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Dresser-Rand Group Inc. (NYSE:DRC)

Q4 2011 Earnings Call

March 1, 2012 9:00 a.m. ET

Executives

Derrico – Director, IR

Vincent Volpe – President and CEO

Mark Baldwin – EVP and CFO

Analysts

Jeff Spittel - Global Hunter Securities

James West - Barclays Capital

Jon Donnel - Howard Weil

Robin Shoemaker – Citigroup

Tom Curran - Wells Fargo

William Conroy - Pritchard Capital Partners

Robert Connors – Stifel Nicolaus

Operator

Good morning, ladies and gentlemen. And welcome to Dresser-Rand's Fourth Quarter and Year-End 2011 Earnings Conference Call. My name is Stephanie, and I will be your coordinator for today's conference. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes. After Dresser-Rand's comments today, I will instruct you on the procedures for asking your questions. I'll now turn the conference over to Blaise Derrico, Director of Investor Relations. Please proceed, sir.

Blaise Derrico

Thank you, Stephanie. 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 number two. 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 include non-GAAP financial measures. For a 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 Volpe

Thank you, Blaise. 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 three. We’re generally pleased with the company’s overall performance in 2011, especially the record level achieved for both the new unit and aftermarket bookings. For the full year 2011, our operating income was $257 million which was slightly above the midpoint of the guidance disclosed in our pre-release. We believe our 2011 performance was good given the series of challenges that impacted our results, including the flood at our facility in Wellsville, New York, the non-recurring integration and transaction related expenses in connection with our acquisition of Grupo Guascor, the continued political instability in the Middle East and North Africa, primarily in Libya, and a one-time cost associated with the refinancing our senior subordinated notes.

From a strategic standpoint, we achieved a number of important initiatives, including our acquisition of Guascor, our investment in Echogen power systems, the refinancing of our long-term debt, securing a new $1.1 billion senior secured credit facility and executing three stock repurchase programs totalling $504 million. We also made progress advancing our technology platform extensions, namely the marinization of our integrated compressor system and Ramgen’s supersonic shock wave compressor.

Please turn to slide four. Earlier this year, we acquired a technology development company Synchrony which brings us a portfolio of world class technologies and products, including active magnetic bearings, high-speed motors and generators and power electronics for clean efficient and reliable rotating machinery. Several years ago we identified the strategic importance of being able to offer oil free solutions and high-speed rotating equipment applications through the use of active magnetic bearing technology.

The overall value proposition for eliminating our auxiliary oil systems centers around three principles. First, reduced footprint and weight in platform and FPSO applications which generates overall CapEx savings in the construction phase. Second, oil-lubricated bearings in subsea applications are neither practical nor reliable, and lastly, lubrication oil in compressor and steam turbine applications in general needs to be reconditioned and ultimately discarded as it is mixed with process gas or steam, thus making it environmentally unfriendly.

We believe that the seamless integration of oil free solutions into our product development process will provide us with the ability to continuously improve our overall equipment designs, and is the fastest and least expensive way to add this capability in our product offering.

Please turn to slide five. Total bookings for 2011 of $2.9 billion, which is a record level, are 28% higher than those of 2010. Approximately 41% of our 2011 bookings were for upstream applications, 12% for midstream, 27% for downstream, 17% for environmental solutions and approximately 3% for applications in general industry and the U.S. Navy. An increasing percentage of our new unit bookings involved projects outside North America and we expect this trend to continue.

Please turn to slide six. New unit bookings totaled to $1.5 billion, a record and an increase of 24% compared with 2010, including approximately 86% in our traditional oil and gas markets and 9% for the environmental solutions applications. New unit bookings finished the year consistent with the disclosure in our pre-release.

Please turn to slide seven. Turning to the aftermarket, we are showing on this slide that for 2011 record bookings of approximately $1.4 billion or $332 million or 32% higher than 2010. The increase in bookings was due to the Guascor acquisition and the continuing recovery in certain of our markets. Excluding Guascor, aftermarket bookings grew approximately 13% from 2010.

Aftermarket bookings for the fourth quarter totaled $336 million, an increase of 23% over the corresponding period last year. Excluding Guascor bookings of approximately $73 million, aftermarket bookings were 3% lower than the corresponding period in 2010. It should be noted, however, that the second half of 2011 bookings of $727 million, excluding Guascor, were 42% higher than the corresponding period in 2010. In most regions of the world, we believe we are seeing signs of recovery in the aftermarket segment. The exception is the Western European market which continues to be somewhat sluggish.

We still have not returned the service personnel to Libya but we are accelerating plans to do so in the second half of this year as long as conditions in the country continue to improve and we believe it’s safe to return personnel to this part of the world.

Turn to slide eight please. Our backlog at the end of December of approximately $2.6 billion was 30% higher than the earlier year period. The new unit backlog of $2.1 billion was up 29% versus a year ago, and the aftermarket backlog of 4477 million was up about 35%. Our backlog gives us a good start on 2012 as approximately $1.2 billion of the new unit backlog is scheduled for delivery this year. I will have more to say about our outlook in a moment but first, I will provide some additional details around the fourth quarter’s shipment shortfall.

Please turn to slide nine. Let’s begin with a look at revenues for the fourth quarter which totaled $738 million and represents a nearly $3 billion run rate on an annualized basis. Aftermarket revenues of $395 million were $113 million or 40% higher compared with corresponding period in 2010. The increase reflects incremental revenues from Guascor that were mostly generated from long term service agreements associated with Guascor’s energy assets business.

New unit revenues of $343 million were 35% higher compared with the fourth quarter of 2010, principally due to incremental revenues attributable to Guascor. Although fourth quarter new unit revenues increased from 2010, they were approximately $200 million lower than our earlier expectations. We estimate that the operating income associated with these sales was approximately $30 million. While the shipment delays are disappointing, it should be noted that this is more a question of timing than project margin erosion or higher than anticipated fixed costs. The earnings were displaced out of a period but were not lost by the company.

Turn to the next slide please. The $200 million new unit revenue shortfall was due mainly to two reasons. Nearly half of the shortfall was client driven and most of the balance relates to supplier driven delays. The biggest portion of the supplier driven delays involves major buyouts, principally the timely receipt of motors.

Turn to the next slide please. With respect to the client driven delays, there are seven discrete projects that account for approximately $100 million of revenue slippage with the largest of the seven projects accounting for a little over 40% of the total. In that one case, the client made changes to their specifications for the compression equipment. The compressors are for a large offshore platform project in the North Sea. As you may now, our equipment is custom-engineered to exacting specifications for a variety of working conditions, such as field pressures and gas composition.

Subsequent to providing us with the original specs for the equipment, the client performed additional field test and determined that the original specs had to change to optimize equipment design. While the changes in delay are being able to recognize revenue and profit, it’s not all bad. The good news is that we make additional profit on change orders. Furthermore, our contracts are designed to be cash flow positive through the provision of progress and the advance payments. So changes of this type do not affect the project cash flows. The other six projects mostly involved situations where the client preferred not to take delivery prior to the end of the year.

Turn to the next slide please. We are showing on this slide the major categories of supplier driven delays that moved approximately $100 million of revenue from the fourth quarter 2011 into 2012. In our new unit segment, we rely on client approved and sometimes specified third party suppliers for certain major pieces of equipment that are integrated into our compression packages. These finished goods are commonly referred to as major buyouts, such as large gas turbines, or motors to drive our compressors. Our reliance on these third party suppliers for this equipment exposes us to delays resulting from a supplier’s failure to deliver the equipment on the contracted delivery dates. Any such delays in the delivery of major buyouts can delay our deliveries to our clients moving revenue and profit recognition to future periods.

Approximately three quarters of this impact involved motor suppliers and the lion share of the problem was with one of the three major suppliers. Changes at this one supplier led to process upsets and inability to execute orders on a timely basis.

Turn to the next slide please. We have completed a detailed review of the projects that made up the approximately $200 million in revenues that were delayed into the fourth quarter of 2011. And this slide shows the timing of expected revenue recognition on those projects in 2012. Based on this review, we now estimate that approximately 68% or $136 million of the delayed revenue will be recognized in the first quarter of 2012 as the balance is shifted to the second quarter.

Turn to the next slide please. The issues, while transitory, are not contained to just the fourth quarter of last year. The supplier driven issues have also impacted certain projects that were previously scheduled for first quarter delivery. We currently estimate approximately $50 million and $15 million of operating income will be moved out of the first quarter and into the second quarter. We have taken steps to address this situation and believe we now have the problem under control.

Fortunately, the problem is bounded because of the limited number of suppliers involved. We have reinforced our supplier management processes with additional executive oversight, management reviews and on-the-floor expediting of these key buyout suppliers. The motor supplier that caused most of the problems was recently acquired by a very large conglomerate. The good news is that after the acquisition, the supplier in question installed an accomplishment executive team at this motor facility and we have since seen some schedule stabilization.

I will now turn the call over to Mark Baldwin to review our fourth quarter financial results.

Mark Baldwin

Thank you, Vince and good morning everyone. Turn to the next slide please. As previously mentioned, fourth quarter revenues were $738 million, an increase of approximately of 37% from the fourth quarter of 2010. Cost of sales was $505 million for the fourth quarter of 2011 compared to $381 million for the corresponding period last year.

As a percentage of revenues, cost of sales was approximately 69% for the fourth quarter of 2011 compared to 71% for the corresponding period in 2010. The decrease in cost of sales as a percentage of revenues was principally caused by different mix of revenues resulting from the Guascor acquisition.

Selling and administrative expenses as a percentage of revenues decreased to 13.3% from 15.2% reflecting good cost control on higher volumes. Operating income for the fourth quarter of 2011 was approximately $128 million and compares to approximately $70 million for the fourth quarter 2010.

Fourth quarter 2011 operating margin of 17.3% compares to 13% for the corresponding period in 2010. This 430 basis point increase was primarily attributable to the benefits of operating leverage resulting from higher volume and acquisition of Guascor.

Interest expense increased to $17 million as a result of adding leverage to the balance sheet for the Guascor acquisition and share repurchases. Other expense, net of approximately $4 million includes losses on foreign exchange, minority interest in our investments such as Ramgen and Echogen and a reclassification of a third quarter item.

Effective tax rate of 34.4% in the fourth quarter of 2011 compares to 16.4% for the corresponding period in 2010. The effective tax rate in the fourth quarter of 2011 was slightly higher than previously expected due to a less favorable mix of the U.S. earnings versus foreign earnings. Additionally, included in the effective tax rate in the fourth quarter of 2010 are some foreign tax credits related to dividends of 2010 foreign earnings we brought back to U.S.

The bottom line of all these is that our net income for the fourth quarter was approximately $69 million or $0.90 per diluted common share. This compares to approximately $52 million or $0.64 per diluted share for the corresponding period in 2010.

Turn to slide 16 please. New unit operating income was $44.5 million for the fourth quarter 2011 compared to $28 million for the corresponding period in 2010. As a percentage of new unit segment revenues, operating income was 13% for the fourth quarter of 2011 compared to 11% for the three months ended December 31, 2010. The increase in operating income and margin from the corresponding period in 2010 were attributable to the acquisition of Guascor and the benefits of operating leverage resulting from higher volume.

Turn to slide 17 please. Aftermarket operating income was approximately $108 million for the fourth quarter 2011 compared to $68 million for the corresponding period last year. As a percentage of segment revenues, operating income increased to 27.4% from 24.2%. The increase in this segment’s operating income was primarily attributable to higher revenues. The increase in operating margin from the corresponding period in 2010 reflects the benefits of operating leverage resulting from higher volumes partially offset by less favorable mix.

Turn to slide 18 please. Net cash provided by operating activities for the 12 months ended December 31, 2011 was approximately $108 million which compares to the $376 million for the full year of 2010. The decrease of $268 million was principally due to a higher level of working capital and lower net income.

Working capital increased as a result of higher business activity. Net working capital for the 12 months ended December 31, 2011 consumed cash of approximately $92 million. This is unfavorable when compared to the 12 months ended December 2010 when we had a reduction in net working capital of approximately $156 million associated with the lower level of business activity due to the worldwide recession that resulted in the low level of new unit bookings in 2009.

In addition, we made $33 million of pension contributions during the 12 months ended December 31, 2011 in accordance with our funding policy which was significantly higher than our $7 million of pension contributions for the 12 months ended December 31, 2010. We currently expect to contribute approximately $22 million to our pension plan in 2012.

Turn to slide 19 please. This slide shows that for the 12 months ended December 31, 2011 changes in net working capital resulted in a use of cash of approximately $108 million, which is $16 million higher than the change in working capital shown on the prior slide. The principal differences are changes in working capital associated with acquisitions and currency translation.

On the cash flow statement, working capital acquired in acquisition is included in the investing activities in accordance with generally accepted accounting principles and the effect of exchange rate changes on cash is shown separately. From the end of last year, accounts receivable inventories increased as a result of higher activity in our factories and the Guascor acquisition. Increases in these working capital accounts were offset by increases in accounts payable, customer advances and progress payments, also resulting from higher activity in our factories. The increase in activity in our factories is attributable to the higher level of bookings as a result of the continuing recovery in our markets.

Next slide please. Investing activities used approximately $346 million of cash in 2011 compared with $106 million of cash used for investing activities in 2010. Cash used in investing activities includes the acquisition of Guascor which we closed on May 4, 2011. We paid approximately $305 million in cash, $284 million net of the cash acquired and delivered approximately 5 million shares of Dresser-Rand common stock at closing.

Cash used in investing activities for the 12 months ended December 31, 2010 of $106 million includes approximately $45 million related to the acquisitions of certain assets of Leading-Edged Turbine Technologies and Turbo Machines Field Services as well as the $24 million earn-out payment associated with the 2008 acquisition of Peter Brotherhood.

Cash used in investing activities for the 12 months ended December 31, 2011 also includes capital expenditures of $51 million which is higher than the approximately $33 million of capital expenditures in 2010. The increase is largely due to the acquisition of Guascor and certain infrastructure investments, including the expansion of our gas turbine repair capability and the service facility under construction in Saudi Arabia.

Net cash used in financing activities was approximately $53 million for the 12 months ended December 31, 2011 compared to net cash used in financing activities of $68 million for the 12 months ended December 31, 2010. Net cash used in financing activities for the 12 months ended December 31, 2011 includes the cash effect of three accelerated stock buyback programs totaling $505 million and debt refinancing activities. Net cash used in financing activities during 2010 included the repurchase of approximately $70 million of our common stock.

Turn to slide 21 please. At the end of the fourth quarter, our liquidity totaled approximately $428 million and consisted of approximately $128 million of unrestricted cash and $300 million of available borrowings under our bank credit arrangements as $202 million was outstanding under our revolver and $198 million was used for outstanding letters of credit.

At the end of the fourth quarter, we also had approximately $135 million of letters of credit and bank guarantees drawn under uncommitted bank lines.

Next slide please. At the end of the fourth quarter, our balance sheet reflected the additional leverage we’ve taken on in connection with Guascor acquisition and the accelerated stock buyback programs we executed last year. At the end of the quarter, our net debt to capital ratio was approximately 46%. As our history has shown, we have a business model that allows us to generate strong cash flows which would allow us to delever as appropriate.

For information about our results for 2011, please refer to our 10-K which we filed yesterday with the SEC. With that, I will now turn the call back to Vince for some closing comments and to moderate our Q&A session.

Vincent Volpe

Thank you, Mark. Turn to slide number 23 please. I’ll wrap up our prepared remarks with a few comments about our outlook for 2012.

The market for new unit orders continues to be strong, especially project activity outside North America. We currently expect that the full year 2012 new unit bookings will be between $1.7 billion and $1.9 billion which is unchanged from our previous guidance despite the slippage of orders that we’d expected to close in the fourth quarter.

I might point out that the U.S. dollar has strengthened approximately 10% since we prepared our preliminary 2012 forecast, which was the basis for our 2012 guidance provided at the time of our third quarter earnings conference, nearly four months ago. As a result, on an apples to apples basis, the current new unit bookings range effectively reflects an increase of approximately $100 million in bookings.

We currently expect aftermarket bookings for the full year to be in the range of $1.4 billion to $1.6 billion. The effect of the stronger U.S. dollar on our aftermarket bookings guidance is estimated to be approximately $50 million compared to our earlier guidance.

Turn to slide number 24 please. As previously disclosed, given the recent strengthening of the U.S. dollar since we initially provided 2012 guidance last fall, our outlook for 2012 revenues and operating income has been adjusted accordingly. As for revenues, we expect the year over year increase of approximately 35% to 40% in the new unit segment, which reflects the record bookings in 2011 and the delay of the fourth quarter shipments into 2012 and approximately 15% to 20% increase in the aftermarket segment.

As previously disclosed, our 2012 operating income is expected to be in the range of $360 million to $420 million. For financial modeling purposes, we also provide the following assumptions for next year: New unit operating margins to be in the low double digits; aftermarket operating margins to be in the 22% to 24% range reflecting the increasing long-term service agreements as a percentage of the total aftermarket revenues.

Unallocated expense is expected to be approximately $110 million to $115 million. It should be noted that the unallocated expenses are expenses that cannot be assigned directly to either reportable segment because of their nature and consist of certain corporate expenses and research and development expenses. For 2012, R&D expenses are expected to increase to approximately $40 million to $45 million.

Interest expense is expected to be approximately $60 million to $65 million. The effective tax rate for 2012 is expected to be approximately 33% to 35%. The higher end of the range reflects certain pending and yet to be clarified tax law changes in several countries where we conduct business.

And finally, diluted shares outstanding are expected to be approximately 77 million to 78 million. We also expect a further increase in backlog over the course of 2012 in both the new units and aftermarket segments which reflects the continued strength of our end markets.

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 2011 operating income was only 7% of the full year. Additionally, given the shift in backlog stemming from the supplier issues discussed earlier, we believe our first quarter 2012 operating income will be in the range of 10% to 12% on the total year.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jeff Spittel from Global Hunter Securities. Your line is open.

Jeff Spittel - Global Hunter Securities

I guess first question with regard to the potential change orders there that you’re going to see related to some of the delayed shipments. Could you give us a sense of how those fit in your guidance and is that expectation maybe embedded in the lower end of the range, or is that one of the swing factors for 2012?

Vincent Volpe

Jeff, we’ve got so much – we got so much range there, $360 million to $420 million that, the magnitude of change orders on that one project aren’t going to move the needle one way or another side. I would say it basically has no impact. You’ve got this new unit backlog that’s there but if you have a couple percent swing in the aftermarket, that does more to move the needle on the operating income than the change order on the unit. So really no appreciable impact.I think the point I was trying to make was that while the shipment was delayed, we’re again paid a little bit extra money for that and it’s not affecting our cash flow because of the progress payments.

Jeff Spittel - Global Hunter Securities

Okay, understandable. And then I guess, shifting a little bit to what’s going on North America related to the shale plays and tidal wave of NGL production. Could you comment on what if anything you are seeing downstream in terms of the impact and the opportunity that might present on the orders front?

Vincent Volpe

Well, in a very small – the small compression range, which is what a lot of the shale gas is focused on, it’s a little bit smaller than what we focus on. So I don’t really see a bit impact there. We’ve got a product line that does fit in that space but we are not strong players in that space, never really have been. So I suspect we will see a pickup but I don’t know how much is going to move the needle. I mean, I’ll just give you one sort of fact, though, Jeff. In the first two months of the year, we booked more in high speed separable reciprocating compressors than we shipped all of last year. And that’s the unit that I am talking about. But we are talking about $40 million in bookings. So again, not a big deal.

There is though the gas stations where the liquids need to be separated which requires larger compression, that is out in front of us and that is an opportunity. I think when you are talking about nominally sort of $1.7 billion in new unit bookings, though, I am not sure how much that will really affect this year but I do think it’s an opportunity.

Jeff Spittel - Global Hunter Securities

Okay. I was thinking more with regard to petrochemicals but it doesn’t sound like that’s necessarily on the radar screen either?

Vincent Volpe

Not in the US, I don’t see a lot of activity, Jeff.

Operator

Our next question comes from James West from Barclays Capital. Your line is open.

James West - Barclays Capital

Just a question on Libya, you guys are preparing to go back in, in the second half of the year. Can you remind us just what size of a business that was for you in pre-disruption? And then I know you have a wide range for guidance but is your re-entry into Libya part of your 2012 guidance already?

Vincent Volpe

Yes, our order of magnitude last year was somewhere 15-ish, maybe $15 million to $20 million. I don’t have the exact number – 2010 of course, we didn’t get that last year. I think the number we have been using is $16 million. So that is significant right? And what we have built into 2012, James, was a half a year that we’d be back in. Where we are right now is they’d like us back now. There is order -- sort of waiting for us to service orders, waiting for us to pick up, we want to go back and we still got a little bit more work to do around making sure we are comfortable from a safety standpoint but others are back in already. And we are talking to other – larger service companies. So I believe that we can get back in there and I can fit the half a year guidance that we put in – the half a year that we built into our guidance is good. I don’t think there’s any downside to it, there may be a month or two of upside.

James West - Barclays Capital

Fair enough. And then just a question on Saudi Arabia, obviously the rig count (ph) is ramping pretty quickly in Saudi and you guys have a facility under construction in Saudi. When is that facility expected to be completed and when will you be fully kind of up and running in the Kingdom? I know you sell products now but when would the – your new facility will you be up and running?

Vincent Volpe

We are up and running now, James, because while we were constructing this thing, we have large orders that we need to package compressors for the Yanbu project. And so we are actually leasing the facility right now. So we are there and we are working. So that’s the first part of the – that’s sort of the second part I guess of the question, to answer first. Our facility we believe will be done in about a year’s time. It takes a long time. We are sort of at the front end of the construction phase right now. It’s taken a long time to get permits and the engineering done, and sometime we can talk about it offline. But we are up and running now.

Operator

Our next question comes from Jon Donnel from Howard Weil. Your line is open.

Jon Donnel - Howard Weil

Wanted to talk a little bit about these third party supplier issues that happened in the fourth quarter and just kind of get a little detail maybe about where the bottlenecks are for you guys. And when you have a large order like you had planned for 4Q, do you rely on really using every single one of these suppliers or is it kind of fungible, and how quickly could you kind of move between supplier issues like these arise in the future?

Vincent Volpe

Well, in fact, Jon, one of our projects we literally at the customer’s request an agreement at the end, we moved to a different supplier. But when you do that, that throws you out nominally six months just because the new supplier can’t get the motors suppliers, just can’t get ramped up and produce the motor that quickly. Right, it takes largely six to nine months to build a motor depending on the specifications. So that’s the timeframe that you look to when you have to change. There are more than one suppliers out there. So we do have the ability to change. We don’t actually think it’s necessary right now. The biggest problem, if you will, resided in one company and we believe either they’ve got those -- they’ve got the right leadership in place now, and they’ve got their arms around the fundamental issues. And on top of that, we are not leaving it up to them.

I think in the past we’ve gotten – they performed quite well and so when people perform well, you don’t necessarily provide as much direct overview and supervision as you do with those that you have a little more suspect. Well, we are providing plenty of overview and supervision, I can assure you right now and so as I said before, Jon, the problem is bounded in terms of 2012. There is some movement from Q1 to Q2. There is some moving from Q4 out into both Q1 and Q2. But the good news is it’s not 20 different suppliers, it really was down to fundamentally one. And we do have other choices going forward. So if we don’t believe that despite the fact that new management is in place and they are saying the right things, and we don’t believe that they are doing the right things to actually improve their performance, they are finished. And we have other options.

Jon Donnel - Howard Weil

Okay. So it sounds like just given the proper lead time there that you are not constrained in terms of total revenue that you could run through your system, in a given quarter just based on those third party constraints, then?

Vincent Volpe

Absolutely not, Jon.

Jon Donnel - Howard Weil

And then shifting over to aftermarket here, I know that, that’s historically been sort of a 10% year over year growth business for you guys, looking well into the past. But as we back out kind of the Guascor impact share this year, it looks like it may be about half of that compared to where you were in 2010. I know that’s been a focus for you guys here. Can you talk a little bit about how you see that kind of unfolding as we go forward? I know you talked in the past about things like gas turbine repair and applied technology. Could you maybe give us an update on kind of how those are going and kind of the target you see for getting back that sort of 10% year over year growth rate?

Vincent Volpe

Sure, Jon. Maybe offline we need to work on the math a little bit, and we may have not been clear. But we’ve actually, excluding Guascor, our bookings increased 13% year over year. So we’re quite pleased with the results sort of excluding the impact of Guascor, so 13% up. We are looking this year, nominally as we’ve guided revenue up somewhere between 15% and 20%. Now you get part of that because you’re going to get a full year of Guascor in 2012 versus the eight months that we had in 2011. So it’s not really a 20% growth rate business, okay. But I do think it’s probably around that 15% range which is what we got this year.

And I just – as long as we are on the topic, I’ve got to tell you this. Q1 really looks solid in the aftermarket which in the scheme of things could be the single most important message I need to get out here today. As the aftermarket goes early in the year, so go the full year earnings, right, because our new unit backlog is pretty much set. And so we can book things early in the year at a good rate in the aftermarket. We’ve got a good chance of shipping those in the second half of the year. So look for a very strong aftermarket Q1, sort of well within run rate of guidance that we provided from a bookings standpoint. So we’ll work with you on the math to get that difference between 6% and 13% cleared up but it was 13%. The gas turbine business is starting to click. We are very enthusiastic about that, about applied technology, and some of the other growth initiatives that we’ve launched, looks pretty good. It’s a really good start.

Operator

Our next question comes from Robin Shoemaker from Citi. Your line is open.

Robin Shoemaker – Citigroup

Thank you, Vince. Good review there. I wanted to ask you going a little further on this aftermarket thesis. As I look at it, it’s very encouraging. Can you speak to the progress you’re making on the greater market share of Dresser-Rand equipment and then the applied technology piece, and then the effort you’re making on Guascor to increase their aftermarket business?

Vincent Volpe

Sure. First of all, the applied technology piece, we saw another strong year, I don’t have the exact number with me, Robin but it continues. And I think in 2012, we’ve got some very nice projects that we’ve teed up and within the next, I would say within the next three to six months, I am hoping that there is some really good news on that front. So I am expecting a nice tick up this year in applied technology. I’d just sort of leave that as it is.

And then the other piece is what we are doing with Guascor. Basically in the oil and gas space, we’ve got an opportunity to increase their share of the aftermarket. So if you look at the engine business, what was used to be Guascor power, they only had about 10% or 15% of the total engine sales, with sort of the parts and service in the aftermarket. And you know that our split is more like 50:50. And we felt that we could improve on that and we’ve started now in the integration process to look at principally our U.S. service centers to begin with to see what we can do to penetrate the space in the United States. Now they don’t have much of an installed base here but one of their competitors and they shared literally the same part numbers. And that specific competitor has fortuitously cancelled their distributor agreements for many of them here in the United States. And so those distributors are coming to us. And we’ve got plans and we expect to see results this year for aftermarket bookings using our service infrastructure in the United States. Remember we’ve got 12 shops to help us grow a business literally working on a competitor’s engine that shares the same part number.

So that’s one – that’s sort of one piece and we’re pretty far along, I believe, with three different distributors at this point in time. I reviewed this just two days ago. So my information is current on that. So forms a piece of that. And Robin, I think over a long call, and it’s going to take us a few years. We ought to be able to get to that same kind of ratio between engines and parts. Maybe not all the way back to 50% but heck of a lot close to that than where we are now. But it will be a journey, it will take time but I think we’ve got built into our plans a nice step forward in that space. Did I miss a part of your question, Robin?

Robin Shoemaker – Citigroup

No, I think that’s it. I mean, in terms of your initiative to have a greater share of Dresser-Rand installed base aftermarket, that’s also I guess – is the market share there perhaps picking up a point or two?

Vincent Volpe

I don’t have the results here from last year. My view of it, just given the earning – the bookings and where they came from is we probably did see a pick up. And you are right, if you make a pick up it’s a point or two. You don’t pick up 10 points in a year. But we will have to get back to you on that, Robin. I don’t want to misspeak but the bookings were very strong in our traditional space this past year. A lot of that – most of that 13% came from us working on our own stuff. So I would say that we probably picked up a little bit this year.

Robin Shoemaker – Citigroup

Okay, great. Just you mentioned at the outset of your remarks, the marinization, I just wanted to ask you on the whole issue of sub-sea processing, sub-sea compression, and separation and so forth that – how is -- of these projects you are looking at going forward on the new unit side, how big of a role do you think that’s going to play?

Vincent Volpe

I think it’s going to be a very – I think it’s going to play a very large role, Robin, going forward but we are still in the mode of – we need to do the work this year. We have this joint project with Statoil that we are working on. There have been several other customers that had been interested in joining the program. I am not sure whether they are going to or not. Depends on how a negotiation goes. But we are proceeding full speed ahead. By the end of the year we should have the unit built with our own bearings in it by the way now. And next year, we will be testing it.

The Synchrony with the magnet bearings is huge for us. And that the Synchrony bearings will go into this machine. So we should be having the machine built somewhere at the end of the year, testing next year, and then you’ve got to put some run time on the thing, Robin, probably run it for a 1000 hours or something. We will run the heck out of it and bring customers in, and I think I believe that this is a technology that once you’ve built it, they will buy it because the rest of the infrastructure is already in place down there, other than in ultra deepwater applications but in sort of the mid – the rest of the systems are there. The Camerons, the FMCs of the world are already supplying.

So our kit should be able to fit down there and be integrated into the rest of that system. So I guess, by some time mid-next year we will be sharing with your extra hours of run time on the unit, and we will be really actively marketing it. And I think thereafter you will see bookings that will turn into sales. So nothing, we haven’t put it in our plan for 2012 bookings, and 2013 may or may not have a booking, and it’s too early to tell. But also remember that the ICS, which is that – it’s for subsea unit, just not marinized. That’s a unit that we’re expecting to run here on top-side applications, and there is a tremendous amount of interest both from the end users and also from the builders of these vessels that are owners and operators. So we’ve got a lot of interest around the ICS even when it’s not marinized portion.

Operator

Our next question comes from Tom Curran from Wells Fargo. Your line is open.

Tom Curran - Wells Fargo

Vince, or Mark, returning to the earlier line of questioning focused on the potential swing variables for the 2012 guidance range. Could you provide us with an update on Guascor’s contracts with PDVSA Industrial?

Vincent Volpe

Yes, right now that contract is on hold. So what we’ve got – and that’s why you get a range. Okay. If we can get that re-energized, that helps. If it doesn’t, that hurts. But what I can tell you in terms of the company is Tom, that we are working on backup plans for that – to build engines for other applications, both in the environmental space and in oil and gas. And so again, there was a review that I had a couple of days ago that I just referred to, it was more than just a review on the aftermarket. We talked about the whole issue and said, if we don’t get PDVSA released, what do we do? And so we’ve got back-up plans going into place. So I don’t want to say that it’s neutral right now because it’s too early in the year to say that. I think that there is a downer if we don’t build a bunch of engines for PDVSA, and but we believe we can offset a significant amount of that. And if PDVSA does go through and the backup plans work, then you get a good to the other side.

So really no impact yet on the range, but it is a big issue Tom and I think it’s one of these that can move the needle depending on how things go. Let me just remind you that what we had in there was that we would start building the plant, not complete building the plant. So originally we had counted the whole plant would be built during the course of the year and that had operating income – a fair amount of operating income associated with it. We knocked that down in half when we provided our guidance, and said maybe we can get half of that. So a, we’re not out of time from that standpoint and then the engines which was the bigger part of what we are building flare gas engines in Spain, but as part of that contract to be supplied to that joint venture.

Once the contrast starts back up, we ought to be able to ship these engines fairly quickly. So even if – I guess what I am saying Tom, is the contract does not mean to be let in the next 24 hours for us to meet what we had in the plan. It could go on – a few more months could go by and we could still make it happen. Obviously we would rather have it sooner than later. But you don’t have a complete blowout here, and by the way even if it starts in the fourth quarter, you still will get some of the positive impact of what we had in there although not all of it. So it’s not a light switch either I guess is my point. But it’s a big issue and it’s something that we probably ought to keep talking about.

Tom Curran - Wells Fargo

Shifting downstream, I was hoping you could speak to how you’re positioned both when it comes to new units and the aftermarket, and the potential incremental growth we could see over the next 12 to 18 months in three specific countries, India, Bahrain and Mexico?

Vincent Volpe

Okay. And Mexico, I am just making a note here, all right. In India, we have a very well developed facility, that traditionally has made reciprocating compressor products for us. And they continue to do that. And they started building small machines and they’ve gotten bigger and bigger, and now they are up to really producing sort of our third largest frame sizes, I think in terms of size. So they are, from the reciprocating standpoint, they are really capable of doing almost everything. What we’ve also got them doing now is we’ve given them a contract to actually package turbine compressors. So it’s for the local Indian market. So I think in both turbine and – reciprocating compressors, we have a very strong play, we have a strong presence in country.

We also do a tremendous amount of engineering in India in our engineering center in Pune. So we’ve got a really strong presence in country. The only product line that we don’t have a strong presence in right now is the steam turbine business and we’re thinking about what we need to do there. But I can’t give you an incremental growth number on this but I can tell you we’ve got the infrastructure in place that we need. Some day if you get a chance to come visit the facility, you will think you are walking through any one of our other facilities worldwide in terms of how it’s equipped and its cleanliness and this is a facility by the way, I think it’s on five years now without a safety incidents. So this is a well-run plant.

In terms of Bahrain, we have no infrastructure, however you just heard me talk about what we have in Saudi, and of course, the Kingdom of Saudi Arabia and Bahrain are quite close in terms of where our production is. So I think we are in good shape in terms of the Middle East. We have an outstanding executive that runs, our vice president general manager runs the Middle Eastern business, he’s got about 30 years of experience with the company and we’ve got the infrastructure there. In terms of sales and service people, we’ve got a service shop in Abu Dhabi, with to complement the production facility we’ve got in Saudi, and we are also setting up a logistic center that we open recently in Dubai. So pretty good presence there.

And then Mexico, we’ve had a long term, longstanding relationship with Pemex. We have seen some really nice aftermarket orders here over the last several months. And we get a very significant share of the Pemex business going forward and we are pretty enthusiastic about what’s happening in country there also. Question mark for us is will we do more locally? And frankly we are thinking about it seriously but we haven’t made that decision yet.

So, sorry, I can’t give you any specific numbers, I just don’t have them, broken down by countries. But in all three of those areas, I think we are well positioned from an infrastructure and technical support standpoint and an existing market share standpoint, so that we ought to be able to benefit from the infrastructure buildout that goes on in those places.

Tom Curran - Wells Fargo

That’s terrific, and just one follow up, specifically on Bahrain. Do you have – are you in ongoing discussions with or have any read on the likelihood that the Bahrain petroleum company is going to approve its expected expansion in refining capacity?

Vincent Volpe

No, I would like to know your views on it. Actually we have same question. It’s a question mark for us.

Operator

Our next question comes from William Conroy from Pritchard Capital Partners. Your line is open.

William Conroy - Pritchard Capital Partners

Vince, you guys have owned GG for knocking on 10 months and you alluded a little bit to this earlier with the U.S. aftermarket business. But as you are looking out now, what are the sources do you see needing to add to GG so that you’re going to accomplish GG’s goal as you envision them now? In order words, what should we be looking for you to bring on to bulk that up and in what area et cetera?

Vincent Volpe

Well, I am not sure, we answered it – I mean, there are sort of a handful of additions, we talked about the other day. So we are not talking about head count additions of 10% or 20% towards the workforce. We just – it’s necessary, we’ve got existing channels in oil and gas. We may want to supplement them a little bit with a person here or there that’s gotten more specific product expertise, William. But we don’t need any channels into the oil and gas, and in the environmental space, they’ve got pretty good existing channels and we don’t believe we need to add a lot of people to be able to use their channels and pull through, it’s like the steam turbine products and maybe our small gas turbine product lines.

So, again, maybe sort of adding a few people, so not a big head count requirement here. I give you an example, one of the things we are thinking about is in the somewhere, in the center of that country, we were talking about this a couple of days ago, they got a very small presence in Louisiana. We think we probably need someone to go shift in one of our sort of middle of the country facilities, maybe it’s Cincinnati, maybe it’s Fort Collins, I don’t think we’ve decided that yet. To supplement what we are doing with our engine, ingenuity is an acquisition we made a couple of years ago that does gas engine retrofits to improve emissions. So these people are experts already at gas engines, and we think that might be a great place to put someone with Guascor product experience and we think – a little investment will go a long way. So things are pretty much on – that from a synergy standpoint, things are pretty much on target with the way we identified them way back when – and the resources that we felt we were going to need are pretty much what we need. So not a lot of surprises, but I think you will see – we’ve already gotten a couple of orders by the way and I think you’d see more of that over time.

One of the things I think we are committed to do, William, is once we get a little bit more fraction in some of this cross-selling, we’ll probably share some examples to give the investment community a flavor of why this was such a good idea, but it’s just little bit early to do that.

William Conroy - Pritchard Capital Partners

And then maybe shifting gears on another one that you alluded, the part of the switch – your explanation on PDVSA, for the two order ranges that you have given, what are just a couple of maybe the major swing factors that explain the range?

Vincent Volpe

You mean some of the operating income range?

William Conroy - Pritchard Capital Partners

No, from orders for new unit, the range on –

Vincent Volpe

New unit orders, oh, look, I mean, it’s all about the FPSOs. One of those moves in and out of the year. Look, remember what we said in the fourth quarter, about $200 million of what we expected in fourth quarter bookings moved out into next year. One of those – of the $200 million, like more than half of it is one job. Okay, one upstream project, which of course we will hold to the book. And so if two of those big jobs of FPSOs, or platform jobs move in and out, you’ve got a couple of hundred million dollar swing. It’s not going to be the odd steam turbine for biomass, or reset compressor for a refinery, that’s not going to move the new unit order range too much. It’s really the upstream business because they are pretty big chunks.

And I just want to make sure that I was clear what I said before, because I don’t know we are confusing or not, but we just increased the range by $100 million. We kept the range the way it was but there is a $100 million headwind due to the stronger dollar from the time that we made this. So by maintaining our bookings range for 2012 to what we had provided in the third quarter call, we’ve effectively increased the range, we’ve upped it by $100 million. Now, you could argue, well, the $200 million moved out of the year, that’s true. That was why we increased it $100 million. You never know what happens in the back end of the year and so we are hedging our bets a little bit. But the reality is that a couple of jobs can do it one way or the other. It doesn’t tell you much and it will be upstream projects.

Operator

Our next question comes from Robert Connors from Stifel Nicolaus. Your line is open.

Robert Connors – Stifel Nicolaus

You talked earlier that aftermarket going into the year looks pretty strong. And I was just wondering what the higher margin parts outlook looks like now versus say a year ago that started to improve substantially?

Vincent Volpe

The parts – let me just – give me a second here to see if I get myself grounded. Yeah it looks to me like the parts sort of the margins should be fairly similar in the parts business to what they have been in the past. And the mix of parts which may be more of your question, in terms of the traditional aftermarket, look as good or maybe slightly better than the past. However, I got to throw the however in there, don’t forget that you’ve got nominally somewhere between $250 million and $300 million of recurring revenue from the energy asset business in Guascor. Which is good business, it’s high margin business but it’s not as high as the parts business. So it will dilute a little bit the operating margins. Now we’ve baked that in, in the guidance that we’ve given on the sort of the 22% to 24%.

If you dial back a few years, we were above 25% in our aftermarket. We dropped because of the mix. The mix is now actually improving on the traditional aftermarket but it’s somewhat temped by the fact that we’ve got about 20% of our aftermarket now, which are these energy asset contracts, which are nominally, I don’t know, 15% to 20% operating income. So they are really good contracts but they are just not as good as the rest of what the aftermarket was. So that’s a dilutive impact now. So mix looks like it used to be in the old days, sort of two, three years back, happy with that. However, and margins by the way inside of each of those pieces look pretty consistent. However, we now have a new piece called the Guascor energy asset business where we have these long-term contracts that dilute that back down to sort of the 22% to 24% range.

Robert Connors – Stifel Nicolaus

And then just regarding end markets, Pemex and Petrobras have some very aggressive downstream plans. It seems like they’ve already begun discussions with some construction companies out there that you’ve had relationships in the past. So I was just wondering if you are starting to see a pick up in some of the downstream inquiries particular on the new unit side, and is that more of like a 2013 time of event?

Vincent Volpe

We’ve got some of that in the back end of 2012. It may be more of 2013 also. Again, activity in our refinery and petrochemical activity traditionally is not $100 million to $150 million is a shot. Like some of these major mega projects are in the upstream. So if we are wrong, it’s not necessarily all that detrimental, if we are wrong on timing, in either direction and it’s not super helpful either in terms of what we have in the plan, because we’ve got some of that in the back end of the year right now. Again, all non-U.S. stuff. And those two companies are part of it pretty sure.

Robert Connors – Stifel Nicolaus

And if I could just flip in one more, how would you compare – because the order size is bigger in the upstream but how would you compare as far as margin lines on downstream versus upstream traditionally if you could?

Vincent Volpe

They are pretty much the same. We got the same competitors, two or three competitors that we have that play in all of those – they play in upstream and downstream and they have – at least in one case all three product lines that we have steam turbines, reciprocating compressors and centrifugal compressors. And so what happens is we think about how the other guy prices without thinking about what the space is, because there are plenty of competitive forces in both spaces. It’s not that in the upstream or the downstream, there is one or two players that are in such a dominant position that they are able to get for more pricing. There is plenty of competition in both, and a lot of them are the same players. So on a variable margin basis, they are pretty close.

Operator

And I am showing no further questions at this time. I will now turn the call back over to Blaise Derrico for closing remarks.

Blaise Derrico

Stephanie, thank you. I’d like to thank everybody for joining the call. If you have additional questions, please call me. My number can be found at the bottom of the new release we issued yesterday. Everybody have a great day. Thank you.

Operator

Thank you ladies and gentlemen. That does conclude today’s conference. You may all disconnect and have a wonderful day.

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