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Executives

Jeffrey G. Altamari - Vice President of Investor Relations

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

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

Analysts

Edward Muztafago - Societe Generale Cross Asset Research

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Angeline M. Sedita - UBS Investment Bank, Research Division

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

J. Marshall Adkins - Raymond James & Associates, Inc., Research Division

Douglas L. Becker - BofA Merrill Lynch, Research Division

William Sanchez - Howard Weil Incorporated, Research Division

Michael W. Urban - Deutsche Bank AG, Research Division

Kurt Hallead - RBC Capital Markets, LLC, Research Division

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

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

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

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

Cameron International (CAM) Q3 2012 Earnings Call October 31, 2012 9:30 AM ET

Operator

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

Jeffrey G. Altamari

Good morning, and welcome to the Cameron Third Quarter Earnings Call. Thank you for joining us today. This morning, you will hear from Jack Moore, Chairman, President and Chief Executive Officer of Cameron; and Chuck Sledge, Senior Vice President and Chief Financial Officer. Jack and Chuck will offer commentary on the results for the quarter. We will then open the line for your questions.

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

I will now turn the meeting over to Jack.

Jack B. Moore

Thank you, Jeff. First, let me say our thoughts are with all of you on this call that were impacted by Hurricane Sandy, and I wish you and your family a speedy return to normal. Cameron reported earnings of $0.91 in Q3, excluding charges of $0.01 per share. Revenues for the quarter were a record $2.2 billion, an increase of 32% versus last year. And orders came in at $2.3 billion, a 15% increase versus a year ago. Backlog finished at a record $7.6 billion, up 31% versus last year. Orders were healthy across all 3 business segments with our Drilling and Surface Systems business units leading the way. The diversity of our business segments continues to provide Cameron a healthy window of opportunity in our customers' spending cycles.

Our North America-focused businesses performed very well in spite of the headwinds of falling rig activity. We actually realized sequential growth in our Surface Systems and distributed valve businesses units in Q3, a complement to the focused efforts of our sales and service teams that are dedicated to this market. International onshore markets provided additional growth in the quarter for our Recip Compression, our Process Systems, Engineered Valves and Surface Systems business units.

Surface Systems had another record quarter with respect to bookings, revenues and profits. We saw sequential bookings growth of 10% in the quarter and a gain of 36% versus Q3 of 2011. Surface Systems also achieved record revenues for the quarter, up 23% versus Q3 of 2011. While our North American markets are experiencing downward pressure, our Surface Systems business actually grew in Q3. A great testament to the focus of our employees and the significant levels of investments we have made in the frac valve tree and manifold infrastructure over the past 2 years. With the sharp declines in the gas-driven markets, our teams have done a remarkable job of redeploying those assets to the west basins and continue to do so today.

On the international front, we had record bookings in our APME and EACR markets. These were driven by project-related activity in Saudi, Iraq, Russia and Norway. Iraq operations base has now been commissioned and provide our customers in-country with a dedicated Cameron operating service base and repair center second to none. Our Latin American operations continued to deliver solid results with operations in Venezuela and Mexico and now Brazil, realizing year-over-year improvements.

Subsea orders came in just shy of $300 million for the quarter, or 28% below last year's level. Subsea revenues totaled just under $400 million for the quarter, a 12% increase versus last year. While no projects were booked in the quarter, we expect that major projects will populate our backlog at the beginning of 2013. But we must always be mindful that the timing of project awards is never quick enough for anyone in this space. Tender activity remains very active in the subsea markets and more importantly, we are seeing more selectivity as to the number of bidders participating in these tenders.

While West Africa and Brazil will support near-term opportunities for major awards, the reemergence of the Gulf of Mexico, continued expansion in the gas monetization activities in Australia and expanding markets in East Africa and the Med will drive new projects. The backlog of major projects in Subsea yet to be awarded has caused many of equipment providers become much more selective in the projects they feel they can execute most effectively. This should provide more rational pricing to account for the cost and risk associated with the complexity of these projects.

Drilling Systems had another strong quarter, with orders coming in at $725 million, a 75% increase over Q3 of 2011. Revenues for drilling were a record $470 million, as major project deliveries have ramped up. Orders were healthy in both projects and aftermarket. We booked 5 subsea stacks in the quarter, and we see no signs with the newbuild or upgrade of opportunities are slowing. Quotation levels continue to run at very high levels and with record backlogs, we are continuing to invest in personnel and manufacturing capacity focused on delivery and service excellence.

The integration of newly acquired TTS Sense is going very well. The quality of the personnel and the technology has proven to be a wonderful fit with Cameron, plus it has afforded us the opportunity to expand the scope of conversations with our drilling customers. And while these conversations about our expanded capabilities have been very well received, we realized we must earn our place in the market that has well established competitors.

Now on to the Valve and Measurement segment. Valve and Measurement had another strong quarter, with total orders coming in just shy of $500 million. Revenues for the quarter came in at $540 million. While orders for distributed valves were off by 16% last year, reflecting the drop in North American activity levels we've seen over the last 12 months, we were actually up sequentially by 7%, a great reflection of the team's efforts to broadening our reach in the North American markets in spite of these headwinds. Our Engineered and Process Valve orders were just under $300 million for the quarter, essentially flat with last year.

A number of projects were booked in both Asia and North America in the quarter, plus we have several projects in Africa and the Med that will support our positive outlook for the balance of 2012 and allows to deliver another successful year for V&M. While North America activity will challenge us in the near future with our short cycle Valve businesses, we have great visibility to a number of projects around the world. Our valve alliances that provide forward visibility to major developments will yield higher growth rates for V&M well into the future.

Moving onto our Process & Compression Systems business segment. Bookings for the Process and Compressions segment came in at $340 million for the quarter, essentially flat with Q3 2011 levels. Revenues finished at $400 million, a record quarter and up 47% versus last year. And we continue to see challenges in both Europe and China for compression as a result of their slowing economies. Russia on the other hand has provided some very nice incremental growth, especially with our processed gas compression products where a number of projects to modernize old power plants has resulted in new orders.

Demand for Process Systems packages onshore North America is still strong in our oil rich markets, however, the dry gas markets have continued to slow. As for our custom engineered process solutions, we saw several orders for our MEG Processing Systems China and North Sea book in Q3, and we expect to see a good number of additional projects evolve to support offshore installations in the coming quarters.

Let me summarize before I turn it over to Chuck. We continue to see significant growth opportunities for Cameron in advancing technologies that will provide our customers safe, efficient and cost-effective solutions and systems to drill, produce, process transport their oil and gas. And as we have communicated on previous calls, these opportunities will yield record orders for Cameron in 2012. Not all of Cameron's business units will escape the softness in the global economy nor the correction in North America rig activity, however, we see great benefits of having a diverse business offering, coupled with dedicated and focused employees that are touching a very broad segment of our customer spend both onshore and offshore around the world. Chuck?

Charles M. Sledge

Thank you, Jack. Before I get into the details of the third quarter financial results, I want to reemphasize the key takeaways for the quarter. Orders for the quarter were again strong across many of our businesses and totaled $2.3 billion. Surface, Drilling and Distributed Valve orders were the highest of the year, with Surface reaching record levels. We booked another 5 deepwater stacks during the quarter. We are now seeing almost every deepwater project requiring 2 stacks, which obviously starts to stretch capacity in the industry and extend delivery days. We saw a sequential margin expansion in both DPS and PCS segments.

Our adjusted EPS for the third quarter was $0.91 per share. There was a bit of noise in our quarter results, so I'd like to point out a few items. Most importantly, our EPS benefited from an international tax election that added $0.05 per share to our earnings as compared to our expectations. Secondly, FX on the balance sheet remeasurement reduced EPS by $0.01 and net interest was $0.01 higher than we forecasted.

Revenues for the quarter were up 8% sequentially with each segment performing in line with our revenue expectations. Our EBITDA margins expanded sequentially in line with our expectations, coming in at 16.5%. DPS and V&M margins were slightly ahead of our expectations. While PCS improved their margins 200 basis point sequentially, they lagged our expectations going into the quarter somewhat. DPS's EBITDA margin was 18.7% for the quarter, up from 18.5% in Q2. Within DPS, subsea margins improved sequentially while the margins associated with our TTS acquisition were dilutive to overall margin sequentially.

As expected, V&M's EBITDA margins decreased fractionally, coming in at 21.6%. This range is a sweet spot for V&M margins, so we're entirely comfortable at these levels. PCS showed improved financial performance during the quarter, registering a 12.6% EBITDA margin compared to 10.6% in Q2. We fully expect the segment to continue to improvement we've seen since the beginning of the year. Cash flow from operations for the third quarter was $178.5 million, as our working capital needs continue to moderate. Therefore, we should see continued growth in cash flow from ops during the fourth quarter. CapEx for the quarter was $98.7 million. As discussed at the outset, our tax rate for the quarter was at abnormally low due to an international tax election we made.

Now turning to forward-looking guidance. We expect our revenues for the quarter fourth quarter to increase in the upper-single digit range sequentially. Factors affecting our revenue performance will be the timing of deliveries associated with projects, our LTI and TTS integration efforts and the pace of our shorter cycle businesses. While PCS should have the largest sequential percentage gain in revenues somewhere in the low teens range, this is somewhat lower than we expected 90 days ago.

DPS's percentage revenue growth should be in line with the company's total percentage growth while V&M should be relatively flat. Overall, EBITDA margins for Q4 should be in line with that of the third quarter. DPS should see slight gain sequentially, V&M should be slightly down while PCS should see another quarter of solid gains. As is typical, our corporate SG&A will increase in Q4, putting some pressure on margins. But for the year, will be close to our previously forecasted $200 million. G&A will increase nominally from Q3 levels but with the large CapEx spend this year, G&A will increase quite a bit in 2013. Interest expense ran higher than we expected in the third quarter coming in at $25 million, which should provide a good baseline for Q4. You should use a 22% tax rate and 249 million shares in your fourth quarter models. This should result in fourth quarter EPS of between $0.95 and $0.97 per share.

Before opening up the call for questions, I'd like to make a few comments about 2013's outlook. While it is too early to get specific EPS guidance for 2013, we do feel it appropriate to reemphasize certain items that will impact next year's EBITDA margin. I will start by saying we should see margin expansion in each of our segments. However, everyone should take the following items into account when thinking about the level of such expansion. With respective EPS margins. While our -- while our recent subsea bookings are at considerably higher margins overall than what is currently flowing through our P&L, we will not recognize any significant revenues for these higher margin awards until 2014 and beyond. Our 2 weeks in drilling acquisitions will continue to carry margins lower than DPS average throughout the majority of 2013.

We have booked a significant amount -- excuse me, we booked a significant amount of Pressure Control business and expect to book significantly more in coming quarters. In order to ensure we can execute on these orders, much of which will not produce revenue until 2014 and beyond, we'll be adding cost to our legacy Drilling business next year without the corresponding increase in 2013 revenue. We should see nominal increases in V&M's margin in 2013. With respect to PCS margins, while we expect improvement throughout 2013, PCS won't get to its ultimate run rate for margins until the end of '13. The net result is we currently see our overall EBITDA margins ranging from 17% to 18% in 2013. We will refine this range on our year-end conference call.

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

Jack B. Moore

Christine, please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ed Muztafago with Societe Generale.

Edward Muztafago - Societe Generale Cross Asset Research

I just wanted to focus on a couple of things here. First off, I think there are some comments the other week by one of your competitors about a more steady-state of ordering for deepwater rigs going into the future. And I was wondering if you could comment on that a little bit. Certainly, your outlook in terms of continued strength seems to be similar, but just wondering if you're seeing more the steady-state ordering going forward or if it's kind of this flurry of orders that we've seen in the past?

Jack B. Moore

Ed, good question. I would say that it is characterized as a steady flow of inquiries is a good way to characterize the current state. We don't see any big spike, but we don't see anything falling off. And I think that's what's really positive about this current cycle we're in. We see a lot of commitments by the major rig contractors, as well as some folks that are wanting to get into the space and to continue to expand their presence in this market even more so, is driving a lot of this incremental activity. I will also say that there's a lot of interest in upgrading the current fleets. You heard the Transocean folks talk about their new generation drilling fleet. That is something that everyone will watch and hopefully emulate.

Charles M. Sledge

And maybe to follow up on that, you did mention that most of the inquiries you're seeing now are for dual stacks. When we actually look at the upgrading cycle that's going on, can you talk about what you're seeing in terms of -- I don't know if you can quantify it as percentage of the fleet or something, people are retrofitting older rigs to incorporate a dual stack and then certainly, that's going to be a much smaller portion than every rig but...

Jack B. Moore

Well, that is correct. The older generation rigs could not handle the weight and just the footprint. They'd have to give something up, which is probably going to be difficult for a lot to do. So what you're seeing as a result is really a kind of a reload in terms of where their rational on these new rig builds are going to land. You're seeing a lot of folks just expand their fleet or upgrade their fleet with new builds or they have started to retrofit some of the old ones.

Edward Muztafago - Societe Generale Cross Asset Research

Right. So the demand is clearly favoring dual BOP capacity and most of the older rigs can't handle it. And then just maybe to switch over to a more picky even question on V&M. You did give a little indication of sort of an upward trend in margin next year. What kind of gives you the confidence in that given what's going on in North America right now?

Charles M. Sledge

Ed, it's the backlog. Remember a lot of the business is international and project driven. So it's the condition of the backlog.

Operator

Our next question comes from the line of Jim Wicklund with Credit Suisse.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

The CapEx for the fourth quarter, if you're going to spend $500 million this year and your $280 million in now, you've got a big CapEx spend in the fourth quarter, what's it for?

Charles M. Sledge

A lot of it's for Brazil. It's the final phases of Singapore expansion. It's Berwick expansion. So it's all the project as is typical with Cameron, we get the fourth quarter rush. And a lot of capacity in aftermarket and Brazil is coming on first of next year, so it's a spend related to those projects.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

And this is what's going to boost your DD&A year?

Charles M. Sledge

Yes.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Second question, if I could. The North American Surface business, can you break down a little bit for us the Fractory and Manifold business? I know this has been a fabulous business for you guys. What the risk do we have over the next 6 months in terms of activity in North America kind of by subsegment, if you would?

Jack B. Moore

Well, I think we would look at it more regionally. Obviously, we've deployed a lot of the assets that we had in the dry gas basins, obviously the Haynesville and Marcellus, into West Texas, South Texas, the Bakken. Jim, what's helped us is the quality of equipment and the level of the investment we've made in the equipment. And when you have customers -- we'll give you a good example, Shell, for example, where they're moving some of their spend from one part of the country to the next, we have a global frame agreement with Shell for all of their Surface Systems around the world. We were just successful in completing the U.S. element of that here recently. And those are the things -- you have the same relationships with the Chevrons and the BPs and Exxons, and as these guys continue to evolve and spend in North America, we've been able to capture a lot more of their activity because of the quality of equipment. And a lot of this, we started this process with the investments 2.5 years ago in the frac infrastructure. We spent close to $200 million. I don't know that very many people in those space have made that level of commitment, it's a big number. So this has really paid off for us in terms of being able to go to these customers onshore and say, we can provide you not only with great products and service, but with the reliability and the safety and security that you're looking for in these projects. So that's helped us gain share. That's probably more in line with what our historical wellhead share is. And so we're kind of catching up from where we weren't, and that's kind of part of the story. But the big piece of our business now and we'll continue to be a big piece of our business going forward, we, like everyone else, see softness in North America next year, that it's kind of hard to get your hands on, but it's not -- we're not going to see the growth in North America in this business that we saw in 2012.

Operator

Our next question comes from the line of Angie Sedita with UBS.

Angeline M. Sedita - UBS Investment Bank, Research Division

Certainly for 2012, you'll have record orders as you've mentioned across all your business lines in 2012. Can you give us your thoughts on -- early thoughts on 2013, given the strong year in 2012? Could it be more likely flat or could it actually still be higher than 2012 on if it's a strong year?

Jack B. Moore

I think we have opportunities in '13 to exceed '12. And that's really, Angie, depends a lot on the international side of our businesses and how well they continue to perform and obviously, the big projects. We don't see much slowing down in the way of the pace of the drilling activity. We don't -- we see subsea as probably bigger in terms of the opportunities. But I'll tell you what, we'll give you a lot more clarity on this as we pull our plans together and get a little more granularity on where those opportunities are going to come down.

Angeline M. Sedita - UBS Investment Bank, Research Division

Okay, that's helpful. And then as an unrelated follow-up, a little color on your Brazil capacity additions, timing on full completion and will this give you the ability to manufacture all parts in Brazil? And does that include Controls? And then some of your smaller peers have seen some issues obviously in the region with supply chain and work content and your thoughts on that.

Jack B. Moore

Well, I think as you look at our overall strategy for Brazil, it's continue to ramp up as Petrobras has made a lot of decisions about rig construction, FPSO construction. These are all the things that are going to support the deepwater infrastructure. And as you know, we touch our customers there, both not just in the subsea spend cycle but we also touch our drilling customers there. We have a Surface Systems business there established to support onshore, with the Valve and Measurement business there and the Compression and the Process business as well. So we have a -- we get lots of bites at the apple in Brazil. So this infrastructure that we're putting in place is really the design to support all elements of that, along with our service aftermarket base in Macae. So all of those things really is kind of part of the master plan to take our capacity, to keep our ability to support the share that we've garnered with PDR down there in the various segments of our business. So the other question you asked is about the strains on their supply chain and personnel. We feel it like everyone else. It's really -- we're all victims a little bit of the ramp-up and the growth, and there's not a whole lot of ways to escape it other than plan and be prepared to adjust, and that's kind of the mode, I think, we're all in. Having that infrastructure and expansion of that infrastructure allows us to keep more of that capability internally, and that's always a good thing.

Angeline M. Sedita - UBS Investment Bank, Research Division

Fair enough. And then one final quick one is, on your U.S. land leverage business, obviously surface and Distributed Valves, would you expect some type of lag effect not only into Q4 but Q1 with the rig count, and thus, you didn't see the bulk of it in Q3 but you will in coming quarters, is that fair?

Jack B. Moore

Yes, I think so, Angie, but what we've kind of said is we don't expect to see declines per se. We just don't expect to see the growth that we would have thought 90 days ago.

Angeline M. Sedita - UBS Investment Bank, Research Division

Right, no, that's fair. And that would apply both to Q4 as well as Q1 or you only have clarity in Q4 at this point?

Jack B. Moore

Well, obviously, our clarity is better on Q4. But that's the plan, is to keep that business from declining. I mean, I would characterize -- in our Distributed Valves business, it's holding in there. It's not growing like we've probably anticipated we would see when we looked at this market 3, 6-month -- 6 months ago, 3 months ago. But it hasn't turned over on this either, so I think Chuck's characterization is correct in that it's really just a flat outlook more so, than what we had expected it a little while back that we would see -- continue to see some positive gains.

Operator

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

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Maybe if we could talk a little bit about, and I know we're pretty early, about the 2013 margin roadmap for DPS. But just kind of qualitatively speaking, it sounds like the problem wouldn't be a lot of downside potential for margins in Subsea and Drilling. Would it be fair to say Surface will be the area that's probably most vulnerable where you would see things flat even with the international business still growing pretty nicely?

Jack B. Moore

You're right, it is early to chat about much. But I think what I would focus you on is the comment about the kind of incremental cost we're going to have to put into Drilling given this tremendous backlog we have there, and we're not going to get any revenue off of that incremental cost we're going to have to put in until '14. So I'd probably caution you to look a little more conservatively on Drilling margins.

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Okay, very helpful. And then maybe if we could talk a little bit about the deepwater valves market. Last quarter, I think we have touched on the number of projects that were potentially out there, Wheatstone, [indiscernible]. Did any of those you see at the fourth quarter? And if they have, and I guess I would assume that there's still some runway in terms of pricing and margin expansion in that business?

Jack B. Moore

Well, let me just tell you that Wheatstone, we had early orders hitting the books in Q3, that will continue to ramp up. [indiscernible], it's still in the works. Our Engineered, especially these highly specified valves going into the subsea infrastructure, this is a very good business for Cameron. And our guys have done a great job of building the relationships with those that are driving these projects, whether it's the Chevrons, the Totals, or the BPs, or the Exxons, Connocos of the world, that have a lot of infrastructure build out that it's going to support, especially the gas monetization side. So we feel very optimistic about it. But some of these projects are not unlike the subsea infrastructure projects, and the timing isn't always easy to guess, but we know that it's imminent.

Operator

Our next question comes from the line of Marshall Adkins with Raymond James.

J. Marshall Adkins - Raymond James & Associates, Inc., Research Division

So obviously, the guidance next quarter is a little lower than most of us were thinking. And I'm assuming it's probably a little bit lower than you guys are thinking 6 months ago or so.

Jack B. Moore

Yes.

J. Marshall Adkins - Raymond James & Associates, Inc., Research Division

Can you help us understand kind of what's different. I think PCS margins, we might have been a little too aggressive on or are we -- should we not expect as much seasonal bump, or help us get a little more color on the change and what I guess most of us were thinking.

Jack B. Moore

Sure, Marshall. I think North America is not going to grow in the fourth quarter from third quarter levels. That's probably different than we thought 90 days ago, probably, as well as you guys. PCS margins are going to be fine, but probably the volume is going to be a little lower than we would have thought 90 days ago, and that's just a factor of a bunch of shipments that got to go out at the end of the year. And then as you guys saw, we had a little bit lower corporate expense for the third quarter, but that's just a shift from third quarter into fourth quarter, so that's impacted where the fourth quarter is. So it's really those 3 factors.

J. Marshall Adkins - Raymond James & Associates, Inc., Research Division

Okay. Second one, Surface business, it's holding up remarkably well compared to what we've seen from just about everyone else out there. Help me understand why that's happening. I mean, guiding to kind of flat over the next few quarters, I think is much better than most people are seeing. So how are you able to hold it up better than I guess others?

Jack B. Moore

Well, I think you look at what Surface Products and Systems we provide and Cameron has had a very strong historical share of the wellhead tree infrastructure market around the world, it's very much a great legacy business for Cameron. What our decision about 3 years ago to ramp-up our footprint in the frac infrastructure, which is frac trees, frac valves, frac manifolds, the addition of some acquisitions we've made to support the CAMSHALE story, these are things that we really didn't project to 3 years later that we went into a flattened market or even a slightly down market, that it would help us, really sustain our core businesses like it has. And it's really these level of services and investments that I really tell you, Marshall, we don't have a whole lot of equals out there. There's people that provide some of these services, but it's very regionalized. Cameron can have a different conversation with a major operator onshore. We can support them in a lot of areas with very similar services, the quality of the products, the performance, the predictability of it is meaningful, and that's been -- our guys have just done a phenomenal job of selling that story and making those connections. We've also invested in infrastructure, not just the equipment, but facilities, and that makes a big difference when customers want not only see your products, they want to make sure that you have the people there to back them up. So that's been -- we haven't seen the pricing pressure that I thought we may would have seen, so that's a good story. I'm not saying we won't see it, but when you look at what we bring to location, we're not providing the horsepower, we're not providing all the iron that connects all that horsepower together. We provide a very somewhat discrete service that customers put a tremendous premium on in terms of its reliability, and that's paid off well for us.

Operator

Our next question comes from the line of Doug Becker with Bank of America Merrill Lynch.

Douglas L. Becker - BofA Merrill Lynch, Research Division

Jack, I was hoping you could give us some insight into the timing of Brazil awards, the drilling packages, as well as the trees and manifolds, just any insights you have there.

Jack B. Moore

I think the drilling packages will continue to evolve this quarter and next. We believe the subsea orders should evolve this quarter and next year. Timing of it is as I said, it's not ever quick enough for all of those in this space. Petrobras has become very, I think, measured in their performance. They credit some what they call their performance group that is looking at a lot of the things that they are building and committing themselves to, to ensure that there is connection with the timing of these orders, what projects they're going to go to -- tieing them to wells and specific actions that are bringing, I think, a lot more clarity to connecting their dots internally. And as a result, I think this has slowed down the process a little bit. They have not backed off from their commitments obviously to advance production. As you know, they're running on a treadmill, and so there's still a lot of the needs that are going to be have to be met over the course of the next 3 months, 6 months, 12 months in Brazil.

Edward Muztafago - Societe Generale Cross Asset Research

And so just with the large subsea orders, would you see a good chance it gets awarded this quarter or is that really pretty much a 2013 event at this point?

Jack B. Moore

I think there's a good possibility we'll see some activity this quarter. But as I said, I can't always predict exactly if it's going to happen in early December, late December or January.

Douglas L. Becker - BofA Merrill Lynch, Research Division

Got it. And then just in terms of fourth quarter on PCS, any new guidance in terms of where those margins could shake out? Some think it's going to be lower than initially expected. But just given the turnaround there, any color you can provide there?

Charles M. Sledge

Are you speaking for the fourth quarter or are you speaking for next year?

Douglas L. Becker - BofA Merrill Lynch, Research Division

For fourth quarter, specifically.

Charles M. Sledge

Yes. I think they will be in that -- probably in the mid-teens range.

Douglas L. Becker - BofA Merrill Lynch, Research Division

Okay. So pretty much where we thought before.

Charles M. Sledge

Yes. It's just a revenue issue in the fourth quarter for them.

Operator

Our next question comes from the line of Bill Sanchez with Howard Weil.

William Sanchez - Howard Weil Incorporated, Research Division

Chuck, I just want to circle back near term on DPS. Maybe you talk a little bit about what you continue to see there as it relates to the impact from acquisitions? I know when you initially had done LeTourneau, that was a business that was doing significantly less margins than what you have done in your legacy Drilling business. Can you walk us through just kind of where you are now relative to plan? I think the expectation was is that by year end you could get LeTourneau back up to double-digit type margins and then on a 20%-type run rate as we exit 2013, is that still part of the plan right now?

Charles M. Sledge

Yes, I think we said high-singles. Actually, it was negative when we bought it. I think we've said high-singles by the end of this year and we'll be there and more like a DPS margin when we exit '13. So still on track there.

William Sanchez - Howard Weil Incorporated, Research Division

Okay. And as we think about just the fourth quarter DPS margin expectation out, Chuck. I know early this year, you thought, given the full year guidance, that we could be potentially the 2 handle, if you will, for the fourth quarter margin. When I listen to what's going on the Surface business and it doesn't sound like there's been any dramatic shifts in mix, I'm surprised. Are you guys surprised at all that margins aren't going to be better in 4Q in DPS as a whole, just your thoughts there.

Charles M. Sledge

Yes, remember, Bill, we bought another business during the year that has significantly lower margins in that business acquisition. So that has -- go back to the first of the year, that's the change, everything else is relatively consistent what we thought.

William Sanchez - Howard Weil Incorporated, Research Division

Okay. So I guess that deal had more revenue associated with it than I thought it did, it's causing a bigger margin detriment than I think what, at least, I thought it would. Would you be able to quantify that, Chuck? I mean, we're talking 100, 200 basis points type of impact overall at DPS as a result of that transaction?

Charles M. Sledge

More closer to the 100, and we're going to get -- we're not going to have a 2 handle on DPS margin in the fourth quarter. But we're going to steadily make progress towards that in the fourth quarter.

William Sanchez - Howard Weil Incorporated, Research Division

Okay. I guess just finally, Chuck. If you could just help us out of 2013, as we think about perhaps CapEx, the CapEx plans, a big CapEx year this year. My sense is you guys are going to be significantly less next year, thoughts there. And just whatever we are using for depreciation, I guess, as we exit fourth quarter, can you give us just an early read on how we think about overall depreciation next year?

Charles M. Sledge

Yes. Depreciation is going to go up. I don't have a number, but you can kind of look at the CapEx and take a 15-year life or something and figure it out from there. I just don't have a number that is I feel comfortable enough giving you yet. But it's going to go up, it's going to go up.

William Sanchez - Howard Weil Incorporated, Research Division

Right. And then on the CapEx side for '13 versus '12, Chuck?

Charles M. Sledge

It's going to go down, but I don't know by how much yet.

Operator

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

Michael W. Urban - Deutsche Bank AG, Research Division

As you look out in the PCS business, I think you made a comment about kind of hitting the ultimate run rate or just a normalized level margins in the latter part of next year. Are you -- I think in the past, I don't have those in front of me, but I think that was kind of a high teens or maybe approaching 20% kind of margin level. Is that what you're still thinking is the right number for that business over time?

Charles M. Sledge

The right number is kind of that high-teens. And so in a good market, it should be an 18% business.

Michael W. Urban - Deutsche Bank AG, Research Division

Okay. And so you'll be there kind of latter part of next year as the target?

Charles M. Sledge

That's the plan.

Jack B. Moore

That's the plan.

Michael W. Urban - Deutsche Bank AG, Research Division

Okay. And in the DPS business, as you've layered in incremental capabilities and product lines with the acquisitions, you have talked about, I guess, beginning to engage your customers in some discussions with respect to capabilities and products that you have not been able to in the past. Where do you stand on that front with respect to your ability to talk about it and integrated deepwater equipment package?

Jack B. Moore

Well, I think it's like anything else, we've got to earn that right. But the conversations have been very well received, and we have lots of encouragement.

Michael W. Urban - Deutsche Bank AG, Research Division

And so do you feel you do have the ability to deliver on that to the [indiscernible]?

Jack B. Moore

Sure.

Operator

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

Kurt Hallead - RBC Capital Markets, LLC, Research Division

I just wanted to also just ask on PCS. I think the initial expectation was to get somewhere in the mid, maybe I don't want to push you, but mid-teens by year -- from the fourth quarter for PCS EBITDA margins. You've mentioned that there be a pickup in margins in PCS going in to the fourth quarter. Is your expectations still that you're going to get into that mid-teens type of level? Are there some headwinds that may prevent you from getting there?

Charles M. Sledge

Yes. We think we'll be in that mid-teens margin. And again, kind of when you look at the guidance, the difference from 90 days ago is we've got a lot of year-end shipments coming out of there, we just out some of those out, whereas 90 days ago, they were in. But the margins will be good, should be good and mid-teens is still where we're looking at.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay. And then I think, Jack and Chuck, you guys have been talking about a strong order year for 2012, it's shaping up to be that way. But I sense the tone that you guys have now with some of the orders that were potentially going to come in 2012, I think you explicitly stated here on the call, are now looking like an early 2013 type of event. Could you provide some additional color on what orders in particular do you think are now getting pushed? I hate to use that word, push, because we all know that these things never come in the timeframe that you expect them. So I don't want to be -- I don't want to be novice about this when asked the question. But I'm just kind of curious as to what's going on out there that are maybe pushing the timing on some of these projects.

Jack B. Moore

Well, I think if you look at it in the deepwater space, we don't comment on orders that we think we are going to win because those are unannounced events. But I think if you just look at what's going on in West Africa and Brazil, which I think are the markets now that if you kind of listen to everyone's calls, they're all kind of talking about projects in that space. I think there's still room for between now and the end of the year to see some of those projects be committed to and booked, but there is the possibility it could slip into early next year. It's just timing is not something that we have control over.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

I wanted to also calibrate one other thing because obviously the North America market dynamics are front and center at this juncture, so is it -- can you give us a general idea of what your revenue exposure is for North America land in particular?

Jack B. Moore

If you look at onshore specifically, rig related specifically, it's about 20% of our revenue stream. Yes, about 18% to 20% of our revenue stream. So it's about a $450 million kind of number for Cameron. So not insignificant, but it's -- we have a lot of other things going on as well.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

I know that you guys relatively are recent entrants into the frac equipment space, but can you give us an indication as to how that business is expected to progress? Though you are in the early stages of the build out of it, are you being hit by the same factors that everybody else is?

Jack B. Moore

Actually, when you look what Cameron provides in that space, it's a fairly niche business. It's a high-pressure wellheads, high-pressure trees, block valves, it's very big iron that is fully collected, that has a significant amount of engineering and manufacturing process controls into it that Cameron does all itself. And then there's a huge aftermarket support for it. So every time these pieces of equipment are utilized on location, they've got to go back and completely ensure the integrity of this equipment is there before it goes out again. So this is where Cameron provides a very, very strong footprint to support our customers. And really, there's only a handful of others that are in this space. So when you talk about us touching the frac business, we're not building pumps and iron and things of that nature that are connecting all of the high-pressure fluid ends. We are really much more on the wellhead side and once these wells are completed and flowed back, this is where Cameron's expertise and specialty services come into play. And that business, we have been building big valves and large bore valves and high-pressure valves for decades. But our focus on getting specifically more into that full systems business has been about a 3-year commitment and it's going very well.

Operator

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

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

As you think about the Valve and Measurement segment orders, albeit Q3 was at the high level, still down a couple of digits sequentially. Distributed Valves was up, so could you just give us some color on what the erosion sequentially was, and then outlook for the next couple of quarters for orders of those businesses?

Jack B. Moore

Yes, it was really just a matter of which project's booked. We think we're going to have a real strong booking. We think we'll see good growth in the fourth quarter in the V&M segment. And next year, the outlook is still very good there.

Charles M. Sledge

I think you've got to look at our Engineered and Process Valves piece of that businesses, it can be lumpy. Not unlike subsea or some of the other project-related businesses. It's just the way these projects fall and booked.

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

And then you talked about sort of BOP business, basically any new rig needing dual stack? Where are you from a capacity standpoint there? What are you doing to augment that? And then just give us a color on kind of where lead times are now are now for a stack versus maybe 6 to 12 months ago.

Jack B. Moore

Well, you've heard us talk about our capital spend. I've got a CFO here who's always harping on these guys are ramping up their investments to ensure the capacity to support our customers' needs. The lead times have gone out on the large deepwater stack. Where I think we've all had to focus a lot of our capacity, however, is really on how you put all of this together. The stack pads, we have invested, a lot of time and energy and money in our infrastructure down in Berwick, Louisiana to support this. We've bought additional property, we are building additional hub to support our stack up capability. We have a very large manufacturing footprint in France, where we build a lot of our large bore in high-pressure deep water stack capability. That has continued to evolve and ramp-up, plus we talked a lot about what we're doing in the far East, and especially Singapore, to ramp of our capabilities there. And that facility will come on stream here very shortly. I think within the next 3 to 6 months. So those are all things we're doing to minimize the impact that the increased demand has had. I think we've all seen demand growth faster than we thought, which has created some strains on lead times. But I think everyone is focused on making sure this industry doesn't get handicapped in meeting those commitments to deliveries.

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

And my last question for Chuck. Q1 this year showed more pronounced seasonality than Cameron has historical have. Do you see 2013 showing the same sort of seasonality in the first part of the year?

Charles M. Sledge

I don't have the first quarter numbers, but you should expect to see some level of seasonality in the first quarter. Yes, you should. I don't know if it's going to be as pronounced as it was, but there will be seasonality.

Operator

Our next question comes from the line of Stephen Gengaro with Sterne Agee.

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

I think you talked a little bit about the subsea still selectivity on orders. When we think about the embedded margins in those jobs versus maybe a year ago that obviously don't flow through the income statements for a while, how different is the embedded margin? Are we talking 200 to 300 basis points, are we talking still pretty flat pricing wise? How should we think about the change that you'd expect [indiscernible]?

Charles M. Sledge

If you're looking what's flowing through the P&L now versus our recent award, it's north of the number that you threw out. But again, I'm glad you heard that it's a '14 revenue we've had.

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

Okay, okay. And then as you look at the aftermarket side of EPS, particularly on the drilling side, we don't have the details, yet. But the run rate on revenue, where this came out and how should we think about that going forward?

Charles M. Sledge

Well I think, number one, aftermarket did go down a bit, hold on one second I'm going to try to get you the number here. Drilling went down to about $150-ish million. It's going to be lumpy like we've always said. We expect it to increase in Q4, but it's not going to stay at the level we booked in the second quarter of north of $200 million, but over time, it's going to have a nice CAGR on the aftermarket given all the new equipment we're putting out there.

Operator

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

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

Chuck, with regard to DPS margins, back to DPS margins, we said they were going to be up year-over-year in 2013 but they were going to be suppressed by the level of spend on the drilling plus the continued delay that TTS provides the overall margins. For 2013, is it unrealistic at this juncture to set margins on average to start with the 2?

Charles M. Sledge

Bill, again, we don't have our budgets rolled up, so we don't have kind of our intersegment allocations and all that. But directionally, they're going to go up. Will they get to a 2 or not, I just don't have that clarity yet, Bill, I'm sorry.

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

That's fine. And then with regard to capital spending, recognizing that you don't have your budget set for 2013. But I would imagine that when the North American-related CapEx onshore, that was fairly prominent, this year is going to be significantly reduced 2013 or is that incorrect?

Charles M. Sledge

I think that's a correct assumption. I would also tell you that we will not have Brazil in our numbers, right? A little bit of Brazil leftover, carryover, but nothing major coming through that geographic part of the world.

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

All right, which brings me to the larger point in that I think sort of informally, a number of perhaps $300 million have been promoted here for 2013, not necessarily official guidance on the part of you guys, but just as an opening. Now though, is there any reason to believe that the capital spending at this juncture is going to be higher than $300 million for 2013?

Charles M. Sledge

Yes, Bill, we've got to see how much carryover we exit the year with. So...

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

If you spend the full $200 million or $195 million in Q4, it's closer to $200 million reduction year-over-year in capital spending.

Charles M. Sledge

Absent us deciding we need to add more capacity in specific businesses, the answer would be yes. We do have a few capacity projects we're thinking about particularly in the valve line, but absent that, the answer is yes.

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

In regards to uses of cash, I think your historic preferences and any current preferences have been to reinvest back in the business. And then share repurchase. Yet, again, as we were discussing earlier in the year, the [indiscernible] significant free cash flow next year coupled with a big increase in after-tax cash flow from operations, as well as a reduction in capital spending, the probability is that some return of cash to shareholders in 2013 appeared to have been going up, is that still a valid thesis?

Charles M. Sledge

I think we are going to generate a lot of cash next year. We're going have to put it to work and I would expect to spend more next year than we did this year on it. This is relatively intact, yes.

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

With regard to returning cash to shareholders?

Charles M. Sledge

Yes.

Operator

Our final question comes from the line of Jud Bailey with ISI Group.

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

A couple of questions. First on the jackup ordering side, we have seen quite a slowdown in the last couple of quarters. And I wonder if you could just kind of talk a little bit about maybe the discussions you're seeing or conversations you're having in terms of jackup equipment and BOPs for newbuilds?

Jack B. Moore

Well, I think it's a good question and we've seen the pace slowed down somewhat. But some of it, this digestion of these guys that have ordered a number of these jackups. We had a fairly large ramp-up in '10 and '11 and first part of '12 as we modernized that fleet. There are still a lot of work to do to upgrade this fleet, and a lot of discussions still going on. In a lot of places around the world, still see a lot of demand increase for the jackup fleet. So while we have seen it tail off somewhat in the last 6 months, where -- we haven't seen anything tell us that it's not going to back up in the next 6 to 12 months as well.

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

Okay. My follow-up is on, I think you said you booked 5 subsea stacks during the quarter.

Jack B. Moore

Yes.

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

Were any of those in Brazil and were those all for newbuilds?

Charles M. Sledge

Nothing was in Brazil. And they were all for newbuilds.

Operator

Mr. Altamari, we've reached the end of the question-and-answer session. I would now like to turn the floor back over to your for closing comments.

Jeffrey G. Altamari

Thank you, Christine. This concludes our third quarter earnings call. And I'd like to thank you, ladies and gentlemen, for joining us this morning.

Operator

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

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