Cameron International Q3 2007 Earnings Call Transcript

Cameron International Corp. (CAM)

Q3 2007 Earnings Call

November 1, 2007 8:30 am ET

Executives

Scott Amann - VP, Investor Relations

Shel Erikson - Chairman and CEO

Franklin Myers - SVP and CFO

Jack Moore - President and COO

Chuck Sledge - VP and Corporate Controller

Analysts

Bill Herbert - Simmons & Company

Brad Handler - Wachovia Capital Markets Llc

Geoff Kieburtz – Citigroup

Dan Pickering - Tudor Pickering

Michael LaMotte - JP Morgan

Ken Sill - Credit Suisse

Roger Read - Natexis

Kevin Simpson - Miller Tabak & Co.

Kurt Hallead - RBC Capital markets

Mike Urban - Deutsche Bank

Renee Gulani - Grand Capital

Monroe Helm - CM Energy Partners

Jim Crandall - Lehman Brothers

Presentation

Operator

Greetings, ladies and gentlemen, and welcome to the Cameron Third Quarter Earnings Release. 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, sir. You may begin.

Scott Amann

Thank you, Ryan. Good morning, and thanks to all of you for joining us today. As a reminder, if you haven't accessed the release yet, it is available on the wire services as well as on our website.

This morning you will hear from Shel Erikson, Chairman and Chief Executive Officer of Cameron and Franklin Myers, Senior Vice President and Chief Financial Officer. We're also joined by Jack Moore, President and Chief Operating Officer, and Chuck Sledge, Vice President and Corporate Controller. Shel and Franklin will each offer some commentary on the results for the quarter, and will then take time to field your questions.

In accordance with the Safe Harbor Provisions of the securities laws, we caution you that some of the statements made on this call may be forward-looking in nature and as such, are subject to various factors not under the control of the company.

For a more complete description of these factors and the related risks and uncertainties, please refer to Cameron's Annual Report on form 10-K, the company's most recent form 10-Q, and the associated news release.

With that, I will now turn things over to Shel.

Shel Erikson

Thanks, Scott. Let me just make a couple of comments, and then I'll turn this over to Franklin. We had a strong quarter; no question about that. The headline earnings of $1.31 included $0.17 of tax benefits. So, the right way to look at our earnings is really $1.14 versus $0.80 last year. We reported $0.78 last year, but we had a couple of cents on restructuring charges. So, all in all, your earnings are up about 42% and a 21% increase in revenue.

Sequentially, earnings were up 5.5% on a 4% increase on revenue. So, business continued to grow, and we look forward to that growth in the next year. Third quarter revenues for all 11 operating units reported increases from last year, which is remarkable. Every one of our businesses is doing better.

EBITDA margins, both dollars and percent, were up from last year for all of Cameron as well as all three reporting segments. So we continue to make progress on a consolidated front. Orders were at $1.33 billion that continued to exceed our revenues and were up 5% from last year and 1% sequentially.

Despite the fact that we had a significant mix shift, drilling equipments orders were about $200 million, and that's a healthy number but not unexpectedly were down more than $150 million from last years' high level.

That business continues to grow but at a slower rate; a lot of it's been driven by deepwater semis, as you know, and we think there's probably something in the neighborhood of 15 to 20 deepwater rigs that could order equipment of our type over the next year or two.

Our surface equipment orders continued strong. They accounted for 21% of our orders; they were up 20% up from last year. Our subsea orders were up 26% from last year. They accounted for 18% of our orders. We expected, actually, the number to be higher, but as you've seen from other people, orders continue to slide.

We don't think it's a reduction in the business but a timing issue more than anything else, particularly with the some of the foreign governments. It's difficult to predict when exactly things happen, but we are convinced that this business will continue to grow.

Clearly, this business is characterized by being what I would call lumpy in terms of orders. Our large orders come at strange times, and they can make quarter-to-quarter or year-over-year comparisons look strange.

Valves and Measurement orders were up 15% from last year. That business continued strong, and compression had a very strong quarter in terms of orders. They were up 49% from last year. Really, as a result of our continued strong and diversified order mix, our backlog expanded to more than $4.1 billion. I think, it's interesting to point out, we don't have any one segment that accounts for more than 21% of our orders on a go-forward basis, and it's pretty much probably the same with revenue.

In the quarter, we had good cash generation. Despite an inventory buildup of about a $100 million, operating cash flow did exceed a $100 million. CapEx, a little more than $50 million for the quarter, was above last year but a little less than what we had expected. Some of the equipment is coming in later than we had expected so what we are doing is guiding for the year end somewhere around $240 million plus or minus.

We are now operational in Malaysia with our new subsea facility, and our spending there is about complete. We are moving ahead on our Romanian facility program, and that's been kicked off. We plan to spend about $10 million of the $60 million this year.

Looking ahead, given our geographical and product line breathe; it positions us well in today's environment. As I mentioned, not one of our 11 product lines accounted for more than 21% of our business.

For the year, earnings are expected to end up between $4.24 and $4.27, and that number includes the tax gains recorded in the second and third quarter to $0.23 a share, and we are forecast a $0.20 non-cash charge that we'll take in the fourth quarter to cover the beginning of the termination of our U.S pension plan.

This implies a fourth quarter earnings estimate of $1.18 to $1.21 a share, excluding a non-cash pension charge, Franklyn?

Franklin Myers

Thank you, Shel. As we discussed in many previous calls, we really try to take a no-whining approach to a lot of the one-time items that we've had. Unfortunately, because of the tax line, we've had to call some of those out for purposes of your understanding.

It’s really a dull part to go through. Our tax rate for the quarter was approximately 24% versus the anticipated rate of 34.6%, with the difference in the quarter being made of several discreet or in other words one-time items, for which the company had previously established reserves.

The ability to utilize foreign tax credit added $0.04. The resolution of a transfer pricing concern added a nickel. The application of foreign tax credits to the U.S, added $0.04, and the reduction in the UK statutory rate added a penny. All important.

I discussed on our last call with a change in the accounting for taxes, it’s more likely that we'll have these discreet items more frequently. And we’re trying to eliminate the swings, but current accounting probably doesn’t make that as likely.

Our tax department is working hard on ways to reduce the book tax rate, but it’s a slow process. The applied tax rate for the fourth quarter is about 33%, down from what we've had previously slightly.

Kind of next, the dollar part in our release is that pencils are getting a little sharper with the respect to the U.S pension plan or at least of those of our actuaries. Our best estimate now is that the charge is going to be $67 million per versus the original $85 million. Both of those numbers are pre-tax; the difference has basically been due to positive investment experience and interest rate stability.

The estimate on the accounting charge in Q4 is between $34 million and $38 million pre-tax or about $0.20 per share as Shel mentioned. Our guidance includes this charge. We still expect to spend about $10 million to $15 million in cash to wrap up the plan. By the end of the plan which will be in ’09, early ’09. The dullest part is, we only bought back 61,500 shares in the quarter for about $76/$77 a share, and I'll come back to this in a minute.

D&A was $28 million in Q3 and $81 million for the full year-to-date. It's about $8.5 million over 2006 through three quarters. Our estimated D&A is about $110 million for the full year, less than originally guided due to CapEx being deployed slower than anticipated; really, lead times on machine tools are what’s causing that.

The CapEx is $53 million in Q3 and a $161 million year-to-date. It's what we expand our estimate, as Shel said, but $235 million to $240 million again down from prior guidance. There's really been no change in our attitude towards deploying the capital. The CapEx has been approved as we've stated before and what we expect to do. It's really been the effort in trying to put the capital to work because of the delays and some of the machine tool providers.

As Shel indicated Malaysia is up and running. Although it's up and running, we are not showing any revenue this year because of the way we recognize our revenue. The revenue from Malaysia really starts in the first quarter of next year.

Share count used in Q3 was $115.4 million and $115.1 million for the full year guidance. As I said, we bought about 61,000 shares in Q3, but we purchased 4.7 million shares for the year-to-date at an average of about $65 a share through three quarters.

One question we probably say well is "Has your attitude on share repurchases changed?" I think Q3 was an unusual quarter because of a couple of things that happened. We were not unaffected by some of the concerns that took place in the credit markets and that were experienced in broad markets in general.

We rescrubbed how we invest our cash and assured ourselves that we won't take any institutional risk in the cash we had on hand. We also tried to evaluate the longer term effect of what I will call the prices of transparency and confidence that occur principally in August. And what we see is, we believe that valuations on company in our space, meaning the private or parts of larger businesses are going to become more reasonable, and kind of come back to historical norms. As a result, we've taken a look at the cash we had on hand and believe that we need to hold it ready to expand our franchise.

We've already seen signs of this. When you couple that with possible higher private capital gains rates, we believe that private companies may be more anxious to transact with our principal competition being strategic players who are typically more conservative prices than what we've seen form private equity.

I would characterize, the deal activity right now within our shop as very robust. We are seeing a number of transactions, whether we actually execute only time will tell, but we do have great deal of activity. Debt at the end of the quarter was $753 million. Net debt was $184 million down from the prior quarter or about 8.5% debt-to-cap.

The other thing that I had mentioned is that currency has been a little, what I will call, concerning in the last quarter because of the weakness in the dollar. As we’ve mentioned before, we are net along US dollars, but what we do and what we’ve indicated before is we tend to hedge our large orders against currency swings so that we can lock in our currency to maintain our margins and to avoid adverse effect at the cost line. And so far, we’ve not seen any meaningful adverse effects as a result of currency swings.

As Shel discussed and the numbers indicate, we had a good quarter versus our expectations and what we’ve guided, and we expect that as we show with our guidance for Q4, that our trend will continue that we are seeing a very robust environment and good results.

With that, Scott, we'll take any questions.

Scott Amann

Okay, Ryan, we can open up for questions please.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this we’ll be conducting a question-and-answer session. (Operator instructions). Our first question comes from the line of Bill Herbert of Simmons & Company.

Bill Herbert - Simmons & Company

Thanks, good morning.

Scott Amann

Hi Bill.

Bill Herbert - Simmons & Company

I was wondering if you could update us with respect to you where you stand today on you subsea manufacturing capacity? I believe Malaysia and also work in Brazil was going to get hit about 170 tress per year, is that correct?

Shel Erikson

That probably right. Again, it depends, Bill, on the mix of tress you’re talking about.

Bill Herbert - Simmons & Company

Got that. But the 170 compares with what at this point last year?

Shel Erikson

Well with Malaysia. You’ve got an increase probably there of about 30 or so

Bill Herbert - Simmons & Company

Okay

Shel Erikson

On an annual basis.

Bill Herbert - Simmons & Company

And with regards to Romania the 60 odd million dollars in CapEx that you are putting in that is that for subsea trees as well?

Shel Erikson

No, no, no that's all surface. Our surface business is strong, and one of the reasons that we are putting up that facility is really a cost issue. We're finding that we're outsourcing way, way, way too much stuff and we are paying a premium to do that. We made that investment, we consider that investment for any increase in the revenue.

Bill Herbert - Simmons & Company

Okay.

Shel Erikson

It's a cost kind of deal where you get a pay back two or two and half years. And I said we got to do that.

Bill Herbert - Simmons & Company

Sure. Now with regard to subsea back to that question. Do you envision continuing expanding capacity in 2008 from where you are right now?

Shel Erikson

The capacity yes, but not the bricks and mortar and not machine tools, it's called softer capacity called people.

Bill Herbert - Simmons & Company

How would you, because I think there is the fair amount on consternation and hue and cry on this particular subject, so here is the question. How would you characterize yourself today from the subsea manufacturing standpoint? Are you capacity constrained or are you basically where want be and where you envision being for the next couple of years.

Shel Erikson

We are tight now.

Bill Herbert - Simmons & Company

Okay. So you are tight right now, but it doesn't sound like you are going to engage in any sort of meaningful capacity expansion in the coming year?

Shel Erikson

Not from what we've already done with the Malaysia. No.

Bill Herbert - Simmons & Company

Okay, fine. And then second question, you mentioned with respect to the continued delays if you will with respect to project sanctioning and some of these large West African Subsea projects. In hearing one of the large offshore constructing companies the other day on their call, it was their belief that Usan was going to get sanction very quickly and probably awarded before year end. And I was just curious as to whether your perspective agreed with that one?

Shel Erikson

Well, we would like to have that in the case, but as I've mentioned in my comments this is not within our control, they don’t check with us before they are ready to go, and typically in large systems like this Bill, it isn't just us that they are having to deal with.

Forget about having to get the sanction approval from the national oil company, you got lots of bits and pieces, things like FPSOs, things like rigs and so forth. My sense is and I have not been told this by any large supplier, but common sense would tell you that you got to have all your pieces in place at one time because it doesn’t do any good ever, rigs standing there waiting.

Bill Herbert - Simmons & Company.

Right.

Shel Erikson

Nor does it do any good to have a whole bunch of trees waiting to be planted and you don’t have a rig.

Bill Herbert - Simmons & Company.

Okay.

Shel Erikson

But I am not saying they got a rig issue, but I am saying you got to take a look at all the pieces and so we are not privy to a lot of that information. So, when they come to us and say, hey we are ready to go, assuming we are ready to go we say, yes.

Bill Herbert - Simmons & Company.

Okay. And then recognizing that delays are a fact of life and handicapping for that, was your hazard a guess as to what the growth in subsea tree orders will be in '08 versus '07?

Shel Erikson

That's a hard one because you do have two or three large orders out there that can dramatically change that number. You are dealing with a relatively small number of wells.

Bill Herbert - Simmons & Company.

Right.

Shel Erikson

Whether you calling at 400 or 500 or 600, you know a 100 trees in one year can change that number dramatically. So do I think over the longer term this continues to grow? You bet.

Bill Herbert - Simmons & Company.

Okay.

Shel Erikson

From quarter-to-quarter? No.

Bill Herbert - Simmons & Company.

Thank you very much.

Shel Erikson

You bet.

Operator

Our next question comes from the line of Brad Handler with Wachovia.

Brad Handler - Wachovia Capital Markets Llc

Thanks. Good morning.

Shel Erikson

Hi Brad

Franklin Myers

Hi Brad.

Brad Handler - Wachovia Capital Markets Llc

Could you guys please spend a little time on compression, just a nice quarter, strong orders as you mentioned. Where is the strength in the order book coming from firstly?

Shel Erikson

Well, we saw a pretty split between both our recip and centrifugal business. A lot of it internationally, and as you would probably notice the EBITDA margins in that business surpass the number or the target we set a year ago and it will for the year.

So, a lot of the work that we have been doing in the past couple of years is starting to pay off; a lot of product development, a lot of new products, and a lot penetration outside the United States. So, we're seeing pretty good growth in orders from both sides of our business. It's not one-legged stool.

Brad Handler - Wachovia Capital Markets

Good. That's good to hear. Coming back to the margin, I guess there was some talk last quarter about second quarter was particular strong because there were some deliverers that have been delayed from Q1.

Shel Erikson

Yes.

Brad Handler - Wachovia Capital Markets

And so, there was some sense that perhaps that wasn’t sustainable margins. Here you've basically put up the same margin and ..

Shel Erikson

Well, you are right. We did better than we expected.

Brad Handler - Wachovia Capital Markets

Okay. Well that’s great, but is there something about the way the business is shaping up with that, that looks to be a sustainable level for us to think about over the next few quarters?

Shel Erikson

Well, it looks like some place between 15% and 20% EBITDA or reasonable number to look at for that business.

Brad Handler - Wachovia Capital Markets

Okay. And the basis for that step up then, how much is pricing versus some of the mix that you are describing and the initiatives?

Shel Erikson

Well, I think part of our problems is not enough of its pricing. We could do a better job on pricing. We are getting it basically through manufacturing volume, and we are tight in that business. The revenues in the third quarter were probably a little less than what we expected, but the margins were certainly better. My guess is you'll see an increase in revenues in the fourth quarter

Brad Handler - Wachovia Capital Markets

Okay, that’s helpful, and I will turn it back, thanks.

Shel Erikson

Thank you

Operator

Our next question comes from the line of Geoff Kieburtz with Citigroup.

Geoff Kieburtz – Citigroup

Good morning

Shel Erikson

Good morning Geoff.

Franklin Myers

Hey, Geoff.

Geoff Kieburtz – Citigroup

Housekeeping first, can we get the revenues orders and backlog within drilling and production?

Shel Erikson

Yeah, I will tell you what probably the easiest thing to do is it's in a bunch of pieces. Why don’t you give Scott a call after the conference call and we will give you that detail. I think we have 11 different pieces so ---

Geoff Kieburtz – Citigroup

That's why. In terms of your comments on the subsea market, you know I quest really sort of wobbly in to the discussion earlier this week. They kind of certainly get a totally different view. They are looking for a decline next year in subsea tree orders and a very subdued growth from there. You clearly have a different view you see continued growth in the subsea market. What is your confidence based on?

Shel Erikson

Well, first of all, we've got some pretty good visibility on some rather larger orders

Geoff Kieburtz – Citigroup

Okay

Shel Erikson

That, for us gives us an increase in business. I am looking at it from my point of view, I am not looking at it from my competitors’ point of view but I don’t see that market declining. There is absolutely a continuing growing need for development of the offshore wells, it’s where the product is. Are there timing issues? Yes.

Geoff Kieburtz - Citigroup

Okay.

Shel Erikson

And are there political issues with particularly foreign countries? You bet. But over the longer run, over the next two, three, four years, the business will be bigger than it is today.

Franklin Myers

Geoff, if the deep water rigs that have ordered come on stream. If they are either unsuccessful or not used, then the market won't grow. But if you believe that they are going to be used and to some degree are successful

Shel Erikson

Then their contract is -

Franklin Myers

And they are contracted is (inaudible). There are a lot of that now. That market should grow

Geoff Kieburtz - Citigroup

Yeah

Franklin Myers

We don't know what goes in to quest on a quarter-by-quarter analysis or even a short term analysis, but just step back and look on a macro basis from where the operators are spending their money and that's what gives us some comfort as to the growth of this area.

Geoff Kieburtz - Citigroup

In terms of the delays this is a characteristic, that that characteristic that's been with this business for as long as I can remember, is there any thing different from your prospective in the nature of the delays is it the magnitude or the causes of them or is it just sort of.

Shel Erikson

No, I don't see any thing different today than it was a year ago or two years ago. It's the same stuff. How it effects us is when you get large orders that can really swing your business from one side to the other, and we have really three business segments today that have these larger orders in them. One of them is our subsea business, the second one is basically what we see in drilling equipment, as you can see how can get some big swings there.

And the third is in our engineered valve business, which tends to take larger orders, and we said all three of those businesses are going to be lumpy. Whereas you get into the surface business which tends to be a little bit smoother, you get in the Distributed Valve business that kind of just moves up and down easily. In the subsea business, I don't see any thing different than what we saw a year or two ago.

Geoff Kieburtz - Citigroup

Okay. And in terms of your outlook for '08, we’ve kind of been through this transition where we had a period where the outlook was dominated by large project, larger number of trees per order, and we kind of went in to a phase where it was more distributed, a lot of smaller lower number of trees per order. Are we going back into the concentrated market conditions here in the next year or two?

Shel Erikson

To some extent Geoff, as you are absolutely right. We went for at least a couple of years, where there are no 25 plus tree orders that were let. And I think you are going to see a few of those over the next 6 to 12 months that come out that tend to skew the numbers. But the thing to look at, the pulse to look at is probably the smaller, the one to five kind of things, because that kind of tells you what people's attitude is in terms of drilling offshore. These larger projects, god it's been in the work for years, and those larger projects whether the price of oil is 90 or 70 is not going to change.

Geoff Kieburtz - Citigroup

Right. And last question. Franklyn when you were talking about acquisitions, you mentioned the prospect of increased capital gains tax, does that suggest that you are looking at a lot of US-based candidates?

Frankly Myers

What I am saying is a number the prospects that come up are US owned.

Geoff Kieburtz - Citigroup

Okay. Not necessarily domestically --

Frankly Myers

They may have business in North America as well as other places, and it's the old Bernard Baruk saying you buy sweaters in the summer time. North American markets have been pretty soft here recently; that we believe that in the long term they will remain soft forever. And so you have to look at where you find the best value.

Geoff Kieburtz - Citigroup

Okay. Thank you.

Shel Erikson

Was it Panama hats or sweaters?

Frankly Myers

Yeah I think it's a sweater.

Operator

Our next question comes from the line of Dan Pickering with Tudor Pickering.

Dan Pickering - Tudor Pickering

Good morning guys.

Shel Erikson

Good morning Dan.

Frankly Myers

Hey, Dan.

Dan Pickering - Tudor Pickering

As we look at the DPS business obviously mix effects margins as we step forward but nice quarter this quarter. Is this sort of a baseline EBITDA and operating income margin level for the company as we step through the next two, three, four quarters?

Shel Erikson

Well, we kind of like to think that that. Is kind of the target where we want to be, the question is, are we capable of executing and being there. But that, to me it’s a reasonable target Dan.

Dan Pickering-Pickering Energy Partners

Okay. So business mix isn’t going to be a meaningful influence or it's going to be your execution capability?

Shel Erikson

Absolutely.

Dan Pickering-Pickering Energy Partners

Okay. And then just spending a lot of time on subsea, I can’t want to pin you down a little bit. If you've booked something before the end of the year, Shel, on a big project or even small projects, does that generate any revenue in 2008, are we really talking about it 2009 issue, when we talk about this projects slippage?

Shel Erikson

I guess it depends on what it is. The answer is yes, it could have an impact on ’08 but not significant.

Dan Pickering-Pickering Energy Partners

Okay. So 2008 in the subsea business, the one reason is coming from small projects, they are going to be more influential to revenues than the big projects?

Shel Erikson

That’s correct.

Dan Pickering-Pickering Energy Partners

Okay. And then last question, the drilling business, you had a big backlog there and the expectation is you start delivering a lot of that equipment. Are you going to see some continued growth in the revenues there and has that revenue ramp started?

Shel Erikson

The revenue ramp has begun, it will continue on. I think the thing we look at Dan, last year we had orders of about a $1.03 billion in drilling equipment. My best guess is you are going to see that number probably between, these orders I am talking about, some place between 8 and 8.50 this year.

Dan Pickering-Pickering Energy Partners

Yes.

Shil Erikson

It will be the second largest order year we've ever had. So, you'll have deliveries that will extend out ’08-’09 and going into ‘10. So, it gives us a nice rollout over the next two or three years. The other thing that happens of course is, as you put more of that equipment out there your after market business starts to grow and in the past and in periods where you didn’t have any large subsea orders or large jack of orders, typically about half the business was aftermarket which is nicely profitable.

So, if you take a look at today our margin percent mix in drilling is down from where its traditionally has been, because we’re shipping new capital not half-and-half margin, I mean higher margin in spare parts.

Now you’ll return to that higher spare parts business when you complete delivery of all of these capital goods. We’re not getting the same margins on new equipment as we do in aftermarket. But it gives you a nice blend going forward.

Dan Pickering-Pickering Energy Partners

Fine.

Shil Erikson

It gives you a lot of surety in terms of what you are going to do in terms revenue and margins.

Dan Pickering-Pickering Energy Partners

Right. And I guess the reason I'd asked the margin question Shel was because as drilling grows that OEM will have a negative mix impact but essentially you are making it up in the other business as it sounds like.

Shil Erikson

Yeah that's pretty true. I think what happens is, I am not saying that the drilling capital equipment margins are bad, they are just not as good as they are just playing after market margins

Dan Pickering-Pickering Energy Partners

Right.

Shil Erikson

So, I don’t think your going to see any dilution of our overall margins as a result of the ramp up of new drilling equipment.

Dan Pickering-Pickering Energy Partners

Well, thank you.

Shil Erikson

From a company standpoint.

Dan Pickering-Pickering Energy Partners

Right, thanks.

Shil Erikson

You bet.

Operator

Our next question comes from the line of the Michael LaMotte with J.P. Morgan.

Michael LaMotte - J.P. Morgan

Thanks good morning guys.

Shil Erikson

Good morning Mike.

Michael LaMotte - J.P. Morgan

I am sorry to beat this subsea horse one more time, but I am wondering how much perhaps needs to follow-up on Jeff's question, the issue of large contracts versus the onesy, twoesy. And in particular I am thinking about Exxon's plan to sort of switch from Kasamba B concept to satellite developments on ABC. Whether that kind of mix factor is really at play here?

Shil Erikson

Well, I can't tell you. The last project we did for Exxon was Kasamba B. Kasamba C we didn't qualify as the preferred supplier, they just didn't like our terms. So, what they are going to do going forward, I really don't know.

Michael LaMotte - J.P. Morgan

Okay, I guess, just in terms of Quest accounting for projects and what shows up in their database.

Shil Erikson

The problem which you have with Quest and it's not their fault. It's just the data that they use, is they count trees, they don't count revenue.

Michael LaMotte - J.P. Morgan

Yeah.

Shil Erikson

And years ago, when you were selling individual trees, it was very much apples and apples, and as you started to go to larger systems, the tree is only the minority of the revenue that is in a system. A typical tree used to go for $2 million or $3 million probably in that range, may be $4 million with all the jewelry on it. But today if you take look at a larger system, it's not unusual to have per tree, if you want to look at it that way, $10 million to $20 million in revenue. So, when you look at the data is data and I am not falsing their data per say, it just is incomplete.

Michael LaMotte - J.P. Morgan

Fair enough. That's helpful, thanks.

Shil Erikson

Yeah.

Michael LaMotte - J.P. Morgan

And then on the surface side, you've been running at a revenue run rate mid 20%, high 20% range, orders are up again 20% in the quarter. Can we comfortably see up 20% revenue year in ’08?

Shel Erikson

Well, we will give you some guidance when we do ’08, we’re not doing ’08 right now, but the answer is it’s not likely. That’s a pretty big number. Having said that, I love our surface wellhead business; it’s the best in the world by far. It’s a jewel for us, but its more than just equipment, it's the whole package that goes around it.

Michael LaMotte - J.P. Morgan

Can you remind us of what the cycle time is between backlog booking and revenue flows through to them?

Shel Erikson

Well, again its depends on the product, it could as much as a order today as revenue next week. To an order today is revenue six to eight months from now, depending upon the size of the tree. You start building, there are large block trees that look kind of like subsea trees and you put those on land, they are going to have a longer lead time because you’ve got a huge hunk of metal to machine out. You take a simple gate valve and stack it on something else and you can get that pretty fast. So, we have a broad mix in our surface business.

Michael LaMotte - J.P. Morgan

In the orders are you still running 80% or so on the international side or does that stretch out that?

Shel Erikson

Well it's interesting. In the US, in that business we’ve basically seen kind of a flat market for the last couple of years, and the growth we’ve seen is been coming out of places outside the United States. But we haven’t seen any decline per say in the US, we just don’t see any growth right now. Do you expect that to resume at some point? Yeah I do.

Michael LaMotte - J.P. Morgan

Lastly, Franklin, a question for you on the dollar impact on B&M in particular. With manufacturing in Europe; you obviously managed the currency issue well in the third quarter. How do we think about that going forward?

Franklin Myers

Most of the orders taken out of North Italy, our two plants in north Italy are in Euros. So we are okay there.

Michael LaMotte - J.P. Morgan

Okay

Shel Erikson

What we want to try to do is sell in the currency that we make, except we can't do it best than we hedge.

Michael LaMotte - J.P. Morgan

Okay. Great, thanks a lot. Goodbye.

Operator

Our next question comes from line of Ken Sill with Credit Suisse

Ken Sill - Credit Suisse

Thank you. Shel and Franklin, obviously the way you guys book things on a ship and every thing out on a completely contract basis you could see a lot of lumpiness in the revenues. I guess was there anything unusual in the quarter or this quarter in any other businesses that would cause some sort of strange trajectory in revenues Q3 to Q4?

Franklin Myers

No.

Shel Erikson

No.

Ken Sill - Credit Suisse

Okay. And then obviously the margins very good across the Board this quarter, Valves and Measurement were very strong. Just going to ask a question on that one, do you think that, that kind of margin is sustainable or is there something unusual that caused the margins to come in so strongly at almost 24% even EBITDA.

Shel Erikson

I don't think there is anything particularly unusual, one of the things we didn’t see in the quarter which is probably contrary to the doom and gloom that you hear about United States. We said before that our distributed valve business tend to pretty much follow a rig count, and we sell in to both US and Canada. Actually our revenues in that part of business were up slightly from where they had been from last two quarters.

So, I guess the good news for us is, I don't see any continued decline in the US, and maybe we've seen a bottom I don't know. But other than a few million one way or the other in that business I don't see anything that is really different by the quarter or in the quarter that would make us change how we operate our business.

Ken Sill - Credit Suisse

And I wanted to dig a little bit deeper in that business. Obviously, this is something that gives you some exposure to infrastructure spending going on internationally. How much of the business is international in the Valve business? And we are starting to hear delays of big projects and obviously anything going on in Russia pipeline wise, timing is an issue. Do you think this is going to affect what happens in Valves and Measurement in '08 relative to expectations?

Chuck Sledge

I don't really think its showing up. I will tell you why, Ken. If you take look at the components of our Valve business, as I've mentioned, we have this distributed Valve business that basically operates in North America. We have a Processed Valve business that's for all terms and purposes, our Orbit Valve business that's related to L&G and projects like that and that kind of continues on.

The thing that is the largest valve piece we have, is an engineered valve and that's when we put the camera all welded together with the grove bolted valve. But a piece of that in Italy is really going for subsea. In our engineered valve, presently there's probably a $500 to $600 million business and probably a quarter of that is for subsea manifold valves that we sell not only to ourselves but we sell them to our competitors.

So, you got lots of different market segments each of these businesses itself. So, we are not overloaded necessarily in the pipeline or in one segment or another. But again, that part of the business because its longer cycle will be lumpier than the typical Distributed Valve business or the Process Valve business.

Ken Sill - Credit Suisse

Okay. And then just one final question on the subsea just to beat the dead horse one last time, are you see any change in behavior out of I guess back to another GEs in there? When your competitors said that thought they were actually probably a little bit more disciplined.

Shel Erikson

Do I? I don't. But I don't hear anything, I don't see anything. Jack, would you agree?

Jack Moore

I would agree, Shel. I think the behavior I think is one we would have expected for the worldwide organization. So --

Shel Erikson

Yes. Its spread in a large corporation, and of course, your tech orders, it's in, as I said before, the oil field center of the world Florence, Italy. And you just don't hear over here much about what's going on with that business.

Ken Sill - Credit Suisse

Okay. Thank you, Shel.

Shel Erikson

Good.

Operator

Our next question comes from the line of Roger Read with Natexis.

Roger Read - Natexis

Good morning, gentlemen.

Shel Erikson

Good morning. Hi, Roger.

Roger Read - Natexis

Quick question on deepwater and I kind of went through it quickly on the internal part. The 15 to 20 deepwater rig, did you indicate those were yet to order equipment or you were getting orders off kind of 15 to 20 deepwater rigs that have recently been ordered?

Shel Erikson

Yes. There are yet to be ordered, and there are some orders that are coming through.

Roger Read - Natexis

Okay. And I know you guys do a lot of risers as well as other equipment, is the mix on those any different than what you've seen historically or is the margin on deepwater rigs any different for you than the orders that are mostly in already, which if I remember correctly, in a more jack-up and deepwater oriented?

Shel Erikson

Well, we've booked, I think 22-23 deepwater systems and the systems that have been booked more recently, have a higher built in margin than the ones that we did at first. The majority of those deepwater rigs we are supplying to, Roger. And so, as this thing rolls out, the margins in that segment should improve. But it's a business that won't go away. It will moderate overtime and then you will get ready to go through another cycle at some point, I don't know when that is. But rigs continue to age. It’s one of those things that is kind of like people, sooner or later they all die and you got to replace them. But we've have gone through a rig build cycle right now and we still see things in front of us but not what we saw two years ago.

Roger Read - Natexis

Sure. And then a different of way of asking questions in the subsea area, the DC tree, has there been any uptake or any update on that in terms of orders or more market penetration?

Shel Erikson

I am not sure I didn't understand your question.

Roger Read - Natexis

The DC tree, your direct current tree.

Shel Erikson

I am sorry. I thought you said deep sea.

Roger Read - Natexis

I am sorry.

Shel Erikson

No, the DC tree, we are delivering that this year and I think we have other people who are interested. We want to make sure that we get the ball all the way in the glove. Everything works the way it's supposed to and then we'll continue on. But the last thing in the world we want to have is something that doesn't work exactly where we expected it to work. But yes, we have interest by several other parties and basically said, hold on, let's get this one planned and make sure it operates.

Roger Read - Natexis

Okay. That's it for me. Thanks.

Shel Erikson

You bet.

Operator

Our next question comes from the line of Kevin Simpson with Miller Tabak & Co.

Kevin Simpson - Miller Tabak & Co.

Good morning.

Shel Erikson

Good morning, Kevin.

Kevin Simpson - Miller Tabak & Co.

A couple of questions, first a quick one for Franklin. Could you maybe give us some guidance on what you might be using for share count ongoing forward? It sounds like you embanking off ---

Franklin Myers

Our guidance for full year was based on the 115.1 million shares for the year. So, what you see in the press release, the number for the full year earnings is 115.1.

Kevin Simpson - Miller Tabak & Co.

And I know you are not into next year guidance, but should we begin to put a little bit of upward creep on shares or would you call them flat?

Shel Erikson

No comment at this point. We'll talk about that in January.

Kevin Simpson - Miller Tabak & Co.

Got you. So, consistently I can't believe it.

Shel Erikson

We are boring, I guess.

Kevin Simpson - Miller Tabak & Co.

Boring is good. The revenues were wide from where I thought they'd be. Maybe I was just overly enthusiastic, I wondered kind of across the segments, how they came in relative to your expectations?

Shel Erikson

Well. Clearly, I would have liked to have more, and more is always better. But as I mentioned that in a number of different places, we are pretty tight. On capacity, we wouldn't be adding capacity in Malaysia. We wouldn't be adding capacity in Romania. And basically, we are ramping up capacity in our drilling business. So, as we said before, execution is getting stuff out of the door and that's why when you talk about guidance, we don't try to give you, here's the most we could possibly do, here's what we think is the reasonable expectation. But having said that, yes I would like to have more and would I like to have more in the quarter, you bet.

Kevin Simpson - Miller Tabak & Co.

Okay. Normally, you get a big kick, you get a seasonal depending on business kick in 4Q manufacturing. With things so tight, is that going to be more muted than it normally would be?

Shel Erikson

I would think so. The flexibility that has traditionally been there in the fourth quarter and they have already started moving towards and trying to make sure, they make their bonus for the year, the foot is on the paddle all the way to the floor. You can't push into the floor board. In many cases, it's already down to the metal.

Kevin Simpson - Miller Tabak & Co.

Pretty much everybody has made their bonuses for the year or being close to it?

Shel Erikson

No.

Kevin Simpson - Miller Tabak & Co.

No.

Shel Erikson

No.

Kevin Simpson - Miller Tabak & Co.

No, okay. Good. Sorry about that, one other quick. Local content seems to becoming an increasing issue in Angola. Where do you guys stand on that there are couple of big Angola? I know Usan is -- Nigeria but Block 31 you guys have mentioned favorably, we keep on waiting for that to come as well, and maybe the incremental Block 18. Are you kind of okay on local content or you going to have to put more money into Angola?

Shel Erikson

We have facilities in both Nigeria and Angola. It's not so much the issue of having to put more investment in per se, it's what the companies want is more product and coming from these local areas and that becomes an area of risk. If you can just think out loud with me for a second, can you imagine somebody in Nigeria building a subsea tree from scratch, compared to what we can do in our leads facility or what we can do in Brazil?

It just boggles the mind, yet these local people would like to have that happen, it becomes really a training issue, make sure you can manage the quality issue, it's a much higher risk. So, when you think about local content, it isn't a facility that you have there, you have to have that, it's the actual manufacturer or assembly or production of equipment that people are looking, because you are looking for jobs, and that's a risk. And very frankly, today we are building manifolds in West Africa, and they are far more expensive, far more expensive to build in West Africa, than would be in United States or in Europe.

Kevin Simpson - Miller Tabak & Co.

On productivity issues?

Shel Erikson

Of course. Not withstanding the fact that the unit labor cost is a lot lower. It just takes longer. You've got things that get screwed up, it’s tough. And I understand why the local governments want you to do that. They are trying to build up their own capabilities internally. But it’s a long-long way from what we do in a developed country to do it in an underdeveloped country.

Kevin Simpson - Miller Tabak & Co.

I don’t know if that’s politically correct anymore, Shel. I think it might be emerging economy or something.

Shel Erikson

Okay.

Kevin Simpson - Miller Tabak & Co.

Sorry. So, these big orders that are out there, they trying to hold your feet to the fire, you are going to have to push more products, bit of more content item both of those countries or do you think you will be able to continue kind of billing along as you are right now?

Shel Erikson

Well, today we've produce product in places like Nigeria. The [AGFO] manifolds are being produced in Nigeria, not without difficulty. So, the question is, we’re not the ones that contract with the national oil company, typically their partners do. But their partners have a demand placed on them by the national oil companies, so the partners have to decide, what local stuff can they put there to satisfy their contract?

Kevin Simpson - Miller Tabak & Co.

Right, although in Angola, Cameron Valves seems to be getting very, very aggressive and while projecting with some of that into these marquee projects that are out there, looking like I guess for more price?

Shel Erikson

Did you see that, there continual pressure. It is not just in West Africa; you see the same thing in Malaysia. You see the same thing and there is pressure to do that in Indonesia. All around the world, people want to have stuff made in their country. It’s not unexpected.

Kevin Simpson - Miller Tabak & Co.

So, for you kind of an issue is business as usual in terms of trend?

Shel Erikson

Yes.

Kevin Simpson - Miller Tabak & Co.

And you don't think you probably can handle?

Shel Erikson

It’s not a massive shift. This has been trend for a number of years.

Kevin Simpson - Miller Tabak & Co.

Thanks, that’s it from me.

Operator

Our next question comes from the line of Kurt Hallead with RBC Capital markets.

Kurt Hallead - RBC Capital markets

Hey, good morning.

Shel Erikson

Good morning, Kurt.

Kurt Hallead - RBC Capital markets

Now, when are you moving the HQ to Florence?

Shel Erikson

Maybe at the summer time.

Kurt Hallead - RBC Capital markets

There you go. I think I kind of covered a lot of ground obviously today and I just wanted to make sure that I understood generally what you are saying here is that, in terms of overall business trends as you look in to ’08 and potentially even beyond, there is really nothing on the horizon here that’s causing you worry or concern or raising a caution flag in any of your segments is that a fair read.

Shel Erikson

I would say no more than it ever has. There are always things, one of the things that we worry about again is something we can't do a heck of lot of about is other than react is currency.

We can’t do a heck of a lot about the fact that people are talking about raising iron ore prices by 50%. Now, how much of that impacts our fortune suppliers and so forth? I don’t know, but do we expect to have some inflationary pressures going forward? Yes. How do we react to that? Well, we basically have to look at how do we lock in contracts for raw material, how do we pass it on. This is not a whole lot different than what we've been doing for the last several years, so I don’t see major jump shift in the way this business is operating or what our expectations are going forward.

Kurt Hallead - RBC Capital markets

Okay. And then Franklin would say this is kind of the best environment you maybe facing for acquisitions and if that's the case is that in recent years or in the recent memory or are things getting relatively better or absolutely more --.

Shel Erikson

Recognize Kurt he is an old guy so he has a lot of experience. The best environment is when everybody's on their rear end that’s when you can buy things right. And in terms of having more willing seller with an elimination of competition who are in our view paying at the highest levels that could be valued on some company. This is certainly improved from the last couple of years.

Kurt Hallead - RBC Capital markets

Okay, alright. And then want to follow-up here. So, you've done so well on the compression segments, what kind lead indicators should we be focused on there, as to kind of track what's going on?

Shel Erikson

You know years ago in the centrifugal, one of the things that took place was there was a downturn before we had that Asian flu. I can tell you we don't see any of that downturn and not necessarily that that was a true precursor of what's going to happen, because we certainly see things in that part of world is continuing on strong. I know China's GNP growth dropped all the way to 11.5%, so things are slowing down there.

I just don't see things changing a heck of a lot. I think there is more concern today over what's happening from a financial standpoint in our markets that what's affecting us right now. You got very frankly strong, strong commodity prices that will continue draw attention by our customers. So, as long as that continues and to me, if it were $60, I don't think that would behave any different then if it's $90. It was $20, you bet, a big change. I don't see that likely to happen.

Kurt Hallead - RBC Capital markets

Alright, great. Thanks.

Operator

Our next question comes from the line of Mike Urban with Deutsch Bank

Mike Urban - Deutsche Bank

Thanks, good morning.

Shel Erikson

Good morning Mike.

Mike Urban - Deutsche Bank

The only thing I had left was on the V&M business, nice performance there this quarter. But you have been working on some efficiency initiatives and putting in some machine tools, and it sounded like some of that stuff was running a little late. Was just wondering if one, you still expected the kind of margin improvement in the Engineered Valve side that you had been talking about previously, and if so is that pushed out a little bit? Just trying to think about what we are looking out for next year?

Shel Erikson

The answer is yes and no. We have seen really good improvements in our Engineered Valve business. The profitability of that business has improved a lot. Do we still have some more things to do? Yes we do. But I would count on the V&M business margins to expand beyond where you see them right now. If for no other reason, we don’t need to attract a whole lot of competition because we are a holding a price umbrella up.

This is a highly profitable business for us, we intend to keep it that way, and the way we intend to keep it that way is to continue to press for cost reduction and by doing stuff in-house as opposed to outsourcing, we can drive our cots down. So it’s conceivable that you could have a point where our price we would actually drop and our margins would continue on. That’s our game plan.

Mike Urban - Deutsche Bank

Okay. That’s helpful, that’s all I had. Thank you.

Shel Erikson

Okay.

Operator

Our next question comes from the line of Renee Gulani with Grand Capital.

Renee Gulani - Grand Capital

Good morning guys.

Shel Erikson

Good morning.

Renee Gulani - Grand Capital

Shel, you have minimal net debt and you’re seeing more steady cash flows than you have in previous cycles. I know there are some potential opportunities in the North American market. What is your optimal capital structure? I know you’ve looked at possibly leveraging up your balance sheet in the past, but is that something that?

Shel Erikson

I would say that, and I think most people would agree even in an energy business that tends to have a lot of volatility, we’re under leverage at this point in time. And our practice in the past is we would either be doing acquisitions or we would be buying back shares or we’d be spending money on capital.

We push the capital button, we kicked up big time this year, in fact coming in as fast as we like, but we kicked that up, but then again that was consistent with the size of our business. I always said anyway that I think our depreciation or i.e. capital spending it probably be somewhere between 3% and 5% of revenues and that's kind of where we getting. Although in this quarter we, I think, we are less that 3%, we are like 2.5% depreciation.

But we would see that as Franklin said earlier that there are a number of opportunities outside this company that we could possibly spend money on.

Renee Gulani - Grand Capital

True

Shel Erikson

And right now that's a higher priority for us than it has been in the past again, because the external markets change. So

Renee Gulani - Grand Capital

May

Shel Erikson

That's kind of our first choice over the next over the next year.

Renee Gulani - Grand Capital

Okay

Franklin Myers

If you look it our three buckets that Shel indicated; CapEx, share repurchases, and acquisitions we've deployed through third quarters over $0.5 billion and now our rate of growth of cash as opposed to our rate of deployment has been a little out of whack. But if we could efficiently put capital out, we'll work on that 30%-35% debt-to-cap and maintain our Triple B plus ratings which is important to us for a lot of reasons because of our project businesses. We would like to be there, but the one thing we can't do is just because we have the cash go spend it. We need to make sure we do it prudently.

Renee Gulani - Grand Capital

Okay. Thanks.

Shel Erikson

Thanks, Rene.

Operator

Our next question comes from the line of Monroe Helm from with CM Energy Partners.

Monroe Helm - CM Energy Partners

Thanks a lot. Actually my question was already asked by Dan Pickering, and it had to do it whether or not these delays could have any meaningful impact on '08 earnings? So I was glad to hear your answer to that. Sounds like this just happened upon the fact that maybe there some delays in these big projects. Somehow surprised, but they are being surprised that there is some -- like the earlier responses to some of these questions, so thanks for the answers.

Shel Erikson

Thanks Monroe.

Operator

Our next question comes from the line of Jim Crandall with Lehman Brothers.

Jim Crandall - Lehman Brothers

Good morning.

Scott Amann

Hi Jim

Shel Erikson

Hi Jim.

Jim Crandall - Lehman Brothers

Shel, how many subsea trees did you book in the quarter?

Shel Erikson

Well, if you believe Quest, it says 17 I believe. One of the things that we booked in the quarter when we got the contract was the Apache Van Gogh project. We don’t look projects until we get an order. It doesn’t go into our backlog until we get an order. In this case I think those trees were accounted for by Quest probably two or three quarters earlier. So, whatever number you want to use is up to you.

Jim Crandall - Lehman Brothers

So if were to look at 2008, 2009 and estimate at this point what percentage of the orders will be booked with subsea separation and that you have that both and you bid on both in conjunction, what would you guess in terms of the total trees in the industry?

Shel Erikson

Probably less than 5%.

Jim Crandall - Lehman Brothers

Really.

Shel Erikson

Yeah.

Jim Crandall - Lehman Brothers

Okay. And how do you think you -- would you think you could be competitive in awards coming up if you're bidding on those in conjunction?

Shel Erikson

If we will bid when we have a package that is we think is equal to or better than our competition. We've been putting the pieces together and that's why we did that DES acquisition. That's why we have the joint venture with Curtis-Wright, and we are developing our own separation capability. Hopefully and more efficiently I think the word really fits nicely. It's with our all electric system. Because what it allows you to do is, is do separation on a major step by the way, far beyond what you can do under a current hydraulic system.

So, a lot of these pieces go together in a package, but there are lots of problems that you have to solve. It isn’t just okay, I am going to separate water from the oil and this is it and it's all set. We've been involved, we were years ago with Petrobras and it was called the Vast project and that was done in Brazil. But there is always going to be separation of some sort that's going to be done on a platform or an FPSO, you are not going to get rid of it. People are not going to all of a sudden down size an FPSO or a platform based upon the fact that they can do all the separation in subsea.

It will come in parts and pieces and it will be developed overtime. One of the big benefits that has been heralded for separation is, you get a greater recovery from the well. And if that's true, then there is a real strong, strong economic benefit of doing something like that. But, when something goes wrong in subsea, you got a huge separation unit, I’ll tell you what, it's a going to be the real cost. So, it's one to these processes that will be developed overtime like our school tree was back in 94 and 95. It took several years before it was accepted by the industry, and that's small in comparison to what we are talking about the way of separation subsea. So the answer is will it move in that direction? Yes, Jim. Will it move at a rapid pace? I don't think so.

Jim Crandall - Lehman Brothers

Okay. So I’ll just bring it back to my first question. First nine months of this year, where do you think you market share was? A number of trees up, a number of orders?

Shel Erikson

Let me see what Quest has said. What has Quest said Scott?

Scott Amann

Here, nine month 25%.

Shel Erikson

25% that's what Quest says.

Jim Crandall - Lehman Brothers

Do you think that that number understates your ongoing market share because the numbers of projects that you think you are – looks like a strong candidate to win, might have been delayed or pushed out?

Shel Erikson

Well I think you've got two pieces in there, you are measuring as said earlier your previous question. This is measuring number of trees, it’s not measuring dollars. Measuring in fact what percentage of the wells did you get, that’s what you are really measuring. And market share can be developed on a unit basis, it could be developed on a dollar basis.

When you do larger projects you pull through more dollars, typical smaller individual trees are worth a whole lot less for a tree than a larger project. But if you included some of the projects that we are looking at right now, our target number is going to be, we'd like to be somewhere around 13% to 35% of the market. Our intent is not to abandon the market nor be the guy that’s been the price leader. We want to make money, we just want to be the profitable subsea guys. And we think we are

Jim Crandall - Lehman Brothers

But do you see market share. Let's just say that, that 25 both in dollars and units was lets just say that was the new level, would you not be happy with that and would you tend to bid some sharpen your pencils so that your market share did raise back, come back into the targeted range?

Shel Erikson

I don’t think so Jim. I think we're pretty disciplined. One of the things that’s very important particularly in larger projects, price is a piece of the whole thing but current terms are extremely, extremely important.

On larger projects you get whipsawed by the customers in terms of how they handle changed orders, on smaller it's not an issue. So, we're careful when we go forward on a process that we can get a return that we think is adequate number one, and number two, we are not betting the company. Call us conservative, but that's just the way it is. Ours is not a market share strategy ours is a profitability strategy.

Jim Crandall - Lehman Brothers

Okay and one other question, how many deepwater BOP stack did you book in the quarter?

Shel Erikson

I don't know. What was it? Was it two or three? Two in the quarter.

Jim Crandall - Lehman Brothers

Okay. Alrighty. Thank you very much.

Shel Erikson

You bet.

Operator

Seeing there is no further questions in the queue, I would like to turn the call back to management for any concluding remarks.

Scott Amann

Okay thank you, Ryan and thanks to all of you for joining us this morning.

Operator

Ladies and gentlemen, this concludes today's teleconference. Thank you all for your participation.

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