Tesco Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 6.13 | About: Tesco Corporation (TESO)

Tesco (NASDAQ:TESO)

Q1 2013 Earnings Call

May 06, 2013 10:00 am ET

Executives

Julio Manuel Quintana - Chief Executive Officer, President and Executive Director

Robert L. Kayl - Former Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Josh C. Lingsch - Simmons & Company International, Research Division

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

John R. Keller - Stephens Inc., Research Division

Gregory M. Macosko - Lord, Abbett & Co. LLC

Trey Cowan - Clarkson Capital Markets, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the TESCO Corporation First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Julio Quintana, President and Chief Executive Officer. Sir, you may begin.

Julio Manuel Quintana

Thank you, Mary. Good morning, ladies and gentlemen, and welcome to TESCO's First Quarter 2013 Earnings Conference Call. I'm Julio Quintana, TESCO's President and CEO, and I will be hosting our call today. Bob Kayl, our Chief Financial Officer, is with me on the call. I'll begin with some general comments on the quarter. Then, Bob will give you an overview of our financial results. Following Bob's remarks, I'll return and provide an update on our business and plans for the future.

Before I begin, it is important to note that during the course of this call, Bob and I will make forward-looking statements within the meaning of the Private Securities Litigation Act of 1995 and Canadian Securities Legislation. These statements are based on current expectations and involve risks and uncertainties, which could cause actual results to vary from those anticipated. These risks and uncertainties have been and are more fully described in our annual reports and quarterly reports filed with the SEC and with the Securities Regulatory Authorities in Canada. You should not place any undue reliance on these forward-looking statements made in our conference call nor do we intend to update these forward-looking statements. Also, we will use certain non-GAAP measures. The earnings release issued earlier this morning contains an explanation and/or reconciliation of these measures to GAAP measures, and we refer you to that release for additional information.

Now onto our first quarter results. We reported net income and EPS in Q1 of $8.8 million or $0.22 per share on $127.1 million of revenue compared to $13.3 million of net income or $0.34 per share in Q4 of 2012 on $137.6 million of revenue. Operating income decreased during the quarter to $11.7 million, down from operating income of $17 million for Q4.

Despite the challenges created by the decreased North American rig activity, we are satisfied with our results for the first quarter of 2013. Not only did our Tubular Services business generate record revenue but again did so with improving margin. This is despite the fact that half of our Tubular Services revenue is generated in North America. The company recognized increased demand in Asia-Pacific region, North America and Latin America for automated offerings. This has resulted in improvement in both revenue and operating income during the first quarter of 2013 as compared to the first and fourth quarters of 2012.

As anticipated and discussed in past conference calls, the Top Drive business in North America has experienced some softening. At this point, we believe we have found bottom in North America, and the international activity has helped substantially in offsetting North American softness. Our international focus is paying off greatly, and our activity remains solid in this business, particularly in Russia, Latin America and the Middle East. The net result of these market dynamics is a stabilizing revenue base with a reasonable operating income and what we believe to be the bottom in the North American market. I'll get into this in more detail after Bob summarizes the financial results. Bob?

Robert L. Kayl

Thank you, Julio. I will discuss our first quarter 2013 operating results by business segment and then give some comments on our corporate and research and engineering expenses.

Starting with Top Drives. Revenue totaled $75.6 million for the quarter, down 13% sequentially from Q4. The decrease from Q4 is primarily a result of a fewer number of Top Drive unit sales. We sold 24 units in Q1 compared to 30 units sold in Q4 and 39 units sold in Q1 2012. Of the 24 units sold in Q1, there were 22 new units and 2 used units from our rental fleet. In Q4, the 30 units sold consisted of 28 new units and 2 used units. With the 22 new units delivered to customers in Q1, we ended the quarter with a backlog of 20 top drive units with a potential value of $28.9 million, down from 28 units with a potential value of $42.2 million at the end of Q4. Today, our backlog stands at 18 units.

Top Drive rental revenue was $29.7 million in Q1, up from $28.7 million in Q4 and down from $34.6 million in Q1 2012. The increase from last quarter was primarily due to increased activity Latin America. Currently, our fleet of rental Top Drives stands at 136 units, up from the 135 units that we had at the end of Q4. After-market sales and service revenue was $13.1 million in Q1, down from $15.4 million in Q4 and $16.8 million in Q1 2012. The decrease from Q4 is primarily due to a decline in aftermarket parts sales in North America.

Our Top Drive operating margins were 20% in Q1, a decrease from 25% in Q4 and 24% in Q1 2012. The decrease from Q4 is primarily due to lower rental activity in after-market sales and service in North America, higher warranty expense and a decrease in the number of units sold. The majority of the drop in Top Drive revenue and associated profitability is a result of softness in North America.

Now onto our North -- now onto Tubular Services. Revenue was a record $51.1 million in Q1, up from $50.3 million in Q4 and $43.5 million in Q1 2012. Automated casing running revenue was a record $40.2 million in Q1, up from $39 million in Q4 as a result of increased demand in the Asia-Pacific region, North America and Latin America for automated offerings. Our Q1 2012 automated casing running revenue was $32.6 million. The number of jobs utilizing our automated Casing Drive System was 956 jobs in Q4, up from 947 jobs in Q4 and 859 jobs in Q1 2012. The higher automated job count is primarily due to increased demand in North America.

A significant amount of current U.S. drilling activity is in shale formations that require directional and horizontal drilling techniques, which we believe are good applications for automated service offerings. Our CDS fleet was 305 units at the end of Q1 compared to 306 units at the end of 2012. We recorded $1.7 million of revenue from our MCLRS offerings in Q1, down from $1.9 million in Q4 but up from $900,000 in Q1 2012. Also, we recorded $2.8 million of revenue from CDS equipment sales in Q1, slightly down from $2.9 million in Q4 but up from $1.8 million in Q1 2012. Conventional casing running revenue decreased to $10.9 million in Q1 compared to $11.3 million in Q4, primarily due to a decrease in the number of conventional jobs in the Middle East region. Our Q1 2012 conventional revenue was $10.9 million.

Overall, Tubular Services operating income in Q1 was $7.4 million with an operating margin of 14% compared to operating income of $6.9 million in Q4 and $4.9 million in Q1 2012. The increase from Q4 is due to improved margins for automated and conventional offerings. In addition, increased domestic and international demand for our Tubular Services, both automated and conventional, has resulted in new jobs and more favorable pricing terms.

Now onto corporate expenses, which were $10.5 million in Q1 compared to $8 million for Q4 and $7.4 million in Q1 2012. The increase from Q4 was primarily due to increased short-term and long-term incentive compensation and increased payroll and benefit expense from additional headcount for operational support personnel. Research and engineering costs for Q1 were $2 million compared to $2.7 million in Q4 and $2.5 million in Q1 2012.

Our effective tax rate for Q1 was 30% compared to 26% in Q4 and 30% in Q1 2012. Our effective tax rate, which is income tax expense as a percentage of pretax earnings, fluctuates depending on the mix of pretax earnings in the various tax jurisdictions in which we operate around the world.

Turning to the balance sheet. At March 31, 2013, cash and cash equivalents were $25.2 million compared to $22 million at December 31, 2012. Capital expenditures were $8.7 million in Q1 compared to $13.6 million in Q4 and $16.6 million in Q1 2012. We project our total capital expenditures for 2013 to be between $30 million and $40 million based on current market conditions.

I'll now turn the discussion back to Julio.

Julio Manuel Quintana

Thanks, Bob. As I mentioned, with the quarterly revenue decrease from Q4, we are satisfied with our results for several reasons. First, overall, our total revenue and EBITDA have remained relatively strong, and we believe we are essentially at the bottom of the cycle. Secondly, the North American drop in Top Drive revenue was anticipated and managed as planned. Third, Tubular Services set another record, and our profitability continues to improve. We are making progress towards our stated 20% OI margin goal. Further, this improvement has occurred when over half of our business is tied to decreasing North American rig count. Fourth, our international service business is proving to be an excellent stabilizer in allowing TESCO to transcend North American cyclicality. Fifth, international Top Drive orders continue and I believe will strengthen throughout 2013. Next, we continue to build our new Top Drives in anticipation of a stronger second half and beyond. This decision that reduces earnings in the short term will pay great dividends in the coming quarters.

Additionally, in North America, the gas regions of North Texas, Louisiana, Arkansas and the Northeast have been historical strengths for TESCO. If natural gas prices continue to strengthen, we are well positioned to capitalize on increased activity. Next, our first quarter of 2013 is in line with our operating plan for the year. We believe that we are experiencing the bottom of the cycle and our operating plan calls for a stronger second half.

We continue to generate cash from our capital needs -- excuse me, we continue to generate cash, and our capital needs are well managed within our cash-generating capabilities. We will generate substantial operating cash in 2013. And finally, as we look at 2013 and analyze projected EBITDA for the year, we are confident that we will manage this cycle even better than the last. Our strategy of diversification continues to position TESCO for a great future. With our revolving TESCO 3.0 strategy, our focus on rig maintenance, rig mechanization and industry conversion to our automated casing running services, I am confident about 2013 and beyond.

Mary, we'll now take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Josh Lingsch from Simmons & Company.

Josh C. Lingsch - Simmons & Company International, Research Division

Julio, just wanted to drill down into Top Drive margins. Bob cited some of the issues that affected this quarter, but I was just wondering if you could elaborate about some of these factors and then also how do you see margins progressing for the balance of the year, specifically within Top Drives.

Julio Manuel Quintana

Sure. Well, as we mentioned on -- in our comments, Josh, the issue is really just North America and it's no surprise. It's been the same for several quarters that it's going to come down. But kind of all around, Top Drive rentals is soft in North America. Generally speaking, in the after-market side, customers are pushing out, as they typically do, the repair and maintenance of their rigs and so ultimately, that can't be sustained. But in the short term, for a quarter or 2, they're able to push that out and postpone some of those costs, and you've seen some of that. Those are the 2 big most operationally, and then the third one, of course, is the Top Drive sales in North America. The capital equipment sales has softened. But kind of concurrent with that, as I mentioned in my comment, we made a decision going back a couple of quarters and said, we're going to go ahead and continue to spend some money to build out some of our inventory into finished products, into finished Top Drives because we think that as the market settles down, there will be more and more sales where you actually have very short-term delivery. So what happens is rig contractors will tend to hold on, hold on to try to minimize the use of capital the last minute, and then at the last minute, they'll say, "Okay, we need a top drive," and whoever can deliver will actually do quite well with that. In fact, this quarter, I think we had 3 or 4 sales where we sold -- where we booked a top drive and delivered it within the quarter. And so we are carrying extra cost in manufacturing for that purpose, but we think it's going to make a huge difference. So that's kind of all of the downside or the negative side, I guess, of the margin erosion. On the plus side, the international sales, I think, continues to be strong and will be strong throughout the year. Bob, do you want to add anything?

Robert L. Kayl

No, I think that's it.

Josh C. Lingsch - Simmons & Company International, Research Division

Okay. And then could you remind us what percentage of your rental fleet is in North America?

Julio Manuel Quintana

Out of 136 units in the fleet, I believe we have 38 of the units in North America.

Josh C. Lingsch - Simmons & Company International, Research Division

Okay. Great. And then as far as Top Drive orders this quarter, could you provide the North America versus international split?

Julio Manuel Quintana

[indiscernible] here. The vast majority were international. Let me just -- Bob's looking at the numbers. I want to say, 85% or 90%, something like that, for international.

Robert L. Kayl

Yes, and that's consistent with our backlog at the end of the quarter as well, Josh.

Operator

Our next question comes from Daniel Burke from Johnson Rice.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Julio, on the -- just to stay with the Top Drive margins for a moment, it sounds like, again, the pressures in North America largely explain the margin compression. But I thought I did hear you all mention warranty expense. I was wondering if you could quantify or give us a view for what that impact was in Q1. And then maybe a second one, switching away from sales, just on the rental side of the business, could you talk about what you're seeing in the international market and how stable the international rentals market appears to be for this year?

Robert L. Kayl

Yes, the first question, Daniel, the warranty expense, we incurred about $1.1 million additional warranty expense beyond our normal warranty charge. It was -- primarily it was due to some repairs that we needed to make for torque track, which is a torque track that we've had in place for several years for many of our different models, and we found that we were -- that we have to make some adjustments there for some of the units that were delivered over the last 12 months.

Julio Manuel Quintana

And then on your second question on the rental, in North America, the utilization rate is sitting somewhere around 40%. Internationally, it's still very strong. There's a couple of places that will probably get even stronger throughout the year, but we're focusing in the 60s. I don't anticipate any reason why it won't continue to be strong and in fact, strengthening for the remainder of the year.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Okay. Okay, great. Bob, on the torque track repairs, I know you would have booked whatever total expense you expect to incur. But is that repair process complete? Or how much -- does that have any forward impact just on your utilization levels or outlook into Q2, Q3?

Robert L. Kayl

I don't think so. We basically booked what we believe is -- we just came up late at the end of the quarter, and we spoke to our best estimate of what we think that exposure could be. We believe that this won't cause any downtime for the customers, so we won't have a utilization issue with our Top Drive rental fleet like we did historically with the ESI issue. These, we believe, we can change out fairly easily and quickly, we feel.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Okay. Did you guys take a Venezuela deval charge of any amount? And if so, would that have been below the line? I mean...

Robert L. Kayl

Below the line in our foreign currency expense, it was about $500,000.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Okay, okay. And then maybe just a last one for me. I tend to -- I've asked a couple of questions on this. But I appreciate the fact that you're maintaining the manufacturing or some level of manufacturing cadence, but what about the prospects to see, particularly within the working capital accounts, the inventory of value begin to downshift this year? Is that still likely? Or should we expect that figure to remain around where it was at the end of Q1?

Robert L. Kayl

I don't expect that balance to grow through the remainder of the year. If anything, we should start bringing that -- those balances down both in inventory and in accounts receivable. Those -- the accounts receivable balance tends to grow in Q1. That tends to be somewhat of an industry trend. But certainly, our guys are focused on and doing everything possible to bring in that cash, bring those balances down.

Julio Manuel Quintana

And also, Daniel, there's the still substantial amount of ESI inventory that we had put on hold pending all the upgrades of ESI as we now start to deliver ESIs, and we've delivered several in Q1. As we now start to deliver ESIs, then we'll be able to start bringing that inventory down as well. So I'm with Bob. I think you should expect a decreasing inventory for the rest of the year.

Operator

Our next question comes from John Keller from Stephens Inc.

John R. Keller - Stephens Inc., Research Division

Julio, appreciate the utilization breakout between the U.S. and international that I think you just laid out for Daniel. But maybe you'll just remind us since you feel like you're at a bottom in terms of Top Drive, I guess, activity demand, however you want to couch it. How do these things typically play out from a utilization standpoint in a recovery assuming we see that over the back half of the year?

Julio Manuel Quintana

Yes, generally, John, Top Drive rentals are the first things that go down on a downturn. So -- and in fact, we experienced that. So what happens is the rigs that have a -- that don't have a top drive on them will tend to be the first ones to get stacked. We also see that in an uptick, the Top Drive rental fleet tends to be the first one that gets back to work, so what happens is as rig contractors start trying to put equipment back -- excuse me, rigs back to work and say they have a rig without a top drive, they generally are going to be hesitant to go spend money on capital equipment and buy top drives until the cycle solidifies. So what happens is rentals tend to tick up faster than the overall market. So if that's what happened -- that should be consistent with what happened in the past that, if that's consistent with what happened in the past then we'll see it again. The other thing that I'm getting fairly bullish about is the general gas activity. So we start talking about $4 to $5 type of gas. Assuming that, that holds, then I think you'll start seeing some of these markets come back again. For example, we had at one point, 5 or so top drives rented in the Northeast. We have none today, and so as those rigs get back to work -- if they get back to work because of the gas and I think that will strengthen. So expect Top Drive rentals in North America to tick up disproportionately faster than the rig count comes back.

John R. Keller - Stephens Inc., Research Division

Perfect. Well, I appreciate that color. And then just also turning to the international business a little bit, I mean, on the Tubular Services side, is part of the margin performance we're seeing there just better driving, better higher revenues through kind of your infrastructure there? I know that's kind of been the goal for a long time and a real key to margin performance, but maybe is that contributing? And if so, kind of qualitatively, how proportionately is it? And then what's the outlook there for the rest of the year?

Julio Manuel Quintana

Yes, international utilization is definitely contributing, and I think that continues to strengthen. I think Middle East will continue to strengthen. Throughout the year, Asia Pacific is doing great. I don't see it changing much, just staying quite strong for the year. And then the key is to continue to drive utilization job count in Latin America. But really, if you look at the uptick for Q1, John, kind of consistent with what we have been seeing, it really is a little bit of everything, right? So we're getting more sophisticated in managing our cost structure in North America. We're getting more utilization internationally. We're selling more CDSs. We're driving automated running. We're getting more MCLRS. So it's a little bit of everything that tends to drive the performance of the business. So that really is very much of how we're managing that business. Every business unit is being told, you've got to deliver on all of these front, including the technology side, things like cementation and so forth, to be able to drive the overall business. So it wasn't any single item. But specific to your question, yes, the international utilization continues to strengthen.

John R. Keller - Stephens Inc., Research Division

Perfect. And then one more if I could just sneak in here. Could I just get a comment from you on how your Mexico operations have been trending recently? I guess we've seen some of the -- some of your peers be kind of impacted by a pretty abrupt slowdown in part of the country there. But if I could get your comment on that and then [indiscernible]...

Julio Manuel Quintana

Yes, I actually had several investors ask me about the drop in activity for key in some of the other -- in Mexico. You have to really bifurcate Mexico into several different groupings. So you have the northern region, which is basically Costa Rica, Veracruz, north to the border, and a lot of that activity is either natural gas or high-cost oil like in Chicontepec. That's one group. The other region is the southern region, which is all oil and then the offshore region, which is primarily all oil, and then you have, of course, the deepwater. And so when PEMEX does their investment and capital allocations, they have to allocate natural gas to oil to offshore and onshore to deepwater and then of course, they have to siphon up some percentage of the cash flow for their social country needs and also for the downstream needs. So overall, what happens in that scheme of things is oil at $90, of course, takes priority. So generally speaking, what they tend to do is they will back off of investments in the North and preferentially invest in oil in the South region and in the marine region. For TESCO, almost all of our work is actually in the South, in the oil region and in the offshore marine region. So for that reason, we have seen no drop in -- essentially no drop in activity in Mexico nor do we expect it. In fact, generally speaking, the bid request that we're getting is probably to increase activity in those 2 regions rather than to decrease it. So we're not worried at all about Mexico and the activity there because we don't operate in the areas -- mostly don't operate in the areas that are potentially negatively impacted.

Operator

Our next question comes from Gregory Macosko from Lord, Abbett.

Gregory M. Macosko - Lord, Abbett & Co. LLC

Yes. Most of my questions have been asked. Just with regard to the -- you mentioned you're spending on building inventory in the Top Drive area. Just is that a reflection that your short-term deliveries and the like, do you feel like that's sort of a short-term phenomenon and once things recover, there will be a longer term? Or is it -- are you looking for a longer-term situation where we will have to maintain that inventory?

Julio Manuel Quintana

Well, so let's be a little careful. I didn't say we're going to build inventory. I said we're going to build finished goods inventory. And so that really is what we're envisioning. We envision to be able to keep our inventory in check but end up with more and more finished Top Drives if the activity stays low. What we found, Gregory, in the last cycle is that we weren't prepared for that. We cut very deeply. The uptick came, the competitors had a lot of top drives on the shelf, and then they were able to sell their product at pretty good premium. Generally, when you're selling a short-term, you're able to sell at a 10%, maybe 15% premium, pricing premium, and we didn't really capitalize on that. And so our view is that the market is going to continue for the next several quarters, maybe a year or 2, to be kind of more of this spot market, "Do you have a Top Drive ready. Can I have it in 2 months" kind of time frame. And people that are able to provide that will benefit from them. What happens is the rig contractors and equipment builders, you can imagine when the market is unstable, they tend to hold off making decisions until the 11th hour. And instead of planning for a build cycle over 3 years. And so that creates opportunities for us if we are able to react to them in short term. So my bet is that for the next, I don't know, 2 to 6 quarters that, that would be the market and the customers -- excuse me, the providers that are able to provide the customer a short-term delivery will benefit from that. So that's kind of what we're betting on, and we'll see if that pans out like we believe, but we think it will. From a risk perspective, really, during the last cycle, I think we ended up with like 25 top drives built out, and of course, that was a really abrupt drop in activity. But frankly, we sold those out within a matter of 2 or 3 quarters when the business came back. And so really from a risk perspective, what you're talking about is ending up with -- we don't have a predetermined number, but 20 or 30 top drives built out, and based on any minimal scenario of activity, we would sell those within a matter of 2 or 3 quarters if effectively the production went to 0, which, of course, it never does. So we see no risk in doing that and see substantial upside in terms of being able to drive margins for the coming quarters.

Gregory M. Macosko - Lord, Abbett & Co. LLC

So then your comments with regard to inventories declining throughout the year means that there's just a rebalancing in the ESI, and some of the assets will fall while the Top Drive might creep up?

Julio Manuel Quintana

Right. Well, we're -- we, of course, if our production -- if the order flows good enough, then obviously, that doesn't hold. Based on our projections of the order flow, if you basically say kind of a minimal number of orders like in Q1, I think they'll be stronger than that. But if you said minimum number of orders in Q1, so then you're talking of 60, 70, 80, 90 kind of order rates, if you annualize analyze the last couple of quarters, and you say if that kind of holds and we're building out at 100, 110 kind of run rate, then you end up with 20 or so units of excess. But of course, we have a fair amount of inventory already in hand. And so it's just a matter of converting some of that into finished goods. And then concurrent with that, you have our ESI that we have inventory for. And so as we sell out the ESI, then that number comes down. Plus, we're getting sophisticated in managing our supply chain. The combination of all those dynamics, we absolutely believe that we can end up with a lot of finished goods and a lower inventory for the year.

Operator

Our next question comes from Trey Cowan from Clarkson Capital.

Trey Cowan - Clarkson Capital Markets, Research Division

Quick question on -- looking at your North American rental division of Top Drives, what do you see as far as the number of those units that are being used on drilling rigs that are either walking capable or doing pad drilling right now? Do you have an estimate for that?

Julio Manuel Quintana

Don't know the answer to that, Trey. I would speculate a little bit here that most of the rigs that are doing pad drilling tend -- in the U.S. we're talking about -- tend to be rigs that were specifically designed to pad drill. So in other words, you typically don't drill on the pad with an old rig. You tend to build a rig that can move quickly from 1 feet -- or 1 level to the other 10 feet away. And so those will tend to have top drives permanently installed. So if I had to bet, I would say the majority of the units that we are renting out today are not in that pad drilling environment.

Trey Cowan - Clarkson Capital Markets, Research Division

Okay. And just final question [ph]...

Julio Manuel Quintana

The other thing I forget to mention earlier on the North American market, I want to be clear. So we were actively lowering the number of units that are in the fleet there. So we have 38 units in the fleet. We are actively looking at selling units out of North America. We're also moving. I think we're moving a couple to Argentina as we speak and at the same time, trying to increase the number of units that we have rented. So our view is that we will get utilization back up over the next couple of quarters in North America by both decreasing the number of units that are on standby and by getting better utilization from we've got.

Operator

[Operator Instructions] And we have a follow-up from Josh Lingsch from Simmons.

Josh C. Lingsch - Simmons & Company International, Research Division

Bob, a quick housekeeping question and perhaps I missed this earlier, but did you provide corporate expense guidance for the year?

Robert L. Kayl

We haven't provided guidance. The corporate expense was higher in Q1 compared to Q4, mainly due to higher incentive comp, both short-term incentive comp and long-term incentive comp and then also higher headcount, salary and benefit expense for more operational support personnel. But I don't believe that the corporate cost would grow from kind of the current levels.

Josh C. Lingsch - Simmons & Company International, Research Division

Okay, so fair to assume Q1 amount for the balance of the year?

Robert L. Kayl

That's your assumption, but I don't see it growing. That's correct.

Julio Manuel Quintana

But just to clarify, too, Josh, so it's not that we're projecting higher -- that we're increasing the compensation in 2013 relative to 2012. We tend to -- everybody in the company tends to be paid on a variable pay based on how we perform against plan. And in 2012, that was a record year, we had an aggressive plan, and we didn't meet the aggressive plan. We fell short of that. And so the short-term compensation was down. What we're saying right now is we have an aggressive plan for 2013, but we are on plan, and so we book according to that plan.

Operator

I show no further questions at that time and would like to turn the conference back to Mr. Julio Quintana for closing remarks.

Julio Manuel Quintana

Thank you, Mary. In closing, I would like to thank you for participating in the call today and your interest in TESCO. Our continued focus on efficiency and cash generation will play a major role in our transformation of TESCO 3.0. Thank you, and look forward to our discussions next quarter.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.

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