Dresser-Rand's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Aug. 3.12 | About: Dresser-Rand Group (DRC)

Dresser-Rand Group Inc. (NYSE:DRC)

Q2 2012 Earnings Conference Call

August 03, 2012 9:00 AM ET

Executives

Blaise Derrico - Director, IR

Vincent Volpe - President and CEO

Mark Baldwin - EVP and CFO

Analysts

Robin Shoemaker – Citigroup

Jeff Spittel – Global Hunter

Tom Curran - Wells Fargo

Rhett Carter - Tudor, Pickering, Holt & Co.

Jon Donnel - Howard Weil

Joe Gibney – Capital One

John Moore –C.L. King & Associates

Robert Connors – Stifel Nicolaus

Operator

Good morning, ladies and gentlemen, and welcome to Dresser-Rand’s Second Quarter 2012 Earnings Conference Call. My name is Shannon, and I will be your coordinator for today’s call. At this time, all participants are in a listen-only-mode. We will be facilitating a question-and-answer session towards the end of this conference 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 will now turn the conference over to Blaise Derrico, Director of Investor Relations. Please proceed, Sir.

Blaise E. Derrico

Shannon, thank you, and good morning to all. This call is open to the public; it’s being webcast simultaneously at www.dresser-rand.com and will be temporarily archived for replay. A copy of the news release we issued yesterday is available on our website, as of the slides we will use today during our presentation. We will let you know when to adapt the slides as we deliver our prepared remarks

Please turn to Slide number 2. The statements made during this conference call that are not historical facts may be forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. In addition, this conference call contains time-sensitive information that reflects management's best judgment only as of the date of the live call. Management's statements may also include non-GAAP financial measures. For reconciliation of these measures, refer to our earnings news release or the conference slides available on our website.

Dresser-Rand does not undertake any ongoing obligation other than that imposed by law to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after this call. Further information concerning issues that could materially affect the financial performance related to forward-looking statements can be found in Dresser-Rand's periodic filings with the SEC.

With that, I'll now turn the call over to Vince Volpe, our President and CEO.

Vincent R. Volpe Jr.

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

Please turn to Slide 3. Our second quarter of 2012 financial results were good and reflect higher year-over-year volumes as a result of the continual recovery in our markets. Operating income of $73 million was slightly above the mid-point of our guidance range. The stronger U.S. dollar was a bit of a headwind, especially against the Euro, which dominates our non-U.S. dollar dominated revenues. We estimate that our second quarter 2012 operating income would have been approximately $3 million higher had there not been a change in exchange rates as compared to the rates in effect at the time of the first quarter 2012 earnings conference call in early May.

As previously guided, we’ve also started to see improved operating margins in the second quarter and expect this to continue with the increase in volume over the balance of the year. Against the backdrop of improving margins however, it should be noted the relative strengthening of the U.S. dollar based on current exchange rates is expected to have an overall adverse translational effect on 2012 operating income of approximately $15 million compared to rates used in the guidance we provided at the time of our first quarter 2012 earnings release and conference call. While we anticipate the impact of this change to be visible to our full year results, we continue to expect earnings to fall within the previous full year guidance range of $360 million to $420 million or be at lower within that range.

Please turn to Slide 4. Bookings of approximately $346 million and $392 million for new units and aftermarket parts and services respectively were strong and add to the solid level of bookings in the first quarter. With oil prices at present levels, we believe investment in energy infrastructure will continue. We have a line of sight through a number of potential major orders throughout the energy value chain. As a result, we are reiterating our guidance of record bookings for both 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 total backlog at approximately $2.8 billion is also at a record level, as is the new units backlog scheduled for shipment in 2013 of approximately $1.1 billion.

Please turn to Slide 5. Aftermarket activity continues to recover as demonstrated by another solid bookings quarter in most geographical markets. The Middle East and Latin America are especially strong. Aftermarket bookings of $392 million for the second quarter were 22% higher than the corresponding period in 2011. Excluding Guascor bookings, which were included for only two months in last year’s second quarter, aftermarket bookings on an apples-to-apples basis were up approximately 16%. We’ve established a track record of growth in the aftermarket segment with a value based solution strategy focused on extending our service offerings into new areas including servicing other OEM installed equipment, developing new technologies for upgrades and increasing our penetration of high value added services into our own installed based.

Turn to the next slide please. To address potential questions about the broader economic environment, please recall that our aftermarket business is very resilient. The installed base of equipment operates under conditions not usually affected by changes in commodity prices or the ups and downs of the energy industry cycle. This means that our aftermarket business has historically and mostly insulated from changes in worldwide economic conditions, representing what we expect will continue to be a reliable source of recurring and increasing revenue in cash flow. This is a quick development of our business model as we believe it brings us inherent stability in cash flow regardless of the level of new infrastructure activity.

Please turn to slide 7. We are also experiencing strong revamp activity, which involve the reconditioning of existing rotating machinery to make the equipment suitable for new applications. Our revamped compressor for example, is reconditioned to meet newer change in compression requirements with existing equipment. It provides a cost effective alternative for the purchase of new equipment and can generally be completed in the shorter time period. Additionally, a long time revamp increases reliability and availability by incorporating the latest material and design technology. In the second quarter, we received a significant order to revamp five compressors that were originally manufactured by one of our major competitors. Because the work is being done on a competitor’s machine, the project is classified as an applied technology order. The award for approximately $25 million is in connection with the rehabilitation project for a petrochemical plant located in Texas, which is further evidence of the resurgence in the petrochemical market in North American that is benefitting from low natural gas prices.

Next slide please. In the new unit segment, second quarter bookings of $346 million were approximately 22% higher than the corresponding period in 2011. For the first six months of 2012 bookings stand at a solid $788 million. Second quarter new units booking included major pipeline award of approximately $95 million in Central Asia. The reason we won the award was our strong value proposition based on technology and delivery cycle times. So in addition to the opportunities we see in the often talked about upstream and downstream sectors of oil and gas, we do from time to time see sizable opportunities in the midstream. In fact, we are focused on a number of major pipeline projects planned for China and the former CIS countries. As mentioned, oil prices at present levels support continued investments in energy infrastructure projects. We have visibility through a number of major potential orders and we are therefore reiterating our full year new unit bookings guidance of $1.7 billion to $1.9 billion.

Please turn to slide 9. Before turning the call over to Mark for a more detail view of our second quarter results. Let me mention that in June we acquired certain strategically important intellectual property assets from Energy Storage and Power LLC, and Dr. Michael McAlpine, including all of his patents, trademarks, intellectual property associated with compressed air energy storage or CAES technology. The acquired intellectual property complements our current SMARTCAES compressed air energy storage technology and expands the range of our offerings. Dresser-Rand will provide complete CAES solutions from conceptual designs through project optimization in addition to provision of equipment supply, engineering services and a the full range of aftermarket services for our entire CAES product line. Specifically, we will now be able to provide solutions from the smallest to the largest CAES projects to meet specific grade scale requirements.

We continue to believe that there will be strong market for energy storage in the form of CAES in the near and longer term. Accordingly, we view this newly acquired technology as complementary to the base technology we presently offer, which has been successfully operating for over 20 years. CAES is an enabling technology that allows clients to serve bulk energy under utility scale and withdraw it on demand when power is needed. It also provides a much needed loading source when in compression mode that prevents curtailment of renewable and base level electrical generation. Dresser-Rand designed and supplied the entire turbo-machinery train and controls for the first CAES plant in North America. Each CAES train is costumed engineered to provide clients with a system design to meet site specific operating and geologic requirements. I know that I have been saying for the past few years that we expected the CAES opportunity to be large with first order in the not too distant future. While our forecast of timing has not been accurate, we continue to believe that this market represents a large opportunity and that we are closing in on a couple of possible CAES awards. Indeed, we expect the first orders within the next 6 to 12 months and they could total approximately 600 megawatts of installed capacity.

As to the overall CAES market opportunity, we are tracking approximately 40 projects in the 100 to 200 megawatt range. These projects are principally in North America, Europe and China. For every 100 megawatts, the opportunity for Dresser-Rand is approximately $50 million of new equipment. As to the smaller CAES projects, we are tracking just under 15 projects in the 5 to 15 megawatt range. For a 15 megawatt project, the opportunity is approximately $35 million for our class of equipment.

Please turn to slide 10. In other exciting news Excelerate Energy has announced plans to build the first floating liquefaction expert facility in the U.S. Excelerate selected the Black & Veatch PRICO liquefaction system. Black & Veatch has declared its intent to utilize Dresser-Rand’s centrifugal compressors for this project, pending the positive final investment decision by the owner, Excelerate Energy to advance the project beyond a feed level of Black & Veatch. Dresser-Rand’s technology offer Black & Veatch high efficiency, yielding incremental LNG production and lower emissions, as well as reduce the equipment footprint and weight, which are important considerations for offshore installations.

In recent years, we have highlighted our LNG liquefaction as a strategic growth opportunity and the floating LNG projects provide an economic means to develop stranded gas reserves to help meet the world’s growing demand for natural gas. Development of these reserves typically requires additional compression upstream of the liquefaction facility for gas processing and pipeline.

I’ll now turn the call over to Mark for a closer look at our second quarter financial results.

Mark Baldwin

Thank you, Vince, and good morning everyone. Please turn to slide 11. The total bookings for the last 12 months were approximately $3.3 billion, 47% higher than the corresponding period ending June in 2011. New unit bookings of approximately $1.7 billion and aftermarket bookings of approximately $1.6 billion were up approximately 52% and 42% respectively versus the corresponding prior period. Approximately 38% of our bookings in the last 12 months were upstream, 15% midstream, 27% downstream and 16% environmental solutions.

Please turn to slide 12. Backlog at the end of June was approximately $2.8 billion, up 25% and a new record. The new unit backlog of $2.2 billion was up 22% versus a year ago and our aftermarket backlog was up about 33% to $603 million. The new unit backlog that is scheduled for ship in 2013 is approximately $1.1 billion, which is a record level for following year deliveries at this point in the year. As a point of comparison the new unit backlog at the end of June 2008, which was scheduled for ship for 2009 shipment was approximately $850 million. This is significant as 2009 has the highest volume of new unit sales in the history of the company.

Please turn to slide 13. Total revenues for the second quarter of 2012 of $636 million increased $47 million or 8% compared with $589 million for the second quarter of 2011 despite the adverse translation impact of the stronger U.S. dollar. Revenues in the second quarter of 2012 would have been approximately $40 million higher had their not been a change in exchange rates as compared to the corresponding period in 2011. One of the significant items that factors into the net change in revenues was the impact of the flood at our Wellsville facilities in the second quarter of 2011, which caused the deferral of approximately $21 million of sales to future periods.

New unit revenues were $287 million for the second quarter of 2012 compared to $301 million for the second quarter of 2011, a decrease of $14 million or 5%. The decrease in second quarter 2000 revenues compared to the corresponding period in 2011 reflects the variability in the timing and the size of very large orders in the new unit segment. A couple of other factors impacted the period over a period change in revenues. First, new revenues in the second quarter of 2012 would have been approximately $19 million higher had there not been a change in exchange rates as compared to the corresponding period in 2011. Second, the flood at Wellsville facility deferred approximately $14 million of new unit revenues to subsequent periods in 2011.

Aftermarket parts and services revenues were $349 million for the second quarter of 2012 compared to $288 million for the second quarter of 2011, an increase of $61 million or 21%. The increase in aftermarket revenues reflects the continuing recovery in most geographic segments. A couple of other factors impacted the period-over-period change in revenues. First, aftermarket revenues in the second quarter of 2012 would have been approximately $21 million higher had there not been a change in exchange rates as compared to the corresponding period in 2011. Second, the flood at the Wellsville facility deferred approximately $7 million of aftermarket revenues to subsequent periods in 2011.

Turn to slide 14 please. As I have previously mentioned revenues for the second quarter increased approximately 8% to $636 million. Cost of sales were $468 million for the second quarter of 2012 compared to $443 million for the corresponding period last year. As a percentage of revenues, cost of sales was 73.6% for the second quarter of 2012 compared to a 75.2% for second quarter of 2011. In 2011 the higher cost of sales as a percentage of revenues was partially caused by the flood at the Wellsville facility, which had an unfavorable impact on the absorption of fixed costs resulting in higher cost of sales for the second quarter of 2011. The decrease in cost of sales as a percentage of revenue for the three months ended June 30, 2012 was also aided by an overall shift in the mix of revenues to our aftermarket segment on the new unit segment.

Selling and administrative expenses were $89 million for the three months ended June 30, 2012 compared to $100 million for the three months ended June 30, 2011. The decline in selling and administrative expenses principally reflects the fact that last year’s second quarter included approximately $8 million of non-recurring transaction and integration costs associated with the acquisition of Guascor. The effective foreign currency also contributed to the decline in selling and administrative expenses. As a percentage of revenues, selling and administrative expenses decreased 13.9% from 16.9%.

R&D expenses for the three months ended June 30, 2012 were $7 million compared to $8 million for the corresponding period last year. The decline in R&D expenses compared to the prior year is principally the result of efficient project execution and delay in expenses to later in 2012.

Total operating income for the second quarter of 2012 was $73 million compared to operating income of $39 million for the second of 2011. As a percentage of revenue operating income for the second quarter 2012 was 11.4% compared to 6.6% for the corresponding period in 2011. Second quarter 2012 operating income and margins increased compared with the corresponding period in 2011 due to higher revenues and the fact that last year’s results were adversely impacted by the flood at the Wellsville facility and a nonrecurring integration and acquisition costs related to Guascor acquisition. The Wellsville flood and the Guascor integration and deal related expenses reduced second quarter ’11 operating margins by approximately 290 basis points. Also note that the operating income in the second quarter of 2012 would have been approximately $7 million higher had there not been a change in exchange rates as compared to the corresponding period in 2011.

Interest expense net was approximately $16 million for the three months ended June 30, 2012, which was essentially the same as the corresponding period in 2011. Interest expense net for the three months ended June 30, 2011 includes $1.3 million of accelerated amortization of differed financing fees as a result of terminating our previous senior secured credit facility and executing the cash tender offer to purchase our then outstanding seven-and-three-eighths senior sub notes. This impact has been offset by interest on additional borrowings.

For the three months ended June 30, 2011 we incurred a prepayment premium of $1.9 million as a result of executing the cash tender offer to purchase our then outstanding seven-and-three-eighths senior sub notes.

Other expenses net was $500,000 for the second quarter of 2012 compared to other expense net of $1.8 million for the corresponding period last year. Other expense net interest principally of net currency gains and losses on tradable admission allowances and income and losses from equity investments.

In the second quarter of 2012 the effective tax rate was 37.7%, which was higher than the statutory rate principally due to losses in certain jurisdictions where the company cannot currently record a tax benefit. The impact of this higher tax rate compared to 33% which is the midpoint of our previously provided full year guidance is approximately $0.04 per share. We continue to believe our full year effective tax rate will be between 32% and 34%.

Finally, the $1 million of net income attributable to non-controlling interest recorded in second quarter of 2012 relates to our partner shares of net income and losses in consolidated entities that are not 100% owned by us. As you can at the bottom of this slide, net income attributable to Dresser-Rand for the second quarter was approximately $34 million or a $0.45 per diluted common share. This compares with a net income attributable to Dresser-Rand of $11 million or $0.14 per diluted share for the second quarter of 2011. The second quarter of 2011 includes the impact of the flood at the Wellsville facility, the nonrecurring cost associated with the acquisition of Guascor and the one-time cost associated with our debt refinancing. These events reduced after tax earnings for the second quarter of 2011 by approximately $0.16 per share.

Next slide please. New unit operating income was $27 million for the second quarter of 2012 compared to operating income of $22 million for the second quarter of 2011. This segment’s operating margin was 9.5% for the second quarter of 2012 compared to $7.4% for the second quarter of 2011. The increase in operating margin was due to the fact that last year’s results were adversely impacted by the flood at the Wellsville facility and by our lower allocation of overhead cost to the segment, resulting from the lower percentage of new unit revenues to total revenues in 2012. We continue to believe new unit margins will average in low double digits for the full year as our margins are expected to increase in the first half level due principally to the positive impact of increasing volumes on upward leverage.

Next slide please. Aftermarket operating income was approximately $70 million for the second quarter of 2012 compared to $47 million for the second quarter of 2011. This segment’s operating margin was 20.1% for the second quarter of 2012 compared to 16.2% for the second quarter of 2011. This increase reflects the net impact of a couple of items. First, last year’s results were adversely impacted by the flood at the Wellsville facility. Second, this year’s quarter benefited from operating leverage on higher volume partially offset by the higher allocation of overhead cost to this segment resulting from the higher percentage of aftermarket revenues to total revenues in 2012. We continue to believe aftermarket margins for the full year will be in the range of 22% to 24%.

Next slide please. As mentioned earlier we have started to see improved operating margins in the second quarter and expect it to continue with the increase in volume over the balance of the year. Furthermore, we expect to achieve our operating margin guidance for the full year which implies a strong second half performance. The principal reasons for why we believe we will achieve a strong second half performance are; one, strong first half aftermarket bookings. As you may know we can turn aftermarket bookings into revenue in a three to four months cycle time on average and our aftermarket operating margins are approximately double that of new unit sales. Two, we have a large backlog of new unit orders scheduled to ship in the second half. Three, we believe the supplier related issues that adversely impacted fourth quarter shipments in 2011, primarily around motors, are under control and finally four our fourth quarter of 2011 volumes demonstrate we have the capability to produce the volumes needed to achieve this long second half performance.

Next slide please. Turning to cash flow. Net cash used in operating activities for the six months ended June 30, 2012 was approximately $2 million compared to $20 million for the six months ended June 30, 2011. The principal reasons for the reduction in cash used in operating activities are higher net income and depreciation and lower pension contributions, which more than exceeded the increased investments in working capital. In the first six months of 2012, our investment in working capital increased by approximately $97 million and we contributed $16 million to our pension plans in accordance with our funding policy. Our pension contribution for the six months ended June 30, 2011 totaled approximately $26 million.

Turn to slide 19 please. Net working capital at the end of the second quarter was $185 million, which was approximately $106 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 six months ended June 30, 2012 as a result of lower first quarter volumes and timely cash collection from clients. Inventories increased for the six months ended June 30, 2012 associated with a higher backlog. Prepaid expenses increased as a result of legally required tax payments in certain R&D jurisdiction increases in value added and similar tax receivables. Lower customer advances and progress payments as well as lower accounts payable and accruals for the six months ended June 30, 2012 were principally the result of the timing of receipts and payment. In addition, this slide show the changes in net working capital resulted in the use of cash of approximately $106 million, which is $9 million higher than the approximately $97 million use of cash from changes in working capital shown on the prior slide. The principal difference is our changes in working capital associated with acquisitions and currency translations. On the cash flow statement changes due to acquisitions are included in investing activities in accordance with generally accepted accounting principles and effects of which exchange rates changes on cash are recorded separately.

Next slide please. Let’s delve a little deeper into the spike of our net working capital. First, it is important to note that net working capital at the end of June of $185 million is at a point in time. Our philosophy is that it is important to look at working capital at end month and not just at the quarter end. As you can see on this slide, net working capital for the six months preceding the second quarter ending balance average to a little over $100 million or approximately 4% of the trailing 12 months sales. The spike in June was principally driven by four major projects. The issues around these projects are not related to contract terms and we are on our way to resolution on each of these projects. As results we expect second half improvement to more normal levels of net working capital and continue to believe that over the cycle we will maintain net working at less than 5% of trailing 12 months sales.

Next slide please. In the first six months of 2012 net cash used in investing activities of $77 million compares to $308 million for the corresponding period last year. Cash used in investing activities for the six months ended June 30, 2012 includes capital expenditures of $25 million. Also included in the first six months of this year is approximately $49 million associated with the acquisition of synchrony and $6 million related to an additional capital investment in the non-controlling interest of Echogen Power Systems. Including in the investing activity last year was $284 million related to the acquisition of Guascor and a $5 million initial investment to acquire a non-controlling interest in Echogen. Financing activity provided cash of $89 million in the first six months, this compares to the prior six months of 2011, when financing activity used cash of $1 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 number 22 please. At the end of the second quarter our liquidity totaled approximately $399 million and consisted of approximately $135 million of unrestricted cash and $264 million of available borrowings under our bank credit arrangements as we had outstanding borrowings of $291 million and $208 million was used for our outstanding letters of credit. At the end of the second quarter we also had approximately $100 million of letters of credit and bank guarantees drawn under uncommitted bank lines.

Next slide please. At the of June, net debt to capital ratio was approximately 46% and net debt to our last 12 months earnings before interest, tax, depreciation, amortization was approximately 2.4 times.

Please turn to slide number 24. Before turning the call back to Vince, I want to give you some data around the translation impact of currency changes on our financial results. Approximately half of our revenues are non-US dollar denominated with 40% to 50% of the non-US dollar revenues denominated in euros. Because our corporate expenses are US dollar denominated, our operating income is more heavily weighted toward foreign currencies in our revenues. Again, the Euro dominates in operating income but we also transact business in other currencies such as British Sterling, Norwegian Kroner, Canadian dollar, Brazilian Riau and the Indian Rupee to name the more significant currencies in our revenue mix. To simply the analysis as to the translation impact of a strengthening of weakening U.S dollar on our revenues and operating income, we assume that the non-U.S dollar currencies move in watch step with the Euro. On that basis, a 1% change in the value of the US dollar will impact revenues by about half of 1%, and operating income by approximate 0.6% to 0.7% on an annualized basis assuming the present mix of business outside of the U.S. Given the relative strengthening of the U.S. dollar based on current exchange rate, we expect translation to have an overall adverse effect on operating income of approximately $15 million compared to the rates in effect of the time of our first quarter 2012 earnings release and conference call. For more information about our results for the second quarter please refer to our 10-Q, which we filed last night with SEC.

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

Vincent R. Volpe Jr.

Thank you, Mark. Turn to slide number 25 please. Turning to our outlook, we expect our full year operating income to fall in previous guidance of $360 million to $420 million or be at lower in the range as a result of the adverse of the translation income and the stronger US dollar. As previously stated the role of a strengthening US dollar based on current exchange rates is expected to have an overall adverse translational effect on operating income of approximately $15 million compared to the guidance provided in our first quarter 2012 earnings release. Said in another way, for those who analyze and model our performance and have not yet reflected the impact of the stronger US dollar, we would suggest your model now consider the impact of the currency translation on revenue and operating income to be approximately $100 million and $15 million respectively.

As previously stated, guidance for our operating margin in both the new units and aftermarket segments remain unchanged, with new unit expected to be low double digits and aftermarket in the range of 22% to 24%. Despite the headwinds from this stronger US dollar, we are however, reiterating our guidance for 2012 new unit booking of $1.7 billion to $1.9 billion and aftermarket bookings of $1.4 billion to $1.6 billion. For financial modeling purposes we also provide the following assumptions for this year. Our allocator expense is expected to approximately $105 million to $110 million. It should be noted that the unallocated expenses are expenses that cannot be assigned directly to either reportable because of their nature and consist of certain corporate expenses and research and development expenses. For 2012 R&D expenses are expected to increase to approximately $40 million. Two, interest expense is expected to be approximately $60 million to $65 million. Three, the effective tax rate for 2012 is estimated to be approximately 32% to 34% and finally diluted shares outstanding are expected to be approximately $77 million to $78 million.

Regarding our outlook for the third quarter of 2012 we expect operating income to be in the range of $80 million to $100 million.

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

Question-And-Answer Session

Operator

Ladies and gentlemen (operator instructions). Our first question is from Robin Shoemaker – with Citigroup. You may begin.

Robin Shoemaker – with Citigroup

Thank you. Hi Vince, I want to ask you if you could just expound a little bit on this petrochemical fertilizer opportunity in the US that you’ve talked about this call and last one. And in terms of – are these Greenfield projects restarting of mothball facilities or both?

Vincent R. Volpe Jr.

Hi Robin, good morning. It’s principally refurbishments and overhauls and so the projects that we are talking about now is a large petrochemical facility, which has got compressors large to large process compress that were supplied by one of our competitors. They are looking to upgrade the units to get I believe more capacity and at the same time, we were able to go ahead and retrofit with higher efficiency internals and as a result we were able to prevail in that job. There are a variety of different orders sort of out there Robin, but this was the murky order for the quarter, which is why we mentioned it. But it’s all piped through low gas prices.

Robin Shoemaker – with Citigroup

Right. Understood. And just more broadly orders for ’12 and the range that you indicated. I think you’ve said that you really expect FPSOs and FLNG to dominate the order inflow this year. And so how do you see particular the FPSO market now versus three months ago if better, worse?

Vincent R. Volpe Jr.

It’s about the same over the last three months Robin, and it’s mostly you should be concentrating short term on the FPSO side of the equation. The LNG project that we announced will be a while before it gets booked but Excelerate has made the decision to go Black & Veatch. Black & Veatch has made the decision to use Dresser-Rand compressors and so what’s in front of us still is to get all the way through the feed, form an engineering design, study and then get to the investment decision and also I believe that in that project there is also need for approval, which should happen hopefully sometime in parallel with all that other stuff going on. So that I would say it’s mostly FPSO short term, but clearly FLNG is starting to kick in.

Robin Shoemaker – Citigroup

Yeah, understood. And there’s a couple of proposals that are working their way through for an onshore liquefaction of gas in the US. I’m assuming I guess it’s way off, but are you looking positive – that would clearly be one scenario where you could participate as well I assume?

Vincent Volpe

That’s correct. That’s the right way to think about it. It’s too early for us to prognosticate which of those projects go forward and it will be weeks before we be successful. But we are certainly aware of them and we have our order in the water so to speak, Robin.

Robin Shoemaker – Citigroup

Yeah, sure. Thank you.

Operator

Thank you. Our next question is from Jeff Spittel with Global Hunter. You may begin.

Jeff Spittel – Global Hunter

Vince, Mark, Blaise, good morning. Just wondered to maybe touch a little bit about the applied technology business. Normally I know we’ve talked in the past about this being kind of a $100 million annual run rate and you’ve got a pretty chunky word out there that you talked about in the prepared remarks. Should we characterize that as kind of a pleasant lump to the upside or maybe could you characterize how that business is evolving and is there opportunity to win some more of these larger orders?

Vincent Volpe

That’s a good question. We lump that into – this is $150 million to $200 million business as we speak and so you’ve got to get some pretty big orders to get to those types of numbers. Traditionally there has been sort of one out there a year. It’s not impossible that we could see another significant order this year also and that might help move the needle up fast where we are right now. So I would say that if you get one a year that’s probably about what you get anyway, Jeff. But there’s a variety more out there and some of them are fairly significant. So I’m hopeful that that applied technology number will continue to grow in total including this year.

Jeff Spittel – Global Hunter

Got you. And then maybe if we could touch on the ICS and a progress update there and how things are evolving I guess with Statoil as well as you work on that technology in a sub C application?

Vincent Volpe

Okay. As far as what the overall ICS project is concerned, I’m sorry to say that Petrobras have again delayed for non compression reasons to start up with that platform or at least that part of the platform. I think the whole process piping issues. I’m not exactly sure what it is. So it looks like we’re into a couple more months of just sitting and wait out for everyone’s benefit. I know you know this Jeff. We’ve had a year sitting there waiting to be started for two years now. So this is getting – it’s fairly frustrating, that’s the bad news. The good news is at the rate we’re going, that was an 800 kilowatt or about a 1 megawatt machine, at the rate we’re going we’re going to have a 10 megawatt machine built, tested and then submerged and tested in a berth of water by the end of next year. So I think that will actually in some ways lap if you will the duration that’s going on trying to get the Petrobras unit up and started.

Nonetheless we’re anxious for the Petrobras unit to be commissioned. Where are we with Statoil? As I said we should have pretty much the whole program by the end of next year. Once we get into next year we’ll be pretty far along the way down the manufacturing process. Early to mid next year we’ll be testing the ICS in a dry environment where we’re just separating the liquid and doing the compression and then a little bit later on in the year we’ll actually submerge it in the tank and start getting runtime on it in a marine type environment. I think that from my standpoint we have seen where there have been others working on wet gas compression, other competitors of ours and they are not having an exceedingly successful go at it right now because you’re not supposed to get compressors wet. And so the ICS is the only dry technology out there which is why we’re excited about it. So progress is good. We’ve got our motor supply solidified now. We’ve got our own bearings going into the machine, the Synchrony bearings that we acquired. Design is pretty much frozen and we’re on our way and we’ll keep you updated as we go, Jeff.

Jeff Spittel – Global Hunter

Appreciate I,t Vince. Thanks.

Operator

Thank you. Our next question is from Tom Curran with Wells Fargo. You may begin.

Tom Curran - Wells Fargo

Good morning guys. Mark, getting started with aftermarket, could you just tell us what applied technology bookings had been year-to-date? So, just the total for the first half of 2012. And then turning to the capacity expansion and enhancement front, first just how many new service centers do you expect to open between now and year-end worldwide? And then turning the rollout of less key capabilities, of those initial targeted five sites to introduce it, how many remain and which are they?

Mark Baldwin

Okay, let’s start with applied technology. Through June we’re a little over $150 million in applied technology. I think the second part of your question was how many service centers we have planned between now and year-end. I don’t have that at my fingertips right now, so we’ll have to get back to you on that. And then finally, the gas turbine repair rollout, we have five sites. We prefer not to say exactly which sites and each of them have had – well four of the five have people in for use and for training and they’re just in different phases of putting the equipment and getting the training started is what I would say and the fifth site is I’ll tell you where that one is. That is in the Middle East and that’s going to be part of our Middle East factory that we’re in the process of directing right now.

Tom Curran - Wells Fargo

Right. So that would be the only one remaining then where you haven’t…

Mark Baldwin

Yes.

Tom Curran - Wells Fargo

And then when it comes to the ongoing effort to get customers to outsource more of the work on their installed Dresser-Rand nameplate base to you, other than Saudi Aramco, who would you next highlight as a customer where you’ve made the most progress there recently?

Vincent Volpe

Let me jump in on that one if I can. There is a variety of customers where we have made good progress and recognizing that you’re not the only one listening to the phone call today like I’m a little reluctant to actually share who they are. But I can tell you that customers that have fleets that are either aging or have significant maintenance issues and downtime issues are getting more and more interested in full service providers like what we can do. They are willing to take on guarantees around equipment availability and do what’s necessary to make sure that we hit those availability guarantees. So don’t mean to be evasive, but there’s quite a bit of conversation in the market now about that and we’re enthusiastic. Excluding Guascor, bookings were up 16% year-over-year and last year was already a nice pickup. So you have to do more than just go out there and peddle parts to make that kind of growth and part of it is what you pointed to which is start taking the bigger piece of the pie around the maintenance and the operation and the reliability and the availability of the assets.

Tom Curran - Wells Fargo

So fair to say though Vincent, I completely understand the point you’re making about competitive concerns. But the momentum that that 16% represents when it comes to the outsourcing effort is not overly dependent on Aramco, that you’ve highlighted them in part I guess because it’s one of the customers you’re comfortable doing that with. But there’s a broader base out there that you’re getting traction with?

Vincent Volpe

That’s right. You can’t even – the ramp wouldn’t even move the needle. This is very broad based.

Tom Curran - Wells Fargo

Okay. And then, Vince, a remark. Turning to the units then, something I think we could all use a better understanding of is to what extent is within upstream in particular there are some degree of run rate orders and could you maybe expound upon the nature of them? Is it enhanced oil recovery related? Within new units what is the closest you get to some reliable run rate stream of orders?

Vincent Volpe

It’s a fairly low number. I’d say that there is – in some of our smaller businesses the small single stage team turbines and so forth, there’s sort of a steady diet of 30, 40 units, whatever it is you can get them on. And the big orders still they’re really lumpy and so we talk about overall market demand and it’s oil production right now and it’s where we have a very strong, good strong presence in terms of share and so that’s probably the steadiest of the big businesses. But those things can be $15 million to $150 million a pop. And so even then it’s hard to convey that as a steady run rate business which unlike the aftermarket where statistically there are so many units out there running that you get a pretty steady diet of parts, services and repairs every month. It’s just not that way in the unit business. It’s hard to categorize, but again the big stuff it is really the oil exploration based and the FPSOs principally in that space.

Tom Curran - Wells Fargo

Okay. And then I’ll just finish with at the opposite the spectrum for new units. We were pleasantly surprised by this large midstream order this quarter which we haven’t been looking to is the driver for bookings growth this year. So then turning downstream, if we were to see a surprise downstream award or just the strength in downstream booking surprise positively, which country or countries would seem most likely to deliver that at this point?

Vincent Volpe

Well, I think on the downstream you would see – you’ve got probably, again downstream, not midstream, I want to make sure I get the question right.

Tom Curran - Wells Fargo

Right. Downstream, exactly.

Vincent Volpe

On downstream I would say would be the Middle East principally and continued activity in Asia and there’s also some activity in South America. So new downstream, I don’t see a lot in the United States. I answered, I think Robin asked the question earlier. That’s mostly an aftermarket play for us. It might be an increase in capacity or renovating a petrochemical plant but it’s not necessarily grassroots petrochemical facility going in. There may be one or two that go over the next several years, but that’s principally an aftermarket play. On the new unit side it’s Middle East, Far East and some parts of South America.

Tom Curran - Wells Fargo

Okay. Thanks so much for all the additional detail. I’ll turn it back.

Operator

Thank you. Our next question is from Rhett Carter with Tudor, Pickering, Holt & Co. You may begin.

Rhett Carter - Tudor, Pickering, Holt & Co.

Good morning guys. Just with respect to aftermarket, I was curious, what percentage of aftermarket came from the Euro area region? And have you see any hesitation on customers undertake aftermarket projects given the slowdown there?

Vincent Volpe

Well, let me answer the second part of the question while Mark sees we can get your actual numbers, Rhett. Europe, continental Europe over the last several years has been fairly slow, but the last couple of quarters we have seen the activity level actually pick up a bit. What we’re trying to figure out is that because we’re doing a better job penetrating the space or is it that there are just busier and I don’t know that we completely have the answer to that question. But I think at least in part they are somewhat busier. So no, I don’t see the Euro crisis significantly dampening the need to run the assets and this is what we kind of say on a worldwide basis. These assets pretty much need to run through these business cycles just because they are revenue producing and income producing assets for the most part and whether the commodities are up or down a little bit they still need to run which means you need to do parts and you need to do your service and your maintenance.

And so if you look at that chart that we provided you can see that even when we went through a fairly horrific shock to the system when we got into that late 2008, early 2009 we got into that deep recession, the aftermarket slowed down a little bit. But it bounced back fairly quickly and there wasn’t a huge drop. It may have been 5%, 10% drop, but it wasn’t 150% drop like we saw in the new unit business. So pretty robust through the cycles which means it shouldn’t surprise us that it’s holding up pretty well now. The pressure that we would see now on the aftermarket is far less than what we saw in 2009.

Mark Baldwin

And Rhett, to answer the first part of your question, this is Mark. 15% of those second quarter aftermarket bookings had what we call a definition of EFA, European served area which would not include Middle East.

Vincent Volpe

So if the whole thing went to zero we still would have been flat year-over-year on an apples to apples basis.

Rhett Carter - Tudor, Pickering, Holt & Co.

Okay, thank you for that. And then just with the exchange rate guidance saying would have a $15 million impact this year versus the original guidance of $30 million. So is that lower or is that incremental?

Mark Baldwin

That is incremental. So to try and – I think what you’re asking to refresh everyone, in October of last year, we originally put out guidance with the exchange rates. In February, we then updated people because the dollar had strengthened and brought the guidance down for 2012 NOI by $30 million. We’re now bringing another $15 million because of the continuing strength of the dollar. So yes it’s incremental.

Rhett Carter - Tudor, Pickering, Holt & Co.

Okay. And that’s based on today’s exchange rates, not forecasting one way or the other going forward?

Mark Baldwin

That’s correct. The way we do that is we assumed, I think it was two days ago and by the way the dollar strengthened yesterday. So we assume that the rate would stay flat for the rest of the year. We’re not predicting one way or the other and you come out with about $15 million impact over the second half of the year.

Rhett Carter - Tudor, Pickering, Holt & Co.

Great. Okay, I’ll turn it over. Thank you guys.

Operator

Our next quarter is from Jon Donnel with Howard Weil. You may begin.

Jon Donnel - Howard Weil

Good morning guys. The operating income guidance here for third quarter I guess is suggesting another pretty big ramp up for fourth quarter results, maybe not to the extent we saw in 2011, but still pretty big ramp in the last quarter there. Is there any particular concentration in one or two large projects or with one or two large customers for the expectations for what’s going to ship there in fourth quarter?

Vincent Volpe

There is a third – we do have one very large contract that needs to go out which you can be assured we’re shepherding right to the finish line. Beyond that there is just a variety of work that needs to go. I think if you look at this thing Jon and you think about the fourth quarter, the volumes that we achieved last year – now remember we had the couple 100 million that didn’t get out the door that we actually pretty much finished. I’m not even talking about that. I’m talking about what we really invoiced. Those volumes this year would need to be about the same as we did last year. So you’re not into wildly uncharted waters in terms of the amount of activity that you need to produce in the third and fourth quarters compared to what we produced in last year’s fourth quarter.

The quality of earnings will be a bit better. The mix, there will be more aftermarket in there which certainly helps and I think just for the record we built backlog the first two quarters this year in aftermarket because our aftermarket bookings have really been terrific. And so that is what helps us through the back end of the year. Mark talked about the impact of translation. We did not actually move anything. We didn’t move guidance down. By the way I haven’t changed guidance. Let me clear. What Mark said was not a change in guidance. What he said was pick your number. There was an impact of about $15 million on that number. We haven’t changed the guidance. We’re still leaving a range intact and we could have done this earlier but we didn’t because we had such strong aftermarket bookings.

So I guess the story on Q3 a little bit and then mostly Q4 is lots of activity, volumes that are consistent with what we actually achieved last year. We have a line of sight to the projects. You asked about one big project and there are other very significant projects. We know what they are. We know what needs to be done. We believe we’ve got the motor generator problem behind us which was a problem last year and there’s a higher aftermarket concentration this year than there was last year which improves the quality of earnings. So that gives a sense of how we’re looking at the fourth quarter internally and why we’re not changing the guidance.

Jon Donnel - Howard Weil

Okay, that’s very helpful. Thank you very much.

Operator

Your next question is from Joe Gibney with Capital One. You may begin.

Joe Gibney – Capital One

Thanks. Good morning. Most of my questions have been answered. Vince, wanted to ask you a little bit about some of your initiatives on cycle time reduction. I know you highlighted data through the area of strategic focus, something you really want to emphasize more going forward. Just curious how things are progressing on that front working things down a little bit on the new unit cycle side.

Vincent Volpe

Sure. Well actually we started, Joe, on – said let’s go after the revamps and the parts, aftermarket parts for us because those are the ones that we might actually, if you make a process change early enough in the year, you can actually have an impact at the back end of the year in terms of getting some actual invoicing. And so that basically – I don’t have the exact number in my mind but it’s probably $30 million, $40 million that we were actually able to accelerate because of our cycle time reduction program which was about what we needed to offset – we talked in the beginning of the year about the risk we have for instance in Venezuela and some other countries. This cycle time reduction basically offset that. So that’s the aftermarket and the revamp side. On the new unit side, it takes longer because you’ve got to do complete value stream on your as is process, then you go through, you decide where you’re going to pick up time and how you need to do it. We are in the process of doing that right now and so to me I think you’ll probably see a small improvement next year in cycle time. I’m going to say maybe and this is really off the back – maybe 20% cycle time reduction.

So if you’re going from the average of 14 months or so or a year to 14 months, you may get a month or two out of that. But that’s not going to satisfy us. We’re talking about collapsing these cycles it’s a much greater expense than that and I think you’ll see most of that starts really come through in ’14 which is good because think about what we said for ’14, we’re talking about again depending on exchange rate, but we’re talking about normally a $4 billion business with really no new factories to speak of. And so the way that you double your throughput is by reducing the cycle times. So we are very committed to it, we stay committed to it. It is the subject of discussion in all the staff meetings. I think we’ve got the proper resources working on the program and we’ll continue to report on it. But please feel free to ask.

Joe Gibney – Capital One

All right, appreciate it. Helpful. Thanks. I’ll turn it back.

Operator

Thank you. (Operator instructions). Our next question is from John Moore with C.L. King. You may begin.

John Moore –C.L. King & Associates

Morning guys. Thanks for taking my question. Just following up on that question regarding the guidance, I guess I’m trying to get a handle on the new unit revenue here in the third quarter and fourth quarter. It sounds like at least this quarter there was an impact from some projects, just a fewer large projects. Do those project roll through in the third quarter or are you expecting them to ramp more in the fourth quarter?

Vincent Volpe

John, let me just ask you to clarify. Did you want to talk about revenues or bookings? Because your question sounds like a bookings question I think or even a sales question.

John Moore –C.L. King & Associates

No. it’s more of a sales question and when some of the projects you’ve got already booked roll through here in the second half of the year.

Vincent Volpe

Yeah, we’ve got them where they’re scheduled. So I don’t – the second quarter I would not categorize as having slippages – excuse me for saying them. It was just a quarter that had low volume for that’s the way that they sort of fell. Our volume is down from Q1 to Q2, something like $100 million and that was just pretty much the way it was planned. Q3 is going to be back up probably around Q1 levels. I think Q4 will be yet again a bit higher.

John Moore –C.L. King & Associates

Okay, great. That’s helpful. And then what are you anticipating in terms of R&D expense in the back half of the year? It seems like I guess R&D in the first half was running a little bit lower than at least I anticipated, but are you expecting a ramp in R&D in the second half and I guess where exactly is that spending going if you can elaborate?

Vincent Volpe

Well, yeah I can assure you that our engineering community has assured me they’re going to cash up and that I shouldn’t count on them under spending which is fine as long as we get what we expect for our money and they’ve done a really terrific job so far doing that. A lot of the money will be spent on the ram jam testing. A lot of money will be spent on the ICS and I think those are the two biggies. I don’t want to get any more granular than that. Those are the two I talk about publicly, but there’s lots of other smaller projects going on that we’re working on. So our progress is good and I would say that will probably be right around that number that we’ve been talking about, that $40 million-ish number for the year.

John Moore –C.L. King & Associates

Okay, great. And then I’m just curious, the 1.60 billion in bookings you have slated for ’13, how does that number compare versus last year at this time? In other words, last year at this time how much in bookings did you have slated for ’12?

Vincent Volpe

Blaise is going to see if he can dig that one up for you. But I think what is pertinent to the question or a pertinent answer, although it’s not exactly what you ask is, our year of record sales was 2009 and at the same time in 2008 as we are now in 2012, we had about – was it about 200 million less in backlog scheduled?

Mark Baldwin

850.

Vincent Volpe

850 versus 1.60 billion. So yeah , so we’re about 200 million ahead of what we had for our all time record year which we again see a reference point from a sales standpoint would actually be 2009 on that basis. And John, we can get back to you on last year’s number. Blaise will follow up if that’s okay with you.

John Moore –C.L. King & Associates

Yeah, that’s absolutely fine. Thank you. Just one last question. The standard variable margins you’re seeing now, just curious if you’ve seen any impact from the global slowdown or maybe lower oil prices have – your standard variable margins had any impact there or are you still seeing them I guess trend upwards?

Vincent Volpe

The standard variable margins have been pretty steady for quite some time and a lot of it has to do with how we quote and how we price our units. We get firm quotes from our major suppliers, castings, forgings, motors, gears and so forth and then we put a markup on them and that’s what we quote. So we pass, if costs go up a little bit or costs come down a little bit, the competitive forces being what they are, things kind of get passed through. So what you really see here in our businesses, as our volumes increase, our turning costs don’t go up nearly as much. So even if your standard variable margins are pretty steady, you get operating leverage in your operating margins in your two segments and the overall business actually improves. And that’s what we have seen here Q2. We’re starting to see that and then we’ll see that to a greater extent the back end of the year which is why we feel pretty solid in terms of the guidance we’ve provided on operating margins.

John Moore –C.L. King & Associates

Got it. Okay, thank you.

Blaise Derrico

I just came across the backlog schedule. Last year, end of June for this year was about the 850 number as well.

John Moore –C.L. King & Associates

Okay. Great, Blaise. Thank for the detail.

Operator

Our next question is from Robert Connors with Stifel Nicolaus. You may begin.

Robert Connors – Stifel Nicolaus

Good morning and I guess my first question for Mark is that, when I look at your networking capital as a percent of revs, it tends to rise and fall with the new unit revenue mix and so with this record level of new unit backlog scheduled to ship into 2013, would we see the networking capital for 2013 gravitate more toward the upper end of that 0% to 5% range?

Mark Baldwin

The net working capital has – it is rated backlog and it’s also related to new unit bookings because when we have our strong period in new unit bookings which we’re obviously having this year, you do get healthy advance payments which really help offset your investment inventory. So what we’re highlighting through today’s date is that we had a couple of projects that we now are focused on collecting that. So we expect to return to that. I guess looking out into 2013 it depend on what the new unit bookings are to be able to drive that. But what we said earlier was we continue to believe that this business will be 0% to 5% of trailing 12 month sales through the cycle and at a point in time we’re a little above that now. And so we’re going to get that back down.

Vincent Volpe

Yeah. Let me just reinforce what Mark said to make sure that you have a clear view of this. First of all the number that you see in June is one point in time if you were to look back the previous six months and take the average of each of those six months, you arrive at that 3.9%, 4% level. So the guidance that we provide when you look at it really month over month is pretty solid. But you do get – every now and again you’ll get a peak. We’ve got several projects where I’m happy to report these are not Dresser-Rand issues and they are good customers and they are credit worthy customers. But there have been some blips in terms of frankly project management from their side in some of the new systems that they’re using and I don’t want to get any further than that down that path. But we’re quite confident that we will bring that number down to “more normal levels” through the third quarter and throughout the rest of the year.

Now, as far as next year is concerned, it’s too early to provide guidance, but I’m going to stick with what Mark said which was 0% to 5% looks pretty good and you never know. It might even come down because I’m not suggesting it will be below 0%, but what I’m saying is as you get bookings, as bookings exceed sales over a given period of time, you are getting progress in advance payments that actually have the effect of driving your networking capital down. Now, when you think, when the (inaudible) turns back in the other direction and I don’t know what year that will be, but it’s certainly not going to be through 2014, or sales exceed bookings, then you’re in a situation where you might see it going the other direction. But as long as new unit bookings are stronger than the new unit sales, you really should not see an adverse impact to speak of on the networking capital.

Robert Connors – Stifel Nicolaus

Okay. And then just touching on the North America pet Kem theme is, one of your rather large strategic alliance T&T partners cited the second half ’13 pickup in a lot of these projects when they should begin to roll. Just wondering if you’re possibly starting to see that too and typically when you do get involved as far as on the awards front? Would it be at the early stage within the FID or would it be a couple of quarters afterwards?

Vincent Volpe

No, we’re involved usually before FID. They need to have a pretty good sense of what kind of compression equipment they’re going to go with, what kind of turbines they’re going to put in, what’s he configuration of the plant. So we need to help the engineering companies and even the end users think about the solution to begin with. So there’s that piece of it, then once they think they have the optimal machinery solutions, then they put together specifications. They go out and they get bids, at least budgetary bids or maybe even a little better than budgetary bids, then they start to try and sharpen their pencils a little bit even before FID because if they use everybody’s budgetary bid no project ever gets to be approved because there’s too much extra fat in all the numbers.

So we need to get involved usually in some cases before the front end engineering design even starts. If you look at this LNG project that we’re talking about that we’re so pleased with, the accelerate job, we were selected before the feed begins. The feed just started several weeks ago. They needed to do that to bring on set the process conditions and so forth. In large petrochemical facilities and refining, you don’t need to make your final decision on the compressor guy until sometime probably in the middle of the feed. So, it’s a little bit later, but it’s always, always before the final investment decision is made and 90% something plus of the time. So we know pretty – we have pretty good vision of what’s cooking and it’s also that way in the upstream by the way, very similar.

Robert Connors – Stifel Nicolaus

Okay, that’s helpful. If I could squeeze in one more, the parts revenues trailing 12 months was up about 18% year-over-year versus down 10 a year ago. Just what end markets are roughly driving that?

Vincent Volpe

Well, I think South America has picked up nicely. We’re seeing good results in Asia. Americas have recovered with the low gas and Middle East has been strong. The presence that we committed to several years ago in the Middle East is really, really paying off. Now we still haven’t got our factory finished yet that we’re building there. This is like building the Taj Mahal or something, but the reality is that it’s not just about a factory, it’s about technical support, people on the ground committed to listening to the customers going in visiting facilities and pedaling. So the Middle East has really been a nice pickup for us.

Robert Connors – Stifel Nicolaus

Okay, great. Thanks a lot.

Operator

Thank you. I’m showing no further questions at this time. I would now like to turn the call over to Blaise Derrico for closing remarks.

Blaise Derrico

I want to thank everybody for joining the call today. I look forward to catching up with folks later today and next week. Everybody have a great day and enjoy the weekend. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day.

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