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Cameron International Corporation (NYSE:CAM)

Q1 2009 Earnings Call

May 9, 2009 8:30 am ET

Executives

Scott Amann - VP of IR

Jack Moore - President and CEO

Chuck Sledge - SVP and CFO

Analysts

Bill Herbert - Simmons & Company

Jeff Tillery - Tudor Pickering and Company

Marshall Adkins - Raymond James

Stephen Gengaro - Jefferies

Mike Irwin - Deutsche Bank

Jeff Spittel - Natixis Bleichroeder

Joe Gibney - Capital One Southcoast

Michael LaMotte - JPMorgan Chase

Brad Handler - Credit Suisse

Phil Dodge - Juhi Brothers

Geoff Kieburtz - Weeden & Co

Robin Shoemaker - Citigroup

Operator

Greetings, ladies and gentlemen and welcome to the Cameron first 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, Investor Relations for Cameron. Thank you, Mr. Amann. 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 seen, Cameron reported $0.52 in earnings for quarter one that included a $0.07 charge associated with headcount reductions in various facilities. Taking this into account, our earning were up 12% versus the prior-year quarter, and this was primarily the result of higher margins and project-related businesses, which included drilling, subsea and engineered valves.

In fact, all of our operating business did a tremendous job of focusing on cost in this quarter. Backlog, at the end of Q1, stands at $5.3 billion, which is $400 million higher than last year in Q1. The EBITDA margin for the quarter came in at 19.8%, up 22% versus Q1 of '08 and up 3% sequentially.

Total revenues for the quarter came in at $1.257 billion, which is 6% below Q1 of '08. The majority of the difference was in our subsea business, where we had significant levels of shipment for Akpo project in Q1 that did not repeat in this quarter.

We also saw a drop in revenue from our North America short cycle businesses, predominantly our distributed valves and some of our surface systems businesses.

With regard to order, overall bookings totaled approximately $1 billion for the quarter, and we had no major projects booked in quarter one. This compared to bookings in Q1 of '08 of nearly $2 billion, which included the $650 million Usan project. Sequentially, orders were down approximately 16%.

Our drilling systems orders totaled $200 million for the quarter, which is up $10 million versus last year's quarter, and up $140 million sequentially. We booked one deepwater system stack in the quarter as well as several riser packages.

I will say that we are pleasantly surprised with the amount of drilling bookings in the first quarter given the negative sentiment surrounding the drilling environment. No cancellations were received for drilling equipment in the quarter. However, we continue to monitor the quality of our backlog to identify any risk with order that are not for contracted rigs, and we have very solid terms on our contracts that would allow Cameron to recover all associated costs at our margins.

As for subsea, order for the quarter totaled $175 million, down $650 million versus Q1 of '08 which, as I stated earlier, was also attributed to the Usan project booking. No, large subsea systems orders were received in the quarter, but Cameron did book 21 trees out of quest reported total of 34.

Engineered valve order came in at $100 million. Again, we saw no large project booking orders in the quarter.

Compression had total bookings of $125 million for the quarter, which is up 10% sequentially. Our recip business is capturing the lion's share of bookings in compression these days. In fact, Q1 was a record quarter for reciprocating and most of this was targeted for international locations.

As for centrifugal business, we continue to feel the effects of the stagnant global economy on new orders, but did see a substantial increase in orders from the lows of the fourth quarter.

We are seeing our sharpest drop in our short cycle businesses, predominantly North America and this is probably no surprise to anyone.

Surface bookings came in at $208 million for the quarter, which was down 10% sequentially from Q4, but better than we expected. International exposure has helped in our surface systems business with over 65% of this business is now outside of North America and our bookings in our international markets actually were up versus Q4 of '08.

Our Latin American markets along with Asia and Pacific and Middle East are holding up well for us, in spite of pricing pressure, but we continue to see continued pressure from our competitors in most all of our environments.

Our distributed valve books were off 40% sequentially. We are beginning to see some stability in the order rate. Meaning it is not falling like it has in the last five months. However, we do not believe that we have seen the rig counts bottom and until we do, we will not see our day rates for distributed come back up.

Let me give you a few comment on our outlook going forward.

As far as our short cycle businesses that are exposed to North America, those Cameron business units that will fall in this market will be our distributed valves, piece of our surface systems business, our measurement, and our drilling aftermarket.

Last quarter, we attempted to frame our 2009 U.S. activity outlook at 1,100 to 1,300 rigs. We have since busted right through it. So I've been told to stick to my prediction that the Rockets will beat the Lakers in fixed games and avoid any rig count projection. So that's what I am going to do.

We do believe that the North American rig activity will continue to seek a bottom. Gas prices will be the drive in this environment and unfortunately, we will see pressure continue on our bookings and margins associated with these businesses.

As for the rest of the world, our international markets have held together pretty well so far. Really, we have so no real surprises in international markets. It's pretty much as we thought it would be.

As far as our infrastructure markets, this would encompass the new offshore platform installations, refineries, LNG, processing, gathering facilities, FPSOs, pipelines, and the manufacturing plants that we support around the world with our compression equipment.

I characterize this market as where we sell platform, surface, wellheads and trees, separation technologies, engineering process valves, and again, our compression equipment.

While we still enjoy the momentum of our backlog, several customers continue to defer decisions to move forward with a number of projects we have tracked in this market. One good example is the Barzan project for engineered valves customers in the Middle East, which now has moved out to 2010.

The question is to when versus not that these projects will move forward will be driven by both the outlook for demand recovery and project cost deflation. In other words, I'm sure some of those managing these projects are going to squeeze every nickel they can out of the current projected cost to keep them moving forward.

Many are asking themselves if they wait another 30, 60, 90 days before they place orders, will the costs continue to come down. This has to be balanced with the commitments that some of our customers have with getting this infrastructure in place by certain time frames to meet contractual commitments. So it will be interesting to how it plays out.

As for our longer cycle, deepwater driven markets, I think what you saw with our rig equipment orders in the first quarter, I think it's safe to say that the market for new rig equipment does not appear to be over. It will however, be difficult to predict the timing of future new build as many are going to be targeted for the Brazil market. And the requirements surrounding both the financing and local content will drive this.

Cameron has a great working relationship in country with both Petrobras and the drilling contracting community, due to the level of investment we have made in support of the local drilling markets. We are confident that we will secure a fair share of these orders when they are tendered.

Our outlook for the subsea markets is still very positive, particularly considering where we were just 90 days ago. Oil prices are moving higher, access to credit markets is easing, and operators are seeing lower costs to the steel and transportation deflation alone.

While all three of these moving in concert unclog some of the projects that have been parked, we think so that conviction on the part of the operators the commodity prices will stabilize is still going to be key.

Before I turn it over to Chuck, I just want to make a comment on the challenges of reducing costs in the market that is still searching for a bottom. We will remain focused on cost reductions. Both internally with the things we can control and externally with our supply chain.

I will say that our employees have done an exceptional job on focusing on this challenge in the last few quarters, but we must also balance these cost reduction initiatives with a conviction that our markets are going to improve. We must be positioned to take full advantage of them when they do; with the right people, with the right products and the right infrastructure. This is why we like our position with respect to having a healthy backlog and a healthy balance sheet.

I'll turn it over to Chuck.

Chuck Sledge

Thank you, Jack. In spite of all the uncertainty in our markets, Cameron delivered a solid quarter. Earnings per share excluding severance costs were $0.59 cents. The most pleasant surprise in our P&L for the quarter were our margins.

Our EBITDA margins excluding severance costs were 19.8%, that compares to 16.2% last year and 19.2% in the fourth quarter. The sequential improvement was driven primarily by better margins in DPS and better cost control in corporate. While we will face margin pressure as we progress through the year, we did not see as much as we had feared in the first quarter.

As Jack mentioned, orders were an interesting story for the quarter. Drilling orders were ahead of our expectations at nearly $200 million, and we booked the majority of the industry subsea trees that were awarded during the quarter. These pleasant surprises were offset by more than expected softness in our North American short cycle business, and continued movement to the right in our large project bookings.

While we think our North American short-cycle businesses will continue to be soft throughout 2009, and we think the movement to the right in projects, large project bookings will continue for some time. The good news is the project list is long, and none of them are being canceled. So again, as Jack said, it's not a question of if, it's a question of when.

As expected, we did consume cash in the first quarter, primarily driven by an inventory build to satisfy our project related businesses. This will reverse over the balance of the year, and we should generate good cash flow for the rest of the year.

CapEx for the quarter was $49 million. We continue to expect a run rate for 2009 of $200 million, about half of which will be for our new Romania surface plant and our Malaysian subsea expansion.

As Jack mentioned, we did execute a voluntary reduction in force during the quarter, and we had some involuntary turnover. That resulted in about 300 people leaving the organization. As we have said before, we will continue to ensure our costs are in line with our revenue expectations, while balancing that with the long-term opportunities we see ahead of us.

As most of you know, the new convert accounting standard became effective this year. As a result of the standard, we restated our historical results, and I'll try to give you a little background on what changed in case you're trying to look at our previous filings.

Beginning, retained earnings were decreased by $48 million, paid-in capital increased by $66 million, long-term debt decreased by $38 million, and non-cash accrued taxes increased $14 million.

If you're looking at our P&L, our first quarter of last year interest expense has increased by $0.02 a share from what was previously reported. For our first quarter of 2009, interest expense was $0.01 a share higher than what you otherwise would have expected absent this new accounting standard.

Again, I hope some people out there believe that this clarifies kind of the balance sheet of the different companies that have converts on hand, but anyway, that's how it affected us.

As you notice, we have adjusted our guidance for the full year to $1.85 to $2 per share excluding any restructuring cost. We've effectively shaped $0.10 per share off the bottom of the range. This change reflects better execution on our project related businesses and a lower effective tax rate for the balance of 2009. This was partially offset as we came up with this guidance by a weaker than originally expected outlook for our North American short-cycle businesses.

A couple of observations on our lower effective tax rate guidance of 29% for the balance of 2009. What's happening here is we're in the process of implementing several new international tax planning opportunities, which will result in a lower tax rate for 2009, but more importantly it will result in a permanent reduction in our effective tax rate to something south of 30%.

While we need to watch developments on the US administrations recent tax rhetoric, we currently do not think that this rhetoric will affect our plans. D&A for 2009 continues to hover around $150 million, and the share count embedded in our guidance is 220 million shares.

With that, Scott, let's open it up for questions.

Scott Amann

Claudia, we are ready to do Q&A now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from Bill Herbert with Simmons & Company.

Bill Herbert - Simmons & Company

Jack, with regard to the 21 trees that you garnered in the quarter, can you give us some flavor as to what the composition of those orders were in terms of customer mix and what have you?

Jack Moore

A lot of ones is in (inaudible), we had three that booked for ATP, Nexus, Marathon, BP, BG and Petrobras. So we were pretty well represented in all over the world; Australia, Gulf of Mexico, North America, and Brazil.

Bill Herbert - Simmons & Company

With regard to the visibility for onesies and twosies in step out activity and what have you, are you encouraged by what you see right now?

Jack Moore

Absolutely. BP has been very active with identifying lots of projects in both the North Sea and the US. In fact, the North Sea was pretty quiet last year for BP. This year we had a pretty good start right out of the chute. I would say where our customers can time back the infrastructure that already exists. It could be a homerun for them, especially as we're seeing oil prices creep back up.

Bill Herbert - Simmons & Company

How should we think about pricing on a going forward basis? I'm sure it's probably a little bit weaker at least with regard to your bidding activity. Want some flavor as to sort of magnitude of weakness and your expectations going forward.

Jack Moore

Well, I would think, Bill, where you see where you have good working relationships with your customers, where you're tying back the existing infrastructure, especially with these one or two or three order requirements. I think you're going to be more focused on execution than price as much as anything. But on the larger tenders, you know, we haven't really seen any of them book yet.

So it's hard to tell where the price is going to come in. My guess is we'll see some pressure on price with some of the larger projects as they continue to push to the right. We got to remember that the subsea business is risky. It has a lot of things that can go bump in the night, a lot of variables. I just hope our customers recognize that there's only so much risk that can be taken and the margins can go away real quick if you're not careful.

Bill Herbert - Simmons & Company

Any perspective with regard to how the turbo business is doing and the outlook attending to that business?

Chuck Sledge

Well, we had a better quarter in Q1 than we did in Q4. We had a few cancellations that netted out in Q4, but not very many. But it is the canary in the coal mine for that GDP business.

We haven't seen anything that would get us, jumping for joy that this economy is coming back. Gosh, there's too many other indicators out there that would tell you that that's not the case. However, the guys have done a tremendous job of expanding the product portfolio and expanding our customer base around the world and that has really made a difference.

I mentioned the recip side. We have a record quarter, the highest quarter they've ever had in their history. One because of what's going on in US gas. It's what these guys have been able to penetrate in Eastern Europe, the Middle East, former Soviet Union, Russia, and that's the attitude that they've taken that they have to approach this market globally instead of historically just in the US or markets that they're comfortable in.

So it's showing up. I think that's a nice surprise for us. Is it going to be meaningful for the centrifugal turbo business in '09, we expect it to be a weak year. That's kind of the way we see it and I don't think we're going to be surprised either way.

Operator

Our next question is coming from Dan Pickering with Tudor Pickering and Company.

Jeff Tillery - Tudor Pickering and Company

It's actually Jeff Tillery here. Chuck, one question on the outlook and guidance. You mentioned that execution had run better than you expected. Does that mean you think you'll ship more of the backlog in 2009 than you originally expected, or is that just saying that it's more profitable, the work you're completing is more profitable than you expected?

Chuck Sledge

Jeff, it's both. So we're in the good position of getting more out of the door, and the margins are holding up a little bit better than we had thought.

Jeff Tillery - Tudor Pickering and Company

You mentioned subsea being down, that should help mix in DPS segment. You also mentioned that price pressure probably wasn't as bad as you feared. Is that a function of orders that were booked in Q4, so you're not really feeling the price pressure in the Q1 results and we'll see it in Q2, or overall are you just not seeing as much price decline as you expected?

Chuck Sledge

No, we're seeing a lot of price pressure in the different businesses. I think it's a function of the backlog margin has held up and we didn't have to give a lot of that margin that was inherent in the backlog away.

Jeff Tillery - Tudor Pickering and Company

Could you just talk qualitatively what you're seeing on the cost side? I guess, on the last conference call it sounded like you weren't seeing very much benefit from lower steel prices. Sounded like later in the quarter you started to see that benefit. Could you qualitatively kind of tell us where you are from a raw material cost standpoint?

Chuck Sledge

Yeah. I think Jeff we're seeing on the casting side, we buy, majority of steel is either forging or casting. On the casting side, those prices have been quicker to come down. So you've seen us quicker to pass those along to the customers, to make sure that we're partnering with them.

On the forging side, the forge houses are still pretty full with their backlog. And there's a limited number of them around the world. So they're doing a pretty good job of maintaining their price. It is coming down, it's coming down slowly. Do we think that will accelerate as we get through the year, probably so. But again, what we've seen to-date is not as great as what we've seen on the casting side.

Jack Moore

Jeff, we have a slide that we share with our customers that talks about the impact of a 40%, 50% decrease in scrap iron and some of the elements that go into the steel that reflects the ultimate cost that we can pass on to a customer. I think it's very telling in that you take a 50% reduction in scrap iron, and that relates to about a 6% or 7% reduction in the cost that we can pass on.

When you think of all the value that's added to that, it's mostly labor and overhead and absorbing fixed costs and steel factories and forging plants and even our own facilities. So we try and have this discussion with customers, that if you really want to see a 50% drop in the price of a Cameron product we almost have to show up at your location with a pile of scrap iron. That's not what we do.

So it's a compelling way to tell the story, but the real sharp reductions in steel prices just don't flow 100% through the bottom line in our product. It's really a map educating our customer base in terms of what we have to do to get a product to them and what we realistically can pass on in the way of the savings that we're generating.

Operator

Our next question is coming from Marshall Adkins with Raymond James.

Marshall Adkins - Raymond James

Let me knock out a few of these backlog questions, jut to get them out of the way. In your guidance, what do you think you need to get in terms of new orders going forward, to hold your guidance? So we will just keep new orders flat from where we are? Do you think they're going to continue trending down? After that also, how much of this backlog do you think is at risk, that kind of thing?

Jack Moore

Well, let me take on the future orders, Marshall, and I'll let Chuck comment on the backlog at risk. We didn't see any major projects booked in the first quarter. It's highly unlikely we will go through a whole year without a major project being booked. So my anticipation is that we'll see some quarters going forward that will have bigger booking quarters than the one we just had. Timing is going to be important to us.

So I would characterize the future as being probably more optimistic about where we're going over the course of the next 12 month or nine months than we were in the first quarter. Now we'll have puts and takes relative to the short cycle business that have yet to be seen. The timing, it's interesting. If you look at Cameron's ability to respond to requirements today versus two years ago, our factories are leaner in terms of their ability to process and cycle orders through their shops. And that's all over the world. That's through a lot of investment we've made. That's through a lot of work we've done through our Six Sigma programs.

So our ability to turn future orders quicker is real. And that will help us in terms of responding to the timing of when backlog is shipped. I mean, we're still not on POC, so we have to build it and the customer has to say yes, I accept it, before we report it. So that element is still there, but our ability to turn things is going to be I think is going to be improved as we go forward in our markets.

Marshall Adkins - Raymond James

Is that why the margins DPS were so strong, or was it mix or pricing? Or, maybe all the above?

Jack Moore

I think it was a little of all of that. You know, our guys did a great job of managing cost. We've been very good, we started some things in the fourth quarter that I think we didn't see in the fourth quarter yet, but we're seeing them now.

We have not seen the benefit of a lot of cost reductions from suppliers yet, because it just hadn't rolled through our cost structure from the standpoint of the revenue generated. We'll see that as we come. We'll also see more exposure to price discounts as we come too, because some of that hasn't totally rolled in yet.

A lot of is just a discipline of pushing back and not rolling over when people ask for discounts. I mean, you've got to educate customers on why they're doing business with you, number one, and you've got to make sure they understand the value of doing business with you going forward.

I give our guys a lot of credit in running the businesses for holding firm on that, and I think it showed up in our margins. We are pleasantly surprised. It wasn't all mixed, but less of this and more of that helped. The majority of our improvement in margins really came from the project businesses, which are sometimes the toughest to get these margin improvements, moved up.

Marshall Adkins - Raymond James

Then backlog at risk?

Chuck Sledge

Marshall, if you look at our backlog, I think we focused on one bucket and that's the drill ships without contracts, and that exposure has gone down as we've worked off the backlog. So that exposure now is plus or minus $300 million or so.

The rest of the business, do we see customers trying to reschedule deliveries? Yes. Do we see widespread talk of cancellation? Probably not as much we saw in the fourth quarter. So knock on wood, hopefully we are over the worst of that.

Marshall Adkins - Raymond James

Any, just rough guess at how much this backlog you think is really an '10 type event?

Jack Moore

Well, what we think is kind of the standard that we tell everybody is probably about 60% of the backlog ships in the next 12 months.

Operator

Our next question is coming from Stephen Gengaro with Jefferies.

Stephen Gengaro - Jefferies

I guess two things, one the follow-up on the DPS margin front. When you think about your guidance going forward, what are you thinking in terms of DPS margins? I mean the first quarter, can that persist at those levels, or do you think it's going to just kind of jump around within a range?

Jack Moore

We tell them they must.

Chuck Sledge

We've told the guys they have no choice but to deliver those margins. Stephen, but in all actuality, we've probably seen the top side of the margins, that we saw in the first quarter. They'll hover around a little bit for the rest of the year, but I do think that you'll see a downward direction in those.

Stephen Gengaro - Jefferies

Can you talk a little bit about your position down there, your kind of thoughts on the whole bidding process and sort of the significance of the tree orders? And I know you have some interest on the manifold side as well and kind of how you're thinking about that market?

Jack Moore

Well, Stephen, Cameron's is well positioned as anyone in country. I don't think anyone of us that are operating in Brazil have an exclusive. Petrobras is going to keep all of us in the game, because they have such significant needs going forward. I think the timing is probably a little slower than we'd like. But given everything going on in the world, probably none of us are too surprised.

It's going to be a great market. We have significant investment in country, they like that, they're going to expect that. We have manufacturing capacity that will meet the requirements that they're looking for. We have ability to flex it and grow it. We have the footprint to do it. We have a great aftermarket operation. I don't think we have any equals in terms of what we have on the ground and market. And I think Petrobras would be keen to tell anyone that.

So we are in a good position, not just with the subsea business, but as I said with our drilling support business and drilling is going to be a big market down there for Cameron. We've penetrated that market with our surface business recently, as well. So we've seen the ability to work with Petrobras in a number of ways, and I think it's going to be very positive going forward.

Stephen Gengaro - Jefferies

Is there a change to the priority of your sort of desires on how you're going to use your cash? I know your historical position. Any change in what you prefer to do?

Chuck Sledge

No, I think first and foremost is continue to invest in Cameron itself. I think we made the mistake a number of years ago by not doing that, and we paid the price in the early part of this up cycle.

So that will continue to be the priority. If we have the opportunity to consolidate some businesses through acquisition, you would see us work pretty hard on those to make that happen in this down cycle. And as we've always told everybody, we're going to mow the grass on the share count.

Operator

Our next question is coming from [Mike Irwin] with Deutsche Bank.

Mike Irwin - Deutsche Bank

More of a general question on philosophy on subsea bids. Few years back whenever we had another lull in the big project orders, you had a view that that the pricing out there just was not sufficient, wasn't going to generate the margins that you hoped and ultimately there was going to be more than enough to go around.

Has anything changed in that philosophy, or is there a certain level of business and certain markets like Brazil that you need to have or is this another case where if someone tries to grab some share, we could see you guys stepping away for some period of time?

Jack Moore

Not really. It's a global market. We have the ability to move product whether it's from Brazil to other markets or from, you know, not necessarily from other markets into Brazil because it's the local content issues. But we would look at Brazil as part of our supply chain that can support any other market that we operate in. But we've seen I think a lot of effort going into making sure that we understand the risk and that we get rewarded for those risks. We've learned a lot over the course of the last three, four years in terms of how to bid projects smarter, how to contract smarter. I think that's going to help us all in terms of being disciplined around the business as we go forward.

Chuck Sledge

Mike, there are certain projects you will see us not too eager to participate in. Depends on the project, the customer, how we view what the pricing may be. We are going to chase a project down to no margin and keep all the risk? Not a chance. So it really is kind of an eclectic view of the projects out there to figure out which one Cameron's really are going to be interested in. It's one we have to earn an adequate return for our shareholders while balancing the risk we take on those projects.

Mike Irwin - Deutsche Bank

Along those lines, you have added some capacity really in all your business, but especially subsea, and I guess surface as well. But specific to subsea, you know, given those capacity additions. Is there a certain amount of volume that you need, because there is a tradeoff there between pricing and keeping your margins up via throughput?

Jack Moore

I think you got to remember we were very strategic where we added that capacity in a place that we can leverage the cost structure a lot better. So when we made that decision we did it for two things. Number one, we believed the subsea market long-term will reward that capacity. But if there are short-term upsets in that, we have the ability to retreat to a better cost position. So we think we're pretty balanced.

Operator

Our next question is coming from Jeff Spittel with Natixis Bleichroeder.

Jeff Spittel - Natixis Bleichroeder

Question following up on those questions in the subsea market. If you look at the composition of the trees that you booked in the first quarter and I guess what you have on your radar screen near term. Could you talk a little about whether those are mostly stock trees versus ones with a little bit of extra bells and whistles on them and what the lead times are for that kind of equipment at this stage of the cycle?

Jack Moore

The trees we've booked in the first quarter I would say would be trees that we had historical designs already established. I wouldn't say they were somewhere probably less complicated than others is a little bit of a mixed bag. But I will tell you that going forward, just to kind of talk about the projects and the things out there over the next 18 months. We see a lot of opportunity. The timing is going to be the real key to this and a lot of these projects are going to have a degree of complexity. For instance there's a project that Chevron is working with everyone on right now. Regarding [Jackson Milo] that's 15k equipment. It's going to be high-pressure equipment. It's not easy to build, and it's not easy to get through the system as quickly as a standard stock through would be. So you're looking at something there that probably would take 12 to 18 months versus a stock tree would be six months.

Chuck Sledge

I would add, Jeff, there are certain of our operators who have had difficulty in the past with the quality. So there are a couple of operators out there that have embarked on some pretty sophisticated improvements in the quality processes. And those trees are much more difficult because there's much more oversight. And, BP and Total and those guys. So you're seeing a mixed bag.

Jeff Spittel - Natixis Bleichroeder

Unrelated follow up. You are starting to see anything I guess either in the compression or the drilling market from unconventional gas plays outside of the United States?

Jack Moore

Not yet.

Jeff Spittel - Natixis Bleichroeder

All right, that's simple enough.

Jack Moore

I think those shale plays will show their face elsewhere.

Operator

Our next question is coming from Joe Gibney with Capital One Southcoast.

Joe Gibney - Capital One Southcoast

Just a quick question. Surface orders only down I think you mentioned 10% sequentially showing a little bit more resiliency than I'd have thought. Just curious on your comment there what you're seeing, obviously there is a higher mix internationally, but a little stronger than I'd have expected. Curious what's going on there?

Jack Moore

Well, I think it reflects breadth of both the product offering and the customer base and the geography that we have with our surface businesses. We stated a lot of you many times, Cameron's surface business is one of our biggest businesses that we have and when you look at the number of wells that are going to be drilled around the world in any given year, 98% are going to be onshore, are going to be on a platform and we like the fact that we participate in a vast majority of those markets were those are at.

So, you're seeing the benefit of having a very broad customer base, a very broad geographic footprint, and a very broad product line. Yes, I hope that, we would be able to leverage that in a down market and that's exactly what the guys running that businesses are doing.

Joe Gibney - Capital One Southcoast

Okay and just on the margin side relative to compression, certainly recip looking up on the quarter, obviously the headwinds that are still there on the air compression side. Just you anticipating or do you feel within your guidance range, we're finally seeing a little bit of stabilization at least from a margin standpoint within compression looking into the back half of the year or are you looking further pressure?

Jack Moore

We're going to see price pressure and it's really a function of how quick we can get the cost out of some of these products going forward and that's going to be working closely with our supply chain in our internal manufacturing component.

So, we're going to be under pressure on margins in these businesses throughout the year and until we get the cost roll through, it's going to be difficult to predict exactly, where that's going to be. We are encouraged by what we see in the first quarter. Our guidance, as Chuck said reflects the fact that we think we see some pressure on margins going forward.

Chuck Sledge

Yes, Jack I'd add to that, this business probably more than others is sensitive to volume.

Joe Gibney - Capital One Southcoast

Yes.

Chuck Sledge

We're in a good position in '09 with the backlog and centrifugally we came in, if that goes down and ultimately puts pressure on volume in the outer periods that's when you could see some EBITDA compression, yes..

Operator

Our next question is coming from Michael LaMotte with JPMorgan Chase.

Michael LaMotte - JPMorgan Chase

Chuck, did you all ever consider taking that convert out? A lot of cash and plenty of firepower to straight that?

Chuck Sledge

How many days in the year are there? Yes, about 365 times.

Michael LaMotte - JPMorgan Chase

Okay.

Chuck Sledge

The converts right now we are in what's called the put period. We've got some conservative lawyers that just kind of like to sit on their hands a little bit and not let us do the things we want to do. I think ultimately once the put periods over, you'll see us have the conversation for the 366th time.

Michael LaMotte - JPMorgan Chase

Would you mind elaborating a little bit on the tax details? I mean historically to get below 30% as US company you had to invert clearly that's not the case here. Is it really just more permanent?

Chuck Sledge

We're moving.

Michael LaMotte - JPMorgan Chase

Just kidding, is it really just the geographic mix in the earnings? Is that simple or is there something else?

Jack Moore

No, there is something much more to within than that. We realized we were a little short on our tax expertise and went out and hired some really strong people and they've come in and looked at some things and brought us some best practices from other industries.

I tell you the amount of the benefit going forward is rather large. So, we're working as fast as we can, to get those things taken care of. Again, I think absent some, got to wash the Washington rhetoric and see where that ultimately ends up. Hopefully cooler heads will prevail. If they do, we think this is a permanent shift for Cameron and one that's probably long overdue.

Michael LaMotte - JPMorgan Chase

Okay. Not that I'm going to understand well, but in terms of the granularity, it just not working into the complexity of the structure at all. Just it's going to be below 30%?

Jack Moore

Yes.

Michael LaMotte - JPMorgan Chase

Okay. Last one from me, if I think about the earnings progression through the year, with kind of 107 as the high end through the first half, and call it $0.45 per quarter in the second half. The exit rate of $0.45 is actually pretty good. Could that end up being a cyclical low for us, you think? Just sort of given the fact that we're seeing businesses, the decline to decelerate and even signs of life in certain other areas?

Jack Moore

Depends on the project bookings, I think you've got to watch that for the next couple of quarters to draw a conclusion as to whether that could be the cyclical low, too early to tell.

Michael LaMotte - JPMorgan Chase

Okay. Yes, I mean, it certainly wouldn't surprise me, as you are in the second half to be at that $0.45 level plus or minus for a few quarters as you rebuild, but it certainly strikes me that, costs are coming out, backlog protection, the margin that you have there, the costs are coming out faster. You just have a lot more levers I think to push in this downturn than we've seen in any other.

Jack Moore

That's the beauty of Cameron's diversified portfolio.

Operator

Our next question is coming from Brad Handler with Credit Suisse.

Brad Handler - Credit Suisse

Could you please just step through a little bit of the guidance kind of before and now I guess. Now let me throw out a couple of things. It sounds like lower tax rate, that's worth $0.05. Is it that more onesies and twosies in the order book than you were expecting helps prop up expectations about revenues? Maybe that's just a subsea comment, but maybe that's also reflective of some other businesses. So that's little bit higher revenues, and that helps to offset some North American businesses, is that a reasonable way to think of it?

Chuck Sledge

Well, I think you've got the tax rate circled in pretty well. Really what you see is our ability to get more of our backlog out in '09, than we originally thought. Add a little bit better margin than we originally feared.

Jack Moore

I think the guys are doing a good job of managing the cost.

Chuck Sledge

And that's being somewhat reflected in our guidance, too.

Brad Handler - Credit Suisse

So it's not what comes in for the balance of the year. It's what was in backlog already, you think you can push out a little bit faster?

Jack Moore

Yes.

Chuck Sledge

Yes.

Brad Handler - Credit Suisse

I appreciate that you don't want to get or wait again into the recount forecasting business? I'd appreciate that.

Jack Moore

No. Our marketing guys have told me to stay away from it.

Brad Handler - Credit Suisse

I guess, I want to be clear that however, there's a bit of shifting around, right? I don't know whether you're willing to comment, but it's $0.10 or $0.20 of perhaps additional or less contribution from North American shorter cycle businesses and that's being offset by the project delivery and the margin comments.

Jack Moore

Yes. I think it's safe to say that our outlook for North America is worse than what it was when we put this budget together. But again, a lot of our cost reductions are targeted within our North American market, and the guys have been aggressive about dealing with that.

So we're going to continue to chase some of that down in this year. I don't think we've seen the bottom yet. I think I'm pretty much in the majority of making that statement. It's just a matter of when that bottom hits and how long it stays there. That's what we have to be prepared for.

Brad Handler - Credit Suisse

I guess, just a last one from me related to the guidance. In terms of the corporate and other expenses, can you put a number on that for expectations for '09? Like its related to the $28 million in the first quarter?

Chuck Sledge

Yes. I think we normally guide to about $100 million for the year. And so with the cost control efforts you're going to see us probably come in something south of there.

Brad Handler - Credit Suisse

Let me just make sure, I got the calibrations, so 122 in '08? Right.

Chuck Sledge

Yes.

Brad Handler - Credit Suisse

So something south of $100 million for the year?

Chuck Sledge

Yes.

Operator

(Operator Instructions) Our next question is coming from [Phil dodge with Juhi Brothers].

Phil Dodge - Juhi Brothers

My question is what utilization rate you expect for the new facilities in Romania and Malaysia when they are all up and running and maybe some guidance on the incremental profits involved.

Jack Moore

Well, they'll be north of 75%, 80%, which is kind wherever we're going to target them to be. But that will ramp up as their capabilities ramp up. So it doesn't happen overnight. We make some pretty sophisticated equipment in these facility. So as our training is completed, as machines are brought up and cycled up, you'll see us move more and more products there. The beauty of having those facilities coming on-stream at this time is that it's a great opportunity for Cameron to shift some things away from high-cost areas to low-cost areas. That's exactly what our game plan is going to be.

Chuck Sledge

We'll be moving to get them as fast as we can to full capacity.

Phil Dodge - Juhi Brothers

Will that be a notable inflection point in the profit trend, or just modest?

Jack Moore

I think it's just going to happen over time. It's not, going to be a one-quarter event. So it will evolve probably in the next 12 to 18 months. The Romania plant is coming on-stream now, but it's not fully up to speed yet. And the balance of what we're doing in Malaysia comes on-stream first quarter of 2010. So that will then begin to ramp up, as well. So its going to evolve over the next 12 to 18 months.

Phil, think of it as a continuum. In the early parts of the capacity that you bring you on, it's actually more expensive, because you're carrying a lot of fixed costs that aren't being absorbed. You're carrying inefficiencies. And as you get into the learning curve probably, I don't what the right number is, a year or so that's when you start seeing the back side of that curve on profitability. So we're a ways out from seeing the big effects on profitability.

Operator

Your next question is coming from Geoff Kieburtz with Weeden & Co.

Geoff Kieburtz - Weeden & Co

Couple of things. I think you mentioned, Chuck, in your comment that now 65% of surface business is outside north America.

Jack Moore

Yes.

Chuck Sledge

Yes, Jack did.

Geoff Kieburtz - Weeden & Co

Jack, okay. That's quite a shift.

Jack Moore

Well, it's shifted over probably the last 12, 18 months given some of the level of major project, you know, you look at the Middle East, the far east, eastern Europe, Caspian, former Soviet Union, we've had some pretty good success in those markets with surface and they're normally bigger orders. We've had great luck, great success in Mexico, and Brazil with our surface business. So, those again kind of reflect bigger orders than what you'd see historically in our traditional North American markets.

Geoff Kieburtz - Weeden & Co.

I think you also said that you had sequential revenue growth outside North America in surface?

Jack Moore

Yes, it wasn't a whole lot, Geoff. But it was a number. We'll take it in this market.

Geoff Kieburtz - Weeden & Co.

Right. Your view there is that that can continue to grow or how were you thinking about that?

Jack Moore

The international as I've said, you get projects. We've seen projects being deferred in Eastern Europe for surface equipment in the last 60, 90 days that we've been tracking. They keep pushing them to the right. But it really depends. It can be a little lumpy in the international market with surface because of big chunks of business that gets awarded at one time.

I think overall we'll look up in 12 month, and we'll say hey, this is a lot better than we thought. So, we're encouraged by where we're at with the international surface business.

Geoff Kieburtz - Weeden & Co.

Okay. DPS margins obviously very strong. I think about 150 basis points better than the second best quarter you've had. You seem to believe that this is structural and sustainable. Do you think you end up beating your best full-year quarter or full-year margin in 2009 for DPS?

Chuck Sledge

No. I think what we mean to tell everyone is that we've probably seen the high water mark for the first quarter. It will come down over the rest of the year. If we came up year-on-year flat in DPS, I think that would be a good outcome given where the markets are.

Geoff Kieburtz - Weeden & Co.

How much of that margin performance is dependent on volume? I mean, if orders do kind of get continued push out to the right here during the year, I mean, are you looking at then a lower margin in 2010 or do you offset that was a combination of, your structural changes and cost reduction?

Chuck Sledge

Well, the goals always to offset, whether we'll be successful on that, yet to be told. We need to see the order rates for another couple of quarters before we can figure out how we need to tweak the cost structure for '010s performance.

Jack Moore

The risk will be in the big projects, the construction side of our business, the valve business. That's where you could get some absorption issues in your factories if you don't have the volume going through. Our able to shift some of that work into areas where we can offset that is really going to be the challenge.

Geoff Kieburtz - Weeden & Co.

So more in the drilling and the engineer valves than specifically the subsea?

Jack Moore

I wouldn't characterize those as the only ones. But, yeah, those probably have the nearest term exposure to the downward pressure on bookings. I'd say, Geoff, we see a lot of opportunity in subsea. So, depending on when that happens, you may never see these guys take a rest.

Geoff Kieburtz - Weeden & Co.

Do you have a ballpark range of how many subsea trees you expect to be ordered in the market for 2009?

Chuck Sledge

I tell you, we can quote what Qwest has said, and it's somewhere between 400 and 600. It's lowered now I think it's 350 to 450, somewhere in that range. The high-end of that really was always I think calibrated based on what Petrobras does with their large tender orders. The reality is those orders for Petrobras are going to be spread out.

Even though they may award a big chunk of them here in the next 60, 90, 120 days, whenever that's going to happen. There will actually be kind of call-off business. So you won't see them all booked in one year. I think Qwest is kind of based on what they saw in the first quarter. I think they brought their total numbers for the year down a little bit.

Geoff Kieburtz - Weeden & Co.

You don't have any reason to differ with their?

Chuck Sledge

I had no reason to differ with that.

Geoff Kieburtz - Weeden & Co.

Lastly, I think you hinted at this. You do expect to see some additional severance charges in subsequent quarters?

Jack Moore

We'll know that when we get there. We are going to do what we need to do to adjust our businesses to the markets that we are seeing, the reality of it. As I said, Geoff, we will also balance that with the outlook to the future. We happen to be pretty positive about our industry going forward. I can't predict when it's going to flip back on. We will see a need for making sure that we maintain a certain level of expertise infrastructure and product development as we continue on.

We're continuing to invest in that. We have a lot of things on, investing in our people right now. We're continuing as Chuck said to make investment in infrastructure. It's the right thing to do if you believe that this industry has a bright future. That's what we believe when we're firmly convicted with it.

Operator

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

Robin Shoemaker - Citigroup

I just wanted to bring up something you had mentioned on previous call as far as an update is concerned. You were going to manufacture some equipment in-house that you had previously outsourced as part of a strategy you had enunciated while back. I wonder if that has happened then if it is showing up in the form of quicker delivery of backlog and better execution on manufacturing.

Jack Moore

To the answer to that, is yes. Especially in the short cycle of businesses, if the bookings have come down in our short-cycle businesses, we've been able to pull some of that outsourced work into our factories and that's helped us with controlling lead time and costs. Our comments probably were really around the Polesti, our Romania factory that we're bringing up right now with our surface business, where we had really targeted that factory to help us manage the outsourced requirement that's we were pushing outside of our own control and we wanted to bring that. We have the capability to bring that in. That's happening. It's starting to happen now. As I said, as we probably get into the third and fourth quarter, we'll be rocking and rolling with that facility.

Robin Shoemaker - Citigroup

Okay. My other question had to do with your comment that customers still sense that waiting to place orders or to go forward major order on projects would result in lower project cost and clearly in the cycle there is some point at which they would conclude that waiting raises project cost.

I just wonder if you have a sense that, we are approaching the point maybe as early as the second half of this year. I don't want to put words in your mouth, but where customers may shift in that critical view of the future in terms of delaying a project or accelerating it based on how they perceive the total cost equation?

Jack Moore

I think you're right. I think that's exactly one of the fears that, if you're sitting on the project and waiting to pull the trigger, thinking costs are going to go lower, at some point in time you have to pull that trigger. I think as these things drag out, we'll see customers I think start to move on some things.

The other issue is need. I think they have to feel convicted that whatever infrastructure they're going to bring on is needed. In some instances until we see demand correct around the world. We're not going to see the need get acted on. So, we've got to see the economy improve before some of these projects I think are going to get launched.

Robin Shoemaker - Citigroup

Okay.

Jack Moore

That's anyone's guess as to when that's going to happen. We can give you a bunch of different opinions on it, but only time will tell.

Operator

Gentlemen, we have no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Scott Amann

Okay. That will do it for us. Thank you, Claudia, and thanks to all of you for joining us this morning.

Operator

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

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Source: Cameron International Corporation Q1 2009 Earnings Call Transcript
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