Dresser-Rand Group, Inc. Q2 2008 Earnings Call

Dresser Rand Group Inc. (DRC)

Q2 FY08 Earnings Call

July 31, 2008, 8:30 AM ET

Executives

Blaise Derrico - Director, IR

Vincent R. Volpe, Jr. - President and CEO

Mark E. Baldwin - EVP and CFO

Analysts

Robin Shoemaker - Citigroup

Ole Slorer - Morgan Stanley

Charles Minervino - Goldman Sachs

Jeffrey Spittel - Natixis Bleichroeder

Joseph Gibney - CapitalOne

Mark Thomas - Simmons & Company-

J. David Anderson - UBS

Glenn Primack - Broadview Advisors

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to Dresser-Rand's Second Quarter 2008 Earnings Conference Call. My name is Theresa, 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]. 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.

Blaise Derrico - Director, Investor Relations

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

Please turn to slide number two. Statements made during this conference call that are not historical facts may be forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements.

In addition, this conference call contains time-sensitive information that reflects management's best judgment only as of the date of the live call. Dresser-Rand does not undertake any ongoing obligation other than that imposed by law, 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 can materially affect the financial performance related to forward-looking statements can be found in Dresser-Rand's periodic filings with the SEC.

Now, I'll turn the call over to Vince Volpe, President and Chief Executive Officer.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Thank you for joining us today, and welcome to Dresser-Rand's earnings call. With me are Mark Baldwin, Dresser-Rand's Chief Financial Officer; and Blaise Derrico, our Director of Investor Relations. I will start with a review of recent highlights and Mark will follow me with a detailed discussion of our second quarter results.

Please turn to slide three. We are very pleased with our second quarter performance. Our operating results were well above the top end of our guidance range. Net income was about $47 million, an increase of 78% from the corresponding period last year. EPS was $0.55 per share. Mark will cover our second quarter financial results in detail in a moment, but first a few recent highlights.

Bookings overall were lower than last year's second quarter, primarily due to timing and the lumpy nature of new unit orders, but bookings in the higher margin after-market segment were up about 32%. Sales increased 23%. Backlog grew 29% from June 30th, 2007 to approximately $2.1 billion. Operating income was $75.5 million or 51% increase compared to the corresponding period last year. As of the close of business yesterday, we have completed approximately three-quarters of the previously announced $150 million share repurchase program.

We announced the approval of two strategic investments. One investment is to construct additional test capability associated with our newly developed compressor-separator technologies, and the second is for a new technology center to house about 500 engineers and technologists.

Finally, we completed the acquisition of Peter Brotherhood, which is consistent with our bolt-on acquisition strategy and along with our share repurchase program a very good use of cash. We’ll have more to say about this transaction in a moment.

Next slide please. Bookings for the last 12 months were approximately $2.2 billion or 3% higher than the same period a year ago and 46% higher than two years ago. Breaking it down into the two segments, new unit bookings of $1.2 billion were 7% lower than a year ago. The decrease reflects the varying sizes and lumpy nature of new unit orders. For example, in the second quarter of last year, we booked a very large order for $154 million for the BP Skarv FPSO order. Please let me emphasize, we expect very strong bookings performance over the second half of the year in the new unit segment.

Turn to slide five please. One new unit order that was booked in the second quarter of 2008 involves one of the world's largest greenhouse gas storage projects. Part of our strategy is to increase our focus on environmental solutions. Under this order, we will supply DATUM compressors to inject carbon dioxide for enhanced oil recovery in EnCana's Weyburn field and Apache's Midale [ph] field located in Southeast Saskatchewan, Canada. These fields are host to the world leading storage projects studying CO2 Geological Storage. Scientists project that by using knowledge gained from the Weyburn project, the Weyburn oil field will remain viable for another 20 years, produce an additional 130 million barrels of oil and sequester as much as 30 million tons of CO2. We believe this type of environmental solution will provide a future platform for growth.

Turn to slide six please. After-market bookings of $985 million were up about 18%, reflecting the continued market strength as well as two national oil company clients, which in 2007 made certain process changes recovering to more normal bookings levels.

Turn to slide seven please. Backlog at the end of June was approximately $2.1 billion or 29% higher than a year earlier and 106% higher than two years ago. Breaking it down into the two segments, new unit backlog of $1.7 billion is up 28% versus a year ago and the after-market backlog is up about 36% to $378 million.

Turn to the next slide please. On the acquisition front, we're pleased to report that earlier this month we completed the acquisition of certain assets of Peter Brotherhood Limited for approximately $62 million net of cash acquired. The agreement includes a potential for additional consideration, based on an earn-out arrangement. Peter Brotherhood specializes in the design and manufacture of steam turbines, reciprocating gas compressors, gearboxes and environmentally-friendly gas engine package combined heat & power systems. With roughly half its sales in Europe, a third in Asia and about 15% in Africa, the acquisition strengthens our position in these regions of the world, especially in the FPSO and marine markets. With an installed base of approximately 750 units, the acquisition is consistent with our strategy to grow the high after-market segment. This acquisition, which is of significant geographic importance to us, is expected to be at least neutral to earnings in the first year and accretive thereafter.

I will now turn the call over to Mark Baldwin.

Mark E. Baldwin - Executive Vice President and Chief Financial Officer

Thank you, Vince, and good morning, everyone. Please turn to slide nine. As Vince mentioned, we reported net income for the second quarter of $46.7 million or $0.55 per diluted share. This includes a charge of $1.8 million pre-tax or $0.01 per share. We're showing on this slide the impact of several unusual items from both periods. After adjusting for these unusual items, adjusted non-GAAP net income was up approximately 58%. This improvement reflects very good operating leverage, as sales were up less than half of that percentage change.

At our first-quarter conference call, we mentioned that in connection with the Olean labor agreement we agreed to make a lump-sum payment to those employees affected by the elimination of retiree healthcare. At the time, we estimated that the charge to income in the second quarter would be approximately $2 million. A lump-sum payment totaling $6.4 million was paid to eligible employees in the second quarter of 2008. Under Generally Accepted Accounting Principles, the payment is considered a partial settlement that required us to recognize approximately $1.8 million of net actuarial losses in the second quarter of 2008 income statement.

Turn to slide ten please. Sales for the second quarter of 2008 of $541 million were about 23% higher than the second quarter of 2007. New unit sales of $299 million were 29% higher than the second quarter of 2007. Sales of after-market parts and services increased approximately 16% from the corresponding period a year ago to $242 million.

Turn to the next slide please. Total operating income for the second quarter of 2008 was $75.5 million, which includes the previously mentioned charge of $1.8 million before tax. Adjusting for the charge, second quarter non-GAAP operating income was $77.3 million. This compares to operating income of about $55.5 million for the second quarter of 2007, adjusted to exclude two unusual items, a litigation provision and workers' compensation expenses, which totaled about $5.4 million. Operating income margin was 14.3% compared to 12.6% for the corresponding period in 2007, after adjusting for these items I've mentioned previously.

Next slide please. After-market operating margin increased 320 basis points to 29.3% from the corresponding period last year of 26.1%, adjusted for the two unusual items mentioned previously. The increase in second quarter 2008 operating margins from the same period a year ago was principally due to improved prices, higher volumes and a better mix. We still believe after-market margins for the year will be roughly flat compared to 2007.

Next slide please. On an adjusted basis, new unit operating margins were relatively flat at 8.6% compared to the corresponding period a year ago. We continue to expect new unit operating margins to be in the low-double digits for the full year.

Turn to slide 14 please. At the end of the second quarter, liquidity was approximately $480 million and this consisted of about $273 million of cash and $207 million of available borrowings under our bank credit arrangements.

Next slide please. Net cash provided by operating activities for the first six months of this year was about $104 million, and this compares to $136 million in the first six months of 2007. The decrease of approximately $32 million was principally due to changes in working capital, which provided $43 million less cash flow than in the corresponding period a year ago. Working capital changes provided cash of approximately $40 million in the first six months of this year compared to $83 million in the first six months of 2007, principally due to the higher receivable balances in 2008 resulting from the significant increase in sales in the period.

Next slide please. In terms of investing activities, capital expenditures used cash of approximately $15 million in the first six months of 2008 compared to $9 million in the first six months of 2007. Investing activities in 2007 also includes the acquisition of the Gimpel Valve business for approximately $8 million.

In June, we announced the approval of two strategic investments at our Olean, New York location. One investment is to construct additional test capabilities associated with our newly developed compressor/separator technologies. The second is for a new technology center to house about 500 engineers and technologists. The capital expenditures for these two projects is expected to be approximately $25 million through the first half of next year. Consistent with the guidance provided on our previous call, capital expenditures for the year are expected to be about 2% of sales. The test facility is expected to be operational later this year, while the occupancy date for the tech center is scheduled for early 2009.

As to financing activities, during the second quarter we purchased Dresser-Rand stocks totaling approximately $28 million under our previously announced $150 million share repurchase program. As Vince mentioned earlier, as of last night we have now completed about three-quarters of the program. For more information about our results for the second quarter, please refer to our 10-Q, which we filed last night with the SEC.

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

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Thank you, Mark. As for our business outlook, demand for products and services continue to be strong across all markets; upstream, midstream and downstream. We expect very strong new unit bookings in the second half of the year. Backlog has extended well into next year with approximately $913 million or 44% of our June 30th, 2008 backlog scheduled to ship in 2009 and beyond. Our expectations for the 2008 operating income are unchanged. While we continue to believe that our 2008 operating income would be in the range of $285 million to $315 million, we now have a strong bias towards the upper half of the range. As for the third quarter, we currently expect operating income to be in the range of 25% to 27% of the total year.

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

Question and Answer

Operator

Thank you. [Operator Instructions]. We will go first to Robin Shoemaker, Citi.

Robin Shoemaker - Citigroup

Good morning. Yes, Vince, I wanted to ask you a little bit on the new unit side, or I guess on the after-market as well. Any cost inflation pressures you are seeing, raw materials, some things that are perhaps unexpected or in line with this recent surge in raw material costs that we've been hearing about on other conference calls?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Yes, good morning, Robin. I think on both sides of the equation we're seeing the cost increases, okay. Now, you've also seen the margins flowing through here pretty good, and you’ve I have no doubt understood our fairly bullish view of the rest of the year in terms of what we are sort of leading you towards in terms of the earnings guidance. I think there's somewhat of a difference in terms of how the costs flow through to us.

On the new unit side, we are basically protected on the material cost because we have fixed the costs at this stage. When we did our cost estimate on these projects, we got commitments from our suppliers based on the deliveries and the terms that we are reporting to our customers. So they've committed to give us forgings for X, Y, Z amount per pound on these projects as we costed up the job, and as we priced the job. So on the new unit side, it's built into the cost estimate and it's covered, so very little risk on the direct materials. Now, energy prices go up, the price of electricity goes up and gas and utilities, that does impact us somewhat. So on the indirect side, we are seeing some of that.

And then on the services side of the business, these steep increases are hard to keep up with, to be honest with you, from a pricing standpoint because we don't go back every single time we quote a bearing, a seal or something else, a spare part, we don't have time to go back and reconfirm with our supply chain on every single order unless they are very big orders. So there is some exposure on the parts side of the business, but globally I would say that we’re doing a fairly good job predicting it. We have a very focused supply chain management team where we've got commodity leaders focused on all of these items and we're doing the very best we can in terms of putting... when we put out our forecast to reflect what's really going on. So, I don't think you're going to see us talk about surprises due to material cost inflation, although it's definitely out there. I mean, it's huge, right, but I don't think you're going to hear us next quarter or in Q4 talking about, we missed an estimate because we had no idea our costs were going to go up that high. That's just not the way that our business model works.

Robin Shoemaker - Citigroup

Right, okay. One other question then relating to your expectation of strong new unit bookings in the second half, will that include possibly the much-awaited awards for some LNG related compressors?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

It's not out of the question, but I will tell you that when I talk about very strong increases in the second half of the year I'm not hanging my hat on LNG.

Robin Shoemaker - Citigroup

Okay. That was my question.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Okay. How can I, [inaudible] this, okay.

Robin Shoemaker - Citigroup

Yes, I know, exactly. I can remember the discussion about this three years ago. Thanks very much, Vince.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Thank you, Robin.

Operator

Our next question comes from Ole Slorer, Morgan Stanley.

Ole Slorer - Morgan Stanley

Thank you very much.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Good morning, Ole.

Ole Slorer - Morgan Stanley

Good morning to you, Vince. Could I ask you, what are you seeing on pricing in bids for new units at the moment?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Well, I can see what we're doing. We continue to press forward, Ole. We evaluate, we continue to process that we've talked about before. We look at sort of the very last job and we figure out how much more we can charge on the next one, our costs… based on our cost estimate and what we think is going out... going on in the Street in terms of the competition. And so, I do not see a shift at this point in time in our ability to make shot of this slow gradual progress that we've been making on the unit margins, which is why we continue to reiterate that we expect full-year margins to be in low double-digits on units.

Ole Slorer - Morgan Stanley

Okay. So, you should continue to expand those by a couple of hundred basis points or so year-over-year?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Year-over-year, correct.

Ole Slorer - Morgan Stanley

Yes. And again, you might have said it, but I probably didn't just catch it. You did very well on the new unit revenues this quarter, but the margins were sort of flat year-over-year, so with flat year-over-year and with the full-year being up quite meaningfully, what was it that caused this weakness in the second quarter?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

I'm sorry, I didn't hear the very last part of your question.

Ole Slorer - Morgan Stanley

You did... the margins that you posted in the second quarter compared with the second quarter margins last year were pretty flat, and yet for the full year you're going to increase margins. So I'm just asking for a little bit of color on what did... clearly, your revenues did very well in the second quarter, but what was it that caused the second quarter margins to year-over-year trend below what you expect for the full-year year-over-year?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Well, first of all, I would say the second quarter margins last year and when you think about the way the year ramps up, we're pretty darn good. So we have got a higher basis of comparison. As the volume continues to increase, and it will definitely increase, sales are going to increase Q3 over Q2 and then Q4 over Q3. As you get that volume effect, Ole, what happens obviously is your period costs become a lower percentage of the total because the period costs are fairly evenly split across the year. So you just... you get the benefit of... really get the benefit of the volume in the back half of the year, Ole, as well as better jobs… the pricing on better jobs falling through.

I mean let me just... to what I was saying before, if you look at last year's operating margins, on an adjusted basis, so this takes out the strike, okay, that takes that into account. They were 5.6% in Q1, then they were 8.8% in Q2, 9.5% in Q3, and 10.3% in Q4. So 8.8% was a big jump, it was sort of... you wouldn't linearly interpolate that between Q1 and Q3. So we probably had a particularly good order in there, we get a little bit of that also. But anyway, look for stronger margins going forward and on a full-year basis just crossing that 10% mark.

Ole Slorer - Morgan Stanley

Okay, sounds good. And again, likewise you did phenomenally well on the after-market side both year-over-year and… are those types of margins sustainable?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Well, I think that we had... when we look at it we probably had a better quarter than what you ought to plug in for the rest of life, so to speak. I think we're expecting margins to be... to return a little bit more to what the norm has been on the after-market, which is still high 20s, right.

Ole Slorer - Morgan Stanley

Yes.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

But I wouldn't sort of send you towards 30% because I don't think that's a reasonable estimate. I think just look for that sort of 27 to 29 range and you will be fine.

Ole Slorer - Morgan Stanley

Okay, cool. And in terms of the new orders, can you… are you seeing... is it upstream mainly, is it... I have been hearing about big refining projects in the Middle East, is it something along those lines? Is it across everything you do or is it biased towards either refining or upstream?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

No. It's a pretty good mix, Ole. I mean, in fact in the month of July I can tell you that we've actually booked $60 million in refining orders. So I know there is this big down around about refining. I mean, I understand that in the U.S. there are some concerns and so forth, but on a worldwide basis, Middle East, South America, there is a lot of opportunity. You guys know the projects as well as I do. But I think what's important here is the refining bookings I believe in the second half of the year, and these are bookings that are going to be fundamentally... significantly stronger than they were last year, will have a lot less refining in them. So you'll see more upstream and more midstream in the second half of the year, and that's kind of the way this business runs.

Ole Slorer - Morgan Stanley

Good. And finally, are you being asked to bid on any domestic LNG projects?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Domestic LNG?

Ole Slorer - Morgan Stanley

Yeah, U.S. LNG facilities, have you seen any of those kind of request tenders come across your desk?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Ole, I've got to tell you, that would mostly... are you talking about on liquefaction or the re-gas side?

Ole Slorer - Morgan Stanley

No liquefaction.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Yes. If we are they're not big enough to have hit my screen, so they may be fairly small, not world-class size plants. So honestly I don't know the answer to the question, but we can find out for you.

Ole Slorer - Morgan Stanley

I would very much like to know. Thank you very much.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Okay, Ole. Thank you.

Operator

Next question comes from Chuck Minervino, Goldman Sachs.

Charles Minervino - Goldman Sachs

Hi, good morning. Just a couple of quick questions. First, the Peter Brotherhood acquisition, is that included in your guidance for the remainder of the year, because it doesn't look your operating income forecast there changed much with the acquisition?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Yes. It's included.

Charles Minervino - Goldman Sachs

It is Included, okay. And then, with regards to the after-market business you highlighted the margin expansion as being a function of pricing, volumes and mix. Is there a way you can give us a little color on how much each of those maybe played a role in that margin expansion, just so we can get a little bit better understanding of how this is going to play out going forward?

Mark E. Baldwin - Executive Vice President and Chief Financial Officer

Chuck, this is Mark Baldwin. As you know, we... I don't know what you know... but in our after-market business we've got parts, service and repair. There are kind of two mixes that are going on, both of which were favorable, the percentage of parts that make up the total of our after-market parts and services. And then within parts, we had kind of good mix of both, in other words, a good mix of the parts that we did get and that parts was a little bit higher as a percent of the total of our after-market. So we had both of those going in our favor this quarter.

Charles Minervino - Goldman Sachs

Okay, that's really helpful. And then I guess in the backlog, can you give us a sense of how the mix plays out with regards to parts and service and repair?

Mark E. Baldwin - Executive Vice President and Chief Financial Officer

Yes, we can. We can if we peel the onion a little bit, but I think what's more important Chuck is I believe that we're going to be nominally here for the second half of the year in the 27 to 29 range based on what we have in backlog right now. We've gone through another forecast, so let me just sort of help get you to the answer rather than providing you with all the pieces.

Charles Minervino - Goldman Sachs

I guess the reason why I ask is because if I'm running these numbers back of the envelop, it looks like 27% to 29% kind of margins in the second half of the year, puts you well above year-over-year margins, doesn't it… year-over-year flatly. I think you're guiding for flat margins year-over-year, but that would put you well above it, if I'm not mistaken?

Mark E. Baldwin - Executive Vice President and Chief Financial Officer

Chuck, when we talk about flat guidance we are talking adjusted for the strike and so the math we do is that that is 27.4% last year. Our guidance is kind of pointing towards that. Our reported numbers were 25%.

Charles Minervino - Goldman Sachs

Okay. That's helpful. Thank you.

Operator

We will go next to Jeff Spittel, Natixis Bleichroeder.

Jeffrey Spittel - Natixis Bleichroeder

Good morning, guys.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Good morning, Jeff.

Jeffrey Spittel - Natixis Bleichroeder

First question, if we could drill down a little bit more on the refining market, Vince, you said that you had a strong order intake in the second quarter from the refining business. Could you give us a sense of whether those orders are coming from domestic facilities or internationally, primarily?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Yes. Jeff, maybe I misspoke, I... what I was talking about was the July bookings, okay.

Jeffrey Spittel - Natixis Bleichroeder

Okay.

Jeffrey Spittel - Natixis Bleichroeder

So... But I am happy to talk about that. I don't know that we have gotten release from our clients to tell you who they are, but that $60 million [ph], about two-thirds of that was overseas, large project in Asia somewhere. I just don't know if they’ve told us whether or not we can release it and about a third... the other third was North America and it was basically a clean fuels project.

Jeffrey Spittel - Natixis Bleichroeder

Okay. So certainly it sounds like despite the compression in crack spreads domestically, you're not necessarily seeing anything on the order front in terms of your customer base pulling back from new units orders.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Overseas, I mean we've got... and again, just we need to caution ourselves that even if the refining market goes in the tank, so to speak, what I think I said earlier was we're not really counting on very much in the way of refinery bookings in the second half of the year. That being said… and the reason is I think there are some big projects. I know that there is two large projects in Saudi Arabia that are already financed and approved, okay, Nianbo [ph] and Al Jabal [ph], which is somewhere around 800,000 or 1 million barrels a day of increased production.

Those projects are going forward… I don't have those in my forecast right now because I don't know when they are going to close. I mean, things tend to drag on a little bit. So we're not... our forecast isn't based too much on this, but when we look around there is South... there is a lot of activity in South America, there is a lot of activity in the Middle East, even beyond those two projects that's being looked at. So I don't know that we're really seeing in the end of the refinery growth, but again from our standpoint bookings, I'm really sort of stressing here as much as I can that we're expecting very strong new unit bookings in the second half of the year and there is not a lot of... heck a lot of refining built in to that to be honest with you.

Jeffrey Spittel - Natixis Bleichroeder

Okay, I appreciate that. And unrelated follow-up on the Peter Brotherhood acquisition, could you talk about the after-market opportunity from that acquisition and how the timing shakes out for that? Is there a bit of a digestion period before you really start to ramp up on that front?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Yes, we're giving ourselves, Jeff, a year in terms of ramping up, which is why we've kind of guided as year one will be neutral in terms of earnings and then it will be accretive thereafter. My hope is that we can move that along faster than that. We have a full integration team in place. We're having just terrific relationship right from the onset with the leadership team over in the Peterborough operations, and my hope is that we'll go as quickly as we can and maybe a little quicker even than what we've sort of guided.

And the principal... really one of the principal drivers is the after-market, so your question is right on. They've got 750 plus units out there. They only had one repair center. We've got a network of over 30 now actually. And so one of the major emphasis and focus areas for our integration team is to figure out how we can drive more of that business through to us.

Their after-market was a fairly small percentage, about 20% I think of the total. And our after-market is half of our total revenues. So you can see that we think with our business model and with our infrastructure we ought to be able to pull through a lot of work that they weren't getting on their own, so that is sort of front and center. That's like the top priority of what we are working on, followed very closely by the fact that we've got some real good expertise in the Peterborough operations in both the steam turbine and the reciprocating compressor area that would really augment our footprints and our emphasis in that part of the world.

So I think we're going to see more new units here in those two products lines coming out of Europe and the Middle East as a result of that acquisition. So those are kind of the two big drivers behind the acquisition with after-market being sort of a lead dog here.

Jeffrey Spittel - Natixis Bleichroeder

Great. Thanks very much. Congrats.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Thank you, Jeff.

Operator

We will go next to Joe Gibney, CapitalOne.

Joseph Gibney - CapitalOne

Good morning, everybody.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Good morning Joe.

Joseph Gibney - CapitalOne

Just, Vince, wanted to touch base on the upstream side relative to the FPSO market, you guys getting a little bit more inroads, a little bit more expertise relative to exposure with Peter Brotherhood. Just curious how this market might materialize on the new unit side this year, are we running into kind of the pushing to the right on the subsea field development side relative to NOCs or you're still pretty opportunistic and feeling pretty good about where this market is going this year or is it more of a kind of an '09 event that you get really excited about it?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

I think we're going to see some more activity here this year, not insignificant, and… but the forecast going forward, I think that the floating... the FPSO market is going to be a very important piece of '09 and 2010 bookings and beyond. I mean there is like 100 projects out there that are supposed to go over the next sort of three to five years. I don't know if they will all go or not, but we... I think our belief is that a fair percentage of them will and we have good market share there and it should only get better now with the addition of Peter Brotherhood to the team.

Joseph Gibney - CapitalOne

Okay, that’s helpful. And just touching on use of cash, I mean Peter Brotherhood, good bolt-on acquisition, what else out there on the acquisition market you guys are still actively looking? And any thoughts on buyback now that you’ve pretty aggressively moved through three-quarters down on further authorization going forward?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Well, let me talk about the acquisitions, and then Mark will, if you would Mark, talk a little bit about the buyback side. We have a lot of targets still out there, Joe. And so I think that you should look for continued activity from us. The ones that we can do fairly quickly that are not too tough to do are the… sort of the smaller bolt-on acquisitions. And so I think I would set my expectations over the next 12 months to discussions around those type of activities, sort of in the up to $100 million... $10 to $100 million range or something like that, okay. Kind of help to set the needle a little bit. Mark, you want to talk about the repurchase?

Mark E. Baldwin - Executive Vice President and Chief Financial Officer

As we mentioned, we are about three-fourths of the way through our $150 million program. Given where our stock is, we probably are going to finish that obviously this quarter and we will continue to look at that as a good use of cash, coupled with our bolt-on acquisition strategy. And at such time as we decide to go back for another one we’ll tell... we will make that announcement, but at this point in time we're just going to finish out our current program.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Let me just add to that, Joe, and I will tell you that we've gone pretty quickly here because of the stock price, okay. This program is designed to do exactly what it's doing and that is, be opportunistic when the price is down and we think a lot lower than it ought to be. It's a great time for all of us to repurchase stock. And so as the uncertainty prevails or continues to matriculate throughout the market, it would not be odd for us to go back and propose to our Board to do another one. Now, I'm not telling you that we are going to do one, but we'll see how we do as we get to the end of this one. And if Mark feels that it's time to do another one, we will. We are going to continue to generate a lot of cash, okay, and we're not going to use it all upon acquisitions, at least it doesn't look like at this point in time. And the balance sheet is very strong. Our EBITDA to... our net debt to EBITDA is less than one right now.

Joseph Gibney - CapitalOne

Good. I appreciate it, guys. Thank you. I will turn it back.

Operator

We will go next to Mark Thomas, Simmons & Company.

Mark Thomas - Simmons & Company

Good morning, guys.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Good morning, Mark.

Mark Thomas - Simmons & Company

Most of my questions have been answered. Could you elaborate on the agreement with Chevron, sort of how long the agreement is for and how these agreements work? Are prices set in the agreements? And then also are there any other agreements coming up for renewal that you'll have?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Well, the agreement with Chevron is either three or five years. I don't have that number on the top of my head. But basically the way that it works is we refresh the pricing every year, that mechanism is built-in. There is a conversation that takes place basically once a year. And what we do is we go back and we talk about what's happening with pricing and so forth, and we agree on what we... basically price book multipliers that obviously over the last few years have continued to go up, okay. I suppose if material costs came down, we'd be having a different conversation with Chevron, and rightfully so. But it's adjusted yearly; it's either three or five years.

Other agreements coming up for renewal, we are in the process of renewing one very large agreement, and we'll announce that when we get through with it. We've never had an agreement cancelled. We have never had an agreement cancelled, Mark. So I think our view of it is these agreements are only as good as how well we execute. And we've been doing these going back… upwards of 15 years now in some cases or close to 15 years. We're in the third agreement with Statoil of Norway. So we're in year, I don't know, 12 or 13 of that relationship and they've never been cancelled. So I wouldn't focus too much on that.

Mark Thomas - Simmons & Company

All right, thanks. And then just for my last question, in the after-market segment, you talked in the past about it becoming a volume story going forward. Could you just talk about maintenance programs for your equipment, how often they're required and is there a good sort of blended average for the amount of time between how often your equipment needs maintenance?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Well, basically what happens is about every three years, on average our… the gas plants or platforms, refiners, whoever they are, will bring... will come down for overhaul... sort of a general overhaul and that's when the critical equipment gets overhauled. Obviously, you try not to overhaul critical equipment when the rest of the refinery or gas plant or facility is running because you inhibit the ability to produce whatever it is you're producing. So on average, it's about three years, but some of the cleaner services like refrigeration machines in LNG plants or in petrochemical complexes, they may run eight or ten years without getting overhauled. So it's about every three years.

Mark Thomas - Simmons & Company

Okay, thanks a lot.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

There are just so many units out there that when you end up developing sort of a steady flow of business even though there… that might be out of... that might be out of period.

Mark Thomas - Simmons & Company

Right. All right, guys, thanks a lot. Good quarter.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Thanks very much.

Operator

We will go next to David Anderson, UBS.

J. David Anderson - UBS

Good morning, Vince.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Hi, Dave.

J. David Anderson - UBS

Hey. So despite the really strong quarter you have there, you didn't really raise guidance too much. So I just sort of wonder if whether some of the new unit backlog perhaps maybe moved up a little bit further than expected or is it a little bit more conservative on your part in terms of guidance?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Well, we are half way through the year Dave, and so you know that our after-market sales have a huge impact on the profitability of the company and we still have some more bookings that we have to do on the after-market side. So I felt like we needed to talk about improving results, but since I'm not completely sure that we're going to be above $315 million in operating income, Mark and I didn't feel that we should actually raise the top end at this point in time. We will revisit it. We're bullish though, Dave. And we don't see any new unit stuff moving out to the right. We know what we have in backlog, we know what we have to ship. Things can only happen at the last minute, but we’re… I think we're demonstrating what we have said over the last three years which is we have the capacity to build this stuff because of the way that our business model is set up. And so we're getting good operational flexibility out of our supply chain and out of our own facilities. So I'm pretty comfortable that we're going to get new unit sales that we're predicting and that you will continue to see those volumes grow throughout the second half of the year. The question is will we get that booking shift in the after-market we need, and it looks pretty good right now. So I think when we get a couple more months into this and we get into sort of the same time next quarter, we will consider what to do with the guidance. But right now, let's just focus on it moving well into the second... into the upper half.

J. David Anderson - UBS

Okay. So it's really just more of a question of visibility in your after-market rather than anything?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Yes. That's it, Dave. That's the missing link here and we still have six months to go.

J. David Anderson - UBS

Got you. Now, the after-market business had a fantastic quarter, obviously. Can you talk a little bit about the sustainability of the growth trend in this business? I recall you talking about adding a couple more service centers internationally, but I’d imagine you're looking at that expansion quite a bit more. So perhaps you can talk about kind of like, I guess how much of run room you have right now in terms of your facilities and your set-up in terms of… infrastructure-wise?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Well, we're going to continue to add these small but very important service centers around the world. I think we're actually up to 33 right now.

J. David Anderson - UBS

Is that from like 29, like a year-ago?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

It might be have been 27, 28.

J. David Anderson - UBS

Okay.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

And so we continue to add these, Dave. There is more to be added. They're not very expensive to add, but they're very important to our clients because we can do service right on the spot and the equipment doesn't have to travel very far. I believe that the after-market growth is sustainable. By the way, these acquisitions like Peter Brotherhood you just heard me talk about, a big portion of why we're doing that is the after-market. We just picked up between 750 and 800 units, and these are all sort of big units, these aren't small standard products. So that's... those are the kind of acquisitions we're going to look forward to and I think certainly for next year be thinking about 10% plus growth in after-market sales again next year.

J. David Anderson - UBS

So it's fair to say, if we look at it like the Peter Brotherhood acquisition and several other smaller ones you have done over the last several years, that that's one of the main reasons of why we've seen so much... such strong year-over-year growth in the after-market?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

No, I don't --.

J. David Anderson - UBS

Volume and it's built on--.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

You haven't seen the impact of those yet.

J. David Anderson - UBS

Right, okay. And the last question here, PEMEX just announced it is building a 300,000 barrel a day refinery. This is obviously the latest in several... you mentioned a couple of Saudi Arabia projects out there. What are we seeing on the international front? Are you starting to see these come a little closer to fruition, little closer following investment decision? Can you talk about really what you are looking at in '09? You were quite clear on your backlog and new unit side, that's not... refining is not really in your second half thoughts, but is that really more into 2009 and can you talk about kind of the trend you are seeing out there?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Yes, I think it is a 2009 opportunity, Dave. I mean, beyond the two that are financed in Saudi Arabia, you've got a big refinery, number four in Kuwait, that's going to come. You have got PEMEX, you have got Petrobras, you've got the Essar Refinery, which is already underway. There is a variety of projects out there. IOCL, these are all opportunities for us. We're not going to book every single piece of kit that goes in every single one of these obviously, but we do have a very strong share, use nominally 30% market share. So that's about what it is in the refining space. And I think you're going to see... I think we feel like '09 there is a pretty good opportunity out there. We also think that our other end markets are going to be strong in '09. So I think we believe that we'll see year-over-year increase in new unit bookings again from '08 to '09. We don't see that flattening out.

J. David Anderson - UBS

So those targets you all mentioned, you think those are... most of them are going to go through in '09, the final investment decision?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Yes.

J. David Anderson - UBS

So pretty confident about that, great. So just for my reference, so if PEMEX announces one of its facilities yesterday, I know they're all different, but when do you kind of expect to see an award for that facility, say yesterday, is that like a year out, I mean is there any kind of rule of thumb?

J. David Anderson - UBS

Yes.

J. David Anderson - UBS

[inaudible], okay.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Yes.

J. David Anderson - UBS

Great. Thank you very much, Vince.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Thanks, David.

Operator

Our next question is from Glenn Primack, Broadview.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Good morning, Glenn.

Mark E. Baldwin - Executive Vice President and Chief Financial Officer

Good morning, Glenn.

Glenn Primack - Broadview Advisors

I have a few "greenwave" questions for you. Firstly, regarding the announced Canadian CO2 project, the Department of Energy here has put out a study on enhanced oil recovery using CO2 in Oklahoma, Illinois, California and I think Alaska. Are you seeing any inquiries in the U.S. on similar type projects?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Yes.

Glenn Primack - Broadview Advisors

Okay. The second one is can you give us an update on the Jamestown, New York sequestration project?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

I can, but it may not be… you’re right, right up to date. You know that the State has put in about $5 million of support and have thrown their support not only financial, but right from the Governor right on down behind this initiative. They feel that it is absolutely something worth looking at. It's potentially great technology. This is really Praxair's technology. We're working closely with Praxair and a couple of other partners there, the Jamestown community, not the least of which. It's going to require funding from the DOE though to build the project, okay. So, I think we're in the mode right now of sort of lobbying the best we can here and it's really again Praxair leading the consortium, trying to make sure that we get the Department of Energy money. And I think it's… we're looking at something like a $150 million investment there. So how far out that is, Glenn, I'm not really sure, but the place to really go digging there would be Praxair. We can also give you some more information. I just don't have anymore on the tip of my tongue.

Glenn Primack - Broadview Advisors

Okay. The third one, and this will sound kind of crazy, but I was at a solar trade show a couple of weeks ago and there were engineers at that show talking about taking power from these panels and then compressing I think air to store the power in caverns and stuff before putting it back out towards the grid. And I remember I think you had projects that were in the past in Alabama and also West Germany using your products. Are you seeing any inquiries on the compressed air?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Yeah. This is... I'm glad you asked the question, Glenn. This is what we call CASE or compressed air energy storage, and it's done... it can be done in combination with either solar or wind power. But the concept simply stated is to take air, compress it at night, drive the compressor with an electric motor .The electricity being cheap at night drives the compressor, the air is compressed and stored in a cavern, and then during the day when electricity is more expensive that compressed air is taken back out of the cavern, run through an expander. The expander drives a generator that makes electricity. So that's basically... what you've got is an arbitrage on electricity.

And then, you take something like wind power, the wind energy augments that. And one of the problems with wind power in general is the wind blows at the wrong time and in the wrong place. And so you have a storage problem because batteries are awfully expensive and you have a transmission problem depending on where it is. But a lot of these sites are in very favorable wind positions. And so you can use the wind energy any time you have it, either to compress the air at night, make electricity to help drive the motor to compress the air, or to sell it directly to the grid during the day. So wind is a nice complement for the standard compressed air energy storage program. We believe that... we're the only ones that have an installation in the United States at Alabama Electric. It is run at very, very high-reliability and availability over I think about the last 18 years or so. So it's really... it's a great site for us to use as a reference, and we are seeing a lot of interest right now, Glenn. And I think over time, you will see some significant projects come as a result of this interest and I'm not talking... we're not going to need to wait two to three years. I think you're going to see some of these projects start to materialize even before that, so a lot of interest. We are very much involved. We were at a recent conference, our leader of Business Solutions, Jim Heid, actually sat on a panel and talked about the equipment side of this. So I think stay tuned on that front. I believe it's real opportunity and they're big opportunities, okay. It moves the needle.

Glenn Primack - Broadview Advisors

Okay. Would you receive any credits on top of that or would the credits go --?

Glenn Primack - Broadview Advisors

Our credits risk would go to the user.

Glenn Primack - Broadview Advisors

Okay, so that's more incentive for the user to deploy the technology. All right. Very lastly, anymore Chinese clean coal type projects on the horizon?

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Not that I'm aware of, but that doesn't mean that there aren't any. I just don't… I'm aware of any at this point in time.

Glenn Primack - Broadview Advisors

Okay. Thanks.

Vincent R. Volpe, Jr. - President and Chief Executive Officer

Thank You, Glenn.

Operator

That does conclude the question-and-answer session today. At this time, Mr. Derrico, I will turn the conference back over to you for additional or closing remarks.

Blaise Derrico - Director, Investor Relations

Theresa, thank you. I want to thank everyone for joining the call today. If you have other questions please call me. My number is on the press release that we issued last evening. Thanks again, everybody. Have a great day.

Operator

That does conclude today's conference. Thank you for your participation. You may disconnect at this time.

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