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Cameron International Corp (NYSE:CAM)

Q2 2009 Earnings Call Transcript

August 4, 2009 8:30 am ET

Executives

Scott Amann -- VP, IR

Jack Moore -- President and CEO

Chuck Sledge -- SVP and CFO

Analysts

Jeff Tillery -- Tudor, Pickering & Holt

Dan Boyd -- Goldman Sachs

Marshall Adkins -- Raymond James Financial

Mike Irvin -- Deutsche Bank

Joe Gibney -- Capital One Southcoast

Jeff Spittel -- Natixis

Brian Omer [ph] -- Richard Capital

Robin Shoemaker -- Citigroup

Brad Handler -- Credit Suisse

Geoff Kieburtz -- Weeden

Michael LaMotte -- JP Morgan

Stephen Gengaro -- Jeffries & Co.

Jonathan Van Orden -- Dominick & Dominick

Operator

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

It is now my pleasure to introduce your host, Mr. Scott Amann, Vice President of Investor Relations for Cameron. Thank you, Mr. Amann, you may now 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 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'll turn the call over to Jack.

Jack Moore

Thank you, Scott. Cameron reported earnings of $0.60 a share this quarter net of special items which included $0.03 of severance, with an offsetting one-time tax gain of $0.05. Needless to say we're very pleased with these results.

Revenues for the quarter finished at 1,270 billion which is down 14% versus our Q2 of '08; however EBITDA was down only 4% versus last year, again a great achievement by everyone on our team given the current market conditions that we are in.

Our Drilling and Production Systems group reported revenues of 872 million in the quarter, which is down 8% versus Q2 of '08 but is up 8% sequentially. Sequential revenue gains were realized in our Subsea and Drilling Systems Business units and we saw slightly lower revenues in our surface systems.

Impressively our Drilling and Production Systems group posted 22% EBITDA margins led by our Subsea and Drilling Systems business units. Valves and Measurement revenues came in at 272 million which was 25% lower than Q2 of '08 and 12% lower sequentially. This drop in revenue reflects a substantial decline in activity we have seen in the short cycle businesses tied to North America.

For example, our Distributed Valves business is off 50% versus Q2 of '08. EBITDA margins, however in our Valves and Measurement group only dropped 10% versus last year's quarter with overall EBITDA margins coming in at 19%. Again, given the challenges in this market that these guys are seeing we are very pleased with these results.

Our Compression group had revenues of 136 million in the quarter, down 16% versus the prior year quarter, but flat sequentially. And again, as with DPS and D&M, compressions margins came in stronger than expected at 19.3% and this is 7% above last year's quarter and 17% better sequentially. So we are pleased overall with all of the operating divisions margins performance in Q2.

(inaudible) it was a combination of great executional backlog and the impact of continuing cost control efforts. Our improvements in costs largely reflect four years of capital investments in our manufacturing infrastructure, both in machine tool technology and low cost manufacturing locations. I will however make this one observation about future margins and I know Chuck will echo it in his comments. We do expect pressure on margins as price concessions yielded over the past three quarters will soon be reflected in future revenue streams.

Cameron booked over 900 million in the second quarter; the majority of these bookings were in our Subsea business unit, where we actually increased our backlog. We booked a total of 18 trees and like Q1 we had no large projects in these numbers. With the exception of the Nobel Tomar [ph] project in Israel for five trees all of these tree bookings were associated with ongoing projects.

Overall backlog sits at just over 5 billion at the end of Q2. As for our outlook for the business going forward, for the large deepwater projects, the key will be our customers' conviction that oil prices will remain stable. Based on current conversations we think that will take more time. In some cases maybe several more quarters.

We continue to expect that we will see some large orders booked in the second half of '09, a position that we have felt from the beginning of the year.

Petrobras has frame agreement for trees and manifold awards will be big news and meaningful to those who win them, but we expect only a few systems projects to be awarded before year-end. This sets up 2010 to potentially to be more robust with respect to systems awards as none of these projects that we are tracking have been canceled. However as I stated earlier our customers response to stable oil prices and their cash flows will drive their spending behavior.

New orders for deepwater drilling stacks will be for the most part focused towards Brazil. And we hope to see some movement in the second half of '09 and well on into 2010. As far as short cycle businesses that depend on North America markets, this again will depend on U.S. gas markets. Specifically, how much will supply contract and how fast can industrial and power generation demand recover? We are not optimistic that we will see any meaningful correction until 2010.

For the rest of the world we probably have some additional downside correction to go through, but we expect that with oil prices stabilizing at current levels, this will recover faster than our North America markets.

As for our pipeline valves markets, we are now beginning to see some signs of life. Only one project had been awarded in the last seven months and just in the month of July we have seen three projects awarded.

Compression bookings totaled 110 million in the quarter, while not a big number; at least we have seen some (inaudible) bookings have increased now for the third consecutive quarter, so the Canary has at least chirped.

We continue to emphasize reducing our cost both internally and with our supply chain partners. And as you can imagine we're getting lots of interest from our customers on helping them reduce their costs as well. And as I stated earlier thank goodness for the investments we made towards lowering our manufacturing cost over the past four years. This is helping us meet these challenges in a big way and I think as you can see by our results this quarter with our margins it has been very meaningful to Cameron's performance.

As you have seen we did incur charges in the quarter for severance-related expenses associated with headcount reductions, and we will continue to adjust our organization as required to meet the changing dynamics in our markets.

Let me give you a brief update on Natco. As most of you have seen we did receive a second request from the DOJ earlier last week and we will not comment on the details of that request, but I will say that we are in the process of responding to those questions and anticipate closure in late Q3 or some time in Q4.

Let me also make another comment with regards to Natco. And that's over the course of seeking the approval for this transaction, nothing has changed our enthusiasm and outlook for the meaningful impact on Natco's people, technology, and capabilities will make to our overall processing and separation strategies going forward.

Now I'll turn it over to Chuck Sledge.

Chuck Sledge

Thank you, Jack. As Jack mentioned, we delivered an exceptional quarter. Operationally, $0.60 per share versus our original expectation of $0.45 to $0.48 per share, so what changed?

First, we were able to complete more project-related work than was expected, particularly, in our drilling business. As we have now completed more than half the subsea stacks that were booked in the latest wave of orders, our processes have become quite efficient. As a result we're completing work quicker than we originally anticipated which is also translated into higher margins.

Secondly, we've been able to reduce our costs faster than the pricing pressure in the market has affected us. As Jack pointed out, however, this is a temporary phenomenon and we will see our margins come under pressure in the back half of the year as the pricing pressure we've been under since late last year is starting to show up in our results.

Given the pricing pressure and reduced order flow that we are experiencing we continue to right size our organization. As a result as Jack mentioned we incurred $0.03 special share of restructuring cost during the quarter. You should expect to see us continuing this process over the balance of the year.

Turning to taxes for a moment, our effective tax rate for the quarter has quite a bit of noise in it. We had a $5 million gain related to adjustments in our tax reserves, but more importantly, we had a lower than expected operating effective tax rate.

For the remainder of 2009 and beyond, we expect an effective tax rate of 27%, down from our earlier guidance of 29%. This reduction results from additional benefits from our international restructuring efforts. These efforts have delivered real value to our Company as our effective tax rate has declined from 32% in 2008 to a go-forward rate of 27%.

As expected our cash flow from operations of 137 million improved dramatically from the first quarter level. We expect to be cash flow positive over the balance of the year.

As you probably saw in the release we did increase our forecast of CapEx to 220 million as we continue to see the opportunity to reinvest in our business to reduce cost.

As we pointed out in the release we are restricted from buying back stock until the Natco deal closes. Once we get this behind us, share buyback will return to the menu as a potential use of our cash.

Turning to backlog for a moment, we did not have many cancellations during the quarter. In fact only 19 million. We still do have approximately 300 million of backlog associated with drilling projects that do not have ultimate operator contracts we'll have to continue to watch those.

As you probably saw we've completed our call of the remaining 1.5% converts. As a result of this call all the convert holders converted their bonds at an average price of $29.61. I will point out that these shares were already in our weighted average share count, so, no real change there. The practical impact of the call was to limit the future dilution potential associated with these instruments.

Our guidance for the year is now $2.15 to $2.25 per share, up from the previous guidance of $1.85 to $2 per share excluding any unusual items. The increase in our guidance reflects the strength of second quarter, our ability to continue to adjust our cost structure, more efficient completion of our backlog, and the lower effective tax rate.

Our D&A continues to track at $150 million and the share count embedded in our guidance is 222 million shares.

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

Scott Amann

Thanks, Chuck. Jackie, we can now open it up for Q&A please.

Question-and-Answer Session

Operator

(Operator instructions). Thank you. Our first question is coming from Jeff Tillery of Tudor, Pickering & Holt.

Jeff Tillery -- Tudor, Pickering & Holt

Hi, good morning guys.

Chuck Sledge

Good morning, Jeff.

Jack Moore

Good morning, Jeff.

Jeff Tillery -- Tudor, Pickering & Holt

Jack, I wondered if you could talk just a little bit more about your commentary on the order front, little bit more optimism about subsea and valves in the second half of the year. On the subsea side, is that more one-off type awards kind of now get what you had most in the first half of the year or do you see any larger projects other than the Petrobras award shaking those?

Jack Moore

Well, I think we said from the very beginning in the year that we just felt our customers were going to sit on hold for a while, just because of oil price uncertainty, falling service costs, I think that a lot of our customers felt that the longer they wait, the better value they could extract out of the supply chain, and that would push us into the second half of the year to see some of these awards. We saw just recently because on the sea, satellites, it looks as though Vetco has been awarded that. That was a large project and I think it's important to see some of these projects we get let whether you win them or not, because I think it underscores the conviction that we all have that our servicing this deepwater market into the long-term outlook that we're so positive about. Second half, we felt that there is several projects out there, the Chevron Jacksey [ph] model project is still out there, up for grabs, that could happen this year. The Petrobras orders as I said, they are going to be meaningful and they're big. Now they are not systems orders but they are big numbers and they will make a big impact on the backlog of those who book them, so there is the club project for Total [ph] it looks like it's moved into 2010 now. I mean there's a ton of projects that we track and all of them for the most part have moved to the right, even the Petrobras orders have moved to the right. I think they are taking a little longer to put in to the net than we all thought. But we're all still very optimistic at Cameron about the general direction of where the subsea markets going to take us.

Jeff Tillery -- Tudor, Pickering & Holt

Both you and Chuck talked about cost control, that sounds the savings you've achieved to me sounded more internal as opposed to externally achieved. Is that a fair characterization and then kind of how much more do you think we have in the third and fourth Quarter just from kind of insourcing type activity?

Chuck Sledge

Well, Jeff, it's Chuck. I think it's a combination of both. We've certainly seen reduction in our raw material costs, our inputs, we certainly see some pressure in our supply chain, our outsourcing partners, where they're looking for work, so we've been able to capture some of that and the third leg of the stool is obviously what we've done internally with our CapEx, our systems, and just really focusing to make sure that if there's a dollar to be saved that we're going after it. Still some more to be saved, but again, the pricing discounts that we've seen over the last three quarters are going to start hitting the third and the fourth quarter. If you do the math on the guidance and the comments we made, I think you'll see that maybe the margins are going to be a little better than we expected in the back half of the year, but again first half of the year clearly the peak in the margin percent.

Jack Moore

Jeff, we feel that attacking internal cost gives us sustainable cost reductions. We can't always control what our supply chains are going to be exposed to in terms of the inflationary forces going forward, even though obviously the market today is working in everyone's favor, but the investments we made internally are starting to show up in our numbers and it's exactly what we wanted to see happen and we feel real good about being able to sustain those cost reductions for the long run.

Jeff Tillery -- Tudor, Pickering & Holt

Okay. My last question just on the valves business. There's more pipeline valve orders being let. Do you think the Valves and Measurement segment is having gets the point as we exit the year the book-to-bill is approaching one?

Chuck Sledge

Well, I would hope so. We've seen like in our distributed valve business while we're off 50% versus last year, we've seen that order rate stabilize. It's not falling any more. Have we reached the floor? I don't know. I mean based on the last 30 days, 60 days the answer to that would be probably, yes, but it really depends on what happens going forward in North America with rig activity. But the sign that we're seeing on the pipeline valve orders, these are projects again we've been tracking all year and have been waiting and waiting and waiting for them to get ordered and, boom, we finally see them and they've kind of all hit here at once and not all of them, but obviously three of those that we were tracking. That's a positive sign and I can't tell you that it's going to, it means now we're on a new trend, it just means it's a positive sign.

Jeff Tillery -- Tudor, Pickering & Holt

Okay. Thank you very much.

Operator

Thank you. Our next question is coming from Dan Boyd of Goldman Sachs.

Dan Boyd -- Goldman Sachs

Hi, thanks. Sticking with the margins and looking at the back half of the year recognizing they are going to be better than what you previously expected, how much of that if you can even quantify is coming from the cost reductions and the improved efficiencies versus more quickly delivering things out of backlog?

Jack Moore

Well, I think, Dan, the more quick delivery out of backlog is really just adding to the bottom-line at the same margins, where the increase is coming from is clearly on the cost reduction side, so I think that's how it's going to work the back half of the year as well. We're going to get a little more out of the backlog than we thought and we'll get a little better margin than we thought on what we do get out.

Dan Boyd -- Goldman Sachs

That also speaks better for your margin expectation as we move into 2010 when potentially revenue is a little bit lighter, but margins should be able to hold in better than whatever we were previously expecting.

Chuck Sledge

Yes, I'm not going to comment specifically on 2010 but building on Jack's comment, this company has spent a tremendous amount of money over the last three years to four years in reducing our cost and so I think what you've seen in past cycles, our margin should hold up better because of that investment.

Dan Boyd -- Goldman Sachs

Okay. Thanks and just one separate unrelated follow-up. Can you just add some comments on what you're seeing in the surface market internationally? I think you mentioned that pricing in some Middle East, Asia, Latin America was holding up well in 1Q. What are you seeing now and how do you see that moving forward?

Jack Moore

Well as I said, I think we still have some downward exposure internationally with the surface business, but I think it has a chance to recover quicker because it's going to be more oil driven. Middle East is kind of hit a bottom in terms of activity, it slowed down. Will it get any worse? It's a good question and I really probably don't have any better answer than any one else you could ask. But our sense is that we'll see a little more weakness in the international markets and then we'll see some recovery sooner than we would in North America.

Dan Boyd -- Goldman Sachs

So 2010 and up year over 2009?

Jack Moore

I'd hope so, but maybe by the latter part of 09.

Dan Boyd -- Goldman Sachs

Okay. Alright, thanks. I'll turn it back over.

Operator

Our next question is coming from Marshall Adkins of Raymond James Financial.

Marshall Adkins -- Raymond James Financial

Good morning, guys. You guys done a real good job of discussing why the margins have been so sticky here and obviously you think there maybe some modest duration but kind of just doing the back of the envelope math here. To get to your guidance you're going to have to have revenues hold up pretty good the back half. Am I reading that wrong?

Chuck Sledge

No. I think you're reading it pretty right, I think third quarter hold up pretty good, you will see some softness, well I think over the back half of the year holdup okay.

Jack Moore

Helps to have a backlog Marshall.

Marshall Adkins -- Raymond James Financial

Well let's talk for a second on the backlog. How much that do you think ships in '09 versus '010 and then I guess related to that, is there an inbound order rate that you think you're going to need to make the guidance that's pretty stout?

Chuck Sledge

Take the last question first. On the guidance, we feel pretty comfortable, we feel very comfortable that we're within the range given the current order flows that we're seeing and the backlog that we have. So again, unless the rig count in North America takes another downward meaningful downward step, we feel very comfortable with the guidance, the range we've given you, maybe not any one particular number within the range, but within the range we feel pretty good. How much of the backlog is going to ship? It's our traditional percentage that we always talk about 60% in the next 12 months.

Marshall Adkins -- Raymond James Financial

Right. Good guys. Well I appreciate it. Thanks.

Jack Moore

Thanks.

Chuck Sledge

Thank you.

Operator

Our next question is coming from Mike Irvin of Deutsche Bank.

Mike Irvin -- Deutsche Bank

Thanks, good morning.

Jack Moore

Good morning, Mike.

Mike Irvin -- Deutsche Bank

I apologize if you guys answered this, I had some technical difficulties, but was wondering wherein particular you might expect the margin pressure you alluded to, was there one particular region, product where you're seeing it or is it kind of across the board?

Jack Moore

Mike, it's going to be in our short cycle business primarily. Our Valves and Measurement businesses some of our DPS that are exposed more to North America and land rig kind of generated businesses. We've seen some price pressure on large surface projects, which we've historically seen because these are projects that span maybe one or two year supply chain, so, folks get to I think a very starry eyed when they see the big numbers, so that historically we've always kind of lived with. The recent price pressure that we've seen over the last six months or nine months has really been a result of just downward activity and people chasing what opportunities that are out there. And I don't think we're necessarily through that yet. We're still going to be living with some of that through this downturn until I think we see things turn back North.

Mike Irvin -- Deutsche Bank

Okay. And in the drilling business, how much did you pull forward there? Are we going to see kind of a little bit of a give back there in the third quarter or some of the efficiency improvements that you talked about? Are those sustainable and all that means you might work through the backlog a little bit faster?

Chuck Sledge

I think on the volume side we should, relatively speaking, be okay. Margin we did say is going to come down a little bit.

Mike Irvin -- Deutsche Bank

Okay, great. Thank you.

Chuck Sledge

Thanks.

Operator

Thank you. Our next question is coming from Joe Gibney of Capital One Southcoast.

Joe Gibney -- Capital One Southcoast

Thanks, good morning guys.

Chuck Sledge

Good morning, Joe.

Jack Moore

Good morning, Joe.

Joe Gibney -- Capital One Southcoast

Chuck, on the CapEx side, the modest uptick there, 220 million, your ballparking 200 million previously, little bit more optimistic about the internal spend. I was just curious where are you targeting that? Obviously it sounds like you're still on target here from Malaysia and Romania. Just where is the incremental interest?

Chuck Sledge

The incremental interest is things that reduces our cost. So it is machine tools, where we can take out six machine tools and three operators and go down to one machine tool and one operator like we always have done in the business. So that's really the focus.

Joe Gibney -- Capital One Southcoast

Okay. And on the compression margin side it's pretty encouraging quarter. Jack, you said Canary is breathing a broken wing, but still hanging in there. Is this mix driven also in the quarter? What transpired here for some of the resiliency that we saw in the second quarter?

Jack Moore

I don't know. I accused our compression guys that it was Terrell Owens showing up in Buffalo that got him all excited, but actually, it's good execution. These guys have really focused on again containing their cost, working their supply chain externally and working with their customers to not give things back. It's really customers are focused on cost, but they are also focused on execution internally, getting their components and their products when they need them, so the guys their delivery performance has just been off the chart and I think that's really help them, build their story with their customers and not be as susceptible to giving some of it back as maybe we had thought. And it's really just comes down to good blocking and tackling.

Chuck Sledge

Joe, I'll add to that. The business came in end of the year with over 400 million of backlog, which is a lot of volume we can leverage its fixed cost structure. Given the order flow we saw starting late last year, over time that margin is going to come under pressure just because of the fixed cost component of that business. So again, you've probably seen the peak of the margins there and as you see the volumes come down, you will see margins coming down not only from pricing pressure but for leverage factor.

Joe Gibney -- Capital One Southcoast

Okay, that's helpful. And within drilling systems and the DPS booking side, did you guys book any deepwater stacks or risers this quarter? I know you had a handful of risers last quarter in one stock.

Jack Moore

There were no deepwater stacks booked in this quarter. All of the bookings and drilling were really bolt-on, ongoing projects that these guys chase every day.

Joe Gibney -- Capital One Southcoast

Alright, that's helpful. Appreciate it. Great quarter. I'll turn it back.

Jack Moore

Thanks.

Operator

Thank you. Our next question is coming from Jeff Spittel of Natixis.

Jeff Spittel – Natixis

Thanks, good morning guys.

Chuck Sledge

Good morning.

Jeff Spittel – Natixis

First question I guess for the Valves and Measurement business, still pretty brutal rate of decline in terms of the top-line in the quarter despite a good job done there. Understanding that engineered valves is starting to pick up, are you seeing any other signs of life potentially in North America at least for stabilization in that business for the second half?

Chuck Sledge

Well as I said on the distributed side, we have seen that order rate stabilize, so that's a positive sign. So the rate of decline is now abated. So how fast will that recover and go North is really going to be driven by one, our customers inventories, how fast they work those down and two, to the rig count actually coming back in North America. And that's something like I said we don't really see any major recovery till 2010 in North America in terms of rig activity. The processed valves, I think we're seeing some things as we are with engineered valves encouraging in terms of some projects that had been put on the back burner that are now getting released and some of that is really again the infrastructure things related to receiving terminals, which are L&G kind of related, some of the refinery work over and maintenance elements that have been put on hold, so those things are encouraging.

Jeff Spittel – Natixis

Okay. Shifting over to the subsea market again, understanding you've done a good job getting ones ease and twos ease out the door, with some of these larger projects, you said customers are trying to be patient in terms of oil price stabilization, is it safe to assume there's an element of them trying to be tactical as well specifically for trees with pricing and weighting things out here?

Chuck Sledge

Well, I think there's some of that, absolutely. There's no doubt that customers are trying to improve their economics given the hiccup we had in oil prices early in the year. I think it's kind of a sobering wake up call. So, yes, absolutely. And they're seeing some deflation obviously with steel and transportation costs. So they're seeing it across a lot of elements of their supply chain more than just subsea hardware.

Jeff Spittel – Natixis

Thanks, guys. Congrats on another great quarter.

Chuck Sledge

Thank you.

Jack Moore

Thank you.

Operator

Our next question is coming from Brian Omer [ph] of Richard Capital.

Brian Omer -- Richard Capital

Good morning. Most of my questions have been answered. I just wanted to follow-up on some commentary we heard about the drill ships and rigs being built in China as well as future orders for Brazil and get your commentary on what you're seeing out there and expectations for any kind of orders back half of the year or into 2010?

Chuck Sledge

Yes, we probably see about a half a dozen non-Brazilian kind of related deepwater stacks that are potentially bookable in '09, so if you take that out of the equation of the 28 or so that are being discussed about Brazil over the next 24 months, it's a small number relative to those, but it's still a positive story in the fact that there's still some deepwater stack potential out there beyond just Brazil. The Brazil stacks I think it's like you've heard from some of the other service companies that are supporting that initiative down there as well. It's really going to be driven by the Brazilian; I wouldn't say politics as much as I would just say it's really the Petrobras desire to get these stacks built locally.

And that's going to require a lot of coordination and effort with whether it's the Chinese ship yards or the Korean ship yards that are looking at investing in that initiative, whether they do them in China or Korea, whether they do them in Brazil and that just I think is taking time to sort out and there is financing challenges, local rig contractors in Brazil that are getting their arms around, taking on these big challenges of not only building these big drill ships, but also operating them. I think it's just a lot of manhandling that has to go on. So it's going to take some time. Everyone is very encouraged that it will happen and so are we. We're ready for it.

Brian Omer -- Richard Capital

Okay, but still a little too early to tell and try to gauge?

Chuck Sledge

I think so. We really aren't going to step out there and say it's going to happen in Q3 or Q4. We're tracking it like everyone else. We've got a lot of effort around it, but I think we're going to have to be patient. I think we've kind of accepted that.

Brian Omer -- Richard Capital

Okay. That's all I had. Thank you.

Operator

Our next question is coming from Robin Shoemaker of Citigroup.

Robin Shoemaker – Citigroup

Thank you. Good morning.

Jack Moore

Good morning, Robin.

Chuck Sledge

Hi, Robin.

Robin Shoemaker – Citigroup

Last time you mentioned that there's some really good efficiency improvements in Romania, which have allowed you to bring in-house manufacturing to previously outsourced items and that you were still getting benefit of that maybe more going forward in the second half of '09 than in the first half. Could you give us an update on that? And is this a permanent feature of your cost structure going forward?

Jack Moore

Yes. Yes, we are seeing benefits of that now and yes, it is going to be a permanent feature of Cameron going forward. We have spent close to $70 million on that facility and it really is a state-of-the-art operation in a very low cost operating area that's very key to our markets in not only Eastern Europe, but the Middle East and actually from an export capability very flexible. So we're excited about what Romania is going to do for us, not only in the back half of '09 but well into the future. It's a key part of our investment strategy that we've made that we've been talking about.

Robin Shoemaker – Citigroup

Okay. Just my follow-up then is on some of the workforce reductions that you've done and the charges you've taken there what are you doing to in the sense of anticipating a recovery in the business in terms of maintaining key people versus the need to clearly downsize in relation to the tremendous drop in the surface equipment orders and manufacturing flow in that area?

Chuck Sledge

Well first of all, we've taken a very, I think, tactical approach to it from a standpoint of being very targeted and specific with where we've taken reductions in our headcount. Obviously, a lot of it has happened in North America and a lot of that is restructuring to the business activity. We see some shifts in activity that we feel are permanent. We have to make our moves relative to organize our sales around those permanent changes in the business.

In the meantime, we have added people in our subsea organization. So you can't take a shot gun approach to this and given that Cameron has 11 different businesses we encourage these guys to run them as effectively and efficiently as they can and some have had to take more reductions towards reducing their focus than others and some will come back quicker than others. And so that's how we've managed through this downturn. And one thing you have to continue to do, you have to continue to invest in bringing new people on board. You have to continue to invest and that means our colleges and universities we recruit from, you have to continue your training and development programs and invest back into the growth of your people. Those things you can't stop and unfortunately with the balance sheet we have, and the performance our guys have generated out there, it's afforded us to continue to do every bit of that.

Robin Shoemaker – Citigroup

Yes. Okay. Thank you.

Chuck Sledge

Thanks.

Operator

Thank you. Our next question is coming from Brad Handler of Credit Suisse.

Brad Handler -- Credit Suisse

Thanks, good morning guys.

Jack Moore

Good morning, Brad.

Brad Handler -- Credit Suisse

Maybe Chuck, I'll steer towards you. Could you please just speak to free cash flow outlook for 2009 and I'll make a couple observations before I ask you to comment. You used cash so far this year, maybe you could speak to the build up in inventory because I'm guessing that's whipped, but I'm still a little surprised to see it I guess, so, maybe with that back drop could you speak to what you see for free cash and free cash flow generation in the balance of the year?

Chuck Sledge

Okay, let me first address the point on inventory. Yes, we are building project-related inventories as we estimate our backlog commitments. You do see in our short cycle business a little bit of inventory build as our supply chains are pretty long and it just takes time to get them adjusted. So year-to-date you have seen a consumption of cash for that. Free cash flow for the rest of the year, little hard for me to give a specific number and the dynamic there that causes me to hesitate is project bookings. We traditionally get quite a bit of cash upfront when we book projects and as Jack had talked about that's pretty lumpy right now and we're not really sure exactly what's going to book this year. So I expect us to be free cash flow positive over the rest of the year. How much, Brad, you just have to wait and see how many projects book to see what kind of cash advances come in.

Brad Handler -- Credit Suisse

Maybe just a quick follow-up on that just staring at your earnings release, Q or K, which has more information, but where do you stand in terms of cash in the door in advance of expenses?

Scott Amann

Brad, I'm sorry. You're cutting out very, very badly. I don't know if you're on a speaker phone or what but we cannot make out your question. Can you repeat?

Brad Handler -- Credit Suisse

Sure, Scott. No problem. I picked up the headset. Could you just speak to your point, Chuck, about cash in the door related to projects, how much cash is in the door now in advance of expenditures?

Chuck Sledge

I don't have that detail I think.

Jack Moore

Probably 200 million to 300 million we're ahead.

Brad Handler -- Credit Suisse

Okay, Alright, that's it for me. Thanks, guys.

Chuck Sledge

Yup, Brad.

Operator

Our next question is coming from Geoff Kieburtz of Weeden.

Geoff Kieburtz – Weeden

Good morning.

Jack Moore

Hi, Geoff.

Geoff Kieburtz – Weeden

On the pricing question, you seem to indicate, Jack, that most of the pricing pressure is going on in the short cycle businesses. Is it exclusively the short cycle businesses?

Jack Moore

For the most part, yes. That's where we feel it because so many of the large projects it hasn't really happened yet. So it's hard to tell whether we're going to see much of the pricing pressure in the big projects. We always see some whenever you lose a project, our sales guys always say it's because of price and especially the big ones, so you tend to kind of blame it maybe more than its other elements of the equation, but because on a big huge project, especially a deepwater subsea systems project, there's so much involved other than just the commercial terms. It's your delivery performance, it's your technology, it's your service relationship with your customers, it's your infrastructure in country, it's your local content, it's all those things. And with the short cycle business, it's really more about just you got a standard product that 20 other people can build and you're just subject to all of that, that goes on around that. I mean you've got suppliers coming from every corner of the world that can compete and that's why been focusing on your cost, infrastructure cost and your product cost is so critical in these shorter cycle markets that we serve. We see it there every day.

Geoff Kieburtz – Weeden

Okay. Let's hypothesize that you're able to resist customer pressure on long cycle pricing. Would that mean that the fourth quarter this year, we'll be seeing results fully reflect the pricing concessions that had been made?

Jack Moore

You may see that drag on a little bit into early 2010.

Geoff Kieburtz – Weeden

Okay. Alright. So we got maybe a little more pricing related margin pressure into the beginning of 2010 and then from there if I understand you correctly, it's largely a function of volume?

Jack Moore

Yes.

Geoff Kieburtz – Weeden

Alright. And to what extent, I was a little confused, Chuck, on your earlier comment, we got on the one hand a bit faster shipment of product resulting in higher margins in the quarter and in the next couple of quarters, but on the other hand it didn't sound like the make-up of backlog and the amount that you expect to ship in the next 12 months had changed materially. Can you help me just understand that difference?

Chuck Sledge

Yes. Geoff, I think you're looking at different segments of the same equation there. What I'm saying is when we formulated our guidance for the year, we had made some assumptions about how effective we were in execution and we have been better than that. And you're talking about how much gets shipped out of backlog, maybe a couple of percentage points, but when you're talking about $5 billion of backlog, it turns into a meaningful amount of aggregate dollars that go out the door.

Geoff Kieburtz – Weeden

Okay, I guess what I'm worried about here is to what extent have we been robbing from 2010 to see 2009?

Chuck Sledge

I wouldn't call it robbing, but yes, there's some of that.

Geoff Kieburtz – Weeden

Okay. So it's a little bit more volume in 2010, it's a little bit more dependent on orders picking up than say it was in your original or prior quarter outlook?

Chuck Sledge

If you want, yes, you could draw that conclusion from our earlier comments, yes.

Geoff Kieburtz – Weeden

Okay. Alright. Great. Thanks very much.

Operator

Our next question is coming from Michael LaMotte of JP Morgan.

Michael LaMotte -- JP Morgan

Thanks. Good morning, guys and good quarter.

Jack Moore

Hi, Michael.

Chuck Sledge

Hi, Michael.

Michael LaMotte -- JP Morgan

I guess my question is a lot of the short-term ones have been answered, if I just think about margins, guys, little bit longer term, and you're still running 2X the trough that we saw in '02 and '03, we're looking at maybe 200 basis points sequentially. It doesn't seem like there's going to be a whole lot of give back in terms of price over the next few quarters before the orders start to reaccelerate, certainly not another 8 percentage points to 10 percentage points, but I'm wondering what impact the mix with stacks coming out in subsea that are filling the order book, what the impact of mix over the next 12 months to 18 months might do to margins theoretically going forward. Is there a big spread today in terms of those product groups?

Jack Moore

Yes. I think all things else being equal, as we deliver the backlog on the drilling systems projects, if you're not replacing it with high calorie stuff you would see some margin compression just for that one reason over the next 12 months to 18 months. Fair comment. But I would not discount, when you look at Cameron in '03 or '02 in the last trough and you look at Cameron today in terms of its infrastructure towards building and servicing products, more efficiently, more cost effectively, it is huge. When you look at we probably have spent North of a billion dollars just internally on getting better at all of that. And you're seeing that built into our numbers today. And our goal is to hang on to some of that going forward. So I agree with Chuck that the mix will have, you can't hide from the fact that you are going to get favorable or unfavorably handicap with mix from time to time, but embedded in all of our businesses is this whole strategy around reducing our cost to build it and deliver it.

Michael LaMotte -- JP Morgan

Trough to trough, maybe if I pin you down a little bit, what do you think that cost structure is improved by? Is it 500 basis points or 600 basis points?

Chuck Sledge

Tough question to answer broadly, but again like I echo Jack's comments that I don't believe you're going to see the peak to trough delta that you saw in prior cycles, this is just a totally different company than it was in the last trough.

Michael LaMotte -- JP Morgan

Okay. Thanks, guys. Appreciate the color.

Chuck Sledge

Thanks.

Operator

Our next question is coming from Stephen Gengaro of Jeffries & Co.

Stephen Gengaro -- Jeffries & Co.

Thanks, good morning, gentlemen.

Chuck Sledge

Good morning, Stephen.

Jack Moore

Good morning, Steve.

Stephen Gengaro -- Jeffries & Co.

Just a quick follow-up on the margin side. Looking at the EPS and looking at surface Subsea and Drilling, has the margin there compressed or expanded based on what you've done to increase your efficiency, i.e. the mix having a smaller or bigger impact than maybe it did two years ago?

Jack Moore

Two years ago, no. I think the mix is impacting it as well because two years ago we didn't have the subsea stacks coming through the pipeline. So there is still some mix favorability to where we were two years ago.

Stephen Gengaro -- Jeffries & Co.

Okay, so that sort of margin gap between the different piece the DPS is maybe the margins gross a little higher but the GAAP is similar?

Chuck Sledge

Yes.

Stephen Gengaro -- Jeffries & Co.

Okay. That's helpful. Thank you.

Chuck Sledge

Okay, thanks.

Operator

(Operator instructions). Our next question is coming from Jonathan Van Orden of Dominick & Dominick.

Jonathan Van Orden -- Dominick & Dominick

Hi. Can you guys talk at all about the regulatory process and getting through Hart-Scott-Rodino kind of what your expectations are with that?

Chuck Sledge

Sure, Jonathan. I'll echo what Jack said on his prepared remarks that while we're not going to get into a lot of specifics about it we're in the process of responding to the second request that we got from the DOJ. We're going to work our way through that as quickly as we can based upon what we know, we haven't given up on a third quarter closing. As Jack said, we're also saying it could also close some time in the fourth quarter.

Jonathan Van Orden -- Dominick & Dominick

Got you. And what's your confidence level with that?

Chuck Sledge

If I could get that right I'd go to Vegas.

Jonathan Van Orden -- Dominick & Dominick

Okay, thank you very much. Appreciate it.

Chuck Sledge

Okay.

Operator

Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

Scott Amann

Okay. Thank you, Jackie 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. Thank you all for your participation.

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Source: Cameron International Corp Q2 2009 Earnings Call Transcript
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