Twin Disc Inc (TWIN) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Twin Disc, Inc., third-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)

I would now like to turn the conference over to Stan Berger of SM Berger.

Thank you, Tadeo. 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 2012 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 predictions for the future, are forward-looking statements. It is important to remember that the Company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company's annual report on Form 10-K, copies of which may be obtained by contacting either the Company or the SEC.

By now you should have received a copy of the news release, which was issued this morning before the market opened. If you have not received a copy, please call Annette Mianecki at 262-638-4000 and she will send 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 Christopher Eperjesy, the Company's Vice President of Finance, Chief Financial Officer, and Treasurer. At this time I will turn the call over to Mike Batten. Mike?

Thank you, Stan, and good day, everyone. Welcome to our third-quarter fiscal 2012 conference call. I will begin with a brief statement; and then John, Chris, and I will be ready to take your questions.

Twin Disc had another solid quarter, with year-over-year net earnings up over 100% on a 25% increase in revenues. We are on track to have another record year.

Looking at our results, sales for the third fiscal quarter of 2012 improved to $95 million from $76 million for the same three months a year ago. Strong demand from our oil and gas markets, along with stable or increased demand from our other end markets, including land-based industrial and transmission, and marine-based military and commercial sectors, contributed to the improved performance. Pleasure craft activity remains at depressed levels.

Year-to-date sales were $260 million compared to $213 million for the first nine months of fiscal 2011.

Gross margin for the 2012 third quarter was 34.6% compared to 36.3% a year ago and a 35.6% last quarter. The differences in gross margins were created by a change in the mix of sales. Year-to-date gross margin was 36% compared to 33.6% for the same period last year.

Marketing, engineering, and administrative expenses as a percentage of sales were 18.6% compared to 22.3% for the same three months last year. Stock-based compensation decreased $1.4 million in the quarter, reflecting the decline in our share price.

Year-to-date, ME&A expenses were 20.7% compared to 23.7% for the first nine months of fiscal 2011. Stock-based compensation expense decreased by $1.3 million for the period. Movements in foreign exchange rates increased ME&A expenses by $900,000 compared to the first nine months of fiscal 2011.

Net earnings attributed to Twin Disc for the third fiscal quarter of 2012 were $9.4 million or $0.81 per diluted share, compared to $4.5 million or $0.40 per diluted share for the same three months a year ago. Year-to-date net earnings were $24.8 million or $2.15 per diluted share, compared to $11.2 million or $0.98 per diluted share for the equivalent period in fiscal 2011.

EBITDA was $18 million for the third fiscal quarter of fiscal 2012 compared to $13 million for the comparable period last year. Year-to-date EBITDA was $48 million compared to $27 million a year ago.

The 2012 third fiscal quarter was one of the best overall quarters in the Company's history. It was the best third quarter ever.

Our success was driven by robust demand for our oil and gas products. With the exception of the pleasure craft market, shipments across all of our end markets increased during the quarter.

High oil prices and the resurgence of drilling in the Gulf Coast have led to increases in commercial marine activity. The demand from airport rescue and firefighting, and legacy military customers remained steady. There has also been a pickup in demand from our industrial customers.

Our six-month backlog at March 30, 2012, was $131 million compared to $148 million at the end of the second fiscal quarter and $140 million a year ago. The sequential and year-over-year declines reflect moderating future demand from North American oil and gas customers, as well as continuing improvement in our past-due order reductions which decreased 26% from the prior quarter-end and 20% since the start of this fiscal year.

We remain optimistic about the long-term potential for the oil and gas market. But over the last two months we have experienced a decline in orders from the historically high levels that we had been experiencing in fiscal 2012.

Our oil and gas customers have responded to the decline in natural gas prices by slowing orders for capital expenditures related to hydraulic fracturing and fracture pumping, due to the effects of the mild winter and a slower than expected US economy, which has led to an oversupply of natural gas.

With one quarter remaining in fiscal 2012 we are confident we will achieve many financial and operating milestones for the year. As we look to fiscal '13, we expect it will be another good year, but down from the record levels we have experienced in fiscal 2012.

While changes in oil and gas landscape have caused our near-term outlook to be cautious, Twin Disc has never been in a stronger position. We continue to improve our product portfolios, strengthen our relationships with our customers and vendors and strategic partners. We remain optimistic about our long-term potential.

That concludes my prepared remarks. Now, John, Chris and I will be happy to take your questions. Tadeo, would you please open the lines?

(Operator Instructions) Peter Lisnic, Robert W. Baird.

Good morning, gentlemen. I guess first question, just to kind of close a loop on the fiscal '13 comments that you made, in terms of it not being another record year, or I guess being down from '12. Can you give us a little bit more color on exactly what that means? Does that mean revenue down, or EPS down? Or just how you are thinking about preliminarily 2013 would be helpful.

Well, Pete, it's John. We are pretty optimistic about most of our markets being stable or up going into next year. The one caveat is the North American pressure pumping market has been such a big component of our growth in '11 and '12, and we see that market moderating right now and into '13.

So it would be pretty hard for us to have an increase on a record year without that market being pretty strong for our next fiscal year. We are going to see a little bit of a pause in the North American pressure pumping market.

Okay. When you say a little bit of a pause, down I guess would be the way to read that for '13.

Correct, correct. In North America.

I was going to say, I know it's going to be hard to guess, but is there any order of magnitude that you can give us, given what your customers are telling you and what you might know about what sort of inventory is out in the marketplace now?

We're not getting to I guess that level of detail about how much of an oversupply they have. We remain optimistic.

I know the international markets for us are doing very well for pressure pumping. So I think we may see a shift in some of the existing fleet or the idle fleet to markets like China and to some places in South America or Australia.

So that hopefully will speed up any activity for new equipment in North America. As gas prices start to go up, supply comes down, and it returns. But right now I just -- if we look at fiscal '13 without the strong build schedule that we have had the last two years it is going to be hard for us to improve upon this year.

Okay. All right. That's fair on that. Then, I'm wondering if we can get some updated commentary on the progress with EJS and Cat, just where that stands. Have you started to ship on that? And then what the -- at what point you really start to fill inventory there would be helpful.

Okay. They are working through the initial applications with their dealers, and we have existing orders at all of our factories that supply components, and those have started to ship. Be a pretty small impact maybe this quarter and next quarter; but I see towards the end of the calendar year it will start to have a bigger impact.

But the forecast that we are getting from the market, from Cat and from Cat dealers and their customers, is very, very encouraging.

Okay, and that is factored in, into the thought that next year is down I guess from fiscal '12. Correct?

Correct, yes.

Okay, that is helpful. I will jump back in queue. Thank you.

Jon Braatz, Kansas City Capital.

Good morning, gentlemen. Couple questions, along the lines of the prior question. Your business is tailing off a little bit in the fracking area; but how much is that being mitigated maybe by what you are seeing overseas in international business, and maybe the fact that you have both the 8500 and 7500 series now? How much of a mitigating factor do you think those two items have been?

Jon, it's John here. The international component is going to be a big mitigator. We had said at the last call that the backlog for overseas was about 25%; the percentage of the backlog for overseas is bigger than that now.

So that is what gives that -- that is a big change from this pause in the North American market versus last time. The backlog for China specifically was very low in the last downturn in oil and gas; much higher now.

So we are very optimistic there and as well as some other countries, so -- and then with the 7500 still not nearly as strong in the sales as the 8500, but there is opportunity there. Unfortunately in North America we have been hit. When everything goes into a pause everything goes into a pause. So that is a smaller, I guess, mitigating factor than the overseas component right now.

Okay, okay. When you talk to your customers, do they have any thoughts on what price natural gas needs to return to, to unpause activity, so to speak?

Yes, I have asked the question. More of the overriding factor in North America right now is just the sheer oversupply of gas. They are running out of places to put it.

So until we work through the oversupply of the gas, which I think as we do the prices will start to come back up, there will be more activity in fracking. But right now I think the single biggest factor is just the sheer amount of the gas.

Okay, okay. All right. With things slowing down a little bit, can you talk a little bit about maybe a dis-investment that you need to make in your working capital? Because I think I have read where -- I think I saw where you have invested $41 million in working capital this year. But as things begin to slow down, we should return some of that to cash, should we not?

Absolutely, and you will see the inventory start to -- at the end -- when we have the call at the end of next quarter, certainly. But we are going to be very smart about the invested capital as it relates to oil and gas and the 8500 and the 7500. As we saw the last time, when it comes back, it comes back quickly,

Right, right.

But we will obviously turn some of that into cash. But we want to be ready for the return of the market, too.

So with that, are you suggesting that as cash begins to build that it would be unlikely for you to return that necessarily to shareholders in the form of a dividend or share repurchase or anything like that?

Jon, this is Mike. I think on that score, we continue to be active on an acquisition front, and there could be a use for that cash that is returned from working capital in that area. So in terms of a special dividend, probably not a special dividend per se.

So our long-term policy is to increase the dividend consistent with our earnings and cash flow and outlook. With respect to CapEx, we will see some moderation of CapEx going forward, but still at reasonably high levels.

Okay. All right. Thank you very much.

Joe Giamichael, Global Hunter Securities.

Thank you for taking my question. In regard to backlog, you talked about the impact from past-due backlog, which is not something I saw in your previous Qs or Ks, but might have been something you discussed on previous calls. Could you just explain how you define past-due backlog, what the dollar value of it is, and whether or not that value had been included in your quarterly discussions of backlog levels?

Joe, it's John here. We discussed it at the last call, and I believe -- the last quarter and then I believe the quarter previous to that.

Just some background. We had some supplier issues in the summer of last calendar year that caused our past-due backlog to rise to historically high levels. We continued to work through the first two quarters of the year -- first three quarters now -- to reduce that amount significantly. It was primarily in our industrial business and our transmission business, getting the 8500s out to customers that were waiting for them.

The 20 -- we were talking about the past-due backlog. It is always reported in our backlog, whether -- in the six-month backlog. It is defined -- the past-due is defined for us as when a customer -- when we accept the orders of the customer, what our published lead-times are or what the agreed-upon lead-time is at the customer.

So we were past-due, and made significant progress in the first six months of the year, and then again really in the third quarter made a big dent into it. So that was a significant component of the backlog coming down. But as we said in the press release, the other -- the major component of that was just the tail-off in backlog in the last two months on oil and gas.

Got it. Thank you. That's very helpful. The way that you present your segment contribution makes it somewhat difficult to quantify the impact from frack rig demand slowing. Could you give us a little more color on the revenue contribution in the quarter or the backlog contribution -- composition from an end-market perspective, of sort of an energy versus a more broadly defined vessel market?

Yes, Joe, this is Chris. As you know from prior conversations that is not something we really give out, that level of detail by those different end-markets.

Okay. That's all the question I've got. Thank you.

Andrea Sharkey, Gabelli & Company.

Hi, good morning. I was wondering if you could give us any sense of -- you have done the Express Joystick and you have the agreement with Caterpillar. You have introduced the 7500, and I guess just because of the slowdown in the frack market may be not getting as much traction there as initially anticipated.

But are there any new products or new things that you guys are looking into or working on, maybe in different end-markets, or what else are you looking at doing?

Andrea, this is Mike. You're right, we have introduced the 7500 and the EJS; and in both cases we look forward in the coming year and beyond to accelerating performance from those products. Obviously, the 7500 may be a little bit slower in coming because of, as you pointed out, the issue in the North American gas market.

In the pleasure craft market, obviously we have a low performance level in pleasure craft; however, the EJS is expected to take share. And the kinds of applications and where we are making our headway is just precisely that. We are taking share of market in a down market, and we fully expect that this will be very helpful when the pleasure craft market begins to turn back up.

With respect to other products that we are looking at, we are. But at this point we are not prepared to discuss them publicly as to what products and what markets we will be going into.

But we do -- we have significant programs underway to develop organic growth in the business, as well as acquisitive growth that we spoke to in another question earlier. So, while we would like to be responsive specifically, at this point we can't, Andrea. But rest assured we have got other pipelines under way bringing new product to market.

Okay. That's helpful and I will look forward to hearing about your new products. So, and then I guess next question, in terms of margin impact. I know -- I think you have spoken in the past about how the oil and gas end-market transitions tend to be a little bit higher margin. So as that tails off I would expect to see maybe some margin decline.

Maybe you can help us, walk us through what you see happening there, combination of mix shift and then also maybe just overhead issues as you maybe are producing less of the frack transmissions.

Again it's Mike, Andrea. The response to that question is we will not be specific to what we expect into our gross margins. But given the decline in oil and gas, we do expect to see some moderation in our gross margin.

Probably not down to 2008, '09 levels that one saw when the oil and gas market went totally away. We do expect that we will maintain a certain level of activity in oil and gas, and that will help from a mix point of view keep our gross margins up.

But nevertheless, the absence of volume will affect us. On the other side, our management team has been working hard at improving margins in other areas to try and get much more in the way of margin expansion in our products. And we have been active through the year in looking and executing on cost reduction, especially in our fixed expenses as it relates to our European operations.

Okay. That's really helpful. Thank you. Then one last question for me and then I will turn it back. Any thought given or -- to maybe doing share repurchases?

Andrea, again Mike. We have an active authorization from the Board, and we deliberate on that subject periodically. We won't rule them out.

It will be a question of -- do we have a lot of excess cash to use if we are not in a situation where we have an acquisition or a capital expenditure plan? I don't see us, as I mentioned earlier, doing a special dividend. I don't -- all the counsel that I have received over the years is that the market really doesn't reward for a special dividend.

So I think, yes, it is an option that is on the table, that is looked at, and could be something that we could do in terms of share repurchase.

Okay. Thanks a lot.

Greg Garner, Singular Research.

Thank you for taking my question. Good morning, gentlemen. A couple items.

On the backlog, is there any contribution from the 7500? Can you give us any details? Is it ramping up a little bit, or level of interest there, or maybe there is more interest from international versus domestic? Can you give us some flavor?

Yes, Greg, it's John. There is -- the 7500 does have, as far as it's one product, a very good representation in our backlog. But it was not immune to the oil and gas effect, the North American oil and gas effect of the last two months.

Having said that, we do have opportunities overseas for the 7500, just like the 8500. It's a little bit more work for us because we are going -- each application is a new one. We have repeat applications in China for the 8500.

So it's a little bit more investment for us in time and people to bring those applications online. But we do have applications overseas for the 7500.

So safe to say that without 7500, the backlog would be weaker?

Correct. Without the 7500 the existing backlog would be weaker.

Okay. Do you still see the 7500 really fulfills a unique niche and a need there that competitive transmissions or even the 8500 can't meet due to the size? And do you still see getting that response?

Yes, the market still sees the need for the 7500 as a competitive product to the existing player, absolutely.

Okay. Regarding the backlog, also just one last question there. I know you talked about how it is changing.

But is there any sense, can you provide, on what the oil and gas business -- is this declining like 20%? Is it declining more like 30%, 40%? It seems like it is probably more in that 15% to 25% range. Is that about right, or --?

I would say, Greg, hard to answer specifically. It depends upon the timeline.

I would say, yes, looking forward into the next year that is probably correct. But there could be quarters here and there where the impact is different.

But this is again a very different situation than three or four years ago, when the shock was driven by something other than the dynamics in the oil and gas market. So I don't see it being as dramatic as it was back in 2008, 2009.

Are you seeing more interests overseas? They don't have the natural gas pricing issues that we have here in the States, so it seems that that market may improve.

Absolutely. The offshore markets -- I mean not offshore oil, but the China, the international markets are going to improve for us in the next 12 months. No question about it.

Are you seeing that your percentage revenue from offshore, as you describe it, in the oil and gas is going to be greater, then, in the next year or two as a result?

Yes, correct. Absolutely. Our percentage of sales and backlog for international markets is going to increase in the next 12 months.

As well as in real terms.

In real terms, yes. In real terms, not just percentage.

Okay. I presume that it wasn't that great of a contributor, the international market for the oil and gas, prior to the 7500 being introduced. Is that correct?

Well, it was -- I would say if we go back to the last ramp-up in 2006, '07, and '08, the international markets were hardly a component at all. They are a significant component now, primarily driven -- as the rest of the market as of late -- with the 8500. But the 7500 is going to be a player in that market as well.

Okay. All right. That helps give me a flavor on that.

The pleasure craft market, in prior quarters you mentioned how it has been improving. And I am not seeing that in your characterization of it for this third quarter.

Is there something -- is it becoming -- is it getting a little flatter now? Because I thought it might continue to improve in anticipation of the summer season.

It's a tough one. Overall, I would say the pleasure craft market bounces around and some regions do better than others. In the last year or so, Australia has been a little bit better than North America and Europe. The Italian yards continue to struggle. There is optimism a little bit in Australia and North America.

Having said that, our percentage of -- we are gaining market share in the pleasure craft market. We are doing our sales into the pleasure craft with the EJS components. And our transmissions continues to increase at very small levels, but the market is so depressed that it is not having a big impact yet.

I remain optimistic that once Cat and their 360 product comes on full-stream, that will have a bigger impact in our overall shipment into the market.

And the timing for that, the --?

Probably starting in the second half of this calendar year, the first couple quarters of fiscal '13.

Okay. That is why you say towards the end of the calendar (multiple speakers).

Correct, yes.

Okay. All right. Given the -- as I remember, first of all CapEx was increasing to double the production capacity for the oil and gas, the 8500 and the 7500 in the past year or two. Does that mean you are going to scale back on some of that production capacity improvement?

Well, the same machines that we're adding to double or oil and gas capacity also work to increase our capacity for commercial marine transmissions, and we are seeing a very big ramp up in demand for those. So the same assets are going to be used for our commercial marine product.

Okay. Is there anything meaningful in the backlog beyond six months at this point? I know you --

Sorry, Greg; you tapered out a little bit. I didn't hear the last part of your question.

Well, you've always focused on the backlog for six months. I'm just wondering; is there anything that you can see beyond six months that has some meaningful value in the backlog?

Greg, this is Mike. It is typically transmission and longer lead-time product that is out beyond six months, and some marine. So our industrial products tend to have shorter lead-times, and certain marine products have shorter lead-times.

So the segment you are looking at beyond six months is definitely filled with transmission product. So that would be oil and gas. It would be ARFF vehicles, airport rescue and firefighting vehicles and the like.

So there what we have reported with respect to oil and gas in the six-month backlog is consistent out in the -- beyond six months. Okay? If that is your question -- is there a similar decline in backlog out beyond six months? And the answer is yes.

Okay. All right. Well, thank you very much.

(Operator Instructions) Shawn Boyd, Westcliff Capital Management.

Morning, gentlemen. How are you doing? Just a couple here. Stock-based comp I know was down; I believe you said almost $1.4 million. Does that get it below about $500,000 for the quarter? What is the absolute level in the quarter?

It was actually -- I guess you could call it income of about just under $400,000.

Okay, great. Going on that back to the past-due backlog, so we have got a pretty good drop now quarter-to-quarter, two quarters in a row. So it would really help us to understand a little bit more on that.

So if we look at the backlog down, let's call it $33 million since September 11 quarter, over that two-quarter period, just roughly how much of that is the past-due backlog?

From the $165 million to the $131 million?

Yes.

It's probably a third.

Okay, so two-thirds is the drop in oil and gas?

Is other stuff, because it would be -- yes, it would be other stuff. But it would -- include oil and gas would be a big component of it, correct.

Okay. That's helpful. Would you say that past-due backlog is normalized at this point? Are you at a level that -- I would assume people are getting -- lead-times are probably down now and people are getting what they need.

Yes, we're about at normalized levels, correct.

Okay. And on the gross margin impact, with oil and gas -- mix shift away from oil and gas as we go forward here a little bit, and I know it is just a pause, but running 35% gross margins we've had quite a fluctuation. The '08, '09 loads were 27%, 28%. Here we are at 35%.

We expect them to moderate. But would you -- I would assume we're probably talking several percentage points, even if we just go to halfway back to the lows. Is that the way to think about it? Or is it just more -- no, it is 50 to 100 bps again, like the last quarter?

I admire your analysis. This is Mike. I don't think we are going to be in a position to quantify what you would like to hear us quantify, but we are going to see some moderation.

A lot depends upon what happens in our mix. So it's not something that we have an awful lot of control over ourselves.

So I think -- I'm sorry to put it this way but we're going to have to wait to see as to what happens with our gross margins. We are doing everything we can possibly do to expand other margins and to get them up to levels that we would like to continue at or even beyond. But at this point, for us to try and make a prediction for your model, that is difficult for us to do.

Fair enough; I appreciate that. Maybe just one other thought, and this could be just directional only. When we think about gross margin within oil and gas, I would think that we are probably -- is the gross margin on new business booked now lower than two quarters ago? Maybe that is the question I am trying to ask. Just within oil and gas, so take -- forgetting about mix shift for a second.

Could you repeat the question again? I am not sure that we caught the question in its entirety.

If we get away from the mix shift issue and we think about just within oil and gas, the gross margin on new business you are booking today, is that at a lower margin than what we were seeing a couple quarters ago when things were so (multiple speakers)?

No.

No.

So that stays fairly constant?

Yes.

Yes, right. We don't see -- just so we understand the question, we don't see a modulating price structure on our transmission equipment. It is a more or less constant margin; but it doesn't fluctuate with the demand cycle.

Got it. So the issue is really are they booking orders or not?

Correct. That's right.

Okay, great. Just last thing, in terms of capacity utilization, we haven't talked about that in a little while. We're off peak a couple quarters now, so what is going on there?

Are you just -- can you give us just roughly what your percentage capacity utilization is now? Are you still increasing shifts, decreasing? How does that -- just give us anything you can in terms of color on where you stand on your manufacturing.

I would say it's -- we're going to go by facility, but I am not going to drag you through all that. But I just -- we are still shipping at extremely high levels. So the capacity that we have added was the Makino centers to increase oil and gas, which is going to play into commercial marine.

We are still operating primarily here in Racine at very high levels. We are still three shifts, six days a week. And we see that continuing because of the demand of commercial marine.

At some point if the oil and gas continues at depressed levels for North America we have flexibility. We have temps, so we can modulate our cost structure depending upon the demand.

But we are still in North America very high capacity utilization. Lower in Europe. The European markets are not nearly as strong as North America, so we have capacity there.

And we still have additional capacity opportunity in Racine, but it's going to be based more on outsourcing and working with our partners here in the Midwest.

Okay. Okay. Very good. Thank you so much.

Joe Giamichael, Global Hunter Securities.

Could you just share with us how you view leverage? You talked about using the anticipated cash flows to reduce debt. But given cost of capital, is there an ability to use the cash flow or use additional leverage to augment shareholder value around these prices?

Joe, we're a Midwestern company that is more or less averse to a great deal of leverage, primarily because we're in a cyclical business. We think that we use leverage well. We are not opposed to using financial leverage, but we don't see us leveraging ourselves up with a lot of bank debt and then going into a downturn.

You've put it -- whether it's a 2008, '09 kind of downturn or whether it's a 1983 kind of downturn, the fact that we are 93 years old attests to the fact that we use leverage when we feel it is important to use it. And then in certain instances we will cut back on it. So I don't know if that answers your question; but we use it, but we are not going to go overboard on it.

No, that's great. Thank you. I just wanted a better sense of how you view it, so that was a good answer. Thank you.

Yes, okay.

Jon Braatz, Kansas City Capital.

Thanks. We talk quite a bit about the oil and gas market, but usually it centers around gas. How much exposure do you have to the oil markets?

Well, the frack rigs including our transmissions can be used in dry gas, wet gas, and pure oil. But the sliding scale is, it is much more intensive. You need more horsepower for dry gas and shale; a little bit less in wet gas; and not nearly as much in oil.

So that is what is happening. The rigs are being redeployed to wet gas and then into oil. But you just need less horsepower, therefore fewer rigs. So that has kind of been the shift in most of the fleet.

Okay. Any mix or proportions that you can give us in terms of where your transmissions are going?

I would -- each company is different, each operator. But if I had to guess I think most of the 3000 horsepower rigs are still in wet gas where they're drilling for oil and there is a natural gas component or vice versa. But the problem is that even in wet gas right now, the [gens] are -- there is no place to put the gas.

Yes, right.

So that is why we are thinking that some of these fleets -- some of the rigs could be headed offshore to other markets.

Okay, all right. Going back to cash flow, what do you at this point maybe think about your CapEx plans for next year?

We're actually in the process of putting together our business plans and so they haven't been finalized. But we are looking at basically a CapEx program down slightly from where we were this past year.

Okay, and this year, what are we going to be at this year?

We said we were going to be in the $15 million to $20 million range. We will probably be closer to the $15 million.

Okay, all right. Thank you very much.

Shawn Boyd, Westcliff Capital Management.

Hi, just one more and it's following off that last call, or that last question. Not just CapEx, but overall operating expenses, if we come in at -- we're probably going to be fairly flat for this fiscal year in the low 70s, $73 million, $72 million for the year.

I know it is real early here, but just a preliminary look down on fiscal 2013 directionally. Would you expect to be bringing those down a little or increasing for further growth?

I'm not sure it -- the number you are quoting, are you talking about our ME&A?

I am, exactly.

With the caveat that of course there is the stock-based comp component that is always in there, certainly there could be some opportunity for it to come down, just given overall incentive comp next year. But I wouldn't expect a significant change.

Okay. Okay, thank you.

Thank you. I am showing no additional questions. Please continue with any closing remarks.

Fine, Tadeo. Thank you. Thank you again, everyone, for joining our conference call today. We appreciate your continuing interest in Twin Disc and hope that we have answered all of your questions.

If you have any follow-on questions please feel free to call Chris or John or me. We look forward to speaking with you again in August following the close of our fiscal year and fourth quarter. Thank you, Tadeo.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.