Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Dresser-Rand Group Inc. (NYSE:DRC)

Q1 2012 Earnings Call

May 4, 2012 9:00 a.m. ET

Executives

Blaise Derrico - Director, IR

Vincent Volpe - President and CEO

Mark Baldwin - EVP and CFO

Analysts

James West - Barclays Capital

Jeff Spittel - Global Hunter

Robin Shoemaker - Citigroup

Rhett Carter - Tudor, Pickering

Jon Donnel - Howard Weil

Ole Slorer - Morgan Stanley

Operator

Good morning, ladies and gentlemen. And welcome to Dresser-Rand's First Quarter 2012 Earnings Conference Call. My name is Tyrone, and I will be your coordinator for today's call. (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

Tyrone, thank you. And good morning, everybody. We apologize for the delayed start. We had some technical difficulties with the slides. The slides are now available in two places. One, on the Investor Relations page as well as the homepage. You can find them on the homepage under Latest News and Events entitled Dresser-Rand's 1Q 2012 Earnings Call Slides.

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

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

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

Please turn to Slide 3. Our first quarter 2012 financial results were good and reflect higher volumes as a result of the continuing recovery in our markets. Operating income of $52 million was above the top end of our guidance range. Bookings of approximately $442 million and $385 million for new units and aftermarket parts and services respectively were strong and are important to helping us achieve our 2012 earning goals and in building a strong backlog for 2013.

As previously guided, we expect to see improved operating margins resulting from the increase in volume over the balance of the year and as such, are reiterating our full year operating income guidance of $360 million to $420 million. Similarly, we are reiterating bookings guidance for new units and aftermarket parts and services in the range of $1.7 billion to $1.9 billion and $1.4 billion to $1.6 billion respectively.

It should also be noted that the New Unit's backlog for 2013 now stands at a little over $900 million, which is a record at this point in the year for the follow year's shipments. As previously reported in January we completed the strategically important acquisition of Synchrony. The acquisition allows us to integrate Synchrony's active magnetic bearing capability into our product development process and to offer oil-free solutions in high speed rotating equipment applications, the benefits of which include reduced footprint and weight and more environmentally friendly applications.

Please turn to Slide 4. Aftermarket bookings of $385 million for the first quarter of 2012 were 46% higher than the corresponding period in 2011. Excluding Guascor bookings, Aftermarket bookings on an apples-to-apples basis were up approximately 20%. Let me repeat. Excluding Guascor bookings, Aftermarket bookings on an apples-to-apples basis were up approximately 20%.

In the New Unit segment, first quarter bookings of $442 million were approximately 70% higher than the corresponding period in 2011.

Please turn to Slide 5. Our first quarter New Unit bookings came from all segments of energy infrastructure including our traditional oil and gas markets as well as the emerging environmental solutions markets. In oil and gas, we booked an order for a fixed platform located offshore Angola to supply both compression and power generation equipment.

We believe this order of more than $150 million underscores our strong offerings for upstream oil and gas applications. We will supply all of the critical rotating equipment for this important project as our technology offers our clients all of the benefits associated with reliability, reduced footprint and weight, all of which are important considerations for offshore installations.

One other project that deserves mention, is an order we received from a client in China for LNG refrigeration compressors for their mini-LNG program. This is the 10th order from this client. We expect the market for mini LNG facilities, those facilities with a million tons or less of capacity per year, will remain strong for the foreseeable future.

Please turn to Slide 6. With the low level of natural gas prices in North America, we are being asked about its impact on our business. Low natural gas prices are good for our business. The increase of production from shale formations has depressed North American natural gas prices and opened an enormous gap between the energy value of natural gas and crude oil.

This appears likely to persist for the foreseeable future and has resulted in proposals for projects to restart mothball fertilizer plants, build new fertilizer plants, build new gas to liquids based petrochemical facilities and possible convert LNG receiving terminals into liquefaction facilities to export LNG. All enabled by the impact of shale development over the past two to three years.

While no substantial new projects broke ground in 2011, we have booked just under $30 million to date and prospects remain good for the remainder of 2012 and beyond. The opportunity for our class of equipment is significant. We build and refurbish compressors and steam turbines used throughout chemical, petrochemical and LNG manufacturing.

Let me share a few examples. Low cost natural gas means low cost hydrogen when produced by the usual steam methane reforming process. After feedstock cost, the cost of hydrogen is one of the more significant input costs to refinery, hydrocracking and hydrotreating. So low cost hydrogen will make investments in these units more profitable.

Hydrotreaters and hydrocrackers are significant users of reciprocating compressors, centrifugal compressors and steam turbines. So anything that results in more of them being built is good for us. With respect to the opportunity surrounding new (inaudible) plants in North America, the local availability of low cost high volume supplies of liquid petroleum gasses such as ethane and propane that are produced along with the shale gas has driven proposals for new (inaudible) plants in the US.

A week or so ago, Dow Chemical announced that it will build a multibillion plant to convert natural gas into the building blocks of plastics in Freeport, Texas. This follows Royal Dutch Shell's announcement a month ago to build a similar plant in Pennsylvania, near the Marcellus shale deposits. We believe the availability of low cost natural gas liquids from shale production will drive new developments in chemical plants further up the value chain as the production of ethylene plants is feedstock.

Low cost natural gas is already driving a renaissance in North American fertilizer. Mothball plants are being reopened providing opportunities for an equipment rehabilitation and new ones are being contemplated. It is quite conceivable that North America will become an exporter of fertilizer. With our facilities in the US and strong home market share this is also a sizable opportunity for both our services and new units business.

As to the aftermarket, we have received several revamp and applied technology orders from producers such as LyondellBasell, West Lake, Chevron Phillips Chemical and others, for services in existing chemical plants. More are in the pipeline. Let me remind you that last year we disclosed that Pandora Methanol contracted Dresser-Rand services to be the mechanical contractor in charge of overall project management and execution of the overhaul and upgrade of all their rotating equipment at their Port Arthur, Texas petrochemical facilities.

These facilities have been shut down for the past 10 years. Since the project launch, we have added scope and the value of our work has grown to more than $30 million. Currently, the 250,000-ton ammonia unit is up and making product. The 750,000-ton methanol unit is in the process of startup and is expected to be making product within the next few months. We are working 60 to 80 mill rites daily. I might add that safety is our number one priority and I'm pleased to report that we have worked roughly 120,000 man-hours on this project to date, without an OSHA recordable incident or injury.

To summarize, low natural gas prices are a good thing for Dresser-Rand for the aftermarket parts and services as well as new equipment sales. Let me share a few metrics to help you size the New Unit bookings opportunity for Dresser-Rand. For a 2,200 ton per day fertilizer plant, the total opportunity is approximately $40 million for our class of equipment. We are currently tracking more than 20 projects worldwide. As to ethylene, the opportunity is approximately $50 million for every 1 million tons per year of new capacity. We are currently tracking six projects in the US amounting to approximately 7 million tons per year of potential new capacity and we're bidding for revamp work in existing facilities.

Please turn to Slide 7. Before turning the call over to Mark for a review of our first quarter financial performance, I would like to provide you with a few examples of the successes we've had to date with respect to the revenue synergies we anticipated at the time of the Guascor acquisition. I'll begin with a reminder of why we acquired Guascor. In summary, it's a great strategic fit. Its high speed rotating equipment serves our energy infrastructure markets and those that are in our fairway.

As you can see on this slide when looking at traditional Dresser-Rand product portfolio and the end markets in both oil and gas and environmental services, it is clear that our legacy products have applicability in both segments. Adding engines to our portfolio is very much the same story. The Guascor engines are being pulled into Dresser-Rand's traditional oil and gas market channels while our compression and turbine products have application in the end markets shown under the environmental side of the chart.

Guascor's market channels are extensive and have increased our access to the environmental space providing access for our legacy products, especially steam turbines, in areas such as distributed power, concentrated solar power and biomass, all of which are projected to be high growth.

Please turn to Slide 8. Since the acquisition, we have been making progress in developing the revenue synergies and vision through the combination. We have generated approximately $15 million in incremental revenues to date. In addition, we have developed a nice pipeline of potential future bookings. For example, we have developed a new pipeline of projects in North America supporting power generation needs of oil and gas clients as well as industrial clients. Currently, the list of potential bookings totals more than $30 million.

In addition, we have developed a pipeline of more than 40 combined heat and power or CHP projects, based on the Guascor engine. These potential bookings would require approximately 125 engines. The picture on the top right of this slide is a CHP application at the University of Wolverhampton located in the UK. That orange piece of equipment is a Guascor engine. The heat from the engine is used to heat water and air for the University.

Previous to the Guascor acquisition, we were providing CHP solutions using third party engines. Today we provide Guascor engines for all the applications that fall within our power range. We are also now successfully cross selling aftermarket services, covering gas turbines, engines for oil and gas and CHP systems.

So to summarize, we're making good progress cross-selling product and services related to the Guascor acquisition.

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

Mark Baldwin

Thank you, Vince, and good morning, everyone.

Please turn to Slide 9. Total bookings for the last 12 months were approximately $3.2 billion, 44% higher than the same period a year ago. New Unit bookings of approximately $1.7 billion and Aftermarket bookings of approximately $1.5 billion were both up approximately 44% versus the corresponding period a year ago.

Approximately 41% of our bookings in the last 12 months were Upstream, 12% Midstream, 26% Downstream and 17% Environmental Solutions.

Next slide please. Backlog at the end of March was approximately $2.7 billion, which is a new record for us. The New Unit backlog of $2.2 billion was up 24% versus a year ago and our Aftermarket backlog was up about 42% to $573 million. As Vince mentioned earlier, the New Unit backlog that is scheduled to ship in 2013 is approximately $900 million, which is a record level for following year deliveries at this point in the current year.

Please turn to Slide 11. Revenues for the first quarter 2012 of $662 million increased approximately 87% compared to $354 million for the first quarter 2011. This increase in revenues reflects the continuing recovery in our markets and the addition of Guascor, which contributed revenues of about $91 million. New Unit revenues of $368 million for the first quarter 2012 compares with $145 million for the first quarter 2011, an increase of $223 million or 154%. Guascor contributed approximately $21 million of New Unit revenues in the three months ended March 31, 2012.

Aftermarket parts and services revenues of $294 million for the first quarter 2012 compares with $209 million for the first quarter 2011, an increase of $85 million or 41%. Guascor contributed approximately $70 million of Aftermarket revenues in the three months ended March 31, 2012.

Please turn to Slide 12. As I previously mentioned, revenues for the first quarter increased approximately 87% to $662 million. Cost of sales was $517 million for the first quarter 2012 compared to $254 million for the corresponding period last year. As a percentage of revenues cost of sales for the three months ended March 31, 2012 was approximately 78% compared to 72% for the corresponding period last year.

The increase in cost of sales as a percentage of revenues was caused in part by a shift in mix from our higher margin Aftermarket parts and services segment to our lower margin New Unit segment. In addition, we experienced a less favorable mix within our Aftermarket parts and services segment associated with our acquisition of Guascor, which has a higher mix of services revenues versus parts revenues.

Higher cost of sales as a percentage of revenues were also experienced in our New Unit segment because the three months ended March 31, 2011 included some higher margin projects leading to a less favorable mix of New Unit projects for the three months ended March 31, 2012.

Selling and administrative expenses were approximately $89 million for the three months ended March 31, 2012 compared to $77 million for the corresponding period last year. The increase is primarily attributable to the acquisition of Guascor that we closed in May 2011. As a percentage of sales, selling and administrative expenses decreased to 13% compared to 22% in the first quarter 2011. First quarter 2011 included approximately $5 million of due diligence and legal costs associated with the acquisition of Guascor.

R&D expenses were $4.5 million compared to $4.4 million for the corresponding period last year. We expect R&D expenditures for the full year to be approximately $40 million to $45 million as we continue to execute our strategy to introduce new and innovative products and technologies with a focus on key new product development initiatives such as the marritization (ph) of our integrated compression system or ICS, and the work we have underway to improve the efficiency of our steam turbine product line and to increase the power range of our engine product line.

Total operating income for the first quarter 2012 was $52 million, an increase of 169% or approximately 2:1 leverage on sales growth of 87% when compared with $19 million for the first quarter 2011. As a percentage of revenues operating income for the first quarter 2012 was 7.8% and compares with 5.4% for the corresponding period in 2011. This 240 basis point increase was primarily attributable to the factors previously mentioned.

Interest expense net was $16 million for the three months ended March 31, 2012 compared to $15 million for the three months ended March 31, 2011. The increase is principally attributable to incremental borrowings incurred in connection with the accelerated stock acquisition programs and the acquisition of Guascor in 2011, which included the assumption of approximately $250 million of Guascor debt.

Interest expense net for the three months ended March 31, 2011 includes $7.2 million of accelerated amortization of deferred financing fees as a result of terminating our previous senior secured credit facility and executing the cash tender offer to purchase our then-outstanding 7 3/8 senior sub notes. For the three months ended March 31, 2011 we also incurred a prepayment premium of $8.2 million as a result of executing the cash tender offer to purchase our then-outstanding 7 3/8 senior sub notes.

Other income net was essentially breakeven for the three months ended March 31, 2012 compared to approximately $4 million for the three months ended March 31, 2011. Other income net consists principally of net currency gains and losses and losses on tradable emission allowances.

In the first quarter 2012 the effective tax rate was 31%, which was slightly lower than our earlier guidance due to a favorable mix of earnings by country. Finally, the $700,000 of net income attributable to non-controlling interest recorded in the first quarter of 2012 relates to our partner share of our joint ventures net income.

The bottom line of all this is that our net income for the first quarter 2012 was approximately $24 million or $0.31 per diluted common share. This compares to approximately breakeven earnings per diluted share in the corresponding period 2011.

Turn to Slide 13 please. New Unit operating income was $20 million for the first quarter 2012 compared to $14 million for the corresponding period in 2011. As a percentage of New Unit segment revenues, operating income was 5.5% for the first quarter 2012 compared to 9.3% for the first quarter last year. The decrease in operating income as a percentage of revenues from the corresponding period in 2011 was principally due to a less favorable mix of New Unit projects.

Additionally, margins were adversely impacted in 2012 by a higher allocation of overhead costs to the segment resulting from the higher percentage of New Unit revenues to total revenues. We continue to believe New Unit margins will average in low double-digits for the full year as our margins are expected to increase from the first quarter level due principally to more favorable project margins and a positive impact of increasing volumes on operating leverage.

Turn to Slide 14 please. Aftermarket operating income was approximately $53 million for the first quarter 2012 compared to $29 million for the corresponding period last year. As a percentage of segment revenues, operating income increased to 18.1% from 13.8%. The increase in this segment's operating income was primarily attributable to higher revenues attributable to the Guascor acquisition. The increase in operating margin from the corresponding period in 2011 was principally due to the benefits of higher volume on operating leverage and the lower allocation of overhead costs to the segment, resulting from the lower percentage of Aftermarket revenues to total revenues. We continue to believe Aftermarket margins for the year will be in the range of 22% to 24% for the full year.

Turn to Slide 15 please. Turning to cash flow, operating activities provided cash of approximately $10 million in the first quarter compared to operating activities using cash of approximately $5 million in the corresponding period last year. The principal reasons for the change from a use to a source of cash are higher net income and depreciation and lower pension contributions, which more than exceeded the increased investment in working capital.

In this year's first quarter our investment in working capital increased by approximately $15 million and we contributed $12 million to our pension plans in accordance with our funding policy.

Turn to Slide 16 please. Net working capital at the end of the first quarter was $109 million, which was $24 million higher than where we ended last year. Let me point out changes in certain components of net working capital.

Accounts receivable decreased for the three months ended March 31, 2012 as a result of cyclically low first quarter volume and timely cash collections from clients. Inventories increased for the three months ended March 31, 2012 associated with the higher backlog. Prepaid expenses increased as a result of legally required tax payments in certain foreign jurisdictions and increases in value-added and similar tax receivables.

Lower customer advances and progress payments as well as lower accounts payable and accruals for the three months ended March 31, 2012 were principally the result of the timing of receipts and payments. In addition, this slide shows that changes in net working capital resulted in a use of cash of approximately $25 million, which is $10 million higher than the approximately $15 million use of cash from changes in working capital shown on the prior slide.

The principal differences are changes in working capital associated with acquisition and currency translation. On the cash flow statement changes due to acquisitions are included in investing activities in accordance with GAAP and affects of exchange rate changes on cash are reported separately.

Next slide please. In the first quarter net cash used in investing activities of $56 million compares to $11 million for the corresponding period last year. Cash used in investing activities for the three months ended March 31, 2012 includes capital expenditures of $10 million. Also included in the first quarter this year is approximately $49 million associated with the acquisition of Synchrony and $4 million related to an additional capital investment in our non-controlling interest of Echogen Power Systems. Included in investing activities last year was a $5 million initial investment to acquire a non-controlling interest in Echogen and a $1.3 million payment of licensees.

Financing activities provided cash of $38 million in the first quarter. This compares to the first quarter of 2011 when financing activities used cash of $119 million, which is the net amount resulting principally from the refinancing of our long-term debt and the stock buyback programs we initiated in last year's first quarter.

Turn to Slide 18 please. At the end of the first quarter our liquidity totaled approximately $356 million and consisted of approximately $123 million of unrestricted cash and $233 million of available borrowings under our bank credit arrangement as we had outstanding borrowings of $247 million and $220 million was used for outstanding letters of credit.

At the end of the first quarter we also had approximately $139 million of letters of credit and bank guarantees drawn under uncommitted bank lines.

Next slide please. At the end of March our net debt to capital ratio was approximately 46% and net debt to our last 12-month EBITDA was approximately 2.5x. For more information about our results for the first quarter, please refer to our 10-Q, which we filed last night with the SEC.

As a reminder, our Annual Meeting of Stockholders will be held on Tuesday, May 8. Whether or not you expect to attend in person, your voting as soon as possible will be greatly appreciated and will ensure that your shares are represented at the annual meeting.

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

Vincent Volpe

Thank you, Mark. Please turn to Slide 20. Turning now to our outlook as previously mentioned we are reiterating our prior guidance for 2012. As to 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% in the Aftermarket segment.

As previously disclosed, our 2012 operating income is expected to the 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 will be in low double-digits. Aftermarket operating margins will be in the 22% to 24% range reflecting the increase in long-term service agreements as a percentage of 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 R&D expenses.

For 2012, research and development 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 estimated to be approximately 32% to 34%. This range is down slightly from our previous guidance of 33% to 35% as a result of clarification of certain international tax provisions.

Diluted shares outstanding are expected to approximately 77 million to 78 million and we also expect a further increase in backlog in 2012, which reflects the continued strength of our end markets.

Next slide please. I wanted to share with you some insights into our second quarter outlook. Based on our scheduled backlog and anticipated orders that we believe we can ship in the quarter we believe our second quarter 2012 operating income will be in the range of 17% to 19% of the full year guidance range.

Added to first quarter earnings, this would equate to a first six-month operating income of approximately 27% to 37% of the full year guidance. This range is a significant improvement over the 22% achieved in the first half of 2011. And given the seasonality of our business is consistent with the seven-year average from 2005 to 2011 of approximately 36%.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from James West of Barclays. Your line is open.

James West - Barclays Capital

Hey. Good morning, Vince, Mark, Blaise.

Vincent Volpe

Good morning, James.

James West - Barclays Capital

Vince, first just a comment from me. Great color on the petrochemical renaissance that we're having. I think that’s an underappreciated piece of your business. And then first question for me is on the LNG facility side. You mentioned several kind of mini-LNG facility. I think it's easy for us to track the large scale one but I'm curious how many of these mini LNG opportunities are you guys targeting right now?

Vincent Volpe

A lot, James. It sort of stays under the radar screen because we really like the position we have in this space. As we said we've booked 10 of them. But we really haven't spoken much about them but it's starting to get to be significant enough that it's got to make the press. So there's a lot – this 1 million tons and less sized plant is nice for countries with developing infrastructure that can't easily move gas around. And so it's a very local business for them. And it comes in small increments.

And we've seen this in the past in ethylene and petrochemicals where they didn't have good infrastructure to move gas. They would literally have to do the refining and the petrochemical work sort of in situ. So there's a lot coming.

James West - Barclays Capital

Sure. Okay. Fair enough. And then a quick question for Mark. On the New Unit margin side, obviously pretty low 1Q because of the allocation of expenses. As we think about the progression throughout this year I know you gave your guidance is still low double-digits. Are we back to those low double-digits levels in the second quarter or is it kind of just a steady ramp-up throughout the year with a blah fourth quarter?

Mark Baldwin

Either (ph) the steady ramp-up. The first quarter was a bit of an anomaly because both last year you had some good projects and this year had a little under the norm what I would say. And as we go through the year volume will help those New Unit margins go sequentially higher.

James West - Barclays Capital

Okay. Great. Thanks, Mark. Thanks, Vince.

Vincent Volpe

Thank you.

Operator

Thank you. Our next question is from Jeff Spittel of Global Hunter. Your line is open.

Jeff Spittel - Global Hunter

Thanks. Good morning, fellows.

Vincent Volpe

Morning, Jeff.

Jeff Spittel - Global Hunter

I wanted to follow-up on James' question about the smaller scale LNG facilities. We've heard some indications of some of the oil and gas companies in North America are contemplating establishing kind of a distribution network to start using LNG as a transportation fuel. Is that what some of these orders are related to? Or is there something else driving it?

Vincent Volpe

No. There's something else, Jeff. So that, that you're talking about is a thought right now. And so that's – between the time it's a thought by some of these guys and the time that it turns into an equipment order for compressors is a while. So put it in the column category of opportunity but it's not in the run rate right now.

Jeff Spittel - Global Hunter

Okay. That’s encouraging. And then shifting over to how we think about cycle times in the New Unit's business. Rod (ph) moving parts, do you have certainly a flexible manufacturing footprint, product mix issues. You rectified a lot of these supply chain issues. New contributions from Guascor. Can you kind of talk through these different moving parts and what that might portend in terms of what cycle times start to look like and how things start to burn out of the backlog over the next couple of quarters?

Vincent Volpe

Sure. Well, let me just start with Guascor. When you look at overall cycle times on engines, which is the product that they build, they're much shorter than on engineered to order turbo compressors or steam turbines or reciprocating compressors. So when you weigh the whole mix in, you say, well your volumes going up. But don't forget a lot of that is gas engines and those things can be produced sort of in three-month cycle times.

Sometimes even faster because they're standard products and they've got a terrific assembly and test set up and so they can move very quickly. So that helps. As you're thinking about Dresser-Rand in 2014 being a $4 billion a year business, you’ve got to ask yourself how you get there. So the Guascor cycle times help.

The other thing is we are very focused on cycle time reduction. We're going to get to the $4 billion and beyond without significant improvement – increase in footprint or roofline. And so it needs to come through cycle time reduction. And I can tell you that we, over the next couple of years, are going to significantly collapse cycle time, both in our New Units, our parts and our revamps.

This is a corporate initiative. It has been launched. We have people on the ground working on it. And we're dead serious about it. We are going to take our cycle times down by a significant amount. That's the way to get increased throughput. I know we can do it. We've done it before. I can tell you numbers that aren't published.

Back in the year 1999 and 2000, we had cycle times all-in for turbo compressors, which are kind of our long lead cycle time, all-in tested and everything else 189 days. Right now our cycle times are over a year. So we have the capability of doing this. We have more volume than we had before but we have better processes, better systems and better people.

So we've very committed to this. And that is the way that you're going to see that revenue ramp up. And by the way, we demonstrated in the first quarter, we're already – if I look up here on the charts, our total first quarter sales were – you got us sort of to a run rate already of $2.7 billion or $2.8 billion or something. And we know that that'll ramp up throughout the rest of the year.

So I'm comfortable that we can get this year's volumes and with the initiatives that we've launched around cycle time reduction, I believe that we can grow significantly and get to the 2014 goal really just by using cycle time as the strategic lever.

Jeff Spittel - Global Hunter

Very helpful. Thanks, Vince. Great quarter.

Vincent Volpe

Thank you, Jeff.

Operator

Thank you. Our next question is from Robin Shoemaker of Citigroup. Your line is open

Robin Shoemaker - Citigroup

Good morning, Vince.

Vincent Volpe

Hi, Robin.

Robin Shoemaker - Citigroup

I just think it's interesting that in 2005 at the time of your IPO there was so much discussion about LNG and seven years later here we are.

Vincent Volpe

Amazing how quickly things move.

Robin Shoemaker - Citigroup

Yeah, exactly. I wanted to ask about some of the things you cited in the fourth quarter about customer-driven and supplier-driven delays. And wondering if that had any role in the lower New Unit margins in the first quarter.

Vincent Volpe

Well, I think the short story, Robin, is as Mark said there were two pieces. One is, should not be underestimated is the mix swing. If you look at the fourth quarter of 2011, okay, we shipped around 343 million in units. And in the first quarter of this year, up sequentially, we shipped about 368 million. So slightly up in units. However, we did just under 400 million in the Aftermarket in the fourth quarter of last year. And in the first quarter of this year, we were about 100 million lower than that.

We shipped 294 million in services. So what happened was your New Units went up call it 5%, 8% and your Aftermarket sequentially because the fourth quarter was so big, came down by 100 million or about 25%. So that is not an insignificant piece of this. The rest of it is you've got some jobs that are better than others. And so I think my message to the street is, don't read anything into this, okay.

It really didn't have anything to do with the fourth quarter shipments per say, it's what went in the first quarter. And things moved out, things moved in but the margins generally are fairly consistent across our business. But every now and again you'll get some jobs that are not good or don't have any margin.

I can tell you, I got one job that I know we didn't make any money on that was about $20 million in sales that went out in Q1. That was not particularly helpful. We don’t have those very often but every now and again that stuff happens. So nothing really in terms of a trend to read into this. Nothing scary about it. It doesn't our guidance. We know what we've got in our backlog for the rest of the year.

As Mark said, the margins will ramp up nicely quarter-by-quarter by quarter. Don't look for 12% next quarter. That's not going to happen. It'll ramp up but we do believe we can get into that low double-digit range for the full year. And we've got the backlog to support that statement.

Robin Shoemaker - Citigroup

Okay. Interesting. My other question had to do with Guascor. If I heard Mark correctly. The sales in the first quarter were heavily Aftermarket-focused. And I thought that was kind of the opposite of what the breakdown of Guascor between New Units and Aftermarket. So what is the kind of expectation as to the New Unit and Aftermarket component of Guascor sales this year?

Mark Baldwin

Robin, in a period of time, one, two years it is about 50/50. This was just an unusual quarter. Our history, it's brief but the last two years each of them have been about 50/50. As I said, this first quarter was a bit of an anomaly.

Robin Shoemaker - Citigroup

I see. Okay. Because I believe you had had an Aftermarket strategy relative to Guascor, which was intended to boost their Aftermarket revenues.

Mark Baldwin

That's right. And we're also intending to boost the New Unit revenues with engines with some of the synergies that Vince outlined. The opportunities that we're pursuing in bringing their engines into both CHP and into oil and gas applications.

Robin Shoemaker - Citigroup

Right. Okay. Thank you.

Operator

Thank you. Our next question is from Rhett Carter of Tudor, Pickering. Your line is open.

Rhett Carter - Tudor, Pickering

Good morning.

Vincent Volpe

Good morning, Rhett.

Rhett Carter - Tudor, Pickering

Just following up on Guascor. It's now been about a year since the acquisition. What has surprised you guys the most on both the positive and the negative side?

Vincent Volpe

Well, I would say on the negative side, we knew – I don't think there was much of a surprise. It's just we've had to spend a lot of time on governance issues. Not that there's bad governance, it's that your talking about a privately owned relatively small Spanish company that’s being integrated and is material by the way, to the results of our company. And so we spent a lot of time on making sure that the veracity of the numbers was good. And focusing on our internal corporate governance programs like code of conduct and SCPA training and all of that type of stuff.

So I would say – I call it a negative because I'm an operations person and I hate to see anybody spend time on that stuff. To me it's overhead, okay. All we're doing is making accountants and lawyers rich but we weren't really surprised by it. I'm just disappointed how much it's cost us. But not a big surprise.

On the positive side, probably not much of a surprise either other than – the synergies that we're getting, we expected we were going to be getting. We sort of booked $5 million to date in what I call incremental – it's getting hard to measure those by the way because you ask yourself, why did you get the order? Was it because Dresser-Rand or was it because of Guascor. But $15 million to date. Another $30 million in the pipeline. And the pipeline is growing very quickly both in the units and the aftermarket side.

I do think the one positive surprise we had was our ability we believe to serve the Aftermarket not only with our equipment but on other people's equipment in the engine space. And I don’t to say much more than that for competitive reasons. And let me just take it – so that's sort of it on Guascor, Rhett, if that gets it done.

Rhett Carter - Tudor, Pickering

Yes. Okay. And then on – just with touching on the mini LNG, the fertilizer plants and the petchem, which end markets will these be classified in?

Vincent Volpe

Downstream. Excuse me, mini LNG is upstream.

Rhett Carter - Tudor, Pickering

Okay.

Vincent Volpe

And then petrochemical and fertilizer are downstream.

Rhett Carter - Tudor, Pickering

Great. Okay. That's it for me. Thank you, guys.

Vincent Volpe

Thank you.

Operator

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

Jon Donnel - Howard Weil

Morning, guys.

Vincent Volpe

Hi, Jon.

Jon Donnel - Howard Weil

Hi. I wanted to maybe dive a little bit deeper into the reconciliation of the New Unit revenues here versus the fourth quarter delays. You got pretty specific last quarter in terms of what was client-driven versus the supplier issues and what you expected to ship in first quarter versus second quarter. Could you maybe give us an update on what exactly shipped? And the status of resolving those issues around both the suppliers and the client change orders?

Vincent Volpe

Jon, we've – I don't have the specifics here exactly on that. What I can tell you is that we have – we put a plan in place. We are certainly not behind. In fact, the revenue is a little higher for the quarter than that which was expected. So we actually were able to improve a little bit on the plans that we put in – not the plans that we put in place but the expectations that we sort of set.

And so if you look at what most people had us modeled for in the first quarter our volume was significantly higher than that because some of those things that were sitting on the bias between Q1 and Q2 we were able to get done in Q1. So I guess broadly speaking, very much on plan. Maybe even slightly ahead of plan in terms of getting things done.

As we've said before we've got feet on the ground in the places where we need them. We've got strong project management and our operating folks and our supply chain folks are very much on top of this. I'm sorry I can't give you sort of a dollar for dollar reconciliation of what shipped out and where did we think it was going to ship and where did it ultimately ship. Because some of the stuff hasn't shipped yet, right.

So I just don't have that detail on the – and it's mostly New Unit business. I do want to say one thing on the Aftermarket if I could. And, Jon, I apologize because you didn't ask me this question but I want to make sure that it's very clear to everyone that $385 million of Aftermarket bookings is a terrific number. And if you do the math on that if we can maintain somewhere around that level and we think we can, you're talking about high end of the range in the Aftermarket on an annualized basis.

Now I don’t want to hype this, okay. But what I do want to just make sure everyone understands this. Q1 and Q2 are critical bookings numbers for us to be able to make the back half of the year. So when you look at the guidance and you say, well, geez, you know. In the first half of the year you're going to make between 27% and 37% of the total. How do I know you can get there? The way to gauge our ability to get there is by looking at the Aftermarket bookings in Q1 and Q2. And if they're strong, certainly Q1 has been, that really enhances our ability to get right into that range because there's a lot that needs to be done yet.

So again, apologize you didn't ask that question, Jon. But I'm sort of answering it on your nickel anyway.

Jon Donnel - Howard Weil

That's fine. Appreciate getting that input there too. And kind of regarding that ramp up that we're forecasting in here for the second half of the year, clearly the motors were a big issue as you kind of had to work through that big chunk at the end of last year. Are there any other sort of major buyout items that are on the radar screen in terms of you guys maybe getting ahead of that management process and making sure that there's not a repeat as we kind of ramp up in the back half of 2012 again?

Vincent Volpe

No. We've gone through the major buyouts and re-asked ourselves if we were managing them properly and what we needed to do to shore that up and we're doing it.

Jon Donnel - Howard Weil

Okay. Great. Appreciate the time, guys. Thanks.

Vincent Volpe

Thank you, Jon.

Operator

Thank you. (Operator Instructions) Our next question is from Ole Slorer of Morgan Stanley. Your line is open.

Ole Slorer - Morgan Stanley

Yes. Thanks. Hello. Vince, sounds like you're getting quite busy again so any pricing to pursue here or is it still your numbers going forward still going to come from efficiency gains?

Vincent Volpe

Well, Ole, I think we're going to probably get a little bit more price and we'll probably get a little more cost on the material side also. I don't see hyper inflation like we had in the past but whatever all that equals, as long as there's no upset in either the supply chain or the demand that we're seeing, I think you'll see our margins on a variable cost line be fairly consistent. And over time, you will see the overall operating margins of the business increase due to the volume.

Ole Slorer - Morgan Stanley

And on the business that first order slipped out of the fourth quarter last year. Was that this offshore Angola project? There seems to be something chunky that you caused in the first quarter.

Vincent Volpe

Yeah. We thought – we actually thought that was going – we were trying to get that closed last year. That was a big piece of it. We talked around – something around $300 million that slipped. That was half of it, Ole. That was a good observation.

Ole Slorer - Morgan Stanley

And when it comes to the upstream clearly lots of FPSO activity in particular and very chunky (inaudible) million each. How do you think about that opportunity relative to the renaissance of the Gulf Coast?

Vincent Volpe

Well, I think that what we're seeing is we've seen for the last 12 months and even longer, around 40% of our business is upstream and most of that is the FPSO business. Although, $150 million order for a fixed laid (ph) platform is a big piece also. So I think going forward it'll probably still be around 40% because it's going to grow but you're going to see that gas-driven business grow in the downstream also.

So again, I don't think that the gas business is going to overtake the upstream business. The downstream business isn't going to overtake the upstream business. I think they're both going to grow significantly and as we said, we expect our backlog to grow over the course of the year. So we believe that for the full year 2012 we will book more new orders than we will ship. So growing backlog.

Ole Slorer - Morgan Stanley

And finally, this is on the Aftermarket opportunity in the oil compressor division maybe predominantly. There's a lot of (inaudible) around from time to time national oil company budgeting, et cetera, until you have some very chunky customers whether it's in Argentina or in Venezuela or Mexico. Anything there that we should be concerned about? Or is it all sort of normalizing at the moment?

Vincent Volpe

No. You cited a couple of good countries that are always on our screen but at this point in time there's nothing looming over the horizon. The bad news last year was Libya. That's actually coming back. A little update on that is we're sort of presently reentering the country and so I think – we said we thought we'd get about a half a year's bookings and earnings from Libya. That's what we built into our plan. That looks like a good number.

So that was a risk that I think it looks like has been mitigated. The Aftermarket in Iran, we were sort of out of that other than existing contracts that Guascor had. The rest of the company hasn’t been dealing with Iran. So if there's a war there, heaven forbid, I'm not sure it has much of an impact directly on us because we weren’t serving that market anyway.

It sure would be nice if there were a way for things to get fixed over there. That would open up a huge opportunity but on the downside no national oil or international risks on the horizon that look like they would be of significance to us, Ole.

Ole Slorer - Morgan Stanley

Okay. Thanks very much, Vince.

Vincent Volpe

Thank you.

Operator

Thank you. There are no further questions at this time. I'd like to turn the call over to management for any closing remarks.

Blaise Derrico

Everyone, thank you. I want to thank everybody for joining the call. If you have additional questions please me, this is Blaise Derrico. My number can be found at the bottom of the earnings news release we put out last evening. Everybody, have a great Friday and enjoy your weekend. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.

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!

Source: Dresser-Rand CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts