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Cameron International (NYSE:CAM)

Q1 2012 Earnings Call

April 26, 2012 9:30 am ET

Executives

Jeffrey G. Altamari - Vice President of Investor Relations

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

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

Analysts

James C. West - Barclays Capital, Research Division

Kurt Hallead - RBC Capital Markets, LLC, Research Division

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

Angeline M. Sedita - UBS Investment Bank, Research Division

Collin Gerry - Raymond James & Associates, Inc., Research Division

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

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

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

Judson E. Bailey - Jefferies & Company, Inc., Research Division

Michael W. Urban - Deutsche Bank AG, Research Division

Douglas L. Becker - BofA Merrill Lynch, Research Division

David Anderson

William Cornelius Conroy - Pritchard Capital Partners, LLC, Research Division

Edward Muztafago - Societe Generale Cross Asset Research

Operator

Greetings, ladies and gentlemen, and welcome to the Cameron First Quarter 2012 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jeff Altamari, Vice President of Investor Relations for Cameron. Thank you. You may begin.

Jeffrey G. Altamari

Good morning, and welcome to the Cameron first quarter earnings call. Thank you for joining us today. This morning, you will hear from Jack Moore, Chairman, President and Chief Executive Officer of Cameron; and Chuck Sledge, Senior Vice President and Chief Financial Officer. We are also joined by John Carne, our Chief Operating Officer. Jack and Chuck will offer commentary on the results for the quarter. We will then open the line for your questions.

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

I will now turn the meeting over to Jack.

Jack B. Moore

Thank you, Jeff. As many of you have seen, Cameron earned $0.54 in Q1, revenues topped $1.8 billion, up $300 million versus Q1 of 2011, net income of $134 million, an increase of $25 million versus last year. Bookings were very strong in Q1, coming in at $2.6 billion, an increase of over $1 billion versus last year and up $650 million sequentially. Backlog is at a record $6.8 billion.

All of our business units recorded year-over-year growth, once again underscoring the diversity of Cameron's business reach, both onshore and offshore. And one order that I would like to highlight is the award of 30 subsea tree systems from Petrobras' pre-salt development at $340 million. What is highly unique about this order is that all of the equipment will be built in our Leeds U.K. facility, a great complement to our subsea teams working with Petrobras to a system in bridging near-term delivery shortfalls. While this particular order will not consume any of Cameron's Brazilian manufacturing capacity, we fully expect that Petrobras will require a substantial number of additional pre-salt trees against our local capacity within the coming months.

I would also like to welcome TTS Energy to the Cameron family, an acquisition that we announced last week. TTS continues Cameron's expansion of the drilling systems markets. Combined with our LeTourneau acquisition in Q4 of last year, this will complement and expand our drilling technology reach and it really takes Cameron's rig solutions capabilities to a whole new level.

On the topic of drilling systems, we see a very healthy market for drilling systems technology and the aftermarket service infrastructure to support it. With demand for deepwater floaters and high-spec jackups growing, coupled with our contractors' commitment to upgrade their current offshore and onshore fleets, we expect another record year for orders. As for Q1's result, we had another great quarter, with orders totaling over $700 million in Q1, up $450 million versus last year, and up $350 million sequentially. We booked 8 subsea stacks and 8 jackup stacks in the quarter.

Aftermarket bookings grew as well, totaling over $190 million in Q1, a $75 million increase versus last year. And investments in our aftermarket operations continue to move forward. Our Gulf of Mexico offshore base in Berwick, our Singapore base in Jurong, our Macaé base in Brazil, and our North Sea support base in Aberdeen, all of these investments will be completed by year end. In response from customers who have been very positive and by judging by our bookings, they are supporting these commitments.

Before we move on to the other business units' results, I would like to expand my comments regarding our acquisition of TTS Energy and its importance to our drilling systems strategy. TTS, combined with LaTourneau and Cameron's legacy products, will provide Cameron a platform to advance its reach, both onshore and offshore. LeTourneau was a great start on our journey to expand Cameron's drilling systems capabilities. However, we still had gaps and TTS Energy provides us a great opportunity to fill many of those gaps. With high-performance drilling control systems, modular top drives capable of lifting 1,250 tons, which is a great complement to our LeTourneau DirectDrive System, hydraulic roughnecks, motion compensation systems, mud control and handling systems, another great complement to our LEWCO Mud Pumps system, plus horizontal and vertical pipe racking systems. And just as significant, we also acquired a great team of dedicated and technically competent personnel based in Kristiansand, Norway.

And like LeTourneau, Cameron provides TTS Energy a great partner to advance the acceptance of their world-class technology. Our global service and sales network and established relationships with drilling contractors in shipyards will provide a great foundation of which to build upon. Will it be accretive to EPS in 2012? Probably not. The real value created is having drilling technology platform that places Cameron in a position to serve both the onshore and offshore market for years to come, with solutions that improve the safety and efficiency of our customers. So our outlook for drilling is very positive, even more so with TTS in our stable of products.

Our Surface Systems markets continue to benefit from global spending increases for onshore development. Bookings in quarter 1 came in at $400 million. This is another record and represents an increase of over $80 million from Q1 of 2011. North America represented approximately 1/3 of our total surface bookings, which were up 25% versus last year. This was driven by the overall rig activity and our investment in the high pressure frac infrastructure. Our international markets were also up 25%. A large reason for an increase in our international activity has been driven by the Middle East, primarily Saudi, Oman and Iraq. And what has been instrumental in Cameron's success in the growth of our Surface Systems business has been a dedicated focus on advancing the technology, infrastructure and personnel to support our customers globally. This is a major reason why our team was successful -- was recently successful in securing Shell Oil Company's global frame agreement for their onshore wellhead and tree requirements. All in, a great quarter for our Surface Systems team.

Moving on to subsea. We are clearly witnessing an inflection point in a number of subsea awards, and it is meaningful in terms of value and that should come with improved pricing levels. Subsea Systems recorded their largest bookings quarter in 3 years. Total orders came in just over $580 million, $330 million greater than last year and $380 million higher in Q4. And as we discussed earlier, Petrobras drove the majority of this number. And while we expect Petrobras to order additional pre-salt trees as well as non-pre-salt trees over the coming months, there remains a number of project opportunities outside Brazil beyond just the tree systems. West Africa, the Med, the Far East will drive big-ticket orders, but we'll see a number of smaller projects gaining momentum in the North Sea and the Gulf of Mexico. As always, with subsea project markets, predicting the timing of awards is difficult. But in our view, the pace of awards over the coming quarters should be healthy for the industry.

Of all of our business units, Valves & Measurement touches the broadest segment of our customer spending cycle. We supply valves for both the onshore and offshore drilling production markets, and we touch the midstream, FPSOs and the transportation segments. And we don't see any slowdown in the demand for highly engineered valve solutions supporting this global infrastructure build-out in both our onshore and offshore markets. V&M bookings were just north of $525 million in Q1, $100 million higher than in Q1 of 2011. Record bookings were achieved on our engineered and processed valves, primarily driven by the U.S., Asia and Middle East. Chevron was a big reason for that with projects in Vietnam, a Wheatstone project in Australia and the Big Foot project here in the Gulf of Mexico, which drove the majority of our major project bookings. Distributed valve bookings came in at $130 million for the quarter, just south of Q4's record levels. While we expect to see some additional disruption in the U.S. with evolving shift away from gas rigs to oil, Cameron's participation in the resource play is very broad and thereby provides lots of opportunities to offset one with the other.

Our Process & Compression business is seeing a larger shift to a global economy fueled by gas. And for our Process & Compression business, that's a good trend. Bookings totaled $352 million in Q1, an increase of $75 million versus 2011. Our recip compression business increased about 44% versus last year, driven by international markets, with sizable orders in gas-gathering markets in the Far East, along with gas production infrastructure in Latin America. And we continue to see a number of positive opportunities in our international markets as we move forward. Process systems bookings in the U.S. grew about 25% in Q1, driven by the oil markets. The oily shale demand, a great deal of separation infrastructure, and demand for this equipment continues at a record pace. International and deepwater markets are demanding more of the complex custom process solutions, and we do not see this trend slowing down. We expect that Brazil, Canada, Mexico and the Far East will be the primary drivers for this growth, and our focus will be on the quality of the projects versus the quantity. Centrifugal bookings grew about 13% versus last year. One area the team is very focused on is in the processed gas market, where their MSG line of compressors targeting the midstream, chemical and petrochemical applications. We expect this market will more than double for Cameron over the next 2 years.

In summary, we expect 2012 to be a record year for orders. While we expect more pricing pressure in the U.S. onshore markets as operators crowd into the oily resource plays, our reach into the international and offshore markets are offering a number of opportunities that will offset it.

Now I'll turn it over to Chuck.

Charles M. Sledge

Thank you, Jack. Before I get into the details of the first quarter financial results, I would like to reemphasize the key takeaways for the quarter.

Orders for the quarter were strong across our businesses. In fact, we were just shy of our all-time quarter record. As everyone has been anticipating, we booked a large subsea project during the quarter. As Jack discussed, this project will be manufactured outside Brazil in order to expedite delivery. We anticipate additional bookings to fill our Brazilian manufacturing capacity, and we hope to begin participating in the manifold business in Brazil in due course. We booked 8 subsea drilling stacks during the quarter. Aftermarket bookings in DPS were 10% higher sequentially, with each of the businesses within DPS recording record aftermarket bookings, quite a quarter from our perspective.

Our adjusted EPS for the fourth quarter was $0.54, which was at the upper end of our guidance range for the quarter. Big picture, DPS and V&M were stronger than we had forecasted while we are still experiencing operational inefficiencies at PCS. As we guided in our fourth quarter call, revenues for the quarter were down sequentially, but they were actually a little higher than we had expected as DPS and V&M overachieved while PCS was below our forecast.

Our EBITDA margins did come down sequentially as expected, coming in at 14%. I'd like to focus on this for a moment. DPS' EBITDA margin was 16.3% for the quarter, down quite a bit sequentially due to the impact of LTI margins as well as the impact of subsea. As we have discussed for some time, LTI currently carries a much lower margin than our legacy drilling margin and subsea revenues were at the low point for the year. The combination of these 2 items negatively impacted the sequential comparison. V&M EBITDA margins were 20.9% for the quarter, a sequential increase due to an improved mix versus the fourth quarter.

PCS struggled during the quarter, registering a 7.4% EBITDA margin. While we are disappointed with this result, we have implemented the necessary steps to produce improvement over the course of the year.

Cash flow from operations for the first quarter was a use of $204 million, but that included the $83 million payment for the Deepwater Horizon matter. So you should really be looking at $121 million use compared to $327 million of use last year. We expect our working capital needs to continue to moderate as compared to 2011, so you should see better cash flow from operations for the year. CapEx for the quarter was $87 million. Our tax rate for the quarter came in on expectation at 22%.

Now turning to forward-looking guidance. I will point out that all of my comments will be excluding any impact of the TTS acquisition. First, I'll cover full-year guidance and then I will cover some points on Q2.

We're expecting revenue to increase in the mid-teens percentage range year-on-year. Factors affecting our revenue performance will be the timing of deliveries associated with large projects, our LTI integration efforts and the pace of our shorter cycle businesses. V&M should have the largest percentage revenue gains for the year, followed by PCS and then DPS. Following up on Jack's comment about North American gas markets, we will clearly see some impact, but the strength of our international markets should more than make up for any weakness in North America. EBITDA margins for 2012 should approach 17%. DPS should be relatively flat year-on-year. V&M and PCS should be up year-over-year. However, the pace of improvement at PCS will be a little slower than we had originally anticipated, so the improvements will be more back-end weighted. As a reminder, the year-on-year margin comparison in DPS are negatively impacted by the LTI and subsea margins, which we've talked about for some time. Absent those 2 factors, DPS would have margin expansion. Corporate SG&A expenses should approximate $200 million for the year. D&A will be about $10 million higher in '12 than we had originally guided, approximately -- approximating $240 million for the year. CapEx is still forecasted at $500 million for the year. Net interest expense should be approximately $88 million. The tax rate should come in around 22% for the year, but as I mentioned on our last call, it may vary quite a bit between the quarters. You should use 248 million shares in your models. Our EPS guidance for the year continues to be a range of between $3.20 and $3.30.

Now for Q2 specific guidance. Revenues for the second quarter should look a lot like the fourth quarter of 2011, with the largest absolute dollar sequential gain being in DPS. Overall, EBITDA margin should expand somewhat north of 100 basis points sequentially. DPS EBITDA margins will improve from the first quarter level due primarily to improvements in subsea. V&M margins should be relatively flat with Q1 margins. PCS margins should improve in Q2 but won't fully recover until the fourth quarter. The combination of these factors should result in EPS of between $0.70 and $0.75 per share for the second quarter.

With that, let's open it up for comments.

Jeffrey G. Altamari

Louie, we'd like now to open the call for some -- for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of James West of Barclays Capital.

James C. West - Barclays Capital, Research Division

Jack, we've heard recently the -- a number of the drilling contractors. This has been going on, I guess, for some time, have been ordering 2 BOP stacks for new deepwater rigs. I'm curious if you think this has now become really the new industry standard. And then a second question on the blowout preventer business. I understand that some BOP orders have come through recently because companies couldn't get their existing BOPs recertified. I'm curious if there's a certain class of BOPs that are not getting recertified or perhaps an age of BOPs, some of the ordered equipment not getting certified, kind of what your thoughts are there.

Jack B. Moore

Yes, a good question, James. First, we hope that everyone orders 2. I mean, we'd be happy if they ordered 3. The more, the merrier. But it is a trend. I think in the newer rig build cycle, clearly, the capability to accommodate 2 stacks is there and it's a smart move. I think the contractors are seeing it now with the strict regulations around recertification. It's just a great way to keep your efficiency operating on the rigs. So we are seeing that trend. I would say, your second question is, is we are seeing some replacements and it's really geared towards the older equipment that has probably gone through a number of repair cycles outside an OEM environment. And it's getting difficult, I think, for some of the equipment to get back to where -- I guess it would call it an OEM performance standard. And I think we're going to see is as the contractors kind of go through their fleets and continue to make these adjustments with their equipment and they see the difficulty maybe in bringing certification levels up, we'll see some additional orders come from that. I wouldn't say it's widespread though. An average life for a BOP is probably 20 to 30 years, depending on how well it's maintained.

James C. West - Barclays Capital, Research Division

Okay, okay. So not widespread, but just something to be aware of. The...

Jack B. Moore

Yes, I think it's kind of a hit-and-miss.

James C. West - Barclays Capital, Research Division

Okay, okay, fair enough. Just one last question for me. At this point, given your visibility is probably a little better than ours on terms of rig companies that are poised to order additional equipment, how many BOP for both floaters and jackup packages are you chasing currently?

Jack B. Moore

Well, I think and I don't include Brazil in our numbers, but there's probably a population of 20 plus or minus that we're chasing. And that that's kind of been a consistent number for the last year. And some have been booked and new ones get to -- get kind of added to the list. And so I think it's really -- some of the contractors have got a lot of new builds in the works and they're probably wanting to digest some of that. And I think we're seeing others that are wanting to maybe get into a new build program that haven't been as aggressive in the past. So it's a healthy outlook from our view.

James C. West - Barclays Capital, Research Division

But you haven't seen an inflection recently with the day rate inflection?

Jack B. Moore

Not necessarily. I think we -- it's just a good, steady influx of orders. Our guys -- we track the amount of quotes that we're working on, and it's been pretty robust for a while and it hasn't slowed down.

Operator

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

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Just I was curious -- excuse me, I was curious as to when you think about the drilling equipment business, the acquisition of TTS, it seems to me that you have some additional holes that you're trying to potentially fill in your product line to complement what you already have. I was wondering if you could give us some insight as to what your game plan is for the drilling equipment business. Will your focus be specifically on deepwater or from this point forward or some additional things you need to add on the jackup front? And are you also looking at some things for land equipment?

Jack B. Moore

Yes. Kurt, a good question. And I think when we've kind of looked at our drilling strategy portfolio over the last several years, it's really how do we build a broader capability. I think some others have done a pretty good job in terms of moving the industry more to a solutions-driven market. And that's an area Cameron feels it can be effective in, as well as we move our capabilities to get there. Some of it, we'll do internally. And some of it, we've done, obviously, with the acquisition of both LeTourneau and now TTS. Both products are geared to offshore and onshore markets. Primarily, we've been focused on the jackups in the high-end onshore markets. I think what Cameron and our capabilities in terms of our touch and our reach in terms of the offshore markets, both floaters and jackups, we have the ability to expand all of that. So let us digest this. We feel really, really good about the TTS technology and how well it complements and fits with what we acquired with LeTourneau. We've got a lot of manufacturing capabilities with LeTourneau as well, and we've got a lot of engineering capabilities with TTS Energy. So it's a great fit. And so our game is to work with our customers as broadly as we can. And that -- as I say, this is a long-term objective of ours. It's really to build the Cameron drilling franchise beyond where it's been historically focused on products.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Jack, and with respect to LTI, can you give us just a general update now where margins are for that business, where you see them exiting in 2012? And then in addition to that, the business that you've been booking right now through LTI, where were those margins and were those margins?

Charles M. Sledge

Yes. Kurt, it's Chuck. It's kind of the story that we've been telling for quite some time. The margins are pretty low right now. They'll improve throughout the year. We'll get them up to probably half of where they need to get to at the end of this year. And by the end of next year, they will be something that looks a lot like our traditional drilling margin. So we're on track with what we're doing there on integration. We do have a lot left to do. We have to move a lot of manufacturing as we've been very clear about out of Longview, Texas, and that won't be done until last part of this year, early part of next year, so -- but everything appears to be on track.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

And the business you've been booking in LeTourneau is closer to Cameron margin right now?

Charles M. Sledge

Yes, it's making progress.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay. And then lastly, just on subsea, I saw that Aker increased their capacity. You mentioned you have much more positive outlook on pricing potentially for subsea projects. Can you help me calibrate what Aker is doing with respect to your confidence level on pricing?

Jack B. Moore

I think Aker has targeted their capacity both in Norway and the Far East. And obviously, I think some of that may have been broader than just tree capacity. But we're probably not far from -- I know there's a lot of folks out there that are saying this is a 600-tree year next year, maybe similar. We're not that far off those kind of numbers if things kind of move like we think they will. But again, the capacity that you have is somewhat dependent upon the type of tree you're building or the other equipment you're building against that capacity. So we're comfortable with the capacity that we have, and we are committed to build out in Brazil. We think we've got a lot of opportunities to fill it. I don't know where Aker's view of that is, but obviously, they're confident they can do the same.

Operator

Our next question comes from the line of Jim Crandell of Dahlman Rose.

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

Jack, when do you expect to be able to offer an integrated package of equipment for drill sets?

Jack B. Moore

Well, Jim, let us get TTS closed and then I'll answer that question maybe in the next call. There is -- really, I think the capability in terms of the desire is going to be there with Cameron. We obviously provide equipment for the floaters today and drillships today on the pressure control side. So it's really making sure that the technology is where it needs to go. We've got partners we work with in the deepwater -- the floater area today. And we're going to continue to work in those arenas, but we also clearly know we have some capabilities now with LeTourneau and TTS that we really didn't have in the past. So we're going to continue to evolve the story and hopefully, we'll have a clear answer to that as we get TTS into the fold.

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

What would you say if you look at the dollar volume of equipment that goes on a drillship, what percentage would you say that LTI and TTS would be able to provide?

Jack B. Moore

Well, it'd be probably -- if you look at the drilling package today on a drillship, it's probably somewhere between $200 million and $250 million, depending on the riser strings and so forth. I would say that, that number is probably approaching $200 million.

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

And how about the capabilities of providing some electronically-linked products that go on the rig in the -- is that a capability that you would have now or that you would have to develop?

Jack B. Moore

Well, Jim, the TTS Energy has a product called Sense, which is I think a very capable drilling control package. It's actually been in the market quite some time. There's quite a few of them operating both in deepwater and in shallow water rigs. This technology is really, I think, the key in terms of being the brains on how all of the rig control systems operate. And I think that's going to be the key element in terms of sensor technology, measurement technology, the things that we're going to see advancing, rig safety and drilling safety operations in the future.

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

Okay, I'm going to presume that since we're in a sort of boom for new drillship orders that your desire to have an integrated package wouldn't be a long-term goal and that you'd want to be out with something to take advantage of this cycle. Is that correct?

Jack B. Moore

Well, Jim, I can tell you that we are -- we're very focused on moving the platform.

Operator

Our next question comes from Angie Sedita of UBS.

Angeline M. Sedita - UBS Investment Bank, Research Division

Jack, you mentioned that you clearly are seeing an inflection point on the number of orders in subsea and some comments on pricing. So just as a follow-up to the prior question, I mean, are you fairly confident that the industry will see enough awards for all the players to push for pricing this year, mid to even late this year?

Jack B. Moore

Angie, I think there is definitely the number of opportunities that should come to fruition over the course of the next 12 to 18 months. It should definitely give everyone, I think, a lot of opportunity to pick their way through, I mean, and find a way to make money at it. That's our intention. We've been somewhat selective in the past, and I think this market confirms the patience that, I think, you want to take in going through an order cycle that's going to be very, very active here over the next 12 to 18 months. I would think the rest of the market would look at that as well and find things they can execute well and be good at and maybe things they shouldn't do.

Angeline M. Sedita - UBS Investment Bank, Research Division

Right. Then you've had a fairly competitor -- better competitor beginning here in the Q1, is it the thought that they have won enough awards that they'll become more disciplined? Or is it still too early to tell?

Charles M. Sledge

Angie, it's Chuck. I think the way I look at it is we have all probably realized that the cost on subsea project execution only goes north. Very seldom that it is lower than you expected. So I just hope everybody is taking that lesson to heart.

Angeline M. Sedita - UBS Investment Bank, Research Division

I agree. Fair enough. And then Jack, you -- I mean, last year, we talked a little bit about the FPSO bids you have out there or had out there and I believe at one point it was high as $1 billion in bids outstanding. What's the status of those bids today? How much has been awarded so far to you or to your competitors? And how much is still outstanding?

Jack B. Moore

I would say, Angie, we probably -- we have booked some of it. The competition has booked some of it. It's kind of a -- it's an evolving target. I'd say that number is still somewhere in the $800 million to $1 million -- to $1 billion number. And so it's really -- I'll tell you what drives it. It's Brazil. And as these Brazil orders get booked and more of them get tendered, it tends to ebb and flow.

Angeline M. Sedita - UBS Investment Bank, Research Division

Okay, fair enough. And then just finally, on the TTS acquisition, certainly, a nice add to LTI. Is your thought when it comes into Cameron that it will be additive to margins? Or will it need some TLC as LeTourneau did?

Charles M. Sledge

Initially, it will not be added to margins.

Operator

Our next question comes from the line of Collin Gerry of Raymond James.

Collin Gerry - Raymond James & Associates, Inc., Research Division

I wanted to follow up, what is a little puzzling to me is -- it's widely known that we've seen a pretty good shift in the rig count, obviously, domestically. And historically, I associate a lot of your U.S. onshore kind of valve business, high pressure, high temperature, higher end stuff, kind of associated with places like the Haynesville gassier type regions. So how is the rig shift affecting your business? The numbers would vet it out that it's not affecting your business as much as maybe I would have thought prior.

Jack B. Moore

Well, it's a good question. And our guys -- I think, what you're seeing is a lot of work on the part of the team to move the assets and move the opportunities where the rigs are moving, and that's the whole key to this. It is disruptive when you drop -- the number of rigs we'd seen dropped in the Haynesville and in the Fayetteville over the course of the last 12 months. They do consume a lot of high pressure equipment. So you've got to really run hard to find the offsets in the Bakken and the Eagle Ford and in the Utica and the Marcellus and other areas that have continued to move forward. So that's the game. And we're -- we've -- the team has done a good job of taking advantage of that. And some of the opportunities come outside of North America. As Chuck alluded to, we'll probably see a faster pace of growth of North America -- I mean, in international this year than we did -- than we will in North America. And that's not been the trend the last few years. So you've got to have a global footprint and you've got to be looking at all your opportunities.

Collin Gerry - Raymond James & Associates, Inc., Research Division

That makes sense.

Charles M. Sledge

Yes, well, I mean...

Jack B. Moore

Sorry, go ahead, Chuck.

Charles M. Sledge

Yes, I mean, clearly, we're going to see some impact during the year, but the first quarter U.S. surface bookings were the second highest quarter in recent memory. So we are being -- our guys are doing a great job. They're nimble, they understand what's happening, they know how to manage the business, and we're quite proud of what they've done.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Yes, I guess my fear was that your products were actually tailored towards -- without knowing too much about it, but tailored towards some of the gassier plays, but it doesn't tell anyone if that's the case, there's applicability in the oilier plays as well.

Charles M. Sledge

Yes. If you can remember that we were late in some of our entry into the frac-ing flowback business. So that actually has turned out to be a very good thing because we've been able to watch everybody else's kit evolve and we've been able to leapfrog it and make sure that we, in fact, have the kit that is fully interchangeable no matter where the drilling is.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Very nice. I've one follow-up question on the guidance. If you kind of look at the EPS guidance and then you back out Q2 and Q1 and what you're guiding there -- I mean, you're effectively almost doubling EPS, quarterly EPS, by the end of the year and a lot of your revenue and EBITDA forecast have kind of gotten us there. Can you walk us through kind of more mechanically like what changes throughout the year? Does it have a lot to do with your accounting and completed contract and then stuff just getting out the door and booking revenue later in the year? Or maybe just walk us through what actually changes now versus Q4.

Charles M. Sledge

Yes. It's really all revenue growth and margin improvement. And it's really nothing to do with our project accounting because remember, most of that is in subsea and it's going to be a very light year subsea revenues for us. So this is valves coming on strong, making sure they are delivering everything their capacity allows them to, same for surface, same for drilling. And it just got improvement in PCS. We have not done well the last couple of quarters. We will towards the back end of the year. So it's a combination of some very significant revenue growth each quarter and margin improvement.

Collin Gerry - Raymond James & Associates, Inc., Research Division

And like for in the PCS division, for example, where do you get that confidence that, that turnaround is coming? What tangible kind of signs are we seeing that makes us more comfortable with some of the fourth quarter outlook?

Charles M. Sledge

Yes, well, remember, let's take a step back. We recognized the issue last year. We made all the changes we need to late last year. We have a series of leading indicators that are turning positive, but they're leading indicators. They don't show up in the financial results until the third and fourth quarters. So the leading indicators are pointing towards the improvement we know are going to happen. But again, it is back-half loaded.

Operator

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

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

With regards to the Petrobras pre-salt tree award, could you give us just a view on -- so these are -- you called them fast track. What does that mean in terms of deliveries? Do we see those before the end of next year?

Jack B. Moore

They will start the latter part of '13, but the bulk is in '14.

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

And the reason you were able to book that and do the work outside of Brazil is basically, there's no one with capacity that could deliver sooner. Is that right?

Jack B. Moore

Yes, that's correct. Petrobras has the need for the trees as -- our strategy for filling our backlog has been pretty clear. We've been very transparent with everyone about what we're doing. And here was an opportunity for us to put the right project into our Leeds plant at the right earnings level.

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

And the expansion you guys are making in Brazil, do you have an order tomorrow? When could you start delivering equipment out of that, subsea equipment?

Jack B. Moore

Probably in the next 2 years. That's in '14.

Charles M. Sledge

Yes, 2014.

Jack B. Moore

That capacity will be online late '14, fully online.

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

And then for your drilling business, with LeTourneau, you've got a lot of to do there. TTS, you've got some work to do. Should we be surprised to see you add anything else in the drilling business? Or you kind of have hands full?

Jack B. Moore

I think we need to let the guys digest what they've got, Jeff. They're pretty busy right now. And we like what we've got.

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

And then for Valves & Measurement, for about a year now, the orders have been pretty consistent and it's a little over a $500 million a quarter range. Anything, I mean, that would take that, meaning lower? Or conversely, anything that you see that takes a step function change higher?

Jack B. Moore

I think you would -- I think what I have said, we really -- the Valves & Measurement business touches the broadest segment of Cameron's customer spend cycle. So I think as long as you've got a healthy oil environment in terms of price, you've got a lot of customers, both national oil companies and international oil companies spending money on planning, producing, moving, refining oil and gas. This is going to be a good market for these guys. And that's our view of the world. What could take it higher, Jeff, is as we've talked about, we have global alliances with large upstream companies and if we're able to expand the concept and show the benefits of what that brings to our customers, that's something that could clearly move the needle higher northward.

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

For my last question, just on PCS, in the first quarter, specifically, was it a pricing issue or an execution issue that took margins and revenue lower than you thought?

Jack B. Moore

It's just "get it out the door." That's what it comes down to.

Operator

Our next question comes from Jeff Spittel of Global Hunter Securities.

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

I wanted to drill in a little bit on the surface order roadmap. You look back at the '06, '08 time frame. This was kind of a $1.1 billion annualized business in terms of bookings, substantively with a limited contribution from the unconventional plays in North America. Last year, you comfortably exceeded that, I would assume with kind of a muted contribution from the international market. Assuming North American order flow holds up relatively well here, and maybe we get back over the next year or so to the international markets firing on all cylinders, could these be conceivably be more of a $1.5 billion, $1.6 billion sort of annualized run rate in terms of order flow?

Jack B. Moore

Our surface guys think that -- they are thinking exactly like that, maybe even better.

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Okay, that's good news. And following up on James' question on BOPs, out of the 8 deepwater stacks booked, would you characterize any of those as redundant for a single rig and/or replacement of BOPs that weren't recertified? Or were those new builds?

Jack B. Moore

A couple of them, a couple.

Operator

Our next question comes from Bill Herbert of Simmons & Company.

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

A couple of questions for you with regard to Petrobras. So you guys garnered 30 trees and it looks like that makes a total of, call it -- I don't know, depending on how you did the math for the competitor who won the other slug of trees.

Charles M. Sledge

108.

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

Well, 108 plus whatever the fully sized order will make it 160. I'm just curious as to many how many additional trees you think are likely to be forthcoming for the industry, one. And two, how many of those would be the conventional or standard trees?

Jack B. Moore

Bill, I would not be surprised if they don't order somewhere in the neighborhood of 100 additional trees. And you can maybe split that 50-50, 60-40, 70-30 in terms of pre-salt and conventional. They are Campos Basin design, I guess you could say. Petrobras always orders a handful of trees that are somewhat specific to certain applications, whether it be from us or FMC or Aker and -- but in terms of their frame agreement trees, like pre-salt and then like some of the AFMNG [ph] tree, I think you'll continue to see both come across every so often, like we are this year, in fairly sizable slugs.

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

And do you think you...

Jack B. Moore

I don't think...

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

Sorry, Chuck, go ahead.

Jack B. Moore

No. I'm just saying they're far from being finished.

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

Got it, right. That is good news. And then secondly, would you consider yourselves to be better positioned for the pre-salt or the conventional slug of those trees going forward or both?

Jack B. Moore

I'd say it's a combination of both. I mean, we're capable, technically, of doing both. And I think you're going to see bigger demand over time for pre-salt trees in Brazil. So that's clearly something we want to make sure we're in the position to support Petrobras with.

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

Okay, good. That is good news. Chuck, a couple of questions on the margin roadmap here for stack. DPS, I would assume that the second quarter margin is not going to yield something which starts with a 2. Is that safe?

Charles M. Sledge

That is correct.

Judson E. Bailey - Jefferies & Company, Inc., Research Division

Okay. So -- but it's going to be improved quarter-on-quarter, right?

Charles M. Sledge

Yes.

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

And does it look more like second quarter of last year as in 18.7% to be precise?

Charles M. Sledge

I won't answer with that level of preciseness, but yes.

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

Okay, got it. And then in the second half of this year, in order to hit the guidance here or probably talk in an improvement of -- from the second quarter, 400 basis points?

Charles M. Sledge

Yes. We're definitely talking about maybe a little lower than that, but definitely something with the 2 handle on it.

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

Okay. And then to be clear, on V&M, would we expect flat margins for the second quarter and then improved margins for the second half of this year?

Charles M. Sledge

Yes.

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

Got it. And last one, promise, PCS margins, we were targeting kind of a mid-teens margin for the second half of this year and it sounds like you're only going to hit that threshold in Q4?

Charles M. Sledge

We've got a shot at it in Q3, but really, Q4 is where rubber meets the road.

Operator

Our next question comes from Mike Urban of Deutsche Bank.

Michael W. Urban - Deutsche Bank AG, Research Division

I wanted to clarify a couple of the earlier comments and some of the related questions as it pertains to the impact of the U.S. gas market. Given the order rates you've seen and in the results that we've had here, it sounds like you have not seen anything to date that is just more going forward, that it would be logical to expect some sort of impact given the gas price and what we're seeing on the operator side.

Jack B. Moore

We think -- look, we think some disruptions in our business -- in the short cycle business related specifically to gas for sure, but we've been able to -- as we said, we've been able to offset it in some other areas of our business, so -- and that dynamics is going to continue to play out across 2012.

Charles M. Sledge

And remember, we're still gaining share in the frac trees, frac manifolds and flowback businesses. So what you're seeing is, yes, we're having clearly some impact on our gas business, but we're still gaining share on the oily side. So they are somewhat right now offseting each other.

Michael W. Urban - Deutsche Bank AG, Research Division

Got you, it makes sense. And then shifting gears a little bit. I mean, a lot of the -- your concern that you see out there in this group really doesn't have a whole heck of a lot to do with the activity levels now, but just the broader macro issues out there. And you guys do have some exposure in kind of the industrial side of your business, in the V&M side and then PCS. But what are you seeing in that side in your kind of industrial to mid and downstream businesses? Is there still healthy demand out there? And what's the outlook for some of those exactly?

Jack B. Moore

It's held up pretty well. I mean -- I think you're seeing there is so much disruption in '08 and '09 that -- and created, obviously, some pent-up demand as things normalized. So we're seeing that level of activity fairly. It's fairly moderate in our industry-related businesses, but it's becoming such a smaller and smaller part of our portfolio now. Our compression guys have moved a lot of their platform back over to processed gas businesses. And internationally, those markets are looking really, really good. And as -- we're seeing more LNG fuel with what's going on in the rest of the world. It's really been a good story for our guys. They've really done a good job in terms of moving the technology to touch that market in a bigger way.

Michael W. Urban - Deutsche Bank AG, Research Division

It makes sense. And last question for me, an update on what you're seeing in the FPSO markets and your opportunities there.

Jack B. Moore

Well, it's a story that is really -- a big part of it is Brazil and it's the timing of that. But there's a substantial number of orders we're working with right now that we have a lot of process equipment to, associate with and a lot of values associated with. So we hope that we'll see some results yielded from those efforts here in 2012.

Michael W. Urban - Deutsche Bank AG, Research Division

Okay. So we're still hoping for some orders this year?

Jack B. Moore

Yes.

Operator

Our next question comes from Douglas Becker of Bank of America Merrill Lynch.

Douglas L. Becker - BofA Merrill Lynch, Research Division

I just wanted to go into PCS a little bit more. Understanding that the issue is getting the stuff out the door, what steps have you explicitly taken to get your comfort level higher that you have your arms around this problem, particularly just relative to last quarter?

Charles M. Sledge

Yes. Again, we have made the management changes we need to. We have put in the Cameron resources that it needs to make the manufacturing more efficient, the project management more efficient, the ordering procurement process, subcontracting process, more efficient. So when you look at kind of the baseline operating statistics of the business, you're seeing them going in the right direction. Now that's all got to culminate in getting project shipment out the door and those will occur kind of at the latter part of the year [indiscernible] the business.

Douglas L. Becker - BofA Merrill Lynch, Research Division

And the sticking point for the first quarter relative to your expectations, anything you could point to specifically there?

Charles M. Sledge

Yes. We didn't hit -- we didn't get the efficiencies in the plants that we had planned for. And therefore, we have inefficiencies in the cost structure. So as we work our way through that and get the plants unplugged, there's 2, you will see greater revenue flow-through, which has better absorption than which has higher margin coming out the door.

Douglas L. Becker - BofA Merrill Lynch, Research Division

Got it. And then just a broader question. Obviously, the subsea tree projects always have a way of slipping to the right. In the past, you've highlighted a few, with the larger projects, with Egina, Erha North, Block 15, Block 18, maybe just anything you're seeing on timing on some of the larger projects?

Jack B. Moore

They're all there -- I think you'll see more of those happen in 2012 than in the near term. Normally, our view is about an 18-month window. I'm probably a little bit more confident over the next 12 months versus 18 months. And a lot will happen over the next 18 months as well. Don't get me wrong. But some of these projects we've been talking about a long time, just where they are in the tendering phase, where they are in the discussion phase with customers and their -- I think everyone in the industry and our peers would tell you the same thing. There is much more -- much greater pace to seeing these things come to conclusion.

Operator

Our next question comes from the line of David Anderson with JPMorgan.

David Anderson

Another question about the pre-salt award you guys just won. One of your -- another competitor had initially won a couple of the pre-salt awards and we've heard they've had a lot of trouble delivering that. Is the reason why this is fast-tracked to replace the orders that they couldn't deliver?

Jack B. Moore

David, I think what Petrobras saw was a delivery gap and that, obviously, they have pretty aggressive pre-salt development plans. And I can't tell you, it's -- obviously, we don't run the other company's business, so I can't tell you what their relative delivery challenges are. But clearly, Petrobras identified last year that -- late last year that they needed some additional equipment and we were able to work with them on filling that gap and -- but we have a lot of backlog in Brazil currently, too. So, I mean, to be able to support what they needed in the time frame they needed, we proposed an option that we were able to get through and we're pretty happy with the results. I think they are, too.

David Anderson

So it's obviously great to see the pre-salt finally kicking off. We're starting to see these -- all these tree awards and I was just kind of getting back to that FPSO side. One thing I'm starting to hear down there is that the production is a lot more complicated than initially thought. It sounds like more CO2, more gas. The salt sounds like separation to me. That's what I'm getting at, I'm just going to -- could you help us out a little bit understand, I mean, how are those discussions going right now with regards to NATCO? I mean, it seems to me like you're not -- you can't just have some sort of standardized package for all of these FPSOs. They probably all have to be different. Are you having discussions like that now? And then as I think about the timing, we're starting to see these trees being delivered late '13 into '14, this stuff has to be ordered pretty soon, doesn't it?

Jack B. Moore

Well, I think what you're -- yes, I mean, there's a lot of activity right now. They ordered, I think, 8 FPSOs mid last year, with an additional slug coming out that we think will be confirmed this year. So there is definitely a lot of activity around trying to line that up with when that production comes on. But every field has some unique characteristics and -- but you're right. I mean, these are complex fields. They have a lot of the challenges around, not just CO2 but oil water, gas water slips and it's a very big opportunity for the process business. Let's put it that way. And around CO2 technology, which the Cynara membrane is uniquely positioned to support, there's not a whole lot of options. So we're working closely with Petrobras and their customers relative to like the SBMs, MOEX and so forth that will be constructing these units to find the right solution.

David Anderson

And can you remind us again of kind of what your revenue opportunity for FPSOs if we just kind of look at the NATCO business?

Jack B. Moore

Well, if you look at just the NATCO piece of it, it's somewhere probably between $30 million and $70 million, depending on the complexity. But then you throw the valves into it and that's a whole another tranche of opportunities, which could move it north $20 million, $25 million additional. So really, it's potentially a big number and those are the opportunities that we're looking at.

Operator

Our next question comes from the line of William Conroy of Pritchard Capital Partners.

William Cornelius Conroy - Pritchard Capital Partners, LLC, Research Division

Jack, maybe just one more on TTS. Obviously, it's a different type of integration than with LTI. Can you just maybe outline for us a little bit what some of the major steps are in terms of integrating that operation into Cameron?

Jack B. Moore

Well, I think first off is making sure that we get our arms around the backlog that they have and with supply chain, getting comfortable with that piece of the business. We've looked at the technology for quite some time and it's a great fit. The guys that owned TTS Energy have been in this business a very, very long time. They've got a very, very good track record of developing and delivering world-class drilling technology. So we're pleased with the relationship in that end of it. It really gets around, just making sure that we can get comfortable with the pace and the degree of complexity with some of the execution work they have going on.

William Cornelius Conroy - Pritchard Capital Partners, LLC, Research Division

Got it. And to change gears, back to the pre-salt tree award, if you have said this, I apologize, I may have missed it, was this a direct award?

Jack B. Moore

Oh, yes.

Operator

Our final question comes from Ed Muztafago of Société Générale.

Edward Muztafago - Societe Generale Cross Asset Research

I wanted to follow up a little bit on a couple of David's questions because I think there were some good points there. On subsea, specifically, I was at the MCD [ph] quarter conference in late April in Paris, and it was pretty clear that one of the things amongst operators is an increased concern over the contractor's ability to execute on new and several of your competitors have relatively depleted backlog levels while another one, obviously, has some record levels. Do you all think that there is the potential for this concern over execution to result in just a shift in potential market share in subsea?

Jack B. Moore

Not really. I think the real challenge, and it's really an industry challenge, is some of these projects are in very, very difficult parts of the world. And I'd say their execution challenges for both the suppliers and the operators. As they are demanded to take on more local content, they push those requirements down to the supply chain. And it's created a little bit of a new dynamic with everyone. And that's why the pricing and that's what your contracting strategy has to be looked at very, very closely to make sure that you capture all of that risk, and be very, very candid and be very transparent with your customers regarding those risks, so that you both know exactly what you're getting into.

Edward Muztafago - Societe Generale Cross Asset Research

Sure, okay. And then my second question is really on FPSO market and potential consolidation. One of the things, obviously, with these fields, as you pointed out, is they're very much all different and likely that the FPSO solutions will have to be individually tailored. One of your competitors, obviously, has banked on the FPSO market becoming sort of fully consolidated kind of like the rig market. Do you all see the potential for the market to move that way just given the individual complexity of these projects?

Jack B. Moore

Not really. I think it's still very fragmented. I think that you've got a lot of technology that's embedded in companies like Cameron and even others that are going to be -- maybe difficult to consolidate.

Edward Muztafago - Societe Generale Cross Asset Research

So presumably, a solution like NATCO comprising a very large portion of the overall FPSO offering, certainly, puts you in a pretty, pretty good position?

Jack B. Moore

Well, I think when you look at process technologies, it does. We're not that -- we just touched what's on top of that FPSO, but it's really what's being treated coming from seabed. And that's where our expertise is. And so I think anything related to the process technologies, we feel -- Cameron feels we have an enterprise opportunity. When you catch valves to it, it becomes bigger. And so those are the things that we'll be trying to move forward with as we have more discussions with those at development.

Operator

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

Jeffrey G. Altamari

Thank you, Louie. This concludes our first quarter earnings call. I would like to thank you, ladies and gentlemen, for joining us this morning.

Operator

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

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