TRANSCRIPT SPONSOR |
Dresser Rand Group Inc. (DRC)
Q2 2007 Earnings Call
August 01, 2007, 8:30 AM ET
Executives
Blaise Derrico - Director of IR
Vincent R. Volpe - President and CEO
Leonard M. Anthony - EVP and CFO
Analysts
Ole Slorer - Morgan Stanley
Roger Read - Natexis Bleichroeder
Kevin Pollard - JP Morgan
Robin Shoemaker - Bear Stearns
Richard Ong - Eagle Capital Management
Presentation
Operator
Good morning, ladies and gentlemen. Welcome to the Dresser-Rand Second Quarter 2007 Earnings Conference Call. My name is Melissa. I will be your coordinator for today's call. At this time, all participants are in a listen-only mode. We'll be facilitating a question-and-answer session toward the end of today's conference call. [Operator Instructions]. As a reminder, today's conference is being recorded for replay purposes.
And now at this time, I'd like to turn the call over to Blaise Derrico, Director of Investor Relations. Please proceed, sir.
Blaise Derrico - Director of Investor Relations
Thank you, Melissa. Good morning. This call is open to the public. It is being webcast simultaneously at www.dresser-rand.com, and will be 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 2. 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. Dresser-Rand does not undertake any ongoing obligations other than that enclosed by law to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after this call. For further information concerning issues that could materially affect financial performance related to forward-looking statements can be found in Dresser-Rand's periodic filings with the SEC.
Now, I'll turn the call over to Vincent Volpe, President and CEO.
Vincent R. Volpe - President and Chief Executive Officer
Good morning. Thank you for joining us today and welcome to Dresser-Rand's earnings conference call. With me are Len Anthony, Dresser-Rand's Chief Financial Officer, and Blaise Derrico, our Director of Investor Relations. Also here today is Mark Baldwin, who will be named Executive Vice President and Chief Financial Officer of Dresser-Rand later this month.
As you may know, Len has announced his plans to resign to pursue other interests and opportunities. Len has done a fine job leading the company to a very successful IPO and the subsequent development of our corporate financial team.
I'd like to thank him for his contribution, and I know he's looking forward to some much-deserved time off. Thank you, Len.
Mark is a great replacement with a strong track record. Some of you may know Mark from his time both at Veritas and Keystone International. Mark's most recent career experience includes three years as Executive Vice President, CFO, and Treasurer with Veritas, an energy service company, which was recently acquired by the French firm, CDG Geophysics and four years as Chairman and Chief Executive Officer of Pentacon Incorporated.
I have no doubt that Mark will add significant value and leadership.
Today I'll start with a few opening comments, and Len will follow me with a detailed discussion of our second quarter results.
Please turn to slide 3. Our net income for the second quarter was about $26 million or $0.31 per share. While our results improved over the corresponding period in 2006, they were somewhat tempered for several reasons.
First, our after-market parts shipments were lower than anticipated, principally due to changes in procurement processes by some of our national oil company clients. Len will cover these in further detail. However, we do expect some recovery in bookings during the balance of the year.
Second, we had two items totaling about $4.1 million after-tax or $0.05 per diluted share including a provision for litigation and related interest and a charge related to a change in accounting estimate for workers' compensation. Again, Len will cover these items in some detail.
First, I'll mention a few highlights from the quarter. Please turn to slide 4. Bookings were 52% higher than last year's second quarter. Our backlog grew 59% to a record level of approximately $1.6 billion.
Sales increased 4%, and our operating income was about $50 million including the items I just mentioned to reduce our operating income in the quarter by about $5 million.
We had very strong operating cash flow for the first six months of the year of $136 million. We are also pleased to report progress in July on two strategic initiatives.
First, Statoil recently announced that they have awarded two supply agreements -- one to Dresser-Rand and one to one of our competitors. They estimate the combined value of those agreements at approximately $1.3 billion. We are delighted to tell you that of this $1.3 billion, our portion of the commitment is approximately $1 billion for equipment and services over the next 10 years.
The agreements cover the purchase, installation, and service of equipment for several Statoil project locations. Statoil has been a long-time alliance partner and one of our very best clients for the past 20 years.
Our joint business model is focused on lowering total operating cost and minimizing CO2 emissions and other environmental impacts. We are very appreciative of their continued confidence in our company.
Second, we received a letter of intent from Petrobras for our first integrated compression system for production on their P18 FPSO platform. The ICS, as we refer to it, with its integrated approach, can reduce the total footprint of traditional modules by up to 65% and reduce the weight approximately in half for a comparable compression solution.
The space constraints of Petrobras's P18 FPSO are typical of existing platforms around the globe. Space and weight restrictions are significant while gas-handling requirements have, and will continue, to increase. The ICS is a technology that allows users to install additional compression within those constraints to address their increased gas-handling needs at a very attractive total installed cost.
A key attribute of the ICS is that it turns compressors into compact compression systems, which we believe makes the ICS uniquely suited for developing subsea applications. This is because of the compressor, motor, separation system, and gas coolers are contained in the same process module, and the system can be installed as a single unit eliminating the need for large stand-alone separators.
With the added feature of separation within the package, we believe that our design will be the industry benchmark for subsea compression in the future. We've enjoyed a long and successful relationship with Petrobras and again appreciate their confidence in us in launching this new technology in a production environment.
Next slide, please. Bookings for the last 12 months were approximately $2.1 billion, or 42% higher than the same period a year ago, and 59% higher than two years ago.
Turn to the next slide, please. Our backlog at the end of June was at a record level of $1.6 billion, some 59% higher than a year earlier, and 91% higher than two years ago. Breaking it down into our segments, new unit backlog of $1.3 billion is up 81% versus a year ago, and our after-market backlog is up about 1% to $277 million.
Included in our backlog is a major order from British Petroleum to supply equipment for a floating production offloading and storage vessel, or FPSO.
Turn to the next slide, please. Orders for approximately $154 million to supply gas turbine packages and gas compression for BP Norge FPSO vessel for the Skarv Field on the Norwegian continental shelf in the North Sea.
We'll supply six DATUM centrifugal compressor trains driven by very little speed electric motors for gas compression service, four generator sets for main power generation, and control panels for each equipment package. The award of the Skarv contract is further evidence of our leading role as a total solutions provider of power generation and gas compression equipment for offshore platforms.
I'll now turn the call over to Len.
Leonard M. Anthony - Executive Vice President and Chief Financial Officer
Thanks, Vince.
Sales for the second quarter of 2007 of $441 million were about 4% higher than the second quarter of 2006. New-unit sales of $232 million were lower than the second quarter of 2006 by about $16 million reflecting the varying size and scope of new-unit bookings and the uneven nature of this segment's bookings and shipment patterns.
Sales of after-market parts and services increased about 19% from the corresponding period last year with $209 million reflecting favorable market conditions and our strategy to grow this segment of our business. Turn to the next slide, please.
As Vince mentioned, we reported net income for the second quarter of $26 million, or $0.31 per diluted common share. Our second quarter 2007 net income included two items that we want to mention, because while that material, from an accounting perspective, they were not anticipated.
These items had the effect of decreasing net income about $4.1 million, or $0.05 per diluted share. They included a provision for litigation and related interests of $2.6 million after-tax, and a charge of $1.5 million after-tax related to changes in accounting estimates for workers' compensation.
With respect to the provision for litigation and related interest we, and Maersk Oil UK Limited, reached a full and final settlement for damages, interest, and claimant's costs in connection with a case that was initiated in the year 2004. The litigation resulted from alleged defects in compressors manufactured at a Dresser-Rand facility that discontinued operations in December 1998.
We previously reported that we had planned to dispute the amount of costs claimed by Maersk, but on further view of the facts and circumstances, we decided to settle this matter resulting in a second quarter charge of $2.6 million after-tax, which, in fact, we announced back on June 28.
As to the matter of workers' compensation, the $1.5 million after-tax charge, resulted from payment information recently provided to us by Ingersoll Rand, our former parent company. Ingersoll Rand sold Dresser Rand to First Preserve on October 29, 2004. As part of that sale, Ingersoll Rand agreed to make workers' compensation payments on our behalf and did so through November 30, 2006.
While Ingersoll Rand had been reporting to us there were no remaining charges, they recently advised us that certain payments that they had made on our behalf during the period October 29, 2004 to November 30, 2006, had not been charged to us. This was clearly an oversight on their part.
We are currently in process of reviewing these charges and may dispute the amounts claimed by Ingersoll Rand, but because the charges appear to have some merit, we did record the full charge in the quarter. Turn to slide 10, please.
Operating income for the second quarter 2007 was $50.1 million including the previously mentioned items, which totaled about $5.3 million before tax. This compares to operating income of $27.2 million for the second quarter 2006, which included a $16.8 million charge for stock-based compensation expense.
As you can see on this slide, if you were to adjust our GAAP operating income for these items, it would result in adjusted non-GAAP operating income of about $55 million for the second quarter compared to $44 million for the corresponding period in 2006.
Again, on an adjusted non-GAAP basis, our operating income margin improved 220 basis points to 12.6% from 10.4% for the corresponding period in 2006, again, before the exit unit expense. Next slide, please.
Our new-unit operating margin improved nearly 160 basis points to 7.5%. The improvement from the same period a year ago is primarily attributable to favorable pricing and lower allocations of manufacturing overhead costs due to a change in revenue mix.
This segment attracted a lower allocation of manufacturing overhead in the current period because new-unit revenues contributed 52.6% of our total revenues for the quarter compared to 58.6% in the corresponding period last year.
Turn to the next slide, please. Our reported after-market operating margin decreased about 100 basis points to 24.8%. The decrease from the same period a year ago is principally due to the impact of changes in procurement processes and a delay in the budget appropriations by certain of our national oil company clients.
It also reflects higher allocations of manufacturing overhead costs due to the change in segment revenues partially offset by higher pricing for parts and services.
We believe the after-market margin would have been about 150 basis points higher if normalized for the cost allocations, the estimated shortfall in bookings, and shipments to certain national oil companies.
Now turn to slide 13, please. As you can see on this slide, bookings from two major national oil companies in the first half of 2007 were about $30 million lower than the corresponding period in 2006.
At one national oil company, process changes have increased the time from RFQ to purchase order from weeks to months due to the additional approvals that are now required in the additional office locations involved in the process.
At another national oil company, budget issues have impacted their ability to place orders. We expect these issues to be worked out and will return to a more normal booking and shipment level later this year.
We estimate the impact of these process changes on our second quarter 2007 operating income to be about $2.7 million. This reflects the operating income for products we had built but were unable to ship because of a delay in receipt of purchase orders.
Now turn to slide 14. At the end of the second quarter, our liquidity was about $308 million and consisted of about $161 million of cash and $147 million of available borrowings under our bank credit arrangements. Next slide, please.
Net cash provided by operating activities was about $136 million. This compares to $7 million in the first half of 2006. The increase of about $129 million was principally from higher operating earnings and favorable changes in working capital. Accounts receivable provided cash of about $52 million in the first half of 2007 compared to $24 million in the first half of 2006.
Inventories, net of progress payments, grew $17 million in the period, as our business continued to grow. Inventories grew nearly $34 million in the first half of 2006. Customer advances increased about $44 million in the period compared to a decrease of about $10 million in the first half of 2006.
Now turn to slide 16, please. As you can see on this slide, networking capital has been reduced more than $100 million to nearly zero over the past 12 months despite the higher business volume.
The improvement in our net working capital is partly the result of our new-unit contract terms that provide for progress payments and advances from customers consistent with our resource expenditures. Next slide, please.
We anticipate that our strong new-unit bookings will help us maintain relatively low levels of networking capital but quarterly fluctuations in our business probably will move us back closer to our target of 5% of sales at some point in the future.
Next slide, please. In terms of investing activities, we used about $16 million of cash in the first half of 2007, $8 million for capital expenditures, and about $8 million for the acquisition of the Gimpel Valve business in April, and that compares to investing activities using $9 million in the first half of 2006 for capital expenditures.
We also used $110 million of cash in the first half of 2007 to pay down long-term debt. Additionally, in July of 2007, we prepaid the remaining the $27 million of our senior secured credit facility debt. As a result of prepaying $130 million of debt this year, annual interest expense will be reduced by about $9.5 million, going forward.
Turn to slide number 19. In total, since the end of 2004, we have reduced debt by about $454 million and let some attractive opportunities arise for us to purchase our 7 3/8% notes. We currently don't have a plan to use cash to further reduce debt.
Next slide, please. We ended the second quarter with a net-debt-to-capital ratio of about 22% and a net-debt to our LTM adjusted EBITDA of less than one times.
We currently expect to use free cash flow principally for strategic acquisitions, but we have nothing to report at this time. We are continuing to evaluate potential targets. For more information about our results for the second quarter, please refer to our 10-Q, which we filed last evening with the SEC.
With that, I'll now turn the call back over to Vince for some closing comments and to moderate our Q&A session.
Vincent R. Volpe - President and Chief Executive Officer
Thank you, Len.
Turn to slide number 21, please. I'll wrap up our prepared remarks with a few comments about our business outlook. Demand for our products and services continues to be strong. Our backlog is extended into 2008 with some $891 million of our June 30th backlog already scheduled to ship beyond the year.
As to our earnings, our expectations for the 2007 operating income are unchanged. We continue to expect our 2007 operating income to be in the range of $250 million to $270 million.
For the third quarter, we currently expect operating income could be in the range of 25% to 27% of the total year. We expect our full-year 2007 earnings per share to be in the range of $1.60 to $1.74. This assumes interest expense in the range of $38 million to $39 million, and our effective tax rate of 37%.
Before opening the call up to questions, I'll comment on one additional matter, and that is the labor agreement covering representative employees at our Painted Post facility in New York. The existing agreement expires this Friday.
We are continuing to work diligently and in good faith with the union in a negotiation process toward a new and fair contract that is market-competitive and generally consistent with our programs and policies covering other Dresser-Rand US-based representative and non-representative employees.
As we are in a period of considerable opportunity, it is important for the company to reinforce our culture, our expectations, and our commitment to profitable growth and sustainable performance.
The entire company has been through significant change during the past two years from our facilities in India to France to our steam-turbine facility in Millbury, Massachusetts, which was closed, to other US facilities in Burlington, Iowa, and Wellesville, New York, and our salaried employees all around the world. We have made these changes to ensure sustainable growth and market leadership.
In Painted Post we have many legacy programs and structures left over from about 20 years of very few meaningful changes in the labor contract. Now is the right time to address these issues, and we are committed to so doing. In the event that agreement cannot be reached resulting in either a work stoppage or a lockout, we will implement a multi-phase contingency plan that has been designed to allow for uninterrupted service to our clients.
Any eventual work stoppage will result in higher costs. We will maintain our commitment to the long-term competitiveness of our operations and believe any short-term adverse impact to our business are worth incurring for whatever period necessary to meet our long-term objectives.
Before opening it up to questions, I do have a couple of non-scripted remarks I'd like to make regarding Len Anthony.
When we did the LBO in late 2004, we realized we would need public accounting and financial expertise that we, as an operating division of a larger company, previously did not have.
We recruited Len who, in the space of the last couple of years, has built an outstanding team with new leadership in the area of Chief Account Officer, Head of Internal Audit, Treasury, Risk, and other key functions, to name a few.
With this as a backdrop, we went through an IPO, three subsequent offerings, in the process have complied with SARBOX, have reduced 10 material weaknesses in 2005, for three in 2006, while with a reduction for further commitment this year -- all of this while managing to pay down half of our debt, working with a new, independent board and audit committee and managing us through this in a period where total enterprise value has gone from about $1.2 billion to over $3.5 billion.
Len, you played a very important and key role in all of this, and I really appreciate, and all of us do, as a member of the leadership team and the board, for all you've done for us. So thanks, very, very much.
Leonard M. Anthony - Executive Vice President and Chief Financial Officer
I appreciate the kind comments, Vince. I think now we should go to the Q&A and deal with the investors' interests.
Vincent R. Volpe - President and Chief Executive Officer
I do, too. Okay. Operator, can we open up the Q&A, please?
Question and Answer
Operator
[Operator Instructions]
We'll go first to Ole Slorer with Morgan Stanley.
Ole Slorer - Morgan Stanley
Thank you very much. Do you guys hear me okay?
Vincent R. Volpe - President and Chief Executive Officer
Yes. Good morning, Ole.
Ole Slorer - Morgan Stanley
Good morning. Just on the after-market business first, Vince, we've gotten real complacent on that, and we've gotten used to this thing performing like an annuity, so can you talk us a little bit through what happened in the second quarter?
You mentioned NOCs that Sempre LA [ph] adjusted there, your way of doing business, and you expressed a view that this is temporary? Can you just give us some more color on why you are confident that it's temporary and the timing for it to come back?
Vincent R. Volpe - President and Chief Executive Officer
Well, the reason I think it's temporary, Ole, is because we've started to see the spigot open back up, and some of these new processes are actually starting to function.
The problem is that the lead time -- I'll give you an example -- in one of the cases, and the major case that we're citing -- we were measuring from the time that we got a request for a quotation for the time that we got an order, on average, was 26 days, I believe, okay? That has now gone out to several months. I think five is actually the measured number.
So what was something that could be approved, literally, in one office locally in one part of the country now has to go back and forth across the country several times going through either three or four different offices or office locations. And so that whole process slowed way down. Now, that started in the beginning of the year, okay?
And now as we sort of look back over our shoulders, we see that between that and some budgetary issues in the other NOC, that has cost us about $30 million year-over-year differential in bookings.
So you put the $30 million in bookings back in, you see a quite a bit brighter picture in terms of the after-market growth, and it looks a little bit more like it's behaved in the past.
Now, why do we think that's behind us is because we're starting to see some of these orders flow through now, so they do have -- the processes are longer, right?
They're not going to go back, I don't think, to 26 days, but now we're in a steady state position where all that stuff that should have been released in January and February is starting now July, August, September, October, November, to coming through.
So I think we've had a break in the continuum, if you will, of bookings from those folks, but I think that break is now behind us, and while the cycle time will probably continue to be long, it's all moved out now, and so we ought to see now orders that we should have been getting in February, March, April, May, coming through in the second part of the year.
And we believe that, in looking at our forecast, that we will return to more normal bookings growth levels in the after-market side of the business, okay? So that's a little bit of color behind that on the after-market and, oh, I'm just going to -- I'm going to build on your question, because I want to make a comment on new units also, if I can.
We had an enormous quarter in the second quarter. We booked $453 million in the new-unit segment, and looking back over the past several years, that is significantly larger than what we've seen -- it's more than $100 million larger than what we saw in the fourth quarter last year, which was the biggest quarter we had had for two or three years before that that we were looking.
So my point to everyone is, let's not get used to seeing $453 million in new-unit bookings every quarter. In that, of course, is $154 million for BP Skarv, so that's a mega project sitting in there.
I think you should expect new-unit bookings to take on a more reasonable level over the second half of the year and, I would say, for the second half expect something between sort of $0.5 billion and maybe $600 million in that new unit segment bookings.
Ole Slorer - Morgan Stanley
I understand. You seem to have done pretty good in Norway this quarter with the Statoil agreement as well. Could you talk a little bit about pricing? I mean, we talked before about the attraction of having this long 10-year frame agreement but, on the other hand, I think we are in an environment where pricing is going up.
So how do you balance the opportunity to raise prices on more --?
Vincent R. Volpe - President and Chief Executive Officer
Well, they're built into those agreements, Ole. We have generated price increases over the period, okay? And so that agreement will -- the pricing will be adjusted year-over-year over year over year as we go forward.
Folks at Statoil understand the objective is not to put the supplier out of business, okay? And so they work with us in a fairly open manner. As to the preponderance of our alliance clients, we have the ability to adjust pricing on that, going forward.
Ole Slorer - Morgan Stanley
Okay. This final -- if you could give some color on the magnitude of what you're seeing in pricing for, let's say, larger FPSO-style compressors year-over-year, and also around us by just describing the ICS. We've talked about it for over a year now, and I'm glad to see you've got your first contract breakthrough there.
What's the real opportunity is for that product line and to what extent will cannibalize existing DATUM solutions?
Vincent R. Volpe - President and Chief Executive Officer
Okay. Well, there's several different questions there. I'll try and take them in the order you asked them, Ole.
The first is pricing. I think what we're seeing now, and we do sort of the best we can to measure this, is about -- over the period, between 3% and 4% on the unit side, and we saw, in the period, a little bit better than that in the after-market.
And so as you look at the results, you'll quickly figure -- you'll figure out quickly that all of that did not make it through to the bottom line, and the reality is, in this period, we had some cost increases that we've had to deal with. Some that get imputed, if you will, to the P&L in each of the two product segments.
So for instance, we have seen an increase this quarter in headcount as we bring people on to increase our ability to book new orders and to execute them. And so those show up in some of the overhead budgets, which are getting -- they're getting charged to the P&L. The reality is that we're investing now for future growth, okay? And so some of that headcount is what's masking some of that.
I think, on a direct basis, though, we're still doing a very good job because of the way that we do our cost estimating, making sure that our price increases get passed through.
And I would just close on the pricing side to say that we reiterate the guidance that we provided before, which is we expect about 300 basis points improvement year-over-year on new units. And if you look at the first six months, you'll find 290 basis points. So we're pretty darn close to that number right now over the first six months.
And then the other guidance that we provided was you would see between 200 and 300 basis-point improvement in the total company result, year-over-year, and we want to reiterate, at this point, that both of those numbers and the guidance we provided, you know, largely, six to nine months ago, looking like they're holding up pretty well.
So the journey continues. And we continue, day over day and month over month, as we get new orders, to prevail on pricing. And so this demand destruction that people get concerned about is not affecting us.
In fact, I will just say -- I'll tell you right now that not reported or reflected in any of our backlog yet, we have a verbal agreement from a major refiner to add about 100,000 barrels a day of increased production for a couple of their projects totaling 100,000 barrels. And so that will be a $30 million to $35 million order coming through probably within the next month or two.
So we can talk about that on the next call. So demand remains strong across the entire spectrum of the markets that we serve. So that's a little bit on the pricing and a little bit on the margin side.
You asked, then, about the ICS, I believe. The ICS is the future subsea compressor, which will -- some of which will be different than what our competitors are offering because it will contain the separator integral in the packing along with the process cooler, okay?
And so what we are basically doing -- if you think about what's going on in subsea compression, our competitors are trying to figure out how wet the compressors can get with the liquid stream of gas condensate going into the compressor on the bottom of the ocean.
What we're trying to figure out and striving to do is how fast -- how dry we can keep that compressor by separating the liquids before they ever get to the compressor itself.
So it's really a different approach to the same problem. One that we believe ultimately will be a lower total installed cost and a more reliable solution. Clearly, keeping your compressor dry is the best idea you can come up with at the bottom of the ocean.
So we think of this as really going to be an outstanding step forward, and what we have sold to Petrobras is literally the subsea compressor not yet marinized.
It's got all the features of what's going to be on the bottom of the ocean, and the reason that it's of interest to Petrobras is because on that P18 platform they didn't have anymore space. In fact, our competitors' equipment was out there operating, and they need higher injection rates and more flow to continue to recover more of the oil in that field.
And so the only option that they had, really, was to put in something that was going to use a small amount of footprint because the existing compressor footprint out there really couldn't be revamped to meet the requirements.
So the ICS provided a unique solution, and what Petrobras have agreed to is that we'll go ahead and install it out there, and we will actually run with condensate through the separator piece to prove that part of the technology as well as simply just compressing gas for more reinjection.
So we're going to be in the production environment. Delivery will be the latter end of 2008, and we believe that the opportunity here is, going forward, whether our existing platforms that need more compression, this will be the lowest installed cost -- the lowest installed cost alternative for our clients.
And then we believe will give us an enormous competitive advantage versus other people that may try and offer compact designs. Then when we move into the subsea realm, you can guess as well as I can what the opportunity is there.
So whatever we cannibalize, Ole, of future DATUM sales, you need to remember this is the DATUM compressor, by the way. There's just more stuff wrapped around it, and I believe that with what we're doing here, we will cannibalize our own DATUM sales, but we will also see we believe in increasing share because of the device that we're going to be selling.
So I think we've got something that's going to help us pick up some market share in some of our existing markets, and we believe, catapult us to a leadership position in the subsea arena.
And so we are delighted that Petrobras have confided in us and are allowing us to do this and working with us and, frankly, they're not the only oil company that's interested in this. And so we're really excited about this, and we'll keep everybody tuned as the development unfolds.
Ole Slorer - Morgan Stanley
Thank you very much.
Vincent R. Volpe - President and Chief Executive Officer
Thank you, Ole.
Operator
We'll go next to Roger Read with Natexis Bleichroeder.
Roger Read - Natexis Bleichroeder
Yeah, good morning, gentlemen.
Vincent R. Volpe - President and Chief Executive Officer
Good morning, Roger.
Roger Read - Natexis Bleichroeder
One, just, housekeeping question first, the $3 million litigation settlement, on the operating income side -- where did that go? Did it go impact the new units or was that in corporate? I'm just trying to get an idea of what the recurring operating margin was.
Leonard M. Anthony - Executive Vice President and Chief Financial Officer
Roger, it was related to a new-unit contract, so it principally went to the new-unit segment.
Roger Read - Natexis Bleichroeder
Okay. And then you detailed the backlog in new units, $815 million to be delivered in '08. How much in '07 and how much in '09?
Leonard M. Anthony - Executive Vice President and Chief Financial Officer
A very small amount in '09, and basically we've gotten --
Roger Read - Natexis Bleichroeder
All right, that helps. And, Vince, can you give us an idea, maybe, acquisitions -- you indicated earlier you didn't intend to reduce debt significantly from here like a lot of companies in this sector, who are already generating significant free cash flow. What direction would you like to go in acquisitions?
Should we expect it to be more of the after-market consolidation or is there something else that looks more interesting, or potentially interesting?
Vincent R. Volpe - President and Chief Executive Officer
Yes, I think, over the short term that you'll see the aftermarket-slash-what we would call "bolt-on" acquisitions, similar to what we did with Gimpel Valve or what we did with Tuthill access, where they're right smack in the middle of what we build, or very adjacent, from a technology standpoint.
So technology that we understand, principally after market, that they hopefully have an underserved after-market that with our infrastructure and sales channels being what they are we can serve more effectively.
So I think I'd look for a little bit more of the same over the near term, Roger, and then as time goes on, we'll see what else develops.
Roger Read - Natexis Bleichroeder
Okay. And then my final question is on -- again, on margins. You said in the second quarter cost increases, be it increasing labor or just trying to keep up with raw material increases, but your overall guidance for the year in terms of margin expansions intact.
As we looked at 2008, if you're getting your headcount or in it today for 2008 levels of business, should we expect in '08 the capacity for increasing your margins at a greater rate in '08 versus '07, and so pricing continues to increase as it has, but your labors costs moderate a little bit. Is that a fair way to look at it or --?
Vincent R. Volpe - President and Chief Executive Officer
It's too early for me to guide you there, Roger. Right now what I would use, I would use about the same margin expansion year-over-year that you're seeing this year in the different segments.
But, again, it's about three to four months too early for us to guide you there with any -- we just need to see a little bit more backlog build, because we have pretty good sense -- that backlog, the $800 million plus, we have a good sense of what our variable costs are going to be, going into that already, okay?
And so what we need to take a better look at is what else we've done in terms of the indirect side from now until the end of the year, and I think we just need to let a little bit more time go by.
But as you start thinking about '08 now, I think similar margin expansion in the two segments to what we talked about this year, is probably a legitimate view, and I'm going to reserve the right to change that up or down on your when we get about another three months under our belt.
Roger Read - Natexis Bleichroeder
Okay. That's fine. Thank you, Vince.
Vincent R. Volpe - President and Chief Executive Officer
Okay.
Operator
We'll go next to Kevin Pollard with JP Morgan.
Kevin Pollard - JP Morgan
Thanks, good morning.
Vincent R. Volpe - President and Chief Executive Officer
Good morning, Kevin.
Kevin Pollard - JP Morgan
I just had a quick question to follow up on your new unit. You've got $815 million of backlog basically booked to ship in '08, and if I take your $500 million-ish estimate of new-unit bookings for the balance of this year, I assume the majority of that would ship at some point in '08.
I start getting a revenue number that looks well north of $1 billion. Is there something wrong with that way of thinking about it? Or are some of those shipments you book in the second half of '07 likely extend into '09? Can you walk me through some of that?
Vincent R. Volpe - President and Chief Executive Officer
Well, I think that above $1 billion is legitimate, okay? What I would say is most of what we'll book in the third quarter is probably going to go in '08, the tail end of '08. Probably less than half of what we book in Q4 will go in '08, all right, because we're on sort of 15- to 16-month cycle times.
However, there will be some book-and-ship inside of '08 on our standard products that have a sort of three-month -- three- to six-month cycle time, and revamps also which are part of that segment, which are on similar-type cycle times.
I'm not sure I'd use all of the $500 million to $600 million, but you could use a large percentage of it, and I think $1 billion-plus is legitimate expectation for next year's sale.
Kevin Pollard - JP Morgan
Yeah. So if I just take some of the rough math you talked about, not counting even any '08 shipments of '08 bookings, I kind of get a number north of $1.2 billion, even. Is that -- I mean am I getting off-track there, or --?
Vincent R. Volpe - President and Chief Executive Officer
Yes, you might be a little bit ahead of yourself on that. I don't know that -- again, haven't thought about this. I'm thinking about it the same time you're asking me the question, so I don't want to give you a reckless answer.
It will certainly be greater than $1 billion. I suspect it could be less than $1 billion, too, but, again, in about three months' time we'll talk some more about it.
Kevin Pollard - JP Morgan
Fair enough, fair enough. If I could just switch over to the FPSO order that you got -- that $154 million was obviously a lot bigger than I think we've been anticipating as the normal -- I've been thinking the high end of an FPSO is like an $80 million type order.
Is that kind of a one-off thing or is there an opportunity -- or do you see the size of the order for typical FPSOs moving up?
Vincent R. Volpe - President and Chief Executive Officer
That's an excellent question. The reason you were thinking 80 is because that's what I've been saying, okay?
So the other thing that I've been saying is that's what we've seen in the past, in the 15 to 80 range, and what I think I committed to on the last call was we would think a little bit more about how to give you folks a little bit of methodology or kind of a simple formula to calculate the opportunity similar to what we did around refining. If you remember that, with the formula we gave you in refining, we said for every 200,000 barrel-a-day expansion, assume about a $50 million opportunity in DR equipment.
So what we've actually done is we've looked at different floaters that we booked, recognizing this one is almost twice the size of the biggest one that we booked before, and the way for you to think about it go to the published data and look at how much gas is actually being produced.
These are gas compressors, right, and power generation equipment that goes with it, and the formula that I think the rule of thumb we can give you right now is for every million standard cubic foot a day of gas, assume about $200,000 in Dresser-Rand opportunity. So $200,000 per every million standard cubic foot a day.
So what you have here now -- let me help you with that math and why this seems to make sense. Abomey [ph] was 400 million standard cubic feet a day, and so that came in at about $80 million but that was in 2003, all right, so pricing has gone up. BP Skarv is 650 million standard cubic feet a day.
That did have one extra piece of kit in it, which was about $30 million worth of boiler that we normally don't supply. So if you strip that out -- we've got good margins on it, but if you strip it out, that's 120 -- between $120 million and $130 million. So if you take your $200,000 per million standard cubic feet a day, it works.
So I think what I would do is point you in that direction as a way to think with a little more granularity now and a little more precision than what I guided to in the past about what these floaters may represent.
So take the -- look at how much gas is being delivered, and then give us our mid-20% market share, and that's how you can gauge what you think the opportunity will be for DR.
Kevin Pollard - JP Morgan
Okay. That's really helpful. Thanks a lot, Vince.
Vincent R. Volpe - President and Chief Executive Officer
You bet.
Operator
We'll go next to Robin Shoemaker with Bear Stearns.
Robin Shoemaker - Bear Stearns
Yes, thank you. Vince, I wanted to ask you about the LNG market, and you reported a contract for a China LNG project right at the end of June. I'd like to hear a little bit more about that and other opportunity in China.
But, also, on the world-class LNG opportunity, which you thought would come about, I believe, this year. If you have $500 million, $600 million in bookings in the second half, that doesn't suggest there's a world-class LNG project in there, or am I wrong on that?
Vincent R. Volpe - President and Chief Executive Officer
Well, when we guide you, we don't guide to all the units that we have in our forecast and all the units in backup, and so the reality is that we take more of a statistical view of what we think could happen rather than trying to build up -- we do a buildup on every single -- what we think every single opportunity is.
But then we take a statistical view and say some of these aren't going to close when we think they are. Maybe we'll lose some of these, and so that's for the ensemble of our business.
The short answer is that there is no change in the guidance that we provided previously in terms of believing that we ought to be able to book approximately $100 million worth of stuff this year in LNG.
Again, whether or not we're right is another issue, but my information today says that there is no reason to change that, and so you can consider that as part of what we're guiding to at this point in time.
Now, if that happens, and a bunch of other good things happen, maybe the number that we just talked about in terms of the bookings will be closer to $600 million than $500 million but, again, there are a lot of moving parts there, Robin, so I think we should stick with those two different figures.
The forecast I provided and the fact that we still believe that we will book something significant in LNG and we'll leave them as two separate pieces of guidance that co-exist between now and the end of the year.
As far as the order in June, that was a year ago that we talked about that, and so we believe there is continuing opportunity for small-scale plants in China because they're not these mega-projects, they kind of get lost in the shuffle of the regular "orders" that we book, and so we really haven't made a big point of hyping those or talking about them to be honest.
Robin Shoemaker - Bear Stearns
Okay.
Vincent R. Volpe - President and Chief Executive Officer
There's more of that out there, yes.
Robin Shoemaker - Bear Stearns
Yes, in China, right. Now, in the Middle East, could you specifically say anything regarding that market opportunity?
Vincent R. Volpe - President and Chief Executive Officer
No, other than there is significant opportunity in the Middle East.
Robin Shoemaker - Bear Stearns
Yes. Okay, thanks a lot.
Vincent R. Volpe - President and Chief Executive Officer
Thank you, Robin.
Operator
[Operator Instructions]
We'll go next to Richard Ong with Eagle Capital Management.
Vincent R. Volpe - President and Chief Executive Officer
Good morning, Richard.
Operator
Mr. Ong, your line is open. Please go ahead.
Richard Ong - Eagle Capital Management
Hi, good morning. Thank you. Sorry. On the after-market bookings, I guess shortfall, or the national oil procurement delays -- the first question is what's driving that change? Why are they lengthening the process and, two, what happens, in the meantime, to production if they don't get the parts and services?
Vincent R. Volpe - President and Chief Executive Officer
Well, let me answer the second question first, if I may, Richard. These parts need to be ordered, which is sort of where you're taking it. There is not an option here. These are critical parts to equipment that is critical for them to produce oil and refine product.
So that's why we don't talk about -- we talk about this opportunity, a phase shift, but the opportunity is not disappearing or going away. What has driven the process changes -- I think if I disclose that to you, I might as well tell you what the name of the oil companies are, and I'm uncomfortable doing that.
But there are some politically driven process changes, which are very understandable based on what it is that these folks are trying to do that have ostensibly lengthened the process on the cycle plan.
But now we know how long the cycle plan is, because we've gotten some orders that have actually come through here over the last -- actually, in July, we've seen a couple of these orders that we thought we were going to get in January/February released.
So now we are able to gauge the length of the new process versus what is was, and I quoted some of those cycle times before, but they're pretty much politically driven, and the folks are actually doing everything they can on the client side to work with us.
The relationship is terrific, and relationships are terrific, and so I think what we've seen is a phase shift, but that -- hopefully we'll resume more normal levels, going forward.
And, yes, they need these parts.
Richard Ong - Eagle Capital Management
Thank you.
Vincent R. Volpe - President and Chief Executive Officer
Okay.
Operator
And it appears, we have no further questions at this time. I'd like to turn the call back over to our speakers for any additional or closing remarks.
Blaise Derrico - Director of Investor Relations
Melissa, thank you. I want to thank everyone for joining us today on the call. If you have additional questions, you can contact me, Blaise Derrico. My contact number is on the earnings news release that we released last evening.
Everyone have a great day. Thank you.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!