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Dresser-Rand Group (NYSE:DRC)

Q1 2013 Earnings Call

April 26, 2013 9:00 am ET

Executives

Blaise E. Derrico - Vice-President of Investor Relations

Vincent R. Volpe - Chief Executive Officer, President and Executive Director

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

Analysts

Jonathan Donnel - Howard Weil Incorporated, Research Division

Thomas Curran - Wells Fargo Securities, LLC, Research Division

Julien Laurent - Natixis S.A., Research Division

Charles P. Minervino - Susquehanna Financial Group, LLLP, Research Division

John R. Moore - CL King & Associates, Inc., Research Division

Operator

Good morning, ladies and gentlemen, and welcome to the Dresser-Rand's First Quarter 2013 Earnings Conference Call. My name is Tanya, 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 call over to Blaise Derrico, Vice President of Investor Relations. Please proceed, sir.

Blaise E. Derrico

Tanya, thank you. Good morning, all. 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 risks 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 could 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 first quarter results.

Please turn to Slide 3. Our first quarter 2013 financial results were generally in line with expectations, with good earnings and aftermarket bookings set against light new unit bookings. Additionally, while net working capital increased at a quarter end to 13.5% of trailing 12-month sales, looking at scheduled commitments and anticipated receipts from clients, we continue to expect that the average for the year will be at or below the 10% of 2013 sales as previously guided. We have a strong backlog of new unit orders scheduled to ship this year, and our aftermarket bookings, especially the increase in parts orders, gives us a solid start to the year. As new unit bookings start to ramp up in the second quarter and then throughout the remainder of the year, this positions us well for the future.

Before moving into the details of the quarter, let me provide a brief overview, along with a few notable highlights. Our sales and net income increased approximately 16% and 39%, respectively, compared to the first quarter of 2012. Our operating income was $65.5 million, increased approximately 27% compared to the first quarter of 2012 and was slightly above the midpoint of our guidance range. Aftermarket bookings, especially parts orders, were strong and are important to helping us achieve our 2013 earnings goals. New unit bookings were light, reflecting continuing delays in clients placing orders and, as previously discussed, will be skewed towards the second half of 2013. As for our outlook, we are reiterating our full year operating income guidance of $450 million to $530 million, albeit with a continuing bias toward the lower half of the range. Similarly, we are reiterating bookings guidance for new units and aftermarket parts and services in the range of $1.8 billion to $2 billion and $1.6 billion to $1.8 billion, respectively. With respect to certain strategic infrastructure investments, we substantially completed construction of the Santa Barbara packaging and service center facility in Brazil, and we are making good progress on the facility in Saudi Arabia. With respect to the Petrobras Pre-Salt project, the first locally packaged compressor skid was completed at our Santa Barbara facility in March and 5 additional skids will be completed by the end of April. We successfully completed basic assembly and bench tests of the Synchrony magnetic bearing and compressor controller for the subsea ICS pilot project that's underway with Statoil. Our first-ever, only-in-class Integrated Compression System or ICS completed commissioning and started up successfully on Petrobras' P-18 platform located in the Marlin field off the coast of Brazil, and we entered into 2 strategically important alliance agreements, 1 with Statoil and the other with ExxonMobil.

Please turn to Slide 4. The agreement with Statoil is the fourth consecutive frame agreement between us. We are very appreciative of our strong relationship with Statoil that extends for over more than 15 years. Earlier this year, Statoil selected us, once again, as an alliance partner for another 5 years, with options to extend by 3 years and then an additional 2 years. The agreement covers the provision of spare parts, services and new equipment. The scope of new equipment comprises fixed and variable speed motor-driven compressors, gas turbine-driven compressors, as well as gas turbine power generation up to 100 megawatts. The agreement has options to include steam turbines, as well as compressors, for LNG processing, CO2 compression and subsea compression. The agreement with ExxonMobil marks a watershed event for Dresser-Rand. We have had an agreement for aftermarket services for several years, but the new agreement is significant because it is the company's first new equipment agreement with the world's largest publicly traded international oil and gas company. We believe this new agreement will drive a focus on capital project costs and schedule efficiency, as well as reduction of life cycle costs through the implementation of advanced business processes and technologies. We also believe the agreement, which is a non-exclusive global-enabling agreement, represents a new strategic and collaborative relationship that is focused on value creation throughout the entire life of the asset. The approach is to tackle all opportunities to create and capture value for the parties from early conceptual studies through project execution from technical support to optimization of operating assets until asset retirement. These strategic agreements exemplify Dresser-Rand's value proposition and technology development position.

Please turn to Slide 5. Aftermarket bookings of $399 million for the first quarter 2013 were 4% higher than the corresponding period in 2012. Parts bookings were especially strong, as they were up approximately 13% compared to the first quarter of 2012. The strong parts bookings are helpful toward achieving our earnings target for the year, as parts represent the highest margin revenue stream inside of the aftermarket segment and they can turn in a relatively short cycle time. Service contracts also continue to pick up, with a notable success involving a major IOC clients for offshore production platforms, which have 10 Dresser-Rand and 5 non-Dresser-Rand units. Under the service agreement, we are responsible for all aspects of the maintenance for these units, planning, reliability, condition monitoring, storage and upgrades. We've also been awarded a global-preferred supplier status by a major IOC, one of only 2 such suppliers to supply maintenance services for over 400 reciprocating pressers of all manufacturers, of which approximately half are Dresser-Rand equipment. On last quarter's call, we introduced a measure of caution into our outlook discussion for aftermarket bookings due to the heightened geopolitical risk, especially in Latin America and Northern Africa. We are continuing to monitor the political stability in the region and with an emphasis on Libya and Iraq at this time. Additionally, the situation in Algeria appears to be improving, and we are hopeful that we might resume aftermarket services in-country in the not-too-distant future. We continue to watch developments in both Venezuela and Egypt.

Please turn to Slide 6. In the new units segment, first quarter bookings of $269 million were approximately 39% lower than the corresponding period in 2012. The decrease reflects the lumpy nature of the new units segment, as bookings can be highly variable due to the changing relative weight of a number of internal processes that clients go through before they place orders, and this can be challenging when it comes to the timing of these orders. For example, in the first quarter of 2012, we booked 1 order that amounted to more than $150 million for a fixed platform located offshore Angola to supply both compression and power generation equipment. In the first quarter of 2013, no single order was more than $50 million in size. Our first quarter new unit bookings came from all segments of energy infrastructure and included a spar, floating production unit in the Gulf of Mexico. Our scope of supply includes 2 DATUM compressor packages for export service and 2 DATUM compressor packages for vapor recovery service. We were selected due to the operating efficiency of our solution, as well as the excellent track record of our existing fleet of turbomachinery located on deepwater platforms in the Gulf of Mexico, an upstream project in Colorado for low pressure CO2 compressor packages. This order is part of a massive program to build a network of CO2 gathering stations. The gas is transmitted by pipeline to West Texas, where it's used to facilitate crude oil production for mature oil reservoirs. It is expected that this building program will continue for the next 3 years. We were selected for this program due to our excellent track record of experience with CO2 applications and the rugged design of the DATUM compressor. Our pipeline in Central Asia. This is a follow-on order for an additional compression train which adds to the 9 gas turbine-driven compressor trains booked in 2012. Our refinery in China where we will supply 3 reciprocating compressors. A nuclear power plant in the U.S. This is an approximately $20 million Applied Technology project. We will revamp 6 non-Dresser-Rand steam turbines that are used to drive reactor feed pumps in a boiling water reactor plant. The revamped turbines will increase power output by an anticipated -- an estimated 12.5%. This award also includes a $9 million service contract. Another major revamp involves an ammonia plant in Russia. The nearly $17 million project encompasses 4 Dresser-Rand legacy centrifugal compressors and 1 non-Dresser-Rand steam turbine. The justification for the project is a 20% increase in capacity of the plant's ammonia syn gas train. We believe success on both these revamp projects will lead to similar opportunities in the future.

I'll now turn the call over to Mark for a more detailed view of our first quarter results.

Mark E. Baldwin

Thank you, Vince, and good morning, everyone. Please turn to Slide 7. Total bookings for the last 12 months were approximately $3 billion, 5% lower than the same period 1 year ago. New unit bookings of approximately $1.5 billion compares to approximately $1.7 billion for the corresponding period 1 year ago. The corresponding period 1 year ago includes approximately $400 million in equipment that was booking connection with a large Petrobras Pre-Salt award for 8 FPSOs. Aftermarket bookings for the last 12 months increased approximately 5% to more than $1.5 billion. The corresponding period 1 year ago includes approximately $60 million in services that were booked in connection with a large Petrobras Pre-Salt award. Approximately 31% of our total bookings in the last 12 months were upstream, 21% midstream, 30% downstream and 17% environmental solutions.

Next slide, please. Backlog at the end of March was approximately $2.9 billion. The new unit backlog of $2.2 billion was up approximately 2% versus 1 year ago, and our aftermarket backlog was up about 14% to $656 million.

Please turn to Slide 9. Revenues for the first quarter 2013 of $766 million increased approximately $104 million or 16% compared to $662 million for the first quarter 2012. The increase in revenues were principally due to higher volume. Price increases also contributed to incremental revenues, albeit to a much lesser extent. Additionally, we entered into 3 extended scope construction-type contracts near the end of 2012, which are accounted for on a percentage of completion basis and contributed approximately $40 million to our first quarter 2013 revenues. We've said on previous occasions that our clients are asking us to do more complex EPC type of activities in connection with our new unit business. We expect an increasing number of our contracts will involve construction-type scope and risk. New unit revenues were $443 million for the first quarter 2013 compared to $368 million for the first quarter 2012, an increase of approximately $75 million or 20%. The increase in revenues was principally due to higher volume. Aftermarket parts and services revenues were $323 million for the first quarter of 2013 compared to $294 million for the first quarter of 2012, an increase of $29 million or 10%. The increase in revenues was principally due to volume growth in most geographic regions, especially the Middle East and Latin America, and, to a much lesser extent, price increases.

Please turn to Slide 10. As I previously mentioned, revenues for the first quarter increased approximately 16% to $766 million. Cost of sales was $594 million for the first quarter 2013 compared to $517 million for the corresponding period last year. As a percentage of revenues, cost of sales for the 3 months ended March 31, 2013 was approximately 77.6% compared to 78.1% for the corresponding period last year. The decrease in cost of sales as a percentage of revenues was caused by improved operating leverage on fixed costs from higher volumes and, to a much lesser extent, price increases and mix.

Selling and administrative expenses were approximately $95 million for the first quarter 2013 compared to $89 million for the corresponding period last year. The increase is generally the result of increased selling activity and cost inflation. As a percentage of revenue, selling and administrative expenses decreased to 12.7% -- 12.6% from 13.4%.

Research and development expenses were $10.4 million compared to $4.5 million for the corresponding period last year. The increase in R&D expenses is the result of strategic projects that are expected to be demonstrated and/or launched during 2013. It is typical that projects entering this phase of development incur higher procurement and testing expenses when compared to design-related activities that occur earlier in the development life cycle. We've continued to effectively execute our strategy to introduce new and innovative products and technology, with a focus on key new product development initiatives such as the DATUM Integrated Compression System or ICS, subsea compression, LNG, steam turbines and reciprocating engines.

Total operating income for the first quarter 2013 was $66 million, an increase of 27% or nearly 2:1 leverage on sales growth of 16% when compared with $52 million for the first quarter 2012. As a percentage of revenues, operating income for the first quarter 2013 was 8.5% and compares with 7.8% for the corresponding period in 2012. The increase in our overall operating margins is primarily attributable to the factors previously mentioned.

Interest expense net was $14 million for the 3 months ended March 31, 2013 compared to $16 million for the 3 months ended March 31, 2012. The decrease in interest expense is the result of the settlement of a dispute with a former non-controlling equity holder of one of our subsidiaries. Interest component was settled at a lower rate than we had estimated prior to the settlement.

Other expense income net was $1 million of expense for the 3 months ended March 31, 2013 compared to essentially breakeven for the 3 months ended March 31, 2012. Other expense income net consists principally of net currency gains and losses and losses on tradable emission allowances. The increase in other expense income net is the result of a devaluation of the Venezuelan bolivar on February 8, 2013. As a result of this devaluation, we recorded a nondeductible foreign exchange loss of approximately $3.6 million in the first quarter 2013.

In the first quarter 2013, the effective tax rate was 31.5%. A couple of unusual items impacted the tax rate. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law. Some of the provisions were retroactive to January 2012, including the exclusion from U.S. federal taxable income of certain interests, dividends, rents and royalty income of foreign affiliates, as well as the tax benefits of the credits associated with that income and an extension of the research and experimentation credit. As required by U.S. GAAP, a $4.4 million of a benefit was reflected in the first quarter of 2013 as a discrete event. As a result of the previously mentioned devaluation of the Venezuelan bolivar, we recorded a nondeductible foreign exchange loss of approximately $3.6 million. If the foreign exchange loss had been a tax deductible expense, our effective tax rate for the 3 months ended March 31, 2013 would have been approximately 1.9 percentage points lower.

Finally, the $1.5 million of net income attributable to non-controlling interest recorded in the first quarter of 2013 relates to our partner share of our joint ventures net income. The bottom line of all this is that our net income for the first quarter of 2013 was approximately $33 million or $0.43 per diluted common share. This compares to a net income of approximately $24 million or $0.31 per diluted common share in the corresponding period in 2012.

Turn to Slide 11, please. New unit operating income was $29 million for the first quarter 2013 compared to $20 million for the corresponding period in 2012. As a percentage of new unit segment revenues, operating income was 6.5% for the first quarter 2013 compared to 5.5% for the first quarter last year. The increase in operating margin was principally from operating leverage on higher volumes, partially offset by a less favorable mix of new unit sales.

Turn to Slide 12, please. Aftermarket operating income was approximately $66 million for the first quarter 2013 compared to $53 million for the corresponding period last year. As a percentage of segment revenues, operating income increased to 20.5% from 18.1%. The increase in this segment's operating income was primarily attributable to higher volumes. The increase in operating margin from the corresponding period in 2012 was principally due to a more favorable mix and higher prices.

Turn to Slide 13, please. Turning to cash flow. Operating activities used cash of approximately $45 million in the first quarter compared to approximately $10 million of cash provided by operating activities in the corresponding period last year. The principal reason for operating activities being a use of cash in the first quarter 2013 was an increase in working capital. In this year's first quarter, our investment in working capital increased by approximately $84 million, and we contributed $6 million to our pension plans in accordance with our funding policy.

Turn to Slide 14, please. Net working capital at the end of the first quarter was $385 million, which was approximately $80 million higher than where we ended last year. Let me point out changes in certain components of net working capital. Accounts receivable decreased for the 3 months ended March 31, 2013 as a result of cyclically lower volume and timely cash collection from clients related to high fourth quarter 2012 sales. Inventories were flat. Accounts payable and accruals increased slightly. Lower customer advances are attributable to the timing of receipts from large national oil company clients or NOCs. As noted, our working capital rose again in the first quarter. Net working capital at the end of the first quarter was approximately 14% of the trailing 12-month sales.

Next slide, please. On last quarter's call, we noted that the shifting of our new unit bookings more to the NOCs skews our billings to reasons where payment due dates are customarily longer and bureaucratic processes further delay payment of milestone billings. The impact of these delayed milestones has moved the ratio of total -- of progress payments and capital on customer advance payments to gross inventory. Historically, the ratio has run about 90% and is now running at approximately 60%. We previously said that as a result of this change in mix to a higher percentage of NOC work and based on our recent review of forecast, forecast bookings, shipments and collections, we continue to expect our net working capital as a percent of sales to average at or below 10% of full year sales.

Next slide, please. In the first quarter, net cash used in that investing activities of $31 million compares to $56 million for the corresponding period last year. Cash used in investing activities for the 3 months ended March 31, 2013 includes capital expenditures of $20 million compared to $10 million in the corresponding period in 2012. Also included in the first quarter last year is approximately $49 million associated with the acquisition of Synchrony and $4 million related to an additional capital investment in the non-controlling interest of Echogen Power Systems. Financing activities provided cash of $111 million in the first quarter. This compares to the first quarter of 2012 when financing activities provided cash of $38 million.

Turn to Slide 17, please. At the end of the first quarter, our liquidity totaled approximately $331 million and consisted of approximately $157 million of unrestricted cash and $174 million of available borrowings under our bank credit arrangement, as we had outstanding borrowings of $417 million and $173 million was used for outstanding letters of credit. At the end of the first quarter, we also had approximately $166 million of letters of credit and bank guarantees drawn under uncommitted bank lines.

Next slide, please. At the end of March, our net debt-to-capital ratio was approximately 43%, and net debt to our last 12 months EBITDA was approximately 2.2x. For more information about our results for the first quarter, please refer to our 10-Q, which we filed last night with the SEC.

As a reminder, our Annual Meeting of Stockholders will be held on Tuesday, May 7. Whether or not you expect to attend it, your voting as soon as possible will be greatly appreciated, and will ensure that your shares are represented at the annual meeting.

Before turning the call back to Vince, many of you have seen our earlier announcement regarding my retirement. I want you to know that this will be my last earnings call. When I joined Dresser-Rand in 2007, I discussed with Vince at the time my desire to work for approximately 5 years prior to retiring. Well, that time has come. I have really enjoyed my time here at Dresser-Rand and the opportunity to get to know many of you on the call today. While I'm looking forward to my retirement and having more time to spend with my family and doing many of the things I didn't have time to do while working, I will surely miss the people I've had the pleasure to interact with both inside and outside the company. I do know that I'm leaving the company in good hands. I have tremendous confidence in the leadership and financial teams at Dresser-Rand and the bright future that I believe is in store for the company. I'm also delighted that Jan Kees van Gaalen, who's in the room with us today, will succeed me. His knowledge of our industry, along with his strong financial and operational background and vast international experience, provides him with the right background for the role of Chief Financial Officer for Dresser-Rand.

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

Vincent R. Volpe

Thank you, Mark, and thanks for your kind words. Turn to Slide #19, please. Turning now to our outlook. As previously mentioned, we are reiterating our prior guidance for 2013. We expect bookings to increase in both segments from 2012 levels. We expect new unit bookings to be in the range of $1.8 billion to $2.0 billion, which, at the midpoint, represents an increase of approximately 17% over 2012. Our end markets remain strong. However, as mentioned at the time of our fourth quarter 2012 earnings conference call, as a result of the high project activity, engineering resource and constraints at the EPC and client levels and CapEx reduction efforts, we are seeing project awards being pushed out. Therefore, we continue to expect 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, which, at the midpoint, represents an increase of approximately 11% over 2012. We expect total revenues of approximately $3.5 billion to $3.7 billion and our operating income to be in the range of $450 million to $530 million, with a bias towards the lower half of the range. For financial modeling 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, total revenues and the associated allocation of fixed cost to the new units segment; new unit revenues represented 48% of total revenues in 2012 and are expected to increase to approximately 55% of total revenues in 2013; aftermarket operating margins to be in the range of 23% to 25%; unallocated expenses expected to be approximately $120 million to $130 million. For 2013, research and development expenses are expected to increase to approximately $15 million. Interest expense is expected to be approximately $16 million. Other income and expense net is estimated 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 at 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-to-electricity power generation systems. The effective tax rate is estimated for 2013 to be approximately 32% to 34%. Approximately $7 million of non-controlling interest is related to our partner share of net income and consolidated entities that are not 100% owned by us. Diluted shares outstanding are expected to be approximately $77 million to $78 million.

Turn to Slide #20, please. I want to share with you some insights into our second quarter outlook. Let me start by pointing out that our business has a seasonal pattern that is continuing. For example, our first half operating income for the last 8 years ranged between 22% and 48% of our full year operating income, with an average of 36%. At present, we expect second quarter 2013 operating income to be between $75 million and $90 million, which, when added to our first quarter operating income of $65.5 million, would represent between 30% and 34% of the current full year analysts' consensus operating income estimate of approximately $461 million. This would place the first half operating income as a percentage of the full year result well within the band of our historical performance.

Turn to Slide #21, please. Before opening the lines for questions, let me end with a brief overview of our strategic evolution over the past couple of years. In November 2010, we hosted an Analyst Day, and at that meeting, we talked about accelerating profitable growth. At that time, we estimated that the underlying business could grow approximately 10% a year for the foreseeable future if we continue to invest at our traditional R&D and CapEx levels. By making incremental investments in technology and strategic infrastructure, we believe we could change the slope of that curve. We said that over the 2011 to 2013 period, we could increase R&D spending by additional $15 million per year and increase CapEx to 2.5% to 3.5% of sales per year, and by so doing, we believe we could accelerate growth to approximately 15% per year through strategic acquisitions, such as Guascor and Synchrony; investments in technologies, such as the ICS; and strategic infrastructure investments, such as in Saudi Arabia and Brazil; and the globalization of our Gas Turbine Repair capability. We are making good progress and are now poised to launch new product platforms, such as the ICS, and to incorporate magnetic-bearing technology into our new equipment and retrofit existing rotating equipment. We are well along in our globalization on our Gas Turbine Repair capability, and the 2 new facilities in Saudi Arabia and Brazil will both be up and running this year.

In summary, we believe these incremental investments will contribute to our profitable growth in 4 ways: one, increase the overall serve market size; two, grow aftermarket services; three, expand new unit margins; and four, increase cash flow. We're at the point where we believe we will begin to extract value from the investments we've made in technology and strategic infrastructure, and then in future years, we will return to a more traditional level of spend. Thank you for your attention.

Before turning to Q&A, I would like to take this opportunity to thank Mark for his almost 6 years of service as our Chief Financial Officer. Mark has built a very strong finance team and brought a culture to our company where the finance department plays a role in reinforcing the needs of the strong governance required of a publicly traded company and, at the same time, as an active participant in helping the company focus on operational excellence. Beyond his professional contribution, it's been a pleasure for me to work with him, which is a sentiment shared by many within the company, as well as members of our Board of Directors. We shall miss him and wish him well in retirement.

Similarly, we're very pleased to welcome Jan Kees van Gaalen to our company and look forward to the broad capabilities and vast international experience he brings to our leadership team. The transition between these 2 gentlemen, which has taken place over the past several weeks, has been smooth and we believe will be seamless to our shareholders, clients and employees.

Operator, please open the line for questions and answers.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jon Donnel of Howard Will.

Jonathan Donnel - Howard Weil Incorporated, Research Division

I had a couple of questions regarding the new unit gross margins that you had in the first quarter and maybe some of the moving pieces there. You commented on the mix being a negative impact here. And I wonder if you could maybe give us some detail on, first, is this driven by any particular geography or segment and how maybe that mix compares to what remains in the backlog to be shipped here for 2013.

Vincent R. Volpe

As far as the mix is concerned, Jon, I think you just -- projects are up and down type of thing. There's no specific pattern here. There's no specific geography or anything else. So it's just what flushes through from one quarter to the next. As far as the rest of the year is concerned, I would say that we expect that margins should pick up.

Jonathan Donnel - Howard Weil Incorporated, Research Division

Okay. And do the $40 million of the POC contracts have any negative impacts here for first quarter? Or is that something that you're looking to help results as we go through the rest of the year as those continue to roll through?

Mark E. Baldwin

Jon, I would say those margins are in line with our new unit margins. So I would not expect them to hurt or help the margin return on sales in the new unit business.

Jonathan Donnel - Howard Weil Incorporated, Research Division

Okay. And then just regarding sort of the back half weighting of the new unit orders here. As we think of how those will eventually float through the top line there, is there -- does there come a point where we should get worried about the impact to 2014 in terms of perhaps larger projects having longer cycle times and if they don't get awarded until the very end of '13 that, that could move through to '14? Or could there possibly be some offset as you start to recognize more of these larger projects on those POC basis and maybe smooth out some of those results going forward?

Vincent R. Volpe

All right. Let me tackle that in a couple of pieces, Jon. First, let's just talk about the timing question so that we can move. Your question is very legitimate, theoretically, so let me see if I can just give you a little bit of what I think is going on here. At the end of last -- excuse me, on the last call, so that was the end of February, we were, as you can understand, cautious about saying, "Well, it just moved out a quarter type thing or just moved out 5 months or whatever." We kind of gave ourselves a leeway of saying we've said -- what we said was as much as 2/3 could be booked at the second half of the year. We didn't actually say we were sure it was going to be 2/3 at the second half of the year. So we gave ourselves a little bit of leg room there, and now, a couple of months later, the situation has not worsened, okay? You might argue that it's maybe gotten even a little bit better. We think we're going to see a nice pickup from Q1 to Q2. So I think the question around 2014 and could this stuff slip out of the back end of 2014, it's possible, right? But it's not a greater risk than it was 2 months ago. It's probably a little bit less, okay? So, again, without being overly optimistic, we are expecting a nice ramp-up in Q2. And then the back-end will still be higher, right? I mean, we still are saying that, but we're going to see a very nice pickup in Q2, we believe. And we're getting -- we're sort of halfway in the middle of the quarter now. And so we -- that's a statement we think is fairly solid. As it relates to percentage of jobs going -- becoming POC-related, percentage of completion-related, let me first underscore what Mark said, and that is, these are new and different types of contracts than what we've traditionally booked. It's -- these circumstances are such the clients want us to provide. It's what we call extended scope, which looks more like EPC activity than our traditional unit. So first things first, we're not changing accounting here, okay? But we've got a different type of accounting that applies to these projects. We believe, as Mark said, that we're going to ramp up over time and see more and more of those. We think it's a real added value to the clients, and we coordinate some of this extended scope work and kit around our equipment. But I don't see it being a huge change quickly, Jon. So you will -- the result of all that is, as you accurately said, you do get some smoothing out, but I wouldn't look for a step change in the order of magnitude of bookings in terms of the total percentage, nor would I look for a step change overnight, say, from 2013 to 2014 in the way that the earnings are distributed. So a little bit of a note of caution. I don't want to be overly enthusiastic about the impact of this accounting for this new type of businesses, but I -- but over time, it will have an impact. It's just natural. I hope -- was that clear, Jon?

Jonathan Donnel - Howard Weil Incorporated, Research Division

Yes, that was. That's very helpful, appreciate the color there. And Mark, just congratulations on your retirement. It's been a pleasure working with you over the last few years.

Operator

Our next question comes from Tom Curran of Wells Fargo.

Thomas Curran - Wells Fargo Securities, LLC, Research Division

First, Mark, let me echo Jon's sentiments and congratulate you on a very successful tenure at Dresser-Rand and wish you the best of luck as you now embark to go become the most interesting man in the world.

Mark E. Baldwin

I hope so, Tom.

Thomas Curran - Wells Fargo Securities, LLC, Research Division

And welcome aboard, Jan Kees. I look forward to meeting you and working with you. A follow-up on the prior question. As you look to 2014 and the potential range of top line growth we still might see, purely based on volume, volume flow-through, what is the potential associated margin expansion we could see, assuming no other benefits?

Vincent R. Volpe

Well, you can answer that if you want, Mark. I think we haven't looked very carefully at 2014 yet, may be premature.

Mark E. Baldwin

We certainly haven't looked at 2014 yet, but I would use this year as some guidance, and by that I mean, if you look at our guidance in aftermarket last year, I think it was 22% to 24%. I'm looking at Blaise to make sure I'm right.

Blaise E. Derrico

That's right. Correct.

Mark E. Baldwin

For this year, it's 23% to 25%. And our aftermarket was up at least in the first quarter 10%. So I would expect to see that type with kind of a 15% increase in revenue, maybe 100 basis points improvement. But that's what without doing any of the math to '14, I think you can use '13 as instructive to look out at '14.

Vincent R. Volpe

Yes, if I may, Mark. I think -- actually, there -- you can even maybe go back to '10, right? What I would do, and I haven't done this, by the way, I'd draw points because the cost geometry has not changed significantly from '10, okay, in terms of what we're doing in the activities and so forth. And so if you sort of take '10, '11 and '12 and you graph them and you look at the volume, that's one thing to look at and the other is the mix between the 2 segments. So as the new unit mix is growing here, and it's going to be around 55% this year, that naturally attracts more of those fixed cost allocations away from the parts. And as you all know, the parts is the biggest single piece of our aftermarket business. So that has a knock-on impact on the parts on the aftermarket services margins. So, again, I think use the past to sort of help you extrapolate towards the future. And, again, none of us have done that math, but that's as a legitimate an approach as any Tom, to get you in the ballpark.

Thomas Curran - Wells Fargo Securities, LLC, Research Division

And where is pricing at this point on the new unit side? And based on how it's evolved thus far and the visibility you do have, what's your current expectation?

Vincent R. Volpe

We haven't seen -- we're not going to get margin expansion in the near future from price. So that doesn't mean the prices haven't gone up a little bit. Where the costs go up, the prices go up. But we haven't -- but for the last 3 years now, we haven't seen and we're still not seeing margin expansion due to pricing. I think that we can say that confidently.

Thomas Curran - Wells Fargo Securities, LLC, Research Division

Okay. And then last one for me and I'll get back into queue. But given that we've continued to see net working capital as a percentage of trailing 12-month revenues move higher here, how is your -- how has your outlook for de-leveraging and your target time frame and level for leverage that would lead you to then turn to considering new opportunities? In other words, I would think that you're seeing the time by which you would reach your target level of leverage drifting out, and therefore, it might be a little longer now before you'd be in a position to consider new meaningful acquisitions or buying back stock. But could you speak to that and just refresh us on what that target level of leverage is that would lead you to, once again, consider sizable acquisitions or other uses of the balance sheet cash?

Mark E. Baldwin

Yes. Tom, our target -- I won't call it target, it's more a comfort range of net debt to EBITDA. We've said is 1.5 to 2.5. We're at 2.2. So we're obviously above the midpoint. And within that range, as we move lower in the range, we become -- have a better appetite for acquisitions or buybacks or dividends or whatever the board looks at for use of free cash flow. In terms of timing and then -- well, the net working capital, my guess is that it's somewhere 6 to 12 months delayed when that de-leveraging will begin. As we said here on the call today, that we believe that for the full year, our net working -- or at the end of the year, our net working capital will be at or below 10% of this year's sales. And as we look at our forecast collections and bookings, that, that would imply a leveling out of our net working capital. And as soon as that happens, we will have good free cash flow, and we will start to de-lever.

Vincent R. Volpe

Now let me just -- let me piggyback on the back of that, Mark. That's the financial story. I want to just talk about the operational story also. And I've said this before, and I tried to make the point sort of on my last slide here, prior to the guidance slide, which was, my belief is we've spent a lot of money over the last several years. We planned on doing that. We told everyone we were going to do that. So the people didn't get nervous about it. And we built a huge funnel of opportunities that are either internal or sort of organic development projects like the ICS, like some of the other things we're working on, some of which we haven't actually disclosed, which is why I should stop myself. We've spent money on infrastructure, Saudi Arabia, Brazil. We've spent money on growing our services network. And we've spent some money on acquisitions that have opened up and significantly expanded the aperture in terms of the size of the total served market. So I believe that where we are right now, if I looked at our total market share all in, it's probably the same place we were 7 to 10 years ago, because we've opened up so much in terms of market opportunities that even though the business has grown significantly, we've got as much runway ahead of us as we did 7 to 10 years ago because of everything else we've open up. Gas Turbine Repair is a $3 billion to $4 billion market that we weren't participating in before. The whole power generation with gas and diesel engines, the ability to drive and double the size of when we provided a separate -- a separable -- high-speed separable reciprocating compressor with a walk ashore [ph] cat engine, and that now becomes a [indiscernible] engine. The same project now has twice the added value on it because of the group equipment. So we've really expanded our served markets. We've significantly improved the technology, which is always what makes Dresser-Rand go. And so it's time for us to get paid now. And my view of this is it's not the right time, regardless of the fact that we could probably do it in a few months, as Mark talked about. It's not the right time to step in now and take on something because we've already taken on something big when we need to extract the value from this great investment. And if we allow ourselves to get distracted and go on to some other new big and exciting deal, we're never going to extract the full value out of everything that we've been working on for the last 3 years. So sorry to be a little bit long-winded on this, Tom. But I think that operationally and strategically, I wouldn't look for us to launch anything big because we're launching it right now with the stuff that needs to come out of the funnel. And that's why I also said that in the out years. And, again, we're not providing guidance yet to sort of 2014 to 2015, as we indicated in 2010, once we get through sort of the big spend, we'll probably go back to the more traditional levels of R&D and CapEx, which are absolutely enough to keep the business going strong but not at the same levels that we've experienced over this 3-year period. So I hope that gives you a pretty good perspective on how we're thinking about this.

Thomas Curran - Wells Fargo Securities, LLC, Research Division

That was a great but thorough answer. And as encouraging as I think I could have hoped. I mean, the idea that there's still so much left to harvest on the investments that have already been made, I would think sounds as if you could see share repurchases therefore rise to front of the queue in terms of the priorities for capital deployment once you reach the point that you'd be in a position to do that. So great answer.

Operator

[Operator Instructions] Our next question comes from Julien Laurent of Natixis.

Julien Laurent - Natixis S.A., Research Division

I was wondering if you could give us any name of the main national oil companies on which you have outstanding billing and putting the amount in front of each name. And second question regarding a bit more of EPC activity for you in terms of a contract structure. Do you have any internal resources to handle this kind of new risk? And did you have to give up new competencies for that?

Vincent R. Volpe

Okay. The first part of the question is on the NOCs. We don't provide the names of those. These are good companies, right? And we don't want to get them too mad at us. And we are working with all of them to improve on the payment and processes, which is really what this is about. We don't -- these are not companies that are deadbeats or don't want to pay or trying to find ways not to pay. It really is about bureaucracy. So I'll need to sort of move past that question, or part of the question. The other part of the question, excellent question, is we saw this coming, Julien, this need. And we sort of classified to make it simple as EPC, but in fact, it's what we call internally extended scope. So you're doing things that an EPC normally would have done, but it doesn't mean you're building a refinery either. It means you're providing interconnecting piping in vessels and process equipment in coolers that are quite contiguous to the compression and power generation requirements of where you're working. So we're not completely going off the ranch on this. That's the first point. Second point is, we saw it coming, and last year, we put in place a project management organization or PMO, as we call it, as part of an organizational change where we put the folks that would need to work on these projects in a group called global solutions. And our concept is not be the EPC but is to be able to manage the entire project. And we've done this from time to time in the past on a very limited basis. So we have some experience internally, but we've gone and we've acquired some folks. And these orders now that we're looking at, there's a list that's getting fairly long here over the next year to 2 years. These orders, not only do we have now what we think in terms of the project management expertise in place, we also have a good process set up whereby we go and we get third parties to help us take a look at this in terms of estimating cost and so forth. And then we go finally to an EPC that we subcontract the detailed engineering procurement and construction of the vessels and the interconnecting piping to, on a fixed price basis, right? And so I think because of the size of the job and the scope, you could argue that there's more risk. But we have had traditionally very strong processes around taking new unit orders, and those processes have been extended to the extended scope business, same process set, same level of discipline. And so whatever extra risk we take, we measure it and we make sure we get paid for it.

Operator

Our next question comes from Chuck Minervino of Susquehanna.

Charles P. Minervino - Susquehanna Financial Group, LLLP, Research Division

I wanted to see if you could touch on the Statoil and ExxonMobil alliance agreements. Those seem like they could be pretty significant, obviously, significant customers. I was wondering, I guess, are those on the new unit side, on the aftermarket side, both? And maybe if you can just give us a little bit of context -- I don't know if you can really quantify kind of the magnitude of these types of our arrangements, but obviously, they potentially could be very big. If you could just provide some detail there.

Vincent R. Volpe

Sure, Chuck. Let me start on -- well, first of all, general comment on both of them is that's new equipment and services. So it's both. The -- let's start with Statoil. We've had 15 years or so worth of an arrangement with them already. It's been very, very beneficial to us. There were years where they were -- they might be -- 2, 3 years in a row, they might have been our single largest customer on new unit projects. So they've been very faithful oil customers for a long time. And we need to keep earning our business with them every so often they come up for new -- these things, they either come up for new renewals or, in this case, they launched a whole new process. And so it's all about technology, it's all about life cycle cost, it's all about service and we have delightfully earned the right to continue -- or the privilege to continue to work with Statoil on a preferred basis. The way to quantify it is basically to look at all the projects Statoil is either participating in as an operator, which is where this thing really germinates or takes hold, and also projects where they may be a partner, where they may go to the partner and say, "Look, we've got a frame agreement with Dresser-Rand. We think this is the right application for their equipment. We'd like to use it." So it may go beyond projects for Statoil as strictly the operator. But I would say, we don't get into forecasting what they are and aren't going to do. So you need to sort of look towards them. But clearly, oil production and perhaps LNG are 2 areas that they're very interested in going forward. As it relates to ExxonMobil, been a very good customer of ours for a very long time. We've never had an alliance on the new unit business with them. This is a real watershed event for Dresser-Rand, and it represents, in my view, significant incremental opportunity for D-R. ExxonMobil, a large company that is taking a very cerebral approach and has done so fairly deliberately. Others have gone faster. And they really thought, as you can imagine, very thoroughly about how to truly extract value by working at more of a partnership mode than a traditional mode. And so I think there's almost no stone unturned with those folks in terms of where we can create value together, and in my view, that value results, from our standpoint, in very solid, profitable projects and, from their standpoint, in some cases, may even be the difference between doing a project or not. I think that, that savings, in some cases, can be that significant. So what are they focused on? Well, in everything. But clearly, we see good future in the production side and pretty exciting LNG opportunities in the not-too-distant future.

Charles P. Minervino - Susquehanna Financial Group, LLLP, Research Division

Great. That's really helpful. And then I just wanted to clarify one other thing. I think it was on Slide -- when you were talking about Slide 5, I believe you mentioned a global-preferred supplier status that you gained with over, I guess, 400 units of equipment that are in the field, half of which are yours. Is that a new arrangement that you just signed? And I'm assuming that's not the Statoil or ExxonMobil relationship. That's something else out there.

Vincent R. Volpe

Yes, you're absolutely right. It's not with Statoil or anyone. It's a separate company. It's reciprocating compressors. And I think this is an area where we worked very hard to try and improve the level of our services. It's a business that requires agility, and in terms -- you got to move fast, right? And you need to be everywhere, and you need to be local. And we worked hard at that. And we're particularly delighted that we're not only getting to work on our own equipment but we're also working on other OEM equipment. And so that represents a nice pickup for us. Chuck, we are focused on growing what we call our Applied Technology business, and this is sort of another piece of that equation.

Operator

Our next question comes from John Moore of CL King.

John R. Moore - CL King & Associates, Inc., Research Division

First question, I wanted to ask you about the new unit revenue guidance and just how this plays out through the year. 55% of your total revenue guidance implies some pretty impressive quarters here coming up, and I think you had a near record quarter in terms of new unit revenue this quarter. So how does this work through the year? Does new unit revenue go higher again sequentially in the second quarter? Or are we counting on some big shipments in the third and fourth quarter to get there?

Vincent R. Volpe

It's going to go up in Q2, John, Q3, and Q4, successively. That's what our view is. So you're talking about revenues, right, sales?

John R. Moore - CL King & Associates, Inc., Research Division

Yes, revenues.

Vincent R. Volpe

Yes, that's right.

John R. Moore - CL King & Associates, Inc., Research Division

Okay. Perfect. And then I wanted to ask also about the mix, the negative mix in the new unit operating margin. And I'm curious how much of that has to do with the increase in buyouts as a percentage of revenue. And I was wondering if you could put some figures around that for us in terms of what buyouts represent as a percentage of new unit revenues today versus last year and then maybe in the last cycle.

Mark E. Baldwin

John, buyouts did go up as a percent, so that mix was working against us quarter-to-quarter. Typically, it's been kind of in the 20% zip code over the past several years, and that is, buyout sales as a percentage of new unit sales is kind of been in the zip code of 20%. And it's moved up in the first quarter. As a result of the client asking us to do more work, and we are doing more work, we've talked about that trend a lot, and that's driving buyouts up starting this year.

John R. Moore - CL King & Associates, Inc., Research Division

And if you look back 5 years ago, what did buyouts look like as a percent of new unit revenue?

Mark E. Baldwin

That was the 20% I was trying to describe. Historically , it's been in the range of 20%, and it has moved up in -- starting this year, kind of in the range of 30%, plus or minus.

Operator

And at this time, I'm not showing any further questions. I'd like to turn the call back to management for any closing remarks.

Blaise E. Derrico

Thank you, Tanya. I want to thank everybody for joining the call today. If you have additional questions, this is Blaise Derrico, please call me. You can find my number at the bottom of the earnings press release we issued last night. Everyone, have a great day. Thanks for joining.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.

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