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Executives

Scott Amann - VP, Investor Relation

Jack B. Moore - President and CEO

Charles M. Sledge - VP and CFO

Analysts

William A. Herbert - Simmons & Company International

Charles Minervino - Goldman Sachs

Stephen Gengaro - Jefferies & Company

Joseph D. Gibney - Capital One Southcoast, Inc.

Jeff Tillery - Tudor, Pickering, Holt & Co

Roger Read - Natexis Bleichroeder

Michael LaMotte - J.P. Morgan

Kurt Hallead - RBC Capital markets

Geoff Kieburtz - Weeden & Company

Douglas Becker - Banc of America Securities

Robin Shoemaker - Citigroup

Collin Gerry - Raymond James

Kevin Simpson - Miller Tabak & Co.

Dean Barber - Duetsche Bank

Cooper Cameron Corporation (CAM) Q2 FY08 Earnings Call July 30, 2008 8:30 AM ET

Operator

Greetings, ladies and gentlemen and welcome to the Cameron's Second Quarter Earnings Release. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Scott Amann, Vice President of Investor Relations for Cameron. Thank you Mr. Amann, you may begin.

Scott Amann - Vice President, Investor Relation

Thank you, Doug. Good morning and thanks to all of you for joining us. This morning you'll hear from Jack Moore, President and Chief Executive Officer of Cameron and Chuck Sledge, Vice President and Chief Financial Officer. Jack and Chuck will offer some commentary on the results for the quarter and we'll then take time to field your questions.

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

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

Jack B. Moore - President and Chief Executive Officer

Thank you, Scott. Cameron had another record quarter. We printed $0.65 in the quarter versus $0.54 last year, and last year's earnings numbers included a $0.03 gain due to resolutions from some tax matters.

Revenues for the quarter came in just under $1.5 billion, which is a 30% increase from Q2 of '07. So getting shipments out the door has been a focus for our plants, and they are doing an excellent job at it.

Revenues for DPS were up 40% versus '07. This was driven primarily by subsea shipments in excess of 50% and drilling systems, where our shipments were up 40% versus '07. So execution on the project backlog is running great as well.

Surface systems revenues were up 17%, our valve and measurement revenues were up 17% as well and compression revenues were up 16% versus '07.

Overall bookings for the quarter came in at $1.8 billion, which included a record bookings quarter for both our Valve and Measurement and Compression groups. Drilling Production Systems had its second largest bookings quarter ever at $1.2 billion. This was following Q1's record $1.4 billion in bookings. Cameron's backlog grew for the 15th consecutive quarter and is now at $5.2 billion. Backlog is up 30% [ph] versus Q2 of '07 and we expect Q3 to exceed all previous booking records. More on that in a minute.

Highlights for our quarter two bookings. Drilling Systems was up 200% to $341 million, which included three deepwater stacks that we booked in the quarter. But overall demand for Cameron's drilling-related equipment has not slowed down one bit. In fact, we now expect Drilling Systems orders to finish '08 at record levels.

Subsea systems orders were up 50%. 40 subsea trees were booked in the quarter. year-to-date, we have booked have 94 subsea trees, which is close to the total number we booked in all of 2007, which was 111.

In fact, the first half value of our subsea orders already exceeds all of 2007. As you can see with Monday's press release, we have a great start on Q3. Ensuring that execution on our backlog is not compromised by the increased order rates, we've just secured approval from our Board of Directors to expand our Malaysia subsea facility with an additional $70 million investment. Once completed, our overall capacity for subsea trees will exceed 200 worldwide.

Our engineered valves bookings came in at a record $200 million, as I said, for the quarter. The quarter was highlighted with the Dolphin Energy Pipeline project booking for $54 million in the UAE. This is the largest single engineered valves order in our history. This pipeline will move gas from the Ras Laffan field in Qatar to the UAE's east coast for desalinization plants. Easier said than done. This order consists of all half pressured large board valve outs. And these will be produced in our Voghera, Italy facility.

Distributed valve orders were up 40% versus Q2 of '07, again, reflecting the strong rebound in activity that we have experienced in North America.

As for our Compression group, we also saw record bookings in Q2, topping $200 million for a single quarter, which is up 55% from '07. Again, our Compressing group continues to enjoy the benefits from their focus on expanding both its product and geographic footprint.

Overall, Cameron continues to leverage its diversified portfolio of products and systems in this very active global energy market.

A note on our short cycle business in surface wellhead and distributed valves. We have witnessed a strong increase in our '08 bookings due to the U.S. rig activity. This growth has also come with increased cost of raw material and transportation, which is reflected in our margins in these businesses. As a result of these cost increases, we have increased our prices in these business units to our customers by an additional 10% effective August 1.

I would also like to expand on the announcement we made on Monday regarding a subsea award in West Africa. This is a frame agreement for BP's Block 31 development in Angola. The frame agreement comprises a total of four projects that are planned to be sanctioned over the next four years.

The first of the projects, PSVM, is for 40 trees and related subsea equipment and services valued at $800 million. The subsequent projects will be of similar scope with the total tree orders exceeding 150. Overall, a very substantial book of business will be realized by Cameron over the coming years.

I would also like to comment on our relationship with BP. Cameron is now involved in subsea developments for BP that encompass their entire global portfolio: the North Sea, the Mediterranean, Caspian, the Gulf of Mexico and now West Africa.

I feel this underscores their confidence in the reliability of our systems, our track record for execution, our investment in field proven technology and a commitment to sustainable development in the countries where their projects are being executed. We're investing over $30 million in incremental infrastructure in Angola to facilitate the manufacturing and assembly and test of subsea equipment, and this capital will be recovered under the terms of our contract with our customers.

In the first half, orders with the $800 million BP award and the continuing strength of our customers' activity levels, we now expect 2008 orders to exceed 2007 by 40%.

I will now turn it over to Chuck for comments regarding the financials.

Charles M. Sledge - Vice President and Chief Financial Officer

Thanks Jack. Just to cover a few house keeping items. First, we generated $205 million of cash flow from operations during the quarter, $250 million year-to-date. That's up from $54 million in the prior year. This improvement's been driven by our higher level of earnings as well as a moderation in our working capital consumption.

For the year, we are expecting free cash flow north of $350 million. That's up $50 million from our previous guidance.

Our CapEx for the quarter was $51 million, $96 million year-to-date. Our capital spend should accelerate in the back half of the year and we are expecting $270 million for the full year.

As a reminder, we issued $750 million of 10 and 30 year notes during June for general working capital purposes. And at quarter end, our net debt was virtually nil. We have had $59 million of our 1.5% debentures convert subsequent to quarter end. In addition to paying the principal in cash of $59 million, we will also be issuing 2.3 million shares to settle these conversions. I will point out, however, that these shares are already in our share count.

A few guidance related items. We are guiding $0.69 to $0.71 per share for the third quarter and we've raised our full year guidance to $2.64 to $2.68 per share. Embedded within this year's guidance is a revenue growth rate of approximately 20%. That's up from our earlier guidance of mid-teens growth rate. Margins, as we talked about last quarter, should be relatively flat year-over-year.

Share count going forward should be approximately 233 million shares. The tax rate should approximate 32% and D&A for the full year is still expected to be $130 million.

With that, Scott, let's open it up for questions.

Scott Amann - Vice President, Investor Relation

Okay, Doug, we can open it up for questions from the audience please.

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 line of Bill Herbert with Simmons & Company. Please go ahead with your question.

William A. Herbert - Simmons & Company International

Thanks. Good morning guys.

Jack B. Moore - President and Chief Executive Officer

Hey Bill.

Charles M. Sledge - Vice President and Chief Financial Officer

Good morning.

William A. Herbert - Simmons & Company International

Hey Jack, elaborating a bit more with regards to the frame agreement. The first phase, 43 is $800 million worth of value also encompassing control system, manifolds, chokes et cetera.

Jack B. Moore - President and Chief Executive Officer

Right

William A. Herbert - Simmons & Company International

The ensuing three stages which will lead up to in excess of 150 trees, do they also come with all the bells and whistles in addition to the trees that phase I came with?

Jack B. Moore - President and Chief Executive Officer

That's exactly what we are thinking.

William A. Herbert - Simmons & Company International

Okay. So basically, it's always dangerous to look at these things on a value per tree basis. But going forward, we should have this at least... the subsequent phases will likely exceed the value per tree, assuming cost inflation or at least equal it on phase one?

Jack B. Moore - President and Chief Executive Officer

Well, Bill, we have no reason to believe that anything will really change based on what we are seeing in our discussions with BP. But until we get the next phase sanctioned and approved, it would be hard for me to speculate on exactly what that number would be.

William A. Herbert - Simmons & Company International

And I didn't quite catch the timing of this, the ensuing three phases will take place over the next four years?

Jack B. Moore - President and Chief Executive Officer

That's their intention.

William A. Herbert - Simmons & Company International

Okay, great. Second question with regard... or second subject with regard to your subsea tree capacity. How about Brazil? I think the last time we spoke about this, you guys were I mean depending, on the trade that you make down there, at about... I think you had capacity of 30 trees per annum. What are your plans with respect to expanding your local content and I guess capacity down there?

Jack B. Moore - President and Chief Executive Officer

Good question, Bill. We had... in fact, we have just... we were down there with our Board two weeks ago.

William A. Herbert - Simmons & Company International

Yes.

Jack B. Moore - President and Chief Executive Officer

And you will see our capacity in Brazil probably reach about 40 trees this time next year.

William A. Herbert - Simmons & Company International

Okay.

Jack B. Moore - President and Chief Executive Officer

And where we go from there is really going to be driven by some of the projects and the needs for Petrobras

William A. Herbert - Simmons & Company International

Okay. So when we talk about 200 trees ultimately with Malaysia, does that include Brazil and subsequent expansionary efforts elsewhere or what?

Jack B. Moore - President and Chief Executive Officer

No. That includes Brazil.

William A. Herbert - Simmons & Company International

Okay. Great, thanks very much guys.

Jack B. Moore - President and Chief Executive Officer

Thanks.

Operator

Our next question comes from the line of Chuck Minervino with Goldman Sachs. Please go ahead with your question.

Charles Minervino - Goldman Sachs

Thanks. Good morning.

Jack B. Moore - President and Chief Executive Officer

Hey Chuck.

Charles M. Sledge - Vice President and Chief Financial Officer

Hi Chuck.

Charles Minervino - Goldman Sachs

I guess, just wondering if you can touch on your kind of essentially unchanged guidance for the second half of the year. Given the high level of orders in DPS and the record order levels in valves, can you just... and especially I guess the increase in North American drilling activity for the second half of the year. I thought maybe you'd be a little bit more optimistic about the second half of the year than maybe you were at the last quarter point. So can you just touch on what you are looking for here in second half of the year?

Charles M. Sledge - Vice President and Chief Financial Officer

Sure, Chuck. Be happy to comment on that. I think we are very optimistic about the back half of the year. I think our guidance for the year reflects that. North America is strong. It's a case now of just getting it out the door. The order flow is there. Internationally, strong as well. And as you saw in the second quarter, the project business, we executed very well and that really led to the performance in excess of what our original guidance was for 2Q. So I think assuming that you continue to see these successes that Cameron is having, I think you'll see a very good back half of the year.

Charles Minervino - Goldman Sachs

So the upside to potentially the second half numbers would be continued execution of getting some of these projects out the door quicker than maybe you would have originally expected?

Charles M. Sledge - Vice President and Chief Financial Officer

Yes, that and making sure our price increases stick and we control our raw material costs.

Charles Minervino - Goldman Sachs

And then just a touch on your margin outlook. I think you said earlier you're looking for flat margins for the full year. I believe last quarter, you were talking about maybe some uptick in margins in the second half of the year in DPS and valve. Can you just touch on if... what your view is on margin here for the second half of the year?

Charles M. Sledge - Vice President and Chief Financial Officer

Yes, second half of the year I think you will see an uptick from where we are today. You have to see it in order to get to flat year-on-year margins. So I think we've got the plans in place to do it. Our margins for the second quarter came in pretty nicely to what we expected, and so I see no reason that we should not meet what we've indicated on the margins.

Charles Minervino - Goldman Sachs

Okay, great. Thank you.

Operator

Our next question comes from the line of Stephen Gengaro with Jefferies & Company. Please go ahead with your question.

Stephen Gengaro - Jefferies & Company

Thanks. Good morning, gentlemen.

Charles M. Sledge - Vice President and Chief Financial Officer

Good morning Stephen.

Jack B. Moore - President and Chief Executive Officer

Hi Stephen.

Stephen Gengaro - Jefferies & Company

Two parts to the question really. The first is when you look at the first half of this year and then obviously you are off to a good start in the third quarter. The market share in subsea seems to have sort of shifted in your favor. Do you think this is sort of a trend which will persist? And then as part of that, any updates on what you've seen or heard out of GE recently?

Jack B. Moore - President and Chief Executive Officer

Stephen, this is Jack. I think you'll see the trend persist in Q3, given where we are starting. I don't think any of us would ever say that there is a huge shift in our market share relative to years passed. I would tell you that we feel like we've got great market position with many of our customers well positioned all over the world. And the traction we are gaining with companies like BP, Husky, some of the... BHP, some of the smaller guys as well as the larger guys is I think reflected in their activity. They have a lot of things going on.

And so you can see the numbers shift over time. Right now, we have a lot of things on. We feel very positive about where we are. Where that shakes out at the end of the year or next year relative to our market position, time will tell.

In respect to GE, we just don't see a whole lot going on Stephen. I know that they have lost a lot of key people. I think that's probably some of the reason why we don't see them as much. I know they've got to be focusing on this business because they paid a lot of money for it. But we just haven't really seen them. In the subsea space, I guess, would be... that would probably be more so than in the surface space. We do see them quite active in the surface markets around the world: Middle East, Far East, Latin America. They seem to be putting a lot of emphasis on their marketing efforts in that area, but not as much subsea.

Stephen Gengaro - Jefferies & Company

Thank you. And then just a quick follow up, when you are looking at pricing on these new larger awards, I assume that the inflationary pressures are being more than covered from a margin perspective.

Jack B. Moore - President and Chief Executive Officer

Yes, on major projects, the guys are doing a great job of getting the inflation elements of the contracts covered contractually. We have been pretty disciplined in that area for the last several years. The in and out business is the ones that can catch us as it's done in some of the short cycle business. But we are going to push... we're going to get our prices back up to cover it.

Stephen Gengaro - Jefferies & Company

Good, thank you.

Jack B. Moore - President and Chief Executive Officer

Go Mets.

Stephen Gengaro - Jefferies & Company

I hope.

Operator

Our next question comes from the line of Joe Gibney with Capital One Southcoast. Please go ahead with your question.

Joseph D. Gibney - Capital One Southcoast, Inc.

Good morning everybody.

Jack B. Moore - President and Chief Executive Officer

Good morning Joe.

Charles M. Sledge - Vice President and Chief Financial Officer

Hey Joe.

Joseph D. Gibney - Capital One Southcoast, Inc.

Just want to follow up on the V&M side, nice booking here in the UAE. I know this can be certainly a very lumpy project-oriented business. I think previous commentary out of last quarter was that some projects which had occurred might materialize in 2Q, 3Q. I know it can be lumpy, but kind of how do we think about directionally order flow out of V&M on the engineered project side looking into 3Q, 4Q? Is it kind of a peak quarter with this very large award or kind of where are we going directionally a couple of quarters ahead?

Jack B. Moore - President and Chief Executive Officer

Well, it could play out that way given the timing of some of the projects we see. There are some other large projects, North America, in the Far East and even in the Middle East that we continue to track. We are not always in control of those awards because so much of it is really dependent upon installation capacity, and that's not something we control. But there is a ton of work out there that is on the board, and Joe, we think we have a good position. When you look at this project for Dolphin, it plays into Cameron's strengths: high pressure, large valves, capacity to deliver and execute. This is a very critical project for the customer and they see a company like Cameron as one of the few out there that can pull it off.

Joseph D. Gibney - Capital One Southcoast, Inc.

Okay, appreciate it. And just following up a little bit more color on the drilling side. You indicated booking 3D water stacks in the quarter. I think that was... correct me if I'm wrong... but flat quarter-over-quarter versus 1Q. Obviously, given the newbuild queue and the resiliency that we have there, just curious about expectations for where directionally we are from a deepwater stack booking perspective looking ahead into 3Q, 4Q.

Jack B. Moore - President and Chief Executive Officer

If memory serves me right. We had --

Unidentified Company Representative

We had two stacks in the first quarter --

Jack B. Moore - President and Chief Executive Officer

In the first quarter.

Joseph D. Gibney - Capital One Southcoast, Inc.

Okay.

Jack B. Moore - President and Chief Executive Officer

And substantially more value in the second quarter just because of all the other things we're seeing going on with the drilling business, both aftermarket and deepwater stacks. We also booked some jack-ups in the second quarter as well. They are not as big a headline news because the numbers aren't as huge as they are with deepwaters.

But we are tracking over 40 deepwater rigs right now that we expect will be ordered over the next probably 6 months to 18 months. And again, the timing isn't always perfect. And what's interesting with that is that does not include the 28 deepwater rigs that Petrobras is considering building in their local markets. So that's going to be something that everyone's watching. So the drilling... deepwater drilling business continues to rock along. I think it will be a good story.

Joseph D. Gibney - Capital One Southcoast, Inc.

I appreciate it guys. And those three stacks booked in the quarter was inclusive of BOP and riser system or strictly BOP?

Jack B. Moore - President and Chief Executive Officer

What we look at is the BOP and control systems, that's what we consider stack. I believe two of the stacks did include the riser systems and one did not.

Joseph D. Gibney - Capital One Southcoast, Inc.

I appreciate it guys. I'll turn it back.

Jack B. Moore - President and Chief Executive Officer

[indiscernible] book riser without the BOPs, we really don't... we wouldn't claim those as a win.

Joseph D. Gibney - Capital One Southcoast, Inc.

Sure, thanks guys.

Operator

Our next question comes from the line of Jeff Tillery with Tudor Pickering and Holt. Please go ahead with your question.

Jeff Tillery - Tudor, Pickering, Holt & Co

Hi. Good morning.

Jack B. Moore - President and Chief Executive Officer

Good morning Jeff.

Scott Amann - Vice President, Investor Relation

Good morning Jeff.

Jeff Tillery - Tudor, Pickering, Holt & Co

Just wanted to gauge how you guys are thinking about the DPS segment in the second half of the year. The revenues, much of that's driven by the project business has run quite a bit ahead of what I expected in the first half of the year. Is the profit in the second half on flattish or maybe even potentially down revenue just improving mix, or do you anticipate revenue continuing to grow in the second half of the year?

Charles M. Sledge - Vice President and Chief Financial Officer

I think you'll see revenue grow... continue to grow in that business and the margins should get better from where they are in the second quarter.

Jeff Tillery - Tudor, Pickering, Holt & Co

And kind of similar question in the Value and Measurement business. You've been running kind of mid teens growth rate the past couple of quarters, pretty nice uptick versus 2007. Is that growth rate you think sustainable here in the back half of the year?

Jack B. Moore - President and Chief Executive Officer

Yes, again, I think you should see volumes move up nicely from where we were in the second quarter. And with the price increases we're pushing, you should see the margins come up as well.

Jeff Tillery - Tudor, Pickering, Holt & Co

Right. And my last question, I think on the Q1 call, you talked about roughly three quarters of the '09 subsea capacity being spoken for. I'd assume with this BP award and some of those shipments in the second half of 2009, it's closer to full capacity. Is that a fair way of looking at subsea?

Jack B. Moore - President and Chief Executive Officer

Well, as far as for the BP Block 31 orders, most of what we'll ship in the second half of '09 will be wellhead equipment and some installation bases and so forth. Tree shipments will start in 2010.

Jeff Tillery - Tudor, Pickering, Holt & Co

Okay. Thank you very much.

Jack B. Moore - President and Chief Executive Officer

We still have some capacity; we are not sold out yet.

Jeff Tillery - Tudor, Pickering, Holt & Co

Alright, Thank you guys.

Scott Amann - Vice President, Investor Relation

Thanks.

Operator

Our next question comes from the line of Roger Reed with Natexis please go ahead with your question.

Jack B. Moore - President and Chief Executive Officer

Hey Roger, good morning.

Charles M. Sledge - Vice President and Chief Financial Officer

Good morning, Roger.

Roger Read - Natexis Bleichroeder

Good morning. First question was with regard to the timing of some of these capacity additions, particularly in the subsea market. Understanding that you're not sold out at this point, but if there are some of the larger orders that are out there in the near term, could you talk about I guess your ability to accommodate some of those large orders and how much that's dependent upon the timing of the capacity addition?

Charles M. Sledge - Vice President and Chief Financial Officer

We don't see it as an issue. The things we're looking at are far enough out that the capacity additions will line up just fine.

Roger Read - Natexis Bleichroeder

Okay. And unrelated follow up. Could you give us some additional color about North America and I guess the magnitude and intensity of the rebound there in those businesses and how that looks going forward for the rest of 2008? I guess for surfaces, distributed valves, the areas where you have the most exposure.

Jack B. Moore - President and Chief Executive Officer

Yes, I would... rig activity is exceeding what I think anyone expected. In fact, I think everyone will tell you that not very many idle rigs in the U.S. markets today. The shell plays that have been identified. In the last several months, we are starting to see rigs move into those areas, and some of those plays play into Cameron's strengths: the tight gas plays where you have higher pressures and higher temperatures. The majority of the uptick in North America, though, I will say has come through the distributed side. And that is a little bit of a result of the fact that in '07, many of our customers were working their inventory levels down. And we've seen a nice rebound and just replenishing where they'd come from and also I think the conviction that this activity level is going to stick. So we've seen a... this 40% increase year-over-year in distributed valve orders is pretty unprecedented. I mean that doesn't reflect the 40% growth in rig activity.

Now I will say that some of the guys will claim that we picked up a little market share, but a lot of that is really responding to just a conviction on our customers' part that this activity levels going to sustain itself.

Roger Read - Natexis Bleichroeder

Okay, great. Thanks. And if I could squeeze in one more, can you talk a little bit I guess about how the backlog is extending in the subsea market and... or excuse me, in the surface tree market right now?

Jack B. Moore - President and Chief Executive Officer

Yes. It's a... our surface business is kind of a two headed opportunity. One is the long-term projects. We are seeing a lot more activity in areas where large surface offshore platform trees are being specified. This would be in areas like the Caspian, Gulf of Mexico and things like Mobile Bay.

So these have longer lead times. They are six months to even... sometimes even out to nine months to a year depending on the complexity of the tree. That business continues to be very good. We don't see that business slowing at all. I will say, though, it's probably not as active as North America's surface, what I would call, in the shorter cycle, the lower pressure valves. And in those businesses you'll see, sometimes our ability to deliver is really what we have on the shelf [ph].

Roger Read - Natexis Bleichroeder

Thanks very much.

Jack B. Moore - President and Chief Executive Officer

Again,good businesses to be in.

Operator

Our next question comes from the line of Michael LaMotte with J.P. Morgan. Please go ahead with your question.

Michael LaMotte - J.P. Morgan

Hey, good morning guys.

Jack B. Moore - President and Chief Executive Officer

Good morning Michael.

Charles M. Sledge - Vice President and Chief Financial Officer

HeyMichael.

Michael LaMotte - J.P. Morgan

A question on Dolphin... first of all, congratulations on it. Did you all do Dolphin I?

Jack B. Moore - President and Chief Executive Officer

Good question. Don't know the answer to that.

Michael LaMotte - J.P. Morgan

Just wondering what I would -- I didn't remember that you did, and so I was just sort of wondering what it was that got you to win this time around.

Jack B. Moore - President and Chief Executive Officer

Well I can tell you what we were told by the customer was, was the capacity and the timeframe in which they wanting to get this project done.

Michael LaMotte - J.P. Morgan

Okay.

Jack B. Moore - President and Chief Executive Officer

And our capacity to support it. So I think those were big drivers from the project standpoint.

Unidentified Company Representative

Yes, Voghera is a different plant today than it was when under former ownership. So that is a strategic advantage for the company. The guys have done a great amount of work on it and that plant is performing very well.

Michael LaMotte - J.P. Morgan

If I think about some of the international gas projects that have been out there, some of them have been tracking for a while. Do you sense a greater sense of urgency this year in terms of... okay, we are making a decision now, let's go, how fast can you get it done?

Jack B. Moore - President and Chief Executive Officer

Well I think the operators would like get them probably executed on faster than some of the capacity that's out there to do it. We are hearing a lot of issues relative to just installation capacity.

Michael LaMotte - J.P. Morgan

Okay.

Jack B. Moore - President and Chief Executive Officer

Pipeline laying equipment [ph], personnel, things of that nature. Not really related to lack of valves; it's more just lack of some of the other support issues. And I don't really think the operators are I think anxious to get these done.

Michael LaMotte - J.P. Morgan

Okay. Shifting gears quickly on pricing. Jack, you mentioned the 10% increase on your shorter cycle stuff. Can you talk about what's happening in pricing for project work?

Jack B. Moore - President and Chief Executive Officer

Well, almost all of our projects have escalation clauses built into them. So as we see increases in raw material transportation related costs, we have the mechanisms in place to pass those on.

The good thing about some of the projects as well is that we have a lot more visibility to what's coming at us and we can get out ahead of that with long lead items and procure them ahead of schedule. So we've been able to work with our supply chain to minimize some of the impact of those costs getting out ahead. But we are getting hit with... steel's gone up and obviously transportations have gone up, costs have gone up. So we are having to pass it on.

Michael LaMotte - J.P. Morgan

I know when things get super tight, availability becomes more important to customers than price. Do you actually have the opportunity to grow some margin in this project work as you feel this inflationary pressure?

Jack B. Moore - President and Chief Executive Officer

I think you will see pockets of that, but I don't think you'll be wise to take advantage of situations.

Michael LaMotte - J.P. Morgan

Yes.

Jack B. Moore - President and Chief Executive Officer

We've got long-term working relationships with a lot of our customers and I don't think they want to feel that they are being taken advantage of. But if we incur an incremental cost to support a quick response, they're willing to reward us for it.

Michael LaMotte - J.P. Morgan

Pay for availability. Okay.

Jack B. Moore - President and Chief Executive Officer

I do think, though, where the margin expansion opportunity is is just better execution within Cameron's four walls of its plant and supply chain. So I do think you will see the margin expand from where they are today over time as we get better and better at this project, these large project work.

Michael LaMotte - J.P. Morgan

Okay, that's helpful. Last one for me. On the centrifuge business, years ago, we used to sort of track economic activity in Asia, the driver plant there, demand and what have you for that business. And,clearly looking at the order book, it doesn't seem to be reflecting any kind of slowdown on economic activities that emerging market economists are telling us to look out for. Can you talk about sort of the dynamics of that business, what's really driving it today and your thoughts on sustainability of growth there?

Jack B. Moore - President and Chief Executive Officer

Yes, good question. Your referring to the centrifugal business in our Compression group. And I would tell you, it is kind of our canary in the coal mine, as people say. You keep waiting for it to chirp and it is still singing along. It's really, I tell you, the guys in our Compression group have done a wonderful job of expanding our product portfolio and really focusing on the international markets. Again, Cameron... and we've been in a great cost position, building a lot of this equipment in the U.S., the dollar has helped us and it's helped us be more competitive in global markets. And the guys have done a great job leveraging that. A lot of fuel gas boosting, plan air for steel, glass, plastics in Asian markets, Middle East, Russia.

A lot of those markets have been very beneficial to our growth. And so it's really not one specific thing or one specific market, it's a combination of a lot of things. It's a result of a lot of hard work from our guys in the Compression side of the business. And it's paying off. And these guys are making a meaningful contribution to Cameron, and it's a great story.

Michael LaMotte - J.P. Morgan

The centrifuge then is more fuel gas than industrial?

Jack B. Moore - President and Chief Executive Officer

Yes.

Michael LaMotte - J.P. Morgan

Okay, great. All right, thanks guys.

Jack B. Moore - President and Chief Executive Officer

Thanks.

Operator

Our next question comes from the line of Kurt Hallead with RBC Capital Markets. Please go ahead with your question.

Kurt Hallead - RBC Capital markets

Hey, good morning.

Jack B. Moore - President and Chief Executive Officer

Good morning, Kurt.

Kurt Hallead - RBC Capital markets

Hey, I just want to follow up a little bit more on the shale plays and land. You made some generic references to some of the areas. If I understood it correctly, obviously, distributed valves is going to be a big player in the shale. I would imagine your surface business as well. What else can we expect to benefit from these land shale plays?

Jack B. Moore - President and Chief Executive Officer

You will see the recip business in Compression benefit from that as well. And then once the pipeline infrastructure, if more is needed, our engineered valve businesses will benefit from it. The rigs that are working there, hopefully, they are using Cameron blowout preventers and if so, they are going to consume aftermarket parts. It's all a great story. I mean we love rig activity and well completions. That means something from Cameron is going to be consumed.

Our Measurement group that has a pretty broad portfolio of products that go on these surface applications as well. Our Process group that has the capability of putting some of the separation technology in these... in this infrastructure. It's a pretty broad footprint. And I think as you see the shale plays evolving, and people talk about Haynesville, there has only been a couple of rigs running in that field... in that part of Louisiana. There is a lot of activity playing and a lot more to come. So as these things evolve, I think you are going to see more and more demand for things that Cameron can support them with.

Kurt Hallead - RBC Capital markets

Okay. And how quick... how quickly do you start to see it in terms of either orders or in terms of your revenue? Are you going to start to see that... shift [ph] or that increase here in the second half of '08 or is it going to be more like a '09 story?

Jack B. Moore - President and Chief Executive Officer

It will... good case in point, our guys in surface, we do a lot of work with a company called EnCana. EnCana has a pretty broad footprint in the Haynesville area. And we've already started to see orders from them as they are ramping up their drilling program and wanting to get ahead of it. Last thing they want to do is wait on a wellhead equipment or any of the valve infrastructure. So they try and give us as much lead time as possible.

Kurt Hallead - RBC Capital markets

Okay. And then and on your drilling systems business, can you us some... the generic or some general sense here as to what the driver is? Is it a land drilling? Is it the deepwater? What are we looking at here to drive that business over the next couple of years?

Jack B. Moore - President and Chief Executive Officer

It's all of it. That's why it is such a great story. Now the deepwater drives a much higher revenue per rig. A deepwater stack for Cameron is a $40 million ticket; you through riser in there, it could be as much as $80 million depending on how much riser you're buying. Land rigs will be fractions of that, but there's lot of them. And then really all this does is set up a great annuity for the aftermarket business. And Cameron will benefit from these rig installations for many, many, many years to come. So, it's... we see '08 as potentially the biggest year ever in Cameron's history for drilling equipment sales... I mean for our bookings, excuse me.

Kurt Hallead - RBC Capital markets

Okay. And I just want to come back, I may have missed your commentary. I don't know how specific you got on it, but clearly, margins flat year-on-year, different businesses, DPS, Valve and Measurement, Compression. Which one is going to have the best incremental growth second quarter through the second half of the year?

Jack B. Moore - President and Chief Executive Officer

So you're asking us to rate our ponies?

Kurt Hallead - RBC Capital markets

Exactly. That's right.

Jack B. Moore - President and Chief Executive Officer

I think, Kurt, it depends a lot on how the project business does and we what we get out the door before year end. So I think you probably have the most opportunity in the V&M side of the business, in Compression side of the business.

Kurt Hallead - RBC Capital markets

Okay. Great. Thanks a lot.

Jack B. Moore - President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Geoff Kieburtz with Weeden & Company. Please go ahead with your question.

Geoff Kieburtz - Weeden & Company

Good morning.

Jack B. Moore - President and Chief Executive Officer

Good morning, Mr. Kieburtz.

Geoff Kieburtz - Weeden & Company

A couple of just kind of follow-up questions really. On the Block 31, I think you said there were... over four years and there is three phases or four phases?

Jack B. Moore - President and Chief Executive Officer

Four phases. The first phase is the one we just announced, so there is three additional phases that will come behind this.

Geoff Kieburtz - Weeden & Company

The four years, is that the period over which you expect to get the orders for the next three phases or is that the period of time in which you expect to deliver all four phases?

Jack B. Moore - President and Chief Executive Officer

No, no. Deliveries for the first phase will start in the second half of '09 and then the other orders will... this will be delivered, Geoff, probably over a 12 year period.

Geoff Kieburtz - Weeden & Company

Okay.

Jack B. Moore - President and Chief Executive Officer

I mean this is a very sizeable long-term commitment and as we book this orders and cycle these shipments out, they'll kind of start lapping over each other as time goes on.

Geoff Kieburtz - Weeden & Company

And do you expect like phase two orders to be made before you complete shipping phase one?

Jack B. Moore - President and Chief Executive Officer

Yes.

Geoff Kieburtz - Weeden & Company

Okay. And so you are basically, what, kind of once a year you are going to get a phase being ordered?

Jack B. Moore - President and Chief Executive Officer

That's kind of what we're looking at --

Geoff Kieburtz - Weeden & Company

Alright, fair enough.

Jack B. Moore - President and Chief Executive Officer

We haven't seen the second one yet, but we're... we've kind of told you what our expectations are based on what we have been told.

Geoff Kieburtz - Weeden & Company

Okay. The comment about flat year-over-year margins, does that apply equally to all three segments?

Unidentified Company Representative

No, that comment is Cameron total.

Geoff Kieburtz - Weeden & Company

Okay. Is there any segment you expect to be below year ago margins?

Jack B. Moore - President and Chief Executive Officer

Year-on-year? If our price increases stick in the back half of the year, we should be fine year-on-year, everybody should be fine.

Geoff Kieburtz - Weeden & Company

Okay. So it would be all three segments?

Jack B. Moore - President and Chief Executive Officer

Yes.

Geoff Kieburtz - Weeden & Company

Okay. And the comment about getting cost inflation pass through on the projects, but having a little bit more difficulty on the short cycle business. If I got that right, number one. Number two is --

Jack B. Moore - President and Chief Executive Officer

Geoff,let me clarify that. I think it just caught up to us faster than we expected it. We just kind of got caught with our pants down on that; that's our fault.

Geoff Kieburtz - Weeden & Company

Okay. And you're --

Jack B. Moore - President and Chief Executive Officer

Should have been out in front of that sooner, and the guys know it and they have responded. Our mission now is to make it stick.

Geoff Kieburtz - Weeden & Company

Right, okay. I guess what I wanted to kind of get an update on is, as you look at either Cameron overall or even better segment by segment, what's kind of the mix between project and short cycle business in each one of the segments?

Jack B. Moore - President and Chief Executive Officer

I think in both V&M and DPS, the short cycle is clearly a smaller piece of the pie.

Geoff Kieburtz - Weeden & Company

Right.

Jack B. Moore - President and Chief Executive Officer

Engineered is the largest piece. Obviously, with subsea and the drilling projects, it's the larger piece within DPS.

Geoff Kieburtz - Weeden & Company

Okay.

Jack B. Moore - President and Chief Executive Officer

And then on the Compression side, most of that is longer lead time stuff for the centrifugal business.

Unidentified Company Representative

And even when we look at our surface business, Geoff, it's not all short cycle. But probably the majority of it is, 60%, 70% of it, what we would call short cycle. But there is project business within... embedded within that that we have similar inflationary contractual language in.

Geoff Kieburtz - Weeden & Company

Maybe overall if we took Cameron consolidated, it's 50% project, 50% short cycle?

Jack B. Moore - President and Chief Executive Officer

Probably weighing more toward project going forward.

Geoff Kieburtz - Weeden & Company

And last question, a clarification. When you said that you were tracking 40 rigs in the Drilling Products segment, are those 40 rigs...do the 40 rigs include both ones that have been announced but the equipment you sell hasn't been ordered or is that all rigs that haven't been announced?

Jack B. Moore - President and Chief Executive Officer

No, those would be rigs that have been announced and some that have not been.

Geoff Kieburtz - Weeden & Company

Yes.

Jack B. Moore - President and Chief Executive Officer

But those 40 are ones that the decision on the blowout preventers have not been made.

Geoff Kieburtz - Weeden & Company

Okay, great. Thank you.

Unidentified Company Representative

Geoff, those would be deepwater, which would either be drill ships or semi.

Geoff Kieburtz - Weeden & Company

Right, right, great. Thank you.

Jack B. Moore - President and Chief Executive Officer

Thanks.

Operator

Our next question comes from the line of Doug Becker with Banc of America Securities. Please go ahead with your question.

Douglas Becker - Banc of America Securities

Thanks. Jack, assuming Cameron has a normalized market share of around 30%, your capacity additions would suggest you see something around 700 tree awards for the industry in 2010. Just hoping you could talk about your outlook for industry tree awards in that timeframe of 2010?

Jack B. Moore - President and Chief Executive Officer

Well, if you look at Quest, and I think they've just updated their data, they're looking at 2010 at about 665 trees as kind of their mean case. And I think we all know that it's going to be plus or minus probably 100 trees, maybe less, maybe more. We feel good about our capacity, where we're at. This additional capacity we're adding is about 40 additional tree capacity in Malaysia where we feel we have... we get happy with the start up operations there.

The guys have done a great job of bringing our skill sets, brining the people on, the technology we put into the plant has performed exceptionally well. We're heading in exceeding our targets there in terms of production. So we feel good about making that investment there. We have the space and the capability to bring it on and it's still flexible.

And a lot of what's going to determine these 200 tree capacity is really somewhat determined on the type of trees that we're going to see ordered. The great thing about the Block-31 order it's going to be a very standardized process. I guarantee it, we'll be able to become very efficient at building those trees as time goes on. And as that efficiency increases, you can get more out of your existing infrastructure.

We also have the capacity to assemble and test trees in Berwick at about 20 to 30 trees a year, depending on the type of trees they are. So we can leverage the outsourcing some manufacturing if you need to. But we feel pretty good about where we are at. And we feel pretty good about our ability to maintain our position with our customers so important.

Douglas Becker - Banc of America Securities

So no concern about industry overcapacity at this point?

Jack B. Moore - President and Chief Executive Officer

I don't think so. I think everyone... I can't speak for the other guys, but I think everyone seems to be pretty busy. I don't think anyone is doing anything crazy from what we see.

Douglas Becker - Banc of America Securities

Okay. Now you have $1.5 billion in cash, about $300 million in free cash flow for this year. You are essentially net debt free. Who or what are you looking to buy?

Charles M. Sledge - Vice President and Chief Financial Officer

Well I think when you look at acquisitions, we said all along, we target things that look like us, that have high aftermarket content, that are pressure control, or that are within a couple of miles of the wellhead. And that's what we focus on. There are a number of opportunities out there and we continue to work them.

Douglas Becker - Banc of America Securities

Okay. And then just one house keeping item. Chuck, did you give any guidance on corporate and other? It was a little bit lower in the second quarter than the first quarter?

Charles M. Sledge - Vice President and Chief Financial Officer

Yes, it was. I think you'll see that number hover around plus or minus $25 million a quarter. It may move around a little bit from quarter-to-quarter.

Douglas Becker - Banc of America Securities

And what was the driver of it being down in this quarter?

Charles M. Sledge - Vice President and Chief Financial Officer

Just timing of when we expense a variable comp.

Douglas Becker - Banc of America Securities

Fair enough. Thank you. Go ahead.

Charles M. Sledge - Vice President and Chief Financial Officer

Just strictly timing of variable comp.

Douglas Becker - Banc of America Securities

Okay, thank you.

Operator

Our next question comes from the line of Robin Shoemaker with Citigroup. Please go ahead with your question.

Robin Shoemaker - Citigroup

Thanks. Good morning.

Jack B. Moore - President and Chief Executive Officer

Good morning Robin.

Robin Shoemaker - Citigroup

Thank you. I wanted to ask about a plan that you implemented I believe last year, early this year, where you were going to bring in house a number of... a lot of manufacturing that was previously outsourced and that this was both being done for cost and reliability considerations. And are we through that process and what benefits have been derived?

Jack B. Moore - President and Chief Executive Officer

I'd tell you what, if you look at... in the valve side of the business, that's... we talked about that. It was bringing engineered valve products back into our plants in Italy where we had a pretty sizeable outsource strategy; definitely seeing it on the engineered side. Margins have improved, our delivery performance. In fact, someone had mentioned earlier in the call about the Dolphin Phase I; that was a project that Dresser had in its backlog when we inherited Dresser that I think lost money on.

So here we are in Dolphin Phase II and we will make money on Dolphin Phase II. Because of what we been able to do in Voghera with the infrastructure we've put in, controlling costs, controlling delivery performance, avoiding things like liquidated damages and so forth. So those investments are about 90% complete there and they are doing an excellent job and delivering on the commitment.

The second phase of that was related to the surface equipment where we are outsourcing more of our surface equipment [ph] than we're comfortable with. And that's when we announced the investment in Romania. That plant is being built as we speak. We will be complete with it in the fourth quarter of this year. They'll start producing product at the end of this year and full gear about mid '09. That's kind of what we're looking at. So that's still yet to come, but it's going to have great benefits to us, especially on the surface side.

Robin Shoemaker - Citigroup

Great, okay. My other question had to do with... I didn't hear... I don't believe an update on the all-electric subsea platform and what, if anything, new is occurring there.

Jack B. Moore - President and Chief Executive Officer

Good question. I am glad you ask. The tree is installed. It's waiting for Total to flip switch. Everything's ready to go. We're excited about getting it up and running. It's really in Total's hands. They have some other issues they're still working on with the well unrelated to anything we're doing, but we installed the tree about a month ago. The control systems, everything's in place, just waiting for them to bring it on line. So just stay tuned. We'll talk more about that as we get some operating results.

Robin Shoemaker - Citigroup

Operating results. Great. Thank you.

Jack B. Moore - President and Chief Executive Officer

Thanks.

Operator

Our next question comes from the line of Collin Gerry with Raymond James. Please go ahead with your question.

Collin Gerry - Raymond James

Okay, thanks. Good morning guys.

Jack B. Moore - President and Chief Executive Officer

Hey Collin.

Collin Gerry - Raymond James

Wanted to follow up on the pressure control side of the business, particularly on the land side. I think you're seeing a little bit more of a competitive market domestically with some new guys. I know guys have a very big share on a lot of the international markets. Are you seeing some new entrants there? Just kind of tell us how that market on the BOP side is developing.

Jack B. Moore - President and Chief Executive Officer

Well, I'll tell you, our guys, and Chuck I know likes to comment on this. You're probably referring to T3?

Collin Gerry - Raymond James

Yes.

Jack B. Moore - President and Chief Executive Officer

And their entrance into the market. I think T3, as we have always said, I think they have filled a gap that a lot of us took our eye off of. I think as Cameron has increased its capacity support, its aftermarkets and I think has gotten some of it's... we've added a lot of capacity in Beziers to build our preventors as well as Mexico. They have done a great job. Our guys have done a great job of recapturing some customers that have drifted away, and I think we have more than held our own. And the numbers will speak for themselves. So we've got record bookings in our drilling equipment business right now, and I think that's a result of the drilling guys being very focused on not just the deepwater markets, but the land markets in North America as well.

Collin Gerry - Raymond James

Right. And I guess, just if you look at the international side, I've seen their quality [ph] on a quite a big share in places like Saudi and Russia. I guess my question was; are you seeing competitive, maybe not even not necessary from T3 but even newer entrants on the smaller scale land side?

Jack B. Moore - President and Chief Executive Officer

Well, we don't play in the, necessarily in the low pressure markets as we look at Cameron's portfolio today, and so that side of the market, I really couldn't comment on. Looking at the customers our primary customers in the land DLP business or the neighbors HNP, Parkers that are drilling some of the higher end wells around the world, and they just won't take a chance. I mean compromising a blowout preventer is not a good option. And they are not going to use some one that they are not comfortable with, familiar with. Someone they can't trust, someone who isn't fair [ph] with the after market service and parts to backing up and that's what we provide. It's a total package and so we haven't really seen a whole lot of pressure from that side of business. Really, it gets back to I think what Chuck has emphasized. It's our belief to execute and get it out the door when they need it.

Collin Gerry - Raymond James

Okay. I am sorry, were you finished?

Jack B. Moore - President and Chief Executive Officer

No, I said that's what's driving it.

Collin Gerry - Raymond James

Okay. And then just one step further, you spoke about GE from a Vetco perspective. I might have missed it, but how is the legacy hydro been acting? Pretty same from a competitive standpoint or just maybe a little update there?

Jack B. Moore - President and Chief Executive Officer

They've got a good product. We haven't seen, they've got some oil customers. I don't know that I can really comment that we have seen anything different from their behavior after being acquired by GE.

Collin Gerry - Raymond James

Okay, thanks guys.

Jack B. Moore - President and Chief Executive Officer

All right.

Operator

Our next question comes from the lines of Kevin Simpson with Miller Tabak. Please go ahead with your question.

Jack B. Moore - President and Chief Executive Officer

Good morning Kevin.

Kevin Simpson - Miller Tabak & Co.

Good morning, thanks and congratulations on a good start out of the box.

Jack B. Moore - President and Chief Executive Officer

Thank you.

Kevin Simpson - Miller Tabak & Co.

I just had a quick follow up on the BP frame. Initially the talk in the --

Jack B. Moore - President and Chief Executive Officer

Which one, Kevin? We've got several of them.

Kevin Simpson - Miller Tabak & Co.

Yes, well, the big one, the 31 frame. But good point, yes, well taken.

The initial talk in some of the trade press was that frame could... may also include additional developments on Block 18. So wondered if there is some implicit... since it wasn't announced, was there... one, is it still up for grabs or maybe to be too far out, you have to be germane, but... or is there some kind of implicit assumption that assuming you do your normal great job that your going to... that that business is also... would also get encompassed in the frame?

Jack B. Moore - President and Chief Executive Officer

I couldn't comment on that. I mean that would be for BP to comment on. I think right now we're focused on the Block 31 phases. And we'll bust our butts executing on what they have given us to do. And if it plays out that there is other opportunities down the road, then we will hopefully be in a position to support them. So I think that's really their call, and I couldn't really comment on what their plans would be in the future regarding other blocks.

Kevin Simpson - Miller Tabak & Co.

Okay, thanks. That's it for me.

Operator

[Operator Instructions] Our next question comes from the line of Dean Barber with Deutsche Asset Management. Please go ahead with your question.

Dean Barber - Duetsche Bank

Hey guys, how are you doing? Quick question. Just on DPS and Valves, you are saying year-over-year margins expected to remain flat. What do you expect on the improvement in the second half? What can you contribute that to?

Charles M. Sledge - Vice President and Chief Financial Officer

Well its execution, execution in the price increases.

Dean Barber - Duetsche Bank

And it's not... mix is not... it's not a function of mix going into the second half at all for DPS?

Charles M. Sledge - Vice President and Chief Financial Officer

I don't think so. I think its execution in the backlog and price increases on the shorter cycle business are the main factors.

Dean Barber - Duetsche Bank

Okay. That's all I had. Thanks guys.

Charles M. Sledge - Vice President and Chief Financial Officer

Thanks.

Operator

There are no further questions in queue. I would like to hand it back over to management for some closing comments.

Scott Amann - Vice President, Investor Relation

Okay, we have nothing further, Doug. Thank you and thanks to all of you for joining us today.

Operator

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

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Source: Cameron International Corp. Q2 2008 Earnings Call
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