Dresser-Rand Group, Inc. (NYSE:DRC)
Pritchard Capital’s 9th Annual Energize Conference (Transcript)
January 05, 2012, 11:25 p.m. ET
Blaise Derrico - Director, IR
Good morning. Thank you all for being here and we thank Dresser-Rand for presenting at our conference. We have Blaise Derrico and he will do the presentation. The breakout room after this will be in the press room which is over that way. So, Blaise.
Thank you. Good morning. I want to thank Pritchard Capital for inviting us to talk about Dresser-Rand today. This is fourth time we have been at the Pritchard conference. So, we do appreciate the invitation, we appreciate (inaudible) support and covering the company.
Real quick, this is the Safe Harbor, we are all familiar with the Safe Harbor that there may be forward-looking statements made are non-historical facts and there is risk associated with forward-looking statements, because actual results may differ materially from those statements.
Just to start Dresser-Rand, Dresser-Rand we serve the energy infrastructure. In 2010 we had revenues of approximately $2 billion this year with recent acquisition of Grupo Guascor which we closed in May of 2011. Our revenues will be approximately 2.5 billion and as we look to 2012 our expectation is for revenues to be up approximately 20% approaching 3 billion. We have a fairly extensive global footprint with 75 sales offices worldwide, 45 service and support centers and 13 manufacturing locations, four of those manufacturing locations are here in the U.S., the balance are in different parts of the world. One of our largest facilities is in Le Havre, France. We have two facilities in Germany, one in the UK, one in China and one in India.
If you look at this chart you can see on the bottom left, our revenue by business segment. We have two business segments. We have our new unit business and our aftermarket parts in services business. Each of those segments represents approximately 50% of our revenues, and a very much independent revenue streams. The new unit business is the sale of new equipment into the energy infrastructure markets. The new unit business is tied to the commodity price, oil, and so it's cyclical by nature. Whereas the aftermarket parts and services business is tied to the install base of equipment and the install base of equipment continues to run through good times and bad. So, the aftermarket revenue stream tends to be much less cycle sensitive as compared to the new unit business and the aftermarket produces operating margins roughly two times that of the new unit segment. New unit operating margins are not only in low double-digits, whereas the aftermarket is in low to mid 20% range.
If you look to the right, you see our revenue by destination, approximately a third of our revenues are in North America with another third in Europe and the Middle East and the balance in Latin America, Asia-Pacific and Asia.
As we think about the outlook, our expectation is that growth will be much faster in the markets outside of North America. So, the expectation is that particularly our new unit business sales will be more in the developing or emerging markets of the Middle East, Asia, Central and South America.
If I had to spend time on just one slide in our presentation, it would be this slide, and this slide is why think about Dresser-Rand. Why the Dresser-Rand make a good investment opportunity. And we think it's a couple of things, first, we believe we are well positioned to benefit from continuing energy infrastructure investment. Both in our traditional oil and gas markets where we supply high speed rotating equipment for oil and gas production, transmission, and downstream opportunities such as refining and petrochemical, but increasingly we are seeing our opportunities in environmental solutions markets. Compressed air and energy storage, combined heat and power, biomass, so increasing percentage of our new equipment business is in these environmental solutions market and I will touch on that little bit more in a moment.
We also believe we have sustainable competitive advantages. First and foremost, we believe we have a very strong value proposition which is based on technology, we have leading compression technology. Your technology is more efficient, more reliable; the equipment because of its unique design is easier to repair. We can do turnarounds much faster on our class of equipment as compared to that of our competition. We also have the largest installed base of our class of equipment in the industry. And that’s significant as we think about our aftermarket and the aftermarket opportunity that we have in front of us.
We have approximately 40% of the industries install base of compressors and steam turbines. We also have the most extensive service network in the industry, we have approximately 45 service centers so we tend to be local in more places, and our competition and that’s usually important to our aftermarket and continued growth in our aftermarket revenues.
We also have more client alliances than anyone in the industry and we thus validate our strong value proposition. We have a unique business model and this business model allows us to perform well in both a strong market environment as well as in a not so strong environment. And I will have some comments on that, but later in the presentation. With this business model includes a flexible manufacturing model which allows us to flex the supply chain to meet changing business conditions in our new unit business. As I mentioned earlier our new unit business is cyclical by nature, and so being able to flex the supply chain. We are able to add capacity when it's needed and contract that capacity when it's not needed without significantly impacting our operations.
We have a high margin aftermarket which represents roughly 50% of our revenues, it produces 65 to 70% of our operating margin and the aftermarket is very dependable. So, recurring almost annuity like revenue stream. We also have a low capital intensity model. We are able to operate this business with less than 5% invested in networking capital and roughly 2% of sales going into capital expenditures. So, as a result of this business model, we are able to perform in both up and down cycles and continue to generate strong cash flows.
I mentioned we serve the energy infrastructure, upstream which is oil and gas production we supply compression and steam turbine and power generation equipment. The midstream which is transmission and storage, downstream refining and petrochemical and increasing the environment markets. Our estimate for 2011 new unit bookings you can see is heavily weighted towards the upstream, particularly loading production, FPSOs, and I have a chart on that to share with you on a moment.
60% this past year represents a very large award from Petrobras where we were awarded 8 FPSOs for the Brazil Pre-Salt. Our expectation is going forward that the upstream markets will continue to provide the lion share of our new equipment opportunities.
Just a minute on our view of the new equipment market, our served industry market. In 2010 we estimated the size of that market opportunity to be about 8 billion, roughly 5 billion of which is oil and gas with the balanced environmental solutions opportunities. If you look inside the markets, our expectation is that the oil and gas markets are expected to grow at approximately at 10% growth trajectory over the next several years with the environmental solutions markets growing a bit faster in the range of 15 to 20%. We believe our served industry market opportunity will grow from approximately 8 billion this past year to approximately 15 billion by 2015.
Just to drill down a bit in the key market opportunities that we see in front of us, first floating production opportunities. We supply high speed rotating equipment, we build compressors and we build power generation equipment that goes on FPSOs and floating LNG vessels. We are currently estimate there is approximately a 130 projects, floating production projects that are likely to be awarded over the next five years. This represents approximately a $5 billion market opportunity for compression equipment, and a like opportunity for power generation equipment.
I mentioned the recent Petrobras award, 8 FPSO, we will supply all of the compression equipment for those 8 FPSOs, the equipment award totaled little over $400 million, so each vessel represents about a $50 million equipment opportunity just for compression.
We have seen our FPSO awards range anywhere from a low of 20, 30 million per vessel to as much as 150 million. Our largest FPSO award was BP Skarv award where we won both the compression and power generation equipment.
For every million standard cubic feet of gas that’s handled per day it's $200,000 equipment opportunity for Dresser-Rand, and we have technology which has positioned us quite nicely in this floating production market. So, if you want exposure to floating production, you want to think about Dresser-Rand.
Refining, the opportunity we see in front of this in the downstream market just refining is quite large. The expectation is there may be as much as 12 million barrels per day of new capacity added over the next five years principally in the developing world, the Middle East and Africa, Asia-Pacific, South and Central America.
For every 200,000 barrels per day of new capacity, that’s a $50 million equipment opportunity for Dresser-Rand. Some recent awards refinery downstream awards Saudi Aramco for example, the (inaudible) project of 400,000 barrel per day, refinery expansion we were awarded all of the rotating equipment and that project award was roughly a $100 million. So, we see refining as a large market opportunity representing approximately 3 billion in opportunity over the next five years.
Turning to environmental solutions. This is just one example, CAES, compressed air and energy storage. We have been talking about CAES for a number of years now; we are currently tracking some 40 projects. With compressed air and energy storage is [off storage] and CAES is where you are able to compress air into a cavern and under high pressure you can reverse that process and take that air out of that cavern which will run through a standard drive generator to produce electricity. There is one operating CAES facility in the U.S., today it's in McIntosh, Alabama as all of our equipment, it's basically (inaudible). It takes cheap power at night, compresses air into the cavern and during the day when rates are higher it reverses the process and produces electricity that’s sold back to the grid at a higher price. So, it's been operating continuously more than 20 years.
More recently CAES has been looked at as a way to harness renewable, principally wind. So, as I said we are tracking some 40 projects today, there is no CAES orders in our backlog at the moment, but the opportunity for every 100 megawatts of capacity is a $50 million equipment opportunity for Dresser-Rand and we do believe these projects will go forward in the very near-term.
This chart reflects our new unit bookings, as I mentioned our new unit business is cyclical by nature. You can see over this more than 10 year period, the cycles, the cycle in 2003 and more recently the recession of 2009, where our new unit bookings fell from a record level in 2008 of 1.4 billion to 700 million in 2009. But we have seen nice recovery in our expectation is for record level bookings this past year, and going forward into 2012.
What’s driving our new unit business is investment in energy infrastructure which is tied to population growth, economic growth. And on the production side increasingly supply if you think about the largest fields worldwide, the average depletion rate of those fields is not only 7% per year. So, even if you don’t see any economic or population growth, our times will continue to invest in energy infrastructure just to close the supply gap and the expectation is that not only will they need to close the supply gap but they will need to invest to increase supply to meet increasing demand.
Turning to the aftermarket, I mentioned the aftermarket represents roughly 50% of our revenues, but produces the lion share of our profits and cash flows. Our traditional market which is the market for our compression equipment and steam turbine equipment, we estimate to be about 10 billion in size. As I mentioned earlier, we have the largest install base of equipment and this equipment has an average operating life of 30 years and the equipment continues to run through good times and bad. We estimate that on our named plate equipment, we capture a little over 50% of the work available to third parties.
On the non D-R named plate equipment we had several years ago initiated what we refer to as an implied technology initiative, where we are going after work on competitor machines; we are applying our technology to competitive machine. So, that’s an opportunity and an area of growth.
As we look out to 2015, we estimate that the size of the market we grow to about 15 billion. In fact the market is larger than 10 billion today as a result of adding gas turbine repair capability as a result of an acquisition of a company. Two years ago leading edge turbine technology, leading edge a $30 million business sitting inside a 3 to $4 billion market opportunity. Our plan is to equip a number of our service centers globally to be able to do repair on these large gas turbines which often are found driving our compression equipment in production, both upstream, midstream and downstream applications.
This chart reflects our aftermarket revenues over more than a 20 year period. A couple of takeaways, if you look at this slide you can see during the 1990s the aftermarket business was normally a $0.5 billion business. It was fairly steady, not cyclical by nature. But it was zero growth. We changed the growth trajectory of this business by doing a number of things. One, focusing on ways to grow that aftermarket.
In the 1990s we didn’t even have aftermarket client facing organization. We literally sat back; we were reactive to client needs. And client would come to us because the equipment we build is custom built, engineered to order mission critical equipment. So, they would come to us for critical parts and components, but we didn’t actively go out, and proactively go after business. With the leadership change in the early 2000, we put in place an organization, we went out and did a census, we determined where the equipment was and the revenue opportunity and built entitlement models. From that we started to focus on growth initiatives which are listed on the right hand side of this chart. And we have done a couple of things which has allowed us to take this business which was zero growth to a business that is growing at roughly a 10% CAGR. And we believe there is considerable opportunity continuing to grow this business going forward.
We have extended service network as I mentioned earlier, we made acquisitions, many of those acquisitions brought product and market opportunity in the aftermarket including the leading edge turbine technologies business that I mentioned earlier We focused on applying our technology to competitor machines and so we have initiatives in place which we believe will allow us to continue 10% plus growth over the long-term.
Just a minute on the business model, there is a lot going on in this chart, but I think it's important. I mentioned that we have a unique business model that’s designed to support strong financial performance in both the up and down cycles. If you look the upper left, you see in the blue bars revenue, and you can see through the period 2006 through 2009, strong revenue growth and I mentioned in 2009 we saw a significant down tick in our new unit bookings. They fell nearly 50% from the record level of 2008.
Because our new unit business order to delivery, order to revenue recognition is 12 to 15 months. We executed those orders in 2010, and you can see the fall off in revenues, but because of the flexible manufacturing model, the ability to flex the supply chain, we were able to keep our factories more fully absorbed and our operating margins held up through that down cycle. They stayed north of 12% normally 13.5% operating margins new unit business. So, we believe that this is evidenced that flexible manufacturing model works, and that coupled with low capital intensity. I mentioned net working capital as a percent of sales, it's average less than 2% over the last five years. And our capital expenditures is average less than 2% over that same period of time, and all of that has resulted in significant free cash flow which you can see on the right side of this chart. We have stayed profitable and generated cash flow through the cycle, including the 2009 recession.
A quick look at our capital structure, we have increased leveraged as a result of the acquisition of Grupo Guascor in May of last year. And more than $0.5 billion of share repurchases, but I think if you look at this chart, you can see we were highly leveraged, time of the leverage buy out. In 2004 we were able to rapidly delever as a result of our ability to generate strong cash flows through the cycle. So, we have taken on a bit more leverage a bit more than are comfortable with, but we have demonstrated an ability to delever rapidly and I believe you will see us do that in the go forward case.
Little bit on outlook, we ended the third quarter with a record backlog; we had a record backlog of 2.7 billion, nearly 2.2 billion of new unit orders. And that supports our new unit revenues as we look into 2012, because the order to delivery remember is a year or more. At this point in time we have the [bulk] of the backlog to support 2012 new unit revenues.
In terms of our revenue and operating income outlook, not an update, but this is our most recent guidance, our expectation for revenues to be up approximately 20% in both segments. Both new units and aftermarkets, and for operating income to reflect more than 2 to 1 leverage.
So, that concludes my prepared remarks.
Thank you, Blaise for that presentation and the break out room will be in the press room again which is over that way.
[No Q&A session for this event]
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