TechnipFMC plc (FTI) Q3 2008 Earnings Report, Transcript and Summary

Good morning and welcome to the FMC Technologies Third Quarter 2008 Earnings Release Teleconference. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]. In the event of technical difficulties during the call, we will post updates at www.fmctechnologies.com/earnings. Thank you. Your host for today's conference is Rob Cherry, Director of Investor Relations. Mr. Cherry, you may begin your conference.

Thank you, operator. Good morning and welcome to FMC Technologies third quarter 2008 earnings conference call. Our press release and financial statements issued yesterday can be found on our website. During our call, we will reference earnings from continuing operations, which excludes the results from the FoodTech and Airport System businesses that were spun off to shareholders in the form of a stock dividend, on July 31, 2008. Historical results have been revised to reflect those operations as discontinued. Please refer to JBT Corporation, for the third quarter results of those businesses. I would like to caution you with respect to any forward-looking statements made during this call. Although these forward-looking statements are based on our current views and assumptions regarding future events, future business conditions, and the outlook for us based on currently available information, these forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements. I refer you to our disclosures regarding risk factors in our Annual Report and our other SEC filings. I will now turn the call over to Peter Kinnear, FMC Technologies Chairman, President and CEO.

Good morning. Welcome to our third quarter 2008 conference call. On the call with me today are Bill Schumann, our CFO; John Gremp, our Executive Vice President for Energy Systems; and Bob Potter, who heads our Energy Processing and Surface Wellhead businesses. I will give you some highlights of our third quarter, Bill will provide you with additional details on our financial performance, an update on our outlook for the remainder of 2008, and then we'll open up the call for your questions. We had a strong third quarter in both revenue and operating profit. Out total company revenue for the quarter was up 28% and our diluted earnings per share from continuing operations of $0.72, was up 47% from the prior year quarter. Energy Production revenue was up 31% from the prior year quarter on the strength of our Subsea and Surface Wellhead businesses. Subsea revenue was $722 million, up 38% from the prior year quarter. Our operating profit and energy production was up 44% over the third quarter of '07 and our operating margin increased to 11.3%. Turning to Energy Processing segment revenue was up 15% from the prior year quarter and operating profit was up 12%. At the end of July, we successfully completed the spin-off of FoodTech and Airport Systems and we are now an entirely energy focused company. Our largest and fastest growing energy business continues to be Subsea. We have achieved a 29% compounded annual growth rate in Subsea over the last 5 years. We ended 2007 with record Subsea backlog resulting from record orders in the fourth quarter. Our year-to-date orders for Subsea were 1.9 billion through the third quarter and our average order value per well remains over $20 million. As most of you know, due to the project nature of Subsea, the order rate at times is fairly lumpy. And looking at the upcoming Subsea projects greater than $150 million in value, which has historically been about 40% of the total market, we anticipate a strong Subsea project market going in to 2009. We are still projecting Subsea revenue of $3 billion in 2008. The backdrop of declining commodity prices thus presents certain market risk for us in North America particularly with our Surface Wellhead and Fluid Control businesses. North American sales for these two businesses accounts for less than 10% of our total company revenue. On the other hand we believe there are several factors working in our favor on the Subsea side. First, once drilling has commenced and equipment has been ordered on a Subsea project, all companies have historically proceeded to complete the project. Second, we have the most established customer alliances and frame agreements in the industry. These relationships allow us to capture an essentially reoccurring of stream of Subsea business. For example in the third quarter, over half of our 33 trees that were ordered come from either frame agreements or alliance partners. Third, our list of Subsea project opportunities is geographically dispersed and involves many of our key customers, both factors are very positive for us. In addition, I think most of you know, FMC has had a long and established history of strong balance sheet management. Overall, we remain optimistic about our long-term growth and feel we have excellent technology, market positions, and global presence. In summarizing our third quarter results, we saw a strong revenue and profit growth. Subsea revenue was up 38% and operating profit and energy production was up 44%. The end result for the quarter was a 47% increase in diluted earnings per share from continuing operations. And now, let me turn the call over to Bill Schumann, who will provide you with more details on the quarter.

Thanks Peter. Before I review the operations, let me talk a bit about the spin off. The spin off of FoodTech and Airport Systems or JBT Corporation was completed at the end of July. They paid us $158 million in cash dividend and tax payments in the third quarter and a subsequent true up of $38 million in October, for a total of $196 million. The October true up payments reflected on our balance sheet at quarters end is a receivable. Outside of a few minor transition services, we're now totally separate from JBT. The other historical results for the month of July and all previous periods are now contained in our discontinued operations. Discontinued operations income includes a spin off costs, corporate items, and business segments associated with JBT's businesses. On Tuesday, November 4th, we filed an 8-K with updated pro forma financials. So now, let's review our continuing operations. Energy Production's sales were $896 million in the quarter, up to 31% over the prior year quarter, primarily due to growth of Subsea which was up 38%. Surface Wellhead generated revenue growth of 15% in the quarter. The Energy Production segment generated EBIT of $101.6 million in the quarter, up 44% from the prior year quarter. Its operating margin was 11.3% in the quarter. Reported inbound orders in energy production were $551 million, backlog was $3.9 billion with Subsea backlog at $3.6 billion. Our orders and backlog in the quarter were negatively impacted by foreign exchange translation. We achieved new Subsea orders of $685 million in the quarter but the new order volume was reduced by $290 million from the impact of weaker foreign currencies on the second quarter backlog. Energy Processing sales were a record $229 million, up 15% over the prior year quarter. The segment generated EBIT of 42.7 million in the quarter, up 12% from the prior year quarter. Sales were up for each of the businesses in the segment except for fluid control which was down very slightly from the prior year quarter. The overall increases in sales and EBIT in the segment were driven by continued industry infrastructure activity and by strong execution from our measurement and material handling businesses. Inbound orders for Energy Processing were up by 8% from the prior year quarter and backlog at $375 million was up 5%. Now for the corporate items. Corporate expense in the quarter was $9.9 million and was essentially flat with the prior year quarter. Other revenue and other income net of $4 million increased $1.5 million from the prior year quarter. The company had two unusual items in the quarter. The net impact of foreign exchange gains or losses in the quarter, was a gain of $4.7 million and secondly the company had a reduced liability associated with FMC stock, held in its non qualified savings plan of $5.2 million in the quarter. The tax rate for continued operations in the third quarter was 32.8% slightly higher than expected tax rate related to our country mix of earnings and foreign dividends. Our net debt at the end of the quarter was $69 million comprised of $306 million of cash and $375 million of debt. Our access to credit continues to be more than sufficient as we have $605 million of credit facilities in place. We spent $154 million in the third quarter to repurchase approximately 2.8 million shares of common stock. We still have approximately 9.7 million shares remaining on our original Board authorized stock repurchase program. We averaged 129 million diluted shares outstanding in the third quarter. We spent 39.5 million for capital additions in the quarter which is down from the prior year quarter as the previously announced Subsea capacity expansions and Light Well Intervention system spending near completion. We expect the full year total for continuing operations capital expenditures to be approximately $155 million. We are reaffirming our 2008 guidance for continuing operations of 260 to 270 per share. This will result in an annual EPS growth of 36% to the middle of the range. Included in this guidance are one time charges in the fourth quarter for pension obligations associated with executive retirements and some temporary Light Well Intervention down time resulting from an unrelated problem with the vessel owned by our partner. The dynamically positioned vessel used with our Light Well Intervention system has had problems with its clusters and will be undergoing repairs in the fourth quarter. While it is down we will complete normal maintenance on our system. The EPS impact of each of these items is expected to be $0.03. Additionally, we expect some weakness from earnings translation as the dollar has strengthened significantly since the end of the third quarter. So in summary, Energy Production and Energy Processing segment profits were up 44% and 12% respectively. We reported a strong quarter of earnings at $0.72, up 47% and we've reaffirmed our 2008 guidance in the range of $2.60 to $2.70. Operator, you may now open up the call for questions. Operator. Question And Answer

[Operator Instructions]. And your first question comes from the line of Rob Mackenzie with FBR Capital Markets.

Good morning Rob.

I guess first question goes for Bill and it hits back to the foreign currency effects on your backlog and your revenue that you talked about there. Can you give us an idea as to how we should think about how any kind of foreign exchange variation that we've seen obviously in the kroner and the Brazilian Real plunge in effect to dollar. How that affects the value of your backlog going forward and how we should think about that following through the income statement, cardizen [ph] of your hedges that you have?

Yes. Let me explain our foreign exchange, the whole program. First of all, as you know, we have this significant amount of business in Norway and in Brazil. In those countries, we hedge all our revenues and expenses into the local currency, into the Norwegian kroner for Norway and then the Brazilian Real for Brazil. So, we essentially make sure that our operating profit margins are locked in local currency. And that impacts our backlog, obviously. So, backlog is held in the local currency in the NOK and the Brazilian Real. As those contracts become executed, turn into revenue and earnings that flows through our income statement and it flows to our income statement at the average exchange rate for that particular quarter. So, we get earnings translation gains and losses if you will from that process. We document those in the Q, you can go in and look and see what the impact on our sales and cost of goods sold and SAR, are quarter-over-quarter in the Q. For instance in the third quarter of 2008, we actually had a gain in foreign currency translation relative to the third quarter of 2007 of about $0.03, to $0.035 cents. Now, let me talk a little bit about backlog because that's very important for us. The currencies, both the NOK and the Real, weakened significantly from the second quarter of 2008 to the end of the third quarter and that's continued to weaken. Again the way we record backlog is, we have some backlogs sitting there, denominated in NOK and then denominated in Brazilian Real. Those have declined in value in the third quarter. We include that in our new orders in order to get our backlog to balance. So, our new orders for Subsea were $685 million. We had foreign currency translation of the backlog of negative $290 million. So, our new orders in Subsea appeared to be $395 million. But we want to point out that the new orders were $685 million relatively flat with the first two quarters of the year.

Okay, thanks. That's very helpful. The next question I guess comes back to one of the things Peter mentioned and that's looking at the projects that are out there cognizant of what's happened here particularly with oil prices surpassed a little bit? Peter can you go down the list of the big projects that you presented in your last conference presentation and is there any risk to any of those getting commitments going forward in 2009 or are those projects kind of beyond the point of no return here?

Well, in some of... I guess, two points. Some of the projects that have started are certainly historical. We have never seen them cancel so they're probably beyond the point of no return. And we're going to go ahead and finish those out. The new projects, we don't know the specifics by customer all that well. But our normal inclination is most... when we talk about customers, they said the economics on these large projects are somewhere in the $50 to $60 range in terms of their financial viability. I mean like past floor or probably on the low 40's is to be economic. So, it varies by project and so we had some insight to that. So, we don't feel... given the... particularly in the big international oil companies, given the declined profile, their production, I mean they take a 15 or 20 year view of these deepwater projects. So, they know that oil prices can jump around a little bit but I think they're going to be intended to continue in to the deepwater subsea arena. There's a lot of rigs that on order to some of those may fall out as some of the rig companies don't have a financial strength power to make that happen. But we still think that the bulk of the rigs are going to be ordered. To give you the specifics of the project, let me turn that over to John Gremp and let him kind of run through that for you.

Bob, this is John. Before I actually get the list, I'd like to point out that the $685 million inbound that we got on the third quarter and the 33 trees that we entered came primarily not from large orders, and I think there was no larger orders in that bunch and they came primarily from our alliance partners, frame agreements, and call offs to existing projects. We're really encouraged by the third quarter and going forward in the near term that that recurring business from our frame agreements and those partners will continue, particularly from the likes of Statoil, Total, and BP, all of which will have call offs of our frame agreements in the near term. But looking at the list, a little further out say for the next 15 months, our list of major projects is actually increased and if you go back a year ago, the list today is substantially healthier and longer than what we saw just a year ago. And those are distributed fairly evenly between the North Sea, West Africa, Brazil, and Asia. So, the list is pretty encouraging and you know what a lot of those customers are, is a big frame agreement for Petrobas that is out there. A couple important projects in the Gulf of Mexico. And goal is that a handful projects over the next 15 months. So, the point is it is a pretty healthy list both in terms of number of projects and potential inbound revenue.

Okay. Thanks, I'll give someone else a chance

And your next question comes from the line of Doug Becker with Banc of America Securities.

Thanks. John, actually, I wanted to follow up a little bit on your previous comments. You highlighted that the larger customers are still expected to have strong demand for call off work, has there been any change in the tone from some of the smaller customers that you call off work given the decline in crude oil prices?

We haven't heard anything but it's logical but very small independent depending on their cash situation they rethink their CapEx. But we haven't heard anything and similar to what Peter said, even some of the smaller independents at least in the near-term, they're pretty committed to their programs. And again, some of the costs from the larger independents were being totaled to expect those to continue. But certainly on the smaller independents, well, we haven't heard anything yet but that's something that we're watching.

Roughly, what percent do the smaller independents make up of your work?

I tell you, the smaller independents are obviously concentrated in the Gulf of Mexico and a little bit in the UK sector of the North Sea. I'd say as a percent in the Gulf of Mexico, it's maybe less than a third. But it's an important part of our business. I think you will maybe remember that over the course of this year, we announced a number of alliances with some of those independents, Anadarko, Devon, LLOG all signed up with long term alliances with us. So they're an important and at least strategic part of our business, but they don't represent... certainly globally they don't represent as significant amount as the majors.

Okay. I got a question for Bill. I think last time you're talking about the potential for margins to be expanding into 2009 given as things are changing a little bit whether it's changing commodity prices or the foreign exchange outlooks. Is that still a reasonable expectation for processing as we go into next year?

I think we're really talking about the Energy Production?

I am sorry it's production

I still think we should see some expanded margins in energy production as we go in to next year.

Okay, then just one point of clarification because you do have some foreign exchange issues and I guess some cost. What is your EPS guidance for the fourth quarter?

Well we come back in to $0.61 to $0.71 for the fourth quarter. That's really offset by those two one time items that I described plus we're concerned about foreign exchange translation both the Real and Norwegian kroner have declined significantly since the end of the quarter on the order on the 20% to 25%. So that's going to impact our earnings translation. So that's the reason for the lower guidance that you might expect, those three items. $0.03 for increased pension expense for the executive retirement, the $0.03 for the Light Well Intervention downtime, and some caution exchange rate foreign currency translation.

Okay, thank you.

And your next question comes from the line of Dan Pickering with Tudor Pickering Holt.

Good morning guys.

Hi, Dan.

Peter, could you talk a little bit about your... the back log as you see it today. The $3.6 billion Subsea, how much of that you anticipate coming through in 2009, how much is 2010 and beyond?

I think, our early...we haven't finalized our budget so, we're going through that process. I think probably two thirds of that will convert... roughly two thirds... 2 billion I guess of the total.

But we expect about $2 billion of that to convert in 2009. The rest will be make up of orders we get in the fourth quarter and then orders that we get during the year that we booked in turn.

Sure. And Bill, roughly as we think about '07 and first part of '08 here, how much has backlog been of the revenue?

I'm sorry.

How much of is revenue through from an order that you get during the year?

How much book in turn orders do we have during '08?

Correct.

We do Dan, we do a percent completion accounting. So when we get an order and we start working on the order I mean we start recognizing revenue and the associated profit basically immediately. And as the big dollar value items of raw material start coming in and it ramps up in value. So, I think we put some information in the Q in terms of.

Yes. I don't have that number handy, I can get it for you. But I don't have it handy.

Okay, and Bill the other question in for you would be, as we looked at obviously foreign currency is impacting the numbers here, makes the orders look softer than they have been. If we look back at 2007, how much did currency help? Well, in 2007, you had I think in terms of inbound orders about 4.4 billion, how much of that would have been strong dollar related for week off?

About a little bit less than $300 million was for 2007 or about $1 million a tree, and year-to-date in 2008, the number's less than a $100 million, about $1 million a tree negative. In other words it has hurt our orders.

And that includes the Q3 number or that's --?

That's right, it is just the first three quarters of 2008. That's all of 2007.

Great. Thank you.

And your next question comes from the line of Charles Minervino with Goldman Sachs.

Hi, good morning.

Good morning Chuck.

Just as a question on the Surface business, that tends to be one that is a little bit more cyclical as we kind of head into a little bit of a slower spending environment. Can you give us a little color on what you think, what you're expecting really from the Surface business, both domestically and internationally?

Let me have Bob Potter answer that for you, Chuck.

Yes, Chuck this is Bob. First of all, let me tell you that our activity in Surface remains very strong, driven primarily by our strong international position which as we shared with you before accounts for about 2/3rd of our total volume. In addition, in the U.S., the unconventional gas plays continue to operate for us. We are very strong in those areas with not only our wellheads and trees but also our frac systems. And we expect that to continue going in to '09. We're looking forward to some emerging opportunities in places like Haynesville, Haynesville Shale which are deep and more complex reservoirs than for example, the Barnett Shale. Up in Canada, we may see some softening particularly in Alberta with the gas plays as well as the oil sands. But we're looking for some offset there in Northeast British Columbia where again some of the unconventional gas plays looked like they're going to go forward. So, on balance, what we might see in terms of softening in the U.S., we believe it's going to be offset by increasing activity internationally particularly in areas like the Middle East, CIS, Latin America, some of the areas where we have very strong position.

So, internationally, you guys aren't really seeing anything in terms of a slowdown or any of the project delays on the surface side just yet?

Not so far, and keep in mind internationally those projects are a little bit more like to Subsea projects. They're multi year agreements, major projects, a little less book in turn than what we see in the U.S. environment.

Okay, great. Thank you.

Your next question comes from the line of Geoff Kieburtz with Weeden.

Good morning Geoff. Geoff Kieburtz - Weeden & Co: Couple of questions, let me come back to John. You mentioned that there weren't any large orders in the quarter on the Subsea side and that more than half came from alliances or frame agreement. Do you have a reasonable amount of visibility on those kind of orders, at least maybe not precisely which quarter, but I guess my question is your comments implied that you had somewhere in the order of $350 million to $400 million of new orders coming in from that type of customer. Is that a run rate or was the third quarter unusually high or low in that regard?

First of all, Geoff regarding visibility. That's one of the advantages of the alliance is that you're talking. They know that the awards is going to go to you. So, I think we have terrific visibility and so a lot of the third quarter business that we saw, we saw it coming. As a matter of fact, some of our alliance partners are lining out for us now as they are doing their budgets. They're telling us what 2009 will look like. I think the third quarter was not an anomaly. If you go back for the full year, you see similar numbers. All year long, we only booked one order with more than 10 trees. So, the third quarter was indeed a run rate without any major projects. I'd expect the fourth quarter to look the same. And other than maybe some of those very small independents, that might be moving some of their programs around we would expect it to remain strong in 2009. Just let me also add in addition to that, for this quarter we received a letter of intent for a major West Africa project. Another letter of intent for an add-on to an existing West Africa project and we are pursuing a Subsea processing project that is very important. So, we're still pretty confident not only about the near term, but the long term, when you look at some of those large orders which we have not seen in 2008 starts to kick in 2009. Geoff Kieburtz - Weeden & Co: On these alliances or frame agreements, does your visibility extend beyond the next 12 months at all, or is it kind of 12 months as far out as you are likely to be able to see?

When the alliance agreements or the frame agreements includes large products, as you know, we have a global frame agreement with Woodside. And they're looking out multi years and we have visibility of those very large projects one, two, three years out. And alliance was an independent where they're doing tie backs and call offs in the Gulf of Mexico. Now, that's probably going to be about one year out. Geoff Kieburtz - Weeden & Co: Got you. And kind of follow on to that subject, we heard from a lot of the offshore drilling contractors that they believe in number of the rigs even in the deepwater segment that have been ordered or at least on paper been ordered may not be built, is that a concern to you at all?

Jeff, I am going to say... it is Peter, we understand that some of those, as I said earlier on the call, some of those rigs are speculative and the rig operator may not have the cash given the financial crisis we are in and all that sort of stuff to proceed with them. But there was a planned 50% increase in deepwater capacity and if it ends up at 40% or something like that, that's still going to be a significant addition of capabilities for us and our equipment as we go forward. So, yes, sure we could see some of the rigs fall out. But I think the commitment that the operators have made, I think Total had made a comment that they're going forward to their rigs and there's no issue there. And so, yes, we could see some but we still think there's a substantial increase that's going to drive our revenue growth. Geoff Kieburtz - Weeden & Co: I think probably, Brazil is the area where there the greatest amount of uncertainty exist, do you have any comments in terms of Brazilian outlook here for the next 2 to 3 years?

Well, we will say it's pretty bullish because I know they have big splash about the number of rigs that they have committed to and want to get operating down there. They've been asked to tender on the Subsea side for 300 plus trees to the industry. They've announced a requirement for 14 Subsea manifolds, which is where we have a very strong position and capability. And that's kind of the run in the middle sort of equipment. You get the two P-discoveries that are different, sub-solved or pre-solved as the way they call them. Fields with quite a bit of CO2 and complexity in terms of drilling and completion and the resulting equipment that needs to go on those wells. So, I mean as that unfolds and gets developed, we would say Brazil is going to be a great market. And we go forward, we need to make sure that we're properly facilitized and have the capabilities. We did in our Subsea prior capital expansion, we added capabilities to Brazil but we're looking at what you need to do more there just to make sure that there's some falls the way we're thinking it might that we have the capacity and capabilities in place to capture our fair share. Geoff Kieburtz - Weeden & Co: Okay. And if I could just one question on North America, specifically in the frac pump product line, can you give us any comments on what you've seen in terms of order flow and customer interest there?

Yes. This is Bob. Interestingly enough, we had a really good third quarter in inbound and our Fluid Control business driven in part by stronger CapEx than we've seen in the prior quarters. So, in addition to some flow line equipment, we have seen a pick up in the order rate for our well service pump and in fact I think the number is 26 for the quarter that we booked. Geoff Kieburtz - Weeden & Co: Great, thank you very much.

Your next question comes from Kevin Pollard with J.P. Morgan.

Thanks, good morning.

Good morning.

I have a follow up on the currency. I'm just trying to understand the full amount of the exposure going forward. How much of the backlog, I guess is in denominated non-U.S. dollars, in percentage terms.

Well, Kevin I was ready to give you an answer. I don't have... I don't know how much of the backlog is denominated for foreign currency. I can get that number for you. But if you want to know our earnings, about two-thirds of our earnings are non-dollar and a significant portion, say about a third of those are in the NOK and Real.

Right.

And let's just say the rest are euro or euro based. Closer to the euro.

Okay. And so, is the majority of that concentration in the Subsea business or is it sort of spread evenly?

Yes. The majority of that is in the Subsea business. So it maybe even be a little bit higher than that for the Subsea business. Those numbers are for the entire corporation.

Okay. So if I sort of... just for round numbers to it and say, approximately 70% of the Subsea sales are in non-U.S. dollars those would be revenues that could adversely affected by these moving currencies?

That's probably a good estimate.

Okay. Let me ask this about the backlog. As we go each quarter and you're marketing the non-U.S. backlog and you're converting it back to U.S. dollars, is it fair to say that that backlog could decline further as you mark-to-market the non-U.S. stuff at lower currency rates?

Yes.

Okay. I just wanted to clarify that. Thanks.

Your next question comes from Collin Gerry with Raymond James. Collin Gerry - Raymond James & Associates: Hi, good morning. On the backlog side, you mentioned that currency effects, is there... are there any effects from moderating steel prices, is that hedged or is that some sort of cost escalator in your contracts?

Most of our long-term Subsea contracts have escalation clauses that kick in between 12 and 18 months after the initiation of the contract. But, that's not reflected in our backlog of course. That's just the stated order amount. We haven't seen to date a lot of weakness yet in steel prices. I should say steel cost. We anticipate some in the future, but frankly we really haven't quantified it much. Collin Gerry - Raymond James & Associates: And then that would have, a net-net... no, no effect on margins just because that would be part of a cost escalation had it gone up?

Yes, assuming that it's perfectly correlated with our index which it won't be, but I think it's a good assumption, yes. Collin Gerry - Raymond James & Associates: Okay. And then just switching gears, when you mention Subsea Processing, how about a status update on Tordis? I think there are some reports on Norwegian press about the problems with the injection well for Tordis and as a result to that the Subsea Processing system is shutdown until they resolve the injection oil issues. But, as you know up until that point the processing system was working extremely and they are very pleased with the results.

It's a Statoil related issue, nothing to do with our equipment. When they drill the well that they were going to inject the... brought seawater back into the formation. The fracturing of that well didn't quite go the way they wanted it. It kind of, I think go more laterally and kind of went up vertically. And so there's some seepage of the seawater which had some residual oil in it coming up into the ocean. So they're working on it to figure out whether they drill another well or how they correct the situation. Collin Gerry - Raymond James & Associates: But in terms of your equipment, would you still characterize that as a success?

Yes, I mean our equipment work fine. There's no problem in our equipment. Our equipment did everything that was engineered to do and it's operated fine. Just... there's no way to... there's no place to put the water. They were separating out. So they have to find a place to do that and they've been working on it for sometime to figure out what the best solution is. Collin Gerry - Raymond James & Associates: Okay, guys. That's it from me, thanks.

Your next question comes from Kevin Simpson with Miller Tabak.

Good morning, Kevin.

Good morning, Peter, Bill, John and all. Couple of questions, I don't know whether this is for Bill or for you, Peter, the... with the percentage of completion accounting with the backlog coming in, albeit for currency related reasons, it's got to be reasonable to assume for '09 that they should be a size, a cut and reduction and pretty meaningful on the rate of growth for Subsea revenue for where you go through next year, once you get a bunch of projects right away?

Well, the currency effects will reduce the growth rate than we anticipated. We don't know exactly what that is right yet, Kevin. We actually haven't looked at our detail and roll up of our budgets and this change in currency is really occurred in the last four weeks or so. So we have not completed and we're not ready to give you guidance for '09 at this point. But it's going to impact us.

And you're completely confident that currency effects and mix effects whatever that you should still see an up-tick in margins?

Yes, the currency shouldn't have much of an impact on our margins. In theory, we've locked in the margins in local currencies. So it's just the size of the earnings. They are going to be impacted in that percent of sales of earnings.

We're still pretty optimistic that we will... in with some translation issues that we'll have a growing Subsea business in terms of profitability going into next year. As Bill said we are in the throes of detailing our budgets and we'll have... but I mean, the dollar could weaken and I mean, this can flip around the side. There's a lots of stuff going on. So we just need to take some time to recalibrate where we think we might head out, head... what might settle down for '09. We're still pretty optimistic on the Subsea side with the level of projects and activity in our frame agreements and alliances that we're going to have a pretty good '09.

Okay. I guess I would apologize for continuing the '09 track here, but some hypothetical, if the rig count averages, say, 1600 next year, which hopefully won't be an optimistic estimate but might be, should we take... say WECO/Chiksan assume that the revenue would... maybe not for quite as much of that, but definitely, but it would be highly likely to be down in the kind of high single digits range for '09 versus '08?

I will let Bob comment on it. Because there is something going on in the pressure pumping industry that's actually in a lower rig count, somewhat favorable to us. Bob can explain those.

Well, first Kevin let me tell you that we're reading all the same stuff you are reading from the various thoughts about possibilities on rig count. But more importantly, we've spending an awful lot of time talking to our customers trying to figure out where exactly these pullbacks may occur, if they do occur and that's very material for us. In lot of cases it maybe marginal fields or it maybe smaller operators where these pullbacks are occurring. And that won't have as a material effect on us as it may have on others. Specifically, as it relates to fluid control, it, as you know is a business that is influenced by rig count. But there are some things that are kind of counteracting what you would expect to be just a direct relationship between our volume and rig count. Those things being some of the ones I mentioned earlier, Haynesville being much more complex Shale environment in some of the ones that we are operating today and the service companies are talking about much higher rate fracs, many more stages, all of which is beneficial to fluid control and the products that we sell particularly Chiksan/WECO. In addition to that, several of the service companies have conveyed to us their intention to intensify their inspection cycles in '09 which means instead of inspecting equipment annually, they'll inspect equipment biannually. And again for that... for us that means a much more intensive fuel sales environment which as we've shared with you throughout this year has been what's driven fluid control volume, thus far and in the absence of some of the CapEx which we just begun to see in the third quarter. So there are some things that are going to counteract just a strict relationship between rig count and what we see on the Chiksan/WECO product line.

That's great, Bob. Thanks. I just have one more for Bill. You were, obviously, you were a buyer I guess early in the quarter based on the average price and are you more gun-shy now about being a buyer of your shares or you are likely to continue to be a buyer of shares in 4Q?

We are likely to be a buyer, we like good price.

I like that answer, especially from somebody as conservative as you. That's it for me.

Your next question comes from Brad Handler with Credit Suisse.

Thanks, good morning.

Good morning, Brad.

I guess just a quick housekeeping kind of a follow-up to Kevin's kind of question. What was the diluted share account at the end of the quarter with the exit?

I believe we had 124.9 million shares outstanding at the end of the third quarter.

Great.

Let me just check that. It is not one that I had.

Alright I can ask a follow-up while you are taking that difference.

I mean 4.9 is right.

Okay, great. And then a follow up, I can't remember now if it was John, if it was you or Peter talking about the 303s and the 14 manifolds kind of on the docket potentially for Petrobras. Can you just give us a little more color on that? Is that a formal tender that's been outstanding, is that expected to kind of be in the way Petrobras generally buys trees and sort of these lump chunk basis and they spread it?

Yes, normally, it's that kind of come out and announced that. It hasn't totally formalized yet, but what they normally do, they'll take those 300 and they might break them up into three or four lots, and so they are smart enough. But they're not going to put all their eggs in one basket. And so there will be different style trees and we have kind of historically focused on the higher textiles. And I mean they will try to posture where they spread the work around. We obviously have a very good position of manifolds, we have done on 80% of the manifolds over the last five or ten years or so. We have a very good reputation and capability and the manifolds would be... I think are going to be split up in a couple of lots and maybe three lots. And that's the way they do it. By law, they have to do competitive tenders and there's a technical qualification that you go through first and then, you estimate your prices and you estimate your capacity, capabilities, and they assess all that and make awards. The 2P is going to be a little different. It's going to be higher pressure, higher tech, more close with environments and so those... we're not sure how they're going to approach that market. But certainly, that's coming too.

So the 300 is not related to the tree [ph]?

Yes. That's correct. It's kind of... an ongoing business.

Right, it's the low pressure equipment Brad and also these requirements of 300 tress and the 14 manifold, that's a four year requirement, not an annual requirement.

Sure, okay. Thank you.

Your next question comes from Joe Gibney with Capital One/Southcoast. Joseph Gibney - Capital One/Southcoast, Inc.: Thanks. Good morning.

Good morning, Joe. Joseph Gibney - Capital One/Southcoast, Inc.: Most of my question have been answered. Bob, actually a question for you on the Wellhead side. Curious, couple of feedback relative to some of your isolation to these technology, we need to creating kind of an environment here in the lower 48, still an opportunity enabling a preferred new market share here given spin loads on that technology, just kind of curious, any feedback there?

Yes, the frac sleeves technology is still going exceedingly well. As you know that technology enables us to optimize the frac operations without taking the tree down each and every time they want to do a stage. So we're continuing to promote that technology throughout the unconventional plays in the U.S. and Canada as well and again Haynesville will be another opportunity for that as were Northeast British Columbia. Joseph Gibney - Capital One/Southcoast, Inc.: Okay, thanks and Peter just back to the Brazil capacity adds and helping to calibrate that a little bit. Is there still lead time for capacity is certainly far less than lead time for your systems correct and you're still calibrating this at roughly a $1 million per tree for the capacity ramp or less than that, is that a reasonable way to think about it?

Yes $1 million per tree is a good way to calibrate it and we are in the throes of trying to figuring out what we... we have some adjacent land that we own to our existing factory about 10 acres or so. We have capabilities to add more machine shop or assembly area office what we really need to do. And that's a pretty easy thing for us to do. If we don't want to do that. In the manifold side, we need to think about better access to the docks and those sort of things in terms of manifold execution. But we're in the throes of what we need to do and we'll probably get that finalized the next quarter or two. Joseph Gibney - Capital One/Southcoast, Inc.: Okay. Bill, just a couple of modeling housekeeping questions. I apologize, if I missed it here, but I'm trying to calibrate your fourth quarter pension obligation charges in the Light Well Intervention downtown on some of the repair work that $0.03 in aggregate or $0.03 each for those two items?

Yes. Sorry, $0.03 each for the two items. So $0.06 in total. Joseph Gibney - Capital One/Southcoast, Inc.: Okay. And then in terms of calibrating a little bit on the G&A and kind of your R&D expenses going forward, can you help us a little bit here post JBT for how you expect those to trend?

I would expect, JBT had a higher SAR expense than the energy businesses on average. So, you are going to see that come down a little bit and we put out... we put out an 8-K on Tuesday, that should give you some guidance on them, both R&D and general G&A. Joseph Gibney - Capital One/Southcoast, Inc.: Okay. I appreciate it guys. I'll turn it back.

You have a follow up question from Geoff Kieburtz with Weeden. Geoff Kieburtz - Weeden & Co: Bill, just to clarify. When you said that quarter ending shares outstanding was 124.9, was that fully diluted or basic?

I'm sorry. That was basic. That was basic. Geoff Kieburtz - Weeden & Co: Okay. Do you have a fully diluted number or --?

I don't have one handy. If you call back we'll give it to you. Geoff Kieburtz - Weeden & Co: That's it. Thank you.

Your next question comes from Dick Kindig with Keeley Asset Management.

Could you talk a bit about what you're doing in Subsea separation?

Yes. No problem. We currently have been awarded over the last four, five years, five different separation projects. The first one that we put in water was a project for StatoilHydro called Tordis which you know in the call here, we mentioned they were having some difficulty with their injection well that they drilled. But that system's fully operational. We have been awarded two projects in the Gulf of Mexico, one by Shell where they have a heavy oil reservoir. That's, we're not sufficient pressure to flow it to the surface. So, they're installing a separation system to kind of isolate the gas and use pumps to burst the flow of the top. So, we have a system called Perdido for Shell, we are in the throes of starting to deliver and we have the project with Petrobas in the Gulf of Mexico. That does... basically it's the same sort of technology. And then we have our third project with Shell in Brazil called BC-10 that we've installed the initial first Subsea Christmas tree. So it has a separation system of the gas and its heavy oil and it needs to be pumped to the surface. And with our Total's Pazflor project in Angola that we announced in December or January this year. It's a fairly sophisticated system with 40 plus wells and has three separation units, again separating the oil, gas and water. And it's a little bit different requirement. So they have the potential given a low temperature and a gas percent in the flow to actually crystallize the water to form hydrates and they can plug up your pipelines and flow lines. So, they are trying to get the gas out of the system and so there is three pumping systems. And so we have one operational, three that should be operational towards the end of '09 and then Pazflor is probably going to be in '10. And then we have on our outlook, I think we've mentioned before in our call, we have 12 to 14 kind of targets that we're looking at over a time horizon, that's probably 3 or 4 years, that's certainly have potential for additional work for us.

But the backlog is down right?

Currency is the only weakness down there.

Is that connecting meaningful to you going forward?

Yes. It's just some... these systems they vary in complexity and size but individual separation systems probably $100 million to $200 million in value, depending on the scope and complexity and number of wells. So, it's averaged $2 or $3 a year. It's pretty meaningful. It's a $0.5 billion in revenue for us.

Rather than a poke in the eye.

You got it.

Thanks.

Okay.

There are no further question at this time. Mr. Cherry, do you have any closing remarks?

Yes, thank you, operator. This concludes our third quarter conference call. A replay of our call will be available on our website beginning at approximately 2 PM Eastern Time today. If you have any further questions, please feel free to contact me. Thank you for joining us. Operator, you may end the call.

This concludes today's conference call, you may now disconnect. .