TechnipFMC plc (FTI) Q2 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the FMC Technologies Second Quarter 2012 Earnings Release Teleconference. [Operator Instructions] In the event of technical difficulties during this call, we will post updates at www.fmctechnologies.com/earnings. Thank you. Your host is Brad Alexander, Director of Investor Relations. Mr. Alexander, you may begin your conference.

Thank you, Robyn. Good morning, and welcome to FMC Technologies Second Quarter 2012 Earnings Conference Call. Our news release and financial statements issued yesterday can be found on our website. 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 expectations, beliefs and assumptions regarding future developments and business conditions, they are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements. Known material factors that could cause our actual results to differ from our projected results are described in our 10-K, 10-Q, and other filings with the SEC. We wish to caution you not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any of our forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. I will now turn the call over to John Gremp, FMC Technologies' Chairman, President and CEO.

Good morning. Welcome to our second quarter 2012 conference call. With me today are Maryann Seaman, our CFO; and Bob Potter, our Executive Vice President. I'll start with some highlights from the quarter. Maryann will provide specifics on our financial performance, and then we'll open up the call for your questions. Our second quarter operating profit was a record $203 million and revenue was $1.5 billion. Earnings were $0.46 per diluted share for the quarter, which represented an 18% increase over the prior year quarter. Looking at the overall market, the subsea industry continued to see a healthy level of awards in the second quarter, and the expectation that this year's industry award total will exceed 2011 by more than 50%, appears almost certain. This increase in subsea activity will rebuild backlogs and drive improved pricing. North America shale activity continues to shift from dry gas to liquid-rich plays that now account for over 70% of the market. Liquid plays have also begun to show some signs of risk, as the natural gas liquids prices have fallen at a more significant rate than oil. U.S. rig counts are essentially unchanged sequentially and remain at levels that provide some confidence in the sustainability of the repair and replacement portion of our fluid control business and our surface wellhead business in North America. Looking at the Subsea results, revenue for the quarter in Subsea Technologies increased 18% over the prior year quarter and 6% sequentially. For the year, we continue to expect to generate approximately $4 billion in Subsea revenue. Subsea margins increased in the quarter as project execution improved. The Laggan-Tormore project in the North Sea reached a critical milestone when the Subsea manifolds were delivered in May, as required by the customer. This project is now near completion. Subsea Technologies inbounded $878 million of orders in the quarter, which included 17 subsea trees. Our backlog now stands at $4.3 billion. Following the end of the quarter, we received a $200 million award for Statoil's Gullfaks South field development in the North Sea. The project includes 7 subsea production trees and 2 manifolds. This development has potential extensions for an additional estimated 30 subsea trees, with the possible additional value exceeding $600 million. In addition to Statoil, conversations with our frame agreement customers remain very positive, and are focused on their large multi-year portfolios of offshore assets and how to best develop these projects. With $55 to $60 per barrel appearing to be the level many operators are using to justify these deepwater developments, and access to international reserves for most international oil companies continuing to be largely limited to deepwater basins, we remain optimistic on the prospects for the subsea market over the coming years. When we look at the subsea market regionally, both Africa and the Gulf of Mexico activity will be substantial, and many of our frame agreement partners have major developments in these areas. In West Africa, the largest project in the region, Total's Egina development in Nigeria should be awarded before the end of the year. Multiple large projects in Angola are also likely to be awarded over the coming 12 to 18 months and activity in Ghana is also on track to see coming awards. Lastly, new prospects in East Africa, primarily Mozambique, are encouraging, the light here a little bit further out on the horizon. In the Gulf of Mexico, Shell, BP and Exxon Mobil have large discoveries that should see substantial activity relating to their subsea requirements in the coming 2 years. Additionally, permitting is at pre-Macondo levels and rig activity continues to strengthen in the Gulf of Mexico, returning this region to one of the most active in the world. Regarding subsea processing, we now anticipate the Petrobras Marlim systems to be operational in the next couple of months, and we continue to expect separation to play a significant role in increasing production from high-water pipe levels in Brazil. We've completed qualification testing of our helico-axial pump, developed by Sulzer. We've seen significant customer interest and expect to begin to participate in project bids later this year, which would be awarded in 2013. In our Surface Technologies segment, second quarter revenue of $414 million was up 33% from the prior year quarter, and 10% for the first quarter. Margins came in at near-record levels in the second quarter, as we continued to work through our fluid control backlog. We still expect to see a decline in fluid control sales in the second half of the year, but believe this could be largely limited to reduced sales related to our customers' slower fleet expansions. International results for our surface wellhead business were very strong, as activity in Asia-Pacific and the Middle East increased significantly. This is in contrast to the North American activity that is flattening, consistent with the rig count. We closed 2 acquisitions in the second quarter that will add to our Subsea offerings. First, we acquired the remaining 55% of Schilling Robotics. As the scope of subsea fields expand, including more mechanical components and equipment requiring manipulation on the seabed, we think Schilling's portfolio will play a major part in our ability to successfully pioneer and serve this new market. Second, the Control Systems International acquisition provides us with controls technology, that we believe is going to be integral to our ability to more effectively expand the capabilities of our subsea processing business. Looking at the second half of the year, we continue to expect Subsea Technologies to generate approximately $4 billion in revenue, with margins improving in the coming quarters, and inbound awards significantly exceeding last year. We expect our surface wellhead business to continue to grow, largely driven by our strong international presence. And in fluid control, we remain optimistic that our fuel replacement and repair business will remain strong, offsetting some of the expected decline related to decreasing sales related to horsepower expansion in the pressure pumping industry. Maryann will now take you through some of the financial details in the quarter and for the full year.

Thanks, John. Subsea Technologies revenue was $946 million, up 18% over the prior year and 6% from the first quarter. Subsea operating profit was $110 million in the quarter and includes a $13.2 million net benefit, associated with the purchase accounting of the Schilling acquisition. Excluding this benefit, our Subsea operating margin was 10.2% for the second quarter, reflecting overall improvements in our execution. We saw operating margin progression again this quarter, as we had anticipated, despite the impact of the margin contribution from the challenged Laggan-Tormore and CLOV projects. We also realized the effects of a stronger U.S. dollar, especially in relation to the Brazilian real. This impacts our Subsea operating results by $9 million, when comparing to the prior year quarter as the dollar strengthened. We continue to expand the Subsea workforce, as projected, to prepare for the inbound expected in the next several quarters, as John commented. We expect to see margins improve in the next 2 quarters, as we experience better project execution, benefit from higher volume and see a mix of higher-margin work in the second half of the year. We expect Subsea margins to average between 12.5% and 13.5% in the second half of 2012. If we achieve the top end of this range, we will see full year Subsea operating margins of approximately 11.5%. Assuming quarterly margin progression due to improving execution, we should exit the year with Subsea margins at or above 13% as we head into 2013. Subsea backlog was $4.3 billion at the end of the quarter and was negatively impacted by the strengthening dollar by approximately $275 million. As John said, we anticipate solid Subsea inbound in the second half of the year and forecast full year Subsea revenue at approximately $4 billion. Surface Technologies operating profit for the second quarter was a record $84 million, a 49% increase from the prior year quarter and 8% increase from the first quarter. Fluid control activity remained strong in the second quarter and, again, helped to produce strong earnings and margins within this segment. In the surface wellhead business, improved performance internationally helped strengthen both operating profit and margins, compared to the prior year quarter. Orders for Surface Technology for the quarter were $366 million. Surface wellhead orders were higher, both sequentially and compared to prior year. Fluid control began to see the anticipated decline largely related to reduced customer orders, associated with horsepower expansion. Backlog exiting the quarter stands at $574 million for the segment, down 9% sequentially, due to reduced fluid control inbound. We have not experienced any order cancellations since our first quarter earnings call, but are seeing very little flow relating to capital expansion. We continue to think we can offset much of this exposure with fuel replacement and repair sales, which are expected to remain steady. We expect our fluid control revenue to be down approximately 25% in the second half of this year, compared to the first half of this year, with more of the decline occurring in the fourth quarter. Margins in the quarter were 20.3%. We anticipate these margins will decline in the second half of the year, and thus are maintaining our previously guided margins in a range of 18% to 20%. Energy Infrastructure operating profit for the second quarter was $9 million, down 15% year-over-year. This was largely related to lower volume in our loading systems business, as a result of the timing of inbound. Now for the corporate items. Corporate expense in the quarter was $10.4 million. We expect this number to average approximately $11 million per quarter in the second half of 2012. Other revenue and expense net reflects expense of $29.7 million. This was above our guided range, as the amount includes $13.7 million of mark-to-mark adjustments related to the earn-out liability associated with our Multi Phase Meter acquisition made in 2009. We expect other revenue and expense net to range between $14 million and $15 million per quarter for the remainder of 2012, of course, subject to foreign currency fluctuations and the potential for an additional mark-to-market adjustment related to the Multi Phase Meter acquisition. Our second quarter tax rate was 28.5%. We anticipate our 2012 tax rate to range between 25% and 27% for the full year. Capital spending in the quarter was $99 million, primarily directed towards subsea. We expect capital spending in 2012 to be approximately $350 million. We invested approximately $340 million combined, for the acquisitions of the remaining portion of Schilling Robotics and for Control Systems International. These both close near the end of April. We purchased approximately 500,000 shares of common stock at an average price of $40 per share. At the end of the quarter, we had net debt of $941 million. It was comprised of $270 million of cash and $1.2 billion of debt. We averaged 241.5 million in diluted shares outstanding in the quarter. So in summary, we believe our full year Subsea operating margins are likely to range between 11% and 12%. This does not include the net benefit associated with the purchase accounting of the Schilling acquisition. We are confident Subsea results in the second half of the year will show significant improvement. Regarding the Surface Technologies segment, we are maintaining our margin guidance in the range of 18% to 20% for the full year. We anticipate a decline in revenues of approximately 25% in the second half of the year from lower fluid control business being partially offset by the strength in the international surface market. In our Energy Infrastructure segment, margins are still expected to average 8% to 9% for the full year. As a result of our outlook, we are narrowing our EPS guidance for the full year to a range of $2.10 to $2.20. Operator, you may now open the call for questions.

[Operator Instructions] And your first question comes from the line of Bill Herbert from Simmons & Company. William A. Herbert - Simmons & Company International, Research Division: John, sort of looking out beyond this year and assuming that the Quest prophecy of continued significant growth in subsea tree awards is going to persist over the next 3 or 4 years, we get to something approaching, call it 800 trees awarded to the industry on 2016. I think you were awarded last year, 165 trees, and let's just -- I know you don't have a forecast for this year, but my assumption is that you'll get something close to, if not in excess of 200 trees. Assuming you have a 40% market share, thereabouts, that would call something like 320 trees for 2016. Do you guys have the people and the manufacturing capacity to actually deliver that within 3 or 4 years, in the event that comes to pass?

We think we do, Bill. As you know, we've been -- and Maryann mentioned our capital spending, so we are preparing for a significantly higher level of subsea activity, not just because of the Quest numbers, but because of the visibility we have through our partnerships. So we've been making the investments to make sure we have brick and mortar in the physical capacity, but as you pointed out in your question, what we focus even more so on, is the unique subsea technical talent. We talked in the last quarter about the number of subsea technical heads that we added, that we've been adding, actually, over the course of the last couple of years, and we'll continue to do that to ensure that we have the capacity to keep up with the pace of the market growth and maintain our market leadership position in the business. William A. Herbert - Simmons & Company International, Research Division: Do you -- I mean, you probably do, whether you want to share it or not is another question -- but do you have a sense as to what, today, you're able to manufacture and crank out, in terms of number of trees and what you're targeting?

Well, we do, but I -- as you know, I think -- we've talked about this before in calls. We focus less on tree numbers and tree capacity because, for us as a subsea systems provider, we're more focused on providing all of the equipment that makes up a subsea system, and that certainly goes way beyond trees. And we believe that the real constraint is some of the technical talent that we need to develop some of these systems. So I could give you a tree number, but I don't think it's the most important number and quite frankly, in terms of tree capacity, that's driven mostly by the brick and mortar machine tools, and I have a lot of confidence that we can continue to increase that physical capacity, I mean, whatever tree demand we face. So yes, I think we just don't think about it in terms of tree numbers because it's the ability to successfully deliver design, manage big subsea EPC projects that we focus on.

And our next question comes from the line of Bill Sanchez from Howard Weil.

John, just a question with regard to the order outlook here on subsea. I think you've, again, reiterated your expectation for orders in '12 to be higher than 2011. And I think commendable results here in 2Q, in the fact that you didn't have any real what, I guess people would call, nameplate press announcements with regard to subsea awards during 2Q, yet booked almost $900 million worth of orders. Could you talk about just in the second half of the year, is there anything with regard to the big projects that you all are tracking, that you see by name, being awarded here in the second half of the year, to get you to those type of order numbers?

Right. Well, you're exactly right, Bill. I mean, the first quarter, we had strong inbounds, driven by Petrobras, almost $1.5 billion. We're pleased with the almost $900 million that we booked in the second quarter given that we didn't, as you say, have a nameplate project. That puts us at $2.3 million right after the quarter closed. We announced another $200 million key order for us from Statoil, so we're sitting at $2.5 million. We're pleased that the call-off projects from our partners were a big part of our inbound in the second quarter. Also our aftermarket business remained real strong in the second quarter. So if that keeps going, and the fairly good size number of large projects that will be awarded in the second half -- if we're successful in picking up the projects that we've targeted in the second half, we believe that we'll, as I mentioned in my remarks, we'll easily surpass the almost $4 billion that we inbounded in subsea orders in 2011 and, quite frankly, the number could start to approach almost $5 billion if one of those big projects is awarded to us. So somewhere between $4 billion or $5 billion is probably a good target for us for inbounding in 2012.

Okay. John, you all have been very aggressive here in adding headcount in preparation for these increased orders. I'm just curious, as you guys have gone out and really kind of trained the industry, I guess, in some respects here and put yourself in a position to succeed on this backlog. Are you seeing here as your competitors get their backlogs filled up, an aggressive move toward some of your more experienced employees here, that you have trained out there in your facilities on a global basis?

It's a good point, though. I mean, we're very focused on retaining our talent. We've made these investments over the last couple of years. We continue to make investments in this talent. We've put a lot into developing them. We don't want to give them up easily. Certainly, in some of our locations where we're surrounded by other companies and other industries that need subsea talent, we're more vulnerable. We're particularly pleased that our retention issues in places like Brazil, have been very positive, but in other areas, we're very concerned. I think Houston is a location that is particularly vulnerable, and we're very focused on making sure that we retain the technical talent. But surely, there's no question that as the subsea activity heats up and those companies -- not just our competitors but even some operators and consulting firms, as they try to respond to this increase in activity, they'll realize that they don't have the talent and they'll target our people. But I think we've been very focused on it, and our retention metrics are holding up pretty well. But it's not going to go away. It's a real concern of ours.

Okay. I guess just one last one for Maryann. Net interest expense up in the quarter, I guess, looking at the balance sheet at June 30. Is it reasonable to expect, Maryann, something in maybe that $8 million to $9 million range, a quarter here for interest expense going forward?

Yes, you're right, Bill. We obviously had on higher debt first half of the year; interest expense, a little bit higher. I don't expect it to continue to trend at that same level for Q3 and Q4. Our cash flow forecasts call for us to see some fairly significant changes in our working capital structure. So I wouldn't anticipate that the back half of the year in interest expense will look like the first half of the year. We'll see that come down.

And the next question is from the line of Joe Hill from Tudor, Pickering, Holt. Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: John, I was wondering if you could give us an update on some of the other projects that had been causing you guys a little bit of indigestion. You indicated you hit the milestone on Laggan-Tormore, which is great to see. Where do we stand with CLOV and maybe some of the smaller projects you've been doing for Statoil?

You're right, Joe. What we called out in the last couple of quarters is our Eastern Region, North Sea and some Africa projects. We're struggling as we responded to the increase in activity, and certainly the first one was Tormore-Laggan, which -- and meeting that milestone was really important for us and I -- clearly important for the customer. We're pleased with that. We're 90% complete on that project, so we think that's largely behind us. But we also talked in the last quarter about CLOV and we're not -- we're only about halfway through CLOV. So there's some risk with CLOV right now. We feel that our Eastern Region has started to stabilize. We're starting to dig out of our issues. But with only 45% to 50% of the project complete, we're still exposed to some execution challenges. Right now though, it's stabilized. Same is true for our projects with Statoil in the North Sea. We've been largely holding our delivery dates, but those projects again, aren't near at the level of completion that Laggan-Tormore was, and so we're exposed to some risk. But we feel, based on our progress in the second quarter, that the situation in the Eastern region is starting to stabilize. But we're still at some risk with CLOV and the Statoil projects in the North Sea. Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Okay. And then I was surprised by the magnitude of the potential availability for orders out of the Gullfaks South, above and beyond what you guys have press released. Can you give us an idea as to what the timing of that might be?

Well -- and I was quoting that actually from a public release and so that's not kind of something that we know, but that's the indication that Statoil have given us. When they gave us the first call-off on Gullfaks, they were very clear that the significance of that award went well beyond the $200 million first award. So that's pretty much all consistent with what we've heard and what they're telling us, that there's a lot of potential for this particular project. Your question is about timing and it's several years off. I mean, it's not near-term on the horizon that the rest of this inbound will show up. I think the significance though, is that because we won the first tranche, then we're positioned to participate in the rest of the project, which is -- which as we pointed out, is not small. It's significant. So I think that's the important point, is that we'll have the opportunity to participate in that much bigger of a business, but it's several years away. Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Okay. And just a follow up. Do you guys have an idea as to the number of industry trees that shipped in the quarter?

Not so much that shipped. We know the number and we have an idea of the number of trees that were awarded, which is a little different answer, but I think it is actually important. We -- there was almost 100 trees that were awarded in the quarter, which brings our year-to-date total to 270-plus. And then if you consider the possibility of these number of projects will be awarded in the second half, we're on track for a 450s of 500-plus tree award year in contrast with the 311 trees that were awarded in 2011, which supports the idea that the industry, not just us, but the industry is really looking at that significant uptick year-over-year in activity.

And your next question comes from the line of David Anderson from JPMorgan. John David Anderson - JP Morgan Chase & Co, Research Division: John, on the past calls, you've talked about midyear as a potential turn in subsea pricing. I was wondering if you could just give us an update on your thinking. I'm just kind of wondering if it gets pushed out a little bit with some very light industry awards in the second quarter?

No, I think just the contrary, David. I think it's tracking as we expected. We said that this year there would be a number of major subsea awards, particularly awards that were tendered. That's happening. We had almost 7 major awards in the first half. We got a handful of awards that are going to be awarded in the second half, so that's materializing. The other thing that we said is we thought that these awards would be more evenly distributed amongst the subsea suppliers and they would have the opportunity to rebuild their backlog, which they haven't had in 2010 and 2011, where we took a very large share of the market. That is also happening. When you look at a tree awards over the last couple of quarters, you see some of the other suppliers booking a number of trees that can be 2 and 3x what they had booked in 2010 and 2011. So I think what's happening -- what we expect is coming to pass, in that the awards are happening. They're being distributed to the other subsea suppliers. They are starting to rebuild their backlog. And I'd expect the next sort of round of awards would start to reflect pricing improvement. Now on a more anecdotal sense, when we look at the competitive intensity, in 2010 and 2011, if there was a tendered project, pretty much all 4 subsea suppliers were in there going after it. If you look back over the last couple of quarters and, although there was always competition, it wasn't quite as intense, including ourselves. We -- a number of projects that were awarded this quarter -- second quarter and first quarter, we didn't participate in and some of the other suppliers also backed off. And to me, that would be sort of a precursor to an improved pricing environment. John David Anderson - JP Morgan Chase & Co, Research Division: So in kind of what you're seeing right now in the conversations that people are having about different projects, your sense is that people are being a little bit more disciplined on the pricing side now?

Yes, I think they're being more selective, just as we are. John David Anderson - JP Morgan Chase & Co, Research Division: That's great to hear. Your guidance on Subsea for the second half of the year is around 13%. If I think about 12 months from now, kind of the second half of next year, taking out kind of the first half seasonality, can we start thinking about maybe a couple of hundred basis-point improvement? Or does it take a little bit longer to work through backlog?

It's going to take longer because as I said, we're -- I'm seeing the pricing environment improve, but we haven't seen the awards that reflect that pricing improvement. So that has to happen, then it goes into backlog and we have to execute it through the P&L. So we've said that we'll see a -- maybe a little bit of it in the back end of 2013, but it's not until you get into 2014 that the pricing improvement really starts to show up in the P&L. John David Anderson - JP Morgan Chase & Co, Research Division: Okay. And then lastly, you talked about $55 to $60 as the oil price for a lot of these offshore development projects. Curious about the cost of maybe the smaller awards because I think one of the things that we've noted in the past cycles is really that a lot of these smaller awards can really help your numbers. I'm just wondering about the -- kind of the onesies and twosies. How do you think about those? It seems that those should be a little bit more oil price sensitive, and I'm just kind of curious of what you're hearing out there? Are you starting to see more of those inquiries starting to come up? And how do you think about the oil price, and how it factors in?

Well, it's all over the map. The price of -- the oil price that makes these fields economical is driven more by the geology and the geography, and so it's kind of all over the map. There was a, I think, a recent survey by Goldman who had the numbers, sort of all over the map. I mean, in some cases it was as low as $40 that I saw; in some cases, as high as $70. But I think the $55 to $60 range is correct. With regard to smaller projects, no, we're not seeing any oil price sensitivity. In fact, it's just the opposite. With our partners, including some of the smaller independents, it's really just the opposite. They have very large, deep-water portfolios and their conversations with us are about, how can we deal with this increase in activity, and are we getting prepared. So we don't see -- whether it's a large operator, it's one of our partners, or a smaller independent that's also partner, we're not engaged in any conversation that suggests they're starting to back off in terms of the developments based on a weakness in oil price.

And the next question is from the line of Kurt Hallead from RBC.

I just wanted to get a quick update, maybe a sensitivity assessment on this 25% reduction on your Surface revenue back half versus first half. Is that -- would that still hold true, let's say, in a band of flat rig count, to maybe down 10%? I'm just trying to get some gauge, some sensitivity on what point that 25% may get a little stressed?

Yes. I mean, the reason we're saying the 25% reduction is driven primarily by the expected and, even what we've seen, decrease in the capital orders for fluid control. And we've assumed that the North America rig count would stay flattish to support our surface wellhead business, and the repair and refurbishment of our treating iron from fluid control. If there were a modest reduction in the North America rig count, we'd see some effect. But I think the 25%, half-over-half reduction, is still valid. I don't think we've stretched that too much. Obviously, if the North America rig count completely imploded, then we'd be talking about a different number. But that's not what we're anticipating. I don't know. I'll let, maybe, Bob comment additionally on that.

Yes. I think that's exactly right. The only other factor that's out there is even at the current rig count, we are seeing the pressure pumpers use less horsepower on these liquid-rich plays. It really is a function of smaller diameter casing strings that are being employed in those applications. So that's embedded within the 25% reduction, second half versus first half.

Great. And then you referenced some partial offset on the surface wellhead internationally. I think you also indicated that, that was predominantly kind of a Mideast-driven, if I heard you correctly? I just wondered if you might be able to give a little more color around what you are seeing in the international for surface, and how sustainable do you think that trend may be?

Well, you're absolutely right. The international strength is really strongly occurring in Asia-Pacific and the Middle East. So we're seeing pockets of strength in places like India, Australia, Thailand, Indonesia, both onshore and offshore and of course, the Middle East is particularly strong in the UAE, Kuwait, Saudi Arabia and Qatar. And interestingly enough, in the quarter we booked a very large order in excess of $20 million for a high-pressure equipment in Kyrgyzstan. So we're starting to see some opportunities materialize there, that we hadn't seen in the past.

And the next question is from the line of Rob Mackenzie from FBR. Robert MacKenzie - FBR Capital Markets & Co., Research Division: Question for you, John. It seems like you guys have been hiring technical talent at a pace, if I might, by my estimation, a fair bit faster than your competition, and probably your customers as well. Coming back to the retention comments you made earlier, John, can you give us some more color and feel for how you plan to retain those people? And also what does that mean for cost inflation going forward, as you retain the people you need to deliver on the growth?

Well, first of all, you're exactly right. I don't know how the others are preparing for the expected growth. One advantage FMC has is because of our partnerships, we have more visibility. So we know through our partners, not only what their activity level is going to be, we know that, that work is coming to us. So that gives us the visibility that allows us to plan and start preparing, which maybe others don't have. But that's only good if you act on it, which is why we're adding the technical talent that you referred to. Retention. There isn't one thing that retains talent. It's many things. We understand that. Certainly, from a compensation point of view, we have to have that covered. I don't believe that we feel that, that is going to make us uncompetitive or have a significant material effect on our financial performance, because that's not the only thing that we use. People work for companies and stay for companies because companies are leaders. They're technically progressive. It's a good place to work. They have career advancement. And so far, our track record -- if you look at our retention rates, all those things are working in our favor to hold onto talent. We're also being careful about where we put the talent. We created a new technology center, as you know, in Brazil, and we located it right next to the university. It's very, very popular with our younger talent. As a result, our retention statistics in Brazil are fantastic, and I think it's because we do those sorts of things which are important to retaining talent. So it's not one thing. It's not just about compensation. We've got to get everything right and our company is focused on doing it, and the metrics we use are, I think, are supportive, that we're able to hold onto our talent. But it's not lost on us, how big a challenge it will be when the industry realize that there's not enough talent -- technical talent to support the rapid growth in the industry. So it's going to remain a concern of ours, but we're very focused on it. Robert MacKenzie - FBR Capital Markets & Co., Research Division: Okay. And then coming back to the pricing question. Maybe I'll ask it a bit differently. Maryann, I believe, got it exiting the year's Subsea margins at or above 13%. Clearly, it seems like most all of that, if not most of -- if not all of that is just executing on what you have in-house, better than you have in the past couple of quarters. Where does that top out? Or what's the -- put another way, what's the -- roughly, what's kind of the range of margins in your backlog here that would be kind of the limit you could achieve without seeing pricing gains roll through the P&L?

Right. So you're exactly right. The 13% assumes that we get back on track with regard to execution. But it also includes some mix of our backlog that we can see as it rolls through the P&L, plus higher volume when we expect some leverage. Again, maybe partially are offset by the costs that we're incurring by adding some of this talent, but it all adds up to something around 13%. Then we roll into 2013, starting at 13%, and as we continue to grow the top line, there should be some opportunity for leverage, but it's going to be fairly modest until we see some of the pricing improvement start to show up. We may see a little bit of that on the back end of 2013, but we want to be -- we should be -- expect sort of only modest improvement. It's not till the -- we really see these awards at much better pricing get booked and then start to roll through the amount. So I think it's better to look at 2014 at when that realistically could occur. But you go into 2013 at hopefully around 13% -- of course, typically our first quarter is a little bit lighter, but after that, assuming we continue our execution improvement and we get little bit of leverage from the higher volume, we might some modest improvement off the 13%.

And your next question is from line of Robin Shoemaker from Citi.

I wanted to ask if in the Marlim project, you had actually operated the subsea processing equipment? And sort of generally related to that, what's your outlook for subsea processing opportunities as you see it today?

As you know, we delivered Marlim subsea separation and boosting on schedule to Petrobras late last year. We were a little disappointed in that it took a while, a long while actually, more than we thought, for them to reconfigure their topside facility to accommodate the topside equipment related to the subsea processing system. It now appears that they've got that work completed and they're proceeding to commission the subsea separation boosting system. So what we understand is in the next month or so, the subsea separation and boosting system that we provided will be commissioned and will be operational. And that will be a very important milestone because that's when Petrobras will begin to start to evaluate the operating effectiveness of that system. At some point after that, which I can't predict, Petrobras will make the decision, whether or not they want to proceed with this technology for the rest of the wells in the Marlim field. And I really can't predict when that will be. So it's sort of one milestone at a time, but we're very close to having the system operational and getting the -- beginning the evaluation by Petrobras. But we know that if that technology is accepted, that there's a tremendous potential for Petrobras to use it to deal with the high-water cut that they're experiencing in the Marlim field. In a broader sense, the outlook for the subsea processing remains very positive. This year, we won't have as many awards, say as we had in 2011, but we always expected this to be lumpy. When you look out into 2013, the list of subsea processing awards, a mix of separation and boosting, and boosting only, is very strong. I think we count, over the next 2 years, almost a dozen-some projects. Now they won't all go ahead, but that's very encouraging. Further, what you can't see quite as clearly, is the interest by the operators. Every major operator has either done some sort of R&D project, a feed study, a joint industry project, to begin to understand the application of subsea separation and boosting for their company, and that's very encouraging.

Yes. Do you include subsea compression within that whole processing entity?

Yes, we do.

Yes, okay. Great. Then I just -- my other question was on the award that you booked in the first quarter, 78, I think, of a potential 130 trees in Brazil. Is that on track for the awarding of the rest of that bunch of the 130 tree award some time by the end of this year, early next year?

Well, we know that Petrobras has a significant pre-salt requirement. We got the 130 tree award. We booked 78 trees because that's what they guaranteed. Another supplier got a smaller award with pre-salt. We think there will be some additional tree awards. It's not as clear what the timing will be. We knew that Petrobras was anxious to get some trees awarded. Now that that's accomplished, I'm not sure how fast they'll proceed with the remaining tree awards. What is out there is the pre-salt manifolds because they haven't made any awards on pre-salt manifolds, and we suspect that they're anxious to get some manifolds on order. We think that between now and the end of the year, there will be a couple of manifold awards for pre-salt by Petrobras. That's we would expect. So you should look for that, and then of course, we're focused on trying to participate on that as well.

And the next question is from the line of Jud Bailey from ISI Group.

A couple of questions on the Surface business. When you look at all the moving parts, you've obviously got a nice growing component internationally, some weakness in North America. I was wondering if you could just kind of help us think about kind of the progression on order levels, and how to think about maybe the downside to orders, and maybe when we see the order levels, perhaps, stabilize. Is that something that happens in the fourth quarter? Or something that happens even in the first quarter of 2013?

Well, I think the biggest risk is North America. And we've been saying, right now, the North America rig count is flat, and so that supports the existing level of business. And then as Bob described, the -- what we're seeing on the upside is international because we're actually -- when you look at FMC, our market position is much stronger internationally than it is in North America. So as international goes up, we're the beneficiary of that and that's what Bob described. I'll let Bob talk to additional risks beyond the North America rig count.

Well, I think the most prominent issue that we don't understand clearly going forward, is the fluid control inbound heading into '14. The pressure pumpers typically either have their foot on the accelerator pushed to the floor board, or their foot on the brake and that can change very, very quickly. And typically, later in Q3, early Q4, we'll begin to get a better picture of what their capital spending plans will be for the following year. So it's just premature for us to predict what they may do in terms of fleet expansion or fleet replacement, whether international opportunities will drive them to do something more aggressively than they've done this year. So that's the big unknown, really. I mean, on the surface wellhead business, North America, it's really rig count-related and we don't expect to see that move around too much, but it's that CapEx piece of fluid control that's going to have to materialize and we'll see that later this year.

Okay, let me ask you another question on that. If -- given the growth you've had in that business in the last couple of years, and I look back going into early 2010, you had orders of around $250 million in early 2010. To get back to an order level like that, in your mind, would that represent a pretty bearish scenario? Or is that something that could be likely if the rig count is flat or modestly down?

Again, I just don't know because it's not really rig count-related as much as its CapEx-related, and what the pressure pumpers view as their kind of ongoing demand for additional horsepower. And that could come as a result of something other than North America. And we're going to have to wait and see how they react later this year when they put their capital plans together for the following year.

Okay. And just a follow-up on CLOV. You talked about some of the risks that you're still concerned about on that project. Could you maybe just give us a little more color, and maybe just give us some color on what you're specifically concerned about? Is it cost overruns, the delays, or kind of all of the above?

Well, the CLOV project suffered from the same things that Tormore-Laggan did in our North Sea projects, and that is our Eastern Region booked quite a bit of business at one time, and we didn't respond as quickly in hindsight as we should have in gearing up, and so they got behind. And so CLOV is an example of that, where we were having to play catch-up to make delivery dates. So that's the risk. There is another risk, and that is that because CLOV is in Angola and there is a local content requirement -- and we've been very successful in local content in Angola, but were more dependent upon Angolan fabricators, so we're going to have to manage that well. So that's another potential risk. As we get deeper into the percent completion of CLOV, the risk starts to diminish because we get most of our purchase orders placed and so we know what those costs are, and that's happening now. We're getting more and more confident. I think the risk would be is if we start to miss some deliveries or some dates start to get in jeopardy, we're going to try to protect the customer's schedule, and we'll spend money to stay on schedule. That's probably the -- that and maybe the local content piece is probably where the biggest risk remains on CLOV. But we're obviously very focused, but I'm not going to pretend that, that isn't a challenging project for us and we've got a ways to go before we're completely out of the woods.

And your next question is from the line of Brian Uhlmer from Global Hunter.

I had a couple of quick questions relating to the acquisition -- to the acquisition accounting. As we look at MPM, is that the accrual for a half year earn out, or is that for your expectation that they'll do $2 million -- well, under $2 million in EBITDA for the year? Or was that just the first half results?

Yes. Okay, so on MPM, first of all, this is good news. What this means is, we're seeing an increase in the forecast from MPM. We purchased 100% back in 2009. We spent roughly $30 million at the time, and the remaining 63% will be paid in payments in 2012 and 2013 based on their EBITDA. So what this represents, actually, is the increase in the forecasted payment for the MPM earn out. And it's obviously, for the full payment. It's not a partial.

Okay. So it's not -- okay, I got it. And secondly, when we move on -- moving onto Schilling. Obviously, that's a positive as well to have to mark it up. My question on Schilling is, is that primarily a book and ship business or does that actually hit any of your Subsea backlog, number one. And number two, just kind of a range of where Schilling with, as a full entity, is that going to be about 5% of your operating income? Or 5% to 7%? Is that the correct range to think about for the Schilling contribution to the Subsea operating income?

Yes. I'll let John provide you some further color on the nature of the business as well, but we haven't specifically disclosed the details of the Schilling component within the Subsea forecast. But let me say this. In terms of the Schilling potential for the full year, that is assumed in our guidance both from a revenue and from an EBIT standpoint for the remaining -- for the balance of the year, obviously from the acquisition in April.

With regard to backlog and the cycle time for Schilling, I would consider it a short-cycle business. It's actually 2 businesses. They're the market leader in ROV manipulator arms, and that's a very short-cycle business. That is book and ship. I don't think they keep much backlog, other than a couple of months. On the ROV side, the manufacturing time is longer, but it's still 6-or-so months. And so, if they get those ROV awards in the first half of the year, they'll ship them in the second half. So versus our subsea business, it's pretty much a short-cycle business.

So fair to say that the markup of Schilling and owning all of Schilling now, didn't have a material impact on your good order quarter beyond what you normally would say? It's just -- okay.

No. No, it didn't. No. No impact, really.

Good deal. Moving on, my next question is on Surface business. And I'm just curious how you're looking at the replacement and aftermarket service work as you've got, I count close to 250,000 to 300,000 horsepower of your customers, horsepower that is just sitting parked and not being put to work. Do you view that -- obviously, that's going to affect CapEx, getting that stuff out to work, but on the aftermarket, do you think that they're more inclined to cannibalize that stuff and pull pumps off of those versus aftermarket? And how are you looking at that in the back half of the year?

Yes, traditionally, when they park assets, which they have been doing of late as we talked about the less horsepower demand per well, typically, they will cannibalize. It's a cycle they go through. They'll cannibalize, and then once they do that and the activity stabilizes or begins to pick up, they have to react very quickly and that's some of that variability in CapEx that's hard to predict until we see their plans for the following year. But it wouldn't be uncommon for them to cannibalize some. We've included those kinds of assumptions in our 25% reduction in revenue from the second half compared to the first half.

And your next question is from the line of Robert Connors from Stifel, Nicolaus. Robert Connors - Stifel, Nicolaus & Co., Inc., Research Division: Just listening to your comments with regard of lack of available talent in the industry, could we see some subsea providers such as yourself charge more for the FEED in project management scope that goes into a project, rather than just from selling the equipment and if so, could that be of material?

No, Rob, we've participated in a lot of FEED studies, but not for the purpose of us making money on FEED studies only. We participate in FEED studies so that we can eventually win the systems business. So we wouldn't go out and use our technical talent just to provide engineering consulting services. We're going to use our engineering talent so that it can lead to us being the systems provider. So I don't see where, for us, FEED studies and charging more for the FEED study is going to lead to any kind of material difference in our margins. We participate in FEEDs for the purpose of winning that company's subsea systems business and supporting our partners. Robert Connors - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then some of the input costs such as like steel and nickel continues to remain weak, and you have some visibility from your frame agreements upon future demand. Any thoughts regarding maybe some advanced procurement to take advantage of it? Or just any update of what you're seeing on the cost side?

Good point. On the basic metals, which we use a lot of nickel alloy in subsea equipment, the pricing has been quite stable. We haven't seen big upticks. What we do worry about however, is some of the OEM components that go into the subsea equipment. They're unique to kind of the subsea world, and if those suppliers start to bump up against their capacity, we could see some big price increases. We haven't seen them yet. But we anticipate that, that could happen as the subsea market heats up. So what we've done is, we've gone to our partners where we have that kind of visibility and encouraged them to give us long lead contracts so that we can get the stuff on order before the big subsea uptick really starts to hit the supply chain and we can stay ahead of it.

And your next question is from the line of Ole Slorer from Morgan Stanley.

With respect to the subsea compression businesses again, I mean, you've got the separation and boosting nailed down. Could you give us a little update on where they stand now on getting reliable subsea compression systems. Is it going to be on what Statoil is working out on the Asgard field?

Well, there's been -- obviously the Asgard which you referenced, there's not a long list of subsea gas -- when I look out the next 2 years, there's not a lot of subsea gas compression projects out there. I think a lot of it is focused around the North Sea. Shell on Ormen Lange is considering gas compression. They haven't made the decision. As you know, Shell is a partner of ours and they're talking to us about gas compression as an option for Ormen Lange. We expect that later this year, early next year, after a number FEED studies and work, that Shell will make that decision whether or not to go with a platform or gas compression. So I'd say that's the next one up, would be a decision by Shell on Ormen Lange. And beyond that, the next couple of years, not a lot of gas compression, certainly, not beyond the North Sea.

And what is it that needs to happen for this to become more of an adopted development method? Is it success on the Asgard field? Or is it -- or are there other kind of critical items that needs to happen?

No, no, I think it -- we haven't had a gas compression system installed and operational to give the industry the field-proven confidence that they need, but I'm confident that Statoil will get to that point. I just would remind you that, at least what we've said, is that the gas compression, although an important market, isn't going to be a large market at least in the near term because the number of subsea gas fields is relatively modest. So I think that the demand for subsea gas compression is going to be smaller and slower over time just because of the number of big gas, subsea fields in the world. But I think the industry will adapt this technology the same way they've adapted subsea separation and boosting, and it's important that Asgard get in the water and be proven operationally. But I don't think you'd see this big explosion after that's done of a whole bunch of subsea gas compression projects, just simply because the number of subsea gas wells -- fields is relatively small compared to oil.

True. I mean, I was just taken aback a little bit by the sheer size and scale of this project, so I mean, they're massive. But as this kind of becomes more of a business, including the growth in subsea boosting and separation, what do you think will happen to your overall margins in your subsea business given the -- that this is sort of more of an engineering and less of a product-based offering? Will -- does it mean you'll gravitate more towards kind of high single-digit margins rather than high single or high teens that you can maybe get on product? How do you see that?

No, we don't see it that way. We see that the margins on subsea processing kit will reflect pretty much the margins that we see on a subsea system. When you look at the passthroughs, the components, we make those. When you look at, let's take, Total pass floor [ph] , the big subsea, almost $400 million subsea processing project, we -- other than the pump, which we're now developing our own pump, a lot of that equipment was manufactured. So the composition of what we make, what we engineer versus what we buy for subsea processing, looks about the same as it does for subsea production systems. So we don't think the margin's really any different.

And we have reached the end of the Q&A portion for today's call. I will turn the conference over back over to our host, Mr. Brad Alexander, for any closing remarks.

This concludes our second quarter conference call. A replay of our call will be available on our website beginning at approximately 2:00 p.m. Eastern Time today. We will conduct our third quarter 2012 conference call on October 24 at 9:00 a.m. Eastern Time. If you have any further questions, please feel free to contact me. Thank you for joining us. Robyn, you may end the call.

And this does conclude today's conference. You may now disconnect.