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Executives

Blaise E. Derrico - Director of Investor Relations

Vincent R. Volpe - Chief Executive Officer, President, Executive Director, Interim Vice-President of Europe, Middle East & Africa and General Manager of Europe, Middle East & Africa

Mark E. Baldwin - Chief Financial Officer and Executive Vice President

Analysts

James C. West - Barclays Capital, Research Division

Robin E. Shoemaker - Citigroup Inc, Research Division

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

David Anderson

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Igor Levi - Morgan Stanley, Research Division

Jonathan Donnel - Howard Weil Incorporated, Research Division

Thomas Curran - Wells Fargo Securities, LLC, Research Division

John A. Scott - Johnson Rice & Company, L.L.C., Research Division

Julien Laurent - Natixis S.A., Research Division

Dresser-Rand Group (DRC) Q4 2012 Earnings Call March 1, 2013 9:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to Dresser-Rand's Fourth Quarter and Year-End 2012 Earnings Conference Call. My name is Mimi, and I'll be your coordinator for today's call. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. [Operator Instructions] I'll now turn the conference over to Blaise Derrico, Director of Investor Relations. Please go ahead.

Blaise E. Derrico

Mimi, thank you. Good morning. This call is open to the public. It's being webcast simultaneously at www.dresser-rand.com and will be temporarily archived for replay. A copy of the news release we issued yesterday is available on our website, as are the slides we will use today during our presentation. We will let you know when to advance the slides as we deliver our prepared remarks.

Please turn to Slide #2. The statements made during this conference call that are not historical facts may be forward-looking statements. Forward-looking statements involve risk and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. In addition, this conference call contains time-sensitive information that reflects management's best judgment only as of the date of the live call.

Management's statements may also include non-GAAP financial measures. For reconciliation of these measures, refer to our earnings news release or the conference slides available on our website.

Dresser-Rand does not undertake any ongoing obligation other than that imposed by law to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after this call. Further information concerning issues that can materially affect the financial performance related to forward-looking statements can be found in Dresser-Rand's periodic filings with the SEC.

I'll now turn the call over to Vince Volpe, our President and CEO.

Vincent R. Volpe

Thank you for joining us today, and welcome to Dresser-Rand's earnings conference call. I'll start with a few opening comments, and Mark Baldwin, our Chief Financial Officer, will follow me with a detailed discussion of our fourth quarter results.

Please turn to Slide 3. Overall, 2012 was a good year, with another year of record bookings and record level year-end backlog. Operating income was approximately 30% higher compared to 2011 despite our 2012 results being adversely affected by certain project delays and, as compared to 2011, a stronger U.S. dollar. We estimate the impact of the adverse translation of the stronger U.S. dollar to be approximately $20 million.

Please turn to Slide 4. I'm especially proud of our safety performance. Safety is a core value of our company, and we continue to make progress toward our goal of 0 injuries. Our total recordable incident rate for 2012 was 0.41, which improved 28% compared to 2011. This is significant, as we believe the prior year's industry average is nearly 10x higher.

While our principal emphasis on safety is to safeguard the well-being of our employees and others involved in our business, it's also important to recognize that a strong safety performance is a proxy for a culture of discipline that results in operational excellence, which inures to the benefit of our clients and shareholders, as well as our employees. We believe that safety, quality and operational excellence are inextricably linked. We share our client's belief that safety excellence requires the same kind of discipline as quality, on-time delivery and cost reduction.

Please turn to Slide 5. The markets for our products and services remained strong in 2012, and we achieved record levels of bookings in both segments. Industry fundamentals are positive. And all prices remain at levels that support continued investment in the worldwide energy infrastructure, and inquiry activity is robust. As such, the markets for our products and services are expected to remain strong throughout 2013.

That said, there appears to be evidence that several major project closings may be delayed approximately 6 months, principally due to resource constraints at the engineering contractor and end-user client levels, as well as continued work by the end-user clients to reduce project CapEx. We estimate the impact of these delays on the order of magnitude of $150 million, which moved from the fourth quarter 2012 to midyear 2013.

Based on the feedback we have received from our clients, we expect another record-setting year for both new unit and aftermarket bookings at this point, and our record-setting year-end backlog gives us a solid start for 2013. As such, we are reiterating our previous guidance for bookings for this year.

Please turn to Slide 6. New unit bookings of approximately $1.6 billion were 9% higher than 2011 and reflect continuing recovery across worldwide energy infrastructure markets, with major orders coming from midstream and upstream oil and gas segments. We consider this a very strong performance as 2011 contained a $400 million new unit booking for Petrobras, which was approximately 3x larger than what we would consider a typical major order.

As I just mentioned, we experienced delays in the closing of several projects, which resulted in our new unit bookings for the year falling slightly below the bottom of our guidance range. These orders should still come to us, though it may be midyear or later in 2013. As a point of clarification, our formal bid activity increased by over 20% year-over-year from 2011 to 2012, which is a concrete indicator of continued strong market activity.

In the new unit segment, fourth quarter bookings of $363 million were approximately 61% higher than the corresponding period in 2011. Major new unit awards in the fourth quarter include the sale of compression and power generation equipment for an offshore production platform in the North Sea, a compressor and turbo expander train for a chemical facility in the U.S., main refrigeration compressors for 2 mini-LNG plants and compressors for another major pipeline in China.

I mentioned on last quarter's call that we were focused on a number of major pipeline projects planned for China and the former CIS countries. The most recent order is the fourth pipeline award that we booked in 2012. The total order value of these 4 awards amounts to nearly $290 million. We expect sustained activity in this segment over the coming years in these 2 regions of the world.

We also received an order from the Applied Innovation Institute, a research and development company located in Switzerland, to supply a DATUM C for a wind tunnel application. Turn to the next slide, please. This award is strategically important because the compressor package will incorporate our recently acquired magnetic bearing technology.

This will be the first application of our magnetic bearing technology in the ICS product family. This compressor package will incorporate our DATUM C technology, which is the foundation upon which the ICS, or Integrated Compression System, is built. The ICS combines in a single casing separation and compression. And additionally, it integrates process cooling into a single, compact package for both topsides and, ultimately, we believe, subsea applications. Because of its integrated totally enclosed configuration, the DATUM C compressor offers significant environmental benefits, including emission-free design, quiet operation, reduced footprint, no on-site leakage from shaft seals and magnetic bearings that eliminate the need for oil lubrication.

You may recall, we acquired magnetic bearing technology early last year through the acquisition of Synchrony, a product development company, and, at the time, noted the strategic importance of being able to offer oil-free solutions and high-speed rotating equipment applications. This order for applied innovation marks our anticipated product launch. Over time, we expect that the mag-bearing technology used on this commercial project will be available across our entire product platform going forward.

It also should be noted that the present ICS program with Statoil will incorporate the use of this same Synchrony-based bearing technology. Magnetic bearings can be used to replace any oil-lubricated bearings used in turbomachinery, such as our DATUM centrifugal compressor product line, as well as in our steam turbines. It should also be noted that this technology will open up an excellent opportunity in the aftermarket for retrofits, as clients consider solutions that will help reduce the use of lubricants in their rotating equipment installations.

Please turn to Slide 8. Aftermarket parts and service bookings of $1.5 billion were approximately 13% compared -- higher compared to 2011, which reflects the ongoing economic recovery in most regions, especially the Middle East and Latin America. The stronger U.S. dollar had an adverse impact on 2012 aftermarket bookings of approximately $65 million or 4% compared to 2011. Such that in real terms, the growth was approximately 17% year-over-year. Aftermarket bookings of $362 million for the fourth quarter were 8% higher than the corresponding period in 2011.

Please turn to Slide 9. Our backlog at the end of December of approximately $2.9 billion was at a record year-ending level and was 15% higher compared to the end of 2011. The new unit backlog of $2.4 billion was up 14% versus a year ago, and the aftermarket backlog of $575 million was up about 21%. Our backlog gives us a good start on 2013 as approximately $1.7 billion of the new unit backlog is scheduled for delivery this year.

I'll have more to say about our outlook in a moment. But first, I'll turn the call over to Mark for a closer look at our fourth quarter financial results.

Mark E. Baldwin

Thank you, Vince, and good morning, everyone. Please turn to Slide 10. Total revenues for the fourth quarter 2012 of $844 million were up approximately 14% compared to $738 million for fourth quarter 2011. Revenues in the fourth quarter 2012 would have been approximately $14 million higher by applying exchange rates from the corresponding periods in 2011.

New unit revenues were $399 million for the fourth quarter 2012 compared to $343 million for fourth quarter 2011, an increase of $56 million or approximately 16%. New unit revenues in the fourth quarter 2012 would have been approximately $4 million higher by applying exchange rates from the corresponding period in 2011.

Aftermarket parts and services revenues were $445 million for the fourth quarter 2012 compared to $395 million for the fourth quarter 2011, an increase of $15 million or 13%. The increase in aftermarket revenues reflects the ongoing economic recovery in most geographic regions, particularly the Middle East and Latin America. Aftermarket revenues in the fourth quarter 2012 would have been approximately $10 million higher by applying exchange rates from the corresponding period in 2011.

Turn to Slide 11, please. As I previously mentioned, revenues for the fourth quarter were approximately $844 million, a record level. Cost of sales was $596 million for the fourth quarter 2012 compared to $509 million for the corresponding period in 2011. As a percentage of revenues, cost of sales was 70.5% for the fourth quarter 2012 compared to 68.9% for the fourth quarter 2011. The increase in cost of sales as a percentage of revenues was principally the result of a shift in mix from the aftermarket segment to the new units segment, as well as a change in mix within the new units segment.

Selling and administrative expenses were $98 million for the 3 months ended December 31, 2012 compared to approximately $95 million for the corresponding period in 2011. The increase was due to the $5 million of expenses we incurred associated with the previously disclosed Guascor realignment. As a percentage of revenues, selling and administrative expenses for the fourth quarter 2012 decreased to 11.7% from 12.8% in the corresponding period in 2011.

R&D expenses for the 3 months ended December 31, 2012 were approximately $13 million compared to $7 million for the corresponding period last year. The increase is consistent with our strategy to introduce new and innovative products and technologies with a focus on key new product development.

Total operating income for the fourth quarter 2012 was $138 million compared to operating income of $128 million for the fourth quarter 2011. As a percentage of revenues, operating income for the fourth quarter 2012 was 16.3% compared to 17.3% for the corresponding period in 2011. Fourth quarter 2012 operating income increased compared with corresponding period in 2011, principally due to higher volumes. Fourth quarter 2012 operating income as a percentage of revenue decreased compared with the corresponding period in 2011 due to the previously mentioned overall shift in the mix of revenues to the new units segment from the aftermarket segment, realignment expenses and higher R&D spending.

Interest expense net was approximately $12 million for the 3 months ended December 31, 2012, which compares to $17 million for the corresponding period in 2011. The decrease in interest expense is principally due to the settlement of a long-standing dispute over loan terms in one of our foreign subsidiaries, which reduced the corresponding interest by approximately $3 million. This will not repeat, so our future run rate should not be based on our fourth quarter results.

Other expense net was $800,000 for the fourth quarter 2012 compared to other expense net of $4.3 million for the corresponding period last year. This line item consists principally of net currency gains and losses, gains and losses on tradable emission allowances and income and losses from equity investments.

In the fourth quarter 2012, the effective tax rate was approximately 34.5%, which was slightly higher than expected due to the shift in the mix of our foreign earnings to countries with higher tax rates. We currently estimate a reduction in tax expense of approximately $4 million will be recorded in first quarter 2013 as a result of Congress passing the extenders bill on January 2, 2013, which will allow us to retroactively claim an R&E credit for 2012 and exclude from U.S. federal taxable income certain income from foreign affiliates, sometimes referred to as subchapter F income for tax purposes. Accounting rules prohibit us from applying the change in law to the 2012 tax calculations since the law was enacted in January 2013. Nevertheless, the overall effective tax rate for 2012 was 33.7%, which is within the range of our prior guidance of 32% to 34%.

The $1.3 million of net income attributable to noncontrolling interest recorded in the fourth quarter 2012 relates our partners' share of net income and net losses in consolidated entities that are not 100% owned by us. As you can see at the bottom of the slide, net income attributable to Dresser-Rand for the fourth quarter was approximately $80 million or $1.05 per diluted common share. This compares with net income attributable to Dresser-Rand of $69 million or $0.91 per diluted share for the fourth quarter 2011.

Next slide, please. New unit operating income was $49 million for the fourth quarter 2012 compared to operating income of $44 million for the fourth quarter 2011. This segment's operating margin was 12.4% for the fourth quarter 2012 compared to 12.9% for the fourth quarter of 2011. Standard variable margin, or SVM, for the period, which is an internal measure we use to analyze profit margin before period costs, decreased approximately 160 basis points compared to the fourth quarter 2012 due to a change in the mix of projects and the change in mix within the segment, as major buyouts in the fourth quarter of 2012 made up a higher percentage of overall new unit revenues, partially offset by the benefit of a cancellation fee.

Next slide, please. Aftermarket operating income was approximately $124 million for the fourth quarter of 2012 compared to $109 million for the fourth quarter 2011. This segment's operating margin was 27.8% for the fourth quarter 2012, which was slightly higher than the fourth quarter 2011. A more favorable mix within the segment helped improve our standard variable margin. This SVM improvement within this segment was largely offset by higher period costs.

Next slide, please. Turning to cash flow. Net cash provided by operating activities for full year 2012 was approximately $93 million compared to $108 million for the full year 2011. Cash provided by operating activities in 2012 was lower than 2011 because working capital consumed a significant amount of cash, which more than offset higher net income and lower pension contributions.

In 2012, our investment in working capital increased by approximately $224 million, and we contributed $21 million to our pension plans in accordance with our funding policy. Our pension contributions in 2011 totaled approximately $33 million. We currently expect to contribute approximately $15 million to our pension plans in 2013.

Turn to Slide 15, please. Net working capital at the end of the fourth quarter was $303 million, which was approximately $224 million higher than where we ended last year. Let me point out changes in certain components of net working capital comparing the balances at the end of 2012 to those at the end of 2011. Accounts receivable increased $89 million as a result of higher sales volume. Inventories net increased $144 million, reflecting the higher backlog and an active cash flow-producing power facility held in inventory pending sale that is now targeted for later this year.

As noted, our working capital rose again in the fourth quarter. Net working capital in 2012 based on a 12-point average was approximately 5.8% of 2012 sales. This compares to an average of 1.6% for the period 2006 to 2011.

On last quarter's call, we cited issues involving 4 major projects principally contributing to our increase in working capital. One of these projects relates to the previously mentioned power facility held in inventory pending sale later this year. The other 3 projects involve delayed payments all from national oil companies, or NOCs. The largest of these was substantially collected. But due to continuing business with these NOCs, as well as other NOC clients, several new milestone billings are experiencing similar delayed collections. While we expect to be paid in full, as has been our historical experience, our NOC business and corresponding payment behavior is a significant and growing portion of outstanding billings.

Next slide, please. The shifting of our new unit bookings in 2012 more to the NOCs also skews our billings to regions where payment due dates are customarily longer and bureaucratic processes further delay payment of milestone billings. You can see on this slide the impact of these delayed milestones by looking at the ratio of the total of progress payments and customer advance payments to gross inventory. Historically, the ratio has run about 90% and is now running at approximately 70%. This 20-percentage-point difference on a $900 million gross inventory explains $180 million of our net working capital increase. 2009 at 66% is an outlier and can be explained by the recession, causing our clients to hit the pause button and our new unit orders being cut in half.

As a result of this change in mix of our new unit business to a higher percentage of NOC work, we now expect our net working capital as a percentage of sales to increase from historically below 5% to 10% or below, which we believe is still reflective of a low capital-intensity business as compared to other oil services and equipment manufacturers.

Next slide, please. In 2012, net cash used in investing activities of $124 million compares to $346 million for 2011. Cash used in investing activities for 2012 includes capital expenditures of $73 million, which totaled approximately 2.7% of 2012 sales. Also included in 2012 investing activities is approximately $49 million associated with the acquisition of Synchrony and $12 million related to an additional equity investment in the noncontrolling interest of Echogen Power Systems. Included in investing activities last year was $284 million related to the acquisition of Guascor and a $10 million initial investment to acquire a noncontrolling interest in Echogen.

Financing activities provided cash of $27 million in 2012. This compares to 2011 when financing activities used cash of $53 million, which is a net amount, resulting principally from the refinancing of our long-term debt and the stock buyback programs we effected last year.

Turn to Slide #18, please. At the end of the fourth quarter, our liquidity totaled approximately $354 million and consisted of approximately $123 million of cash and $231 million of available borrowings under our bank credit arrangements, as we had outstanding borrowings of $315 million, and $220 million was used for outstanding letters of credit. At the end of the fourth quarter, we also had approximately $120 million of letters of credit and bank guarantees drawn under uncommitted bank lines.

Next slide, please. At the end of 2012, our net debt-to-capital ratio was approximately 42%, and net debt to our last 12 months EBITDA was approximately 2.2x. For more information about our results for 2012, please refer to our 10-K, which we filed last night with the SEC.

With that, I'll turn the call back to Vince for closing comments and to moderate our Q&A session.

Vincent R. Volpe

Thank you, Mark. Turn to Slide #20, please. As previously mentioned, we are essentially reiterating guidance for bookings and our financial performance for this year. We expect bookings to increase in both segments from 2012 levels. We estimate new unit bookings to be in the range of $1.8 billion to $2 billion. Our end markets remains strong. However, as I mentioned earlier, as a result of the high project activity, engineering resource constraints at the EPC and client levels and CapEx-reduction efforts, we have seen project awards being pushed out. Therefore, we currently forecast that our new unit bookings will be back-end loaded, with as much as 2/3 potentially coming in the second half of the year. With respect to the aftermarket, we expect bookings to be in the range of $1.6 billion to $1.8 billion.

As to revenues, we expect total revenues of approximately $3.5 billion to $3.7 billion, with new unit revenues at approximately 55% of the total. We expect our operating income to be in the range of $450 million to $530 million.

We understand that this is a wide range. But at this point in time, there is still uncertainty due, on one hand, to the variability and the timing and size of very large orders in the new units segment, and on the other hand, heightened geopolitical risk, especially in Latin America and Northern Africa, which could have a more immediate impact on our aftermarket bookings and revenues. Indeed, since the time of our previous guidance, there has been a devaluation in Venezuela, a conflict in Libya and other Northern African countries where we do considerable aftermarket business. Traditionally, bookings for the combined Venezuela, Libya, Algeria, Tunisia, Egypt and a few other Northern African countries, subject to geopolitical risks, totaled approximately $170 million.

Any interruption, even if only short term in nature, may have an almost immediate impact on the approximately $1 billion of book and ship required in the aftermarket this year. In light of this, we presently, and I repeat, presently have a bias toward the lower half of the aforementioned operating income guidance range.

For financial modeling services -- purposes, we also provide the following assumptions for 2013: New unit operating margins to be approximately 10%, reflecting the relative value of new unit revenue to total revenues and the associated allocation of fixed costs to the new unit segments -- segment. New unit revenues represented 48% of total revenues in 2012 and are expected to increase to approximately 55% of total revenues in 2013.

Two, aftermarket operating margins to be in the range of 23% to 25%. Three, unallocated expense is expected to be approximately $120 million to $130 million. For 2013, R&D expenses are expected to increase from approximately $30 million in 2011 to approximately $50 million -- excuse me, $30 million in 2012 to be approximately $50 million in 2013. Four, interest expense is expected to be approximately $60 million.

Five, other income and expense net is expected to be approximately $10 million, which represents the estimated impact of the recent devaluation of the Venezuelan bolivar and the losses from equity investments, principally our investments in Ramgen Power Systems and Echogen Power Systems, both of which are development companies working on exciting new technologies, such as supersonic shock wave compression and innovative heat tool electricity power generation systems.

Six, the effective tax rate is estimated for 2013 to be approximately 32% to 34%. Seven, approximately $7 million of noncontrolling interest related to our partners' share of net income and consolidated entities that are not 100% owned by us. Eight, diluted shares outstanding are expected to be approximately $77 million to $78 million. And nine, finally, given the rapidly changing geopolitical landscape in the future, we plan to provide initial full year guidance on our fourth quarter when we have greater visibility for both segments.

Turn to Slide #21, please. I wanted to share with you some insights into our first quarter outlook. Let me start by pointing out that our business has a seasonal pattern that is continuing. For example, our first quarter operating income for the last 8 years was only 14% of the full year. And if we were to exclude 2010, which, because of the recession, was a bit of an outlier, the average is 12%. At present, we expect the first quarter 2013 operating income to be between $60 million and $70 million, which would represent between 12% to 14% of the midpoint of the guidance range. This is consistent with historical performance.

There are 2 items that will impact first quarter results below the operating income line. First, the recent devaluation of the bolivar mentioned earlier. We estimate the impact will reduce pretax income by approximately $4 million. Second, as previously discussed, we currently estimate a reduction in tax expense of approximately $4 million will be recorded in the first quarter 2013 in connection with the recently passed extenders bill.

Turn to Slide #22, please. Before opening the line for questions, I wanted to reflect a moment on the progress we have made as a company. I would say that our journey to date has been a success. Since we've gone public in 2005, we have grown revenues at more than 12% compounded annually. More importantly, we've been able to create significant shareholder value in both absolute and relative terms.

As you can see on this slide, during this period of time, Dresser-Rand achieved a total shareholder return of 177% compared to the OSX, which was up 32%, and the Dow which was up 24%.

We believe this level of performance can continue. The underlying fundamentals of our served markets and our ability to extract value have never been stronger. We have a great opportunity ahead of us. Our markets, which extend beyond traditional oil and gas, are strong, and our backlog is at a record level. We believe we have sustainable competitive strengths.

Additionally, we have initiatives underway to accelerate growth through technology platform extensions and infrastructure investments. We have a solid strategic plan and an outstanding group of employees across our company to help ensure we successfully execute this plan.

Thank you for your attention. At this point, we'll open the line for questions. Operator, please begin the Q&A session. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from James West of Barclays.

James C. West - Barclays Capital, Research Division

Vince, a couple years ago at your Analyst Day, you had outlined a scenario where you addressed it would get to some $4 billion in revenue and about $700 million in op income in '14. Understanding that '13 has some moving parts to it, and you outlined a lot of those in your prepared remarks, is that still an achievable level of revenue income for '14?

Vincent R. Volpe

I think, James, I would say, yes. I think it's achievable. I think part of it depends on currency. If you currency adjust those numbers from the time that we made the projections in 2010, there is a significant change. And I don't know if Mark's got the numbers off the top of his head. But it's -- I think on the operating income line, it's -- I don't know, $20 million to $40 million or $50 million. I mean, it's a pretty good number, right? So whatever that is, we can go back and look at it. And so -- but I think in terms of the fundamental business, James, if you say you've got a business that you think is going to be sort of in the mid-$3 billion this year in revenue, 2013, and you believe that you're going to book more than you're going to ship, which is what we're forecasting, that means you're going to build backlog again, I don't think that it's an unreasonable -- I don't think it's an unreasonable view. And the other thing you got to look at is, if you don't hit it right on the spot, you might hit it a month later on a trailing 12-month basis. So broadly speaking, I think the target is still achievable.

James C. West - Barclays Capital, Research Division

Okay. Okay, good to hear. And then just a follow-up for me. The projects that got pushed from 4Q into the middle of the year, I know you talked about engineering delays there and other issues, are these offshore projects, onshore projects? Could you give some color there and maybe perhaps what regions of the world you're seeing those delays?

Vincent R. Volpe

They're offshore. And -- they're offshore, and at least one of them is in the North Sea. One of them was in -- there were really 4 project, James, and it was between 150 million and 200 million. And we had -- and they're all offshore and you've got –- they've got pretty good spread on them: one's in Asia Pacific, one's in the Gulf of Mexico and 2 are in the North Sea. I want to just -- I just want to build on that. We have provided guidance that says up to 2/3 of our bookings may be in the second half of the year. I didn't say 2/3 of the bookings will be in the second half of the year. There's a difference. We've seen these projects move out. That's between $150 million and $200 million of business in 4 jobs. I don't know if that's a proxy for other stuff moving out. We think those have moved out about 6 months. And so you should -- I think we're exercising a bit of caution, okay. I do think that the first quarter will be sort of on the order of magnitude of Q4, so in terms of what you're expecting Q1. These things moved out, for the most part, past the first quarter. Second quarter, maybe same order of magnitude or maybe better. So let's not give up on Q2 being strong. But we're sort of -- in the interest of caution right now, we don't know if this is a proxy for bottlenecks in other places, where projects are being executed, or if in fact, the other projects will go sort of when we expect them to go. And the final thing I would say, to reiterate, all 4 of those projects, we strongly believe, are going to be for Dresser-Rand. So this is not about these projects going away or going away from Dresser-Rand. It's strictly movement.

Operator

Our next question comes Robin Shoemaker of Citi.

Robin E. Shoemaker - Citigroup Inc, Research Division

I wanted to ask you if you -- or experienced in the fourth quarter any new unit shipment delays, where -- which might have been either on -- of your own account or customers that requested delayed delivery of new units.

Vincent R. Volpe

We executed as we expected we would. We had a conversation a year ago about things that moved out and the issue around motors and generators. That has been solved, I'm happy to report. We don't have project management issue that we had last year as it relates to that commodity or any other commodities for that matter. So very pleased to report that, that's behind us. So we understand we have an accounting policy that is then -- has been vetted thoroughly, and we believe it's correct. But nonetheless, it's pretty harsh when it comes to recognizing revenue. We bake that into our comments the best we can, and so we pretty much got what we expected, Robin. In terms of shipments, some things slipped out, some things got pulled in. But broadly speaking, we're -- we forecast $140 million in operating income, which is an awfully big quarter. We came in within about 1% or 2% of that, in terms of what we actually achieved. I know there are some out there that may look at that as a miss. But I guess my question back to you is if we would have exceeded the number by a couple of million instead of being a couple million short on $140 million, would you have considered it really a beat? I wouldn't have. I think what I'm saying is that the quarter is pretty much in line from an earnings standpoint with what we expected. No major project issues, no major project management issues. Yes, we've got clients pushing, and they don't want to sign this sheet of paper or that sheet of paper. We had one -- listen to this. We delivered this -- this was worth a couple million bucks. We delivered the -- what needed to be delivered. We opened -- part of the delivery term was to open an insurance policy in favor of the -- or to have an insurance policy in favor of the client, we did. So that was fine. We just never gave the client the piece of paper that said so. And so when it got to our internal controls, we were not able to recognize the revenue, because we literally didn't hand the customer a piece of paper. So that stuff happens. There's a lot of complexity in this business, and there's a lot of complexity to revenue recognition. But fundamentally, we did what we expected we would do from an earnings and shipment standpoint, and we're very pleased with the results.

Robin E. Shoemaker - Citigroup Inc, Research Division

Okay, great. So the -- it's just the reason it prompts the question is some other equipment manufacturers have said -- have cited some delays, which -- in deliveries, which had more to do with the customer actually requesting a delay, either because of the manpower constraints or they just weren't ready to take delivery. But it sounds like that's really not the -- that's not applicable to what you're seeing.

Vincent R. Volpe

Sometimes that happens. But normally when it does, we try and find an arrangement where customer takes title and the unit goes into storage. Because this -- our stuff is pretty long lead, and so they give themselves a buffer. We principally deliver on time, which means for them, a lot of times, it's early. And so there are times when things need to go into storage. But customers are usually pretty good about taking delivery. Every now and again, you get kind of a bad customer out there that wants to find reasons, and he'll come in and send a bunch of inspectors in to find a wire that's bare or something. But for the most part, customers are pretty good.

Robin E. Shoemaker - Citigroup Inc, Research Division

Okay, great. So then my other question had to do with the new unit margin guidance. And just generally, the question is, if back in 2009 and '10 when you had 13.5% new unit margins, was that -- is that still achievable? And is now this kind of 10% level, where you've been in '11, '12 and now '13, is that really more representative of the kind of bookings you're -- you have now in the competitive environment versus those years when you had significantly higher new unit margins?

Vincent R. Volpe

Let me answer the question -- let me answer your first question first, which is those margins are achievable. What we did in '09 and '10 are achievable. The road there is going to be somewhat different than it was before, okay. What happened in '09 and '10 was we had -– pricing was stable and we had a drop in -- we had contracts in hand. The recession hit, and we had a drop in material costs that we're able to benefit from. We were able to go back to our suppliers before giving them an order and saying, "I know you committed to 100, but now it's going to be -- 90 or 80 is your price, because everything has dropped." Meanwhile, we still had the full price from the customer. So that was one thing that helped us and gave us a little bit of tailwind in that '09/'10 period because '08 was at 11%, right? '08 was at 11%. The other thing was the mix of new units to aftermarket was different, and so we had -- largely 50% of our volume was aftermarket. And so what's happening now is the new unit business is growing a little bit faster because we've got some of these larger projects. There's more of what we call these major buyouts in them. And so we've got 2 things going on in our business right now. One is a higher mix of new units versus aftermarket. And to give you a -- just to kind of give you a data point, okay, had we have the same variable margins that we had in 2012, but with the mix that we had in 2011 of units versus aftermarket, we would've -- our unit margins would've been about 80 -- 70 or 80 basis points higher than they were, just based on the mix, okay. So that's just under one percentage point, with nothing changing other than you take some money away from the aftermarket and you give it to the units. The second piece is inside the new unit business, you have got significant, what we call, buyouts, where we put 10% profit margin on top of those buyouts. And so that -- as that number grows, that has a somewhat dilutive effect on the total, whereas the margins -– the gross margins or the variable margins on what we fabricated in-house are somewhat higher. So you got 2 things sort of working against you. So -- however, I still come back to, yes, I believe, we can get to the numbers that we were at in the past, the sort of the 13%, 13.5% range, whatever those were. Maybe even at some point in time, higher. Who knows? The way there, though, is different. The way there is operating leverage. And I also think that it should not go unnoticed that we are spending a lot of money in expense right now in R&D. We are continuing to build out our IT infrastructure, which is expensive, and we're going to do that for another year or 2. So I think – what'll happen is operating leverage will continue to pull us up. We're not going to add new factories or a lot of square meters or square feet. We're going to continue to lean our processes out. We've got good manufacturing flexibility. We will get operating leverage, and those margins will come back over time.

Operator

Our next question comes from Jeff Spittel of Global Hunter.

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Can we start off, Vince, with your new units booking expectation for the year and speak a little bit about what percentage of that you would expect to come from offshore production infrastructure, and then maybe whatever color you can provide on what component of that FPSO this might represent?

Vincent R. Volpe

Well, if I use the inquiries, Jeff, as a sort of proxy for what we're going to book, I think we've got, as an example -- our inquiries were up 20% year-over-year, formal inquiries. And so as people get the heebie-jeebies about the fact that we were light in the fourth quarter on bookings, the formal inquiry level is up 20% year-over-year. That is a very concrete proxy for next year's activity, and the upstream activity was up 30 -- over 30% year-over-year. Now in terms of our forecast, which we know is wrong, it always changes, right, from now until the end of the year, we've roughly got about half of our business, so call it between 40% and 50% coming from the upstream. And then we've got the other 2 principal pieces, which is downstream and midstream, sort of divided equally amongst them, with the environmental services slightly below that. So I would say -- well, hold on, let me correct myself. We've got a little between 40% and 45% on upstream. I just found the actual percentages here, so let me give them to you: between 40% and 45% upstream; 10% to 15% midstream, that could be a little higher; downstream, between 15% and 20%; environmental services, between 25% and 30%; and then other is -- makes up the rest. So again, principally, upstream, and the preponderance of that would be floaters, Jeff.

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Got you, very good stuff. Okay. And then modeling question on Q1. There's a lot going on in both segments. Anything you could do to help us out in terms of moving parts that are going to impact the segment operating margins in the first quarter specifically?

Mark E. Baldwin

Jeff, it's Mark. But one thing -- historically, that first quarter has been a slower quarter. That's where we're guiding $60 million to $70 million. Our fixed costs are spread roughly 25% per quarter, in our fixed or period costs. And therefore, the overall margins for the first quarter are going to be lower because of those fixed costs being spread ratably than our overall full year guidance, Jeff, is all I'd say right now.

Operator

Our next question comes from David Anderson of JPMorgan.

David Anderson

Vince, I was just curious on your guidance. You were talking about the low end about 35%, growth in operating margins up to 60%. Can you help us understand how -- what the variables are? And is there a particular kind of region, or is it a part of the segment that kind of is the big swing factor there?

Vincent R. Volpe

Yes, that's a good question, David. I know it's a huge range. Let me repeat that, sort of to start with. And I will also tell you that we have a path to both of those endpoints, both the high end and the low end, and so we -- that's why we reiterated the range. I know I led you right now to the bottom half, because of the some of the things I talked about, but we didn't change the range from what we said before. We believe in that range. What gets you to the bottom part? If you get significant delays in some of the new unit work -- a lot of the new unit stuff we book now isn't going to ship this year anyway. Even if we booked it January 1, it would go January 1, 2014 or later. But you do get absorption from that stuff in terms of hours, okay. So there is some help there, what we call the capacity cost complement, which I won't go into, but you get absorption. The other thing is there is a certain part of the business, single-stage steam turbines, high-speed -- reciprocating separable compressors and gas engines and gas and diesel engines, the Guascor line, those products can turn in 3 to 6 months, depending on what the project is and the cycle times on those projects. So if that stuff -- if we don't book that stuff early in the year -- or if we book it early in the year, that goes -- that, from the new unit standpoint, contributes to getting towards the higher end of the range. If you don't book that stuff -- even if we book it in the last month of the year, we're not going to ship it. So there is book-and-ship opportunity in units. The other thing in units is there is a couple of jobs we're working on that may be, actually, percentage-completion jobs when we finally get our -- get the accountants to put the stamp on them. And so there would be some earnings that would actually come from those projects during the course of the year if: a, the accountants do deem them to be POC jobs and we, of course, still out on that; and b, that we book them fairly early in the year. So those are the 2 new unit components that if they go right, that contributes to the top end. And if we completely miss them, that gets us a little bit closer to the bottom end. What I would say the bigger piece is, is in the aftermarket. So we've got $1.7 billion to $1.9 billion laid out for you, okay. We think, Q1, we're going to be somewhere around $400 million, which is not a bad start. That's sort of at the low end, but it's in the ballgame in terms of the run rate. If we do that and if we do a little bit better in Q2, that's very helpful. But -- and this is where the -- kind of where the caution is -- has worked its way into the conversation. If something happens and we have to pull everybody out of Libya -- Libya is not really stable right now. Our people are still there. We think they're safe. They're in the southern part. And so we know -- and -- but if we have to pull them out of there -- Libya's a pretty big deal, and some of these other countries are also. And the day you pull those guys out, they stop invoicing. We've got $1 billion of book and ship to do. Is there something right now that says I am going to have to take them out? No. Is there something right now that say Venezuelan business is going to dry up? No. So we're exercising some caution here, but the reality is things can happen quickly. And if we have a significant amount or -- there can be a little bit of trouble, right. I mean, that's why there's a range there. We could still hit $470 million, $490 million or whatever, with a little trouble. But if things really sort of go to hell in a handbasket on us in several of these countries at the same time, then you're really looking at the bottom end of the range. And it happens quickly, right. And if it happens July 1, it's going to matter for 2013. So again, Q1, don't see it, don't expect it. I think we're going to have a good strong first quarter in aftermarket bookings, which is really important, and the rest of the year is likewise. But things can change quickly. So aftermarket, sudden upset can move the needle quickly, and we do need to get some of the standard products booked early on in the year. If those 2 things go well, we got a shot at the higher end of the range. And if they go against us, we're looking at the lower half of the -- lower part of the range.

Mark E. Baldwin

Yes. Just to clarify, Dave, the aftermarket booking range is $1.6 billion to $1.8 billion.

Vincent R. Volpe

$1.6 billion to $1.8 billion. So $400 million is right -- it gets us right into the bottom of the range.

David Anderson

And how much -- at what percentage of backlog converts into revenue in 2013? Where do you think that is right now?

Mark E. Baldwin

On the new unit?

David Anderson

Yes, yes, the new unit.

Mark E. Baldwin

$1.7 billion of the $2.4 billion.

David Anderson

$1.7 billion. Okay. Is that a bigger or a smaller percentage as in, say, last year or in 2012?

Vincent R. Volpe

It's consistent on a [indiscernible] basis.

David Anderson

Consistent? Okay. I'm also curious about your statement, Mark. You -- Mark, you mentioned on a larger -- I just want to make sure I heard you right, and I wonder if you could clarify a little bit. You said a higher percentage of NOC clients is kind of contributing some of the higher working capital. Can you just expand upon that a little bit more in terms of how your customer base is shifting? Is that on new unit? Is that on aftermarket? Can you kind of explain maybe some of the dynamics between how that customer base is shifting a bit on you?

Mark E. Baldwin

Sure. Every year, we do what we call a long-range plan. And we have been seeing that as these new fields, as the new areas of hydrocarbons, they're in areas where the governments want to control that. So they're the national [indiscernible]. The Angola is there. The Petrobras is there. The PETRONAS is. And we're -- so we've been planning and seeing that they're going to have a bigger influence. Well, now, we're winning somewhat more of that business as a percentage of our -- and it's all new unit, by the way, David, right, to answer one of your questions. But -- so we're seeing a shift in the mix. Yes, we're still getting the IOC business and -- but the mix is shifting. We've been seeing it operationally, and that's one of the reasons why we opened a second headquarters 3 years ago. And what we didn't quite fully anticipate is all the bureaucratic processes of getting those milestone payments paid. So at the end of the third quarter, we had 3 NOC clients that were kind of late in bureaucratic processes of getting paid. It's now 6 or 7. So -- and that's what contributed to fourth quarter delay, David.

Vincent R. Volpe

Let me try and put parenthesis around this thing though. We're still negotiating. Other than one contract that we took, which was a big contract with an NOC, where we knowingly took -- we took -- we have no progress payments on that job. But I got to tell you, the return is significantly higher than our cost of capital. So it was a really good -- it was a great economic decision. And we said to them, "You guys are crazy doing this. You can borrow cheaper than we can." But nonetheless, that's the way they wanted it to do. With that exception, the rest of them were basically giving us our terms. They're just not paying us, okay. And it's not because they're deadbeats. It's because of the bureaucracy. And so if you guys think that we're accepting this, that's -- that would not be an accurate assessment. We are absolutely engaged in conversation on -- in at least 2 different -- 3 different continents that I'm aware of, on how we're going to streamline things and get these payments processed a little more quickly. But the reality is there's a certain amount of bureaucracy you cannot get away from that the international oil companies just don't have. And so I think we've now seen it, and I think what's important here is we don't believe that this is going to degenerate further. We think -- if you look at -- our use of cash as a change in net working capital. And so now we think we've seen the change. And we think that now the sort of -- the plateau has moved from below 5% to below 10%, largely up, maybe 5 percentage points, and we think there it's going to sit. We're going to try like crazy to work it down in the future, but I think, at least for 2013 and probably '14, that's going to be more like the level. That's the bad news. The good news is we're going to keep after it and try and improve it, and the other good news is there shouldn't be a big change now in net working capital from year-to-year. So I don't think you'll see net working capital change as a drain on cash, which will allow us to generate more free cash flow in '13 and beyond.

Operator

Our next question from Jeff Tillery of Tudor, Pickering.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

As you think about the revenue ramp into '13 and beyond, could you just give some color as to how you're thinking about the biggest challenges in terms of either taxing your system, working with your vendors and whatnot? Because even in kind of the low end of the range for '13 is a little bit above what you did in kind of the record fourth quarter. So could you just give us color on how you're thinking about the challenges for '13, to get product out the door?

Vincent R. Volpe

Sure. I think we believe that we've got the internal capacity that we need. We think we've got the supply chain in place. We continue to work with the supply chain, but we're not -- in '13, as we've laid things out, we don't believe we can -- we think that there's a lot of work. We don't believe that we have any major capacity issues. The things that -- the business that's driving the volume is the turbo business, turbo compressors and large generator sets that are gas-turbine driven. Those projects -- the bottlenecks are ability to build rotors for turbo compressors and, basically, the test capabilities, okay. We believe we've identified the capacity on the outside to supplement our inside capacity -- internal capacity on rotors. So that's check number one, and we've been working on that for like the last 3 years, right. We understood -- we've understood that this is going to continue to be an issue. From a test capability standpoint, we have a lot of test capability in Olean. We have a lot of test capability in Le Havre, and we have a lot of test capability in Norway. We also have the opportunity to use a very -- an excellent supplier that we've been working with for the last couple years as a partner, Samsung Techwin. They're taking part of the load. They've got capacity, spare capacity that can suck this up. And we also have the ability, if we need to, to actually increase the test capability in Norway over time and without an enormous investment. So I think it looks like a lot. It is a lot. A lot of these -- a lot of what's in these numbers, by the way, are buyouts that we don't build, okay. So we don't need to actually build. When you look at sort of total numbers of units, it's not nearly as scary as it looks when you look at the dollar volume, because of these buyouts, big gas turbines, which is where the growth is coming. But I think it's -- there's really only those 2 areas. And so as a -- from a management standpoint, lots of work needs to be done, but when we look at really critical bottlenecks, we don't have to add new factories, we don't have to crank up our supply chain by an order of magnitude. And so we think we know what needs to be done, and we're highly confident we can get to that sort of mid-$3 billion sales number this year.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

That's helpful color. And my second question is just the aftermarket performance in 2012. If I look at incremental margins, it seems kind of more normal what I would expect for that business unit, 35% incremental margin. If I think about the path for the next couple of years, is there any reason to think that we should vary very much from what we saw in 2012 in terms of seeing that incremental profitability?

Vincent R. Volpe

No.

Operator

Our next question comes from Igor Levi of Morgan Stanley.

Igor Levi - Morgan Stanley, Research Division

So it looks like your new technologies are gaining traction with the first award using magnetic bearing technology. So I was hoping you could talk a bit about the conversations you're having with customers and the timing of potential awards for other technologies like the ICS, CAES or the Rampressor.

Vincent R. Volpe

Sure. There's a -- that's pretty broad question, Igor, but I think as far as mag bearings are concerned, now we've got this order, plus we've got the project with Statoil, which is also using our mag bearings. And I can tell you, we're also putting mag bearings in a small steam turbine, or we have a plan to do that this year. So we're covering that sort of at 3 different levels. Once we get a unit out and running, that is going to take off. We just had a management meeting this past week. And one of our guys made the statement, we probably ought to look at our mag bearing as the base offering now, going forward, rather than an alternative solution, because it takes the oil out in many cases. And it's -- the CapEx is about awash between having a mag bearing with a mag bearing system and saving on the whole lube oil console that you no longer need now because you don't have oil in the reservoir and all that other stuff. So I think that we've got to get the units running. And so I think within 2 years, you're going to see a significant increase in mag bearing business coming from Dresser-Rand. Now what we're not counting on, but what I think will happen is, I think our margins will improve, and I think that our share may even pick up, because I don't see our competitors with the same class and capability as it relates to magnetic bearings, particularly the design that we have. We've tested it on a Navy program for a steam turbine, and the mag bearing was magnificent. It was absolutely -- it tested beautifully. The Navy has never seen anything like it, so really proud of that. The ICS, this year, we're building the unit. We now have the Statoil project, which is a 12-megawatt unit. We are now finally starting up P-18. It's a little early to give you data, but at least we're starting it now. And so that will start to acquire some traction. And on the PEMEX order that we booked this past year, we're supplying 2 18-megawatt units that are ICS units also. So my belief again is we get some running time on those, we get the qualification from Statoil, we get the verification on the PEMEX job that those are working, and so again over the next year or 2, you're going to start to see a proliferation in bookings on a product line where our margins will improve. That's not a guess. That's a for sure. And perhaps, our margin will pick up. So that's that one. Echogen and Ramgen, both going through extensive testing this year. I think that you'll start to -- I think you can see a potential introduction end of next year in both of those. We have successfully run Echogen. We know that the process works. We've got some more work to do on some of the components, but the process fundamentally works, has been verified. On Ramgen, we have achieved good efficiencies, but not what we're after yet. We've got a unit now that will run, and it's got a stable operating range, so more work to do there. But I think when we get sort of the end of 2013, we're going to be ready to market that, or early '14 market that product platform also. So I think those are sort of the main units that you covered. The one that I would add that may be the shortest cycle time of all is the VX, and this is very exciting. And I -- again, I don't want to hype this, but we're not -- I believe that we could get orders as early as this year. This is where we're talking about nominally 6,000 very small LNG facilities, liquefaction facilities that can go right at the wellhead or right at the -- at a pipeline station. We can liquefy the gas or we can transport it. It can be used for vehicles, for vehicle fleets. It can be used for locomotives. It can be used for powering engines that are driving fractioning pumps. So there's a variety of uses for it. These are sort of 6,000-gallon-a-day plants. We believe that the process will work. We are going to try and verify this summer and try and get, at least, the prototype unit built. Let's remember that it's Guascor engine, a MOS high-speed separable compressor, which is a new product line that's just been launched. We've got 6 or 8 units in backlog now, and it's Dresser-Rand controls. And so we've got a high degree of content. These packages, I think -– or let me give you sort of the end line. I think within the next 2 to 3 years, this could be a couple hundred million dollar business. So this isn't just about starting to launch a product. This is about really moving the needle here in fairly short order. And I think that there's a chance that we'll get -- we'll start booking orders by the end of the year. Whether or not they show up on our P&L this year, that's probably unlikely. I wouldn't bake that into anybody's model. But I think there's a high probability that we can -- we will book some units before the end of the year. So we're spending a lot in R&D, and we're spending a lot, not just in our expense line, but also in terms of buying some of this technology that we capitalize. I think it's a really good investment. Guys, I could give you a couple of percentage points higher returns right now if I wanted to. We're spending $20 million more this year in R&D than we spent in 2012. We just think that's the right thing to do for the long term. We want to make sure that, that separation between the Dresser-Rand, total shareholder return and the rest of the market continues to grow.

Operator

Our next question comes from Jon Donnel with Howard Weil.

Jonathan Donnel - Howard Weil Incorporated, Research Division

Vince, you had mentioned that there's a potential for you all to potentially do some percentage of completion accounting on some new unit awards. I was wondering if you could maybe give us some more detail of maybe what types of awards those would be or maybe the prospects of that actually coming to fruition here.

Vincent R. Volpe

Well, the prospects are high. We've got fundamental agreement on one now. It's got to -- Jon, it's going to be stuff that goes beyond just building straight equipment. A straight equipment job, even if it's a really big job, is still a straight equipment job. And so that's why I've been complaining about it, okay, but nobody seems to be listening. Mark Baldwin's ears are shut on that, okay. Because I don't care if it's big or not, it's the same kind of stuff that we've already explained to the SEC is a percentage -- is a contract completed accounting deal. But when you start getting into extended scope, where you're supplying coolers and scrubbers or perhaps the building in which the pipeline compressor goes or maybe when you're selling complete installation services, along with the contract rather than on a separate order, those types of things are things that we're considering. So we're not going to go back to the SEC and say we made a mistake, because we don't think we did. But we are going to look at these contract by contract perspectively. And where there is new and different types of activities than what we did before and jobs that are on pretty long cycle times also, there, we'll look at percentage of completion. And I think that's the -- so I think this year, there is one job that's we're going to do it on, that we've made a decision, and that job already is more or less baked into the guidance. There may be 1 -- there's at least 2 other jobs that we're seriously considering, okay, for this year, that, right now, are not in the guidance. Now 2 jobs is not going to move this thing $30 million, okay. But we make our operating earnings $1 million at a time or sometimes $100,000 at a time. So every little bit helps. So there's a couple on the docket, but they need to be different types of jobs than straight equipment purchases, which is what we've had in the past.

Jonathan Donnel - Howard Weil Incorporated, Research Division

So this wouldn't be something to where you would necessarily be having a new treatment for existing backlog, it'll be for prospective orders only?

Vincent R. Volpe

Well, there's a couple of jobs -- there's one job in backlog, which, right now, could be converted, and we booked it fairly late in the year last year. We booked it midyear, but we didn't have a lot of "costs" log to it. And so if we decide to convert it to a POC job, percentage of completion job, the impact on 2012 results were not material. So it's not going to cause a restatement in 2012, and there really wasn't much in 2012 to begin with. And so I don't know if that goes on a sud or what happens to it. But the reality is that can -- that could be a reclass, and that -- it won't have any impact on the 2012 -- the integrity of the 2012 numbers. So there is one that could be reclassified.

Operator

Our next question comes from Tom Curran of Wells Fargo.

Thomas Curran - Wells Fargo Securities, LLC, Research Division

I've been in and out of the call, so forgive me if I revisit some of the topics that have already been fairly explored. But I just want to start with revisiting the initial 2014 target, $4 billion in revenue, and I believe it was $700 million in company-wide operating income. At this point with the newly introduced lower half bias for 2013, what -- just based on that context today, what, realistically, do you think should be your targets for 2014?

Vincent R. Volpe

Well, I got to be honest with you, we're not thinking about them. To be brutally honest with you, James asked the question at the front-end of the call, James West asked the question, can you achieve them, and I just sort of talked through, I don't know if you heard that or not, and said, well, we're going to be in the mid-$3 billion right now in 2013, and so -- and we believe that we're going to build backlog again this year. We think we're going to book more than we ship. And so I don't think it's unreasonable for us to say that we could sort of get there. There is this thing of currency from the -- in 2010, and we haven't quantified it. You know what? It could be $40 million, I mean, I'm picking a number out of the air, in currency impact, a translational currency impact between the dollar, the euro and the yen and whatever all other currencies we deal in versus what the values are today. So that -- adjusting for that -- that would be one thing you'd adjust for. But I'm not negotiating a new number now, right, because I actually haven't thought too much about it. But just this early, I think that what we talked about in 2010 in the 2014 time frame is not unrealistic.

Thomas Curran - Wells Fargo Securities, LLC, Research Division

Okay. I actually kind of find it reassuring that you're so focused right now on the near term. I guess next question would be, when it comes to the $150 million worth of projects on the new unit side that have slipped, is that the entirety of the projects you referred to in the press release, or are there others in addition to those? And then specifically for that $150 million, what would you have expected to be the average EBIT margin associated with them?

Vincent R. Volpe

Well, they're nominally on a -- let me start with that. Nominally they're sort of 10% jobs, right. If our segment margin is 10%, now there maybe -- the incremental -- there's always a discussion, right, on incremental margins, which we don't get into, but those projects, they actually add up to $180 million. We said about $150 million. It's actually $180 million, and so just under $200 million. Those projects, we -- because they were right in front of us in closing, we got very specific feedback from the clients in terms of when they're planning on purchasing them, okay. And so what we said was, "All right, if that happened on these jobs, it could happen on others in the first quarter or the second quarter." And so we just have now sort of said, "Even in the absence of other data, let's move stuff out." Okay. And so we think that the first quarter will be light. Second quarter, we know less about. And as the year goes on, we know less and less about it. So we just made this assumption that everything shifted. So the stuff that we thought was going to book at the end of the year, which, still, we may book it at the end of the year, we just moved it out till 2014. We just used these 4 projects as a proxy for everything's going to ship, which maybe a bit of an oversimplification, but we decided we would err on the side of conservatism. I do think that Q1 will be about the same order of magnitude as Q4 bookings on units. Q2 is a really big question mark. And so for now, we're going to keep your expectations low and perhaps will exceed them. I don't know if that covers all of your questions. But...

Mark E. Baldwin

Tom, I just wanted to -- this is Mark. I just wanted to clarify, when we were talking about the $150 million of slip outs, or I think [indiscernible], those are bookings. That's what I want to clarify because...

Thomas Curran - Wells Fargo Securities, LLC, Research Division

I understand. Right. Yes, that's what I assumed, and thank you for sort of explaining that domino-effect assumption you've made. Last one for me, one of your long-time archrivals has recently been described by an analyst as a rudderless ship. They've acknowledged to market share woes within the energy division for them for turbo machinery and have even started cutting jobs. As a result of that, are you seeing any opportunity to exploit the problems they're having?

Thomas Curran - Wells Fargo Securities, LLC, Research Division

Well, I don't know who it is. You can tell us that sometime. Tell Blaise off-line. I mean, I don't think we want to [indiscernible] about that on the phone.

Thomas Curran - Wells Fargo Securities, LLC, Research Division

The job cuts are being made in Germany.

Vincent R. Volpe

Okay. So when you say exploit, be more specific. I don't want to answer too much of an open-ended question. But in terms of the day-to-day execution of the business, we have very strong offerings. You know that. And we've got -- we've done very well in the midstream, which I suspect maybe the company you're talking about against these folks, particularly, in Central Europe, and we're going to stick with that. We just stick to our knitting. I mean, I think for every guy that's not doing well, there's another guy out there that's doing well. And so it sound like competition is crumbling around us, okay. Our competitors, in some cases, have never been stronger. And so we just know that we've got to stick with the technology, we've got to stick with our infrastructure buildout. I mean, as long as we do that, we're going to continue to, we think, maintain the position that we occupy. The other thing is we're not share driven. Never have been, at least not for the last 13 years. We like the fact that we have a really strong share, but it's because of our value proposition, not because we cut price to get jobs. We don't think that's a good idea. We try and sell our stuff at a premium. Now does that answer the question around the word exploit, or did you mean something else?

Operator

Our next question comes from Jase Scott of Johnson Rice & Company.

John A. Scott - Johnson Rice & Company, L.L.C., Research Division

Sorry to harp on the ballpark 24 number -- or 2014 numbers, but that $700 million of operating income, that would exclude un-allocable expenses, right?

Vincent R. Volpe

No. That include -- that would include them.

John A. Scott - Johnson Rice & Company, L.L.C., Research Division

Okay. Well, see, if you include them, that's about 17.5% operating income margin, and you all did about 12.5% this year. I was just thinking about how you get that kind of margin improvement over the next 2 years. I know you talked about R&D, but what else can we think about there?

Vincent R. Volpe

Well, the first thing is you probably -- and again, as I've said a couple times, I'm not sure what the impact on currency is, but you probably need to factor that in at some point in time. And so $700 million, maybe some other -– maybe $660 million. I'm making this up. I really don't know what to put. So that takes part of the challenge away. What we said was we were going to invest for about a 3-year period at an unusual rate, okay, and then it would ramp down. So if we do that, okay, you start to see the ramping down coming in '14/'15, you may get -- that also helps. You get higher volume and lower -- actually, some of it -- some of the spending is it's actually -- it doesn't increase at the same rate or even, in some cases, comes down. So when we get there, and we're not there yet, we'll make a decision as to whether or not we wanted to come down or if we think we can continue to accelerate in '16, '17 and '18 by maintaining the spend that -- we may choose to do that also. But theoretically, if you go back, you got to really read what was said in 2010, it was about 3 years of significant increase in CapEx and capacity cost and fixed cost spending to build infrastructure, to do development work and so forth. And then that would taper down, and you'd get the benefit from a higher sales and significantly greater leverage. So you definitely need more operating leverage. What we don't think will happen is that the variable margin on either the new business or the aftermarket business, we don't think that will go up significantly. So you have to get it from operating leverage, higher volume, not necessarily from lower cost of goods sold as a percentage of the total. I mean, it may happen, but we're not counting on that.

Operator

Our final question comes from Julien Laurent of Antics (sic) [Natixis].

Julien Laurent - Natixis S.A., Research Division

It's Julien from Natixis. Just a quick question about Brazil, do you see a big or flashy contract coming on your radar screen in the coming years for multi-FPSO contract? And second question, if I may, on Venezuela devaluation effect, I was wondering if you are selling in bolivars there or in dollars.

Vincent R. Volpe

Sure. I'll take the first question, and I'll let Mark, our CFO, take the second question. In terms of flashy orders, we think all orders are flashy, some are flashier than others. We expect that there'll be sort of a steady diet of work coming out of Brazil. They've really bit off real big chunk -- couple of chunks here in the last 2.5, 3 years in terms of our class of equipment. We don't expect to see 8 vessels at a time being bought like they did with us. But we do think that there'll continue to be an FPSO here and there that'll need to added. And so my view of this is, we'll see work, and it'll be steady coming out of Brazil. But I don't think we'll see huge -- I don't think we'll see another $500 million, $600 million, $700 million order being let here in the next year or so. Mark?

Mark E. Baldwin

And, Julien, the second part of your question around Venezuela. We really have 2 fundamental parts of our business in dealing with Venezuela. One is we have a local service and repair facility. All that business is conducted in bolivars. And what we were suggesting is when you take the valuation that occurred earlier this year, we estimate that, in the first quarter, that will impact upon that repair and service facility the exposed assets to the devaluation, about a $4 million translation loss. That'll be recorded below the line of the operating income line and other income expense. The other part of our business, which frankly is a bigger part of it from a operating income standpoint, is selling parts in dollars in hard currency to PDVSA. And so I would say the preponderance of our business in terms of what shows up on our income statement is sold in dollars.

Vincent R. Volpe

Yes. Let me just -- I want to come back -- we've gotten the question 3 different times on '14. I want to reiterate that we have not focused at all on '14. And sort of this whole issue around currency, and I'm sort of just pulling these numbers off the top of my head, for those of you that are really focused on that, we will provide information as we get a little further along. I do want to reiterate that we're going to get -- we're going to take the benefit of being a little smarter by waiting until the fourth quarter call this year before we provide guidance for 2014. But for those of you that are really focused on modeling, don't forget that in 2008 and 2009, we were between 15% and 15.5% operating income as a company, and that's not an insignificant number. We had -- and from now until the -- over the next couple years, our D&A will continue to roll off the business from the acquisitions that we made before. We don't have any huge big acquisitions planned in the near future. And we do believe that our volume will continue to roll, will continue to generate leverage. I stand by all the other comments I made on 2014. But I wanted to just remind people, we have been north of 15% in the not-so-distant past. That's it from my standpoint, Blaise.

Blaise E. Derrico

I want to thank everybody for joining the call. This is Blaise Derrico. You can reach me by phone. My number is at the bottom of the earnings news release, and I look forward to continuing the dialogue.

Everybody, have a great day, and enjoy the weekend. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.

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