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FMC Technologies, Inc. (NYSE:FTI)

Q3 2007 Earnings Call

October 30, 2007 9:00 am ET

Executives

Rob Cherry - Director of IR

Peter Kinnear - President and CEO

Bill Schumann - SVP and CFO

John Gremp - EVP of Energy Systems

Analysts

Brad Handler - Wachovia Capital Market

Kevin Simpson - Miller Tabak

Geoff Kieburtz - Citigroup

Dan Pickering - Tudor Pickering

Kurt Hallead - RBC Capital Markets

Rob MacKenzie - FBR

Ken Sill - Credit Suisse

David Anderson - UBS

Jim Crandell - Lehman Brothers

Joe Gibney - Capital One Southcoast

Operator

Good morning, and welcome to the FMC Technologies Third Quarter 2007 Earnings Release Teleconference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). In the event of technical difficulties during this call, we will post updates at www.fmctechnologies.com/earnings.

Thank you. Your host is Rob Cherry, Director of Investor Relations. Mr. Cherry, you may begin your conference.

Rob Cherry

Thank you, operator. Good morning, and welcome to FMC Technologies third quarter 2007 earnings release conference call. Our press release and financial statements issued yesterday can also be found on our website. In the event of a disruption of service or technical difficulty during this call, information will be posted at our website at fmctechnologies.com/earnings.

During our call, we will reference earnings from continuing operations. In 2006 we disposed of the Floating Systems business and a small FoodTech product line was divested in the third quarter of 2007. Historical results have been revised to reflect these operations as discontinued.

I would like to caution you with respect to any forward-looking statements made during this call. Although these forward-looking statements are based on our current views and assumptions regarding future events, future business conditions and the outlook for us based on currently available information, these forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements. I refer you to our disclosures regarding risk factors in our annual report and our other SEC filings.

I will now turn the call over to Peter Kinnear, FMC Technologies' President and CEO.

Peter Kinnear

Good morning. Thank you for participating in our third quarter 2007 conference call.

On the call with me today are Bill Schumann, our CFO; John Gremp, who heads our Energy Systems Group; and Charlie Cannon, who runs our FoodTech and Airport Systems. I'll give you some highlights on the third quarter and an update on our outlook for 2007. Bill will provide you with additional details on our financial performance, and then we'll open up the call for your questions.

Before I get into the details on the quarter, if you've seen our press release, we announced our intent to spin-off FoodTech and Airport Systems into a separate publicly traded company in a tax-free distribution to our shareholders. These are very well-managed businesses and industry leaders in their respective markets, but are outside our primary oil field focus. Due to the growth of our energy businesses over the past several years, they have become a smaller part of our total company, and we now feel that they would prosper more as an independent company.

The company would be focused on the food and airport transportation markets. It will have its own capital structure more suited to its financial characteristics and will have its own management. Charlie Cannon, the current Senior Vice President for FoodTech and Airport Systems, will be the CEO, and Ron Mambu, FMC Technologies' Vice President and Corporate Controller, will become CFO of the new company.

This separation will also allow FMC Technologies' management to focus entire on our rapidly growing energy businesses. As you know, FMC Technologies was itself a spin-off, and we believe that separate management focus will improve the future performance in both companies. We expect the spin-off will be completed by mid 2008.

Now let me discuss our third quarter results. Our diluted earnings per share from continuing operations were $0.60 in the quarter, up 46% from the prior year quarter. Inbound orders for subsea were $766 million, up $490 million from the prior year quarter. Year-to-date, subsea inbound orders are $2.4 billion, already exceeding subsea orders for all of 2006. Our subsea backlog reached yet another record at $2.6 billion.

Energy production revenue was up 21%, and operating profit was up 43% from the prior year quarter on the strength of both subsea and surface wellhead businesses. Subsea revenue was up 17% from the prior year quarter, and we continue to forecast revenue to be approximately $2.2 billion in subsea for 2007. Revenue from our surface wellhead business was up 31% from the prior year quarter, with most of the growth coming from outside of North America.

Our Energy Processing Systems revenue was up 14%, and operating profit was up 41% from the prior year quarter, largely due to the strength of our fluid control business. Our fluid control business, including WECO/Chiksan remained strong with sales up 25% from the prior year quarter, driven by strong field demand. We do anticipate, however, slower growth of service company capital spending in 2008. Overall, our energy businesses in total have seen more than 40% compounded annual EBIT growth since 2001.

In the quarter, our subsea order value per well was approximately $18 million. This puts our year-to-date subsea order rate per well at $19 million, and this compares to $14 million per well in 2006, and $9 million per well in 2005. This metric demonstrates the success of our strategy to expand our subsea scope on the seabed and, in particular, on our efforts on subsea processing.

When we talk about subsea processing, we include any activity involving separation, pumping and/or compression of oil, water and gas on the seabed produced from a subsea well. Some of the subsea processing activity is replicating functions traditionally done topside, while other subsea processing is essential to make the economics work for a new field.

Given the importance of subsea processing, I'd like to briefly review some of our initial projects to give you some context regarding how this market may evolve. We have won four subsea processing projects and are actively bidding on a fifth.

The first was the Statoil Hydro Tordis project, which is now in the water and scheduled for startup this quarter. This is a brownfield application where the topside processing facility could not handle the increasing water production from the subsea wells. FMC supplied a 200,000 barrel per day subsea separation system to separate the oil, water and gas and the sand produced from the wells. The excess water is reinjected into the formation. Statoil Hydro benefits from increased recovery from the reservoir estimated at 19 million barrels.

The second and third subsea separation projects, which we have won, are greenfield applications with Shell--one in Brazil and one in the Gulf of Mexico. The drivers for these fields are heavy oil and low reservoir pressure, thus presenting the need for artificial lift for these projects. FMC is supplying subsea systems to separate the gas, and then pump the oil and water to the surface. The subsea separation of the gas mitigates the risk of cavitation of the subsea pumps, thus enabling a commercial development of the fields.

Our fourth subsea processing project, also a greenfield application, is our recently announced award from Petrobras for the Cascade and Chinook fields in the Gulf of Mexico. Its drivers are heavy oil and low reservoir pressure, similar to the Shell projects. The subsea solution here calls for the use of submersible pumps installed at the seabed to boost production from the subsea wells.

Additionally, we are bidding on a fifth subsea processing project for Total's Pazflor field in Angola. This project has a requirement for three subsea separation systems to support 49 subsea trees. The driver in this field is to mitigate the potential formation of hydrates in the pipeline. Here the subsea separation will be used to first remove the gas, and then the flow will be boosted topside with subsea multiphase pumps.

The key point about subsea processing is that it is being used to solve many different field challenges, both for brownfield as well as greenfield applications. We are still in the early stages of subsea processing, but we are very encouraged and excited about the initial number of projects and the market position that FMC has established so far.

Overall, the outlook for deepwater developments remains robust. The new deepwater rig additions over the next several years will add to the capacity to develop future subsea fields and supports the secular growth trend that we believe exists for subsea equipment. The combination of our traditional subsea completion business and the growth opportunities of our new subsea processing technologies, coupled with the strength of our other energy businesses, positions us well for future growth.

So, in summary, our third quarter performance was very solid. Our subsea backlog, yet again, grew to a new record of $2.6 billion, our Energy Systems operating profit was up 42%, and we reported a 46% increase in earnings per share from the prior year quarter. The strength of our energy portfolio gives us confidence to again increase our earnings guidance per diluted share from continuing operations to a range of $2.16 to $2.21 for 2007. I should point out; these numbers include both FoodTech and Airport Systems.

And with that, let me now turn the call over to Bill Schumann, who will provide you with some further details on the quarter.

Bill Schumann

Thanks, Peter. Let's look at some of the highlights of our operations.

Energy Production sales were $684 million in the third quarter, up 21% over the prior year quarter, primarily due to the growth of subsea, which was up 17%. Surface wellhead also contributed to the revenue growth, up 31% from the prior year quarter. Approximately 80% of surface wellhead sales came from outside North America.

Subsea sales were down somewhat from the second quarter. This is due mainly to the weight of newer projects in our backlog and the timing of revenue recognition under our percentage of completion accounting method in that business. Our projects typically record lower revenue in their early stages, and the large amount of new projects that are in the early, primarily engineering phase, led to the slight decline in revenue from the second quarter.

The Energy Production segment generated EBIT of $70.4 million in the quarter, up 43% from the prior year quarter. Energy Production operating profit margins were 10.3%. We realized a margin improvement in subsea, both over last year and the prior quarter. We continue to expect double-digit margins in the segment for the full year 2007.

Inbound orders in Energy Production were up, with subsea orders up $190 million from the prior year quarter and up 81% year-to-date. Subsea backlog, as Peter mentioned, was a record $2.6 billion.

Energy Processing sales were up 14% over the prior year quarter, led by the continued demand for our fluid control products. In fact, fluid control revenue, which includes our WECO/Chiksan product line, was up 25% over the prior year quarter, and grew 11% from the second quarter of this year.

The Energy Processing segment generated EBIT of $38 million in the quarter, up 41% from the prior year quarter. Again, the operating improvement from the prior year quarter was the result of higher volume in margins in our fluid control and measurement businesses. We expect Energy Processing profit margins to be around 18% for the full year of 2007.

Inbound orders for Energy Processing were up 4% over the prior year quarter and up 16% sequentially. Backlog is at $357 million, up 31% from the prior year, and strong fluid control, loading system and measurement orders.

FoodTech revenue of $146 million was up 39% from the prior year quarter, due to increased sales of food processing, cooking and freezing equipment. FoodTech operating profit was $14.1 million, up 44% from the prior year quarter on strong volume in cooking and freezing equipment. With backlog at a near record level, we expect FoodTech's 2007 full year profit to exceed last year's levels.

Airport Systems revenue of $109 million was up 22% in the quarter, mainly on increasing demand for ground equipment. Operating profit was $11.7 million, up 38% over the prior year quarter, again, on a higher volume in our grounds systems equipment business. With backlog up 33% from the prior year quarter, Airport Systems is also expected to see increased full year profitability over 2006.

As for the corporate items, we have seen benefits from the timing of foreign currency activity in the quarter. Other expense net of $800,000 decreased $4.2 million from the prior year. Our comparative results reflect $8.9 million in increased net gains due to the mark-to-market of equity instruments, foreign currency and restatement gains and losses. Partially offsetting these increased net gains were increased stock based compensations and LIFO inventory expense. We expect full year 2007 corporate expense to be up, while other expense net should be lower than last year, reflecting the gains from the third quarter.

The tax rate for continuing operations in the third quarter was 33.8%, which is up over last year due to country mix. We anticipate that our overall tax rate for 2007 will now be 33% for the full year.

Our net debt was $159 million at quarter end, down $107 million from the second quarter. The decrease was driven in part by reductions in working capital.

We spent $26.6 million in the third quarter to repurchase approximately 600,000 shares of common stock. Since initiating our repurchase program, we've repurchased a total of 15.8 million shares out of our total buyback authorization of 30 million. We averaged 132.6 million diluted shares outstanding during the third quarter.

In the quarter, we spent $49.3 million for capital additions, mainly in the Energy Production Systems business to fund the advancement of capacity additions and the Light Well Intervention Systems. For the full year 2007, we now estimate our capital spending to be approximately $160 million. The increase from our previous estimates is due to investments in the Light Well Intervention Systems.

Now let me talk a little bit about our intent to spin-off the FoodTech and Airport Systems businesses. As you know, FoodTech is one of the world's leading technology and solution providers to the food processing and convenience food industries. It produces systems and equipment that sterilize food, extract juices, portion protein and cook and freeze all types of foods.

Airport Systems manufactures and service products that keep airport ground operations running smoothly from touchdown to takeoff. These include cargo and baggage loaders, aircraft tow tractors, deicers, ground power and air, as well as passenger boarding stairs and bridges. We also service this equipment along with baggage systems in the airport. Both businesses maintain leading technology and market shares in their respective businesses.

We estimate that the two businesses will contribute approximately 20% of FMC Technologies' total sales in 2007, approximately 19% of EBITDA, and 17% of EBIT, and 16% of net income. These numbers are current estimates, and will be finalized as we prepare separate financial statements for the two businesses. The numbers include the two segments as we report them, along with estimated expenses from corporate items that were not previously identified with these two businesses.

Over the next few months, we will prepare separate audited financial statements for the two businesses, file a Form 10 on the new company for review by the SEC, and file a Private Letter Ruling Requests with the IRS to support the tax-free nature of the distribution. We also expect the new company to put in place financing arrangements to borrow approximately $200 million that will be paid to FMC Technologies as a dividend. We anticipate that this will allow the new company to attain an investment grade credit rating.

FMC Technologies anticipates using the dividends to repurchase stock. FMC Technologies' shareholders would then receive a tax-free dividend consisting of 100% of the equity ownership in the new public company comprised of the FoodTech and Airport Systems businesses. This process should be complete by mid 2008.

As Peter mentioned, we're increasing our 2007 earnings guidance to $2.16-$2.21 per fully diluted share from continuing operations. This estimate does not include any estimates of the transaction costs associated with the spin-off, most of which will primarily impact 2008. We anticipate continuing to report FoodTech and Airport Systems in continuing operations until the distribution.

So, it was a good quarter. In summary, we had strong subsea inbound orders, which are now up 81% over last year. Our backlog is again at record level with subsea at $2.6 billion. Energy System's operating profit was up 43% from the third quarter of 2006. We reported a strong quarter of earnings at $0.60, up 46% from last year. We've increased our guidance, as I've mentioned before, to a range of $2.16 to $2.21, and we've announced our intent to spin-off the FoodTech and Airport Systems businesses in a tax-free distribution to shareholders.

That concludes my prepared remarks. Now operator, could you please open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from the line of Brad Handler, from Wachovia Capital Market.

Brad Handler - Wachovia Capital Market

Thanks. Good morning.

Peter Kinnear

Good morning, Brad.

Brad Handler - Wachovia Capital Market

I guess I'll just ask, I mean, I think you've given a lot of information about the spin and the logic, and I appreciate that, but I guess I'll just come back to it just to try to get a clear sense for--why now, after, obviously, a number of years of discussion by many interested parties on that?

Peter Kinnear

Good question, Brad. I mean, this has been something that we've had under evaluation for long periods of time as to what we should do, and we've had some discussions with our Board, off and on, about it. And I think we just reached a position this year where we felt it was an appropriate decision to make and our Board was very supportive of that. And so that's kind of where we ended up.

Brad Handler - Wachovia Capital Market

With the main part of what you mentioned, of course, was the issue of managing, I guess, three very different types of businesses. I guess what you're saying is you feel that you personally will have a lot more time to focus on the Energy business. Is that an important part of the logic?

Peter Kinnear

I think it goes two ways. I think the new management of our FoodTech and Airport businesses will be much more focused on the spinout of those businesses, and I think can add value in that regard. And I think from the Energy side, we will be much more focused on our day-to-day Energy businesses. And so, it's kind of a double-pronged benefit from our standpoint.

Brad Handler - Wachovia Capital Market

And then, I guess, maybe just help me. I know, Bill, you were trying to give us a flavor for it, I guess, but from a capital structure or capability standpoint, how do the two companies potentially differ?

Bill Schumann

Well, the combination of FoodTech and Airport is not growing as quickly as the Energy business, maybe that's probably obvious. And we, at least, initially are planning on starting them with about $200 million of debt, which is roughly two times their EBITDA. So we think that's a more highly levered company, and it will also probably pay a fairly significant dividend, and won't have significant capital requirements. That's kind of what we were alluding to when we talked about the capital structure of the new company.

Brad Handler - Wachovia Capital Market

Right. Okay. Well, that helps me understand a little bit better. Thanks. I'll turn it back.

Operator

The next question comes from the line of Kevin Simpson, from Miller Tabak.

Peter Kinnear

Good morning, Kevin.

Kevin Simpson - Miller Tabak

Thanks. And congratulations, I guess, to Charlie for a new CEO role, and to Peter--what looks like a good move into separating the companies. A question on WECO/Chiksan. I was just wondering how good your visibility is into 2008. It's one of the areas that I'm more cautious on. And I know you're not into giving guidance yet, Peter, but maybe for next year, but I'm just wondering…

Peter Kinnear

It's a good point.

Kevin Simpson - Miller Tabak

…you talked about a slowdown, do you have enough visibility to say that you will have good growth in the first half, and then not so sure on 2H, or can you even say that you might be able to grow throughout next year?

Peter Kinnear

Well, I mean it's an area of that. Certainly, we have some exposure to North American activity and we're watching it very carefully, Kevin, as you can appreciate. With regards to the service company activity, we still have pretty strong field orders in terms of spares and repair activity. The multistage fracing activity for tight gas is still pretty active; there are still rigs doing that. That's a big source of revenue for us.

We're a little concerned about the Canadian royalty issue--what happens there. And as I mentioned in my comments, we anticipate some slowdown in the '08 CapEx by the service companies. And the offset of that is our international activity is quite strong. So, I always say, network. We're still pretty optimistic that we'll have a pretty good year in '08 for fluid control for Chiksan/WECO.

Kevin Simpson - Miller Tabak

Okay. Can I pin you down, though, does pretty good mean that you'll have an up year, or it's going to be an outstanding year in '07?

Peter Kinnear

Yeah. I think, I mean, it will be slower growth. And we're still doing our budgeting process, Kevin. We haven't finalized all that. So it's kind of premature maybe to make a specific comment at this point.

Kevin Simpson - Miller Tabak

Okay. And two other questions. One, on subsea. Can we assume that you'll return to kind of mid-20s type revenue growth for 2008, and that 17% is just a function of the percentage of completion issues in early stage of so many projects?

Peter Kinnear

Yeah. As you know, we have very strong backlog at $2.6 billion, with just kind of an unusual quarter where the revenue recognition wasn't as strong. There are still a number of big projects yet to be decided. As you know, this year the order rate for subsea has lagged a little bit. There are a number of big projects. Total Usan Nigeria still we thought would happen, and they're close to Total Pazflor 49 wells; Shell's Gumusut in Malaysia is going to get decided; Chevron Gorgon in Australia is going to get decided; BP-Block 31.

All these big projects that probably represent 150 trees--the industry anticipated those being awarded in 2007. And so, although, it's slipping a little bit, but those projects are still going forward. There's lots of activity. As I mentioned, the new deepwater rigs coming out is going to be favorable. So, you could see a dip in order in the number of trees year-over-year, but we still think it's a very strong segment for us, and we're inbounding some key projects and really building backlog. So we don't see any concerns from that respect.

Kevin Simpson - Miller Tabak

Okay. And one last one--very big increase on the surface side in the quarter--was there anything unusual in the quarter and do you think you can maintain a kind of north of 20% revenue growth rate in that segment of the business?

Peter Kinnear

Well, I mean, we had a very good international activity; even our North American activity, We've added some technology based in North America, in addition to our surface tree business, in around the fracing dual area tree saver type products. And year-over-year, we get some benefit from the acquisition of Galaxy, which is active in the oilsands.

Kevin Simpson - Miller Tabak

And so maybe not at this level of year-to-year run rate, but still your outlook would be for a continued good growth for surface?

Peter Kinnear

Yeah. I mean we're very strong. As Bill mentioned, 80% of our revenue comes internationally. And the international rig count, I mean, I think over the last four or five years has been growing 7% or 8% a year. And we have very good positions in the Middle East in those markets that are very active.

Kevin Simpson - Miller Tabak

Okay. Thank you. Good quarter. That's it for me.

Operator

Next question comes from the line of Geoff Kieburtz from Citigroup.

Geoff Kieburtz - Citigroup

Can you hear me okay?

Peter Kinnear

Yeah, Geoff. Good morning. How are you doing?

Geoff Kieburtz - Citigroup

I'm fine. Operator sounds like she's breaking up a little bit. Fluid control, could you just remind us outside of WECO/Chiksan, what is included in the fluid control segment?

Peter Kinnear

Well, we have our new high pressure pump for the service companies that we've introduced, and that's going well. We're just, as we mentioned, introducing that this year. And it's mostly the fittings and valves. We also have some small reciprocating pumps that we make for oil and gas, and we do some topside manifold work for fluid control. But the bulk of the activity is the WECO/Chiksan product line.

Geoff Kieburtz - Citigroup

Okay. So when we hear you say 25% revenue growth in fluid control, we can think that's pretty much the WECO/Chiksan revenue growth.

Peter Kinnear

Yes, that's correct.

Geoff Kieburtz - Citigroup

Okay. And margins at WECO/Chiksan, what has the trend been over the past several quarters?

Peter Kinnear

I'll let Bill respond to that.

Bill Schumann

It moves around a little big, Geoff, but it's been very steady. As you know, fluid control was kind of high margin business within Energy Processing, and it's been steady. What you've seen in the total is, frankly, and I'll have to take the blame for this, I've underestimated--we've underestimated--the size of the fluid control business, and that's what's driven the margins from 17%-19%. Not necessarily increases in the fluid control margin, it's the mix more than it is the actual margin.

Geoff Kieburtz - Citigroup

Okay. And in an environment where you're expecting the topline growth to slow, what would you expect margins to do from the current level?

Bill Schumann

Well, specifically for the fourth quarter, we tend to have more business coming out of the other businesses within the Energy Processing segment; loading, measurement, material handling. So that will depress margins a bit, absent any anticipated change in fluid control margins. But as we go forward into next year; we would expect margins probably to stay approximately the same level.

Geoff Kieburtz - Citigroup

Okay. And on the margin subject, you mentioned in the subsea business that the revenue was affected by the percentage of completion accounting. How does that affect the margins in the subsea business?

Bill Schumann

Well, it shouldn't affect it at all. One of the things when we start a project, the initial phases are primarily engineering. And so, we don't accumulate a lot of costs on a project. And then as we get into the kind of middle of the project when we're procuring equipment and taking delivery of equipment, we kind of have a big ramp-up in costs, and consequently, that's the time when we're recognizing a lot of revenue quickly.

And then towards the end, when it's in assembly and test, again, we're not incurring much costs, and consequently, are not recognized in a lot of revenue. Now over that entire cycle, if we do things perfectly we should have the same margins.

Geoff Kieburtz - Citigroup

Okay.

Bill Schumann

On that particular project.

Geoff Kieburtz - Citigroup

Okay. That's what I thought. I just wanted to confirm that. And you've mentioned several times in the call this morning the Light Well Intervention, mostly in the context of your capital spending plans. Can you update us on what's going on there and what kind of increase in capital spending you've planned for that?

Peter Kinnear

Geoff, Peter. Earlier this year, we announced two additional Light Well Intervention Systems; a second one for Statoil and one for BP that we were awarded contracts for. But CapEx on each of those systems is around $20 million-$25 million, and they'll be ready for deployment mid '08. So that's ramping up now in that capital spending. That's what Bill mentioned. This will be third contract, again, our strategy to add more value into the subsea arena in terms of doing different activities. And Statoil has an installed base of over 250 subsea trees, so they're an ideal customer to deploy this technology.

Geoff Kieburtz - Citigroup

And what should we think about in terms of an annual rate for revenue or EBIT on the Light Well Intervention Systems?

Peter Kinnear

Yeah, I think, on the revenue side, we're depending on the utilization of the system. These are prices on a day rate basis with some guarantees for activity. But I think they run $8 million-$12 million, in that range, per system per year.

Geoff Kieburtz - Citigroup

Okay, great. Thanks very much.

Operator

Your next question comes from the line of Dan Pickering from Tudor Pickering.

Dan Pickering - Tudor Pickering

Good morning, guys.

Peter Kinnear

Hi Dan. How are you doing?

Dan Pickering - Tudor Pickering

Doing just fine. Thank you. Question one about the FoodTech and Airport spinout. You mentioned putting $200 million of debt on it and then using that $200 million at the old, if you will, FMC for share repurchase. Is that going to be basically a mechanical process? Will you be opportunistic on that share resale? I'm asking because your stock purchase this quarter was obviously at much lower levels than where we are today.

Peter Kinnear

Yeah. Dan, we'll try and be opportunistic, but we do want to retire the shares. If we can't be overly opportunistic between now and then, we'll probably do it mechanically.

Dan Pickering - Tudor Pickering

Okay. All right. And then, Bill or Peter, anyone chime in, when we look at the new standalone FoodTech company and Airport, sort of how do you think about comparable, who do you look at and say these are going to be our peers in the marketplace?

Peter Kinnear

Dan, I wish it was real simple. They aren't really any direct comparable. So as you can imagine, there's no company out there that combine food processing and airport systems. But there are a group of kind of pure-play food service companies. They're a little bit different than our food processing business, the food service. Those would be Middleby and Otis, Aga Foodservice and an Icelandic Company called Morrell.

On the airport side, there aren't any public pure-play public competitors. But there are a number of diversified companies that seem to have foodservice, food processing, and maybe even some airport equipment businesses, like ITW, Dover, United Technologies, and Ingersoll Rand, Manitowoc, and even a Dutch company called Stork. If you take a look at that group of companies, you'd probably get an EBITDA range of 8-11, I mean--maybe as low as 7 and as high as 12.

Dan Pickering - Tudor Pickering

Okay. That's helpful. Last question, we look at the subsea business, what sort of incremental margins or incremental profitability do we think about for that business as we step into '08? I mean, we see the aggregate margins for the business at 10%. How do you think about the incremental margins in that business?

Bill Schumann

Well, Dan, we're continuing to build our backlog at higher margins than we've had in the past. And the real challenge for us is to execute those projects. And we've got $2.6 billion of backlog, and I would expect that to be higher by the end of the year going into 2008. So, we got a challenge of execution and leverage, leveraging our SAR infrastructure with more projects. But I would expect kind of increases in bottomline, EBIT margins on the order of what you've seen over the past couple of years, which is on the order of 1%.

Dan Pickering - Tudor Pickering

Okay. So your resulting growth in margin ought to continue the 100 basis points year trend.

Bill Schumann

Yeah, I think so. I have the caveat that we haven't really rolled up budgets and looked at it from the bottoms up. But that's what we would expect from the top down.

Dan Pickering - Tudor Pickering

Okay. Thank you.

Operator

Your next question comes from the line of Kurt Hallead, from RBC Capital Markets.

Kurt Hallead - RBC Capital Markets

Hi, good morning.

Bill Schumann

Morning.

Peter Kinnear

Good morning, Kurt.

Kurt Hallead - RBC Capital Markets

Hi. Just wanted to kind of follow-up, I guess there were some data out this morning by Quest, once again, making some adjustments to their kind of tree forecast. What kind of credibility do you put in their forecast? And I know it's pretty much the only thing that's out there, which always makes me skeptical, so I just toss my books. But what's your take on the subsea forecast relative to what you know is out there?

Peter Kinnear

Yeah. I think they have difficulty, I mean, like anybody in forecasting given the movement of some of these big projects. I think their current forecast is around 450-500 subsea trees to be ordered in 2007, which is down from their initial forecasts, which were probably 550-650 earlier in the year.

Now, part of that is these big projects that I mentioned earlier on Total, Lucent, Total Pazflor, Shell Gumusut, Chevron Gorgon and BP Block 31 that have kind of shifted out of '07 into '08. So it's a timing issue. We have our in-house database and we track all our customers and all projects they have.

So, Quest is a resource for the industry. But obviously, we supplement that with our own internal market data and market intelligence as to what's going on in the marketplace. But their accuracy, Kurt, as you know, hasn't been that great, but its difficult year-over-year to pin each project in which quarter or which year it's going to fall.

Kurt Hallead - RBC Capital Markets

Okay. The other thing I had, for Bill, you referenced, once again, the fact that you have a number of different projects that are in the early phases right now along with your revenue. So I guess it would be safe to assume along those lines that revenue should be accelerating as we move into 2008?

Bill Schumann

Yeah, it should be. You're right, Kurt.

Kurt Hallead - RBC Capital Markets

And then the multiples that you guys used--I guess on the airport equipment business, one of your public competitors last year went private at 8 times EBITDA on the airport equipment side. You guys are using somewhere between 7 and 12 on the EBITDA. That would imply that your Energy multiple probably is lower than probably what most people are probably thinking out there right now.

Is that 7-12, you gave a few different kind of estimates on the company, so you wouldn't use like a Tyson or a Hormel or somebody like that as comp for the food equipment business?

Bill Schumann

Well, I don't think so, Kurt. We're suppliers to those two companies that you mentioned. I think the others are kind of in the foodservice industry. They tend to service restaurants and fast-food type establishments. We tend to have, as customers, large food processing companies. Tyson's, being an example; Hormel, being an example; Unilever, and others. But I think the companies that I mentioned are closer to the kind of business that we participate in rather than the food companies.

Peter Kinnear

We're kind of forecasting this isn't going to happen until the middle of 2008, and there are a lot of variables that are going to move around in between in the meantime.

Kurt Hallead - RBC Capital Markets

Got you. Okay. Then, just lastly, in terms of your revenue and maybe EBITDA, what's your percent exposure to North American natural gas related, and then, more specifically, what's your exposure to North America pressure pumping?

Bill Schumann

Well, we've got our wellhead business in Energy Production. That's about little bit less than 20% exposed to North America. In order of magnitude, that's about a $500 million business. Fluid control, it looks like it will be closer to $300 million this year. We bill 55% domestic in that business, but a lot of the billings go to company staging grounds to tape in ship international. So our exposure to North America in that business is probably closer to 40%. Although again, out of the total, those are fairly low numbers of our total exposure to North America, not necessarily gas, but North America.

Peter Kinnear

But the fluid control business, don't remember, 75% of the fluid control business is parts and supporting field activities and 25% is new construction. So, as long as there's drilling activity and fracing activity, we've still got a pretty solid base of revenue in North America. The recab's been flat this year, and just because of the complexity of these frac jobs, these multistage frac jobs, the equipments, in very severe conditions, it's wearing out quicker. And so we're getting a benefit because of the mix of activity in the US market that unless you understand the business, you wouldn't necessarily see.

Kurt Hallead - RBC Capital Markets

Okay, great. Thank you.

Operator

Your next question comes from the line of Rob MacKenzie, from FBR.

Rob MacKenzie - FBR

Good morning, guys.

Peter Kinnear

Good morning, Rob.

Rob MacKenzie - FBR

Peter, I want to try and see if you could, in light of the Quest data--the Quest revision--see if you could give us your best guess based on the book as you see it right now; what industry-wide orders might look like in terms of your view right now for '08, and also how FMC stands at this point.

Peter Kinnear

Let me answer the first one. I mean, year-to-date, we've had a pretty good percentage of the market activity. In the quarter, I think we had, the Quest data just came out, I think we have 47% of the orders, and year-to-date, they're about 43%. Last year, we were targeting around a 40% share. So we're doing a little bit better than we anticipated. Obviously it's lumpy because of the bigger projects you can gain or lose share, depending on individual projects.

We still track. In our time horizon, we track these projects kind of out over the next 15 months. And right now, we have around high 300s in terms of potential projects and probably an order value of $6 billion out there. So, we're still pretty optimistic that '08 is going to be a good year, and we have these five big projects that are yet to be awarded. And some of those could fall into the tail end of '07 and some might roll into '08, but we're still pretty optimistic. Plus our revenue per well or per tree, we're ramping up our activity. So from an FMC standpoint we're probably in pretty good shape for '08.

Rob MacKenzie - FBR

Okay. And then following up on that, can you give us an update on where the bidding process stands on the past four contract right now?

Peter Kinnear

Well, I can tell you that there are three bidders and it's still in discussion with Total. We, I think we've said publicly before, Total is a good customer of ours. We've done quite a bit of business with Total in Angola itself. And so, we would anticipate that would help us in this. But it still has yet to be decided, and Total has to go through the process of getting Senegal's partners sign off first, and then Senegal's agreement to proceed with the project. So these things just take a long time, and they seem to sit out there for a number of months before they get decided.

Rob MacKenzie - FBR

Okay. And then my final question is on subsea processing/separation, I know Petrobras has talked about using that on some wells in Brazil. Can you just give us an update or a feel for how much more interest you've seen in potential projects that are now being talked about with Tordis basically starting to come online soon?

Peter Kinnear

Yeah. I would say, in general, I think this will be a good indication once Tordis is up and running, maybe get six or nine months under its belt. I think this will be a really -- we're very enthused about this because we think it will be a showcase to the industry of handling issues like increased water production, water cut in the wells. You talked about Brazil; Brazil has the same issue. Their wells are now starting to produce a lot of water. They are in deeper depth than the Statoil Tordis project is. So we're going to have to look at a little bit different types of technologies.

But you have to say that this is a pretty good trend for the industry to start using subsea processing or separation on the seabed and assuming that it proves to be economic and it doesn't have any glitches, we're very optimistic that we'll see more and more of this as we go forward.

Rob MacKenzie - FBR

Okay, thanks. I'll turn it back.

Operator

The next question comes from the line of Ken Sill, from Credit Suisse.

Ken Sill - Credit Suisse

Yeah. Good morning, guys.

Peter Kinnear

Good morning, Ken.

Ken Sill - Credit Suisse

So I just wanted to run back by the spend just to make sure I'm hearing what you guys are saying. So, if you look at the FoodTech and Airport Systems blended multiple in, roughly, 8-10, 8-11 times EBITDA, I guess is what you're thinking, and that will get spun out directly to shareholders with $200 million dividend. Do you think that your, I guess, multiple for what's left will actually expand, or do you think that your multiple is probably going to stay about where it is, or do you have an expectation there?

Bill Schumann

Well, you're asking us to predict something that it's obviously kind of difficult to forecast. But the remaining businesses will have a higher growth rate than the current collection. And you would anticipate that the margin would expand a little bit based on that. That's our guess right now, Ken.

Ken Sill - Credit Suisse

Yeah. I guess my only concern is you guys are already trading at the highest multiples of any stock out there in the group, but I think it does make a lot of sense from a business perspective. And then, why don't you go back on, you know, everybody is here trying to figure out what '08 is, I know it's a little bit early, but essentially you're saying that you think that the process system margins and that kind of 17% -19% range are going to be sustainable into '08? Do you have a view on that?

Peter Kinnear

Yeah. That's based on fluid control holding up. But we would assume that those margins are sustainable, yeah.

Ken Sill - Credit Suisse

And your current guidance is expecting a little bit of margin detriment in Q4, because of mix?

Peter Kinnear

Right.

Ken Sill - Credit Suisse

And then if you look at production, you're kind of creeping up there on margin, so 10%-11% this year, and I'm assuming the 100 basis points creep you can see that coming in '08 and '09 and beyond because your backlog actually goes out pretty far?

Peter Kinnear

Yeah. We would think I'm just going to stick with '08 right now.

Ken Sill - Credit Suisse

Yeah, I understand.

Peter Kinnear

You're right. Our backlog is beginning to stretch out longer than it has been in the past.

Ken Sill - Credit Suisse

Okay. And then, we still have to deal with the Airport and FoodTech for the next few quarters. So you're expecting them to be up year-over-year, but do you expect kind of typical seasonality in Q4 for those two businesses?

Bill Schumann

Well, actually, yeah. The Airport business tends to peak in the third quarter based on deliveries of deicers in advance of the winter season. The FoodTech businesses have tended to be seasonal in the second and fourth quarters. But this year, we had a big order that we are delivering in the third quarter. So I wouldn't expect the fourth quarter to show the seasonality in FoodTech it has in previous years, Ken. So we would expect that fourth quarter, for the combination of those two businesses, probably be flat to down a little bit versus the third quarter.

Ken Sill - Credit Suisse

Okay. That makes sense. And then, obviously, we're all sitting here trying to figure out the slippage on some of the big West Africa projects. At what point do the orders slip so much that you start pushing revenues from '08 into '09 or is that a big driver what's going to happen in the near future, what orders come in the next six months?

Peter Kinnear

I don't think it's going to be a big driver. I mean we have plenty of backlog to work on. And if we slip a little bit into '08, it's not going to be a big deal for us.

Ken Sill - Credit Suisse

Yes. So you guys are actually fairly full for '08, given what you've already got on the plate in production systems; is that fair?

Peter Kinnear

Yeah, I mean we have a pretty good workload. I'm not sure… We're not saying we can't take more work.

Ken Sill - Credit Suisse

I wouldn't want to imply that. Okay. So some of these delays, again, it may be an issue of acceleration lever or anything, but it's not really something that you're expecting is going to impact what's happening in '08. If it slips into '09, that's not a big deal at this stage.

Peter Kinnear

Right, yeah.

Ken Sill - Credit Suisse

Okay. Thank you very much.

Operator

And your next question comes from the line of David Anderson, from UBS.

David Anderson - UBS

Good morning. I just wanted to kind of go back on the subsea awards. Peter, if I heard you right, I think you were saying that you thought awards could actually dip perhaps a little bit this year. With these project delays, is there anything from our perspective what do you think is the cause of it? It's certainly not on the manufacturing side. I mean, you guys don't have any problems in trees and umbilical don't seem to be much of a bottleneck. But what do you think is the cause behind some of these project delays?

Peter Kinnear

Well, I think the international, particularly in West Africa, the international company kind of has to queue its project up with in competition of other projects as NNPC or Senegal decides which projects get bought off in which timeframe. So part of it's just the competitive dynamics of the international oil companies and how they get their project approved. I mean, there's lot of things in terms of the technology. There are other international partners on the project to get approved and you got to go to get Senegal.

And Senegal and NNPC, as examples, they may not agree with the local content that the oil company has decided that they want to do in-country, and they may push back, and say, "No, no, you've got to go back and get your vendors to agree to more local content." And that may take three to four months to get put in place, or five months. I mean, it's just a very complicated cycle to get these projects approved. So, I mean, it's just the fact, that's just the way it happens.

David Anderson - UBS

Now, if right now, let's say we're assuming something on the order of like a 500 tree market right now, I mean do you think this market can grow substantially above that over the next couple of years?

Peter Kinnear

Well, I'm still personally pretty optimistic on the outlook given the number of new deepwater rigs coming in here. And if you think about the international oil companies looking for new fields, they have kind of focused in on deepwater where they're finding pretty big finds, and big discoveries. So the trend has been very positive over the last number of years.

And I mean we had this Gulf of Mexico lease sale 205 that the industry spent $2.9 billion, I think, in lease commitments. So, I mean, I would say it's still pretty bullish in terms of the secular trends we've seen will continue.

David Anderson - UBS

Okay. And on your subsea backlog, another nice increase sequentially in your $2.6 billion. Can that continue to grow over the next several quarters? Do you expect that to continue to grow, or do you think it kind of flattens out somewhere around here?

Peter Kinnear

Well, it really depends on the timing of when projects get awarded. And we've stated, I think, before Pazflor, just that one project is $800-plus million. So I mean if that comes into the backlog in one specific quarter, you could continue to build backlog.

David Anderson - UBS

Okay. Fair enough. And one last question on that spin-off; is your standalone company, is it going to be accretive on return metrics? It's pretty obvious on the growth side, on the margin side; but what about return metrics?

Bill Schumann

I'm not sure I understand the question.

David Anderson - UBS

Well, like return on capital. Will your return on capital, before and after, does that go up?

Bill Schumann

Interesting. I haven't looked at it. I believe it does.

David Anderson - UBS

Okay. And you sound like we're talking about a couple hundred basis points here or…

Bill Schumann

Maybe 100.

David Anderson - UBS

Okay, great. Thanks, gentlemen.

Operator

Next question comes from the line of Jim Crandell, from Lehman Brothers.

Peter Kinnear

Good morning, Jim.

Jim Crandell - Lehman Brothers

Good morning. Peter, what is the average value of subsea separation units for the jobs that you've won to date?

Peter Kinnear

Now we really haven't broken out that data, and it really depends on the application and the complexity of what's required on the seabed.

Jim Crandell - Lehman Brothers

Can you give a range?

Peter Kinnear

Well, the only published data and I think the only thing we really want to talk about is the value per well. And obviously the value per well has gone from the $9 million, as I mentioned earlier, the $9 million range in '05 to $14 million per inbound order in '06, and year-to-date we're running at $19 million. And that adds our mix of subsea processing increases, that's the driver.

Jim Crandell - Lehman Brothers

Okay. For Pazflor, at this point, are you and the other two competitors you think bidding these subsea separation units and the subsea trees together?

Peter Kinnear

Yeah. Total, early on they decided that they would put all the trees and the subsea processing in the package as one bid. And they're still sticking to that.

Jim Crandell - Lehman Brothers

Okay. So 49 trees and 3 subsea separation units, I would think would be above $800 million.

Peter Kinnear

Well, that could be the case. We've got local content issues, and it just depends on how much -- obviously, the manufacturing country is more expensive for us than manufacturing in an established situation.

Jim Crandell - Lehman Brothers

This is sort of second hand information, but I just got this from a client, Peter. And if you haven't seen it, it's maybe unfair to ask you to comment. But Quest not only is cutting their '07 estimate, but cut their '08 estimate by 23% and cut their '07 to '11 forecast by 13%. So, I mean, '08 seems like an unusually large reduction and probably playing just by the pushing out of the existing contracts. The contracts that you would have thought would have appeared in '08, are the delays of the '07 projects do they have implications for the delays of the '08 projects, and have you gotten more cautious as to when these awards will come?

Peter Kinnear

We haven't analyzed all the data. We saw the reduction in '07, which was pretty obvious given that these five big projects have slipped out probably into '08. Beyond that, I mean, we track our own, as I mentioned earlier, our own database, and Quest does a reasonably good job. It's just hard to predict the timing, and there are new discoveries every day that people have in their portfolio. I think there is 530 odd deepwater discoveries, about 25% are actually in production, some are in the process of bringing on production. This cycle between discovery and startup is a four or five year cycle.

So the oil companies, if you look at the five big oil majors, last year, in '06, only two had increasing production. The other thee had declining production. So the international oil companies, if they don't plow back and reinvest, I mean they're going to be in a situation where they've got declining revenues and declining production. So it's kind of a Catch-22 for them. They have to bring on some of these fields. The avenue where they've turned to is deepwater. So year-over-year you could see changes, but I think that the trend is still very positive for deepwater subsea.

Jim Crandell - Lehman Brothers

Is there really is the thing that's really causing the delays, Peter, the government delays, particularly the West African government delays?

Peter Kinnear

Well, that does tend to be the bottleneck. I mean there's some inflation in the industry for equipment associated with these deepwater fields. I mean the rig rates have gone up, the costs for new FPSOs has gone up. Our subsea pricing has gone up. But if you look at the economics, you hear numbers in the range of $14 to $18 of finding and development costs. If they can bring a field on for $14 or $18 a barrel and the market price is $70 plus, they're making a lot of money. There's no reason for them not to go forward with these projects.

Jim Crandell - Lehman Brothers

Final question, Peter. If you look back 6-12 months ago over the projects that you would have thought would be 2008 awards, and I know you put dates on the awards, and you were to look at it now, do you think 25% of your potential awards in '08 out into '09; and do you think that the projects are looking at that kind of delay? Have you pushed back your own internal expectations for these big projects?

Peter Kinnear

Well, as I mentioned, we track all these projects on our own, and we obviously deal directly with oil companies and have pretty good contact in terms of what's going on. I mean the delays this year have probably been a little bit unusual in that some of these we thought would have come on sooner. But I mean, you know, like we did win about like BPs [Car] was, I mean it was pretty straightforward, Norway came on the radar screen, BP went out for commercial tender; the Petrobras Cascade project was pretty much on track in terms of execution.

Another one that got delayed, Chevron Gorgon, for example, they had a lot of issues around environmental issues in Australia that they had to get sorted out before it got sorted out. And that project seems to be gone. It's not been announced who's going to win it yet, but it was on our radar screen for early '07 decision, it probably got pushed back. You know Shell Gumusut, again, that was a lot of internal discussions between Shell and Petronas to get that project sorted out. So it just varies. Some go quickly and others take a longer time to come to fruition.

Jim Crandell - Lehman Brothers

Okay. All right. Thank you very much.

Operator

Your next question comes form the line of Joe Gibney, from Capital One Southcoast.

Joe Gibney - Capital One Southcoast

Good morning, guys. How are you?

Peter Kinnear

Good morning, Joe.

Joe Gibney - Capital One Southcoast

Most of my questions have been answered. Just wanted to follow-up on one minor one, just wanted to check on the status of the Malaysian facility expansion, if you could just give us an update on the timing and progress there? And also, Peter, if you could touch a little bit on how quickly you have to add people to meet the large growth demands we've had recently, any personnel constraints that you see over the next year, obviously, as you build your backlog and capacity?

Peter Kinnear

Just let me answer Malaysia first. The plant was finished towards the end of '06 and we got it operational probably in the first quarter of this year. So it's manufacturing product for our customers in the Far East. The staffing level is probably a couple hundred people in the plant already. So we're in pretty good shape for Malaysia, and it's turned out to be a real nice facility for us.

On the people side, I mean the market is still very tight for experienced people in terms of project managers, project engineers, offshore service technicians in that arena it's still pretty tight. We've brought on a lot of new grad mechanical engineers over the last number of years to help supplement our activity in terms of manpower and capabilities. And the supply base is still pretty tight too. So, I mean, executing our projects is not easy. It takes a lot of hard work and effort to make all that happen.

Joe Gibney - Capital One Southcoast

Thanks, guys. I'll turn it back.

Operator

We have follow up question from the line of Geoff Kieburtz from Citigroup.

Geoff Kieburtz - Citigroup

Thanks. Just wanted to come back on the backlog. Can you tell us out of the $3.7 billion backlog, how much is expected to be realized as revenue in '08 and how much '07, '08, and I guess, I don't know if you can break down '09?

Bill Schumann

Geoff, this is Bill. We're going to realize about 30% of it in '07, and obviously, some of the remaining goes into '09. I don't happen to have the number on that. But hopefully, we'll get some more backlog that we can execute in '08 also.

Geoff Kieburtz - Citigroup

Okay.

Bill Schumann

I think the good number is about 30% of it.

Geoff Kieburtz - Citigroup

And would that apply to the subsea backlog as well or would those numbers be any different?

Bill Schumann

It's not quite that high on subsea, but as 2.6 of the 3.7, it's got to be pretty significant.

Geoff Kieburtz - Citigroup

So a little bit under 30% in '07, any difference in the '09 and beyond?

Bill Schumann

Well, I think the subsea backlog is the only backlog we have that stretches to '09. But again, I don't have a real number on that. I just know we have some in '09.

Geoff Kieburtz - Citigroup

And given these delays, do your bids for these various projects have a time limitation on them? Is there a point at which if a decision hasn't been made you effectively withdraw your bid?

Peter Kinnear

Yes, we have a [validity] date that expires. And depending on the circumstances, obviously, we will reprice it, yes. And we have cost inflators in the seas in our contracts. So normally, when we have a bid, Geoff, that may be outstanding for nine months, we kind of pre-escalate the costs that we get in and we pre-escalate it and we bid on that basis. So we're protected with some through the process into the award.

Geoff Kieburtz - Citigroup

Okay. Are there any bids that are kind of coming up to that expiration date?

Peter Kinnear

Yeah. But I mean we always have some that come up to the expiration date. But I don't think we want to be specific on that.

Geoff Kieburtz - Citigroup

Okay. All right. Thank you.

Operator

And your final question comes from the line of Brad Handler from Wachovia Capital Market.

Brad Handler - Wachovia Capital Market

Thanks for letting me back on. A follow up about processing please, the Cascade and Chinook fields, that was originally intended to, or I think maybe you thought it was going to be a separation, it was going to include separation and it wound up just being boosting, if I have it right. To what extent is that a phenomenon that is likely to recur, maybe in other words, is it downsizing of the processing needs? Maybe it's just about adding some color as to that project and maybe how some of the others are progressing that way?

John Gremp

This is John. On Cascade, it has to do with gas volume fraction, the amount of gas versus liquid. In the case of Cascade, the gas level was low enough. They didn't need to separate before they boosted production. I don't believe it ever envisioned separation, maybe in the early days there were some separation component, but it has to do with the gas volume, gas liquid ratio.

And so the case of Shell Perdido and BC-10 they have a higher level of gas. They need to separate some of that gas out, so they can utilize the pumps to boost it. That's the technical reason why one processing system includes separation and the other doesn't.

Brad Handler - Wachovia Capital Market

Okay. That's helpful. So my guess is then you'd steer me not to make some conclusions that were broader than specific answer as to whether or not separation is as likely to be as large or anything along those lines?

John Gremp

Well, I think that goes back to Peter's point. Depending on the solution that you're trying to solve, the processing can be very complex like in the Tordis field where you've got liquid gas separation, water, oil separation, sand, it's very complex. And then you've got Cascade which is relatively simple. So you have to be careful on the assumptions on processing.

Brad Handler - Wachovia Capital Market

Fair enough. Okay. That helps. Thanks.

Operator

And that was the final question. Do you have any closing remarks?

Rob Cherry

Yes. Thank you, operator. This concludes our third quarter conference call. A replay of our call will be available on our website beginning at 2:00 pm Eastern Daylight Time today. If you have any further questions, please feel free to contact me.

Thank you for joining our call today.

Operator

And this concludes today's conference call. You may now disconnect

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