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Cameron International Corporation (NYSE:CAM)

Q4 2008 Earnings Call Transcript

February 3, 2009, 08:30 am ET

Executives

Scott Amann – Vice President of Investor Relations

Jack B. Moore – President and Chief Executive Officer

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

Analysts

James Crandell – Barclays Capital

Robin Shoemaker – Citigroup

Stephen Gengaro – Jefferies & Co.

Jeff Tillery – Tudor, Pickering, Holt & Co

Geoff Kieburtz – Weeden & Company

William Herbert – Simmons & Company International

David Smith – JPMorgan

Jeffrey Spittel – Natixis Bleichroeder

Joseph Gibney – Capital One Southcoast, Inc

Michael Urban – Deutsche Bank

Kevin Simpson – Miller Tabak & Co., Llc

Joe Agular – Johnson Rice & Company

Operator

Greetings, ladies and gentlemen and welcome to the Cameron fourth quarter earnings release conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation (Operator Instructions). As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Scott Amann, Vice President of Investor Relations for Cameron. Thank you. You may begin.

Scott Amann

Good morning and thank you for joining us today. This morning you'll hear from Jack Moore, President and Chief Executive Officer of Cameron and Chuck Sledge, Senior Vice President and Chief Financial Officer. Jack and Chuck will offer some commentary on the results for the quarter and we'll then take time to field 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 associated news release.

With that, I will now turn things over to Jack Moore.

Jack Moore

Thank you, Scott. As you have all seen, Cameron generated record revenues and earnings in the fourth quarter. Record revenues of $1.5 billion were primarily driven by DPS, which is subsea at $300 million; our drilling systems at $295 million and surface systems at $300 million. And both our recip and centrifugal compression businesses generated $180 million of revenue in the quarter combined.

Bookings for the quarter finished at $1.2 billion versus $1.5 billion in Q4 of ’07. The biggest differences in subsea, approximately $200 million difference versus Q4 of ’07 and remember that we booked Usan in Q1. Our drilling systems was down $200 million versus our ’07 numbers were. Surface Systems however was actually up 18% versus last year’s quarter. Our Q4 bookings did include a reversal of two subsea drilling stacks worth approximately $140 million plus approximately $20 million in our other businesses combined primarily within our centrifugal business.

We did book 31 subsea trees in the quarter, the largest order came from Noble Energy where we were awarded 10 trees for their Benita project in Equatorial Guinea, the first stage of a multi-well development program. We also made radar release for the first of several projects we will see in the future from BP and our Gulf of Mexico frame agreement as well as the second phase of the high pressure / high temperature Tahiti project for Chevron in the Gulf of Mexico as well.

Backlog closed the year at $5.6 billion, which is 31% greater than the $4.3 billion of the year ago. Chuck will give you more color on the financials, but needless to say this was a great quarter for the Cameron. I will however highlight one financial metric that is and that we finished the year with $1.6 billion in cash. I would like to move on and talk about the operating environment and where we are in today and its impact on Cameron.

As you know we are organized in three operating groups: our DPS, our Value and Measurement and our Compression groups. So 11 different businesses that participate across the wide spectrum in the oil and gas delivery cycle, but in the current environment our 11 businesses can best be characterized by the following market segments. First to the short cycle market, primarily the businesses that are exposed to the North American market. This is a market where we essentially build and ship what we book within the fiscal year.

Said in other way this is the business where we eat what we kill. All of our distributed valves, the good portion of our measurement businesses will fall into this category as well as the portion of our surface, our engineered valves, our land drilling and our flow control businesses. We do not claim to have any greater insight into the market forces for the segment of our business, than many of those you've already heard from in prior calls., but we do expect to see our business correct by approximately 20 to 30% in the U.S. in '09 and approximately 10% internationally. The magnitude will be accentuated by the actions with specific customers whom we are working for in this market.

The second category would be the infrastructure of project businesses, the ONG facility, refineries, processing plans, pipelines and even large scale production platforms that we service through our various businesses. All of those businesses that service these markets will be our process valves, compressions, parts of our separation, surface and engineered valve businesses.

Many of our customers have already committed to large sum of cash to start these types of projects and we'll see them improved. However, several that were set to be launched have or will be delayed and some may be canceled all together. The good news is that we have some degree of visibility for these projects with the measure of our backlog to be shipped in '09.

Third segment would be the longest cycle deepwater related projects. This represents approximately $4 billion of Cameron's backlog primarily in our subsea and drilling systems businesses. As for the drilling systems businesses, as I've said we have two cancellations that have taken place to make one belief you will not expect to see a market for new orders in '09. The two deepwater stacks we discussed in Q3 calls have been reversed in the quarter, and let me reiterate that our contracts ensure that we will recover all of our costs at margin.

As per any additional recancellations while we can’t predict with the future holds in this environment, we have no indications that any additional stacks in our backlog are currently at risk. While cancellations for drilling equipment should be a strong indicator that this market may be at risk in the future, we do see opportunities with several deepwater stacks to be ordered in '09 mostly targeted at the NOCs.

On the subsea hardware side, we have seen a more conscious effort to stay the course with both ongoing and intensive projects to operators. Underscoring the significant investments these guys already have in place as well as a longer-term view as the role deepwater production will play in their portfolios. However with all in the $40 to $50 environment, we expected some operators may rethink their project economics, which means redesigning field layouts to produce more wells to fewer FDSOs or reduce the number of flow lines and overall take or eliminate discretionary cost in the hardware.

We actually welcome these challenges to find ways to improve the economics of future projects and while we believe practical technology and field-proven solutions will pay dividends for Cameron in this environment. Cameron just completed the year what we booked a record 174 trees with 17 different operators around the world.

Based on the quest data we received last week Cameron clearly was the market leader for subsea systems booking in ’08 and this is the fair track than where we were in the last down cycle when were considered strictly a product supplier. These results underscore that the investment we have made in people, infrastructure, technology and relationships do indeed payoff. So, we expect the long-term delivery of our deepwater markets will continue to pay big dividends from these investments, and this is why we continued to invest in this market.

I'm going to switch to the subject of cost reductions. Each of our businesses will be affected differently based on the markets they serve and the backlog that resides within them. And each are responding and adjusting their cost structures accordingly. We also expect our costs would be challenged for both customers and competitors alike. This is where the sizable investments we have made in manufacturing technology and lower cost locations will pay off and I will assure you that we will be committed to protect those markets we have worked so hard to develop.

Before I turn it over to Chuck, let me highlight a few points important for you to remember that has and will sustain Cameron to this environment and allows us to enter the next up cycle a stronger competitor. The diversity in the geographic breadth of our businesses, the relationships with our customers, our competitive cost structure, our balance sheet that gives us lots of flexibility, experience of our management team and the confidence our customers have in the Cameron Brand.

And now I'll turn it over to our CFO, Chuck Sledge to discuss the financials and guidance for ‘09. Chuck?

Charles Sledge

Thanks Jack, a few additional comments on our results and expectations. In spite of how the markets have ended in 2008, Cameron had a great year. We ended the year with a challenge of delivering 25% more revenue than we did in 2007 and our team delivered. In addition to the revenue increase, we delivered a 27% increase in EPS and put more cash in the bank.

As you saw in the release, earnings per share for the fourth quarter were $0.75, which excludes a non-cash charge for terminating our U.S. plan, which I will cover in a little while versus the $0.61 in the comparable period of 2007. EBITDA margins were 19.2% up from 17.8% in the comparable quarter.

For the year, our EBITDA margins were virtually unchanged from 2007. We generated $470 million of cash flow from operation during the quarter, almost $1 billion for the year. Our guys did a great job shrinking the working capital requirements of the business despite revenues being up 25%.

As a result, we ended the year with $1.6 billion in cash and no net debt outstanding. We see the capital markets continuing to be tight for the foreseeable future. So, the flexibility that we have would be a source of strength in 2009 and beyond. We invested $112 million in CapEx during the quarter, $272 million for the year. The vast majority of this CapEx represents investment, which improve our efficiency and lower our cost and the challenging environment we are facing, these investments will serve as well.

We closed our two acquisitions during the quarter, with an aggregate purchase price of $94 million vast majority of which related to acquisitions of KB, which will allow us to enter the low pressure DLP market. We still see evaluation gap between buyers and sellers, but we should be able to bridge this gap once people get a better view of the length and depth with this downturn. Our balance sheet will allow us to quickly capitalize on opportunities as they present themselves. We've repurchased 2.7 million shares during the quarter at an average purchase price of $22.57, this leaves us $7.8 million shares left under our authorization.

We completed the termination of our U.S. pension plan during the quarter, do you recall we announced this termination in 2007. As a result of this, we recorded a non-cash $0.08 per share charge in the fourth quarter. We actually wound up up with the $5 million surplus in the plan as compared to our original view of needing $10 million to $15 million to terminate this plan. This excess will be used to fund the company's future matching contributions to our 401(k) plan. With how the financial market they performed I shudder to think of how much additional cash Cameron would have had to use to fund our pension plan had we not made the decision in 2007 to terminate it and take appropriate steps.

As Jack mentioned, we ended the year with $5.6 billion of backlog, which provides us a good runway as we deal with this downturn activity. I will point out that our ending backlog reflects approximately $160 million in cancellation, what Jack mentioned, and also $150 million downward adjustment due to the strengthening of the dollar we experienced during the quarter.

With respect to 2009’s outlook, we are guiding through a $1.75 to $2 per share. Embedded within this guidance is the assumption that approximately 60% of our backlog will ship in 2009. This percentage is somewhat lower than, which we would ordinarily expect for Cameron, but that's due to the fact of the large subsea orders we booked like in the year where the revenue really won't start materially impacting results until 2010 and later. Our guidance implies a 20% to 30% drop in our booking built business in 2009. And this business amounted to about $2.3 billion in 2008.

Our CapEx should approximate $200 million for the year, a $100 million of which relates to our facility expansion in Malaysia and our new surface facility in Romania. The $100 million is evenly split between these two facilities. D&A should be about $150 million. While we do have a lot of cash on the balance sheet, we have it in pretty conservative investments. So as a result our net interest expense will go up about $50 million on a pretax basis ’08, ’09.

Included within this increase is a $17 million increase in interest due to the new accounting rules on converts. In addition, the reported amount of our debt will decrease by $38 million as a result of this accounting. The tax rate should approximate a 31.5% and our share count should be around 220 million to 222 million shares.

With that let’s open it up for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting the question-and-answer session. (Operator instructions). Our first question comes from Jim Crandell with Barclays. Please state your question.

James Crandell – Barclays Capital

Good morning.

Jack Moore

Good morning Jim.

Charles Sledge

Good morning Jim.

James Crandell – Barclays Capital

Jack, could you address what do you see in terms of the pushing out of the deepwater or subsea projects, those projects which are first of all that are at the stage or near the stage where you would expect subsea tree orders and then also deepwater projects that are more in the earlier stages?

Jack Moore

Well let me as I said there a conscious effort to see the existing projects through. I think while operators are admittedly nervous about the price environment, they're still far down the road, Jim with the current projects, but we don’t really see anything that is tendered or in the works being shoved out to the right, to any material degree. I expect, we’ve always seen the big projects move to the right, and for not all together reasons of price, the political issues and our partner approvals and others, and I just think some of that is probably going to be a little bit more testing in this environment, but I don’t see anyone backing away from the commitments they have already made.

James Crandell – Barclays Capital

So, would you think that we could see subsea tree orders for this year in the same general range as 2008?

Jack Moore

You know I haven’t seen quest's forecast for ‘09. The last forecast I saw, and they do a pretty good job of handicapping the future with a number that was probably going to be 10% greater than '08’s number and the number we have provided is slightly less than 400. So could have been 450 to 500, but I think it depends on some of the larger projects like Cluv and the satellites and Block 31 second phase. We’ve already made the decision that we are going to probably expect that in 2010 instead of 2009, and it could happen in '09, but we think it’s a 2010 event. So, the timing of those when they land makes a big difference on the quest numbers because they are such big numbers.

James Crandell – Barclays Capital

Okay and last question, in terms of deepwater rig orders, are you looking at the same timing in general of deepwater rig deliveries that you were six months ago as far as the defects, the watering of BOP stacks?

Jack Moore

Yes I think, could you see the lead time for any future deepwater stack shorten with what’s going on the shipyards maybe but, the rigs are still the long pole in the tent.

James Crandell – Barclays Capital

Okay. Thank you.

Jack Moore

Thanks.

Operator

Our next question comes from Robin Shoemaker with Citigroup. Please state your question.

Jack Moore

Hi Rob.

Robin Shoemaker –Citigroup

Yes hi good morning. I wanted to ask you regarding the backlog. I think Chuck you described in the last call how you have no letters of intent in the backlog and that you have very strong cancellation provisions. So, what actually is your net financial impact from a cancellation of this magnitude that you have in the quarter?

Charles Sledge

Well we are still working in through with our customers exactly what the cancellation charge will be. We weren't very far along in those two projects and so there won’t be a material impact at all on our financials as a result of that, but we will get our cost back at a margin. And so that’s the way our contracts work and that’s what we expect our customers to honor.

Robin Shoemaker –Citigroup

And so I think you mentioned that in the previous quarter you had six deepsea stacks that were ordered and this I guess was two of those, and so were they all with the same customer or?

Charles Sledge

I’ll tell you. First of all, only one of the cancellations, was one of the six I had mentioned previously on the call. One of them has a contract. With respect to the rest of the uncommitted, if you will rig, but they don’t have contracts, that backlog now stands at about $400 million because we took an order in the fourth quarter or the operator does not have contract, but, the cancellations were not with the same customer.

Robin Shoemaker –Citigroup

Okay. Just finally then on the compression business such an economically sensitive business I guess overall what is the outlook there for '09?

Charles Sledge

Well. I think you’re separating them on both centrifugal and recip. Recip, our businesses given that the gap, I think they have done a great job of internationalizing that business and opening up some new markets that we have not experienced opportunities in nearest past. It is going to cushion them quite a bit in ’09. But on the centrifugal piece, we are really, the GDP driven project related business. We don't expect ’09 to be a very lucrative year at all. We expect it to be down significantly from where we were in ‘08.

Robin Shoemaker –Citigroup

Okay. All right. Thank you.

Charles Sledge

Thanks.

Operator: Our next question comes from Stephen Gengaro with Jefferies. Please state your question.

Stephen Gengaro – Jefferies & Co.

Hi, thank you, good morning.

Jack Moore

Good morning Stephen.

Charles Sledge

Good morning Stephen

Stephen Gengaro – Jefferies & Co.

I have two things if you don't mind. The first on the subsea side. What are you seeing as far as pricing and sort of the competitive landscape and how the other guys are acting right now as far as new orders are concerned?

Charles Sledge

Well. I think Stephen everyone has been pretty disciplined from what we experienced in the projects we have worked on, probably a good data point would be one coming up with pretty sizable Petrobras tender that is soon to be put out. And I think that may give you a good indication of how everyone behaves but haven’t seen it, yet.

Stephen Gengaro – Jefferies & Co.

So, the recent awards that you guys have announced are the margins comparable to what you were winning throughout the year in ‘08?

Charles Sledge

Yeah. We looked at the Nobel order. We’ve got a great track record with Nobel. That project, we have been working with them on for a while. The BP-Gulf of Mexico frame agreement, the Tahiti project, those where you have good relationships and proven accountability with your customers, I think you would expect a more reasonable behavior. Obviously, we have to ensure that our customers feel that we are in a competitive environment, but the value proposition there is really driven more from the history and the performance you have already taken with them. So, we haven’t really seen or experienced a whole lot of anything unusual in those projects.

Jack Moore

Steven, I’ll also add that these projects are very complex and we take on a lot of risk when we take on these projects, and so for a competitor to start dropping its price, but still maintain that same level of risk, get the dangerous situation for our people to get themselves into.

Stephen Gengaro – Jefferies & Co.

Okay, thank you and then just as a followup. When we look at ’09, I imagine they are based on those comments that their subsea margin should be let’s say more to what we’ve seen. Can you talk about the margin deterioration, expectations in the other areas?

Charles Sledge

Well, we expect, short cycle businesses is where we will see the most tense pricing environment. We’ll put it that way because we have a lot of competitors and lot of it's regional. And while we expect to get some relief from our supply chain and our customers obviously want to get as much as that as they can, the timing of that is going to be difficult to always guage. So that’s where we will see most of our margin compressions in the short cycle businesses.

Jack Moore

But we had a great margin year in 2008. But I think unfortunately, and probably in ’09 we’ll have to give some of that back in order to make sure we maintain our share in the short cycle businesses.

Stephen Gengaro – Jefferies & Co.

Great, thank you.

Charles Sledge

Thanks Steven.

Operator

Our next question comes from Jeff Tillery with Tudor, Pickering, Holt & Co. Please state your question.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Hi, good morning.

Jack Moore

Good morning, Jeff.

Charles Sledge

Good morning, Jeff.

Jeff Tillery – Tudor, Pickering, Holt & Co.

In both the subsea and drilling equipment businesses, how much if any are you seeing kind of your existing order book in the deliveries for those orders pushed further out?

Jack Moore

Not much at all. In fact it's hard to I can't really point to anything specific. There is nothing really that we're having to reschedule or push out in those long cycle deepwater projects. Where we are seeing some of it, Jeff, is in some of the infrastructure projects I’ve talked about where large platforms that may not be coming on as quickly as the operators would like. They are asking us to hold off on shipping some of our equipment. And as you know that we’re not on PLC that can create some challenges in terms of timing that.

Jeff Tillery – Tudor, Pickering, Holt & Co.

And could you just talk or provide some more color just on the businesses within Valve and Measurement and what sort of order outlook looks like there? I mean some of these engineering valve projects were on a drying mode. Are those been pushed or canceled? Can you just provide a little more color, which you see in those businesses?

Jack Moore

Not much of them are canceled. We've got a pretty large list of projects we're still tracking, but we are seeing some of that move to the right and we would expect that on the distributed side, which is all North America 99% of it. That business is up substantially from where we were. Third quarter was our watermark and but Jeff I think booked $136 million. And fourth quarter we booked about $70 million, so it’s almost half. And so you could see how quick that order rate responds to what’s going in North America activity. But on the infrastructure project as I've said, we'll see more sensitivity on those move to the right and that’s going to effect a little bit of the timing of the larger engineered down projects, but they're still going to have - the confidence is there, the engineering firms and the customers who are working on that they're still very confident these things will happen, it is just a matter of when.

Jeff Tillery – Tudor, Pickering, Holt & Co.

And my last question just on the shorter cycle business. How much pricing weakness have you seen to date? And is that net pricing reduction meaning a kind of in excess of what your raw materials have gone down. So can you just provide a little more color, what you have seen in the past three months?

Jack Moore

It is really more regional. It can be in some cases as much as 20%. In other cases it may be five and I am not either the net of that is that I wish I could say we are seeing raw material cost come down at a rapidly declining rate that’s not necessarily the case. A lot of our steel components have yet to correct is one would expect when you see what's happening with components in steel. We would obviously get some relief on the transportation cost with lower cost fuel, but well we are working close with our supply chain to make sure we capture those. It’s just a matter of timing. So the net impact within a day, we hope that net is zero. But we’ll probably have some disconnects as we try and match these on the way down, and as Chuck said we worked hard to capture some of these markets and we are going to work hard to keep them.

Jeff Tillery – Tudor, Pickering, Holt & Co.

All right, and thank you very much.

Jack Moore

Thanks.

Charles Sledge

Thanks Jeff.

Operator

Our next question comes from Geoff Kieburtz with Weeden. Please state your question.

Geoff Kieburtz – Weeden & Company

Thanks. Good morning.

Jack Moore

Hi, Mr. Kieburtz.

Geoff Kieburtz – Weeden & Company

First the definitional question, Jack when you were talking about the three segments, you started with the short cycle, and said you thought it would be down 20% in the U.S. and 10%?

Jack Moore

20 to 30 Jeff, I’m sorry.

Geoff Kieburtz – Weeden & Company

20 to 30.

Jack Moore

In Cameron's businesses.

Geoff Kieburtz – Weeden & Company

Right, and Chuck was talking about a 20 to 30% drop in the book and bill. Is the book and bill the same as the short cycle?

Jack Moore

Yes it is. That sums really the distributed some of our after market businesses related to -- like land drilling. Keep in mind that we’re very sensitive toward the rigs that are coming down in the U.S. or in certain markets we’re not really a player, and others we are more significantly in place. So where those rigs come down, where we might see a 30 to 40 drop in rig count, it may not impact Cameron significantly because we tend to play in the high pressure deeper formations is where the bigger parts of our booking revenue opportunities are at. So we're somewhat sensitive to that.

Geoff Kieburtz – Weeden & Company

So, you are using your three-segment definition the short cycle business, you’re looking at 20% to 30% all in decline in what was about a $2.3 million revenue base?

Jack Moore

On the North America piece only, what we are seeing in the other pieces is about a 10% internationally.

Geoff Kieburtz – Weeden & Company

Okay, and a split in that short cycle business between domestic and international?

Jack Moore

Well, 30% of our revenues are U.S. or North America based and of that about 80% is natural gas, but in this environment those get a little bit hit too, so activity, so and that’s some of the math you can get too.

Charles Sledge

Yeah large portion of that 2.3 is North America based.

Geoff Kieburtz – Weeden & Company

Right, more than half, right?

Jack Moore

Yeah.

Geoff Kieburtz – Weeden & Company

Yeah, okay. And then of the infrastructure segments, can you give us a ballpark of the split between the infrastructure and the long cycle businesses where you are talking about them in revenue terms?

Charles Sledge

Yeah, I would say that 20% of our backlog is in this infrastructure related project related business that’s not the long cycle piece and so that’s about $1.2 million of our backlog somewhere in that range.

Geoff Kieburtz – Weeden & Company

Right, okay. And I wanted to get that established before asking the question I really wanted to ask which is you are the first company, at least that I've been on a conference call that’s going out their limit, put a 2009 guidance out there.

Jack Moore

Thank you.

Geoff Kieburtz – Weeden & Company

Beside asking you the question, what I want to understand is the assumptions that you’ve used, it looks to me from your comments that the primary driver here is your input assumptions about what's going to happen in the North American market. Am I correct there? Is that the biggest variable and your calculation of guidance?

Jack Moore

It’s back and how much of the backlog we can get out right during the year.

Geoff Kieburtz – Weeden & Company

Okay.

Jack Moore

It's lot of backlog and the challenge is how much can we get out. We over achieved IN end of 2008.

Geoff Kieburtz – Weeden & Company

Okay.

Charles Sledge

So, we will try to do that again.

Jack Moore

And after giving you guys some level of guidance. See the amount of range it may be a little broader than we have in the years past.

Geoff Kieburtz – Weeden & Company

But it’s narrower than anyone else’s.

Jack Moore

We may have a different conversation at the end of the year but I’m just telling you that with the backlog we have, we have some degree of visibility to this business. As we do in 2010, that’s the beauty of Cameron’s diversity and if we are also attracting business it would be very difficult for us to give you guidance.

Geoff Kieburtz – Weeden & Company

What I’m trying to get to is, what have you embedded in your $1.75 to $2 in terms of U.S. rig count?

Jack Moore

We're down. Let’s say the bottom is going to be somewhere in the 1100 to 1300 range and it depends a lot Geoff, you got to remember on where those rigs go down, and we could see rigs fall, we’ve seen 40 to 50 rigs a week fall and where it ends no one knows. And you can pick a number from 700 to 1300, and as we try and gauge that it's really who the customers are. Remember that we work for mostly in our higher valued short-cycle business. BP, Exxon-Mobil, Chevron, Shell, Total, these guys have a longer-term view of these cycles. They are not as quick to react to taking rigs down overnight, they are not yet exposed to the credit issues, that some customers and the independants that we don’t look for all. And that’s gauged into our thinking where we may not take a particular business down 30 or 40% because we think the rig count is going to go down that much. It may be something less than that, because of who we’re working for and where we are positioned geographically.

Geoff Kieburtz – Weeden & Company

Okay. But if the rig count were to look like it’s going south of a thousand you would have downside risk to your guidance?

Jack Moore

That’s what our range is what it is.

Charles Sledge

Absolutely we would have the downside risk to the $1.75.

Geoff Kieburtz – Weeden & Company

The last question I apologize for all the time, but the reversals, as you look at your backlog. If you look at your backlog three months ago, were the two orders that were canceled already recognized as being high risk or not?

Jack Moore

One of them was.

Charles Sledge

One of them was and one of them was not.

Geoff Kieburtz - Weeden & Company

Okay. With the fact you had a non-identifiable risky order in there, how do you feel about the risk of further cancelations in any part of your backlog right now?

Jack Moore

Geoff, I couldn’t predict that.

Geoff Kieburtz – Weeden & Company

Okay. All right, thanks.

Jack Moore

We know there is potential out there, but we don't see any today, but it's hard to predict?

Geoff Kieburtz – Weeden & Company

Okay. Thank you.

Jack Moore

Thank you, buddy.

Operator: Our next question comes from Bill Herbert with Simmons. Please state your question.

William Herbert – Simmons & Company International

Thanks good morning.

Jack Moore

Hey Bill.

Charles Sledge

Hi, Bill.

William Herbert – Simmons & Company International

Back to the pricing issue, I am curious as to how the steel cost inflation that we witnessed over the past year is still present to the pricing period on for your parts and services I mean, based upon the latest project or haven't seen anything obvious that how should we view that going forward?.

Jack Moore

I would tell you Bill that is sort of, we thought it would be a bigger opportunity when profits started several months ago.

William Herbert – Simmons & Company International

Yeah.

Jack Moore

And we work it pretty hard. Cameron, when you look at all the collective businesses we have, we bought a lot of steel. And we have a pretty aggressive purchasing council that’s enterprise wide. And we are seeing some of the shorter cycle businesses of casting and things like that and more opportunities to reduce cost because of supply changes much broader. But we have also seen major steel companies take a lot of capacity out in the last 90 days. And that's not creating a huge cost discount to those that are buying some of the higher end steels, the half round steel contents that we use for [pretty] since a lot matter in our big bore in big block projects for both subsea and things like engineered valves and even the drilling businesses.

William Herbert – Simmons & Company International

Okay.

Jack Moore

It may, but we just haven’t seen it as of yet. We expect we will see some, but it is very hard to handicap there.

William Herbert – Simmons & Company International

Right. We just assume that you benefited from I believe raw material surcharges and price inflation due to raw material cost inflation, you did necessarily see huge net pricing gains -- for gross pricing you certainly did. And I just can't believe that your consumers wouldn’t demand a corresponding reduction in pricing given what we have seen with regard the reduction in input cost.

Charles Sledge

Yeah they asking for, you just got to educate them what actually is happening in the market. And I think customers around now do you expect to see their cost come down substantially from where they were because of the inflation they have seen. But keep in mind, Cameron's scope on the major project whether it’s deepwater or even land is really nickels compared to rig cost and pipe and drilling fluids and pressure pumping and another services that really make up a lot of the cost and some of these developments.

William Herbert – Simmons & Company International

Okay, second question, you have a $125 million subsea project with that [ASA] just curious as to how that has proceeding any concerns about receivable in that sort of thing?

Jack Moore

Great question. And it's doing just fine. Have a great contract. What we do is obviously we get a lot of cash upfront.

William Herbert – Simmons & Company International

That was going to be my question.

Jack Moore

Absolutely, the cash collection, on our subsea projects is wonderful.

William Herbert – Simmons & Company International

Okay.

Jack Moore

Something we insist on in the project. And so that is proved to be wide in this case.

William Herbert – Simmons & Company International

So the milestone payments are on time and on schedule?

Jack Moore

Yeah.

William Herbert – Simmons & Company International

Okay. Well that’s great. And then last question for me is with regard to some of the subsea orders that were on the radar screen for ’09. The satellite 30 to 60 trees, Tahiti, we've already done a good job, Petrobras is 300 tree tender what’s the timing of these?

Charles Sledge

Petrobras is been slam to the right for a couple, I think it's slipped for a couple of months now, but I expect that will happen in this quarter. When will all know who won what, with Petrobras you just can't predict, but it will happen probably between now and the first half of the year.

William Herbert – Simmons & Company International

And remind me these are for standard trees not the pre sold trees, right?

Charles Sledge

These would be not pre sold, these would be the standard what they called their frame agreement type call lots.

William Herbert – Simmons & Company International

Okay.

Charles Sledge

As far as I know, the satellites are still under review, we expect Huskey to be active this year [inaudible], there is nothing advert that would not keep that from happening.

William Herbert – Simmons & Company International

When does Cluv get announced do you think?

Charles Sledge

Sometime between now and the end of the year.

William Herbert – Simmons & Company International

Remind us how large that is?

Jack Moore

After the first half of the year, so that’s probably going to happen.

William Herbert – Simmons & Company International

How large is that Chuck?

Charles Sledge

I believe it's 36 trees.

William Herbert – Simmons & Company International

Okay great.

Charles Sledge

Lifetime we looked.

William Herbert – Simmons & Company International

And the case satellite you've said was 14 but you weren’t sure?

Charles Sledge

I am not sure when that would be awarded.

William Herbert – Simmons & Company International

All right, guys, thanks a lot.

Charles Sledge

Thanks, welcome.

Operator

And our next comes from David Smith with JP Morgan. Please state your question.

David Smith – JP Morgan

Hi good morning.

Charles Sledge

Hi David.

Jack Moore

Good morning, David.

David Smith – JP Morgan

You've got negative net debt, the share price down 60% from the high-end and presumably narrowing bit as spread on acquisitions target. Could you rank your priorities today for deploying cash and maybe provide a little color around that ranking?

Jack Moore

Yeah, David this is same as we have always been. The first mission of Cameron is to invest in ourselves to make sure we have the latest technology machine tool technology, the right R&D level to review this as a marathon amount of spread. So, that’s the first priority, I think you've seen that in the level of CapEx we've spent over the last three year. The second is to look for accretive acquisitions that look like Cameron manufactures, high after-market content consolidation type obviously we've like the best. And then thirdly is to retire or return cash to the shareholders through the share buyback. We were quite active last year in that and then we will continue to buyback shares at a measured pace.

David Smith – JP Morgan

Thank you. Also I thought I heard you comment about selling subsea stacks to the NOCs in '09. And could you provide some color around that comment?

Jack Moore

Well I think everyone read about what Brazil intents to do with their whole pretty softer developments and to spend a lot of money on the infrastructure, locally to drive that program. And we do expect that Brazil will be a borrower of deepwater stacks in '09. I just couldn’t predict the time, there is some variables they go with that but they are very committed to move forward. I think, guys let me tell you, deepwater long-term is where it's going to happen. And whether you're talking to Cameron or FMC or NOB I think we'll all tell you that we are long-term variable as shown in this piece of the business and you'll see customers continue to invest in the technology that’s going to take them there.

David Smith – JP Morgan

Okay great thank you.

Jack Moore

Deepwater stacks are going to, that’s the only way we know to get down to the bottom of the [ocean] floor at this stage of the game.

Operator

Our next question comes from Jeff Spittel with Natixis Bleichroeder. Please state your question.

Jack Moore

Hi Jeff.

Jeffrey Spittel – Natixis Bleichroeder

Hi guys. I get that all the time.

Jack Moore

Not from your relatives I hope?

Jeffrey Spittel – Natixis Bleichroeder

They call me things that are probably a lot worse than that. I guess first question regarding pricing in the short-cycle businesses. Can you talk to us about how you weigh pricing versus defending market share in an environment like this?

Jack Moore

We’ve got eleven guys - smart guys running their businesses, and we give them a little bit of rope in that respect. It depends on who the customer is and where is that. I mean we're not going to do an exhibit. As Chuck said, on the big projects, where you take on a lot of risk and we got guys coming to us and saying, “Hey this is strategic, we kind of get real nervous when someone says that, but things that we know that we do very well and things that’s parts of business that we have a real good feel for in terms of our ability to execute and control all the cost because maybe we built 80% of it. We probably take a little more of the risks with those kind of opportunities, so it’s kind of a case-by-case basis, but to some degree we leave that to our businesses, to the guys running them to make those costs. I mean they build their budgets and they know what they got to do to deliver.

Jeffrey Spittel – Natixis Bleichroeder

Gotcha. I guess related to the short cycle businesses you talked in the past about your mix of unconventional deep gas production in North America and that customer base. Can you talk to also a little bit about how that’s holding out versus sort of the more traditional areas in North America right now?

Jack Moore

Well actually the unconventional things in Haynesville for instance where customers had huge investments in the properties already just to release and nothing else or rig contracts that they are committed to. That they are going to continue to spend their capital in those specific area, those tend to play stronger the Cameron’s strength. And so those, while we are going to see activity decline in those areas as well that may not be as significant with those particular rigs as it is with some of the more conventional very short cycle, even shorter cycle, but shallower less productive, less desirable drilling opportunities.

Jeffrey Spittel – Natixis Bleichroeder

Okay, thanks very much.

Jack Moore

Thanks.

Operator: Our next question comes from Joseph Gibney with Capital One Southcoast. Please state your question.

Joseph Gibney – Capital One Southcoast Inc.

Thanks good morning everybody.

Jack Moore

Thanks Gibney.

Joseph Gibney – Capital One Southcoast Inc.

Just a quick question. Jack, on the after market side of the business expectations for this mix a little bit more in 2009 and you said around 20% average size, 30 plus in the year’s past against the backdrop of these recount declines. What are your expectations on after market here as a percentage of revenue going forward in ’09?

Jack Moore

It would get bigger. I mean as we see that the backlog is going to be less in ’09 now than it will in Q4, and than it was in Q3 for instance. We will see the percent of back to after market to be a little bit. The after market business is a great annuity and guys out there will keep their wells running that are already completed. Some of the land rig after market will get a haircut, but the deepwater rigs that are coming on, prove a really good window of opportunity for Cameron as those rigs come on and they spend the money to keep them operating.

Joseph Gibney – Capital One Southcoast Inc.

All right Chuck, you mentioned the evaluation gap that is still out there. Just curious on timing what you see in your crystal ball and then how many weeks, 50 rigs coming out to dissipate some of that valuation prior out there, just kind of curious how that’s going to materialize in the first half of the year.

Jack Moore

I think it depends on whether the family business and the age of element. There are a lot of cases unfortunate. Yeah, just I know it’s going to take time to work out.

Joseph Gibney – Capital One Southcoast Inc

Okay. And Chuck for you, the modelling housekeeping questions. You mentioned that foreign exchange currently on it, do you indicate it was around the $150 delta in the quarter. Is that right?

Jack Moore

Yeah, that’s on backlog.

Joseph Gibney – Capital One Southcoast Inc.

On backlog correct. Okay, do you have any potential as relative to foreign exchange looking forward in ’09. That is still relatively immaterial for you guys. Is there any potential versus some tailwinds here in particularly with Romania?

Jack Moore

Yeah, you got to look across our chain and we’re relatively balanced across our chain. Clearly, what’s happened to the Romanian lei and the euro, our costs that had surfaced up has gone down year-on-year because of that, for no other reason. There are other place like Bulgaria where we typically sell in euros and make in euros, so we’ll probably take a haircut there in profitability back in U.S. dollars in our consolidated accounts. So, Joe I think all in all we hope to come out relatively balanced.

Joseph Gibney – Capital One Southcoast Inc.

Okay, that’s helpful and one last one if I may relative to some of the data points you drew out earlier on subsea side, so the two reversals that came out on the taxes in aggregate how much?

Jack Moore

$140 million.

Joseph Gibney – Capital One Southcoast

$140 million and then the $20 million out on the centrifugal side?

Jack Moore

Most of it in centrifugal.

Joseph Gibney – Capital One Southcoast.

Okay. And then the one booking in the fourth quarter, was it just one deepwater stack booked in the fourth quarter and that was for a customer without a contracted rig, is that correct?

Jack Moore

Correct.

Joseph Gibney – Capital One Southcoast.

Okay, right. And on contract rigs are about still roughly 10% of your backlog. Is that about right.

Jack Moore

It’s about $400 million.

Joseph Gibney – Capital One Southcoast.

$400 million.

Jack Moore

It’s still deepwater backlog but a little bit bigger than the drilling backlog, and characterize those uncontracted rigs, some of these rigs are working their contracts terms and conditions too, so it’s - given all that detail, you have to talk to this, to get [inaudible].

Joseph Gibney – Capital One Southcoast Inc.

Sure I agree. I appreciate guys, I’ll turn it back

Jack Moore

Okay, Joe.

Operator

Our next question comes from Mike Urban with Deutsche Bank. Please state you question.

Michael Urban – Deutsche Bank

Jack Moore

Hi Mike.

Michael Urban – Deutsche Bank

Hey good morning.

Charles Sledge

Good morning Mike.

Michael Urban – Deutsche Bank

Just wanted to clarify a couple of points on the backlog and the guidance and then I agree that you are brave for giving us, we’ll give you the credit for that?

Jack Moore

Thank you, Mike.

Michael Urban – Deutsche Bank

So, going forward you talked about how much of the backlog you expect to get out in '09. Are there any assumptions of further slippage or additional cancellations in there or that’s embedded in the 60% of the current backlog number?

Jack Moore

That’s embedded. I can argue how that backlog is going to shift based on what we know today is embedded in there.

Michael Urban – Deutsche Bank

Okay, and are there any assumptions to further cancellations or like you said, you just can’t tell at this point?

Jack Moore

Nothing big dollar.

Michael Urban – Deutsche Bank

Okay, and you also addressed a little bit the margin and pricing pressure. You expect to see better than any earnings guidance, is there any assumption of price relief on the raw material side that you have talked about or is that something you hope to get and it was a lag, so you don’t want to?

Jack Moore

We think we’ve done as good a job as we know at this stage to net that into it.

Michael Urban – Deutsche Bank

Okay. I think that was all from me everything else was answered, thank you.

Jack Moore

Thank you.

Operator

(Operator Instructions) Our next question comes from Kevin Simpson with Miller Tabak. Please state your question.

Kevin Simpson – Miller Tabak & Co., Llc

Good morning.

Jack Moore

Good morning Kevin.

Charles Sledge

Hi Kevin.

Kevin Simpson – Miller Tabak & Co., Llc

Just a couple of followups. I guess one. Do you see any unusual build up of inventory in the distributed valve side from your distributors?

Jack Moore

Actually not. I’ll tell you our guys and distributors have done a great job of working very closely with the major distributors we're working with: the [Wilsons], [Redman], [Junkin] to the biggest in national. Well nothing takes on the great job of keeping that visibility at hand. So, much better than we were probably in the last down cycle, back in '01 or '02, so this is something we feel we got a pretty good hand on.

Kevin Simpson – Miller Tabak & Co., Llc

So even with the severity of the hit to rig activity?

Jack Moore

Probably, a little bit of the correction in the fourth quarter considered how fast it sells, and it’s still falling fast. So, we expect the distributor valve business to be hit the hardest of any of our short-cycle business.

Kevin Simpson – Miller Tabak & Co., Llc

But not even a large area pocket from having to run through inventories here?

Jack Moore

[Inaudible] The booking levels we’re seeing now pretty much make sense to us.

Kevin Simpson – Miller Tabak & Co., Llc

Okay.

Jack Moore

What kind of activity it is.

Kevin Simpson – Miller Tabak & Co., Llc

Okay next headcount. How are you going to handle this hit going forward?

Jack Moore

As I said, each business is going to be impacted a little bit differently and we will make the necessary and are making the necessary adjustments to respond to it. It is going to be a process we go through.

Kevin Simpson – Miller Tabak & Co., Llc

And then I guess lastly, can you say, maybe you already and I missed it. The kind of infrastructure projects that are getting pushed out of these refineries, pipelines or?

Jack Moore

Refineries, we had, I think they were on the drawing board. Some of the LNG facilities– at around the drawing boards, some of these are expansions to existing infrastructure that were on the drawing board. We’ve processed valves, and some of our engineered valves would go into pipeline extensions or some infrastructure developments. And this is pretty much across the world. So it’s not just any one geographic spot, so we’ve seen a little bit of everywhere and it can add up. So, it’s mostly that infrastructure that is really building more capacity to generate more fuels and distribution of fuels, and I think as customers see demand being handicapped, they just took on their hands right now.

Kevin Simpson – Miller Tabak & Co., Llc

Okay and then one last one, the surface tree business orders held up pretty well. I have to, assuming your guidance with it being an important profit center that you got it down guessing 10 to 15% on the top line for ’09. Is that in the right ballpark?

Jack Moore

You are in the ballpark.

Kevin Simpson – Miller Tabak & Co., Llc

Too bad. All right thanks a lot.

Jack Moore

We'll weight it again that’s geographically challenged in certain areas. We do have some measure of backlog in that business too that helps us but, the short-cycle businesses are little bit of a – move the target for us to some degree and that’s going to be a challenge for us in '09. But it is what it is guys, and we got to deal with it.

Kevin Simpson – Miller Tabak & Co., Llc

Okay, thanks that’s it from me.

Jack Moore

Thanks.

Operator

Our next question comes from Joe Agular with Johnson Rice, please state your question.

Joe Agular – Johnson Rice & Company

Thanks good morning. I was just wondering, looking into 2009, if you could give us maybe some help on the working capital expectations given that the business is going to slow a little bit. Do you expect to generate cash from working capital or should it remain fairly neutral?

Jack Moore

Joe that’s a question we can’t answer right now because of the project award business. We're not sure of the timing of some project awards and because of how we collect the cash, a lot of cash upfront there that could significantly change kind of how the cash flow looks for the year. So I think we need a little bit of time to get into that and see how the project awards go.

Joe Agular – Johnson Rice & Company

Okay. Regardless I guess the reason I was asking was more given your active share buyback that you had, you all certainly continue to have in the fourth quarter I noticed a lot of other companies sort of slow down, and given your balance sheet I assume that you all are comfortable going forward continuing that as you mentioned earlier. Could you tell us of your 2009 guidance of $1.75 to $2 of debt account for any further share buybacks or is that just using existing share count?

Jack Moore

Yeah, we use the existing share count. We do need to take a look that [inaudible] got to help in case during the quarter, so let's leave ourselves a little bit of room.

Joe Agular – Johnson Rice & Company

Okay. I appreciate thank you.

Operator

Ladies and gentlemen, there are no further questions at this time. I will turn the conference back over to management for closing comments.

Scott Amann

Okay, thank you [Diego] and if there are no other questions we appreciate all of you joining us this morning.

Operator

Thank you. Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.

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Source: Cameron International Corporation Q4 2008 Earnings Call Transcript
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