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Cameron International (NYSE:CAM)

Q2 2012 Earnings Call

July 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

John D. Carne - Chief Operating Officer, Executive Vice President and President of Drilling & Production Systems

Analysts

James C. West - Barclays Capital, Research Division

Michael W. Urban - Deutsche Bank AG, Research Division

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

William Sanchez - Howard Weil Incorporated, Research Division

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

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

Edward Muztafago - Societe Generale Cross Asset Research

Tom Curran - Wells Fargo Securities, LLC, Research Division

Judson E. Bailey - ISI Group Inc., Research Division

Operator

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

Jeffrey G. Altamari

Thank you, Rob. Good morning, and welcome to the Cameron Second 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 in 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've seen, Cameron earned $0.74 in Q2, excluding charges related to pension settlements and integration costs. We had record revenues at the quarter at just north of $2 billion. And we had another great order story for Q2, with total orders coming in at $2.6 billion, our second highest ever and just slightly ahead of a great Q1. Orders were strong across all of our divisions with Surface Systems and V&M setting new records. Subsea Drilling and Process & Compression had sizable order rates as well in quarter 2. Total backlog for Cameron stands -- now stands at $7.5 billion, up 35% from a year ago and up 10% sequentially. Backlog has increased across all of our major business segments year-over-year. Our bookings in Q2 once again highlight the strength of our diverse businesses across a global footprint supported by a lot of hard-working Cameron employees.

Both our international onshore and deepwater markets continue to move forward as we achieve another solid quarter in our Engineered Valves, Drilling and Subsea businesses as well -- and focused in these markets. And even with North American activity coming under pressure, Cameron still achieved sequential growth in this market.

We did close on the TTS drilling technology acquisition in June and are extremely excited with bringing their employees and technology on board. It is a wonderful complement to our Drilling Systems platform and will be instrumental in executing on our rig solution strategy.

Now I'm going to review some of the additional comments regarding our business unit performance in Q2. Our Valves & Measurement business had a record quarter across the board: in bookings, revenues and profits. The big driver for our bookings -- our record bookings of $550 million came from projects both in onshore infrastructure and deepwater.

Our Engineered and Process Valves business saw another record quarter with a number of sizable project bookings in the North Sea, Australia, the U.S. and Canada. And we continue to track a long list of projects that cover both upstream and downstream opportunities, several of which we're engaged in the early feed stages at this time. Given this visibility, we remain very confident of our ability to build on the success we have had in the first half of 2012 well into the second half. And with all of the noise in North America, our Distributed Valves orders saw a sequential decline of just 2% in Q2.

Our measurement business had a record quarter for bookings with strong order flow from our custody transfer products, as well as those focused on midstream developments. And while we expect to see the headwinds in our distributed business, we remain very bullish on the overall Valves & Measurement order flows in 2012.

Our Surface Systems business unit had record Q2 -- had a record Q2 in both bookings and profitability. Surface Systems booked $438 million in the quarter, up 35% year-over-year and up 8% sequentially. Order activity in Latin America and our Asia-Pacific and Middle East markets are strong. And our North Sea markets, both in Norway and the U.K. sector, continue to expand. Our recent announcement for the supply of wellhead and tree systems for the Rumaila field in Iraq would generate over $100 million in revenues over the next several years, and our decision back in 2011 to build a comprehensive service and aftermarket support base in Iraq has won us a lot of support with the majority of the operators there. As for North America, investment in high-pressure frac tree and manifold systems is paying off, which is allowing us to build share. We continue to win over customers with the quality and reliability of these systems. And even more impressive, it has allowed Cameron to broaden its footprint at our customers' well-side by adding valves, measurement, process and compression technologies as a Cameron enterprise. This packaged solution is providing customers with more safe and cost-effective operations.

Subsea bookings totaled $572 million in Q2, a 70% increase over Q2 of 2011. Quarter 2 results included bookings in the Panyu project in China and Petrobras's deepwater project off of Egypt. Our view of the subsea landscape has not changed from last quarter. We remain very bullish as the number and value of the projects we see on the horizon and expect to see record orders in 2012. We expect that Petrobras will drive a large number of tree and manifold systems award over the second half of 2012 as well. Projects in West Africa, Mediterranean and Asia will be meaningful, with timing being somewhat of a guessing game, but suffice to say, there is no lack of conviction with moving these projects forward. And based on demand, we continue to track for new build drillships coupled with a healthy rebound in the Gulf of Mexico, as well as a rash of new discoveries in East Africa. We see a lot of upside to our deepwater markets over the coming years.

Our Drilling Systems business had another outstanding bookings quarter, with total bookings coming in at $614 million. With the 5 subsea stacks and 5 jack-up stacks in the quarter, 4 of the deepwater stacks were sold as backups to stacks on existing rigs. Aftermarket bookings continue to build as well, with 10% sequentially, as our focus on investments and growing the support level is taking hold. To put our drilling aftermarket growth in perspective, our year-to-date bookings of $400 million exceeds the entire total for 2010 or any year prior to this as well. We expect this rate of growth to moderate to some degree, but with the number of new builds entering the market, the focused on using OEM, but both operators and contractors, coupled with the significant investments Cameron has made in both infrastructure and personnel, we expect to maintain a healthy activity level.

We're also excited about the acquisition of TTS's drilling technology business, which we closed in June. It's a wonderful addition to our Drilling Systems platform that brings a talented team of professionals and high performance drilling technology that will allow Cameron to target a broader envelope to equipment and services to the offshore rig markets. With a healthy start to the first half of 2012, we don't see anything slowing down with respect to new build opportunities as the number of projects we are tracking has actually grown. That coupled with our expanded product and systems offering, we expect 2012 to be a record year for Drilling Systems.

Our Process & Compression business saw a marked improvement in execution this quarter, a result of a lot of hard work by our PCS employees, and it's great to see the progress the team has made. Overall Process & Compression bookings totaled $407 million in Q2, up 16% sequentially.

[Audio Gap]

system's bookings of $219 million led the way in Q2. Demand for both onshore and offshore top markets drove the increase. The shift to oil-focused drilling activity in North America has actually played well into our process technologies offering as demands for more complex and broader envelope process equipment versus dry gas exists. We're also benefiting from the increased demand for centralized processing and conditioning facilities primarily in the Eagle Ford. Offshore bookings are benefiting from the increase in subsea developments, with Petrobras continuing to drive incremental demand, and we expect to see increased opportunities to develop in the Gulf of Mexico, Asia and West Africa as the year moves forward. Activity in China and India continue to drive our compression bookings, and processed gas activity in North America remains a strong driver as well, with more focus on the Micro LNG opportunities.

And one last point I want to emphasize with respect to our Process Systems business and its relationship to the Cameron enterprise. We recently provided a Cameron Enterprise solution to a major operator in U.S. shales. This solution consisted of our wellhead and tree systems, high-pressure frac tree and manifolds, a series of Valves & Measurement products, and a number of Process Systems technologies support the flowback separation and processing operations plus compression. This customer's well would have typically generated about $250,000 to $400,000 in revenue for Cameron, but with the ability to pull together an enterprise Cameron well-side solution, the value actually exceeded $1 million.

Now let me make a few final comments before I turn it over to Chuck. I think as you heard, I expect 2012 to be a record year for Cameron. First half of 2012 has been a good start with respect to our orders. We have made a lot of conscious investments in infrastructure to support our aftermarket support capabilities. We have developed what we feel is the more robust and reliable frac support system in the industry. We have invested in geographic capacity expansions, and we have taken a disciplined approach to targeting subsea projects that will pay off in better margins in the years ahead. Plus, we have developed strategic acquisitions in Drilling Systems to build on a very successful platform; all keys, we feel, to building a bigger and better Cameron franchise. We're bullish on the outlook for our business in 2012. We remain confident that 2012 will be another record year. Chuck?

Charles M. Sledge

Thank you, Jack. Before I get into the details of the second quarter financial results, I want to reemphasize the key takeaways for the quarter. First, our orders were again strong across our businesses. In fact, as Jack mentioned, we eclipsed our order level of the first quarter, which again highlights the strength of our business portfolio. Subsea bookings were again strong, coming in at $572 million, highlighted by the Petrobras order in Egypt. As Jack mentioned, we expect continued strength in our subsea orders over the remainder of 2012. The replacement deepwater stack market heated up in the second quarter with 4 stacks being booked in Q2, bringing the total number of backup stacks to 7 for the year. Aftermarket bookings in DPS again grew sequentially, with drilling leading the way with a 10% increase. We saw margin expansion in each of our business segments, with PCS showing the largest percentage point gain. We are confident the steps we have taken to improve this business will lead to further margin expansions.

Our adjusted EPS for the second quarter was $0.74 per share, which was at the upper end of our guidance for the second quarter. This was a 37% increase over our first quarter earnings.

Big picture, V&M margins were a little stronger than we forecasted due to volume increases, while subsea was a little softer than we expected due to mix. Revenues for the quarter were up sequentially, with V&M and PCS up slightly against our expectations. Our EBITDA margins expanded sequentially in line with our expectations, coming in at 15.5%. DPS's EBITDA margin was 18.5% for the quarter, up from 16.3% in Q1. Each business unit in DPS showed sequential margin improvement. V&M EBITDA margins were 21.8% for the quarter, a sequential increase due to the leverage we obtained on a 13% revenue increase.

PCS showed improvement in its financial performance during the quarter, registering a 10.6% EBITDA margin for the quarter. We expect the margin expansion in this business to accelerate over the back half of the year as our operational and organizational changes continue to show results.

Cash flow from operations for the second quarter was $163 million, significantly better than the adjusted $121 million use of the first quarter. We expect our working capital needs to continue to moderate as compared to 2011, so you should see continued growth in cash flow from operations over the remainder of the year. CapEx for the quarter was $95 million. Our tax rate for the quarter came in at 21.7%.

And now I want to turn and discuss guidance for a minute. First, I will cover the full year guidance and then I will cover some points on Q3 guidance. We expect our revenues to increase in the mid to upper teens percentage range year-on-year. Factors affecting our performance in revenue will be the timing of deliveries associated with large projects, our LTI and TTS integration efforts and the pace of our shorter cycle businesses, particularly in North America. V&M should have the largest percentage revenue gains for the year, followed by PCS and DPS. EBITDA margins for 2012 should be between 16.5% and 17%. DPS should be slightly down year-on-year due to the diluted impact of LTI and TTS, as well as this being a trough margin year for subsea; but none of this is new news. Excluding these factors, surface and our legacy drilling businesses are expected to show margin expansion year-on-year. V&M and PCS should be nominally up year-on-year. Another factor impacting the year-on-year margin percentage comparison is our corporate cost, which will increase approximately $40 million in 2012 to $200 million. The majority of this increase relates to strategic initiatives we have in place, primarily our company-wide systems upgrade. D&A will be approximately $245 million for the year. Interest expense, net, should be approximately $88 million. The tax rate guidance, we're keeping at 22% for the year. And you should use 248 million shares in your models. Our EPS guidance for the year continues to be a range between $3.20 and $3.30.

Now for Q2-specific guidance. Revenues for the quarter should grow in the upper single digit range sequentially. And actually, I need to correct my guidance statement -- yes. No, that is correct, $3.20 to $3.30. Revenues for the quarter should grow in the upper single digit range sequentially. The largest percentage sequential growth should be PCS followed closely by DPS. V&M will be down due to the impact of North America on our Distributed Valves businesses. Overall margins should expand somewhat. DPS's EBITDA margins will stay relatively flat sequentially. However, margins will expand in Q4 for DPS due to mix. While we were pleasantly surprised with V&M margins for the quarter, they will come down sequentially as a result of the expected revenue decline, but should remain above 20%. As V&M volume picks up again in Q4, margins in Q4 should look a lot like Q2's level. The combination of these factors should result in EPS of between $0.87 and $0.90 per share for the third quarter.

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

Jeffrey G. Altamari

Rob, please open the call for questions.

Question-and-Answer Session

Operator

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

James C. West - Barclays Capital, Research Division

Jack, in your opening comments, you mentioned that the number of new build projects you were chasing or launching had actually increased. Could you give us some order of magnitude? I think that in deepwater, at least last quarter, you said plus or minus 20, x Brazil. Could you give us a sense of where that stands now?

Jack B. Moore

I'd say that number is probably up about 15% from where we last saw it. Just a number of rash of -- of very positive inquiry coming from a good mix of our customers in the industry. So James, we're just -- we're pretty optimistic about where we think the drilling influx and drilling orders will come from, as well as systems that will back up current systems that are on existing rigs.

James C. West - Barclays Capital, Research Division

Sure. And then maybe just to touch on that topic for a second, so the dual or backup BOP theme -- at least last quarter, I know when we talked on the call, you said it was a little bit hit or miss. It seems to have, as Chuck said, heated up here in the second quarter. And we've seen Diamond come out and announced dual BOPs. Seadrill did yesterday as well. So could you comment on how that's playing out?

Jack B. Moore

Well, I think, again, we've got a number of customers that are going to move forward with dual BOPs where they can. Not every rig can accommodate a dual system. And even when the rigs can't, we're seeing some customers move to ensure that they have backup strategically located where their rigs are operating. So it's going to be better, I think, than we thought. It's not going to be across the board 100%. But clearly, what the operators and contractors are realizing is with the spread costs where they are today in the deepwater markets, a backup rig that can keep you from being down for a week or so while you're tripping a stack can be a significant to up the savings.

James C. West - Barclays Capital, Research Division

So if you're going to order a new drill ship today, is it more than 50% chance that you would engineer the rig to have dual BOP capabilities?

Charles M. Sledge

Yes, it would.

Operator

Our next question is from the line of Mike Urban with Deutsche Bank.

Michael W. Urban - Deutsche Bank AG, Research Division

It sounds like you've scaled back your views on North America a little bit, which certainly makes quite a bit of sense given the environment out there. I was wondering if you could calibrate that a little bit for us? I think, kind of overall, your guidance hasn't changed much, but that's something that's a function of some of the other businesses going up and your more North American oriented business coming down a little bit. Just trying to calibrate how much that's changed in your view.

Charles M. Sledge

Yes. I think when you look at it, we still think our surface business in North America will be pretty strong the rest of the year. I think the only place where we're currently seeing weakness is in Distributed Valves. And as Jack said, it was that orders were only down 2%. So the North American piece of our guidance, the impact has been relatively small as we've moved throughout the year.

Michael W. Urban - Deutsche Bank AG, Research Division

And would you expect, though, as -- I mean, I would expect, especially the surface equipment business in North America, to move with a lag, obviously, versus rig count. Is there any expectation that as you get a little further out, that, that business begins to slow or go down -- move down a little bit as you get that flow-through impact on the rig count moderating or declining?

Charles M. Sledge

Well, I think the overall market, clearly, yes. But remember, in our surface business, we're still taking share. So we think we still have quite a bit of share gain to be had over the remaining part of the year due to the technology we deploy and how we deploy it. So again, we're just not expecting a big impact in our North American business.

Michael W. Urban - Deutsche Bank AG, Research Division

Okay. So the share impact should offset whatever you see in terms of activity weakness?

Charles M. Sledge

For the most part, yes.

Operator

Our next question is from Collin Gerry with Raymond James.

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

I wanted to dig in a little bit deeper on the PCS division. A couple of interesting points there. I guess in the past, we've always called that "the canary in the coalmine." Bookings looked pretty good. Maybe talk about the trends in that business. Is this a leading economic indicator, if we could take a little bit of a macro stance? But more importantly, what that means to Cameron?

Jack B. Moore

So Collin, let me just say that I think in the past, 5 years ago, the business was focused on North America. So the canary really didn't have a whole lot of room to fly around. The guys have done a great job of expanding this business customer base beyond North America. So we're seeing the benefit of emerging market demand for -- especially some -- more for the Process Arab side of the business. But keep in mind, too, the business has shifted and the technology is moving more towards the energy-related markets: API gas, gas processing, gas boosting. A lot of our compression technology is really focused on those markets. So we're seeing with infrastructure build-out in the mid-streams, in the gathering systems around the world, we have a lot more opportunities to participate than we did in the past. So I wouldn't say it's really GDP driven. Pieces of it still are, but a lot of it is going to driven now by what we're seeing with energy. And on the process side of the business itself, where we're seeing the biggest gains, that is really, for the most part, 95% energy related. We still have a little bit of the municipality business, but it's becoming less and less part of the mix. So as energy goes, so will that business go.

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

Okay, okay. And just to kind of hone in on that division, in the guidance, did I hear that correctly that overall revenues are up, consistent with what you've been saying, in the mid to upper teens, and that the PCS division will be the leader in that category? Of the 3?

Charles M. Sledge

That is correct. Yes.

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

Okay. So a question that relates to that. If I just look at the 6 months to date, 2012 over 2011, the V&M division looks to be up 37% in revenues and PCS is roughly flat. So does that imply a very stout next 2 quarters in terms of revenue for the PCS division? I mean, I'm thinking the numbers must -- the growth in the back half of the year must be pretty big.

Charles M. Sledge

Yes, it is well into the double-digit range.

Operator

Our next question is from Bill Sanchez with Howard Weil.

William Sanchez - Howard Weil Incorporated, Research Division

So could you spend a moment maybe talking about the components within DPS as we think about surface, drilling in subsea? I know you commented on margins in the quarter on subsea maybe a little bit weaker due to mix. I just thought maybe you could talk a little bit about trends you're seeing there and specifically as you think about LeTourneau and TTS and the negative impact that had on margins within the drilling segment, just can you tell us maybe just the incremental progression we see within that segment going forward?

Charles M. Sledge

Yes. I think, Bill, when you look at LeTourneau, it is exactly where we said it would be. We'll exit this year kind of upper single digit, exit next year something that looks a lot like a traditional Cameron margin. So no surprises there. When you look at the rest of drill -- TTS, obviously, a different animal. Relatively, it's going to exit a little bit lower than what LTI would exit just because we hadn't had it that long. When you look at the traditional drilling business, margins are improving in the traditional drilling business. With respect to subsea, this entire year, as we've said all along, is going to be a trough year. Pricing is getting better. Cameron is being very selective on the projects we book. And so when you look at '13 and '14, you will see higher margins in subsea.

William Sanchez - Howard Weil Incorporated, Research Division

Fair enough. Are you able to break out, Chuck, for us in terms of the 2Q orders you had in the drilling business, which are north of $600 million, just what the contribution was from TTS and LeTourneau?

Charles M. Sledge

TTS is virtually nil. LeTourneau, we -- Jeff can get that to you. I don't have that information at my fingertips.

William Sanchez - Howard Weil Incorporated, Research Division

Okay. But my last question...

Jeffrey G. Altamari

But the majority of it...

Charles M. Sledge

I'm sorry. Go ahead, Jeff.

Jeffrey G. Altamari

The majority of it is our base Cameron.

Charles M. Sledge

Yes.

William Sanchez - Howard Weil Incorporated, Research Division

Okay. But my last question is just, you've talked about some of the volume challenges, I guess, on orders in the shorter-cycle businesses. I was just curious as it relates to the comment around Distributed Valves business being down 2% sequentially in orders. Are we seeing any change in pricing on that yet? Or is that still to come here?

Charles M. Sledge

No price pressure at this point. It will come at some point, but none.

Jack B. Moore

Yes, we expect we'll see some. I mean, it's going to happen, but the guys have done a pretty good job of keeping it up at this point.

Operator

[Operator Instructions] The next question is from Stephen Gengaro with Stern Agee.

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

Jack, could you talk about the subsea market a bit? I know you've been patient in the bidding process. It sounds like things are getting a little bit better. Can you talk about kind of what you're seeing out there from a -- for the bidding perspective and maybe a pricing perspective?

Jack B. Moore

Well, I think, Stephen, that as we've talked about, as more of these projects come to fruition, people are getting more selective. And that's exactly what we're seeing. I don't think we're -- and not everyone is chasing the same projects, like we saw a year or so ago. And I think that's helped in terms of just put more discipline in what we feel -- we need to get paid to do these things. And there is a number of them. The activity level across the globe has really been quite impressive relative to where we're seeing the deepwater strength, if you look at the rigs, which is a great early indicator of where this market is going to go. And so I think everyone sees that it's going to continue to expand and you can be a little bit more selective as a result, and that's what -- that's the position we've taken. And I think we're seeing that behavior on others as well.

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

That's helpful. And then as we think about LeTourneau and the TTS acquisition, how would you sort of describe the overall approach over the next 12 months to 2 years on the drilling side? And how your competitive position should evolve?

Jack B. Moore

Well, I think, Stephen, yes, this is really part of our strategic initiatives around building a broader portfolio of capability for Cameron's Drilling Systems. We've got a great platform around the world. We've got huge infrastructure to support the installed base. So, really, it's, how do we add more to the envelope? When you look at what we do, we challenge our team with what fits, what complements. The acquisitions of LeTourneau and TTS are perfect fits for us. Now we've got to build a story around that. We have earn it. We've got some really good competition. And so we're going to have to go out and tell our story and make sure that our customers are confident that Cameron can deliver a broader solution. So we're going to see that evolve over the next 6 months, 12 months, 24 months, 36 months. I think as this unfolds, it gets to become a better and better story for Cameron. So our customers have embraced it. We've gotten a lot of encouragement, but we still have got a lot of work to do in terms of getting that story together and making sure our customers are confident with our ability to do it. But we're committed to it, and it's going to be a lot of fun getting there.

Operator

Our next question is from Jeff Spittel with Global Hunter Securities.

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Can you touch on subsea a little bit more? It sounds like the run rate of non-press-release, onesies and twosies type orders is starting to firm up. Maybe some commentary around what the outlook is there and what the implications are from a pricing standpoint from that end of the business?

Jack B. Moore

I'll let John take this one.

John D. Carne

Well, I think we're all seeing the orders firm up. So I think we'll see more activity, particularly out of Brazil, coming up through the second half and also some activities in West Africa we will see come through. As well as Egypt, as we're seeing some very strong signals coming out of Egypt as well.

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Very encouraging. And shifting over to the FPSO front, I think you'd commented in one of the last few quarters about having somewhere around $1 billion of bids outstanding. Could you give us an update on where that stands and how the order pipeline is filling up over the next couple of quarters?

Jack B. Moore

It's still very healthy. I think we've probably dialed it back a little bit because some things continue to move to the right. A lot of which driving the FPSO markets is Brazil, although we've got a lot of activity in West Africa right now. But I think it's the Brazil where it continues to move to the right. These numbers kind of shift around. But it's still pretty healthy in terms of the projects we're tracking, the opportunities out there. And it is driving some of the bookings that we're seeing in the first half of 2012, for sure.

Operator

[Operator Instructions] Okay, next question is coming from Jeff Tillery of Tudor, Pickering, Holt.

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

Valves & Measurement, obviously, had a very good quarter from a revenue standpoint. Could you -- you've indicated Distributed Valves slowed down a bit, but could you just give us color on how stretched was the business in terms of shipping almost $560 million of revenue? What do you see as necessary things to do on the capacity side?

Charles M. Sledge

Yes, Jeff. It's Chuck. A couple of things. It did ship a lot of revenue this past quarter, and capacity is very tight in that business. Distributed Valves shipped quite a bit of volume. I think though, as we talked about, you'll see volume come down just a little bit in the third quarter before ramping back up again in the fourth. So right now, it's really -- the modulator on the revenue is Distributed Valves, but it's also just timing of deliveries out of Engineered Valves because these are large projects. So we could do more revenue if the project delivery schedule supported that.

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

Could you give us a feel -- is that 10% more revenue or 20% more revenue? I'm just curious, at what point do we need to start seeing some capital -- some decreased capital investment made in order to grow that business further.

Charles M. Sledge

We're pretty close to that point right now.

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

Okay. You guys obviously have your hands full on M&A, specifically in the drilling business, still have a lot of cash. I mean, as you digest these acquisitions, has your view on stock repurchase changed at all?

Charles M. Sledge

No, it has not. It is always one of the uses of cash we look at. I think for 2012, the real driver -- the share repurchase which have been minimal, has really been our CapEx program. We're going to spend $0.5 billion in CapEx and we need that capacity and we need what that CapEx will bring us. So don't expect a lot of CapEx this year, as we -- excuse me, a lot of share repurchases this year. But 2013, different story. The CapEx will moderate and therefore, the free cash flow will be substantially higher.

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

Okay. My last question is just on the Process & Compression business. Your guidance really hasn't changed there. Could you just update us on progress in terms of turning the separation business around? What are you guys seeing on a leading-edge basis? Is the improvement from here more very late this year weighted? Or do we see another step-up in the third quarter?

Charles M. Sledge

You're going to see another step-up in the third quarter. You saw improvement in the second with double-digit margin there. It will continue to improve. You will see sequential improvement both in the third and the fourth. We feel very comfortable with that.

Operator

Our next question is from Ed Muztafago with Société Générale.

Edward Muztafago - Societe Generale Cross Asset Research

We obviously had a very good couple of order quarters here. And you guys sound like you're pretty optimistic on the number of the businesses for the back half of the year. Just wondering what your thought process is. Can we see a back half of the year that possibly exceeds the order rates that we saw in the peak in 2008 as you guys kind of sit there and look out right now?

Jack B. Moore

Oh, yes. Yes.

Edward Muztafago - Societe Generale Cross Asset Research

Okay. That's a very simple answer. I like that. And then second there -- as an additional one, now that you've kind of got your hands around TTS a little better, can you sort of update us as to your thoughts on sort of getting that business towards the core drilling margin? Is that something that you guys think is achievable by next year? Or...

Jack B. Moore

I don't know if you mean LTI or TTS. We just put into the fold...

Edward Muztafago - Societe Generale Cross Asset Research

LTI, I'm sorry guys.

Jack B. Moore

So give us a little more time. Pieces of LTI, yes. We said that 2012 would be a year where we would be moving the LTI business to exit with a better margin rate than we went in. But it would take a little while to get to -- to that business to a Cameron-esque drilling margin behavior, and we'll get there. We're seeing pieces of it already coming to that level. But we're on track. So I guess the message here is, just stay tuned.

Edward Muztafago - Societe Generale Cross Asset Research

Okay. So it's still a 2013 event, really, for kind of getting it to the core margin.

Jack B. Moore

Yes.

Operator

[Operator Instructions] Our next question is from Tom Curran of Wells Fargo.

Tom Curran - Wells Fargo Securities, LLC, Research Division

Chuck, could you provide us with a breakdown of your North American onshore revenues across the 3 divisions just in terms of the mix on a percentage basis?

Charles M. Sledge

I don't have the percentages right in front of me, but when you look at kind of North America revenues for the quarter across all of the businesses, it was about $900 million across all the businesses in Cameron.

Tom Curran - Wells Fargo Securities, LLC, Research Division

And is that just North America onshore?

Charles M. Sledge

No. That's everything. It's -- onshore was -- surface business was approaching $200 million. And then the valve business -- the Distributed Valves was north of $100 million. Those are the big components of it.

Tom Curran - Wells Fargo Securities, LLC, Research Division

And then just historically, where has drilling ran as a percentage of North America onshore?

Charles M. Sledge

I don't have that data in front of me. I'm sorry.

Tom Curran - Wells Fargo Securities, LLC, Research Division

Okay. Turning to V&M, looking at 2 main end markets there, offshore, specifically deepwater field, fuel, the LNG projects and then oil sands projects, what were some of the large projects out there where there is award still on to come that you would highlight?

Jack B. Moore

Well, I'd say Wheatstone is still a big one to come. Excess [ph] is going to be big one to come. Pearl [ph] is going to be another -- that's another phase that's going to come. There's another phase of Gorgon that's going to come. These guys have got a great footprint of visibility -- a great visibility of where we're going to be looking at over the next 12 to 24 months in terms of processes. And a lot of activity, too, is going to come in our traditional infrastructure build-out, pipelines both in the U.S. and international, as well as just some of the infrastructure around receiving terminals that all this LNG is going to be going to.

Tom Curran - Wells Fargo Securities, LLC, Research Division

Okay. And then could you just refresh us on the rough size and nature of your exposure downstream, both in terms of refining and then petrochemicals?

Jack B. Moore

It's -- when you look at the refining and petrochemical side, it's very small, less than 5%.

Charles M. Sledge

It's less than that.

Jack B. Moore

Maybe even less than 3%.

Charles M. Sledge

It's a very small number.

Operator

[Operator Instructions] The next question is coming from Judson Bailey of ISI.

Judson E. Bailey - ISI Group Inc., Research Division

You touched -- or we touched, rather, on opportunities for dual BOPs earlier. I was wondering if you could talk a little bit about the opportunities on maybe upgrading some of the existing subsea control systems on existing rigs? There seemed to be a lot of concerns about rigs needing 5-ram [ph] BOPs and upgrading shear rams and so on and so forth. And I was wondering if you could -- just give us a little color on discussions you're having with customers and the potential demand you're seeing there.

Jack B. Moore

Well, I think if anything, Jud, the new technology that's available to us today in terms of the operating components of the control system: the actuators, the solenoid valves, the software; all of it, new generation is where we're moving to. And so we'll see a lot of potential -- we see a lot of upgrading going on today. We're going to continue to see this evolve, I'm sure, over the coming years. So that's going to happen. You're looking at more redundancy. That's going to benefit all of us in the manufacturing side of this business in terms of improving control, functionality and making it more reliable and more -- providing more redundancy as these systems become deployed. You're also going to see a lot of shear ram capacity increases, shearing heavy wall pipe casing, things that can shear and seal. These are all technologies I know our teams are working on with the specific operators. And you're going to continue to see that generate upgrades in retrofit opportunities going forward as well.

Judson E. Bailey - ISI Group Inc., Research Division

And if I try to think about the magnitude, are we -- is it fair to say we're probably looking at a multiyear process in terms of revenue opportunity that could provide Cameron with maybe double-digit growth? Several years?

Jack B. Moore

Yes. Absolutely. Because, basically, you physically can't do it all in 1 year. And a lot of these rigs are operating now under various contracts. So as they become available to be upgraded and go through this phase, then you'll see those opportunities come at us.

Judson E. Bailey - ISI Group Inc., Research Division

Okay. And second question is on the opportunity for 20K BOP stacks. It sounds like some of the majors are talking more and more about designing drillships that could accommodate this type of equipment. I was wondering if you could maybe comment on discussions you may be having or maybe a timeline on how serious some of the bigger operators are about building rigs with this type of capability.

Jack B. Moore

Well, I think it's a very serious topic. And Cameron developed the 20K BOP 18-3/4 system for Rowan here about 2 years ago and introduced it and it's actively being used today. We have built a 25K system for an operator in the Gulf of Mexico that's being utilized today. So we see that a lot of customers are drilling into these higher-pressure formations and are going to need 20K stacks ultimately. There is more than just the stack, though, that goes with these wells. You've got to have the riser and the connector systems and the wellhead systems as well. So it's -- the beauty of Cameron being in not only the BOP manufacturing business, we also build wellheads, we build trees, we build a lot of kit that we're seeing a lot of discussion around the higher-pressure envelope that we need to work in. So you're going to see it happen. Just as we got to 15K years ago, we're going to get to 20K. And it's going to be -- you'll look up in 5 years and I bet you'll see a lot more activity in that envelope than obviously we do today.

Judson E. Bailey - ISI Group Inc., Research Division

Okay. And I just want to follow-up there, if they try to order -- try to order a drillship with that kind of capability today, I'm assuming delivery would be some time in the first half of 2015. I assume Cameron could meet that deadline if requested to do so.

Jack B. Moore

Cameron would not be the long pole in the tent. We've got -- we've made a lot of progress in that arena already, and I think a lot of the operators and contractors realize that.

Operator

Our next question is a follow-up from the line of Tom Curran with Wells Fargo.

Tom Curran - Wells Fargo Securities, LLC, Research Division

I just thought I should get your latest thoughts on where the industry seems to be headed in terms of global theoretical tree capacity in terms of the total number of trees that could be delivered per annum. Conventional wisdom was that we entered the sub cycle with around 800. Where does it seem to be headed based on your market intelligence, say, by the end of 2013?

Jack B. Moore

Well, I think it's probably going to be more, where is it physically located? A lot of capacity expansion is underway in Brazil, which you really can't export. So when you look at the Brazil market in and of itself, it's going to drive a lot of demand not only for trees, but it's going to be responsible for a lot of increased capacity. If you look at, again, the type of trees that's being ordered, that's going to drive a lot of it. So I would say that most -- I would hope to believe today that most of us are kind of operating at a capacity level that we're comfortable with, but the real challenge for us now becomes people -- in finding the right people to not only execute on these large projects but from an engineering standpoint as well. So the real challenge is that the capacity from a manufacturing standpoint, I don't think is really going to be the pacing out in force.

Tom Curran - Wells Fargo Securities, LLC, Research Division

Sure. And certainly, your peers have continued to echo that same mantra that the challenge is going to be the people, not the plants. Given that, could you just refresh us then on what exactly gives you so much confidence about your own approach to ensuring you're going to have those people and where you stand today in terms of ramping up?

Charles M. Sledge

Yes. I think -- remember, we're in the back end of execution of 2 very large projects. So we have the people in place today. They will just move from one project to the next. So we feel -- while we'll need to add some people, we feel relatively comfortable that we have the skill set that we need to execute the orders we believe we're going to book.

Tom Curran - Wells Fargo Securities, LLC, Research Division

But presumably, given the growth trajectory just for the industry and the range you would expect for your win rate, you're going to have to do some workforce expansion from here.

Jack B. Moore

Oh, that's ongoing. That's ongoing. In fact, just last night, we had a reception for 150 of our new graduate employees. And that is ongoing. That's part of the -- I think, of the cycle we're in today. But you'll look at our workforce devoted to subsea in 2 years and that will be substantially larger than it is today.

Tom Curran - Wells Fargo Securities, LLC, Research Division

Okay. That answers my question although I sense some reluctance to quantify. Last one on subsea for me then, given the point you made about where exactly the capacity is being added, which markets do you think have highest potential to see the most significant potential shifts in share for subsea globally? Which market would you highlight as being the most in play potentially?

Jack B. Moore

Well, I think you're going to see the Gulf of Mexico, from where they were just 2 years ago to where they'll be 2 years from now will be significant. Is it going to be as significant as Brazil? Probably not. Brazil still has a very, very high trajectory in terms of their need for subsea infrastructure in the years to come. So the issue with West Africa is always the timing of projects. They're going to be a lot more disciplined about project awards, and they will not award 6 projects at once in West Africa. So I would say that you're going to continue to see Brazil to be the primary driver. You're going to see the Gulf of Mexico come back and be more important in the mix. East Africa is going to evolve to be an important player, but that's going to take more time. Australia is going to continue to expand. It's -- which one is going to expand quicker is really going to be dependent upon the timing of the -- of some of the awards. But it's all a healthy picture. I mean, when you look around the world, subsea has got a pretty healthy run rate looking out there in the forward picture.

Tom Curran - Wells Fargo Securities, LLC, Research Division

You gave an answer that was helpful, but what I was actually trying to get at is, within each of those regional markets, where do you see the most potential for significant shifts in share within the market, intra-regional market?

Charles M. Sledge

Well, you're going to see -- it really depends on the timing of awards. You're going to see a very choppy share picture if you look at too small of a timeline. So it's tough to answer the question because if you just have 1 or 2 large projects in West Africa booked in a 6- to 12-month period, then the shares are going to move quite around quite a bit. But if you look at over a 3-year period, they may not move around as much, so a pretty difficult question to answer. I think that at the end of the day, everyone will book a lot of work in subsea.

Operator

There are no further questions at this time. I would like to turn the floor back to management for closing comments.

Jeffrey G. Altamari

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

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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