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Gardner Denver, Inc. (NYSE:GDI)

Q3 2012 Earnings Conference Call

October 29, 2012 08:30 AM ET

Executives

Michael Larsen - Interim Chief Executive Officer and Chief Financial Officer

Vikram Kini - Vice President of Investor Relations

Analysts

Mike Halloran - Robert W. Baird

Julian Mitchell - Credit Suisse

Cliff Ransom - Ransom Research

Jeff Hammond - Keybanc Capital Markets

Mike Wherley - Janney Montgomery Scott

Kevin Maczka - BB&T Capital Markets

Joshua Pokrzywinski - MKM Partners

Joseph Mondillo - Sidoti & Company, LLC

Brian Konigsberg - Vertical Research

Operator

Greetings and welcome to the Gardner Denver Third Quarter 2012 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Vikram Kini, Vice President of Investor Relations. Thank you, you may begin.

Vikram Kini

Thank you, and good morning everyone. Gardner Denver’s third quarter financial results were released earlier this morning and a copy of the release is available in the investor section on our website at gardnerdenver.com.

Before I turn the call over to Michael Larsen, Interim CEO and Chief Financial Officer for Gardner Denver to discuss our third quarter results, I would like to remind you that any statements made by Gardner Denver during the call that are not historical in nature are to be considered forward-looking statements. These forward-looking statements are subject to a number of risk factors and uncertainties that may cause the company’s actual results to differ significantly from expectations. A detailed discussion of the risks and uncertainties that may affect our future results is contained in Gardner Denver’s filings with the Securities and Exchange Commission including the company’s annual report on form 10-K for the fiscal year ended December 31, 2011 and subsequent quarterly reports on form 10-Q. These statements are made only as of the date of this call and Gardner Denver disclaims any intention or obligation to update or revise any forward-looking statements.

I will also refer to the investor section of gardnerdenver.com for the reconciliation of any non-GAAP financial measures including adjusted DEPS and adjusted operating margins used during this conference call.

We will begin with some prepared remarks and then open it up for questions.

As a reminder, this call is being broadcast in listen-only mode through a live webcast. This free webcast will be available for replay up to 90 days following the call through the Investor Relations page on the Gardner Denver website, at gardnerdenver.com, or through the Thomson StreetEvents site at earnings.com.

And now I would like to turn the meeting over to Michael.

Michael Larsen

Thanks, Vik. This morning we announced third-quarter results that includes dilutive earnings per share that exceeded our expectations. In a more challenging market environment, the Gardner Denver team achieved adjusted DEPS of $1.32 exceeding the high-end of the third-quarter guidance communicated on July 19, 2012.

Revenues in the third quarter of 548 million were down 11% versus the same period last year, and down 7% excluding foreign exchange headwind. Organic growth was down 11%, while the Robuschi acquisition added 4%. Foreign exchange was a headwind during the quarter and reduced overall growth by 4%. The decline in revenue year over year was driven primarily by Engineered Products Group, which was down 20% as result of lower shipments of pressure pumps and loading arms. Industrial Products Group revenues were down 3% during the quarter, up 2% excluding foreign exchange. Q3 performance of IPG was primarily impacted by weakness in Europe and China.

Operating income for the third quarter was 89 million compared to 107 million in the prior year period, primarily resulting from the lower revenues in EPG. Operating income in IPG actually grew 2% year over year, reflecting the positive impact of the Robuschi acquisition and the impacts of our operational excellence initiatives.

Operating margin in the quarter was 16.2%, 110 basis point decline over the third quarter of 2011, due primarily to lower revenues and the higher margin pressure pumping segment of EPG. In addition, 30 basis points of the decline resulted from the non-recurring low margin loading arms project offset by approximately 2% positive price realization in both IPG and EPG.

Net income for the quarter was 64 million down 13% year over year and dilutive earnings per share were $1.30, down 8% versus last year’s third quarter. Diluted earnings per share included unfavourable charges of $0.02 related to restructuring and result in adjusted DEPS of $1.32, which is $0.12, or 10% higher than the midpoint of the guidance range we gave when we reported Q2 back in July.

The more challenging market environment especially outside the US the expected cycle in a pressure pump business and tough comparisons to prior year contributed to a 23% decline in orders year over year to 482 million for the quarter. Organic orders declined 23% as the Robuschi acquisition added 3% and foreign exchange created a 3% headwind.

Cancellations for the third-quarter were about half of what we saw in Q2 at 6 million, spread evenly between the two segments and only about $1 million in petroleum and industrial pumps. The book to bill ratio in the quarter was 0.88 up slightly from the second quarter and our backlog is now 594 million as we enter the fourth quarter.

Cash flow was solid as cash flow from operations improved 32% sequentially to 88 million representing 137% of net income. Free cash flow was 79 million or 124% of net income.

Turning to the individual segments starting with Engineered Products Group, revenues were 237 million, down 20% versus prior year, primarily due to our petroleum and industrial pump business that was down about 25% and our Emco Wheaton loading arm business that was down about 35%. The Emco Wheaton business can be lumpy from a revenue and orders perspective and during the third quarter of 2011 there was a large loading arms shipment that did not repeat in the third quarter of this year. Adjusted for this one project revenues in EPG were down 16%. As a result of the lower revenues EPG operating margins declined 210 basis points to 21%, 60 basis points of the decline was due to the Emco Wheaton project that I previously mentioned.

EPG orders in the third quarter declined by 36% to 193 million, due principally to lower demand in the petroleum and industrial pump business, which has expected was down approximately 60% year over year. We saw an order decline of the same magnitude in Q2 of this year. That said three out of four EPG businesses saw a sequential improvement in orders from 2Q to 3Q. And orders for the first three weeks of October are off to a strong start, currently up 30% sequentially.

Our backlog in EPG is now 333 million and gives us good visibility to the fourth quarter. Like I said, we did not see any significant cancellations in a petroleum and industrial pump business in the quarter. And while encouraged by a 5% sequential improvement in orders in P&IP, we’re not expecting an improvement in pressure pumping market conditions in the near future. Rather, we are expecting the fourth quarter in pressure pumping that is down versus the third-quarter.

Uncertainty in the North American pressure pumping business remains high and customers are cautious, by now many have cut back their CapEx spend or exhausted their 2012 budgets. And we’re hearing that repairs are being deferred to 2013 due to significant customer inventory in pumps and aftermarket fluid ends. Anecdotally we are hearing that about 15% of the installed base is waiting for repairs. As the economics upstream improve and great count and commodity prices remain at current levels with crude around $85 and natural gas in the mid $3 range, the likelihood of recovery is improving. In terms of how this cycle could play out, we would expect to see an improvement in repairs first, followed by aftermarket parts and then pressure pumps. Consistent with our previous view timing is uncertain and it could be the second half of 2013 before we see an increase in pump shipments. This view seems to be broadly in line with both industry consensus and customer feedback and is obviously dependent to an extent on rate count, crude oil and natural gas prices going forward. In this uncertain environment we are staying close to our customers and suppliers, reducing our cost and staffing levels, moving rough machining in-house and working hard to reduce working capital levels, all while continuing to invest in future growth opportunities.

Let me give you some examples of those investments. Our primary focus from an innovation standpoint remains highly customer driven and centers on fluid end performance and life which in turn drives efficiency for our customers. In Q3, we expanded our (inaudible) fluid end design to smaller cementing pumps, as well as the larger 3000 horsepower pumps. We also launched a new 50% lighter 1500 horsepower driven pump at a Permian basin also. In terms of organic growth, we have recently increased our salesforce of petroleum and industrial pumps to focus more on the growing international opportunity and then we continue to expand our view of the aftermarket. We recently began manufacturing and selling Gardner Denver valves and seats. The customer feedback so far has been terrific. Consistently over the last two years our investments in resources have been focused on winning in the less cyclical higher-margin aftermarket and we can see that strategy paying off.

As you know, we have been navigating the pressure pumping downcycle since the beginning of the year but because we have been so focused on the aftermarket, a pressure pumping business is actually on pace to match our record 2011 in terms of revenues. On a Q3 year to date basis, while pump shipments are down through the third-quarter our aftermarket fluid end shipments are up more than 60%. We know this business can be cyclical and we remain big believers in long-term trends and future of this business and continue to be laser focused on profitable growth.

Turning to the shorter cycle Industrial Products Group. IPG had revenues of 312 million in the third quarter, an increase of 2% year over year excluding foreign exchange. The positive contribution from the Robuschi acquisition and strong performance in Asia-Pacific was offset by weakness globally, principally in Europe and China. Revenues in IPG were down 3% year over year as Robuschi added 7% and foreign currency and organic growth declines both reduced sales by 5%. Revenues in the Americas were down about 5% and were driven primarily by tough comps in the truck blower segment of that business. Revenues in Europe were down about 5% organically and revenues in China were down about 25%, which was offset by an approximate 25% increase in Asia-Pacific revenue.

As a result of the continued focus on costs and productivity, the IPG team had a solid quarter in terms of margin expansion. IPG’s operating income for the quarter was 39 million, a 2% year over year despite lower sales. Adjusted operating margins were 13%, up 40 basis sequentially over the second quarter. The IPG team is making great progress in terms of margin expansion and we are pleased to report our second best quarter for IPG margins since 2008.

In the third quarter, market conditions in the Industrial Products Group became more challenging as the global slowdown impacted orders for our products globally. Orders in the quarter were down 12% to 289 million, as Robuschi contributed 6% offset by a foreign exchange impact of 5%, and a 13% organic order decline. By region, orders in the Americas were down about 10% relative to a very strong third-quarter 2011, so orders were up 20%. 2011 orders for mobile truck blowers that did not repeat in 2012 accounted for more than half of the decline in the Americas. Organic order rates in Europe were down about 10% and China was down approximately 25% percent. As opposed to the typical third-quarter orders dynamic of the September uptick coming out of the summer months, the third quarter of 2012 showed fairly consistent order trends throughout the quarter with little meaningful upswing in September.

Like EPG, IPG orders across the board except for Europe are off to a better start sequentially versus the second quarter through the first three weeks of October. Given the fairly significant order declines in our IPG business in Europe and China, it’s useful to frame these two regions in terms of our earnings and you’ll see that while significant in terms of being approximately 30% of our global revenues, these regions represent a meaningfully smaller share of our earnings at about 20%, slightly more than $1 in terms of earnings per share. Our IPG business in China represents about 5% of our 2012 sales, but they were only about 2% of our earnings. In addition, our IPG Asia-Pacific business is up 30% year to date and is more than offset the declines in China. Our progress in Asia-Pacific is a good example of expanding our market presence in underserved markets such as Indonesia and Thailand, as well as our success in custom engineered products used primarily in the oil and gas industry. Our ability to combine a Gardner Denver blower and compressor unit and provide a complete air solution for our customers has been a significant growth driver this year and we believe the future prospects remain attractive.

Our IPG Europe region is approximately 25% of revenues in 2011, but that said, our earnings in IPG Europe represent approximately 15% to 20% of our total earnings. We are executing a plan to improve the profitability of our IPG business in Europe as evidenced by the 85 million to 100 million restructuring initiative that we announced in August 16. As we continue to execute this plan over the next 3 years, we are going to expand margins in Europe by approximately 500 basis points and global IPG margins by approximately 300 basis points. As you can tell, we remain focused on growing our earnings despite the economic downcyle.

Let me just spend a few minutes on European restructuring plan and give you a little more detail on our progress. Focus on reducing our high cost operating footprint in IPG, as evidenced by our 10 manufacturing facilities throughout Western Europe, our restructuring plan is a systematic approach that will allow us to reduce our footprint and strategically align our production capabilities to better serve our customers. We have a dedicated cross-functional team on the ground in Europe that is executing on the restructuring initiatives and a major focus of their plan is to ensure there is absolutely no customer disruption as we progress. Based upon our current timeline, the majority of the actions should be completed by the end of 2014 with some final consolidation activities concluding in 2015.

In the third quarter, we announced the first of the manufacturing consolidation activities in our Ipswich site in the UK. The manufacturing activity at the Ipswich site will be moved over the course of the next 12 months to our Redditch site in the UK creating a new high pressure compressor center of excellence. The merging of these sites will not only lead to infrastructure-related savings but we also anticipate operational lean synergies as we leverage to increased volume that we will be running through the Redditch site. In addition to restructuring In addition to restructuring we continue to right size the business as needed and in the quarter staffing was down another 2%. Year-to-date staffing has now been reduced 5% or by approximately 375 employees. In addition, we have closed or announced the closure of 20 locations year-to-date including 6 production facilities. In IPG Americas alone we have eliminated 75,000 square feet of manufacturing space as a result of our commitment to lean and we continue to make good progress on our low-cost country sourcing efforts. Next year, we’ll have a full year of cost savings associated with all of these initiatives. So, as you can see we’re working hard to drive controllable operating improvements in order to take IPG margins to 14% by ’14 and beyond and we’re not waiting for an economic recovery to improve our financial performance.

Turning our attention to capital deployment, our balance sheet is strong and our cash flow and financing facilities provide us with ample liquidity to run the business and execute on our capital allocation strategy. As I mentioned previously, we generated $88 million of cash flow from operating activities in the third quarter and spent $9 million on CapEx primarily to increase operational efficiency on the shop floor. We are on-track to spend approximately $50 million in CapEx this year, down 10% from both 2011 and from our original 2012 budget. Year-to-date we have spent $114 million to repurchase 1.788 million shares and as of today 1.6 million shares remain under the authorization approved by the board of directors. As you can appreciate in light of the announcement last week relating to the exploration of strategic alternatives we did not repurchase shares in the third quarter. Our current buyback program remains available depending on any developments coming out of our exploration of strategic alternatives. We would intend to utilize our repurchase capacity as appropriate.

Before we update you on our outlook for the fourth quarter and full year 2012. Let me quickly recap our year-to-date results. For the nine months ended September 30, 2012, our revenues are up about 0.5% to $1.8 billion and our adjusted diluted earnings per share year-to-date of $4.26 up 7% rest of the same period last year. So, flat revenues, we successfully achieved earnings growth of about 7% and cash flow in excess of $200 million.

Turning to our outlook for the balance of 2012, given current macroeconomic headwinds, the outlook for energy business and foreign exchange trends. We expect results for Q4 broadly in line with Q3 and our previous guidance. Typically, we would see sequential revenue improvement from Q3 to Q4 as indicated by our quarter to date order rates and our shippable backlog for Q4, but in an uncertain environment we remain cautious. As a result of our Q3 performance and outlook for Q4, we are raising total year guidance and now anticipate that adjusted diluted earnings per share for 2012 will be in the range of $5.47 to $5.57 up $0.12 from the midpoint of the guidance we gave you July. Essentially, matching our performance of 2011, which was a record year for Gardner Denver.

We estimate that adjusted diluted earnings per share in the fourth quarter will be in the range of $1.22 to $1.32 consistent with our July guidance. The full year guidance excludes profit improvement and other items totaling $0.42 with $0.05 to be reflected in the fourth quarter. Based up on this, our guidance on a GAAP basis is in a range of $5.05 to $5.15 for the year and a range of $1.17 to $1.27 for the fourth quarter of 2012.

At this point, I’d like to pass it over to Vik to give little more detail on some of the financials.

Vikram Kini

Thanks Michael. First, we continue to execute well on cost controls in the third quarter as SG&A declined 8% quarter-over-quarter to $95 million or 17.4% or revenue. In the quarter, foreign exchange impact was unfavorable by approximately $0.04 on year-over-year basis and flat versus our July guidance. Our guidance for fourth quarter assumes current exchange rates which on a year-over-year basis creates about $0.02 of earnings headwind. Our effective tax rate in the quarter was slightly ahead of our previous guidance at 26% while the rate can fluctuate on a quarterly basis, we expect our tax rate to be in the 27 to 28% range in the fourth quarter of 2012.

On the balance sheet, operating working capital defined as the net of inventory receivables and payable/accrued liabilities with 18% of sales in the third quarter up slightly from the second quarter of this year. Working capital improvement a special inventory remained the top priority and we expect to see solid cash generation again in the fourth quarter. At the end of the third quarter of 2012, we had approximately $249 million of cash on hand and total debt was $440 million resulting in a debt to capital ratio of 24% giving us plenty of flexibility in terms of capital deployment.

Depreciation and amortization of $14 million for the quarter and we expect $65 million for the full year. With that I would like to turn it back over to Michael.

Michael Larsen

Okay. Thanks Vik. I'd like to give you a quick update on some of the progress we have made as a team since the last earnings call. I discussed in the Q2 earnings call as Interim CEO, one of my important goals is to minimize all disruption to customers and employees by stabilizing the Gardner Denver team and by focusing and energizing our talented employees and moving this Company forward by delivering forward customers and executing on our proven strategy to deliver cash and earnings growth. Over the last three months, we’ve communicated a simple message to our employees, customers, distributors and partners across the globe. Gardner Denver is a great company focused on delivering value for customers and results for shareholders. If we stay focused, execute the strategy and work together as a team we can and will continue to be successful.

We made progress in stabilizing the team and I remain confident that we have the team in place today to deliver for our customers and to execute our strategy for profitable growth. In short, I am really proud of the Gardner Denver team.

Before, we turn to the Q&A, I want to briefly comment on the announcement we made last week regarding the exploration of strategic alternatives. Last Thursday, we announced that our board is working with Goldman Sachs to explore strategic alternatives to enhance value for Gardner Denver shareholders. It is important to know that no decision has been made to engage in a transaction and that we remain laser focused on executing our strategy to expand growth and profitability.

I’d like to remind everyone that the purpose of today’s call is to discuss our third quarter financial results and outlook and therefore we will not be commenting further on this process or taking any questions on this topic. I thank you all in advance for your understanding and cooperation.

With that we’ll open up the call for questions. Louis?

Question-and-Answer Session

Operator

We will now be conducting a question and answer session. (Operator Instructions) Our first question comes from the line of Joshua Pokrzywinski with MKM Partners. Please proceed with your questions.

Joshua Pokrzywinski - MKM Partners

Hi. Good morning guys.

Michael Larsen

Hey Josh.

Joshua Pokrzywinski - MKM Partners

Just to start off on the pressure pumping business have you guys been surprised here positive or negatively? How pricing has held in or not on the aftermarket side?

Michael Larsen

Yeah Josh, I would say, we really didn't see much change here in the third quarter relative to the second quarter and I'd go back to some of the comments I made on the last call that if you want a quality reputable fluid end from a Company that that will give you a warranty and standby, it's fluid end in terms of safety. You really don't have that many alternatives. So, while at the upstream clearly, we all know that pricing has been under pressure. We are really seeing a fairly limited pricing pressure on fluid ends and if you look at the total EPG segment pricing in the quarter and year-to-date is up 2%. So, obviously with the new capacity that's been added this is something we're watching very closely, but we have not seen a significant impact at this point.

Joshua Pokrzywinski - MKM Partners

Roger. Then thinking about where we’re at and maybe the drilling pump cycle seems like that one is maybe moderated more recently. I guess the thing is about maybe the baseball analogy, what you (inaudible) do you think we are there based on where we at today, when should we see something close to a bottom in that?

Michael Larsen

Yeah, I mean I have seen, in drilling pumps we saw a similar decline in orders in the third quarter as the one we saw in the second quarter and our stance is that there is just a lot of uncertainty and hesitation amongst our customers. So at this point, where typically we would tell you, we have six months backlog, where I would characterize it as closer to three to six months backlog in this business. I'd say domestic rig count obviously is headed downward slightly, but still at a pretty good level here north of 1,800 and in addition to that when you look at crude oil prices, that's clearly providing some support, but as I said, it looks as if our customers are being very cautious and so we have not seen the orders in the third quarter that typically we would have seen for shipment starting in the second quarter of 2013. So, like I said, the good news is that commodity, oil price is around $85, the economics are still pretty good and when the orders come back we will be in a very good position to meet the needs of our customers.

Joshua Pokrzywinsk

Got you and this will help. Just to sneak in one more here, do you think we're kind at a low watermark on margins in EPG? What's your confidence and ability to hold something in the 20% range and then I guess same question on IPG, obviously nice uptick. Should we really view this as something closer to the low watermark that you are able to move higher going forward?

Michael Larsen

Yes, sure. Let's start with EPG, I mean we just saw nearly 25% OE in EPG and that's probably close to the peak at this point. Our Nash business, our late cycle[ph] Nash business which is also a high margin business is still going strong and so that's helping us but clearly there is some mixed pressure here as the energy business cycles. If you look at the last cycle, you look back at '09 and '10 EPG margins for the year were about 20% with a few quarters in the high teens. So, I would say trough margins in EPG are probably somewhere in the high teens as we sit here today. The other thing I would tell you on IPG obviously the team has made good progress and we are currently sitting at 13% in the third quarter for the year. We are slightly ahead of 12% which is I think it's 12.2% which is actually ahead of last year. So, while we are cautious in the fourth quarter we believe that all the controllable operating improvements that we are working on should allow us to come in slightly better than 12% for the year. Then all the things I talked about in terms of rightsizing and restructuring, our sourcing efforts, here we are going to get a full year benefit as we move into next year. So we had expect that with moderate growth rates we would be able to continue to expand margins well on our way to 14% we have committed to by 2014 and then the European restructuring like I said as we execute that by the end of 2014 will add another 300 basis points to that. So, now we are in the mid to high teens and moving closer to where some of our competitors are positioned. So, that's how I would answer the IPG question. In terms of IPG on trough margins, I really don't think there is much more to go on the downside here. I will tell you that our, if you at incrementals in both these businesses IPG at about 25% typically, EPG 30% to 35% and total Gardner Denver Way at about 30%. It works the same way on the way down. So, when you do see revenue declines, your incrementals obviously become your detrimental.

Joshua Pokrzywinsk

Understood, that is helpful. Thank you very much.

Michael Larsen

My pleasure.

Operator

Our next question comes from the line of Kevin Maczka with BB&T Capital Markets. Please proceed with your question.

Kevin Maczka - BB&T Capital Markets

Thanks Good morning.

Michael Larsen

Good morning.

Kevin Maczka - BB&T Capital Markets

Michael, going to EPG orders, down sharply year-over-year, but I think you said up 30% sequentially in October and even up 5% in P&IP. Can you give a little bit more of a sense of what's driving that and if you have a sense if it's bottomed here?

Michael Larsen

I would be somewhat cautious at this point. I mean we're talking about three weeks into October, but so, I think it's too early to call a bottom in our P&IP business. I mean I'd say we're encouraged by orders being up 5% sequentially in P&IP and across the board here quarter-to-date, we're up 30%. So, I'd just I'd be careful. Portions of our EPG business as you know Emco Wheaton and Nash in particular orders and can be fairly lumpy. A bit project you either book it in one quarter. We cut it off, September 30, and if the order comes in the next day, obviously it falls in the next quarter. So, I'd say it's encouraging. It's too soon in my mind to call a bottoms-out, but we're cautiously optimistic, but again, I mean, like I said, that the overall macro environment and the energy cycle are still tough. We are not expecting an improvement here in the fourth quarter, for example, in our pressure pump business, but that’s how we characterize the kind of the recent order trends.

Kevin Maczka - BB&T Capital Markets

Okay, got it. Shifting over to the international opportunity P&IP, I think you have mentioned that before, you mentioned it again today. Can you say anymore about, and I know this is hard to call, but just timing, the magnitude of what that opportunity may ultimately be?

Michael Larsen

Sure. I mean, we previously said it’s probably in terms of international pressure pumping, another three to five years. I would also say that obviously, you know, activity is picking up globally, more and more talk in countries like Argentina and China in particular. And so, we still think it’s a couple of years out, but we also think it will be a very good business for Gardner Denver as our large customers in this space continue to focus more internationally and take advantage of the growth opportunity. So, as our customers go international, so will we as they take our pumps with them.

Kevin Maczka - BB&T Capital Markets

Okay. Finally from me, on the sourcing benefit that you mentioned, given all of the actions that you have done year-to-date, can you just frame what that benefit will be when we talk about the full-year benefit for the first time seeing that in ’13?

Michael Larsen

Yes, I will tell you, Kevin, I mean, I think we were encouraged by our margin, and if you look at our gross margins, we had a nice improvement as well. We haven’t seen a full quarter yet of the sourcing savings that we are expecting. I think the fourth quarter and then the beginning of 2013 is really when we expect to see the impact. So, it’s a little too soon for me to give you a number. I want to make sure that we see it in the financials here in the fourth quarter, and then, when we start talking about 2013, it should be on the earnings call in February, we will give you a little more color on what we think the impact could be financially.

And we have a team now of about 20 employees focused primarily on the IPG side, 15 in China, five in India. We have got a leadership team that knows how to do this. And so, we are encouraged by the progress. We are, I would say, to some extent waiting to see a full quarter’s worth of results. And then, when we get to February, we will give you a much clear view of what we think the impact could be here in 2013. But like we have said before, I mean, our current country sourcing as a percentage of our total material buy, we are probably in the 15% range. I mean, obviously our global competitors are, many of them in 30s. And structurally, there is no reason we wouldn’t be able to attain their levels overtime, okay.

Kevin Maczka - BB&T Capital Markets

Got it, thank you.

Michael Larsen

All right, thank you.

Operator

Our next question comes from the line of Mike Halloran with Robert W. Baird. Please proceed with your question.

Mike Halloran - Robert W. Baird

Good morning, guys.

Michael Larsen

Hi Mike.

Mike Halloran - Robert W. Baird

So, starting on Europe side of the business, on the IPG side, could you just talk about trajectories in the quarter and what your sense is for the stability on the top line and stability on the order side in that region specifically?

Michael Larsen

Yes, I would say Europe looks tough and we are not expecting any improvement here in the near term. It’s going to be, I think credit line in Europe in the near future. In terms of the order trends, we sell at a time, actually starting in July that continued into August and really stabilized at that level. Typically, what we would see is when customers come back from the vacation period in Europe, you would see an uptick in September, we did not see that in IPG Europe. And I would say even though our – if you look at the first three weeks of October, we are seeing improvement in most of the regions in IPG, the exception is our European business.

So, that’s why we are really not expecting much in terms of improvement here in Europe for the fourth quarter, and I would go beyond that and say in the foreseeable future. So, and that’s why we are still focused on the things that we can’t control, which is the European restructuring efforts that we talked about, the continued right-sizing as well as our low-cost country sourcing efforts, so we can continue to drive margin improvement even in a tough economic environment, such as the one we are seeing in Europe in particular.

Mike Halloran - Robert W. Baird

And then, segwaying over to the guidance commentary, just wanted to clarify the comments you made on the sequential trends on the revenue line going from the third quarter to the fourth quarter. I think your comments were normally up sequentially, which makes a lot of sense, but you were cautious on the trajectory 3Q to 4Q. Are you essentially expecting something closer to flattish sequentially, maybe even modestly up or there is just a little bit concern at this point, given the uncertainty in the environment? Is that a fair way to characterize that?

Michael Larsen

Yes, I would say that’s fair. I mean, I think in IPG, we are expecting a fourth quarter, that’s about flat versus the third quarter. In EPG, based on the backlog that we have in some of our later cycle businesses in Nash and then Emco Wheaton and those projects that are in the backlog. Shifting in the quarter, we won’t see an increase in revenues in those businesses.

Like I said, pressure pumping will be down and so, like you said, probably a moderate increase totaled Gardner Denver revenues in the fourth quarter, but that really accounting on much of the improvement given the uncertain environment that we are in.

Mike Halloran - Robert W. Baird

That makes sense. And then last one from me, just a comment on the repairs, on the fracking side of the business, pressure pumping side of the business being pushed to 2013 and commenting that 15% of the installed base is waiting for these repairs. A few things there I guess. One, is this for both the repairs on the original equipment as well as the fluid end components side of things? And maybe also, could you just talk about how you would expect that to play out if CapEx starts getting released a little bit, does that mean that you are looking for a potential in that side of the business for things to improve sequentially 4Q to 1Q?

Michael Larsen

I think it’s – I am not prepared to say that we are looking for it to improve in the first quarter. I would say just in terms of the first half of ’13, we are kind of expecting no much change from where we are today. Now, I will say if you look at repairs, what I have described, anecdotally we are hearing that, you know, about 15% of the installed base. So, this could be pumps and fluid end are waiting repair. The reason they are not being repaired is that there is excess inventory, excess customers inventory. So, rather than repairing these units, customers are utilizing that inventory. Sooner or later though, I think what you are alluding to is correct that this equipment will have to be repaired. And that’s when we will be in a good position given our world-class facilities that we have in Fort Worth as well as in Altoona.

In terms of the timing, our crystal ball is the same as yours and everybody else’s. So, I would just say while we remain cautious, at some point, these units will be repaired. The exact timing is difficult. I think that there is some evidence that CapEx budgets and repair expense budgets for 2012 have basically been exhausted and that customers are waiting until new CapEx budgets are being allocated in ’13, and basically holding back.

Now, in terms of those CapEx budgets for ’13, I would also not expect much of an improvement, frankly from what there were budgets for in 2012.

Mike Halloran - Robert W. Baird

Appreciate the time.

Michael Larsen

Okay.

Operator

Our next question comes from the line of Julian Mitchell with Credit Suisse. Please proceed with your question.

Julian Mitchell - Credit Suisse

Hi, thanks.

Michael Larsen

Hi Julian.

Julian Mitchell - Credit Suisse

Hi. So, the first question really I guess just on the non-P&IP business sort of in EPG, obviously more broadly in industrials, you are seeing a lot of sort of order push-out, some project delays. And so, I just wondered if you are seeing that, as I say, on the non-P&IP order intake or anything changing in the backlog in EPG?

Michael Larsen

No, I think obviously, you saw the EPG order trends for the quarter. Those declines were primarily driven by the expected decline in our petroleum industrial pump business, so, pressure pumping as well as drilling pumps. We did also see a decline in Emco Wheaton loading arms year-over-year. I would say in Nash, like I said, some of these projects that either book in the quarter or they don’t. And so, Nash, I would say is on track to deliver a record year. This is a later cycle, more project-based high margin business. And so, I think their third quarter probably doesn’t really reflect the real strength in that business.

I will tell you that in terms of what’s being deferred and pushed out, increasingly in China, in particular, we are hearing about projects and orders that are being pushed out. I would say, you know, the last business within EPG and the fourth business is our Thomas business that has a significant amount of exposure to medical and healthcare. And I think there it’s really more of heading into the fourth quarter, maybe some destocking activity inventory levels coming down, but I would say nothing really unusual and Thomas in terms of our project is being deferred. That’s really more of a transactional shorter-cycle business than the other EPG businesses.

Julian Mitchell - Credit Suisse

Got it. Thank you. And then just within the overall P&L, I mean, it’s interesting to see that gross margins were up very slightly in Q2, sales were flat, and then the sales have gone down about 11% year-on-year, the gross margin is up sort of 80 bps plus year-on-year. So, could you, is it the – what’s exactly driving that improvement? So, it solely the cost reduction activity, so there is nothing sort of one-off in nature inside it?

Michael Larsen

No, there is nothing one-off. It’s a lot of singles and doubles, not a lot of (inaudible). I mean, I think it speaks to our progress in terms of self-help. We are really focused on the things that are controllable, whether it be the continued right-sizing and restructuring, the sourcing efforts we talked about, obviously we are boosting year-over-year. That’s helped us. They had a quarter in line with the projections that we had expected to see from them. And so, then I would also say, we don’t talk a lot about it, but we did see, if you look on a year-to-date basis, we have seen a positive price realization kind of in the 2% range, both in EPG and IPG.

Julian Mitchell - Credit Suisse

Got it. And in terms of just lastly, the staffing reduction, I think it was down about 3% in Q2, down about 2% in Q3. I mean, is that sort of the anticipated run rate going forward as long as the order book remains very cloudy?

Michael Larsen

That’s a great question. I mean, I think the way I would answer that is we obviously continue to watch the order trends very closely and if we continue to see the type of global weakness that we have seen recently, then we will continue to stay focused on right-sizing and restructuring the business. In terms of the timing of that and how exactly that’s going to play out, frankly, probably wouldn’t be appropriate for me to talk about this on this call, but beyond the European restructuring that we have given you obviously, but in my mind, Julian, in terms of right-sizing and redeploying resources maybe from certain functions from inside of business, we have 6,400 employees, never quite done, right. And so, that’s what I would say.

We continue to stay focused on improving the business everyday and optimizing margins while making sure we can take care of our customers better than before and continue to invest for growth. So, that’s how I would answer your question.

Julian Mitchell - Credit Suisse

Great, thanks.

Operator

Our next question comes from the line of Cliff Ransom with Ransom Research. Please proceed with your question.

Cliff Ransom - Ransom Research

Good morning, gentlemen, thank you for the completeness of the responses. I have got three questions, and I will just start. I was a little surprised, not to hold you responsible from my surprise, but the European restructuring was really as modest as it was. Having visited and talked about that for the last few years, what was it that allowed you to make it a relatively small hit?

Michael Larsen

I mean, we are not, let’s say, if it’s really the bulk of our European restructuring efforts in terms of the bigger sites, and the larger employee populations are really scheduled for 2013. So, at this point, the one that we talked about on the call here is the Ipswich consolidation into Redditch, which was exactly in line with the plans that communicated. And so, the bulk of what we are going to see in terms of larger charges are going to be in 2013.

So, a lot of what’s going on right now is we are ongoing negotiations with works councils and so forth and making sure that like we said in the press release that we treat all of our employees with respect and recognize their contributions over the years, as we make these difficult decisions to right-size a high-cost footprint and make our business a lot more competitive in Europe.

Cliff Ransom - Ransom Research

Michael, I was thinking more as a hold program over the course of the multiple years. It struck that, I am not suggesting to throw a baby out with the bath water, but were there any one or two things that said, this is all we need to do now?

Michael Larsen

No, I think our plans have not really changed, Cliff. I mean, these are the plans we have been working on all year. It’s an $85 million to $100 million restructuring program. It’s just focused just on the high-cost footprint for now, and like we said on the last call, the front-end activities associated maybe with what you might recall as the one GDI initiative, those activities that really impact the front end of the business, impact our customers, impact distribution. In the current environment, our view is that, that is not the priority. The priority is to get the cost structure right in terms of our manufacturing footprint. And like we said last time, obviously these acquisitions over many years have created a lot of complexity and a lot of cost also at the front end of the business where in Europe, we have a model where we go both direct and through distribution. There clearly is an opportunity there to optimize, but in the current environment, we have decided to focus our efforts first on the manufacturing side and then we will get to the front end of the business.

Cliff Ransom - Ransom Research

Got it. Okay. The second question, can you tell us please, what is the exact status of the CEO search?

Michael Larsen

The update I can give you on the CEO search is that a search is on-going from internal, external candidates are being considered. It’s a rigorous search. The goal is to move as quickly as possible with the right level of care. And while I am not directly involved in this search process, my sense is that it’s nearing its final stages.

Cliff Ransom - Ransom Research

Okay. And then the last question is who were the two or three people inside of Gardner Denver today who are responsible for the continued spread of operational excellence, of the Gardner Denver way?

Michael Larsen

I would say it’s really not two or three people. In my mind, it’s all 6,400 employees that have been trained on Gardner Denver way over the last four years and that every day are looking for a better way to do things and are working to implement lean and velocity across our processes in the back office, whether you are in finance or legal or HR as well as the front end of the business and in our manufacturing plants. So, it’s much broader than two or three people, Cliff.

Cliff Ransom - Ransom Research

No, I am just trying to say, I mean, clearly Barry was a spark plug and a very important one over the last few years. And typically in every organization, not unique to GDI, there are one or two people who are the real champions who have the background and the experience to provide the role model and the energy, if you will. I am sitting here in the middle of Hurricane Sandy, and I am thinking who are the drivers.

Michael Larsen

I can't really answer that question indifferently. I mean, it's not two or three people, it’s really all 6,000 plus employees everyday focused on making the company better.

Cliff Ransom - Ransom Research

Okay. Thank you. I mean, ideally that’s what you want. So, thank you. Good day.

Michael Larsen

Thank you.

Operator

Our next question comes from the line of Jeff Hammond with Keybanc Capital Markets. Please proceed with your question.

Jeff Hammond - Keybanc Capital Markets

Hi, good morning guys.

Michael Larsen

Hi Jeff.

Jeff Hammond - Keybanc Capital Markets

Just to follow on the management issue, I mean, I think part of the departure there seem to be a good bit of management turnover, both at the higher ranks and in kind of within the organization. I am just wondering, one, have you been able to stabilize that? And two, just given the uncertainty about not having a CEO and now these strategic alternatives, are you able to start filling some of these holes that have happened as a result of some the turnover?

Michael Larsen

What I would say Jeff, I mean, I think, the leadership team and myself, we have spent a lot of time this last quarter really on stabilizing our employees and the management team. Like I said, I think we have done a good job. We really had insignificant attrition in the quarter. And while you can never get complacent, we are very focused on continuing to attract as well as retain and develop the talent that we have.

But I will also tell you that things appear to have stabilized in this short term. And so one part of the equation that you were referring to is obviously our employees, and the other part of our equation is our partners globally, our customers, our distributors, we have also spent a lot of time with them including myself over the quarter really reassuring them that nothing has really changed, and we have got a great company. As long as we stay focused on the customer and delivering results for shareholders, we are going to continue to be successful the way we have been in the past. So, that's really been the message and I would say it seems to be working.

Jeff Hammond - Keybanc Capital Markets

Okay. Great. And then, just back to the mud pump business and the weakness there. Have you started to see that in the shipments or revenues yet, or is that more in order comment and more perspective on when it starts to hit you on the revenue line?

Michael Larsen

Yes, Jeff, that’s really an order comment. I think when you look at – actually our drilling pump business is going to have a record year 2012. I mean, I am very proud of the, what we call them the Quincy pump team, they have done a terrific job managing the cycle this year and what is a very profitable business for us. And so record revenues and pump shipments this year.

And it's really more as we go into the first half of 2013 where we do not, as we sit here today, have the backlog that we would expect at this point. And so, as long as we are watching closely, we are staying very close obviously with our customers. We have got, as you know, a large customer in this space that is the kind of the premier and the premier provider of rigs in North America and also a customer that has never canceled an order. So, we are confident in the backlog here for the fourth quarter and we are anxiously awaiting new orders really for 2013.

Jeff Hammond - Keybanc Capital Markets

Okay. And then finally, you talked I think in your earlier comments about based on your customers and your view, maybe you would should start to see some recovery in the second half of '13 in the petroleum and pump business, but I just wanted to get a sense and maybe you said this already on the order front, but as you look at the orders you are getting, what your customers are telling, what you are seeing in the fluid end and a lot of these I guess frac pumps getting stacked, what really gives you the confidence that it's not more of a longer downturn versus kind of the snapback into second half of '13?

Michael Larsen

Yes, I don’t know if I would necessarily call it a snapback. I think what we are basically saying is that for the first half of '13, we are not expecting much of an improvement and that's primarily as a result of the inventory that exists with our customers. I think as pumps continue to run and generate profits with crude oil prices and natural gas inching up here in the $3.40 to $3.50 range, there is a replacement cycle on pumps and there is a repair cycle obviously on pumps and particularly wear and tear on the fluid end side of things.

So, you put those things together, you look at the installed base and the replacement, when you come up in the replacement cycle at about five years for a pump, you listen to what your customers are telling you. You look at third-party independent research reports and the consensus appears to be that if unless there is a significant change in rig count and commodity pricing, everything points to an improvement starting really in the second half of '13.

The way we think that might play out is probably we will see repairs first. We know there is – I wouldn't call it a bubble, but there is a build-up of repairs in the field today, and we will start to see those first. And then, as we burn through the excess inventory, we expect to see an uptick in the aftermarket fluid end side of things. And then finally pumps, and so – that you put all those things together, we really don't expect much of that improvement until the second half of '13. And I don’t think that we expect it to be a snapback. I think we would say probably a moderate sequential improvement starting in the second half of '13. But like I said earlier, I mean our crystal ball is no better than yours. And so, there is a lot of uncertainty here, business is cyclical, we know that, and we know how to manage through it, and we are doing our best here to protect margins in the business and improve working capital by reducing our inventories keeping our costs low, our staffing levels low.

And so, we will just have to manage through the cycle and be ready for when it comes back because the consensus is also that it will come back and when it does, we want to be ready and we want to have the best product in the market, so that we can serve our customers.

Jeff Hammond - Keybanc Capital Markets

Great, thanks guys.

Michael Larsen

Thank you.

Operator

Our next question comes from the line of with Mike Wherley with Janney Montgomery Scott. Please proceed with your question.

Mike Wherley - Janney Montgomery Scott

Good morning, guys.

Michael Larsen

Hi Mike.

Mike Wherley - Janney Montgomery Scott

I was just wondering on the China piece, you said that that’s 5% of sales. Is that 5% of IPG or 5% of the company?

Michael Larsen

5% of the company and about 2% of our earnings here. So, $0.10 to $0.15 of earnings per share.

Mike Wherley - Janney Montgomery Scott

Okay. And what sort of things did you see through the quarter there and are you getting any sense that it is getting close to a bottom or is it still getting worse?

Michael Larsen

I think it's too early to call a bottom in China. I know that others are doing that. I think that's too soon. I would also tell you this though that when you look at our quarter-to-date, you know, October, first three weeks, order rates, we are seeing an improvement in China. But it's too early to say that we have turned the corner in China for our business anyway.

Mike Wherley - Janney Montgomery Scott

Okay. And then just going to the restructuring, are you still expecting the 10 million to 15 million in savings to be realized in 2013?

Michael Larsen

Yes. I think, in terms of restructuring, nothing has changed relative to the August 16th announcement.

Mike Wherley - Janney Montgomery Scott

Okay. And this 300 basis points of margin accretion for IPG, what is the timeframe on that? Did you say by the end of 2014 you think you will have that?

Michael Larsen

That will be on a full year and exiting 2014, so you would expect to see a full year benefit in 2015 as the 300 basis points. So 2015 roughly will be first full year where you are going to get the total 300 basis points that we were talking about.

Mike Wherley - Janney Montgomery Scott

Okay. And then just quickly moving on to the EPG, this wasn’t clear on Nash and Thomas how they did in in the quarter as far as revenue?

Michael Larsen

Yes, I think those businesses were down slightly in the quarter. And like I said, I think for Thomas in line with what we saw in the second quarter. Nash had a very good first half and like I said, projects can be – revenue can be lumpy in that business and so they were down in the third quarter, but we expect based on what’s in the backlog for the fourth quarter since they are shippable projects, the Nash business is going to have a very strong fourth quarter and is on track to deliver a record year.

Mike Wherley - Janney Montgomery Scott

Okay. I guess the last question I have is kind of – on the EPG backlog, you said that the cancellation in P&IP were it’s only about 1 million, I was wondering what the year-to-date cancellation is in that part of the business and if that’s better than you had expected at this point based on what you saw three months ago?

Michael Larsen

Yes, I would say the team in P&IP, the commercial team and the management team have done terrific job managing through the cycle. If you add up our year-to-date cancellations and P&IP I think they are just slightly north of $7 million. I think relative to what you may have heard from other players in this space, I think that’s significantly lower than that. So, I would say it’s better than we had expected when we first started to see the news coming from some of our customers back in the March and April timeframe.

Mike Wherley - Janney Montgomery Scott

Okay. Thanks so much, guys.

Michael Larsen

Alright, my pleasure.

Operator

Our next question comes from the line of Joe Mondillo with Sidoti & Company, please proceed with your question.

Joseph Mondillo - Sidoti & Company, LLC

Good morning, guys.

Michael Larsen

Hi, Joe.

Joseph Mondillo - Sidoti & Company, LLC

I was wondering if you could talk about the North America piece of IPG, what kind of growth rates did you see in the quarter and how was that trending compared to the second quarter and what sort of your outlook on that piece of the business?

Michael Larsen

Yes, I mean, I think what I said was that you saw orders down double-digit in IPG Americas. I would say half of that decline was really driven by -- if you remember last year in the third quarter we talked about a very strong quarter in our truck blower business. As you see truck production decline or you will see that have an impact on our business. And that’s actually a fairly high margin product for us. So the fact that we are able to hang in there in terms of margins in the Americas despite this decline I think the team deserves a fair amount of credit. So, I would say going forward, IPG Americas are expected to probably move sideways from here on out, not expecting a significant improvement in the Americas either. And I think what we are seeing is similar to what we talked about in the energy business and really that customers are hesitating and are maybe waiting for some clarification around where they think the economy might be headed, and so we are not expecting much improvement in our IPG Americas business either here in the fourth quarter.

Joseph Mondillo - Sidoti & Company, LLC

Okay. Excluding that truck piece of the business how is the rest of that sort of faring?

Michael Larsen

The balance was down 5%. So I think total organic order rate down 10%. If you take out the truck blowers, the Americas was down 5%. So, I think we are really seeing -- and that’s fairly broad-based. I can’t tell you that there is any big outliers here. If anything things that you would expect to be a little more stable is maybe food and beverage, packaging, things like that, and then slightly larger declines beyond truck blower also in maybe the mining portions of that business. But fairly broad-based I would say in the third quarter.

Joseph Mondillo - Sidoti & Company, LLC

Okay, great. In terms of your share buyback program, how many shares did you buy back in the quarter, what price, and what’s left in the program?

Michael Larsen

Yes, I think what we said earlier, Joe, is that we did not buyback any shares here in the third quarter really in light of the announcement that we sent out on Thursday last week that the Board with their financial advisor is exploring strategic alternatives. In light of that we did not repurchase any shares in the third quarter. The buyback program remains in place. And kind of depending on where this exercise goes in terms of exploring strategic alternatives, we expect that that the buyback program is available to us and our view in terms of capital allocation strategy and our view of the stock and repurchasing stock opportunistically has not changed. It’s just in light of the work we are doing related to the announcement we made last week. We did not repurchase shares in the quarter. So, the remaining authorization is 1.6 million shares.

Joseph Mondillo - Sidoti & Company, LLC

Okay. How did the average amount of shares in the quarter decline by about 600,000, it looks like compared to the second quarter then?

Michael Larsen

Are you looking at the average number of outstanding shares?

Joseph Mondillo - Sidoti & Company, LLC

Yes, that’s correct. That’s just because you bought back at the end of the second quarter?

Michael Larsen

The other fact here is the dilution impact that we had here in the middle of the second quarter, okay.

Joseph Mondillo - Sidoti & Company, LLC

And then just lastly the tax rate is a little under than what I expected, why is that --?

Michael Larsen

We have filed our tax return here in the quarter. So, these are really the Gardner Denver team as the tax team in particular. So, as we chew all these things up, we came in a little bit better than what we thought for the quarter. What I would expect like we said is that our rate going forward remains in the 27% to 28% range.

Joseph Mondillo - Sidoti & Company, LLC

Okay, great. Thanks a lot.

Michael Larsen

Thank you.

Operator

Our next question comes from the line of Brian Konigsberg with Vertical Research, please proceed with your question?

Brian Konigsberg - Vertical Research

Yes, hi.

Michael Larsen

Hi, Brian.

Brian Konigsberg - Vertical Research

Hi, good morning. Call is getting long here, so I will try to be quick. Just as far as the channel inventories you guys discussed that a couple of times, is there a way to quantify that at all? Is that all OE or is there any degree of fluid ends actually stacking up in the channel as well?

Michael Larsen

Yes, I mean what’s stacking up is -- or what stacked up I should say previously because right now there is not much being added to that inventory obviously. Our OE pressure pumps, as well as fluid ends, and so the inventory that was ordered late 2011 shipped in the first half of 2012, there are some attempts of quantifying this. I think we said that anecdotally about 15% is awaiting repair. The number in terms of excess inventory that was declining every day as these pumps are running, so the number that I heard a couple of months ago may not be accurate anymore, but the estimate at that time was about 10% to 15% of the installed based was basically new excess inventory awaiting to be put in use.

Brian Konigsberg - Vertical Research

I understand during the quarter you said actually pricing was fairly good, so I assume as far as fluid ends you were holding your share pretty well. I mean, are you seeing some incremental encroachment by peers trying to kind of gain share just given that the OE component has pretty much deteriorated that significantly?

Michael Larsen

I think, Brian, it’s tough to get good share data on a real time basis. What I would say is similar to the comment I made upfront that if you want a quality fluid end that’s safe and reliable and that lasts longer than what you expect to see from a third-party fluid end, you really don’t have much choice. So given that we are also selling to a fairly short list of customers that happened to be some of the biggest players in this space and given also that we didn’t as you may know raise prices aggressively over the last two years on the up cycle we are not seeing significant pressure here in terms of price in pressure pumping. So the number I gave you was EPG in the third quarter, 2% positive price realization and it’s the same on a year-to-date basis. So, I would say, so far we have not seen significant price pressure.

Brian Konigsberg - Vertical Research

Just one last quick one. This might be a better -- well it is a better question for the service providers, but in your view, I mean, at what point do we start to sees some incremental drilling on the gas side? Do you guys have kind of a price point in mind where you see some of the basins start to ratchet up some production, just curious to hear your take on that?

Michael Larsen

I think it’s very hard to call that, Brian. Like I said, my crystal ball is not better than yours or our customers’ frankly. I think, there is two factors. One, you don’t want a lot of volatility, okay, so to the extent that prices remain stable that’s helpful. The other thing I would say is $85 crude oil is attractive and the economics work well. On natural gas, I mean we have come a long way since the 10-year lows earlier in the year. Anecdotally, we are hearing $3.50, $4.00 is when you would expect to see a significant ramp up again, but there is a lot of other factors here at play. So we don’t have a kind of threshold here, but we think this thing is going to come roaring back, alright. So, that’s why supply chain we need to stay flexible and be ready in the event that customer start ordering equipment again.

Brian Konigsberg - Vertical Research

Alright, thank you very much.

Michael Larsen

Alright, thank you.

Operator

There are no further questions at this time. I would like to hand the floor back over to Michael Larsen for closing comments.

Michael Larsen

Alright. Thanks everybody for joining us this morning and we wish you all a great day. Take care.

Operator

Ladies and gentlemen this concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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