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Executives

Jeffrey G. Altamari - Vice President of Investor Relations

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

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

Analysts

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Igor Levi - Morgan Stanley, Research Division

Waqar Syed - Goldman Sachs Group Inc., Research Division

Michael K. LaMotte - Guggenheim Securities, LLC, Research Division

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

Edward Muztafago - Societe Generale Cross Asset Research

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

William Sanchez - Howard Weil Incorporated, Research Division

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

James C. West - Barclays Capital, Research Division

Robin E. Shoemaker - Citigroup Inc, Research Division

Angeline M. Sedita - UBS Investment Bank, Research Division

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Cameron International (CAM) Q1 2013 Earnings Call April 25, 2013 9:30 AM ET

Operator

Greetings, ladies and gentlemen, and welcome to the Cameron First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jeff Altamari, Vice President, Investor Relations for Cameron. Thank you. Mr. Altamari, you may begin.

Jeffrey G. Altamari

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

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

I will now turn the meeting over to Jack.

Jack B. Moore

Thank you, Jeff. Cameron reported record orders in Q1 of $3.6 billion following last year's record $3.4 billion. Q1 orders are up 40% versus last year. Total backlog now stands at $10 billion, up $3.3 billion versus year-ago levels. While all of our business segments recorded year-over-year orders growth, record orders are driven by our DPS segment, which totaled $2.7 billion, up over $1 billion versus Q1 of 2012 and up $200 million sequentially.

Q1's order performance, again, demonstrates the diversity of Cameron's businesses as our record orders for Drilling Systems in Q4 were followed with record orders for Subsea Systems in Q1. We also saw record orders for Surface Systems as well. Another area I would like to highlight with Cameron's order performance in Q1 is that aftermarkets totaled $680 million in the quarter, an increase of 25% over last year. Revenues totaled $2.1 billion, an increase of 17% versus Q1 of 2012.

Now let me cover more detail with our operating segments. As I mentioned, DPS had record orders in Q1, which were up 62% from Q1 of last year. Revenues totaled just shy of $1.3 billion for DPS, which were up 20% versus a year ago. Subsea Systems led the way in Q1 for our DPS segment. Orders for Subsea Systems totaled $1.4 billion in quarter 1, up $800 million versus last year. The quarter was highlighted with the award of the Petrobras global tree award and the ExxonMobil Erha North project.

Revenues in the quarter totaled $340 million versus $320 million in 2012. Our outlook for the balance of 2013 in subsea remains very robust across all regions and with a large number of operators. We continue to track lengthy list of projects that should be awarded before the close of the year. Pricing levels continue to improve, and we will have a positive impact on future margins as these projects are shipped over the next several years.

While the market remains competitive, we are witnessing more rational behavior with respect to pricing as a result of the sizable project opportunities that are in the pipeline.

As for OneSubsea, which should close in Q2, the team is excited about launching what will truly be a unique subsea systems provider.

As for Surface Systems, the start of 2013 was exceptional. We recorded our seventh consecutive record bookings level in Q1. Overall, bookings topped $650 million for Surface Systems in the quarter, an increase of $260 million or 68% versus 2012 levels and up 35% sequentially.

Primary drivers for the growth in orders came from our Far East and Middle East operation, as well as North America. Our Middle East orders were primarily in support of large projects in both Iraq and Saudi. Both were substantial in quality and value that will allow these customers have better visibility of supply going forward. And once again, our Surface Systems team grew our North America orders. Surface Systems had performed exceptionally well given the downturn and pressure over North America market activity, with exceptional products and services targeted to shales. Much of the increase is being driven by the tremendous reception by customers to our expanding presence in South Texas.

Our Latin America activity levels also increased, and European markets are solid and are being boosted by strong demand for aftermarket services towards our offshore platform markets in the North Sea. We are very bullish on our Surface Systems outlook, and we should see record bookings in 2013.

Moving on to Drilling Systems. While matching the unparalleled order levels in the last quarter was never predicted, Drilling Systems had healthy bookings of $665 million in the quarter. We booked 4 subsea stacks in quarter 1 and continue to see great success with our jackup systems offering, with both the addition of LeTourneau and CIMS products. We see a healthy demand for jackups developing as contractors advance their plans to upgrade an aging fleet, and inquiries for deepwater stacks for both semis and floaters continue to run high. Onshore bookings were healthy in our international operations, while U.S. new equipment demand has slowed. However, aftermarket has held in very strong. We had an exceptional aftermarket order level for all of Drilling Systems in the quarter that came in at $240 million, a record level for drilling and an increase of 26% over last year.

Moving on to Valves & Measurements. Segment total orders came in at $540 million in Q1. Revenues for V&M closed the quarter at $530 million, up 6% versus a year ago. Engineered and Process Valves continue to see healthy activity levels, driven by pipeline and infrastructure build-out across the U.S., Middle East and Asia. And deepwater projects for West Africa and Gulf of Mexico are also driving Engineered Valve demand, while our petrochem markets are providing a strong boost for our Process Valve businesses. Distributed Valves activity held together in Q1 despite the downward pressure on North America rig activity, and we're seeing some benefit of our Distributor customers' focus on managing working capital that have avoided the large swings in inventories we witnessed in years past, when activity levels have slowed.

Orders for our Process & Compression segment totaled $350 million in Q1, slightly ahead of last year's level. Revenues came in at $330 million, up $56 million versus Q1 of 2012. Our custom process systems business drove the majority of the bookings as offshore separation projects continue to provide ample opportunities for our technology offerings.

Onshore process equipment and recip orders have slowed as a result of low activity in North America, and we do not anticipate this to correct in the near future. One area our team will stay focused on is maintaining pricing discipline even at the risk of share in this particular market environment. Our Centrifugal Compression orders were driven by process gas and air separation markets, and we continue to see a large number of opportunities as these markets grow globally based on -- in support of our 2013 plans.

I want to summarize that, as you've seen in our embedded guidance, we're seeing the reality of a weaker North America market manifesting itself in a couple of our businesses that will negatively weigh on our 2013 results. However, the strength and diversity of our bookings, as seen by results in quarter 1, give us great visibility as we look forward. Our deepwater markets are expanding, and the formation of OneSubsea with our partner, Schlumberger, will provide an exceptional platform to build our Subsea Systems upon. Our Drilling Systems platform is gaining traction with our customers. Surface Systems is fast evolving to be another $2 billion-plus business unit for Cameron, and V&M is benefiting from both the infrastructure build-out on both onshore and in deepwater.

All in, 2013 will be a record year for Cameron, and the strength and quality of our backlog is coming together better than we had anticipated. Chuck?

Charles M. Sledge

Thanks, Jack. We reported earnings per share before charges of $0.70 for the quarter, which was at the lower end of our guidance range. As we discussed in our fourth quarter call, 2 factors were going to impact 2013 results. The first is the strength and timing of recovery in North American market, and the second was our -- the second factor was our ability to execute on our record backlog. Both of these did, in fact, impact first quarter results.

Our PCS segment was negatively impacted by activity levels in the U.S. We have 2 business lines in this segment which are heavily influenced by North America. They are our reciprocating gas compression and wellhead separation businesses. Both of these businesses underperformed our plan to lower-than-expected activity levels. We see this continuing further into 2013 for these 2 businesses.

In addition, we had a project delay, which further compounded the issue. I would like to point out that North America did not negatively impact our Surface business due to share gains nor did it negatively impact our Distributed Valve business. We also had project slippage in our DPS segment. Simply put, we were unable to get some project work out the door in the first quarter, which drove both lower revenue and additional cost. The good news is this project work was low-margin revenue booked some time ago. The bad news is that it will ship in Q2 and will negatively impact DPS margins then.

Now to the details. Revenue for the quarter were down 12.7% sequentially, which was greater than the normal seasonal decline we expected due to reasons I just discussed. DPS was down 9% sequentially. V&M was down 6% sequentially, which was in line with our expectation, and PCS was down 31%. This represents the low point of revenues for each segment for the year.

Our EBITDA margins declined sequentially to 14.6%, which lagged our expectations. DPS's EBITDA margins were 15.6% for the quarter due to project slippage I discussed earlier. V&M's were 23.6%, significantly ahead of our expectation due to mix, and PCS were 9.4%, driven by the factors I discussed earlier.

Other costs were $0.10 per share, which primarily comprise costs associated with getting ready of the OneSubsea formation and the impact of the Venezuelan currency devaluation. Our tax rate for Q1 was 19%, which was in line with our guidance for the quarter.

Cash flow from operations was significantly better than our normal Q1, registering $23 million of cash used in operations for the quarter. This compares to a $202 million usage in the first quarter last year. We repurchased 613,000 shares in Q1 and have repurchased nearly a like amount since the end of Q1.

Now turning to second quarter guidance. Revenue should rebound from the first quarter levels with a low-double-digit percentage increase sequentially. DPS will account for virtually all the revenue growth. However, some of this increase reflects lower-margin shipments missed in the first quarter, so margins will be affected. V&M and PCS should have mid-single-digit percentage increases. Overall, EBITDA margins for the second quarter should increase nominally, but 3 items will weigh on them. First, V&M had a stellar margin performance in Q1 due to mix. Simply put, that mix will not repeat itself in Q2, so margins will come down something close to V&M's 2012 full year margin attainment, which was 21.8%. Secondly, PCS will continue to struggle with its North American businesses, and so while margins will improve in Q2, such improvement will not be as much as we would have planned for at beginning of the year. Finally, while DPS margins will expand in the second quarter, much of the lower-margin project slippage from Q1 will hit Q2, so the expansion will be somewhat muted. I want to emphasize that the margins for DPS you'll see in the first half of 2013 are not indicative of the margins we've been booking orders at, nor are they indicative of the margins you should see in our income statement in the back half of '13.

Two additional second quarter items of guidance. As we indicated in our year-end call, the tax rate will rise for the rest of the year and should approximate 23% from Q2 onward. Additionally, you should use 248 million shares in your model. This results in EPS of between $0.75 and $0.80 per share, excluding charges. What I'd like people to take away from our second quarter guidance is that the margins in Q2 are not indicative of what you'll see in the back half of the year. We should be through the vast majority of our lower-margin backlog, and the shipments of higher-margin backlog over the back half of the year should offset North America's impact on PCS.

Now turning to full year guidance. On this guidance, I've assumed OneSubsea closes in the second quarter and no further share repurchases occur. Revenue should eclipse $10 billion for the year. DPS will drive the vast majority of this growth. Our 2013 revenue outlook for V&M has not changed, so you can expect a mid-single digit revenue increase. North America will continue to weigh on PCS, so their revenues will only increase in the mid-single-digit range. Overall, EBITDA margins for the company should be around 16.5% for the year. This is somewhat below our previous forecast due to PCS's North American businesses, as well as project slippage which occurred in Q1.

DPS will increase over 2012 levels, but the underperformance in the first quarter will impact the overall year, so about a 100 basis point improvement year-on-year will be a good target. V&M is as advertised for the year, with a slight expansion over 2012's very strong level. PCS will be the biggest change from our beginning-of-the-year margin guidance due to the factors I discussed at the outset of my remarks. However, margins should still improve year-on-year. The improvement should approximate 150 basis points.

D&A for the year should be approximately $305 million, which includes an estimate for the impact of the write-up of Schlumberger assets contributed to OneSubsea. This is our preliminary estimate, and I'm sure it will change as more information becomes available. And you can see from our previous guidance on D&A that, in fact, the amortization is quite large.

Interest expense should approximate $100 million. You should use $220 million of corporate SG&A in your models and a 23% full year tax rate. CapEx should approximate $500 million.

Finally, our guidance is based upon 248 million shares outstanding. This results in a full year guidance range of $3.50 to $3.70 per share. I want to emphasize that majority of this decline from our original guidance represents the initial dilutive impact of OneSubsea. With it closing midyear, there simply isn't enough time to get any revenue synergy out of the joint venture. However, as you saw from my earlier comments, we did not include any potential share repurchases using the proceeds we will get in conjunction with the formation of this JV in our guidance, so there's opportunity there.

Jack B. Moore

Jeff, let's go ahead and open it up for questions.

Jeffrey G. Altamari

Rob, please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Jim Wicklund of Crédit Suisse Group.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Fabulous order rate. Several of the manufacturing companies have dealt with the idea of episodic increases in activity. Deepwater seems to be more secular, and this is fabulous. But is this the beginning of the deepwater development trend, or is this going to be -- are we going to look back in 2 years and this is going to be episodic event of high orders?

Jack B. Moore

Jim, when you look at the Subsea, you just look at the last several years. I think all of us in this space have seen the bow wave of opportunities, the number of projects we're tracking, the number of things that are in our customers' queue to launch. I think we're seeing a convergence of a lot of the rigs coming into play over the last couple of years and more rigs coming, confidence that oil prices are going to give these guys the justification to make these projects generate the kind of returns they're after. It's a great convergence of opportunities and the market fundamentals that are making these things happen for us. And I see nothing but very, very positive things for our deepwater space over the next several years. As I said, we're pretty bullish on what we see near term and long term. And I think our orders in the first quarter, our bullishness for the balance of this year, I think others that are in this space would echo the same comments that we're finally seeing some of the things come together that we've been talking about for the last several years.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Okay, the visibility is fabulous. My follow-up, if I could, you're obviously not terribly optimistic on PCS. And obviously, in the first quarter, there was a great deal of discussion as to the strength through the rest of the year in North America. But the big 3 that have already reported are talking about increased activity through the rest of the year. Do you have backlog visibility, or is your...

Jack B. Moore

This business is -- it's very short-cycled, Jim, the business that are impacted. Some of the things -- yes, I'm very optimistic that this back half of the year is going to be better than the first half, activity-wise, and some of that's built into our thinking and our guidance. But we just -- this first half of the year is going to impact that business more so than we had planned.

Operator

Our next question is from the line of Ole Slorer of Morgan Stanley.

Igor Levi - Morgan Stanley, Research Division

This is Igor filling in for Ole. Nice order number. I had a question, a follow-up on the OneSubsea closing. You mentioned, I mean, a big part of the decrease in guidance is due to dilutive effect there. Is it fair to assume that at some point in 2014, that will turn accretive? And then just with the proceeds, could you talk a bit about -- I know you mentioned repurchases. Are there other investment opportunities that you think you could pursue in Subsea with that additional cash?

Charles M. Sledge

Yes. I think first of all, obviously, with more time, the ability to generate revenue synergies will help that become accretive. So, yes, in '14, it should be accretive. When you look at -- we purchased a lot of shares during the first quarter. We have a lot of cash available, and you guys are very familiar how we deploy that cash. And you saw our activity in the first quarter and quarter-to-date. You'll probably see us continue that activity.

Igor Levi - Morgan Stanley, Research Division

Okay, great. And then shifting gears to your Drilling segment, could you just talk a bit about your progress in streamlining LTI and TTS? And then what kind of discussions are you having with customers around additional jackup packages or even potentially winning a second floater package?

Jack B. Moore

Well, it's a great -- I think it's a great opportunity that Cameron has developed, with both LeTourneau and CIMS coming in with a very established pressure control brand. As I've said, this is going to take some time in order to make sure that we integrate these businesses efficiently and that the customers see that Cameron truly is committed to delivering them a systems approach to meet their technical challenges and their operational challenges in the markets going forward. We've had a lot of success in terms of early days with the jackup markets. Obviously, we booked our first deepwater stack as well. I mean, our deepwater system for floater as well. We've been very clear that on the floater side, we want to make sure we get this right. This is a market that we are committed to and committed to doing it right. Customers have high expectations. We've got a lot more traction in the jackup market. Obviously, both businesses that we acquired have good track records in history. Pulling it all together has been, I think, a great opportunity for us, and we're seeing a lot of very positive response from the customers. And our first quarter results reflect some of that. And we're pretty bullish on the balance of the year in terms of the opportunities that we can deliver with both LeTourneau and CIMS combined with Cameron's pressure control businesses to offer our jackup markets.

Operator

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

Waqar Syed - Goldman Sachs Group Inc., Research Division

My question relates to floater ordering. Are you seeing any more inquiries there? There's been kind of a slowdown on new floater orders. Are you seeing more conversations regarding that? And secondly, on the FPSO market, what's the outlook there? Are you seeing any incremental order flow coming in?

Jack B. Moore

Well, I'd say we booked 4 subsea stacks in the first quarter, which was pretty much what we thought. And as I say, we still are tracking a high level of new stacks going forward. I will say, though, that I think what we're seeing in terms of the floaters is more weighted to the semis than the drillships. I think that has a lot to do with customers just trying to look at having the versatility of their floater fleet around the installation, the servicing, as more and more of these deepwater projects continue to evolve. So I think we're seeing a little bit of a shift around that, but we're still very optimistic. We're seeing a lot of demand for upgrading. We're seeing a lot of inquiries around higher pressures, things that our customers are encountering in these deepwater developments that are going to give us a lot of -- I think a lot of growth opportunities to continue to evolve in the deepwater equipment side. As far as the FPSO market, Brazil drives a lot of this market. We see a steady market. I wouldn't say that it's ballooning or growing at any great rapid pace, but I will tell you it's a very healthy market and a steady market. And we don't see anything really changing that over the near term.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Now as the market shifts towards more semis, as you mentioned, do you still see prospects of dual BOPs, or because of smaller footprint, people may just keep a single BOP in that market?

Jack B. Moore

Good question. I think it's a little bit of a mixed bag. I think the dual BOP capability is going to give the operators a lot of comfort. It's going to give the contractors a lot of flexibility. And uptime is king, and there's a lot more oversight on how this equipment operates offshore. And that flexibility is worth a lot to them, to have that dual capability.

Waqar Syed - Goldman Sachs Group Inc., Research Division

But the question is, is this technically -- or is there enough space on semis to have dual BOPs, or do you think that remains a drillship phenomenon?

Jack B. Moore

Like I said, I think it's a little bit of a mixed bag. I think some of the contractors and operators are looking at accommodating that. But we'll see some that will stay with the single system, I'm sure.

Operator

Our next question is from Michael LaMotte with Guggenheim.

Michael K. LaMotte - Guggenheim Securities, LLC, Research Division

First question, Jack. How many trees were in the order number for Subsea?

Charles M. Sledge

83.

Jack B. Moore

83 total for Cameron in the first quarter.

Michael K. LaMotte - Guggenheim Securities, LLC, Research Division

Okay. And then Chuck, I hate to sort of pick on the one thing that doesn't seem to be going as planned, but if I go back to the fourth quarter conference call, PCS, the commentary seems -- the fourth quarter number was good, and the color around '13 was clearly positive. If I think about year-on-year expectations for '13 in terms of overall activity and rig count, I don't think expectations have really changed all that much. I mean, maybe a few rigs here and there, but it's not 10%, 15% swing vis-à-vis expectations. So I'm just wondering if there's something going on in terms of markets bifurcating. There are some product and service lines that are doing better than others in a rather flat environment. Can you provide some more granularity on what's going on in PCS?

Charles M. Sledge

Yes. A couple of things. The 2 things we talked about, the weakness in the reciprocating gas compression and the wellhead separation. The wellhead separation is an off-the-shelf business, and I think the rig counts are lower than probably people were thinking they would be going into the first quarter and right now, too. So that's affecting it.

Michael K. LaMotte - Guggenheim Securities, LLC, Research Division

Is that a mix in terms of the hydrocarbon? Because, I mean, the rig count has been shifting in terms of getting more oil. Is there less separation that's needed?

Charles M. Sledge

Yes. You had a slow season up in the Bakken and some other places where we saw weakness we didn't expect to because of weather. The second is on the gas reciprocating compression. We are a very small player there. There is a very dominant player, and you've clearly seen some shifts there, with gas activity down. They typically will take the lion share of the work. So that has impacted us a little bit. And then at PCS, we did have a first quarter -- I did mention we had a first quarter project slippage, but that's just a one-quarter phenomenon there.

Operator

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

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

I would appreciate a little bit more color on guidance as well, I guess, and maybe focusing on the DPS side. Now part of it, I was trying to keep up, and I may not have been able to fully keep up. But I think what I heard was guidance in DPS, EBITDA margins of 100 -- growth of 100 bps year-over-year. Did I hear that correctly?

Charles M. Sledge

Yes, that is correct.

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

And that was slightly -- that's somewhat down, I think, maybe 100 bps down or so from prior guidance, right?

Charles M. Sledge

Not quite that much. But yes, it is down.

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

Okay. And that we should we attribute to this project slippage, I think, but I'm not -- does that all tie? I mean, I understand it's a little weaker in the first quarter, but I'm not sure why, in the aggregate, it should be impacting the overall margin outlook. Maybe I'm just missing something.

Charles M. Sledge

Yes. What I said was project slippage and additional costs. Anytime you have, in the project world, you have project slippage, it means you're incurring some additional costs. So yes, the revenue isn't that big of a deal, but it's the incremental costs you incur because you don't get it out on time.

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

From the timing.

Charles M. Sledge

And again, that's all through the pipeline first half of the year. Second half of the year, we're shipping what we had booked recently, and it's just that significantly better margins.

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

Got it. And so we should -- so your second half guidance would be unchanged -- or your outlook for the second half in DPS is unchanged relative to prior?

Charles M. Sledge

That is correct. That is correct.

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

All right, that's helpful. If I could shift to OneSubsea, thank you for the early look, and that's very helpful on the D&A side. Are you in a position to give us a bit of guidance in terms sort of revenue impact and the EBITDA impact from OneSubsea?

Charles M. Sledge

I can't give you the EBITDA impact, but the revenue impact is around $400 million-ish for the back half of the year, plus or minus.

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

$400 million, okay.

Charles M. Sledge

And again, this is all initial guidance. Obviously, we're not closed yet. I want to put all the right words around that and the caveats around that, okay?

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

Sure. No, of course. And I understand -- it's not EBITDA guidance, but to what degree, as you think about that $350 million to $370 million, to what degree are you including or excluding kind of the integration costs and things that we would probably think about pulling back out and sort of below the line, if you will? Where is that in your guidance?

Charles M. Sledge

Okay. The integration cost is not in the guidance. That will be reported in other cost. But we are adding cost to this business when we form it in order to develop technologies, so we're adding R&D, we're adding some positions. And again, since we're closing midyear, we just don't have the runway to get the revenue synergy off of it. So we are making additional investments in OneSubsea, both in R&D and people, that we believe will pay off over time. And that's incorporated in my guidance, those costs.

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

That is in the guidance. So putting both sets of people into new headquarters would not be, but incremental investments in the space would be, correct? That's how we should interpret that?

Charles M. Sledge

That is correct. So move costs and things like that, IT cost, that's not in. But the actual R&D, incremental R&D and incremental payroll for continuing people is in.

Operator

Our next question comes from Bill Sanchez with Howard Weil.

[Technical Difficulty]

We'll move on to Ed Muztafago of Societe Generale.

Edward Muztafago - Societe Generale Cross Asset Research

Great quarter on the order side. I'm wondering if you could talk a little bit -- you highlighted again the strength of the aftermarket, and I know that's a part of the business that the industry was struggling to keep up with the demand. And can you kind of give us an update as to where Cameron is relative to being able to meet the industry's demand in terms of the aftermarket side of the business?

Jack B. Moore

We're running hard. We have spent a lot of CapEx in this area. We've hired a lot of folks to support it. We've got a lot of folks going through training programs to support it. Aftermarket service is the biggest differentiator that we've identified in Cameron. It's an area we have to be great at. It's what our customers expect us to be very good at, and we have to be that and more. So yes, we are ramping up our capacity to serve customers, primarily in our Drilling, our Surface, our Subsea and our Valve businesses, as well as our compression sides of the businesses. These are key markets where customers put a huge premium on service after the sale. So when you look at the number, we tracked this number since we were spun out in '95. We have continued to grow our aftermarket business year after year after year in spite of whatever cycles we were in. And it proves that this is an area you have to get focused, too, because it will reward you in the long term. And I'm very pleased to see the numbers. It tells us that customers have confidence in Cameron, that they're going to continue to bring their opportunities to us. We're expanding how we are capturing our share, that we should own in this space. We're not finished, and we're going to continue to invest in both the facilities and people to keep this ball moving. But you're never -- I don't think you ever finish being where your customers want you to be in this space, but we're doing a lot of good things that are getting us there.

Charles M. Sledge

Ed, I'll just add on to that. Some of the capacity expansions won't be done until the back half of the year in aftermarket. And so you're going to see a richer aftermarket mix running through our P&L in the back half of the year, so that also contributes to the margin.

Edward Muztafago - Societe Generale Cross Asset Research

Okay. So presumably, 2014, some material margin benefits from that expansion.

Jack B. Moore

Absolutely.

Charles M. Sledge

Yes. And the pricing we've been getting for some time on new equipment orders.

Edward Muztafago - Societe Generale Cross Asset Research

And as an unrelated follow-up, I was wondering if you could talk a little bit -- we've heard a number of the service companies kind of reiterate this idea of the breakdown in relationship between wells and rigs. Even with rig count potentially down in North America in 2013, overall well count may actually be flat. Can you kind of walk us through, at least, how maybe your business has changed a little bit in relation to that? I'm sure there's some parts that are related more to well count than rig count and vice versa.

Jack B. Moore

Well, I think if you look at our Surface Systems business, it's a great barometer for that. I mean, we've grown that business now in the U.S. quarter-over-quarter. Year-over-year, we're up substantially in our Surface Systems business in North America. A lot of that is focused, really, on us moving to offering a broader suite of services at the well site. And it's frac trees and frac valves, frac manifolds. The wellhead and the tree that ultimately ends up on those wells is not all that different from what we would have sold 3 to 5 years ago. It's all the other ancillary services that we're able to provide. So the type of wells and the pressures that those wells are seeing are meaningful to Cameron in terms of the scope of revenue we would participate at it. That's probably more important to us sometimes than the numbers. You've got a lot of wells being completed in the U.S. that may not have much of anything that Cameron could be competitive in terms of providing. But when you're looking at multistage frac, high-pressure, a lot of oil and gas in terms of the mix, those are good targets for us.

Edward Muztafago - Societe Generale Cross Asset Research

Okay. So I guess the direct answer is rig count is still a better proxy than well count, right?

Jack B. Moore

Well, rig count's a good barometer. I don't disagree that the number -- the rigs are being more efficient. As we see more efficient completions, the type of completions are really the big driver for us.

Operator

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

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

All right, Chuck, so to flash a dead horse here, but the 20% to 25% revision to EPS, predominantly OneSubsea, predominantly due to the fact of added incremental costs associated with [indiscernible], that you're not going to be able to get any leverage off of it with regard to increased revenues early on. I mean, is that basically it?

Charles M. Sledge

Yes, it's $0.25, not percent.

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

Right. $0.20 to $0.25, yes.

Charles M. Sledge

Okay. I thought you said percent, sorry. The other thing, Bill, remember, they're paying us $600 million, which, by definition, meant the earnings streams didn't justify a 60/40 split. And so when you form this thing with 6 months left to go in the year, it's just hard to overcome the fact that they had -- that Schlumberger's contributing $600 million to Cameron to equalize to the 60/40.

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

Okay. And with regard to the margin roadmap for DPS getting back to that substantially higher second half of the year predominantly due to more favorable mix, do we exit the year with something beginning with a 2?

Charles M. Sledge

Yes.

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

Fine. And then I get to the point -- the question of what you would view as reasonable, not necessarily assuming a perfect stream of execution, a reasonable mid-cycle margin for DPS as you look -- I mean, we're not talking about '14, but assuming you're getting better leverage off of OneSubsea, you're reflecting your pricing with regard to -- on the improved fundamentals for Subsea in general and better integration of acquisitions, what have you, should that margin be comfortably in the 20% range?

Charles M. Sledge

Yes, it should. We should -- and again, I'm not going to comment whether it's '14, '15 or which quarter thereof it may be, but you should easily surpass EPS margins.

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

Okay. And finally, with regard to Drilling, $600-and-something million in orders for the first quarter. I assume that you would not necessarily encourages us to use that as a quarterly run rate for the balance of the year in terms of expectations for orders.

Jack B. Moore

Bill, that's -- we're pretty optimistic about where Drilling orders will be for the year, so I'm not going to say no to that. What I would say no to is do not annualize first quarter Surface Systems bookings of $655 million. Even though Surface Systems, as I've said, will be a $2 billion business for Cameron, that's an incredible order run rate for Surface Systems in the first quarter. We had a couple of orders that will not repeat this year, but I don't want to diminish what Surface is doing because it's a phenomenal story. But Drilling still has more bandwidth to run, for sure.

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

But the $240 million, if I heard you correctly, with regard to the aftermarket inbound for Q1, step change increase, does that persist?

Jack B. Moore

I would -- when we look at the aftermarket numbers for Drilling, there's a few things in there I can look at and say does this repeat, does that repeat because we have some sizable projects that kind of go into rebuilding certain things. We continue to see those opportunities come up, so the story is we have the opportunity to get there.

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

Okay. So something approaching $2.5 billion in total for Drilling inbound for 2013 is not something that you're going to dissuade us from really believing at this point?

Jack B. Moore

I'm not going to tell you no. We've got a lot of -- creating a -- our ability to deliver something more than pressure control equipment has helped position Cameron differently. The key to us is making sure that we do that and we do it right. We've got great competitors in that space, and we've got to bring our A game.

Operator

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

William Sanchez - Howard Weil Incorporated, Research Division

Chuck, just a question as it relates to the Surface business, and clearly, you're noting that the order rates remain good there, that you guys have been taking share. I'm just wondering, could you comment at all in terms of just the pricing that you're seeing? Is it meeting expectations? Are you having to be more aggressive on the pricing front to gain share?

Jack B. Moore

Yes. Bill, this is Jack. What I'm really, really happy with, with this group is that we're winning this work on performance. We can go to customers and show them exactly what their downtime is when they use Cameron, and they love what they see. And the stories that I get from our customers is -- we can make a difference on location with the quality of equipment, the quality of people, the infrastructure we have put to support it. These are -- I mean, customers are spending huge sums of money on these build-outs, especially in concentrated areas like the Eagle Ford. To be down half a day because of a valve leaking or flow lines not hooking up correctly, it's a huge win when they see what Cameron can do to help that performance on location. And so we're winning this work, I think, the good old-fashioned way. And our margins in Surface Systems continue to improve along with the revenue streams.

William Sanchez - Howard Weil Incorporated, Research Division

Okay. And you've already commented that it's more of a mix issue as to why the margin performance won't be repeated here in 2Q. Is that right, Chuck?

Charles M. Sledge

The estimate for Q2 of why it's going to change going forward? Or I'm not sure I understand the question, Bill.

William Sanchez - Howard Weil Incorporated, Research Division

I'm sorry, no. I'm sorry, I was thinking North America. I'm sorry, that was a comment on the V&M in terms of the margin mix.

Charles M. Sledge

Yes, yes. That's just a mix issue. We just shipped out a lot of high-margin stuff. It will return to more normal levels.

Jack B. Moore

Yes, V&M, we have projects that go in certain quarters, and more of the bigger project orders are going to weigh on that mix. Great business. It's just not -- it's not as consistent quarter-to-quarter as you guys would all like, but at the end of the year, it's a great -- it's going to be a great performer.

William Sanchez - Howard Weil Incorporated, Research Division

Sure. Just one other question on OneSubsea. Chuck, you're keeping the full year CapEx number, I believe, flat at $500 million. I guess stay tuned in terms of the incremental CapEx needs that we might see as a result of this business. Any early indication there, and how much of the $600 million you'll be receiving do you think you can use for other uses, if you will?

Charles M. Sledge

Stay tuned on the CapEx for OneSubsea. We obviously can't get into some of that given regulatory issues, but stay tuned on that. But we have the opportunity to deploy capital into our businesses, absolutely.

Operator

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

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

I just wanted to follow up on one of the earlier questions. Just around the Drilling aftermarket, this is kind of a new record this quarter. We had a little bit of a lull second half last year. Is it reasonable to think about a $200 million quarter run rate for that aftermarket business? I mean, so clearly -- I guess the worry by some was with the low second half last year was the big slug in aftermarket growth there, kind of onetime-ish. And I guess this quarter, you would say no. I'm just curious how you think about the go-forward run rate.

Jack B. Moore

Well, I think you could see a few episodic blips in the aftermarket. I think overall, the strength of the aftermarket story continues to evolve. So yes, I mean, if you -- annualizing the current run rate would be great. I don't think it's impossible to say that we wouldn't end up the year at a number that's better than what we had last year and would equate to something at $200 million or north of. The opportunities are there, Jeff. I think part of it is -- some of it is just, again, as we talked, we got to make sure we can demonstrate the ability to take it and digest it and support it in the time frame the customers need it.

Charles M. Sledge

Jeff, our thesis that we've told you guys that we think Drilling aftermarket could grow double digit for the foreseeable future is still intact.

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

That's good color. Within PCS, I guess some of the execution issues of 2011, 2012 are really the -- seems like they're not the area where kind of the standard and separation business and the onshore. I guess did you see any step back in some of those kind of longer-cycle separation-type projects where you had issues before? Or has that kind of continued down the plan you laid out?

Charles M. Sledge

Yes, we had one project slip, a complicated project. It was taken a long time ago. But I don't think that's indicative. Everything else, absent that one slip, they were on plan in CPS.

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

And then the last question I had, just on DPS, the -- could you give just the business line in which the project you had the slippage in Q1?

Charles M. Sledge

Subsea and a little bit of Drilling. We were waiting to get a stack pack complete, which will be completed here in a few weeks.

Operator

Our next question comes from the line of James West with Barclays.

James C. West - Barclays Capital, Research Division

Jack, I was over in Asia a few weeks ago, and I got a chance to sit down with most of the shipyards. And one of the things that I came away with is that they believe themselves to not really be any kind of bottleneck to your rig construction this cycle. I think we're all aware of that because they're not building tankers, et cetera. They're just building rigs for the most part. But what they were suggesting is that the true bottleneck now that developed was with the rig equipment suppliers, particularly pressure control and, of course, subsea BOPs being the main area, I guess. So number one, do you agree that that is kind of the tightest part of the kind of market right now and the ability to build new assets? It's the first question. And then second, if I were to order a BOP, let's say, a subsea BOP today, what would you quote me as a delivery time?

Jack B. Moore

Well, depending on the price.

James C. West - Barclays Capital, Research Division

Assuming I'm a normal customer.

Jack B. Moore

I don't necessarily disagree with the shipyards. You're right. A lot of their focus has shifted to the drilling arena, and you see a lot of ability to replicate designs and replicate their business plans. And so it puts more emphasis on those providing the equipment to support them. And for sure, when you look at a deepwater stack, you look at the complexity of it, you look at the fact that not a whole lot of people can do it. It doesn't surprise you. Our lead times are probably running close to 18 to 24 months for a stack. Again, it depends a little bit on what it looks like, but that's not inconsistent with kind of where we were a year or 2 ago. And even though we continue to expand our ability to put these things together, as Chuck mentioned, we're spending a lot of money and have spent a lot of money in the last 1.5 years in expanding our capacity to not only build stacks but also to assemble and test them in terms of the components. So we've opened our new yard in Asia, in Singapore, on the key side there near Jurong. That's giving us a lot of additional capacity to do not only manufacturing but also some of the stacking needs that we need to do to support them. So I think we'll be -- I think we'll be -- we'll continue to evolve that, but I think the shipyards probably got a good case to claim that we could be a little swifter in what we're doing.

James C. West - Barclays Capital, Research Division

And would you say that your competitors, NOV and [indiscernible], are probably about the same in terms of their delivery schedules as well?

Jack B. Moore

I can't speak for them, but I would say that I think all of us are challenged to deliver something inside of the time frames I've discussed.

Operator

Our next question comes from the line of Robin Shoemaker with Citigroup.

Robin E. Shoemaker - Citigroup Inc, Research Division

I wanted to ask about -- again, go back to the jackup topic. There's been a lot of jackups ordered in the first months of 2013. And I wonder, first of all, have all the jackup rig equipment packages been ordered on those rigs? And if not, what's the timing of that, and how are you doing with that?

Jack B. Moore

Well, let me just say that, no, not all of the equipment has been ordered on the jackup strength. But when you kind of look at the overall landscape for the jackup markets, we're seeing -- obviously, the contractors are seeing increased demand for higher-spec jackups. They're seeing increased day rates. And it's really kind of hitting them all over the world, Mexico, Gulf of Mexico, the Middle East, Asia, North Sea. Obviously, it's continuing to high grade their specs. So we're seeing very healthy demand coming from a lot of different corners of the world that are driving some levels of different specifications. But with the advent of what we now can offer customers both in the rig design with LeTourneau and then the topside equipment as well with both LeTourneau and CIMS to go along with the pressure control equipment. It's giving customers more options. So we're going to continue to see and chase those, and I think it's going to end up being a very healthy year for all of us in this space when it's all said and done.

Robin E. Shoemaker - Citigroup Inc, Research Division

Okay, good. So let me just then turn to Brazil, where, I think, they're building 29 rigs. I think 20 rig equipment packages of the 29 have been awarded at this point, with 9 more imminently to be awarded. So how are you doing there?

Jack B. Moore

Well, we've booked some of the deepwater stacks through -- with Aker providing the topsides on those. And we announced those last year. We are still looking at options for some of the additional ones that have not been ordered yet, but I can't really promise you that those are going to go to Cameron or someone else. But we continue to work those opportunities.

Operator

Our next question is from the line of Angie Sedita of UBS.

Angeline M. Sedita - UBS Investment Bank, Research Division

Jack, on Subsea pricing, clearly, you got some positive comments and that you're pushing higher for pricing today and you have been. Are you seeing, number one, all your peers doing the same in the marketplace? Is everybody following suit? And number two, do you think we can return to last cycle pricing over the next 1 to even 2 years?

Jack B. Moore

Well, Angie, I can't -- obviously, I can't speak for what the other guys are doing on pricing. I just know that Cameron's made a very conscious effort to make sure we get paid for the risk we take on these deepwater projects because I think we've all learned the hard way that they're not easy. They don't operate in -- we don't operate these in easy places that are predictable. So yes, you've got -- I think you've got to pay a lot of attention to making sure you get both the terms and the pricing structure correctly before you go forward. And my sense is and what we see is that everyone else, I think, has taken that same approach to it. And I think the commentary on some of the other calls would indicate that, I think, everyone expects margins to get better in this space, and they should given the risk we have. So as we look forward and we continue to be more selective on what we can and can't do in this space, we're going -- I think that results in better pricing and obviously, better margins. And yes, do we get back to where we were, let's say, in the '07, kind of '08 kind of time frame, where our margins in Subsea were a lot healthier than they are today? And the answer to that is yes, and I think with the advent of OneSubsea and the ability to drive more value with our customers related to the technologies that we are targeting for them, I think there's a lot more upward growth for that than we have yet to really understand.

Angeline M. Sedita - UBS Investment Bank, Research Division

Okay, fair enough. And then since you've -- on OneSubsea and developing new technologies, what's your thoughts on how long it would take to actually develop your own subsea separation technology and get it in the water, get it tested?

Jack B. Moore

Yes. Some of that's underway now. I think the recent success that FMC had in Brazil is a great -- I think it's a good story, and I think it's great for the industry and that it sees that subsea separation is a viable option. I think all of us will be challenged to develop various solutions that meet the various customers' needs. And we have -- as I've said, we have a number of projects that have been underway. Cameron has a lot of process technology that we own. Marinizing it is some things we've been committed to, partnering with various and sundry operators. That continues, and that will be advanced under the OneSubsea initiatives, so you'll see some great things start to evolve with that as the years unfold.

Angeline M. Sedita - UBS Investment Bank, Research Division

Great. Then as an unrelated follow-up, obviously, 2012 was a great year for deepwater stack awards, BOP stack awards. You have 39, I believe, that were ordered. Obviously, it's going to be lower in 2013. Any thoughts on how many you're chasing for 2013 and how it's going to shake out?

Jack B. Moore

Well, that's a good question. And yes, I think we've been very clear that 2013 will not equate to 2012's booking success with Drilling. But 2013 will be a good year for Drilling. It will be -- we've got a lot of opportunities. As I said, the packages that we can now offer with the acquisitions with LeTourneau and CIMS give us more -- a lot more bandwidth. And so, Angie, as we look at the -- if we look at the floater market, going forward, it's not going to be as robust as it was in '12 in terms of the order right at the end of the year, but it still will be pretty decent. And I would expect that Cameron will get its fair share when it's all said and done. But I won't give you a number.

Operator

The question is coming from the line of Kurt Hallead of RBC Capital Markets.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

So stack is down 3%, 4% this morning. As an opportunity here to kind of get some message across, to give some people some comfort and confidence, what would you suggest here that people kind of focus on? Looks like the earnings guidance is trumping your very strong order look -- order outlook, so what do you think people are missing here and the reason that they should kind of stay the course?

Jack B. Moore

Well, Kurt, let me just say I think the order story is phenomenal for Cameron. And I think it gives us great visibility as to where our future is going to take us. And that's a very strong, strong position to be going into the balance of this year and looking into '14 and '15. So that is a -- I think the order story is one that everyone probably should be pleasantly surprised with. I know everyone is a little disappointed with the margins in a couple of our business segments, but I think as Chuck articulated, we've got great visibility as to where we're going to come out of this in the second half of the year and where that takes us in terms of the '14 and '15 bandwidth. So it's a story that is going to continue to evolve and be very positive for Cameron.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

I appreciate that color. Now that was the easy question. Now, Chuck, the hard question. From a context of the revised guidance for the year, the street, I think, was at $3.87 coming in. You're guiding down to $3.50 to $3.70. Can you help us kind of delineate that? How much of that is the dilution factor from the OneSubsea versus some of the other margin dynamics for PCS, for example?

Charles M. Sledge

Yes. When you work through your models, you'll see the majority of the decline is OneSubsea-related.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay. And you guys gave some initial color on some of the OneSubsea. Is there anything that you can provide us in terms of what the minority interest may look like in the second half of the year?

Charles M. Sledge

No, we're not prepared to do that yet, but as soon as we get a little more information that we're waiting on, we can.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay. And then just lastly, and I know the question has been asked a couple different times, but one of your primary competitors yesterday gave indications that exit rate for margins for '13 and going into '14 are going to be at levels lasting in '07, '08, I know, Jack, you just mentioned there's a possibility that margins can get to that level, if not above. When you think about exit '13 into '14, given the bookings that you're taking in and the improving margins on those bookings, is there a chance that we can get to that margin level or close to that margin level at some point in '14? I know initially, you don't want to give us some color on it, but given your stock is down 3%, I'll give you another crack at it.

Charles M. Sledge

Kurt, we'll just say what we've already said in the past, is that '14, when you look at the composition of backlog, we've been booking orders for quite some time in much healthier margins. We've been at a low point in Subsea revenues for quite some time because we haven't wanted to play in low-margin work. So I think all the dynamics could very well -- will lead to a very good '14 year. Is it going to be peak margins for Cameron? I don't know yet. We haven't rolled up our numbers, but it will be a good year.

Operator

At this time, for closing comments, I'll turn the floor over to Jeff Altamari.

Jeffrey G. Altamari

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

Operator

This concludes today's teleconference. You may now disconnect your lines at this time, and we thank you for your participation.

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