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Cameron International Corporation (NYSE:CAM)

Q1 FY08 Earnings Call

May 1, 2008, 08:30 AM ET

Executives

Scott Amann - VP, IR

Jack B. Moore - President and CEO

Charles M. Sledge - VP and CFO

Analysts

William Herbert - Simmons & Company International

Michael Urban - Deutsche Bank Securities

Kurt Hallead - RBC Capital Markets

Brad Handler - Wachovia Capital Markets, Llc

Dan Pickering - Tudor Pickering & Co.

Charles Minervino - Goldman Sachs

Jeff Spittel - Natixis Bleichroeder

Michael LaMotte - JPMorgan

Geoff Kieburtz - Citigroup

Ken Sill - Credit Suisse

Operator

Greetings ladies and gentlemen, and welcome to the Cameron First Quarter Earning Release Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions].

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Scott Amann, Vice President of Investor Relations for Cameron. Thank you, sir; you may begin.

Scott Amann - Vice President, Investor Relations

Good morning and thank you for joining us today. As a remainder, if you have an access to release yet, it is available on the wire services as well as the on our website. This morning, you will hear from Jack Moore, President and Chief Executive Officer of Cameron; and Chuck Sledge, Vice President and Chief Financial Officer. These gentlemen will offer some commentary on the results for the quarter, and will then take some time to field your questions. In accordance with the Safe Harbor provisions of the securities laws, we caution you that some of the statements made on this call maybe 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 Cameron's annul report on Form 10-K, the Company's most recent Form 10-Q and the associated new release.

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

Jack B. Moore - President and Chief Executive Officer

Thank you, Scott. Let me cover Cameron's Q1 highlights. As most of you have already seen Cameron's earnings for the quarter came in at $0.55 this compares to $0.44 in Q1 of 2007. with strong revenues for the quarters, more than $1.3 billion, which is up 34% from Q1 of '07, revenue increased across all of our business segments, but primarily came from our project related business within subsea drilling and engineered valves. Our Drilling & Production System revenue were up 40%, Valves & Measurements were 16% and Compression was up 49%. The compression's growth somewhat reflected the strong... slow start out of the gate in Q1 of last year, but this is a great start for Compression in '08.

As for orders, Q1 was a very good quarter. Our strongest ever at $1.95 billion; this represent the 56% increase over Q1 of '07, and was up 31% sequentially. In fact, this was the 14th consecutive quarter that Cameron's orders exceeded revenues. Orders were up in all three business segments. DPS was up 92% with subsea leading the way with total orders of more than $800 million. Subsea bookings were up 400% versus Q1 of '07 and up 50% sequentially versus Q4. Cameron booked a total of 54 trees in Q1, the majority 44 for Total's Usan project, which we announced back in March, and the news keeps getting better. As most of you saw, we signed a contract with Husky Energy yesterday for $235 million for the North Amethyst project in Eastern Canada.

This is actually the third phase of this development, which we have participated in and we expect this project to expand yet again over the next 12 months. Orders for surface system reached a new high totaling $300 plus million in Q1. This represents an 8% increase versus Q1 of '07, which was our previous record quarter's booking. But sequentially our surface orders were up 60%. Our drilling orders were down 6% in Q1; however, this continues to be a very active market for both our new and after market business. We booked three new deep water stack in Q1 and two of the stacks will feature a new EVO BOP Technology.

Our distributed valve business, which is predominantly driven by North America was up 21% versus Q1 of '07 and up 31% sequentially. Processed valves were up 26% in Q1 and again 49% sequentially. Engineered valve orders were down 16% versus Q1, but up 50% from Q4. And I think this reflect some of the lumpiness we've talked about with the timing of pipeline projects. Compression had another good quarter as well with our centrifugal orders of 27% versus Q1 and a 56% sequentially. Overall, Cameron's orders reflected continued growth in the international markets with 73% of our Q1 orders coming from markets outside of North America.

Our backlog ended at $4.9 billion, which is up $630 million from the end of Q4 of '07. As we said in the last call, we continue to invest in our infrastructure to support the backlog that we have in all of our businesses. We opened our new drilling after market facility in Houston. Our new surface systems facility environment is now fully operational. The expansion of our manufacturing and engineering center in Brazil is now completed. We continue to ramp up our subsea manufacturing capabilities in our Malaysia plant. And construction of our new surface systems manufacturing plants in Romania is on track to completion in Q4 this year. As you have read, we have also raised our guidance for the full year 2008 to 250 to 260 per share, and with a strong flow of orders and the subsequent increases in our backlog coupled with the optimism from our customers, we feel very good about future of Cameron and sets up 2009 to be another great year.

Chuck, I'll turn it over to you for the financials.

Charles M. Sledge - Vice President and Chief Financial Officer

Thank you, Jack. Excuse me, If you have a housekeeping items, first we generated $44 million in cash flow from operations in Q1, that's up 20% from the first quarter of '07, it is down sequentially from the fourth quarter, but the first quarter reflected a large working capital build as we fund our working capital requirements for the back half of this year. We are still targeting free cash flowa little north of $300 million for this year. We spent $57 million on acquisitions during the quarter and this is comprised of three tuck-in acquisitions, which fit nicely with our existing product lines. While the large deals are still pretty competitive as you guys have seen out there, the smaller deals are available, fit nicely in the Cameron and are attractively priced. We have few of these in our slides and so we hope to be able to report some additional acquisition during the balance of the year.

Our CapEx during the quarter was $45 million. We are still targeting somewhere between $250 million and $270 million for the full year. As you probably noticed from the balance sheet, we did borrow under our revolver during the quarter, and that was to fund working capital requirements primarily in our subsea business. This is resulted in a debt-to-cap ratio... net debt-to-cap ratio of 7.6%. Our convert to $238 million of 1.5% converts can be put back to the company in May as a reminder, and so on our second quarter financials, you will see these classified as current. We mentioned in our release that we did increase the size of our revolver to $585 million, and we pushed out our maturity by five year. This gives us plenty of dry powder as we evaluate our acquisition opportunities and share buybacks.

We repurchased 2.2 million share of stock during the quarter. We continue to believe the share repurchase is an attractive to place to deploy capital. In addition, we also topped up our share authorization during the quarter to write out 12 million shares. During the quarter, we also received the IRS approval to terminate our U.S. pension plan that we talked about before. We expect to wrap up this termination in the fourth quarter. When we do wrap it up, we will take a $ 26 million non-cash pre tax charge at $0.07 a share during the fourth quarter, and that is not in our guidance that we have given.

A few guidance related items; as Jack mentioned, we were guiding $0.60 to $0.62 for the second quarter, and we raised our guidance to $250 million to $260 million for the year. Embedded within this guidance are mid-teens revenue growth for the year. And as Jack mentioned, we did have a record quarter for project related revenues, which typically, as we said before, carry lower margin than our in and out business. We expect our mix to normalize over the back half of the year. So for the full year, we expect our margins in the aggregate to be relatively flat '07 to '08. Share count to be used for modeling purposes, you should target $234 million, D&A of $130 million, and our tax rates should hold at 32%.

With that, let's open it up to questions.

Scott Amann - Vice President, Investor Relations

Okay. Diego, we can start Q&A if you'd like.

Question And Answer

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the Bill Herbert, William with Simmons & Company please stay your question,

William Herbert - Simmons & Company International

Thanks, Good morning

Jack B. Moore - President and Chief Executive Officer

Hi, Bill

Charles M. Sledge - Vice President and Chief Financial Officer

Hi, Bill.

William Herbert - Simmons & Company International

Hi. Jack, I was wondering if you could amplify a bit with regard to what's you are seeing on the surface side, record orders. And in relation to that, what's the expectation with respect to those orders gestating into revenues and margin implications overall for DPS.

Jack B. Moore - President and Chief Executive Officer

Okay, lot of questions there; surface orders, our surface business it's... this is a global business for Cameron.

William Herbert - Simmons & Company International

Right.

Jack B. Moore - President and Chief Executive Officer

We are active in all the markets around the world, but we are seeing... we are actually seeing a nice increase in activity, Middle East, Europe, Far East, and we are starting to see some things again that we are very encouraged with the North America. This last quarter was a record quarter for us, Bill.

William Herbert - Simmons & Company International

Okay.

Jack B. Moore - President and Chief Executive Officer

You look at $300 million plus for the surface business. This is clearly Cameron has a pretty large share position in this market and moving a needle on this one gives interesting... more interesting every quarter. But we are very encouraged about where the business is with only gas prices tracking, where their customers are obviously going to continue to develop a project on shore as well as offshore.

William Herbert - Simmons & Company International

The reason I asked about margins is that I though the quarter overall was expected from my standpoint and the results were encouraging, but the margin with regards to DPS were kind of softer than they have been off late. And I am curious as to how we should think about margins for DPS unfolding as the year unfolds, and do we get a pick up as those surface orders gestate in the revenues.

Jack B. Moore - President and Chief Executive Officer

Yes.

Charles M. Sledge - Vice President and Chief Financial Officer

Yes, I think, Bill, you will see the margins in the back half of the year pick up in DPS as we start shipping these and our mix returns to a more normal level.

William Herbert - Simmons & Company International

Okay. And when you prophesized basically flattish margins year-over-year, were we also talking about DPS? I mean is that the working assumption for 2008?

Charles M. Sledge - Vice President and Chief Financial Officer

I think for all the business other than compression, which you should see a little uptick in.

William Herbert - Simmons & Company International

Okay. Well, if we get then flat year-over-year, then we are just going to see quite a bit of an improvement for that segment as the year evolves, right?

Charles M. Sledge - Vice President and Chief Financial Officer

Correct.

William Herbert - Simmons & Company International

Okay.

Charles M. Sledge - Vice President and Chief Financial Officer

Andexpecting.

William Herbert - Simmons & Company International

Thanks very much.

Operator

Our next question comes from Mike Urban with Deutsche Bank. Please state your question.

Unidentified Company Representative

Hi, Mike.

Michael Urban - Deutsche Bank Securities

Good morning.

Unidentified Company Representative

Good morning.

Michael Urban - Deutsche Bank Securities

Last quarter, you guys and part of what was viewed as kind of conservative guidance at the time was there are some orders kind of supposed to go out the door, late in Q1 potentially slip into the second quarter. Just wanted to get a sense for where that kind of shook out and how... if did that have an impact on margin, was it a volume kind of thing or are there cost issues there or is it truly just an unusual level of project work?

Jack B. Moore - President and Chief Executive Officer

I think our quarter pretty much reflected what our thinking was when we went into... when we into the year. The guidance we gave in Q1, I think reflected what we felt the plans we'll be able to out the door. We eat what we kill. We really... we kind of look at in the quarter and that's what we've got to report. So we are not on POC. So the timing of things going out the door will definitely impact our margins one way or the other given whether that particular piece of the business has a lot of third party of or external supply impact on it. But it pretty much looked like what we though it would look like, Mike.

Michael Urban - Deutsche Bank Securities

Okay. And the follow-up on the last question on the surface business. It somewhat sound like pretty strong across the board on the order side, and you said you were seeing some potentially interesting things going on in North America. Was that reflected in the quarter. Did you book those or is that still potentially become or perspective?

Jack B. Moore - President and Chief Executive Officer

Not necessarily, we... the surface business is going to be the one that... our distributed valve, if you heard us talk about that, we are up 21% relative to where we were last year in our distributed valve. That is much more sensitive to North American activity. Surface business depending on what... where it is, there is a lot areas of the world in North America that our surface business really doesn't get impacted much by, but what's going in the Rockies, offshore Gulf of Mexico mid-continent to the things going on in the Barnett. Has that activity continues to rock along and I think a lot of people are very encouraged that second half of the year. That will be good for our surface business.

Michael Urban - Deutsche Bank Securities

Okay, but nothing as of yet?

Jack B. Moore - President and Chief Executive Officer

I am sorry, Mike?

Michael Urban - Deutsche Bank Securities

Nothing booked as of yet fundamentally.

Jack B. Moore - President and Chief Executive Officer

Yes.

Michael Urban - Deutsche Bank Securities

And then looking forward, looks pretty good.

Jack B. Moore - President and Chief Executive Officer

Yes.

Michael Urban - Deutsche Bank Securities

All right; great that's all. Thank you.

Jack B. Moore - President and Chief Executive Officer

Thanks.

Operator

Our next question comes from Kurt Hallead with RBC Capital Markets. Please state your question.

Jack B. Moore - President and Chief Executive Officer

Hi, Kurt.

Kurt Hallead - RBC Capital Markets

Hi, good morning.

Jack B. Moore - President and Chief Executive Officer

Good morning.

Kurt Hallead - RBC Capital Markets

Hi, the question... on the orders as you look out for 2008, obviously very strong here as you mentioned. In the quarter; can you some insights on how you think it may progress year-on-year in '08, would the 30% sort of run rate year-over-year be reasonable based on the business trends as you see them?

Jack B. Moore - President and Chief Executive Officer

Well, Kurt, we... I think as Chuck reiterated, our outlook is about 20% year-over-year, which would be pretty strong, given were we ended 07 at and that's the number we feel pretty good about.

Kurt Hallead - RBC Capital Markets

That's just... that's for your order. I was little bit confused whether that was orders or revenue, okay. And that's overall, so within DPS, Valve & Measurement and Compression, which one of those three do you think has the highest gross rate potential? And which one would be on the lower end of the spectrum?

Jack B. Moore - President and Chief Executive Officer

I'll tell you what, I would... with what we see in the subsea arena coming forward, I would then definitely say DPS will have the strongest, but I would, our compression business... these guys are... they had a great quarter. And lot of positive things going on with compression guys, not just in terms of their market expansion, but also some of their product expansion as well.

Kurt Hallead - RBC Capital Markets

Okay, then...

Jack B. Moore - President and Chief Executive Officer

The valve business is really... what's going to drive our valve business is really going to be the timing of some of these pipeline projects, not in light of some the subsea business. If some of these projects are awarded when we think they'll get awarded, then '08 could be a better year. If things flip to right like they sometimes do with this... with the big projects, then '08 will look little less filling versus where it otherwise would be.

Kurt Hallead - RBC Capital Markets

Okay, and if I did my math correct on the Husky project, it worked to be about closely $20 million kind of dollar per tree type of number. I think that's significantly higher than what's the run rate been for Cam over the last couple of years?

Jack B. Moore - President and Chief Executive Officer

I'll tell you what, that's going to be project but project specific; project we booked, we announced yesterday with the Husky project in eastern Canada. I think that worked out to about $18 million a tree. It really depends on what the complexity of the projects, I think it's safe to say that the projects are getting more complex, and there is additional equipments that has been delivered and provided by companies like Cameron.

Kurt Hallead - RBC Capital Markets

That'skind where I was going. It may not be directly $18 million, but you think a trend per tree... dollar value per tree is trending higher.

Jack B. Moore - President and Chief Executive Officer

Yes.

Kurt Hallead - RBC Capital Markets

And then one just one more follow-up here just I'll get on the margins side, big... a pretty significant increase in orders here, can you commend on pricing and the kind of pricing that you have in backlog and if you're looking at kind of flat preparation on margin year-over-year if there is a margin away of kind of incremental pricing in backlog, just want to get some color on that.

Charles M. Sledge - Vice President and Chief Financial Officer

I think you've got to dissect it between the business. Obviously the project related business is going to have a lower margin in backlog than our day in, day out business. You've got steel prices that are rising that we are in the process of raising our prices to our customers to pass that along and maintain our margin. So, I think on the day in and day out businesses, not much is happening there. Themargins are about where they've been historically. As same as the project business; we don't see a lot of deterioration in the margins; in fact, we don't see much at all and assuming the competitive environment holds and capacity stays tight, we see that same way going forward.

Jack B. Moore - President and Chief Executive Officer

We see a few project, where people do some things and typing that we don't understand. But in the most parts, we are holding in there.

Kurt Hallead - RBC Capital Markets

That was really the story here on earnings call is it's really going to be just to share volume of business that's following through. Right?

Jack B. Moore - President and Chief Executive Officer

I think you've got it.

Charles M. Sledge - Vice President and Chief Financial Officer

You've got it and that's leveraging our cost structure.

Kurt Hallead - RBC Capital Markets

Got it. All right, thanks a lot appreciate it.

Jack B. Moore - President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Brad Handler with Wachovia. Please state your question.

Charles M. Sledge - Vice President and Chief Financial Officer

Hi, Brad.

Brad Handler - Wachovia Capital Markets, Llc

Good morning guys, thanks.

Jack B. Moore - President and Chief Executive Officer

Good morning, Brad.

Brad Handler - Wachovia Capital Markets, Llc

Maybe just a follow-up on your comment about the pipeline project... just curious if you can give us some color about it, sort of a number of projects maybe that you are bidding on rough sizes that we are talking about and then some color on timing as you see it today.

Jack B. Moore - President and Chief Executive Officer

There isprobably about 100,000 plus miles of pipeline projects that we are tracking, both... primarily North America and Asia. And so those are... things that have been on radar screen for months, and we book some of them in the first quarter that we thought we would some of them that slipped in whether they will land in the second quarter or the third quarter is yet to be determined. But both of those markets are looking very promising in terms of the feature; yes, the size of projects. These are anywhere from $10 million to $40 million in terms of the values and there is multitudes of them.

Brad Handler - Wachovia Capital Markets, Llc

Okay. Very, very helpful. If I stick with that a little bit, you've said in the past that the combination of the Dresser, your legacy businesses plus Dresses has given you this great position with respect to the pipelines. Are you seeing any comment about the competitive landscape there and how you are... you are fairing and what's been awarded so far?

Jack B. Moore - President and Chief Executive Officer

I'll tell you what, we've... the guys have done a great job of holding our shares, where we've historically when we combine this business. We continued to get competition, but we've got a great product offerings. And you look at the size range that Cameron can offer, you look at the competitive position we're in both manufacturing product here, North American manufacturing product in Europe and some in Asia. We are just... we are in a great position support it, and the aftermarket that backs it.

Brad Handler - Wachovia Capital Markets, Llc

Okay.

Jack B. Moore - President and Chief Executive Officer

That's all important to these customers.

Brad Handler - Wachovia Capital Markets, Llc

Yes. All right, that's helpful. And I guess I'll just we stick it for one last one, please. The... your process in Bogera [ph] probably nearing completion in terms of initial plans, right, the insourcing effort?

Jack B. Moore - President and Chief Executive Officer

We are getting there, we are close to getting there. The machine tools... some of the filing machine tools will be put in the first half of this year. Things are moving very well.

Brad Handler - Wachovia Capital Markets, Llc

Okay. Any comments that you might be able to make as to whether there are some follow on thoughts expansion or anything of the sort?

Jack B. Moore - President and Chief Executive Officer

In Bogera?

Brad Handler - Wachovia Capital Markets, Llc

Yes, like a broadening out the valves business in general.

Charles M. Sledge - Vice President and Chief Financial Officer

I think if this market holds, we obviously want to maintain our share and we think the market have got some room to grow. And so you'll see it deploying out of the $250 million, there are some capital in there to expand the engineered valves capacity.

Jack B. Moore - President and Chief Executive Officer

Absolutely.

Brad Handler - Wachovia Capital Markets, Llc

Okay, very helpful guys; thanks.

Jack B. Moore - President and Chief Executive Officer

Thanks.

Operator

Our next question comes from Dan Pickering with Tudor Pickering Holds. Please state your questions.

Charles M. Sledge - Vice President and Chief Financial Officer

Hi Dan

Dan Pickering - Tudor Pickering & Co.

Good morning.

Jack B. Moore - President and Chief Executive Officer

Good morning, Dan.

Charles M. Sledge - Vice President and Chief Financial Officer

Good morning. This our maiden voice, so you've got to be easy on us.

Dan Pickering - Tudor Pickering & Co.

All right, I'll be soft on you. I do want to come back and talk a little bit about the first quarter, and I just want to understand that the revenue mix a little bit better, because I think it did have a influence on the margins. So, can you just walk through biggest components of our business this quarter with subsea and you have a big delivery quarter here.

Charles M. Sledge - Vice President and Chief Financial Officer

Yes, we had... Dan, we had the largest delivery quarter ever in subsea, approaching $300 million. Our separation business also had a very, very large quarter, and those are about project driven businesses.

Dan Pickering - Tudor Pickering & Co.

Yes, okay. And so guys, when you look at the margin change from quarter-to-quarter, would the mix basically address all of the decrement from Q4 to Q1?

Charles M. Sledge - Vice President and Chief Financial Officer

Yes.

Dan Pickering - Tudor Pickering & Co.

Okay. So, it wasn't a big effect there. It wasn't increasing costs of to manufacture a bad job or somewhere anything like that.

Charles M. Sledge - Vice President and Chief Financial Officer

No, we did have... we have a no winding policy, so they were... a lot of couple million dollars of cost that flow through on that we view as kind of abnormal, but we are not going to call out every single little thing that goes bad for us. But overall, it is the mix story, and that's all it is.

Jack B. Moore - President and Chief Executive Officer

As you know, we will can't add color like we see at the end of the quarter based on what we ship, so a lot of that mix will determine exactly where these margins comes in. In terms of... we ship a lot of products element of the project. We'll see higher margins, we ship a lot of the projects that was third party or what we call flow. It's going to bring them down.

Dan Pickering - Tudor Pickering & Co.

Right, okay. And then as you look at that mix for the next few quarters, how do you anticipate that wouldn't change? Let assume our North America rebounded in the second half of the year; so as we look at the second quarter, how do shipments look there in terms of mix?

Charles M. Sledge - Vice President and Chief Financial Officer

Second quarter, I don't think you'll see much difference in the mix.

Dan Pickering - Tudor Pickering & Co.

Okay.

Charles M. Sledge - Vice President and Chief Financial Officer

But the back-half of the year, you should see the mix return to a more traditional mix and you'll see the margins improve nicely.

Dan Pickering - Tudor Pickering & Co.

Yes.

Charles M. Sledge - Vice President and Chief Financial Officer

Our surface business is shorter cycle. So, we see nice close in the first quarter in terms of orders. We have a better chance of getting that out the door between now and the end of the year. Same with distributed, but on the big project business, Dan, that's probably... most likely most of that will into '09.

Dan Pickering - Tudor Pickering & Co.

Okay. And then speaking of '09, Jack, your Husky work, it sounds like it's mostly 2009, you've got Usan and that's coming portion in '09.

Jack B. Moore - President and Chief Executive Officer

Yes.

Dan Pickering - Tudor Pickering & Co.

How much of your 2009 subsea capacity is now kind of spoken for with backlog?

Jack B. Moore - President and Chief Executive Officer

Up 75% to 80%.

Dan Pickering - Tudor Pickering & Co.

Okay.

Jack B. Moore - President and Chief Executive Officer

But we have... don't forget, we have the flexibility, we have some flexibility with our capacity. What we have done in Malaysia, had given ourselves a lot of flexibility with our infrastructure there. And there is well in North America with our facilities down Berwyn [ph]. So, we built that flexibility in over the last couple of years, but you Cameron's guys have done a good job of getting that and booking the business in the subsea.

Dan Pickering - Tudor Pickering & Co.

All right.

Jack B. Moore - President and Chief Executive Officer

And the story is not over.

Dan Pickering - Tudor Pickering & Co.

Yes, so execution becomes the key component.

Jack B. Moore - President and Chief Executive Officer

Execution is always the key. We've got to bust this stuff out of here.

Dan Pickering - Tudor Pickering & Co.

Right. Last question from me, the plant air business in Asia has always been kind of a good leading indicator for what's going on in kind of emerging economies. What do you think from that business?

Scott Amann - Vice President, Investor Relations

Very good, it's been very good. And we keep watching it too. I ask these guys probably every other day, because it's kind of the canary in the coalmine for us. And the order rate as you could see was very good and the enquiries continue to be very strong.

Charles M. Sledge - Vice President and Chief Financial Officer

Dan, in that particular business, we had the second largest quarter booking ever in term of the air side.

Dan Pickering - Tudor Pickering & Co.

Okay, that's encouraging. Thanks guys.

Jack B. Moore - President and Chief Executive Officer

Thanks.

Charles M. Sledge - Vice President and Chief Financial Officer

Thanks.

Operator

Our next question comes from Charles Minervino with Goldman Sachs. Please state your question.

Charles Minervino - Goldman Sachs

Hi, good morning.

Unidentified Company Representative

Good morning, Scott.

Charles Minervino - Goldman Sachs

So, just want to talk a little bit more about subsea. I know you had a great from a tree award market share perspective. Just going forward here, do you see yourself picking up some market share in that over the next couple of years, you give a plan in place to maybe do that. I know in the past you have talked about kind off settling out where you are now, but given some of these awards and the fact that you are getting some of these larger projects, it seems like you are being viewed more and more as a full solutions provider here and just wanted to get your sense of what you are thinking going forward here over the next couple of years.

Jack B. Moore - President and Chief Executive Officer

Well, I don't think we think of ourselves as anything, but a full solutions provider, we worked hard to get there so. And I do agree, I think our customers... very projects that our customers do not see Cameron being able to take on and execute to their satisfaction. We've never said we are going to be specifically number one or number two in this business. I think we said we are going to be a significant player in the subsea markets. There is no market that we are not focused on getting into. But we have been a little bit more selective in terms of what we have targeted and what we have basically avoided. And I don't see that changing. A lot of the projects, booking in Usan that doesn't happen overnight that relationship with Total has evolved over years. And the same with some of the other projects as we did with Husky yesterday. That's a relationship we started back... I got involved with it back in 2001. So, those are things that evolve and the timing of when those hit will impact your share in that particular quarter. It's not something that I would say, I would characterize as a long-term trend. But I would... I think it just goes to emphasize the Cameron is going to be a very serious and a very significant player in the subsea markets. And as we execute on these projects, it gives us a little broader footprint in terms of the knowledge base and the breadth of products that we are offering.

Charles Minervino - Goldman Sachs

Okay. And I am not sure if you mentioned in your earlier comments, but I don't believe I heard anything regarding Block 31. I was just wondering if you can give us a little bit of an update of what's going on there.

Jack B. Moore - President and Chief Executive Officer

Well, I think that's probably a question that be best posed to BP. But I think their intensions are to try and award that project sometime in '08. And yes, Cameron has targeted that project, but that's... no one is... BP is not made any announcements or any decisions on how they are going... or the timing of the how they're going to go forward. So, it's not in typical with any project in West Africa that we've gone through with all the others. The timing never happens... it never happens as soon as we'd like it and it probably never happen as soon as the operator would like it. There is a lot of variables that go into these projects and patience becomes a virtue.

Charles Minervino - Goldman Sachs

Okay, just one last question quickly on the share count; it was 5 million this quarter, but you only bought that 2 million. I believe it has something probably to do with the convert there, and I guess you have it going up for the rest of the year. Can you just give us an update on what's going on there?

Charles M. Sledge - Vice President and Chief Financial Officer

Yes, Chuck, that's the convert; obviously, we had a little dip in the share price during the quarter, which affected the number of shares that the converts translated into, so we see that price coming back up, and so it's just going to convert into more shares.

Charles Minervino - Goldman Sachs

Okay, all right. Thank you.

Jack B. Moore - President and Chief Executive Officer

Thanks, Chuck.

Operator

Thank you. [Operator Instructions]. Our next question comes from Jeff Spittel with Natixis Bleichroeder. Please state your question.

Jeff Spittel - Natixis Bleichroeder

Good morning, gentlemen

Jack B. Moore - President and Chief Executive Officer

Hi, Jeff

Charles M. Sledge - Vice President and Chief Financial Officer

Good morning, Jeff.

Jeff Spittel - Natixis Bleichroeder

Just wanted to see if we could drill down a little further in the subsea market, looking a little more specifically at brazil; could you commend on what's going on there and projects in the pipeline that you're evaluation, are we looking 2011 timeframe and beyond at this point?

Jack B. Moore - President and Chief Executive Officer

Well, specifically on Brazil, that's probably a good way to characterize it. These guys... it's kind of like the discovery du jour. I mean they are having so much and we were... we just had our management team there last month. And in our meetings with them, they are just... I think there is a lot more potential down there that they hadn't even talked about. The issue they're going to have is really how quick and they bring all of the rigs in the infrastructure together to get it online. And that probably will not be... it won't... Cameron and the folks in our competitive space will probably not be the long lead issue for them. It's going to be rigs, it's going to personal, it's going to be the infrastructure, the support infrastructure on the shore to handle all of it, but it is going to be wonderful market.

The discoveries could generate, there is a lot of discussion around the incremental rigs and obviously that turns into incremental well both subsea and platforms, so it's a good story. And a Cameron is well positioned in Brazil. We have a large footprint in our manufacturing space; we have wonderful after market infrastructure there as well to support, not only the subsea, but the drilling business. Don't forget that drilling business for Cameron down there; it is a great position. We are the only OEM provider for drilling equipment in Brazil and it's been a great business for us.

Jeff Spittel - Natixis Bleichroeder

Sounds good. And if we can switch gears to the distributed valve business, it sounds like it did pretty well in the first quarter. Is that just indicative of an uptick or earlier than people might have expected in North America. And then I guess as you head into Q2 when things slow down in Canada, how do we marry that with the near term outlook for that business?

Jack B. Moore - President and Chief Executive Officer

Well, I'll tell you, disturbed... it is a good story. It's combination of both; one is our customer's order habits. We saw them build a lot of stock towards the end of '06, and they kind of slow down on the order rate in the first half of '07. So, we are seeing some of that get replaced and so that's helped us. But we've also seen an uptick in the activity. Obviously this distributor valve business will move pretty much in sync with the activity level. And even some of their optimism about activity level, because they want to lay in inventories ahead of need and so that's been good. Now, how Canada is going to look coming out of the break up, we don't know, but we are encouraged in terms of what we are continuing to see with that piece of the business right now; order rates are still pretty good.

Jeff Spittel - Natixis Bleichroeder

Thanks very much.

Jack B. Moore - President and Chief Executive Officer

Thanks.

Operator

Our next question comes from Michael LaMotte with JPMorgan. Please state your question.

Jack B. Moore - President and Chief Executive Officer

Hi, Michael.

Charles M. Sledge - Vice President and Chief Financial Officer

Good morning, Michael.

Michael LaMotte - JPMorgan

Jack, first one is for you. Shell used to downplay Cameron's role in the shale basin claiming that surface business you all focused on was really high pressure. There is lot of low pressure stuff in shale. I am just curious with all the announcements in the first quarter... in shale basins, new shale basis in low 48; is that position under your leadership might change a bit?

Jack B. Moore - President and Chief Executive Officer

Well, it's probably a more... I wouldn't say down and dirty business, but it is a much more competitive market. But let me characterize it this way. Exxon has moved into that business; Chevron has moved into that business. We've... obviously some of the traditional players, Chesapeake and others who have been very big players in there. We have been pulled into it just by association, and we have got... obviously we've got products that fits their needs. It's just once that have not driven the better pricing and the higher value that we have enjoyed in the higher pressure high temperature applications. But we have... we carved our niche into it. We are... we have opened a couple of new operating basis in the Mid-Continent around that whole shale play, and it's doing pretty good, it's doing pretty good; it's not as rich of a business as other parts of it, but nothing to sneeze at.

Michael LaMotte - JPMorgan

And for volume increases, would you look to step that out beyond the core customer base you just described?

Jack B. Moore - President and Chief Executive Officer

Well, once we... yes, and it's naturally happen once we have set up our operating locations in those areas, it's... you put the Cameron, shingle out on the building, and we are going to get a little interest and that's... and of course the sales guys are naturally going to go out and find the opportunities whoever they are with ones they get in place. So, yes, it has opened up the door for some incremental opportunities for us, but it's not huge in terms of Wellhead in North Texas in the Barnett shale versus one that we sale in the platform for instance in the Gulf of Mexico. It looks like for Exxon and Mobile Bay, bid differences, but the volume can be big in these shelf plays. And think it's going to be a good market for years to come.

Michael LaMotte - JPMorgan

Okay, that's helpful; thanks. A couple for you if I can; on working capital, obviously good backlog growth, mostly project related and yes inventory growth is drawing capital wasn't as strong as it was in first quarter '07. Is that simply because of the timing of Usan being late in the quarter. Are we going to see more inventory pull down in working capital in Q2?

Jack B. Moore - President and Chief Executive Officer

Yes, I think you'll probably see; I'm not sure Q2, but you will see as we continue laying inventories to spot the backlog, and you'll probably see that being offset by cash advances from the customers.

Michael LaMotte - JPMorgan

Okay. And then on the receivable side, the big delta there... negative delta there; any comments, any light you can shed on that?

Jack B. Moore - President and Chief Executive Officer

Just timing of when we build the customers during the quarter.

Michael LaMotte - JPMorgan

Okay. And then lastly, on the acquisition front, any material contribution to revenues or earnings in the quarter?

Charles M. Sledge - Vice President and Chief Financial Officer

No.

Michael LaMotte - JPMorgan

The acquisition that you did in Q1?

Charles M. Sledge - Vice President and Chief Financial Officer

No, not during the quarter.

Michael LaMotte - JPMorgan

Okay,impact on Q2?

Charles M. Sledge - Vice President and Chief Financial Officer

These acquisitions will be accretive over the rest of the year.

Michael LaMotte - JPMorgan

Okay. And then segments, where are you focusing right now in terms of the acquisitions?

Jack B. Moore - President and Chief Executive Officer

I'll tell you, we are... where we are comfortable is if it's got a manufacturing element, if it's got an after market element, obviously if it's in the surface of sea or drilling equipment side of the business about the compression piece of the business, the things that we already do. And we've talked a little bit about our footprint that we've developed in Eastern Europe with some of the down hull markets in the artificial lift business; one of the acquisitions we did supported that. And that's an area of business we continue to look at.

Michael LaMotte - JPMorgan

Great, that's helpful. Thanks.

Jack B. Moore - President and Chief Executive Officer

Great.

Charles M. Sledge - Vice President and Chief Financial Officer

Thanks, Michael.

Operator

Our next question comes from Geoff Kieburtz with Citigroup. Please state your question.

Jack B. Moore - President and Chief Executive Officer

Good morning, Jeff.

Geoff Kieburtz - Citigroup

Good morning.

Unidentified Company Representative

Hi, Jeff.

Geoff Kieburtz - Citigroup

Yes, I think maybe just going over a couple of things that's already been touched on. Just to clarify, I think we have established the mix was a primary driver of DPS margins in the quarter, but if we look at subsea surface drilling, Petroco individually, just wanted to make sure I understood you correctly. You are seeing margin stability in each one of those segments?

Charles M. Sledge - Vice President and Chief Financial Officer

During the quarter, yes.

Geoff Kieburtz - Citigroup

What about longer-term? I thought you said something, Chuck, you're kind of holding on or you've not seen much deterioration. I just want to kind of get a sense of within the lines of business, are you fighting margin compression are things stable?

Charles M. Sledge - Vice President and Chief Financial Officer

There are a couple of things; first of all, the steel price increases that everybody is reading about are real; we are going to hit with those. And so, you have to draw your assumptions about whether we are going to be able to pass that along to our customers and maintain our margin. That's our intend, that's what we are doing now. So if you ask us, we think we'll be successful in that. Jack mentioned, you do see a few pockets of the world that we kind of scratch our heads at when we see the tender coming out and what people are pricing at. And so, you are always going to have that. But on a kind of a broad brush view, I think we are holding our own right now.

Geoff Kieburtz - Citigroup

Is your ability to hold your own, obviously steel prices have had a lot of upward momentum, but it's you're finding more difficult than say a year ago to pass through those costs or is it about the same?

Jack B. Moore - President and Chief Executive Officer

I would characterize that, Geoff, it's kind of a mix bag. If you... with the NOCs, we fight it; with our traditional customers, who back Cameron, because they trust our delivery, they value our aftermarket, they value the quality of the product, it's less of an issue. And we are pretty upfront with them about the need to pass incremental cost on. They understand it, they are part of the cost structure. Energy is a big part of why we are seeing costs go up for steel.

Geoff Kieburtz - Citigroup

Right.

Jack B. Moore - President and Chief Executive Officer

And so it is a little bit of a mix bag, but we worked hard to get our market shares where they are atespecially in some of our traditional businesses. We are going to work hard to keep them.

Geoff Kieburtz - Citigroup

Are the challenges any different or is it the intensity of the push back, any more severe in one or another segment from what you've just said, I would guess that subsea is the tougher one to get these; is that correct?

Jack B. Moore - President and Chief Executive Officer

Well, I'd tell you on subsea, I think the guys have done a very good job of building our contracts of around escalators relative to steel, because we've gone into these contracts now with our eyes wide open. Five years ago, we were little bit naïve about steel prices, and we may have taken it out, but not today.

Geoff Kieburtz - Citigroup

Okay, all right. There was a question earlier about the surface business in terms of geographic exposure; you said that the North American... I think you said that the North American market is a somewhat lower margin market, but possibly higher volume potential. Did I understand that correct?

Jack B. Moore - President and Chief Executive Officer

No, I wouldn't characterize it as that. I think our North American market actually, where we have more of our traditional global customers the Exxons, the BPs, the Shells, the Chevrons, these guys will... I mean they tend to put more value on companies that will back up what they do and put the infrastructure in the capital, and in the locations, where they are operating, and that's important to it, especially today's prices for both... for both products and both the rigs. So, they don't want to be waiting on anything. The margins more... are going to get more pressure on the long-term contracts for the NOCs and things of that nature, where... you are tendering and going through fairly aggressive tendering process. And that... commercially that' where you are going to get more pressure.

Geoff Kieburtz - Citigroup

Okay.

Charles M. Sledge - Vice President and Chief Financial Officer

Geoff,you may have picked up on Jacks' comment on the shale place.

Geoff Kieburtz - Citigroup

Yes.

Jack B. Moore - President and Chief Executive Officer

Yes.

Geoff Kieburtz - Citigroup

The type of project is opposed to necessarily geographic region.

Charles M. Sledge - Vice President and Chief Financial Officer

Right, that's correct.

Jack B. Moore - President and Chief Executive Officer

I think what I wanted to say is this that we are in the shale place, but it's not as bigger percent of our overall revenue stream is a hub... more traditional higher pressure, higher temperature markets that we play in.

Geoff Kieburtz - Citigroup

I know I am taking a lot of time, but just quickly on the orders outlook 20%, I understand you don't have any crystal ball in terms of Block 31, but how are you treating that in your guidance about orders?

Jack B. Moore - President and Chief Executive Officer

Man, we see it as a potential opportunity out there.

Jack B. Moore - President and Chief Executive Officer

I'll tell you. You'll know the same time we do, okay?

Geoff Kieburtz - Citigroup

No, no. I mean in terms of what... will you kind of adjusting that in putting out a 20% order forecast or will you excluding it, because you don't want to have a short fall. I mean... it's more of... how you calculate the guidance?

Jack B. Moore - President and Chief Executive Officer

I can't tell you what's going to happen on Block 31. It... we have in our outlook, we have things built into our plans based on what our customers are telling us in terms of timing, but we also know there is risk with that. So, what happens on Block 31 is going to be determined by BP and their partners in terms of the timing and who... would we love to do it? Absolutely.

Geoff Kieburtz - Citigroup

I was asking a slightly different question.

Jack B. Moore - President and Chief Executive Officer

We targeted, but we... you know when we do, when I make a decision.

Geoff Kieburtz - Citigroup

I was...what I was asking is a question about your guidance; when you put 20% orders out there; you have some probability weighted impact from that award or have you exclude it entirely

Jack B. Moore - President and Chief Executive Officer

Yes, absolutely.

Geoff Kieburtz - Citigroup

You have a risk adjusted element in there for that?

Jack B. Moore - President and Chief Executive Officer

I would say that's a good observation.

Geoff Kieburtz - Citigroup

Okay, that's it. Thank you.

Jack B. Moore - President and Chief Executive Officer

Thank you.

Charles M. Sledge - Vice President and Chief Financial Officer

Thanks, Geoff.

Operator

Our next question comes from Ken Sill with Credit Suisse. Please state your question.

Jack B. Moore - President and Chief Executive Officer

Hi, Ken.

Ken Sill - Credit Suisse

Good morning, guys.

Jack B. Moore - President and Chief Executive Officer

Good morning.

Charles M. Sledge - Vice President and Chief Financial Officer

Good morning, Ken.

Geoff Kieburtz - Citigroup

I want to ask a relatively high level question, one of the things that's differentiated you from some of your competition is the fact that you guys own the factory. And as you fill up, you get better absorption of overhead, but kind of what I am hearing now is that things were running at a pretty good levels, margins are going to be relatively flat. So, the whole, you are running at a high level that more volumes are necessarily going to drive margin improvement or are you just being cautious on that?

Jack B. Moore - President and Chief Executive Officer

No, I think if you are... if you get higher than our revenue guidance for the year, you will see some leverage off that.

Geoff Kieburtz - Citigroup

Okay. And then another... yes, that's fair. And then I guess just to follow-up on Jeff's question, so if Block 31 actually comes in, that would be upside to what your order guidance is. Because you have ... you've weighted the probability of that.

Jack B. Moore - President and Chief Executive Officer

I wouldn't necessarily characterize that. I think when we look at our guidance in terms of order growth for '08. We build into that, the probabilities of certain things happening based on what our customers are telling us. So, I wouldn't look at if we were to get a awarded a big subsea project from one customer, the other, I wouldn't say that's an incremental or what we are guiding. If you look at the number we are guiding up, it's a big number.

Geoff Kieburtz - Citigroup

Yes.

Jack B. Moore - President and Chief Executive Officer

From where we came from in '07, 20% is a big number.

Geoff Kieburtz - Citigroup

Yes. So how many...

Jack B. Moore - President and Chief Executive Officer

Most of that increase will come from the project related business.

Geoff Kieburtz - Citigroup

Okay.So, it's a lot large number that will all kind of even out over the end and that's kind of where you think it's going to be.

Jack B. Moore - President and Chief Executive Officer

That's kind of what we are thinking.

Geoff Kieburtz - Citigroup

Okay, and then last question; this is kind of open ended. But there is a perception out, they want to talk to investors that one of your large competitors is has a leg up on you guys on technology because of their subsea processing capabilities and those things. Would you discuss... I mean... things that people are talking about you guys have the all electric tree, which is going in there is a lot more talk about subsea compression, which is something I think you guys would obviously be able to do, and could you discuss where you are relative to the other guys in your abilities to do subsea processing?

Jack B. Moore - President and Chief Executive Officer

Good question. We launched a program called Cam Force within our DPS group, a little over a year ago. We kind of combined and this is kind of coming off the heels of our acquisition of Petroco, which was about 3.5 year ago from... which is the processing company that we went out and acquired. That basically was onshore, our... at least above the water land processing, but if you think of the technology, we use in that arena and marinize that coupling those gas with our subsea team. I think it's been very beneficial in building this Cam Force initiative.

We see a lot of the processing... subsea processing future is really going to be... at least near terms, it's going to be around boosting. And there is multiple projects out there that they are going be awarded we think over the next 12 to 24 months that are going to include boosting technology. And some of that will be aligned with companies like Baker Hughes and Halliburton, who have the electrical submersible pump technology that you embed in your technology. Things will take like our DES technology. Some of it will build off of our all-electric platforms; some of it... we take from Petroco platform and marinize it. So, it's really a combination and all those things Cameron is going to pull together to build this package. We've got some equipment on the King project with BP; that's currently being installed and working. These guys are very encouraged about what they are seeing. Our DES, our MARS technology that we applied to that has been very instrumental in that. We are set to go with Petrobras on the similar system. We've got several systems that we quoted in the North Sea. We are very encouraged by where it goes. And I don't... I wouldn't expect Cameron to be taking a backseat towards the technology front. On the compression side, most all of that is in Norway, Statoil has been very I think very progressive in terms of pushing that technology and trying to understand it and get our arms around it. And that's... unfortunately, we don't have a footprint there. But we do have a lot of knowledge about compression business. So, I guess just stay tuned on that.

Geoff Kieburtz - Citigroup

Okay. And then as a follow-up on that on the boosting side of things, are these things kind of dollar volume projects as you get with the separation or are they smaller, but maybe a little bit better margins?

Jack B. Moore - President and Chief Executive Officer

Based on what we saw with the differential on past for instance and FMC was able to realize what their separation. I would say boosting would be a lower dollar element versus a total separation system subsea. But the operators would see that as I think very value added. And becoming a lower risk to them, because there are several systems out there now, and I think a lot of this have the capability to... and the confidence to do it pretty reliably.

Geoff Kieburtz - Citigroup

Okay, thank you.

Jack B. Moore - President and Chief Executive Officer

All right.

Operator

There are on further questions at this time. I will turn the conference back to management for closing comments.

Scott Amann - Vice President, Investor Relations

Okay, thank you Diego; and thanks to all of you. You want...

Jack B. Moore - President and Chief Executive Officer

Yes, I have one thing I want to say before we get of the call while you guys are still hanging on. I just want to express my thanks to Shell and Franklin. These guys built a great company, and we didn't say it in the last call those guys are shy, and they get embarrassed easily. But I wanted to say it and hopefully they are listening in. They created enormous value, not only for many of you guys on this call and your shareholders, but for the 15,000 plus employees of Cameron, and I just want to say thanks. That's it.

Charles M. Sledge - Vice President and Chief Financial Officer

Well said.

Scott Amann - Vice President, Investor Relations

All right. Diego, thank you; and thanks to all of you for joining us this morning.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your line as this time. Thank you all for your participation.

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Source: Cameron International Corp. Q1 2008 Earnings Call Transcript
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