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

Cameron International (NYSE:CAM)

Q4 2012 Earnings Call

January 31, 2013 9:30 am ET

Executives

Jeffrey G. Altamari - Vice President of Investor Relations

Jack B. Moore - Chairman of The Board, Chief Executive Officer and President

Charles M. Sledge - Chief Financial Officer and Senior Vice President

Analysts

Robin E. Shoemaker - Citigroup Inc, Research Division

Edward Muztafago - Societe Generale Cross Asset Research

Kurt Hallead - RBC Capital Markets, LLC, Research Division

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

James C. West - Barclays Capital, Research Division

Brad Handler - Jefferies & Company, Inc., Research Division

William Sanchez - Howard Weil Incorporated, Research Division

Waqar Syed - Goldman Sachs Group Inc., Research Division

William A. Herbert - Simmons & Company International, Research Division

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

Operator

Greetings, ladies and gentlemen, and welcome to the Cameron Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jeff Altamari, the Vice President of Investor Relations for Cameron. Thank you, Mr. Altamari. You may begin.

Jeffrey G. Altamari

Good morning, and welcome to the Cameron Fourth Quarter Earnings Call. Thank you for joining us today. This morning, you will hear from Jack Moore, Chairman, President and Chief Executive Officer of Cameron; and Chuck Sledge, Senior Vice President and Chief Financial Officer. Jack and Chuck will offer commentary on the results for the quarter. We will then open the line for your questions.

In accordance with the Safe Harbor provisions of the Securities Laws, we caution you that some of the statements made on this call may be forward-looking in nature and, as such, are subject to various factors not under the control of the company. For a more complete description of these factors and the related risks and uncertainties, please refer to Cameron's annual report on Form 10-K, the company's most recent Form 10-Q and the recent earnings news release.

I will now turn the meeting over to Jack.

Jack B. Moore

Thank you, Jeff. Cameron reported record earnings of $0.95 a share in the fourth quarter, excluding charges, an increase of 23% versus Q4 of 2011. Total earnings in 2012 equaled $3.13 a share, excluding charges, up 17% versus last year. We had record revenues in the fourth quarter totaling $2.4 billion and total revenues for 2012 equals $8.5 billion, an increase of 22% versus last year.

Bookings in the quarter were exceptional, coming in at a record $3.4 billion, up from $1.9 billion a year ago and up 50% sequentially. Overall bookings for the year totaled $10.9 billion, an increase of 39% versus 2011. Our backlog ended the year at $8.6 billion. Deepwater bookings were driven by our DPS segment which totaled over $2.5 billion in the quarter. This was driven by Drilling Systems business unit which realized unprecedented bookings in the quarter, totaling $1.5 billion. We also had record bookings in our Surface Systems business unit and healthy subsea bookings in Q4.

International activity and major capital projects drove our record bookings growth. Cash flows in the quarter came in north of $500 million and just shy of $700 million for the year. We also announced the creation of OneSubsea, our joint venture with Schlumberger that will develop products and systems focused on enhancing the recovery of subsea developments through the life of field management. Needless to say, we're very excited about the value this transformational new venture will create for our customers and our shareholders.

Now I'll review our business units' performance in Q4. Surface Systems had another record quarter across the board in revenues, bookings and profits. Orders for the quarter totaled $495 million, an increase of 34% versus a year ago and up 5% sequentially. This is in spite of lower levels of activity in North America. Full year bookings were just shy of $1.8 billion, up 33% versus 2011. We continue to see enormous benefit from executing on internal growth strategy, focused on the unconventional markets in North America and critical service markets globally.

Investments in people, technology and infrastructure focused on delivering higher wellhead side performance have paid off both in share gains and margin improvement. We expect these benefits to drive higher performance in 2013 and beyond.

Our Drilling Systems business unit had extraordinary bookings performance in Q4 to add to an already exceptional year. Q4 bookings finished at just over $1.5 billion and total bookings for 2012 totaled a record $3.6 billion, twice that of our record performance of $1.8 billion in 2011. There are a number of highlights to point out in the quarter.

As we previously announced, Cameron secured its first deepwater total rigs solutions package in the quarter. We also booked 21 new deepwater stacks in Q4 and sold the first ever 18-3/4" 20K deepwater containment system. Cameron booked a total of 39 deepwater stacks in all of 2012. Our major project bookings in the quarter were driven by Transocean's new generation drillships and octers [ph] packages for the Petrobras newbuild programs in Brazil. The magnitude of these newbuild orders underscores the commitment Cameron is making to its OEM aftermarket service programs around world.

Aftermarket bookings totaled $181 million in the quarter and finished with a record year totaling $738 million. While we do not expect to see a repeat of the level of bookings we witnessed in 2012, 2013 will be another active year for Drilling Systems, a broader product and service offering, coupled with continued demand for upgrades to existing fleets and a focus on expanding the next generation of deepwater floaters will provide a number of opportunities for Cameron in 2012.

Subsea orders totaled just north of $500 million in Q4 and just shy of $2 billion for 2012, an increase of 65% versus 2011. While no significant projects were booked in the quarter, we saw a lot of activity with a number of smaller projects in Canada, Brazil, Gulf of Mexico and West Africa. And there remain a number -- a sizable number of projects we are tracking that would have been tendered but not yet awarded, and we expect that these projects will be awarded in the very near future. The size and complexity of these projects, once awarded, will require equipment providers to be very selective on those additional projects that will be coming to the tender phase in the coming quarters. We believe this will bode well for pricing discipline through 2013 and, hopefully, beyond.

Our Valves & Measurement business segment had another outstanding quarter and a record year in performance. Revenues in the quarter were a record $560 million and orders finished at a healthy $540 million in spite of our North America headwind. Total orders for 2012 came in at a record $2.1 billion.

Our Distributed Valves bookings could not escape the downturn in North America activity in Q4, which resulted in Q4 bookings being off 10% sequentially. With did, however, have record bookings in our Engineered and Process Valves business units in the quarter with orders totaling $360 million, which benefited primarily from deepwater markets, U.S. pipeline and international infrastructure projects. We've also seen a large number of opportunities emerging in our Process Valves business unit with the expansion of U.S. petrochemical markets. Engineered Valves is also benefiting from a number of large international infrastructure projects in both West Africa and Asia. While the North American markets had challenges in the first half of 2013, we see a very healthy market for Valves & Measurement business in the balance of the year.

Our Process & Compression business unit had record revenues in Q4 totaling $475 million and EBITDA margins north of 16%. Orders in Q4 totaled $360 million and were led by Process Systems, which came in just shy of $200 million. A number of orders shifted to the right which will materialize in 2013. We see a number of large Process Systems awards in 2013, but order discipline is still a must as we must drive margin recovery forward.

Compression bookings totaled $165 million in the quarter and were off by 5% versus 2011, primarily to slower demand in China. We did, however, see good results in our efforts to penetrate the emerging processed gas and micro LNG markets as targeted product development has resonated with these buyers.

So let me summarize. Cameron had a record year in 2012 across the board, profits, revenues, bookings and even more importantly, our safety performance. We've broadened our Drilling Systems offering with the addition of TTS Sense, and we announced the formation of OneSubsea with our partner, Schlumberger. All in, a great year and I want to personally acknowledge our dedicated employees for making this happen.

As for our outlook in 2013, we expect that our North American markets with challenges in the first half of the year, but recover as the year progresses. Our international markets will provide ample opportunities for all of our business units in 2013, plus, we expect a record numbers of subsea project awards that should yield another record bookings year for Cameron. Chuck?

Charles M. Sledge

Thanks, Jeff. Cameron had its best quarter ever, delivering a record $0.95 per share in earnings, excluding charges. Record quarterly cash flows and record quarterly orders. Revenues for the quarter were also a record, up 9% sequentially. DPS grew 9%, V&M 4% and PCS 18%. Our EBITDA margins declined from Q3 levels ending up at 15.7%.

A little commentary around this. DPS EBITDA margins were 17.1% for the quarter. This sequential decline was due the dilutive impact of our drilling acquisitions but more importantly, as well as the incremental incentive compensation. Our DPS segment collected a massive amount of cash in the fourth quarter, which is a focus point in our bonus programs, hence, the incremental comp expense. Margins in our legacy Drilling, Surface and Subsea businesses were good. So the bottom line is, you should not extrapolate DPS's fourth quarter margins, EBITDA margins, into 2013.

V&M's EBITDA margins were 22.8% for the quarter, up sequentially. We saw EBITDA margin improvements across the board in this segment. Outstanding job by the team. PCS EBITDA margins for the fourth quarter were 16.3%, up from 12.6% in Q3. We are grateful to the PCS team for all their hard work and perseverance during a difficult recovery period, and are proud of what they have accomplished. As is typical, our fourth quarter corporate SG&A expenses came in higher sequentially ending at $67 million.

The majority of the increase from the third quarter reflects higher stock and incentive comp as a result of the strong financial results in Q4 and the remainder represents project-related spending. Other costs were $0.07 per share, which were driven by a noncash write-off of intangibles and integration costs. Cash flow from operations for the fourth quarter blew away all previous records, coming in at 400 -- excuse me, $545 million. For the year, we generated $683 million from operations while still investing in the working capital needs of the growing business. CapEx for the quarter was $147 million, resulting in a total of nearly $430 million for the year, $70 million short of our previous commentary. Our tax rate for the fourth quarter was 20%. Our initial EPS guidance for 2013 has a range of $3.70 to $3.95 per share. There are 2 main factors which will ultimately affect where we come out within this range. The first is the strength and timing of a recovery in the North American market. The second factor is our ability to execute on our record backlog, particularly our Drilling business. Revenues should increase in the low double-digit range. DPS will have the highest growth rate while -- with Drilling and Surface driving this. Subsea should be relatively flat.

As a reminder, recent bookings in Subsea will not drive revenue growth until 2014. V&M should grow revenues in the mid-single digit range while PCS should grow close to 10%. EBITDA margins should come in around 17%. This is at the low end of our previous guidance due to a more muted outlook on North America as compared to October and the mix of project business anticipated to be recognized in 2013's revenue. All segments should show EBITDA margin increases. PCS should have the most expansion followed by DPS and then, V&M, which will have slight expansion.

Corporate G&A expenses should approximate $220 million for the year, G&A will be higher in 2013, probably around $285 million due to our rate of capital spend. Interest expense should be approximately $100 million. CapEx should be about $500 million. Although this is higher than our previous commentary, remember, we've had $70 million of 2012 spend pushing into 2013. The tax rate should come in around 23% for the year as a whole. This is due to a change in the mix and jurisdictions in which we will produce taxable income. Q1 will show an abnormally low tax rate due to the impact of certain tax credits, probably around 20%. You should use 249 million shares in your model.

Now turning to the first quarter. As is typical, the first quarter will be the low point in the year for revenues, EBITDA margins and EPS. Revenues could look a lot like the third quarter of '12, with PCS having the largest seasonal decline in sales, and that's perfectly normal. Consolidated EBITDA margin should be relatively flat sequentially. DPS margins should improve modestly from the fourth quarter of '12, although they will still be impacted by the recently acquired drilling businesses. Q1 is the low point in margins for DPS, and we should see rapid improvement from there. V&M margins will also be somewhat lower sequentially due to a mix of valves being shipped. Again, like DPS, Q1 will be the low point for margins for V&M with rapid improvement thereafter. PCS margins will come down in Q1 due to the lack of leverage on the fixed cost structure of the business. We're expecting a very good year from PCS. The combination of these factors should result in EPS of between $0.70 and $0.75 per share for the first quarter.

With that, let's open it up for comments.

Jeffrey G. Altamari

Rob, please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Robin Shoemaker of Citigroup.

Robin E. Shoemaker - Citigroup Inc, Research Division

Jack, I wanted to ask you about the drilling equipment success that you had in the most recent quarter, the integrated deepwater package. And how does that, then, serve as a platform for competing across a much broader set of opportunities? Or how would you want us to anticipate the rate of growth in this drilling products area?

Jack B. Moore

Yes, Robin, I would characterize our success with the first rig solution package as confirmation that our customers have confidence in Cameron's ability to back up what we say we're going to do. Now we've got to go execute. And I think this is the challenge for our team, is to make sure that we deliver on what we say we're going to do with respect to the rig solution package. And this is going to evolve over time. We've got a very solid competitor, as you know, in this business. And for us to put together a viable competitive platform, we have to execute. We have to prove that we can do it. We've got a great team and we've got a great start. Our traditional businesses, which is really focused around the pressure control business are going to provide us continued progress, a lot of opportunity going forward. The aftermarket business in drilling is going to be a great business for us as these new rigs get commissioned and come into service, we'll continue to see that opportunity expand. But I just am -- I'm very pleased with the platform we have as we look to the future. It's more than just a 2013 outlook, it's really over the next 5 to 10 years where you'll see Cameron evolving in our Drilling Systems space.

Robin E. Shoemaker - Citigroup Inc, Research Division

Okay. And then, as a follow-up, the 39 BOP stacks you said you won in 2012, does that more or less conform to what has been your historic market share? Or does it represent some market share gain? And in terms of your anticipation of a slightly down year for, in terms of BOP stacks, would -- do you anticipate a slowdown in offshore reconstruction? And is that just basically what -- why you think it'll be a little bit of a slower year?

Jack B. Moore

Well, let me answer the first question. I would say, our share probably reflects some positive trends from maybe what we've seen in the last 2 years on the pressure control equipment. One of the big reasons is Transocean. This is a company that Cameron had not sold a lot of new equipment to over the last decade, and I think our relationship with them and their confidence in us has changed in the last 12 to 18 months, and this is a great opportunity for us to reestablish ourselves with the world's largest offshore driller. But we've also been able to establish, I think, a strong platform with the newbuild program that Rowan has started. Our relationships with many of the other established drillers and their confidence in our ability to support them for the life of their assets continues to pay dividends for us. When you look at the 2013 market for newbuilds, we don't see as many as we did in 2012. I will tell you that when we were here a year ago, we didn't see as many as we ended up with in 2012. Though it's hard to say, Robin, exactly where this market will take us. We feel, though, that the activity on -- around newbuilds is really focused on next-generation performance, dual-capacity stacked rigs, deeper water, higher performance around just operating efficiency. You're going to continue to see this story play out, and it's going to give opportunities for us to sell new equipment and upgrade existing equipment.

Operator

Our next question is from the line of Ed Muztafago with Societe Generale.

Edward Muztafago - Societe Generale Cross Asset Research

Great order quarter there. I was just wondering if you could talk a little bit about on the Drilling side of the business, your comments on execution. I think one of the drillers highlighted that they had some problems with BOPs that had been reworked over and had to send them back. Can you just generally talk as to how you see the pipeline constraints in drilling playing out over the year?

Charles M. Sledge

Yes, Ed, it's Chuck. We've invested heavily in our CapEx program and the Drilling infrastructure. So our Singapore facility comes online midyear, significant machine tool additions. It's a challenge when the business has grown as much as it is. And so our team, though, is focused on it. We're doing everything we can to make sure we stay ahead of it. And I think, overall, our orders reflect that our customers are relatively comfortable that we're doing the right things in the business. So it's a process like all the times like this, but it's a good problem to have.

Edward Muztafago - Societe Generale Cross Asset Research

And so you would pretty much characterize your customer satisfaction is remaining pretty high even, given the constraints in the industry.

Jack B. Moore

I would say, we have a lot of work to do as an industry to get to where our customers -- especially on the drilling side -- are ecstatic about the service they get from suppliers. I think the challenge you have in this business is that when a customer in the drilling equipment is down, it hurts and it's expensive. And you've got to be very sensitive of that and that's the life we live. So as Chuck said, the investments we're making are hugely important to make sure our responsiveness meets their needs.

Edward Muztafago - Societe Generale Cross Asset Research

And I guess, as a second question, I think you were pretty clear in saying that the outlook for orders for 2013 was equally as good, if not greater, but driven more so by the subsea market. And I think the Street has been a little concerned about the slow pace in subsea awards. Can you talk a little bit as to how you see that playing out over the coming quarters? I mean, I think what we all expected this past year was a pretty rapid acceleration in the back half, which we never saw. Does that just -- the stack this year is being -- stack up this year is being even stronger with things shifted, if that's right word?

Jack B. Moore

That's exactly how I would see it. We're not in control of when those orders are awarded. But when you look at the number of projects that have already been tendered, and I'd say, a number have already been decided, who's going to be selected to perform on them, but have yet to be announced. I think you're going to see a very healthy 2013, and I think hopefully, we'll see that earlier versus later in the year that will give, I think, everyone some confidence in what we're saying. So we see it stacking up as a great year. I wouldn't characterize '12 as a bad year, we ended up with almost $2 billion in bookings, our second biggest year ever. And the only sizable project we really had in the year was Petrobras valves that we're building in our Leeds facility. So a lot of things that are on the lip of the cup and we just -- we have to be patient as to when they fall in.

Operator

Our next question is from the line of Kurt Hallead of RBC Capital markets.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

So I just wanted to make sure I get something clear. I thought you mentioned early on that $3.4 billion in the order intake for 2012 won't be repeated in 2013. So I guess you were just kind of delineating that subsea is going to probably a better year than 2012, but the aggregate order number, you're not going to match that $3.4 billion? I just want to clarify that.

Jack B. Moore

The $3.4 billion was Drilling and we do not see the Drilling order pace repeating itself in '13. When you think of all of Cameron, the $10.9 billion for the year, we think we have a good chance of seeing a better year than that in 2013.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay, great.

Jack B. Moore

And that is driven, a lot, by what we see happening in the subsea projects. You know what's great about Cameron, guys, it's having the portfolio we have and the diversity. And you've got Drilling business that had just a phenomenal year. We think this year will be subsea's year, and we've had -- you surround that with what's going on with our V&M, our Surface business and our Process & Compression business, it really gives us a pretty good, comfortable feeling about where we see the future.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay, great. And you mentioned that 2 elements to that earnings range guidance for the year, one of which is North America. My general understanding has been, I think, North America gas was kind of 20% of your revenue and North American aggregate was 20% of your revenue. It seems like a relatively small piece of the overall pie to have such a big impact on earnings, so I'm just looking for some additional color on that.

Charles M. Sledge

Yes, a couple of things. We also said, obviously, we've had some project mix shifts and what's going to go in '13's revenue versus '14's revenue. But Distributed Valves, just look at what happened with the orders, that's high-margin stuff. So if gas doesn't improve and if the rig counts stays where it is for an extended period, it's absolutely going to have an impact on Cameron.

Operator

Our next question is from the line of Jim Crandell of Dahlman Rose.

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

Jack, there's been some debate over these initial big West African awards on what pricing will be, and I know there's a lot of awards and supply and demand should put things in balance. I'm sure you have a good sense as to who will win what and what the price people bid on to win those. Do you think, for these early awards, that -- are you happy with how pricing will -- has worked out on them from an industry standpoint? Or are they still pretty price competitive?

Jack B. Moore

Well, Jim, I can't speak for others, but I can tell you that Cameron has a clear remit with respect to projects in West Africa specifically because of the risk involved. Because you better get it right on the terms and the pricing to take those risks into account. And I can assure you that anything that you see us book in that part of the world will have that baked into the consideration. Now I can't speak for the other guys, but I hope that everyone has seen the challenges that we have as an industry and in working in that part of the world, especially, as the local content requirements are dialed up. So you've got to be very conscious of it, and that's where we put a lot of focus on that. I told you all that we've been very disciplined around what we are looking at in that part of the world and making sure we get it right.

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

Can you comment, Jack, on whether you're happy with sort of the percentage of awards, or the number of awards you've won so far over in West Africa?

Jack B. Moore

Well, Jim, I think 2012 was a pretty lean year in terms of where Cameron stands in -- I mean in West Africa. And I think if you just look at the whole industry, there wasn't a whole lot awarded in that part of the world. So I would say that I'm comfortable based on where we are driving our tendering process. So if we are successful in winning projects in that part of the world here in 2013, I think you guys should expect to see much better margins than what you've seen historically.

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

Okay, good. And secondly, Jack, on Transocean, were you saying that you won not only the BOP stacks on the 4 newbuilds, but is Transocean adding a second stack on other of its floating rigs out there? Is that included in your comments as well?

Jack B. Moore

No. The orders we received in the fourth quarter from Transocean were for the 4 newbuild programs that have dual-stack capability.

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

Okay. But still 19 -- was it 19 in the quarter or 21? That's an extraordinary number and...

Jack B. Moore

Right. The oscar [ph] orders for Brazil were a big part of that as well. So those were the 2 biggies, plus we had a number of others. It's a pretty active quarter for the Drilling guys.

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

And where is the industry as a whole, Jack, right now in terms of ordering, let's say, a second BOP stack for deepwater floating rigs on existing equipment?

Jack B. Moore

Well, I think a lot -- we've seen some of it, Jim, but I think a lot of it really depends on the rig's configuration and how it was pitted out to support that additional weight and space. And I imagine, there's a lot of folks considering how they can accommodate an additional stack on those older rigs. And some will be able to, I think, and probably easier than others.

Operator

Our next question is from the line of Jeff Spittel of Global Hunter Securities.

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

If we could elaborate a little bit more on the subsea market. Another big order number in the fourth quarter from the smaller onesies and twosies types of orders. Is there any reason to believe that you can't assume that run rate is sustainable through 2013? And then, obviously, we can lay our arms on some of the larger projects, awards as well?

Jack B. Moore

Well, I think that what never ceases to surprise us is the number of smaller opportunities that are out there, but we don't talk about those as an industry, but I could tell you the other -- our competitors see the same thing. I mean there's -- as you've kind of planted your flag in certain projects, the extensions and the bolt-ons and the changes that get added to it become very meaningful. And it's normally pretty decent business. So when we look at our opportunities across '13, we have to take into consideration the additional work that we hopefully get to do with Chevron [ph], the additional work we hopefully get to do with BP and some of their projects in mobile and others that historically aren't big -- they're their not big projects on the radar screen, but they give you a very, very good base, as you've seen, our 2012 bookings to kind of reflect. And then, the big projects kind of become, as you say, the accretive opportunities. And you have to be very conscious of what you're biting into because they can be very consuming.

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Understood. Okay. And then, switching over to the FPSO market, and I know we haven't really talked that much about it in the last few quarters. It seems like things have been relatively quiet. But if you've got these large subsea projects that look like they're coming to fruition, is it reasonable to expect maybe globally that we're looking kind of 10 to 15 FPSOs per year as a reasonable build rate?

Jack B. Moore

Yes, I think actually it could be a little more than that. When you look at our Process Systems, if we just kind of look at the projects we're chasing in that space in our valves space, that's pretty meaningful, pretty meaningful opportunity. So we think that's going to continue to be pretty healthy.

Operator

Our next question is from the line of Jeff Tillery of Tudor, Pickering.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Jack, you mentioned that in your prepared remarks around the PCS order books and things flipping to the right. But also, it sounded like between this call and last call, you've intimated that you kind of tapped the brakes on them, taking out some orders until you figure out if you've got the margin picture right. Just how would you grade yourself in that so far? And just give us a little color on how you're thinking about the order book for next year within PCS?

Jack B. Moore

Well, I'd take the fourth quarter and that's if -- if we could capture that one, I'd be pretty happy. But this business, like others, has -- when you're in the project business, it gets a little bit bumpy sometimes. But what we found is when we launched this business unit in 2009 and in early part of '10, we got a little bit over the tips of our skiis in going out and taking on incremental work without really understanding the cost that we were going to incur to support it. And we've got religion around that. As you well know, and in the performance we had in the latter part of '11 and first part of '12. But I think you've seen some corners turned around that, and I feel pretty good. I feel pretty good. It starts with getting it right on the front end and then -- and given that a lot of these orders you're seeing materializing the revenue and margins now were things we've taken kind of under a different remit relative to what our expectations are and what we end up with in terms of margins. So it's caused us to be probably a little lighter in the bookings area than maybe some would expect, but it's also focused us on doing things, picking the customers we need to be focused on and the opportunities that yield the best value for what we're going to do. And I -- there's a ton of opportunities in our Process business, and our guys are more focused on what to do to get those right now that they ever had been. So we're looking forward to a good year.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

That's helpful. And then, one of the major offshore construction providers stumbled in terms how -- their outlook for next year, and part of the blame was around West African progress and whatnot, part of it is company-specific. But I just -- it leads to the question, West Africa is always prone to delays. Anything different in your mind around the West African opportunity today versus 3 months ago?

Jack B. Moore

Well, it's taken a lot of the things we've learned through hard knocks and building them into your tendering and pricing philosophy. The opportunities in West Africa are going to be huge and our customers we work with around the world have huge portfolios there that they need, they're going to need Cameron to help them develop. We just got to make sure they understand what the real costs of doing that are and build that into their thinking as they get these projects approved and take into their partners. And it's our -- our role is to make sure we help them understand that.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

My last question for Chuck. I mean, cash flow was great in the fourth quarter, balance sheet's in good shape. The guidance around share count would suggest that there's kind of a limited amount of share repurchase this year. Should we just think about that as upside potential if you proceed down a more aggressive path? Are you thinking about any sort of cash return this year?

Charles M. Sledge

Well, we're 35 minutes into the call and that's the first time that came up, that surprises me. But no, in all seriousness, we just -- our policy of issuing guidance is, we just tell you what the share count is in the model. It's not a foreshadowing of what may occur on share buybacks. You saw the incremental incentive comp and depressed EPS margins, that was because of cash flow. And so we need to put that cash to work and we're going to put that cash to work. We're going to go through our funnel. We've got CapEx taken care of, so that leaves a lot more to go down to the next 2 priorities.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Great. And then, my last question. Around OneSubsea, when that closes, should we expect any sort of numbers or guidance around that? Or...

Charles M. Sledge

Yes, we'll give you guys guidance there when it -- when we kind of get everything sorted out. Obviously, moving pieces and purchase accounting and stuff like that, but this guidance does not have any impact of OneSubsea in it, and we'll refresh the guidance once we've got everything squared away.

Operator

[Operator Instructions] The next question is from the line of James West of Barclays.

James C. West - Barclays Capital, Research Division

Chuck, I wanted to quickly just reconcile your guidance for this year versus, I mean, the huge order tailwind that you have right now. It seems to me just looking at how our numbers stack up versus what you guys are guiding to, that it's the first half of the year that is a little bit light, which would suggest that your NAM [ph] weakness and maybe, some project mix in the second half has not really changed since the somewhat soft guidance, I guess, you gave last quarter. Is that a fair statement?

Charles M. Sledge

Yes, I think that's probably pretty fair, overall.

James C. West - Barclays Capital, Research Division

Okay. So then, we should be thinking more about exit rate in 2014 as a very strong year rather than focusing on the next couple of quarters.

Charles M. Sledge

Yes. Remember, we've said all along, all the pricing improvements on the recent stacks we've booked, plus the subsea awards, that's all '14 given our revenue recognition model.

James C. West - Barclays Capital, Research Division

Right. Okay, that makes sense. And then, Jack, one question. On OneSubsea, you've obviously talked to all your customers since that's been announced. What's the customer response been at this point?

Jack B. Moore

I think they're very anxious to see it get launched. When we talk about optimizing reservoir production, when we talk about life of field management and the capabilities that a combination of Cameron and Schlumberger can bring, it gets their attention and they see the benefits of combining what we can do in terms of hardware, integration and optimization and advancing that technology through design changes and enhancements and even new products that we probably have yet to even know what they're going to be. With that geotechnical capability that Schlumberger brings, their wellbore construction knowledge, their innovation pace, it's just a great combination. And I think the customers see that and they're anxious to see it -- get it launched and up and running. And like everything, you've got to give it up and you've got to prove it, and we're anxious to do that.

Operator

Our next question is from the line of Brad Handler of Jefferies.

Brad Handler - Jefferies & Company, Inc., Research Division

Guys, maybe Chuck, could you just amplify a little on your guidance for DPS. I just wasn't -- there are a couple of moving parts in there, I wasn't sure I got it, on the revenue side as well some expectations for margin growth year-on-year.

Charles M. Sledge

Yes. When you think about margin growth, we should -- for the year, margins will definitely improve. They came in at 17.7% so you should see mid-100 kind of basis point improvement. So you're looking at somewhere between 19%, 19.5% there. Still impacted by -- we got lot of project, business going through that doesn't have the margin improvements on recent orders going through it. So when you think about that, that's probably about where it'll wind up.

Brad Handler - Jefferies & Company, Inc., Research Division

Okay, that's just a -- so I think what I'm hearing is, the -- that may not be driven in subsea per se, maybe subsea is still relatively modest growth, but even more optimism about the drilling side? Is that...

Charles M. Sledge

Yes. Well, look, what's going to drive the growth in DPS revenues is Drilling and Surface. Subsea is going to be relatively flat, that's a '14 event.

Brad Handler - Jefferies & Company, Inc., Research Division

Right, okay. And the overall outlook for -- I think you said faster-than-average revenue growth overall in DPS, so somewhere in the low double-digits, still, but faster than average?

Charles M. Sledge

Yes. Yes.

Brad Handler - Jefferies & Company, Inc., Research Division

Okay. An unrelated follow-up, then. Could you just give us a little more color on your CapEx in '13? Just sort of how it's directed, what are you addressing in that $500 million?

Charles M. Sledge

Yes. A couple of things. We need to do some capacity expansions in V&M. We're pretty much at capacity there, so we need to expand there. So we're going to do that. The majority of the CapEx, we're going to continue the drilling investments. Our customers expect it, we expect it. It needs to continue to occur, so you're going to have north of $100 million still going into Drilling. Subsea, we don't need any roofline, but there's opportunities for life of field and opportunities for rental tools that we need to invest in. And then, we have our business system which, obviously, we're continuing the implementation of. So that has some CapEx implications.

Brad Handler - Jefferies & Company, Inc., Research Division

Okay. That's helpful. I know it's, in a way, a little silly to think about '14, but just, is there -- should -- are we thinking about it in terms of it's still a hump to kind of get you to another level, and the expectation might be that CapEx falls off in '14, at least, to some degree?

Charles M. Sledge

I think when you take everything into account, meaning the shift from '12 to '13, CapEx probably came in $50 million to $100 million higher than we would have thought 6 months ago when we really looked at the market opportunities. So do I expect $500 million every year? Probably not, but we're going to continue to invest. And then, the impact of OneSubsea, we're going to have to figure out with that. I know that we did that to invest in that business, and we're going to really need to put some money into product development to take the whole Subsea Business to another level.

Jack B. Moore

So it's just a little early to declare.

Operator

Our next question is from the line of Bill Sanchez with Howard Weil.

William Sanchez - Howard Weil Incorporated, Research Division

Chuck, can you remind us on what kind of the order to revenue recognition period is on BOPs?

Charles M. Sledge

Gosh, when we're booking them now it's for '15, '16 deliveries, so it's quite aways off.

William Sanchez - Howard Weil Incorporated, Research Division

Okay, so it's that far. Okay. Because I guess I was just trying to reconcile, it still sounds like you're getting headwinds here with regard to the acquisitions in the Drilling side of the segment, just given the robust nature of the BOP awards you've had to date, I would just figure from a mix standpoint we'd perhaps start seeing some of that absorbed. But it sounds like that there's still a longer tail on that, is that fair?

Charles M. Sledge

Yes, yes. You're not going to see that until '14.

William Sanchez - Howard Weil Incorporated, Research Division

Okay. And then, just one question as it relates back to North America. You mentioned -- I guess, Jack did specifically in the comments that Distributed Valves are down 10% sequentially. You noted that the Surface business in North America was down as well. I guess, as we think about that business here first half of the year, I know there's still are headwinds, but is it safe to say that the rate of change is slowing in terms of those order declines? Or can you talk a little bit about that, please?

Jack B. Moore

Yes, let me just -- let me clarify that. Surface, actually, was up a little bit quarter-over-quarter in North America, and that's impressive, what these guys have been able to do. It wasn't as much as they had hoped it to be, but what you plan for to do and what you actually get can still be good news, and it was still good news relative to what was going on. Especially when we saw the decline in spending at the end of the year by many, many of our customers in North America, a lot of them just shut it off. And so you kind of start the year with a little less than what you started -- thought you'd start with. So that's kind of baked into a lot of our thinking here in 2013. But if you look at where we are today here in the third week of January versus where we were in December, yes, that rate of change is stabilizing, I think we're seeing a little pickup in the Distributed side of the business. Not as great as we would like it, but not as -- probably as bad as it was in December. And we'll watch it real close. But as Chuck said, that is going to determine a lot of -- kind of how we end up this year within the upper or lower end of that guidance as to how quick this North American business kind of switches back on and we can turn that into revenue in 2013.

William Sanchez - Howard Weil Incorporated, Research Division

Jack, I guess, one more for you with regard to the Subsea Business. I know it's probably evolved slower than you had hoped on some of the larger orders. You've, I think, done a good job holding onto your technical staff and your engineers, kind of, awaiting this ramp. Do you feel like you've properly anticipated and right-sized the business in Subsea for what you see now? Or is there a hiring spree, I guess, that needs to take place here as we anticipate orders during the course of '13?

Jack B. Moore

Bill, we've never really stopped hiring in that business because we are very, very bullish and optimistic on where we're going to be. And so I would say that we have a bigger team today than we did when we started last year to support our Subsea businesses. Getting it right, staffing these projects right on the front-end is so critical to the success. That's one of the things you learn, and I'm sure I'm saying the same thing for all of our competition in this respect, that you've got to have people, the right people, engaged early in these projects to get them right. Otherwise, they can go the other way on you. And so if you try and nickel-and-dime them on the front end, it's going to cost you a lot more money on the back-end. This is a business you've got to be seriously committed to. So we are -- we've got more folks focused in that business today than we did last year. When we get the OneSubsea team put together, we're going to have a lot more resources to support this business. It's a huge upside and we're excited about it.

William Sanchez - Howard Weil Incorporated, Research Division

So Jack, we should...Go ahead, Chuck.

Charles M. Sledge

I was just going to just reemphasize what Jack has said quite a bit is, we have to be selective on what we take in the order book in Subsea. There is just that much out there. We need to make sure that we can execute it so we can deliver it on time and on budget, and we need to get paid for that. So it is -- it really is tight out there, on capacity.

William Sanchez - Howard Weil Incorporated, Research Division

Yes, and I guess, one of the reasons I asked, too, is just as we thought about potential headwinds for you in future calls, it doesn't sound like -- given the comments, that we would hear about Subsea margin dilution as a result of a staffing issue.

Jack B. Moore

God, I hope not. It's pretty low right now.

Operator

Our next question is coming from the line of Waqar Syed with Goldman Sachs.

Waqar Syed - Goldman Sachs Group Inc., Research Division

I want to find out about your -- what you expect your working capital investments to be in 2013.

Charles M. Sledge

Yes, we typically target 20% of our sales increase as incremental working capital investment. That's our rule of thumb.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Okay. And then, you answered this earlier as well in terms of what to do with the free cash flow. How about thinking about a dividend. Is that completely off the table? Or is that something that you think about as well?

Charles M. Sledge

Well, we think about all the options for the cash. So we continually reevaluate what we're going to spend it on.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Okay. And finally, just on the LNG projects, we're hearing that there have been some delays on that. Is that something that you're finding out as well?

Jack B. Moore

I think LNG projects are kind of like our other deepwater projects. Waqar, they move to the right. I think you just have to understand that, especially in Australia, if you look at the cost of bringing these things on. I mean, everyone is kind of going, "Okay, let's kind of rethink how we're doing this and how we can make them more effective and cost-effective." So yes, I think everyone is kind of rethinking these projects all the time. It's a constant process, so it doesn't surprise me.

Operator

Our next question is from the line of Bill Herbert from Simmons & Company.

William A. Herbert - Simmons & Company International, Research Division

Chuck, so given the working capital relationship to revenues of about $0.20 on the dollar and guidance for earnings per share, free cash flow kind of lands somewhere close to $600 million for 2013?

Charles M. Sledge

Yes, I'm not going to comment on a specific amount, but it'll be clearly a lot higher than it was this past year.

William A. Herbert - Simmons & Company International, Research Division

Okay. So getting back to uses of cash and returning cash to shareholders, rather than sort of describe the different options, which I think we're well aware of, what's likely? Share repurchase, dividends or what?

Charles M. Sledge

I think... No, I think you'll see us buy more shares than what we did this past year.

William A. Herbert - Simmons & Company International, Research Division

Okay. So basically, it's a resumption of the share repurchase program. And remind us how much is left on your existing authorization?

Charles M. Sledge

It's a little north of $400 million.

William A. Herbert - Simmons & Company International, Research Division

Okay. Would you even -- so you talk about considering a dividend. So what goes into your thinking with regard to dividends versus share repurchasing, why wouldn't you do a dividend?

Charles M. Sledge

Bill, I didn't say we were considering dividend. I said, we'd think about all the uses of our cash. And it's a complex decision that our board thinks about, and that's really about all I can say on it.

William A. Herbert - Simmons & Company International, Research Division

Okay. Jack, with regard to Subsea in your summary comments before the Q&A, you said record Subsea orders expected for '13. Is that record for Cameron or record for the industry?

Jack B. Moore

I would say, record for Cameron. And I would, based on -- if things happen the way we are looking at it today, Bill, it could be a record for the industry. It should be. So there's enough opportunities out there but like those LNG projects, things do move to the right and you can't always...

William A. Herbert - Simmons & Company International, Research Division

Yes, I hear you. And so given that, we expect to exceed the $2.7 billion in orders that we saw in 2008 for Subsea, is what you're saying?

Jack B. Moore

Yes, yes. Exactly.

William Sanchez - Howard Weil Incorporated, Research Division

Okay. And do you expect those orders to be first-half weighted or second-half weighted?

Jack B. Moore

I hope we kind of see them equally distributed throughout the year. That would be very, very helpful to how we deliver and execute on these in '15 and '16. So I think there's -- I think we'll see some things happen in the first quarter and hopefully, this momentum will build. But I think we'll see some things shift, too. It's just inherent in what we always do.

William A. Herbert - Simmons & Company International, Research Division

Got you. And can we talk about Brazil a little bit. We've had a lot of questions on West Africa, but we haven't really touched on Petrobras. What's going on there with regard to the slipping to the right here. Is it simply deferral of capital spending, pronounced introspection given the growth that they've had and the inefficiencies that have been realized or what?

Jack B. Moore

All of the above. I think you can -- I think it makes a lot of sense for them to do what they're doing, and just step back and making sure that equipment is tied to a well and they're being very disciplined around that, instead of just one hand going out, buying a bunch of equipment because they know they're going to ultimately need it, versus trying to tie it in to when they will need it and that hopefully matches up with producing wells that generate cash flow so that they can pay for all of this. And obviously, execution's been a challenge down there for everybody because of just the ramp-up in demand, on services, people, third-party suppliers, it is -- all the -- everyone's moving through the same supply chain providers en masse. And so it just creates a huge constipation of trying to get things out the door. So I would say, Bill, we'll see a much more disciplined approach and rational approach in 2013 to orders. They still need equipment, they're still going to have a massive development program over the next decade. It's going to be, I think, a wonderful market for equipment providers like Cameron. But like everything else, you've got to be disciplined and patient with order process and make sure you get paid to cover the cost you're incurring. And that's it.

William A. Herbert - Simmons & Company International, Research Division

Okay. And last one for me. Chuck, I think on a call or 2 ago, you mentioned that we were bidding -- or it may have been Jack, on sort of Subsea projects at margins that were equivalent to basically peak levels from past cycle. If that, in fact, is a correct recollection on my part, when would we expect those margins to be realized on the P&L, '14, '15 or when?

Charles M. Sledge

'14 and beyond.

Operator

Our next question is coming from the line of Jim Wicklund of Credit Suisse.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

With the improvement in PCS, do we assume that a lot of that is NATCO, or what was formally NATCO, is that...

Charles M. Sledge

Well, it's our processing business, a combination of Petreco and NATCO. The answer is yes.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Okay. So you're starting to see -- and I don't mean to say this wrong, but after a couple of management missteps, you're starting to see those assets acquired 3 years ago start to deliver now?

Charles M. Sledge

Yes. We're very pleased with the fourth quarter from those assets.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

And can you give us some idea of the impact they should have, let's say, the first quarter versus a year ago?

Charles M. Sledge

Let's see if I have that handy... Jeff will get you that. Jeff will get you that.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Okay. But we should consider that those old assets are a decent part of the improvement in PCS?

Charles M. Sledge

Yes. Basically, Jim, you shouldn't hear us telling you why PCS is underperforming. It's not [indiscernible] anymore.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Okay. Second question, if I could. Jack, you talked about how things have changed for North America versus your outlook a couple of months ago. Can you talk about from 3 to 6 months ago, what else in your outlook has changed other than North America, either positive or negative?

Jack B. Moore

I think the Subsea outlook has changed for the positive. Obviously, our outlook on Drilling is a little better because of just the fact that we were able to do some things in the fourth quarter that -- in terms of awards that we didn't maybe think we would get. Our performance in Process & Compression is a nice -- I wouldn't say it's a surprise, it's just a nice confirmation that what we know these guys can do are doing. Really, Jim, our concerns around '13 really kind of evolved around the timing of how robust North America can come back, or how it can come back and recover and how that impacts some of our shorter cycle businesses. That's the biggest change from where we were.

Operator

Our next question is from the line of Scott Gruber of Sanford Bernstein.

Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division

Cameron had a phenomenal year in drilling aftermarket, sounds like sales are up about 26%. We're also hearing about sizable increases in maintenance spending from the offshore drillers. Do you think drilling aftermarket can deliver a double-digit type of increase in '13 after a phenomenal year last year?

Jack B. Moore

I don't think it's out of the question. It's really, a lot of our growth in aftermarket comes from folks building their spares back into their into their programs where they may have kind of let that to slide. I think we just have to look and see where some of our customers are with respect to that. But the commitment to stay focused on OEM service and OEM providers is rock solid. So our role is to make sure we back it up with great service, and that's where we're focused. And if we don't do that, then we are going to see that -- those opportunities slip away.

Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division

Do you think it's fair to say that you'll still be up in drilling aftermarket better '13 than '12?

Jack B. Moore

Our plans are to be. As you get more rigs coming into the market and commissioned into service, that will support continued growth.

Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division

And regarding OneSubsea, when do you expect that deal to close?

Charles M. Sledge

Well, we expect approval here, this quarter.

Jack B. Moore

We'll have to figure out the timing of closing from there.

Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division

Okay. And the $600 million to come from Schlumberger, that will be received in the U.S.?

Charles M. Sledge

Undetermined.

Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division

Okay. And what percent of your current cash balance sits in the U.S.?

Charles M. Sledge

The vast majority is in the U.S.

Jeffrey G. Altamari

Rob, we have time for one more question.

Operator

And that question will be coming from the line of Stephen Gengaro of Sterne Agee.

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

I guess, I have 2 questions to follow-up on DPS, and the first would just be, historically, Subsea margins were obviously, the lowest of sort of the 3 main components. As we go forward in late '13 and '14, should that gap close or should we -- I'm sort of thinking about this as margins, going forward, and how the overall mix impacts DPS margins in late '13 and beyond. How -- are the relative margins about the same as history, or are they changing?

Charles M. Sledge

'13 is relatively the same, but by '14, you should see the gap close.

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

And the gap, basically, seeing the Subsea work start to get back to prior high levels?

Charles M. Sledge

Yes. But we expect that business to be a mid-teens EBITDA, it's not. But that's where the expectation is. And I think with the orders and the margins, that -- in '14, that's doable.

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

Okay, great. And then, just the second question is, we've heard continually sort of less competition, better pricing on the Subsea side, is that trend continuing pretty strongly? I mean, it seems like it is from what you've said, I just wanted to confirm that.

Charles M. Sledge

Yes, I think, Stephen, that's exactly what we see. And as you see some of the awards that have already been tendered, or to be announced, I think every one of us has to stop and think about what are we going to take on next, and can we execute it effectively. And that's going to force us to be more selective, and that selectivity, hopefully, means better pricing.

Operator

Thank you. I'd like to turn the floor back to management for the closing comments.

Jeffrey G. Altamari

Thank you, Rob. This concludes our fourth quarter earnings call. And thank you, all, for joining us this morning.

Operator

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Cameron International Management Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts