Dresser-Rand Group Exec Insights: LNG Facilities, Cycle Times

On Friday, Dresser-Rand Group, Inc. (NYSE:DRC) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

LNG Facilities

James West – Barclays Capital: First, just some comment from me, great color on the kind of petrochemical renaissance that we’re having. I think that’s an underappreciated piece of your business. First question from me is on the LNG facility side, you mentioned several kind of mini LNG facilities, I think it’s easy for us to track the large scale ones, but I am curious how many of these mini LNG opportunity are you guys targeting right now?

Vincent R. Volpe Jr. – President and CEO: A lot. James, it sort of stays under the radar screen because we really like the position we have in this space. As we said, we booked 10 of them, but we really haven’t spoken much about them, but it’s starting to get to be significant enough that it makes the – it’s got to make the press. So, there is a lot. This 1 million ton and less size plant is nice for countries with developing infrastructure that can’t easily move gas around and so it’s a very local business for them and it comes in small increments, and we’ve seen this in the past in ethylene and petrochemicals where they didn’t have good infrastructure to move gas, they would literally have to do the refining and petrochemical works sort of in-situ. So, there’s a lot coming.

James West – Barclays Capital: A quick question for Mark on the new unit margin side, obviously pretty low in 1Q because of the allocation of expenses. As we think about the progression throughout this year, I know you gave your guidance is still low double digits. Are we back to those low-double digit levels in the kind of the second quarter or is it kind of just a steady ramp-up throughout the year with (blow-out) fourth quarter?

Mark E. Baldwin – EVP and CFO: It is a steady ramp up, the first quarter was a bit of anomaly because both last year had some good projects and this year had a little under the norm what I would say, and as we go through the year, volume will help those new unit margins go sequentially higher.

Cycle Times

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

Vincent R. Volpe Jr. – President and CEO: No, there is something else, Jeff. So, that what you’re talking about is a thought right now. So, that’s between the time it’s thought by some of these guys, and in time it turns into an equipment order for compressors is a while. So, put it in the column category of opportunity, but it’s not in the run rate right now.

Jeff Spittel – Global Hunter: Shifting over to how we think about cycle times in the new units business, a lot of moving parts. Do you have certainly a flexible manufacturing footprint product mix issues, you rectified a lot of these supply chain issues. New contributions from Guascor, can you talk through these different moving parts and what that might pretend in terms of what cycle times start to look like and how things start to burn out of the backlog over the next couple of quarters?

Vincent R. Volpe Jr. – President and CEO: Let me just start with Guascor, when you look at overall cycle times on engines which is the product that they build, they’re much shorter than on engineer-to-order turbo compressors or steam turbines or reciprocating compressors. So, when you weigh the whole mix in, you say, well, your volume is (indiscernible), don’t forget a lot of that is gas engines and those things can be produced sort of in three month cycle times, sometimes even faster because they’re standard products, and they’ve got a terrific assembly and test set up and so they can move very quickly. So, that helps. As you’re thinking about Dresser-Rand in 2014 being a $4 billion a year business, you got to ask yourself how you get there. So, the Guascor cycle times helped. The other thing is we are very focused on cycle time reduction. We’re going to get to the $4 billion and beyond without significant improvement – increase in footprint or (indiscernible). And so it needs to come through cycle time reduction and I can tell you that we over the next couple of years are going to significantly collapse cycle time both in our new units, our parts and our revamps. This is a corporate initiative. It has been launched. We have people on the ground working on it, and we’re dead serious about it. We are going to take our cycle times down by a significant amount. That’s the way to get to the increased throughput. I know we can do it. We’ve done it before. I can tell you numbers that aren’t published. Back in the year 1999-2000 we had cycle times all-in for turbo compressors which are kind of our long lead cycle time, all-in, tested and everything else, 189 days. Right now, our cycle times are over a year. So, we have the capability of doing this. We have more volume than we had before, but we have better processes, better systems, and better people. So, we’re very committed to this, and that is the way you’re going to see that revenue ramp up, and by the way, we demonstrated in the first quarter, we’re already – if I look up here on the charts. Our total first quarter sales were – we’ve got sort of to a run rate already of $2.7 billion, $2.8 billion or something and we know that that will ramp up throughout the rest of the year. So I’m comfortable that we can get this year’s volumes and with the initiatives that we have launched around cycle time reduction, I believe that we can grow significantly and get to the 2014 goal really just by using cycle time as the strategic lever.