, improved manufacturing efficiency and absorption, and a more profitable mix of business.

While marketing engineering and administrative expenses rose by $1.1 million in the quarter, compared to last year, as a percent of sales they declined to 19.6% from 24.1% last year. As noted in the press release, the net increase in spending was impacted by foreign exchange rates, increased R&D, wages and salaries, as well as stock-based compensation. As indicated earlier, Twin Disc reported record net earnings for the fiscal 2012 first quarter of $9.6 million, or $0.83 per diluted share, compared to $2.7 million, or $0.24 per diluted share for the same period a year ago.

As was previously mentioned, our six-month backlog at September 30, 2011, was a record $165 million, compared to $147 million three months ago, and $100 million a year ago. We continue to benefit from demand from our oil and gas customers, as well as from improving order rates for our Express Joystick System in the marine market. We are encouraged that fiscal year '12 will be another strong year for Twin Disc.

Recently, we announced a series of agreements with Caterpillar to provide innovative technology solutions to the global marine pleasure craft market. For vessels equipped with a conventional shaft arrangement, we will be providing quick shift and joystick technology systems that will be available for delivery in 2012. The vessels that we will utilize an innovative Cat POD system, featuring Twin Disc patented quick shift transmission technology, these systems will be available for order in 2014. We are very pleased to have formed this strategic partnership with Caterpillar, and look forward to supplying the pleasure craft market with innovative, technology-driven propulsion solutions. That concludes my prepared remarks and now, John, Chris and I will be happy to take your questions. Patricia? Will you please open the line for questions.

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

I guess first question, on the gross margin, I heard the commentary on what drove the increase. I'm just wondering if we can break that down a little bit more, help us understand exactly how much mix drove it. And then maybe more importantly, how sustainable that is going forward if indeed you're starting to see marine bottom or in fact improve from a demand perspective?

Right, Pete. This is Chris. As we've talked about in the past and I think the comments still hold, obviously we're having the benefit, a significant benefit of volume, with the volume being up 33%. So, in terms of actual dollars, that's a big driver, but to your question, in terms of the actual margin improvements, clearly there is some absorption benefit there. A big piece of it would continue to be the mix of business, and particularly oil and gas, but I think now, more so than previously, after market and industrial business is also a part of that mix improvement.

Regarding the sustainability, a lot of it is heavily dependent upon the mix, and so as we've said in the past, we think sustainable above 30% is realistic. But whether we will be able to grow it from here as we talked about in the past, is highly dependent on a lot of those factors. So, I would caution that it is going to be -- it won't be unusual for us to be above 30% in that mid-30s, but in terms of sustaining it at these levels at 38, I don't know if we would go that far.

Okay. Got it. And then I just want to clarify your comment about after market being a contributor there as well. From what I remember recall you saying on previous calls, after market as a percentage of total revenue remains a relatively small piece of the pie. Is that the right way of phrasing it?

I don't know that we've ever said that. After market has tended to be -- I would say north of 20%, pretty consistently. In the first quarter, it would have been more than what its historical high has been, in terms of as a percentage of the total business. But it is always a significant portion of our business.

Okay. And you're seeing after-market growth, I assume, from oil and gas, correct?

Pete, it is John. We're seeing after market growth in all of the product areas. So, oil and gas and industrial and marine as well.

And then if I can just shift over to backlog really quickly, I would assume the Cat agreement hasn't necessarily had any impact on that backlog number, correct?

That's correct.

Okay. Fair enough. And then in terms of the increase, 64% year-over-year, 12% or so sequentially, can you give us a little flavor as to what drove that? It sounds like it was relatively broad, but I'm wondering if there is more granularity you can give us behind the increase.

And Pete, you're talking about the comparison to fiscal year end or versus a year ago?

Either way would be fine, actually.

Versus the end of the fiscal year, it is pretty -- it is across all of the different markets, after market as well as all of the other business product markets. If you go back versus last year it is a similar answer, but clearly, the oil and gas would be a big part of it.

Okay. And then last question, if I could, just can you help us understand in terms of the oil and gas demand, to what extent is that being driven by onshore versus offshore? And then North America versus international? Kind of what the trends there are.

Pete, it is John again. I would say it is being driven by both onshore and offshore. Certainly we've had continued growth in onshore activity for the 8,500 and the 7,500. Growing component is coming from Asia, as far as what is in the backlog for those units. And also, on the offshore, continuing to see activity in Asia and the Gulf Coast, and a little bit coming back from Europe for the West Coast of Africa.

Still concerned about the activity in the US Gulf Coast and when we're going to get back to the daily rates and the activity that we saw just a couple of years ago before the spill. That is still a concern. We would like to see that part of the business come back stronger.

Okay. That is very helpful. Thank you very much for your time.

Thanks, Pete.

Thank you. And our next question comes from the line of Jon Braatz with Kansas City Capital. Please go ahead.

A couple of questions. Can we talk a little bit about the 7,500? I know you mentioned that there is a little bit of 7,500 revenue in the quarter, but how long will it take to get up to full production? And secondly, can we talk a little bit about maybe cannibalization? Are we seeing any cannibalization of the 8,500 with the 7,500?

Jon, it is John here. Yes, we shipped a handful of units in the first quarter, sorry, in the fourth quarter, also in the first quarter. We are still in the application sensitive part of the whole process. We're only shipping limited to those field test applications that have been proven.

So, to really make an impact of what I think you're driving at, it is still a quarter or two away, probably closer to two quarters away, as we work through all of the field tests and then the application for each style of rig. And I'm happy to say that we have yet to see cannibalization of the 8,500. That product is still in very strong demand.

Okay. Can you give us any sense as to -- let's say in two or three quarters you're at sort of full production, and there is no cannibalization. Can you give us a sense on relative production rates of 7,500 versus 8,500? For example, if you're generating X revenues in a quarter with 8,500, what kind of revenues might you be able to generate with the 7,500? How additive can it be?

I would think that we would get to the same production rate as the 8,500. So, another way to say is, the potential there is to double our transmission shipment. How long that is going to take, certainly won't be six months, but it won't be three years.

Right.

So, it is going to be somewhere -- and a lot of factors to get there.

Okay.

But we certainly see the potential to be equal.

Okay. That's great. And then lastly, what about price realizations? Have you been able to raise prices at all in the oil and gas market?

Yes, we have.

Okay. Above and beyond the costs?

That would be a fair assumption.

And then lastly, the deal with Caterpillar, I don't know too much about the marine market, but is that something that can move the needle if it all goes well?

Absolutely. As the pleasure craft markets recover, this will accelerate our recovery in the pleasure craft market.

Okay.

Absolutely. Cat is a very strong player in the pleasure craft market.

Okay. All right. Thank you very much.

Thank you.

Thank you. And our next question comes from the line of Robert Sussman with Bentley Capital. Please go ahead.

Hi. That was an incredible quarter by the way. Congratulations. I would like to ask you, I don't fully understand what your product adds to the Caterpillar marine product. And can you give us any idea, looking out two to three years, how significant the volume could be from this area? And also differentiate the first product, which is going to be available in 2012, versus the one that is available later on. I'm not sure I understand the distinction.

Okay. It is John again. For the Cat joystick system, Caterpillar produces engines, obviously. And to complete the joystick system, you need a marine transmission, which a marine transmission, thrusters, bow thrusters, stern thrusters, the control system to operate the engine and transmission and thrusters, and obviously the joystick is a part of that. And then in some cases you also have a propeller. And all of the components that I just mentioned we produce and would add to the Cat system.

So, Cat would be providing the engine. We would be providing the gear box, the transmission, and the rest of the components to complete the joystick system. And what Cat brings is by far and away one of the strongest dealer organizations in the world, and selling arms to sell that product into the pleasure craft boat builders. So, as this rolls out over the next couple of years, it could have a substantial impact on the business.

Can you distinguish what the two different products are --

Oh, I'm sorry.

One is sooner, one is later.

Oh, I'm sorry I missed that part of the question. The first part, their joystick system is going to be operated on both that have a conventional propeller shaft type of arrangement. So, engine, transmission, propeller shaft out to a propeller, and then you steer the boat with rudders. And these are twin installation boats.

What Caterpillar has announced they are coming out with in a couple of years is a POD system which is an engine transmission and POD shaft -- well, POD device that comes out through the bottom of the boat, through the hull, and these POD units steer. They're kind of like outboard engines that come out through the bottom of the boat, or an IO, coming out of the back of the boat. It is one complete system. Everything is sold together and installed together. Engine, gear box, POD, and propellers. So, our Twin Disc quick shift technology will be incorporated into those POD units. That program has just kicked off, but that is it two years away from release.

Okay. And so I assume you're already supplying some of the components to Cat now. What is the additional volume per boat or per unit that you would get by adding these products to what you're already offering?

We typically don't give that information out. But it will increase our volume, as these programs roll out. There is no doubt about that.

Does it increase your volume per ship 20%, 40%, 60%? Is it significant? You don't have to give me, obviously, a dollar amount, but is it a significant increase?

It is a significant increase because it will be more -- we have these products, so we have X percentage on different vessels. This is just giving us more vessels and content through the Cat dealer network.

And what is the earliest point we would see any impact from this in your revenues?

I would say it is going to be a fiscal '13 impact.

Thank you.

Thank you. And our next question comes from the line of Greg Garner with Singular Capital. Please go ahead.

Thank you for taking my questions. First of all, congratulations on a great quarter.

Thank you.

And just as a follow-up from that last question, regarding Caterpillar, first of all I appreciate the clarification there. Very helpful for me. But it sounds like initially that Caterpillar brings Twin Disc into their market and that will help you sell some of your transmission products with their engine, but then a couple of years from now, this POD system, that is actually Caterpillar's transmission, so that may not be as beneficial as what is happening in the first phase. Is that the right way to look at this?

Both will be beneficial. Having our technology in the POD system will be very beneficial for us.

So, I guess that would be addressing a different type of vessel or a different size or --

It would be addressing a slightly smaller vessels, that's correct. The POD systems -- I guess I should have clarified in the previous question, the joystick system is not limited in horsepower. Cat today goes up -- they have a very successful engine line, pleasure craft, going up to almost 2,000-horsepower. This, the joystick system, can go up to that, and beyond as Cat really comes out with new engines. The POD system that they're coming out with will have some horsepower limitations somewhere in the 800 to 1,000-horsepower range. So, per engine. So, that is obviously a much smaller vessel. So, yes, the POD systems are aimed at smaller vessels in the pleasure craft world, and the joystick system is aimed at much higher horsepower level engines.

So, teaming up with Caterpillar in the short term here expands the market for Twin Disc and who would you be replacing there?

Well, we would be replacing, A, our competition, that has sometimes been behind Caterpillar, but it is also replacing Cat's competition who generally chooses our competition. So, we're winning on both ends. We're winning behind Caterpillar and we're winning in the engine transmission combinations as well.

Did you already mention who this competitor is?

Sure. I would say the main competitor for Cat is MTU and ZF out of Germany and Volvo ITS for the POD system.

MTU and ZF you mentioned?

Correct, yes.

Thank you for that. And the 7,500, is there any way -- I'm just looking to see what was -- for prior guidance, it was mentioned that the 7,500 would probably have a negative impact on margins in the first half of the year, due to the low volume, and we're just seeing some very high margins. So, I presume higher -- very little of the 7,500 was part of revenues in the first quarter. So, it makes -- does that mean that as the 7,500 ramps up that, that would be reasonable to expect some lower margins there? I'm just trying to get a better understanding of how this gross margin being so high and some of the explanations that were given previously and factoring that into what the 7,500 is --

Well I don't -- everything went right in the quarter. Even on the 7,500 that we did ship. As the 7,500 comes more and more online, it may have a slight negative effect on the gross margins, but not a significant one.

Okay.

There would be other factors that would have a much bigger impact on that than the 7,500.

And what's the current delivery time for current orders for 7,500 versus an 8,500?

We're looking at -- actually for either one, the 7,500 is still, you're looking at a six-month time frame, and the 8,500 is actually not much longer. We're kind of in the seven to eight-month range.

And can you give us any insight into the level of interest of the 7,500, being a new product, and it might be shown to new customers or new -- how is it being received?

It is being very well received, but everyone is also -- understands the need for testing, not only our field testing and product testing, but also testing in their application. Because the horsepower's are essentially the same, but engines are different, pumps are different, pump strokes are different, so the rig manufacturers are being very diligent in their testing before they release out into production. So, it has been a very thorough process. But I would say that the 7,500 has been very well received.

So, based on whatever kind of additional product that you need to work with the 7,500 on the rig, that is all being thoroughly tested right now?

Each application is being tested, that's correct.

Okay. All right. Thank you.

Thank you.

Thank you. And our next question comes from the line of Matthew Dodson with Edmunds White Partners. Please go ahead.

Can you just talk a little bit about -- you guys did a great job on your SG&A and engineering costs, et cetera. You really leveraged that. Help us understand how that has to grow as you go through the year in dollar terms. Does it grow sequentially from the first quarter, or not necessarily?

I think one thing to point out first is in the first quarter is the -- as we pointed out in the press release, there was the benefit of the stock-based comp adjustment as the stock price went down in the first quarter. If you adjust that out, then I would say -- and don't -- I guess as a disclaimer, not knowing what is going to happen with stock-based comp in the last three quarters of the year, I don't expect a significant increase in MD&A, but, yes historically the second, third and fourth quarters had to be a little higher than the first quarter.

Got it. And how much was the stock-based comp benefit for you in Q1?

I believe it was a $1.1 million, but I'm just going to confirm it here. Yes, it was a $1.1 million.

Got it. So, what we should do is just take that number and add $1.1 million and that is the real run rate, is that fair?

That's fair, but with the caveats that I just gave in terms of not knowing what potentially could happen to stock-based comp based on the stock movement in the last three quarters of the year, and that also there tends to be a slight increase in the last three quarters of the year versus the first quarter.

Got it. And also, you can just talk a little bit about the seasonality of revenues? Is there any seasonality to the business? Or do you think you can continue with what you've seen in your orders and your backlog to grow revenues sequentially?

Historically, it has been a fairly substantial growth from quarter to quarter throughout the year. I would say the oil and gas component has leveled that out a little bit. So, it is not as big as maybe it has been when oil and gas is a much smaller component. I'm talking specifically about land-based oil and gas, but still the demand increases throughout the year. And it is a function really of how many production days do we have in each of the quarters to deliver on that demand.

Got it. And the other question, just relative to the 7,500, is the 7,500 a bigger ASP for you, or a bigger ticket so you will actually get more dollars per --

I guess in comparison to the 8,500?

Yes, sir.

No, it is lower horsepower than the 8,500, and it is also a lower price than the 8,500 system.

Okay. Got it.

But probably our second highest product price.

And then just one more question. Relative to the marine, you seemed in this quarter more bullish about the outlook for the yacht market, et cetera. Is that just because what you've seen in the order book, and if that starts to happen, or materialize, like maybe you think it could, does that have positive implications for gross margin? In other words, is marine a better-than-corporate average gross margin?

It is -- I have to answer your last question first so I don't forget it. It is average. It is the average, more or less, of the corporate gross margin. And I would say that we are optimistic, but it is coming off of an incredibly low level. And that optimism is being driven by -- some manufacturers are able to -- they're selling boats. And we are doing well with our joystick system. The Express Joystick, the EJS.

So, we're optimistic because we're -- what few sales there are out there, we're able to capitalize on them. That is on the pleasure craft side. But I would say yes, we are more bullish now on the commercial markets, the work boat markets than we were last quarter, or two quarters ago.

Okay. Great. Thank you for your time.

Thank you.

Thank you. And our next question comes from the line of Neal Miller with Fidelity Investments. Please go ahead.

Hi all. Looking forward to seeing you in Chicago. A couple of questions on oil and gas, in that arena. The first question I have is who controls the transmission decision? Maybe you can help me out. In other words, I'm wondering who you're selling the product to.

We are -- we sell to the rig manufacturers who actually build the rigs, and unfortunately there is no one answer as to who makes the decision. Some rig manufacturers make the decision, but a lot of operators make the decision as to what transmission is behind on their rig. So, between the operators and the rig manufacturers, that is where 99% of the decisions are made.

Does that mean that over time, there might be less duplication in terms of marketing effort, or because your equipment might be more reliable, or become more accepted in a competitive profile?

Yes, Neal, market reputation and performance is your biggest asset. So -- and again, thankfully, the market has been shifting to higher horsepower.

And then a clarification comment, you mentioned rig, but I thought the transmission a la the picture in your annual report went on a truck for fracking.

Correct. Same thing, two different words. When we talk about a frac rig, it is essentially the back of a semi tractor trailer.

That's helpful. Because when you say rig, or at least in the oil patch, I think of a Derrick or something.

No, maybe I should be more clear. The term that we use and a lot of people use in the industry, when they say frac rig, it really is a semi tractor trailer arrangement with the engine transmission pump cooling on the semi trailer. And that gets the name rig, frac rig.

Appreciate it. And going on with a couple more questions, but in terms of aspiration or goal line, or hope, are you close to the three major companies, Schlumberger, Halliburton, Baker Hughes? I'm just kind of wondering whether --

We're in one of them and we've had meetings with the other two in the last quarter.

Wow. That's excellent. Last question would be, it seems to me the trend is toward higher horsepower and I think you just referenced it, rather than lower, and based on that, do you think your 8,500 has a longer life and will out distance the 7,500? I guess another perspective on this would be is the 7,500 a different type of shale than the 8,500, et cetera, so the market segmentation. So, I guess the basic question is, will the 8,500 continue to out distance because of the higher horsepower requirement?

If they're using 3,000-horsepower engines then the answer is yes, because the 7,500 is 2,500 to 2,600-horsepower, so as long as the trend continues at 3,000-horsepower, the 8,500 will continue to distance itself. And the 8,500 has a very good reputation, and that's what we aspire to have the -- the 7,500 to have the same reputation. And that is what we're shooting for. But there's still a market. And it goes back to really the size of the frac truck. Marcellus Shale, anything in mountains with winding roads, whether it is in Asia, Europe, you're going to need a smaller rig, you're just not going to be able to get a 3,000-horsepower frac rig into these sites. So, the 7,500 still has a great market potential.

Boy, that's really helpful. Thanks. See you in Chicago.

See you there.

Thank you. Our next question comes from the line of [Ryan Kingsley] with Neuberger Berman. Please go ahead.

Good afternoon. What should we think about for the tax rate for this year?

It is still pretty consistent with what I've said in the past. It should be in the mid-30s range. There could be some noise in any given quarter that may take it plus or minus a percent or two, but in that mid-30s is a pretty reasonable number to use.

Okay. And you mentioned lead times on the 8,500. Have they changed in any way over the last quarter? Lengthened or gotten a little shorter?

As we've expanded monthly production rates, we've brought the lead times down and I would say about two months.

You brought them down. Okay. Have you seen any -- obviously, it has been a hyper growth market, have you seen any sort of weakness in demand from the rig perspective pushing down that may be heading toward you guys over the next couple of quarters?

No, we haven't seen it over the next couple of quarters. I think people are still wondering -- I think everyone is still confident on 2012 being a very good year, calendar, and I think people are very hesitant to make bold predictions for 2013 and beyond, but macro economically, I think shale is here to stay.

In terms of the backlog composition, we're talking about mix in terms of the margin mix in the quarter, but is there any reason -- my assumption is that if I think of the backlog make up, it probably is somewhat similar to how your revenues were in the first quarter. Is that somewhat fair? Or is there any material difference to the backlog make up versus the revenues mix you had in the first quarter?

This is Chris now. In any given quarter, there will be a difference just because the lead times of the various products are different. Industrial products have the shortest lead time and then the longest lead time would be on the oil and gas transmission, so it is not going to be an exact mirror of what revenue will be in any quarter, or any year. As we've been saying for the past few quarters, a big driver of the growth in the backlog has been oil and gas, and in the last couple of quarters, it started to -- the growth started to include after market and the other businesses as well. So, oil and gas in the last quarter represents a smaller portion of the growth, but still represents a big portion of the backlog.

All right. I guess that's all the questions I had. Thanks.

Thank you. And our next question comes from the line of Shawn Boyd with Westcliff Capital Management. Please go ahead.

Hi, congrats on the quarter and thanks for taking the question.

Thanks, Shawn.

Just a couple here. If I could, Chris, on a comment earlier about stock-based compensation, I want to make sure I'm counting this right. I was looking at the press release, looking at a $1.1 million reduction on a year-over-year basis. So, that puts me at about $800,000 on an absolute basis in the quarter. Is that correct?

I don't think so. My recollection, and I think I'm pretty close on this, is the movement in the stock price had an impact of about $1.4 million in the quarter. The offset to that was just the increase in the underlying awards and achievement of those awards. So, that would have taken it back to the 1.1. But in reality, the stock, the movement of the stock price had a benefit of about $1.4 million.

So, going back to that $15.9 million, in MD&A, backing that out, we've got about $14.5 million in non-stock based comp expenses?

And then there was some increase. The 1.1 is still a good number for the quarter of what the effect was and I'm just saying 1.4 of it was -- I use the word good guy. A good guy or a favorable adjustment or reduction in expense, I should say, 1.4 as a result of the movement of the stock price, that was offset about $300,000 increase in actual stock-based comp for awards or achievement of awards.

Got you. Okay.

So, the net 1.1 is still what I would back out.

As the absolute level in the quarter.

Yes.

Okay. That's helpful. And going to backlog for a second, in terms of the correction that we've seen, in the commodity prices, can you talk about the backlog a little bit, and how fluid that is? In other words, have we had any push outs or cancellations on the 8,500? I would think the 7,500 is way too young to even think about that, but any kind of shifting or swapping of delivery schedules, or --

No, this is John. No, we have not seen any of that yet. None.

And on the comment about price increases, passing through costs, and maybe a little more. Has that plateaued in any way, or is that all still pretty fresh?

It is still pretty fresh. We're watching, obviously, inflation and surcharges pretty closely to see if we have to make another move, coming up in the near future.

Got it. Okay. So, the bias is still to the upside there?

Yes.

And we haven't had anybody coming back that is currently in the queue looking for any kind of concession or negotiation on existing price points?

No, we haven't.

Okay. Last question for me. I think I probably ask this every quarter, but there is a reason behind that. Manufacturing capacity. We just did $81 million in the quarter. We did $97 million in the quarter before. But refresh us again on how you look on manufacturing capacity, both in the oil and gas and other markets, as we see improvement outside of oil and gas as well.

Well, obviously, if you look back at the fourth quarter and this quarter, we did not achieve manufacturing capacity in this quarter. We still can handle growth in all of our facilities. I'm not saying there is not a lot of hard work involved. It involves a lot of outsourcing, duplication of suppliers, and some capital spend inside our four walls with assembly and test equipment. But we're constantly looking at ways to improve the -- increase the capacity at our facilities. And we're not at the limit yet.

Okay. Would you venture to say you're at 70% utilization, 80%, 90%? Can you give us anything there to help us on that? And I'm coming at this, I don't mean to really harp on it, but we're beyond those '08 quarters so that is what is really bringing me to --

Shawn, this is a Chris. I think it is a difficult question to answer because there are different manufacturing facilities provide products for different markets. We have, as John was talking about, we have new machinery coming on that expands capacity, we are adding suppliers which expands capacity. The first quarter versus the fourth quarter, as you know, we talk about through the year the number of production days available to us grows. So, the first quarter generally is going to be lower than the fourth quarter. So, I don't know that we can pin down a number as to what our capacity utilization is.

As John says, we have a lot of room for growth. We're adding the capacity as we've talked about in the past in the Keno, which was the transmission business, as well as just the overall investment program that we've had the past couple of years, so there is definitely room for continued growth.

Got it. Okay. Thanks a lot for the color. And congratulations.

Thanks, Shawn.

Thank you.

Thank you. And our next question comes from the line of [Dick Kinley] with Kinley Asset Management. Please go ahead.

Have you ever talked about your market share relative to Cat and Allison?

No, we haven't. Not in specific numbers. Other than I would -- Allison is -- in all of the frac transmissions produced, I would say Allison is number one. We're number two. But in the high horsepower, the 3,000 range, I would say that we're number one, Cat is number two. But in that lower horsepower range, kind of the 2,250 and below, Allison is still the major player.

Is it fair to say that with longer laterals and more fracs, you need higher horsepower now, so that there would be a trend toward 3,000 and up?

That is absolutely a fair statement to make. The shift in the market has been towards building the high horsepower rigs.

And the 7,500 is really introduced to get you into difficult places like the Marcellus?

Correct. But also, when we started the 7,500 project, the horizontal drilling was not as popular and as common as it is now. It was still designed to get us into that lower 2,250, the big huge market. Body load style rigs, which are not necessarily a tractor trailer set up, it is a 20-foot truck that has the frac pack on the back of it, but certainly now, we see the 7,500 being used in horizontal drilling.

And who are you major customers? Are they people like Stewart and Stephenson or rig builders like that? I don't know who they all are now.

No, Stewart and Stephenson has a pretty tight relationship with Allison. There's TRICAN in Canada. There's other players in Texas and in Canada. And now a growing customer base in Asia.

Did National Oil Well make any of these rigs?

Not -- National Oil Well? I don't believe so.

And one other question. Is there -- do you have an advantage with your transmissions that the others don't? It seems to me there is something about the variable speeds, the ability of the transmission, where Allison, for example, may just have a constant speed?

I think the advantages with the 7,500, are even step ratios. It is a transmission that was never designed for a vehicle. And so we designed the ratios and the ratio split with pressure pumping in mind. We've designed out the torque converter which is an extra component, extra expense, and we have used our clutch technology to do all of the shifting. And we take great pride in our control system and being able to control the engine and the transmission more precisely and better for the pressure pumping. And then certainly with respect to the 8,500, the 7,500 is a lot lighter, and lets you get on smaller rigs for the overall frac vehicle size, smaller sizes.

So, you can't apply those same technologies to the 8,500?

I don't know if our next step would be to change the 8,500 into the same design criteria as the 7,500, or we would add a different model of frac transmission. The 8,500 certainly is a proven commodity in its marketplace.

Okay. Thank you very much.

Thank you.

Thank you. (Operator Instructions) And the next question comes from the line of Andrea Sharkey with Gabelli and Company. Please go ahead.

Hi. I was curious if you could give me a sense at all of how much the 7,500 is in your backlog? I believe last quarter, it wasn't in the six-month backlog at all, but I was wondering if it has been added and included and maybe give us a sense of either in percentages or dollar amounts how much that is.

Andrea, it is John. We don't disclose the specific amount, but it is in the backlog now, and it is one of the products responsible for the jump in the six-month backlog.

Just to push a little bit further on that, could you give a sense of if there is -- I think it was a $17 million bump or a 12% increase, was that 5% of the increase, or 10% of the increase, sort of a range?

This is Chris. I think I would stick with John's comments and what I said earlier. Of that increase that you just quoted, the $17 million, $18 million increase, it was across the board. It was in the 8,500 to 7,500 marine product, industrial products, after market, so you can assume if all of those things were involved, it wasn't a $17 million number, but it was a part of that, and I would say all of them within a reasonable range were very similar.

And then just one other question. I think in the past, you guys have said that some of the oil and gas transmission orders actually extend beyond the six-month backlog number that you report, and I was just curious if that is still the case, and if that has changed at all, either increased or decreased.

That is still the same. There is still a very sizable amount outside the six-month backlog.

Great. Thanks a lot.

Thanks, Andrea.

Thank you. And our next question comes from the line of [Robert Felton], a private investor. Please go ahead.

Thank you very much. Two quick questions. The last conference call, I remembered just a slight cautionary statement about the supply chain, your raw material sources. I'm wondering if you foresee any problems in that area.

This is John. No, it actually -- the first quarter went very well in that respect. And I'm more confident now than I was in the last -- at the fourth quarter call. We're working hard to duplicate suppliers so we have more than one source. And we've seen some capacity adds and some key components, both in North America and in Europe. So, I would say the situation is a little bit better today than it was three months ago.

Great. Thank you. And this may be a naive question, not being real familiar with your technology, does the switch to natural gas as a fuel source by drillers from diesel fuel have any impact on you at all?

Well, it does, they're burning natural gas, what they're drilling for, but it is probably a negligible -- in the overall demand for natural gas, that is probably a very small component.

Okay. Thank you.

Yes. You're welcome.

Thank you. And we do have a follow-up question from the line of Robert Sussman with Bentley Capital. Please go ahead.

Yes, there have been a number of points made about the benefit of the $1.1 million from the stock price appreciation rates. But on the other hand, you mentioned that there is $792,000 hit from foreign currency. Can you give us a sense of what currency is moving against other currents here causing this, and whether this charge may come down in future quarters?

I'm not going to predict whether -- where foreign currency will be in the future.

I understand that.

But I will say -- this is Chris. I will take the first part of that question.

Okay.

The majority -- our foreign currency that we deal with, first it would be the Euro, in terms of just magnitude, and then you have the Asian currencies and Australia, which is also Asia-Pacific. So, all of those currencies I just said, and all of them had an impact on the quarter.

Does the dollar strengthening or weakening against these currencies help you?

Well both in some respects because we have the translation effect of a higher Euro or other foreign currency, but we also manufacture in some of those currencies and ship to the US. So, there's somewhat of a natural hedge in place there. But there are places that we prefer a certain exchange rate versus others.

Robert, it is John. I would just like it to be stable.

I would agree with that.

I don't think they care what we hope for.

Yes, exactly.

One other thing. Can you give us some sense of the price difference, the ASP of the 8,500 versus the 7,500? Not in specific dollars, but is it a 20% premium, a 30% premium?

It is about -- the 8,500 is about 20% higher than the 7,500.

Okay. Should the margins be relatively similar between these products, or will a slower ramp-up in the 8,500 mean lower margins at first?

Well, the ramp up will be in the 7,500. Eventually, they will be within single digits of each other, but any time you bring the product into production, your gross margins will be lower for the first year or so.

Okay. Thank you very much.

Thank you, Robert.

Thank you. And we do have another follow-up question from the line of Ryan Kingsley with Neuberger Berman. Please go ahead.

My question was answered, but I thought of another one that I don't think you're going to answer but anyway, can you give us the number of 8,500s you shipped last fiscal year?

You were right.

We're not going to answer that one.

I thought it was late in the call, you were you all giddy and you might answer it. All right. Thank you.

Nice try.

Thank you. (Operator Instructions) And management, I'm seeing no questions in the queue at this moment. Please continue with any closing remarks.

Thank you, Patricia. Thank you, again, everyone, 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 you have any follow-on questions, however, please feel free to contact Chris, John, or me. We look forward to speaking with you again in January, following the close of our second quarter. Patricia, we will now turn the call back to you.

Thank you. Ladies and gentlemen, this does conclude the Twin Disc incorporated first quarter fiscal 2012 financial results conference call. This conference will be available for replay after 4.00 PM Eastern standard time today. You may access the replay system at any time by dialing 1-877-870-5176. And entering the access code of 4480206. Thank you for your participation. And you may now disconnect.