TechnipFMC plc (FTI) Q4 2012 Earnings Report, Transcript and Summary

Welcome to the Fourth Quarter 2012 Earning Analysts Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Brad Alexander. Mr. Alexander, you may begin.

Thank you, John. Good morning, and welcome to FMC Technologies Fourth 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're 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. References made to completion services during this call are related to the businesses we acquired in conjunction with the Pure acquisition that closed on October 1, 2012. I will now turn the call over to John Gremp, FMC Technologies' Chairman and CEO.

Good morning. Welcome to our fourth quarter 2012 conference call. With me today are Maryann Seaman, our CFO; and Bob Potter, our President. I'll start with some highlights from the quarter and for the year. Maryann will provide specifics on our financial performance and our outlook for 2013, and then we'll open up the call for your questions. Regarding the results for the quarter and full year, earnings were $0.50 per diluted share for the quarter and $1.78 for the full year, a 9% increase over our prior year performance and our 11th consecutive year of earnings growth. Our operational performance in the fourth quarter was strong in all 3 business segments and met our expectations. The quarter and full year earnings include an earn-out charge related to our Multi Phase Meters acquisition that Maryann will discuss. Record quarterly company revenue and operating profit was driven by significant growth in subsea, which more than offset the declining North America land market. Subsea Technologies revenue of $1.2 billion in the quarter represented a significant sequential and year-over-year increase and drove our full year revenue to $4 billion. Our subsea revenue has grown almost 50% since 2010 as our backlog has strengthened and we increased capacity through investments in talent, supply chain and facilities. Subsea Technologies' inbound for the quarter was $1.4 billion, bringing our 2012 total inbound to $4.6 billion. Orders were strong for our subsea business despite the delay of some large awards the industry has been expecting. We were awarded 35 trees in the quarter, bringing our 2012 total to 159 subsea trees. This brings our market share for industry tree awards to almost 40% for the year. We also saw strong order flow from both MPM and Schilling Robotics in the quarter as both of these businesses are responding to increasing demand and gaining market share on the strength of their innovative technologies. As a result of our strong order performance in the quarter, we exited the year with $4.6 billion in Subsea Technologies backlog. Surface Technologies fourth quarter revenue was $444 million. Activity improved sequentially as international surface wellhead sales growth offset our expected decline in North American activity. In addition, we benefited from the October acquisition of Pure Energy Services. In the fourth quarter, fluid control revenue was at its lowest level in 6 quarters due to the decline of capital equipment backlog. While repair and replacement business has also declined, it's maintained reasonably good volume and profitability in this challenging market. Our international surface wellhead business remains strong as a result of our established presence and the expanding opportunities in these markets, particularly in the Middle East. Energy Infrastructure performed as expected in the fourth quarter as we experienced sequential gains in measurement solutions and loading systems. Looking forward, in 2013, we expect to see continued year-over-year growth for subsea activity. We think many of the projects we've previously discussed will be awarded this year. This includes large projects in West Africa, additional awards in Brazil and a continuation of orders in the North Sea and significant growth in the Gulf of Mexico. Focusing on the Gulf of Mexico. We were recently awarded the contract for BP's Mad Dog Phase 2 development. This project falls under our global frame agreement with BP. We also expect to see major operators, including Shell, Anadarko and Exxon Mobil, increase their activity in the Gulf of Mexico as they have projects slated for award this year. In 2012, the subsea market strengthened. We began to see indications pricing would improve, and we feel confident this better pricing will materialize in upcoming awards. With regard to some of our other capabilities in the subsea portfolio, in the future, much of our investment will be -- will focus on expanding our subsea services business and processing capabilities. Consistent with our strategy of expanding our subsea processing business, the qualification of our helico-axial multiphase pump, combined with our agreement for future product development with Sulzer, gives us a solid platform participating in the boosting market. Coupling this with our capabilities in subsea separation and compression provides us the most complete offering to participate in the subsea processing market. Our confidence in the growth of this market is bolstered by operators becoming increasingly more engaged regarding subsea processing technology, as indicated by the increased number of named project and FEED studies over the next few years. In Surface Technologies, North America will remain a challenge in the first half of 2013, and it's unclear if recovery will occur in the second half of the year. In contrast, we believe our surface wellhead business will remain strong internationally as rig counts continue to increase. In the long term, however, the shale plays are a growth opportunity, and we will work to fully develop and integrate our products and services associated with the fracturing process. In summary, we delivered strong operational results this quarter in all 3 of our business segments. Subsea Technologies' outlook includes increased revenue, margins and inbound awards as we benefit from a strengthening market. Surface Technologies' outlook includes solid international surface wellhead activity and a full year of completion services results. This will be offset by declining North America fluid control and surface wellhead results. Overall, we expect 2013 earnings per share to increase to a forecasted range of $2.05 to $2.25. Maryann will now take you through some of the financial details in the quarter and for the full year and provide more detailed explanation on our 2013 expectations.

Thanks, John. Our fourth quarter operational performance was solid as all 3 segments delivered results that are above our expectations. Included in our earnings in the fourth quarter is a charge of $17.5 million or $0.07 per share for the increased liability associated with the earn-out from our Multi Phase Meter acquisition made in 2009. The earn-out is based on 2012 and 2013 performance. MPM performance was better than expected in 2012, and we have raised our MPM forecast for 2013. Excluding the impact of this incremental charge, earnings per share were $0.57 in the quarter. Also included in our $0.50 per share is the charge of $8.6 million or $0.04 per share for the changes made to our Norway pension, as we previously guided. Subsea Technologies operating profit was $151 million in the fourth quarter. Operating margins of 12.2% were in line with our most recent expectations. Surface Technologies generated operating profit of $65 million with a margin of 14.6%. Operating profit declined 15% from prior year quarter but improved 12% sequentially on the strength of international surface wellhead. As we anticipated, our fluid control business revenue decreased sequentially due to the absence of sales related to capital expansion. Backlog for fluid control is the lowest we have seen since the first quarter of 2010. Looking forward to the next few quarters, we expect this business will be driven by repair and replacement work until our customers begin adding to or updating their existing fracturing fleets. Our international surface wellhead business showed improvement from the third quarter, where we had some delivery slipped. We recovered those and delivered activity originally forecast for the fourth quarter. Our completion services business also contributed to the quarterly earnings increase on the strength of flowback services. Orders for Surface Technologies for the quarter was $389 million. Surface wellhead continued to see a healthy level of international activity, and the $389 million includes orders for completion services, but fluid control inbound continued to decline. Backlog now stands at $501 million for this segment, with a greater percentage attributed to surface wellhead in the last quarter. Energy Infrastructure generated operating profit of $23 million with a margin of 13.7%. The 13% increase in profit over the prior year quarter was due to the acquisition of Control Systems International and improved performance in our separation systems and loading systems businesses. Sequential increases were largely the result of both loading systems and measurement solutions, where both the expected strong year end revenue, combined with activity delayed from the third quarter, helped deliver a solid quarter. Now for the corporate items. Corporate expense in the quarter was $11.4 million. Other income and expense, net, reflects expense of $40 million. Included in this quarter is the $17.5 million charge for Multi Phase Meters as the 2012 performance was better than expected, and we have raised our expectation for their performance for 2013. Additionally, as previously forecasted for the fourth quarter, we took a charge of $8.6 million for the Norway pension plan as we moved to a defined contribution plan. Our fourth quarter tax rate was 32%. For the full year, our tax rate was 28%, 26% when excluding the MPM earn-out expense, which does not receive a tax benefit. Capital spending this quarter was $123 million, primarily directed toward both Subsea Technologies infrastructure and service asset investment and the recently acquired Houston real estate for future growth requirements. For the full year, our capital spending was $405 million. We repurchased 927,000 shares of stock in the fourth quarter at an average price of $42.21 per share. For the full year, we repurchased approximately 2.1 million shares at an average cost of $42.61. At the end of the fourth quarter, we had net debt of $1.3 billion. It was comprised of $342 million of cash and $1.6 billion of debt. So in summary, for 2012, we earned $1.78 per diluted share on revenue of $6.2 billion, representing 9% increase year-over-year in earnings and a 21% increase on revenue. Subsea Technologies revenue was $4 billion, an increase of 22% with margins of 11.3%. Surface Technologies revenue was $1.6 billion, an increase of 22% with margins of 17.8%. Energy Infrastructure revenue, $576 million, an increase of 14% with margins of 8.5%. Looking at 2013, as John communicated, our earnings per share guidance for 2013 is in the range of $2.05 to $2.25, an increase between 15% and 26% year-over-year. In Subsea Technologies, we expect to see revenue growth over 2012. While we see a strong 2013 for subsea inbound, award timing could impact our 2013 revenue growth. As we have seen in prior years, we anticipate sequential revenue and margin decline in the first quarter for 2013. For the full year, we anticipate margins should average at least 13%, with the back half of 2013 stronger than the first half. Moving to our Surface Technologies segment. In surface wellhead, we expect our North America business to be down from 2012 given the strong performance we delivered in the first half of the year last year and given the challenging market in 2013. We do, on the other hand, expect to see a modestly improved rig count internationally, which should benefit our international surface wellhead business. However, the international market growth may not be enough to offset the decline we expect in North America surface wellhead. For 2013, we expect our fluid control business revenue will come mainly from repair and replacement activity. We entered the year with minimal backlog associated with capital expansion, and as of now, we are not forecasting recovery associated with this part of the business for 2013. In 2013, Surface Technologies will include a full year of completion services revenue. With the addition of our completion services business, we have greater exposure to Canadian breakup and thus think our revenue and margins for Surface Technologies should be at their lowest level for the year in the second quarter. Our completion services business overall should see some activity expansion in the U.S. as we grow its flowback presence. In Energy Infrastructure, we expect to see revenue growth over 2012 on the strength of loading systems, separation systems and the full year contribution from Control Systems International. As in previous years, we expect a decline in both revenue and margins in the first quarter, with better activity in the second half of the year. We think full year margins should average over 10% as a result of the activity improvement and lower project cost. Regarding corporate items, we expect corporate expense to average approximately $13 million per quarter in 2013. We expect other expense, net, to be approximately $20 million per quarter in 2013, subject to foreign currency fluctuations and any MPM earn-out adjustment that may be required if results in 2013 continue to outperform our expectations. We expect our interest expense to average $8 million per quarter, weighted toward the first half of the year. We anticipate our 2013 tax rate to a range between 27% and 29% for the full year. Due to 2013 changes in U.S. tax law having retroactive effect for 2012, we do expect our first quarter tax rate to be lower than the remaining quarters since we expect to record the 2012 benefit in the first quarter. We expect capital spending in 2013 to be approximately $400 million. The majority of our 2013 capital spending will be directed towards subsea in Brazil, Norway and West Africa, along with increased spending related to growth for our subsea services offering. For Surface Technologies, our capital spending will be focused on growing our completion services flowback offerings in the United States and international-based expansions. So in conclusion, we remain optimistic that our subsea business will continue to grow profitably in 2013 and beyond and that our Surface Technologies business will perform well despite the challenging North America market we are currently facing. Operator, you may now open up the call for questions.

[Operator Instructions] And our first question comes from Joe Hill from Tudor, Pickering. Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: John, I'm curious as to what you're seeing in West Africa with regards to some of the opportunities you touched on that gives you confidence we're going to see some of these things break loose this year. Obviously, there's been some issues within NPC and some FPO award changes and maybe a slowdown of development plans. So just a little curious as to what gives you confidence.

I think I mentioned last quarter that we -- one of the big projects that we're targeting had a potential to slip into 2013, and now it looks like that's happened. I would be very surprised if that project was not awarded in the first half of the year. I know there's petroleum law issues in Nigeria and so forth, but it looks like these projects are not only affected. I know there was another project, a Nigerian project, I believe, Erha, where there was an installation contract award, which would suggest that these projects are getting pretty close to breaking loose. And I think that's what will happen. If you look at Angola, the list of projects there, we'll see some activity in Angola this year. So I think, particularly Nigeria, where things have stalled for the last couple of years, we're going to start to see that break loose, and I would be surprised if a couple of those projects weren't awarded, the ones at least we're targeting in the first half of the year. Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Okay. And then another question I had was how Pure performed relative to your expectations in the fourth quarter.

Yes, we were pleased -- the acquisition of Pure is part of our longer-term strategy, and although there's difficulties in North America, their Canadian business, where they're so strong, held up as good as we could have expected. I'll let Bob Potter make some comments on Pure.

Yes, the integration is going really quite well. We're beginning to see some of the synergies between our surface wellhead, fluid control and flowback services business that we anticipated, and we're taking advantage of those things. Now looking at additional expansion opportunities outside of Pure's historic strength markets, which were Canada and the Bakken. And we're really pleased with the pace at which those opportunities are being realized. Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Okay. And then just one more for Maryann. Maryann, what are your expectations for the balance sheet over the course of this year? The company has been building up debt, and I wanted to kind of get a sense for what your comfort level is and what your expectations are for how that debt level carries forward.

Yes, sure, Joe. I mean, as you know, we did over $600 million in acquisitions. This year, it's been over $400 million. So we know -- we spent $1 billion this year. We've had some working capital performance challenges in 2012, and we expect to see good recovery in 2013. So it's my expectation by the end of the year, we'll look at a net debt position that's probably somewhere in the neighborhood of 50% improved from where we sit at the end of 2012. We're expecting performance improvement. Clearly, we've got strong cash flow expectations as you look at the growth year-on-year and then the working capital improvement that we've got forecasted in 2013.

Our next question comes from Jim Wicklund from Credit Suisse. James Knowlton Wicklund - Crédit Suisse AG, Research Division: The CapEx, $400 million for this year, and you talked about Norway and Brazil, and then you talked about service. And Bob, you're talking about the additional expansion opportunities for Pure, and you mentioned international. How much of your CapEx in 2013 will be spent on the businesses that are -- that were Pure and that type? I don't want to be too narrow, but the service -- surface -- the shale business, the service business that you have.

Yes, Jim. Most of our CapEx is directed to our high-growth businesses in subsea. The first CapEx piece is going to be to make sure that we have enough capacity to support the significant growth coming at us in subsea. CapEx devoted to Pure would be extremely small. James Knowlton Wicklund - Crédit Suisse AG, Research Division: Okay, good. That's nice to hear. And my follow-up is the subsea business that's coming at you and you have to be ready, most of what we've seen for the last 1.5 year or 2 years has been a consistent push to the right. And with everything that's been going on in Brazil, most people think whatever CAGR you were going to use for Brazil is probably a little bit lower number. Nobody doubts the inevitability of this, but do you see this year as a year of acceleration for subsea?

Yes, well, you're right. If you look over the last 3 years -- and I would just use trees as a proxy for activity. Over the last 3 years, the number of trees awarded per year has been in the 300 range. And then this -- in 2012, it jumps to 414. So you have a 30% to 40% increase in subsea activity in 2012, which will have to be delivered over the course of the next year or so. And then you look at 2013, and it could jump again by another 30% or 40%. And that's the growth that we've been anticipating with our CapEx spend in capacity add. So I think it's definitely coming. I mean, it arrived in 2012 with 400 trees awarded, and there's more to come in 2013 and... James Knowlton Wicklund - Crédit Suisse AG, Research Division: Well, I understand the growth, but if I go back 4 years or 3 years, I thought that most people in the industry would have expected a faster growth rate average than we've seen. And I'm not arguing '11 over '12, '12 over '13, but even that's lower than we expected 3 years ago, isn't it?

Well, I mean, if you're using Quest forecast, yes, it is lower and the projects moved -- you're right. Projects moved to the right, and so it probably is lower. But it still represents for an industry to respond in a couple of years to 30% to 40% growth year-over-year, it takes the kind of CapEx investment that we've made over the last couple of years to make that happen.

Our next question comes from Tom Curran from Wells Fargo.

Just first returning to Q4 for subsea. So we had a sequential revenue increase that came in 50% above the minimum of $200 million you were expecting, yet we actually saw a 20 basis point contraction in subsea's EBIT margin. I don't want to parse quarter-to-quarter fluctuations in EBIT margin too much but would like to know why we didn't see more fixed cost absorption and margin at least hold steady, if not increase. And then maybe just some reassurance that the improvement trend is firmly intact.

Let me start by saying our -- or for the quarter, our margin and backlog continued to improve, so that's what gives us the confidence that over time, the margins will improve. But as you know, our backlog is made up of lots of different projects with different margins, projects that were taken at different periods in the cycle. And therefore, what happened in the fourth quarter was really an issue around mix and how certain lower-margin projects in our backlog flowed through on percent complete basis through the P&L. So that's what happened, but the confidence maybe that you're looking for comes from the margin improvement and backlog continuing to progress. But I'll let Maryann maybe talk a little bit more about the margins in the fourth quarter for subsea.

Yes, Tom, we talked about achieving $4 billion in revenues from a full year perspective, and I think we delivered that with, obviously, revenues improving by at least $200 million in the fourth quarter. As John said, we've got multiple projects that we're running through in the quarter, and as I mentioned in talking about 2013 guidance, we are expecting to see somewhat of a decline in the first quarter. Part of that is driven, really, by the mix of service business that we've got. And in the first quarter, we don't get the level of service revenue coming out of our Light Well Intervention. It's a good time for maintenance given the weather, et cetera, in the North Sea. So you'll see some variations and fluctuations. We're managing a lot of projects, as you know, but on a full year basis, we're expecting margins, as I said, at the 13% average level for 2013, which means we're probably looking at higher margins in the back half of the year than we are in the first half of the year in order to be able to achieve the 2014 progress that John has talked about and we've talked about in the past.

Right. So it doesn't sound as if you've really made any changes to the initial 2013 margin preview you gave last quarter.

Yes, that's correct.

Okay. And then based on what you added to backlog over 4Q and the updated pricing evolution outlook you have, what might be the earliest we would see a '14 handle for subsea EBIT margin?

Yes. Well, we don't expect to see the orders that are received this year to show some of that pricing improvement, and then there'll be -- they'll run through the P&L no earlier than 2014. And to the extent projects move a little bit to the right, then it just pushes it further back into 2014. But we definitely expect the awards to be made this year, in 2013, to reflect a better pricing and better margin.

Great. One more for me. John, maybe just an update on subsea processing, both total revenues booked in 2012 and then the project outlook for 2013 in terms of the slate of projects that could be awarded.

Right. This new emerging technology and the industry's adoption of subsea processing, we just should expect it to be lumpy, and that's exactly what happened. We saw a number of awards in 2010 and 2011 and very few, if any -- just -- I think there's only 1 or 2 awards that were made in 2013. But then you look at the slate of projects for the next 2 years, and there's something like 8 or 9 projects that could potentially happen in 2013 and a similar number for 2014. Now they're not all big EPC projects. Some of them are just FEED studies, and of course, some of them may not materialize at all. But I think this is the kind of lumpiness that we're going to have to expect for a while as the industry adopts this new technology. But there's no question, Tom, about the interest. When I look at the list of the projects, the diversity of customers, the diversity of geographies where this technology can be applied, I think all the expectations that this is a very, very important and significant material -- new segment of the industry is very much real.

But has either the Eni or Total boosting tenders that were the first to bid the Sulzer pump on, have either of those been awarded yet?

No, they haven't, and we didn't expect them to be awarded yet. What we understand is they will be awarded in 2013. And as you know and pointed out, we're very pleased that the Sulzer pump was fully qualified to participate in both of those awards this year -- or tenders this year, sorry.

Our next question comes from Bill Herbert from Simmons & Company. William A. Herbert - Simmons & Company International, Research Division: John, with regard to the composition of your orders in the fourth quarter for subsea, especially impressive given the absence of major projects. I mean, I think you said you had 35 trees in the quarter. You had close to $1.4 billion in inbound, and that compares to a little bit more than $1.4 billion in inbound in Q1 and 85 trees, and of course, most of those were Petrobras in Q1. But nonetheless, revenue per tree has been really strong in the past 3 quarters, and I'm just kind of wondering about the baseline order rate x major projects going forward for 2013. Are we witnessing a decent sustained inflection higher based upon the blossoming of some of your growth platform businesses, coupled with the fact that the onesies and twosies on a quarterly rate are just ramping higher? Has it been the case?

Right. Well, it's not -- first of all, we were pleased with the inbound from smaller call-offs in Q4. You're right. It was significant. Now your question is, is it sustainable? In part. Most of it came from strength in the Gulf of Mexico, and the strength in the Gulf of Mexico, I think, will be sustainable. We were -- we especially benefited by significant small onesie, twosie orders from our alliance partners. Probably 70% of what we booked in the Gulf of Mexico in the fourth quarter came from our alliance partners, and I've got to say that's a lot of timing in there that they arrived in the fourth quarter. So I don't think it's completely a new baseline going forward, but the strength of the Gulf of Mexico is a baseline. I think that is sustainable, and we'll go forward. And in some of my remarks I mentioned -- well, I mentioned that we recently got the BP project, which is big. There's more to come from Exxon, Shell and Anadarko this year. So that part in the Gulf of Mexico is sustainable. With regard to our growth platforms, no, not in the fourth quarter, although we're obviously optimistic about both subsea processing and subsea services. Those are growth platforms that are going to materialize over a much longer period of time. William A. Herbert - Simmons & Company International, Research Division: Got it. And with regard to -- sticking to subsea here for a sec, I don't think you issued a prophecy with regard to the magnitude of subsea inbound for 2013, and I think we were something along the lines of $4.5 billion, $4.6 billion this year. What is a reasonable sub position for 2013 with the expectation that you're going to land some of these bigger projects that we've been waiting for, coupled with the improvements that you just talked about?

Right. Well, let's just start with the facts. You're right, $4.6 billion in inbound for the year, which we were pleased with particularly because it was absent a large West Africa project that we had been targeting. But I would remind you that it did include the largest subsea award ever, the $1 billion Petrobras pre-salt project, which will not recur. So looking at 2013, we don't get the pre-salt recurring, but we do expect to get a big project in West Africa. So I think it would be -- we would -- we believe that the inbound for 2013 can exceed the inbound in 2012, and so we should expect an increase in inbound over 2012. Now how high? With the timing of these big projects, I think it's still a little bit too early to predict. But definitely, we should expect a higher number in 2013 for inbound from us, particularly when you look at the number of projects that are out and the ones that are associated with our partners. I'd also expect our market leadership position to be sustained in 2013.

Our next question comes from Ole Slorer from Morgan Stanley.

John, just a quick update on the Campos Basin and Marlim. I get some signals that this system is about to start now. Can you give us an update?

Yes. As you know, Ole, they've had a number of challenges and obstacles on topsides, and I'm sure that's been frustrating and certainly delayed the full commissioning. As you know, they're flowing fluids through our system, but the big test is when the separation of boosting system gets commissioned. And we understand also that that's -- it should happen very soon. They're getting very close to starting commissioning, and our commissioning team is ready once we get the call from Petrobras. So we, too, hope that it's eminent.

And if this is eminent, can you just give us an update again? How many risters [ph] are on that platform? This system is only tied to 2 of the flow lines, right?

I don't actually know the number. It's tied to just one of the flow lines is my understanding.

Okay. And the second question is in terms of the adoption rate of subsea, I mean, Pazflor has arguably been the most successful complete system on subsea processing so far, given what you did there and how much capital was saved on the development as a result. So this thing has been 18 months in operation now. Could you give us some kind of feedback on what's going to interest to getting in that type of a system that the concept has proven?

Yes, I -- well, you're seeing now Pazflor, which is fine, but I'd like to broaden a little bit. Even though Statoil's Tordis project was -- didn't work out exactly like they thought, there was tremendous interest, and the technology did do what it said it was supposed to do. And there was a lot of that interest and experience that rolled over to the Pazflor project, which, you're right, has been -- all the feedback on Pazflor has been successful. But I would go even further and talk about the success that Shell had when both Perdido and BC-10 -- Perdido had some flow assurance issues, but BC-10, in Shell's mind, was very successful. And both of these discoveries, in Shell's mind, would not have been possible without subsea processing. So I think all -- you can look at all these projects as being important milestones for the industry and their adoption of the new technology. Now they're all solving different problems. The technology itself is different, but I think each of the operators would point to the success of how the technology was applied and meeting their expectations. But you're probably right. Pazflor looks like it's been successful for many, many different points of view. First oil on schedule, within budget, technology working. But I'd take a little broader view. I think that all the projects that are out there have been -- have had a successful...

And I would agree with that. We have about 30 full projects now, and we are way past the prototypes. So if this thing materializes the way we think, which is to be quite a meaningful industry opportunity, what do you think they will do to your margins? Will they go down because little bit more of a systems mix in your subsea business and more engineering hours, or will they go up because of higher componental [ph] technology? How should we sort of think about sales 2014, '15, longer-term margins and how they're being affected by a high degree of subsea systems?

Well, first of all, we should definitely not think of margins as going down. This technology is new. It creates tremendous amount of value for the operator, so I can't imagine that would margins go down. So I would start by -- let's thinking of -- think of margins at least in terms of the margins we expect for our subsea systems. But then beyond that, I think because some of this technology is new, the competitive intensity might not be so strong today. We compete against 3 other subsea systems suppliers that are almost always qualified for tenders. We don't -- there's not the same level of capability, at least in the early stages of the development of this technology. So I think there is some potential for improved margins on the subsea processing side, but for now, I think we ought to look at it as being very similar as our subsea systems margins.

Okay. So you don't think that it will be dilutive to what your margins otherwise would have been? I think that's important.

Yes, I don't see it being dilutive, particularly if your point is in terms of pass-throughs and that sort of thing, we think...

Yes, well, just more engineering and less manufacturing.

That's not what we saw on the -- on BC-10, Perdido, Pazflor. We saw very similar margins to our subsea systems.

Okay. Just one related follow-up, if I may. I mean, you're endorsing your alternative subsea pump, the Sulzer. As you break into the market with that pump, do you think that will have any kind of negative margin impact on industry as a whole? Or is there too many projects out there to handle?

Yes, I can't imagine that it would necessarily be negative. I mean, obviously, there's just one provider today, so there was really no competitive environment. But I think the industry is looking for multiple suppliers for the helico-axial pump, and I wouldn't imagine that there would be a -- I don't really know how dilutive another supplier would be. I think it's important that the industry have multiple suppliers, and the operators are encouraging that. I don't -- I think the margins on the pump, we expect anyway it to be....

Let's say it will not be dilutive to your margins. You will [indiscernible] industry.

Right. Well, I don't know what the margins are for the competition, so I can't really speak. But I'm sure when there's...

Our next question comes from Angie Sedita from UBS.

John, any initial thoughts on the one subsea joint venture between Cameron and Schlumberger based on what you know today?

What we know is just the statements that have been made by the organization, and they make their statements that actually, we've made for some time. I mean, they point to the growth of the subsea market, which we are convinced of. They point to the importance of increased ore recovery, which we also believe strongly in. They see the importance of subsea processing as part of the technical answer to that, which is something that we feel strongly about and have for some time. There's also this point about the importance of systems integration. And as you know, Angie, one of the things that has contributed to our market leadership in subsea is we are a systems provider providing the integration. So I think that's another point that we feel strongly about, that being a systems provider is, in fact, an advantage because you can optimize through integrating the various components of the subsea system. And then finally, something that also resonates with us is the importance of working with an operator very, very early in the life of the field, particularly at the FEED study to optimize the entire subsea system. And through our significant alliance partners, that's exactly what we've been doing for a number of years, again, contributing to our relations [ph]. So these kinds of themes, if you will, that were -- we've heard from the one subsea organization is very much what FMC has built our subsea business around for several years.

I agree. And as follow-up to that is, as you pointed out very fairly, that you do have a high number of frame agreement and alliances which are already in place. So thus I would assume you feel confident in your maintaining your current market share. And also as a reminder, how long is the duration of your average frame agreements and alliances?

Right. So you're exactly right. The biggest contributor to our market share being sustained -- and again, we ended 2012 with just under 40% market share and the leadership position again. And it comes from the fact that almost 50% of our inbound comes from our alliance partners. And that will be important as the market expands into subsea processing and other capabilities. It will be our -- we'll, again, work with our alliance partners as we introduce that new technology. To answer your point about how long the alliances last, yes, they're contractual, and they have kind of beginning and end dates, but that's not really what sustains them. What sustains them is our performance. And you think about our relationship with Shell, which is almost 20 years, and our relationship with Anadarko that goes back 20 years, our relationship with BP that's now starting its second decade, these relationships, they're sustained not just because of some time frame on a contract but because of our level of performance and the value that's created. And I think that's how you have to look at it. And we pay a lot of attention to that, as you can appreciate.

No, I -- that's fair. And then as a follow-up. On the agreement with the Sulzer pumps for subsea boosting, how does this pump -- the technology differ from the Framo pump? And then second, I would assume the bids you already have outstanding are maybe a combination of Framo-specified pumps and now, the newly-added Sulzer pumps.

Right. Well, the Sulzer pump, which we've been -- which we've had fully qualified now and is qualified to tender for Total, Petrobras, Eni and others, that, in terms of performance, would look very much like the Framo pump. It's based on the same patent technology, so you ought to look at that pump as being fully compatible with the Framo pump. Our relationship with Sulzer, the one that we announced earlier this year, is really about the next-generation pump. And our collaboration -- or an exclusive relationship with Sulzer is designed to what will the next-generation pump look like. And we're already busy working on that, and that's why that collaboration agreement -- exclusive collaboration agreement with Sulzer was so important is because it defines the path forward for the next-generation pump.

Okay. And then finally, on the subsea pricing, are you -- give us an update on what you're seeing from the degree of discipline from your peers and the outlook for pricing in 2013. And is it possible that pricing does not recover, or in your view, is it only a matter of time?

In my view, it's only a matter of time. The outlook is we're convinced that the pricing will improve, and it should start to improve, definitely, in 2013. I'd feel a little bit more -- I'll feel a little bit better when I actually see these awards show up with the better pricing, but we certainly know how we're pricing, and we're pricing for a market that's in an up cycle. When you look at that sheer number of large projects, for example, EPC projects that will be -- that have been awarded in the second half of 2012 and will be awarded in 2013, they really start to bump up against the industry's capacity to deliver that many EPC contracts concurrently, and that should drive different pricing behavior. What we've seen so far is a decline in what I would call competitive intensity. Now these are kind of qualitative kind of remarks, but when you look at the number of bidders that start out with a tendered project and then end up at the very end, it's reduced. Typically, we'll see everybody participate in a large tender, and then as the tender progresses, several fall off, and it's down to just 1 or 2. We didn't see that 3 years ago, but that's what we're seeing now, and that's where that competitive intensity is starting to drop off. And I believe that's a precursor to better pricing, certainly, as some of the other subsea suppliers are faced with filling up their backlog, which we've seen. One competitor that's been particularly aggressive over the last couple of years has won something like 4 or 5 EPC contracts in the last 18 months alone, and that would exceed at least their demonstrated capacity by 2x and 3x, and you'd think that would start to influence their approach on some of these tenders. And that's what we're counting on and expecting to see in 2013.

Our next question comes from Rob MacKenzie from FBR Capital Markets. Robert MacKenzie - FBR Capital Markets & Co., Research Division: I wanted to come back to some comments made earlier in your prepared remarks, I believe, about the surface business. Particularly the fluid control business being primarily or almost entirely just maintenance activity this year, and it's been my impression that that is far more profitable in the OEM portion of that business. A, is that correct, and B, if so, what should that do to our view of how margins progress in that segment?

Right. Well, first of all, with regard to margins between the repair and the placement versus the CapEx, those margins are the same. It's the same identical equipment. It's just used for capital build when the pressure pumps are adding capacity. So those margins are the same. What -- the only difference there would be when we talk about our pumping business. That has lower margins. But the WECO/Chiksan treating iron has the same margins, whether it's sold in a CapEx to expand fleet capacity or in repair and replacement. Those margins are the same. You're right, though. In the fourth quarter, we saw virtually no fluid control inbound for CapEx. And historically, in a normal market, if there is such a thing, we could see as much as 25% of our inbound being CapEx. And during the peak, we saw as much as 50% of our inbound was CapEx. That's now all gone to 0. And it carries with it those same high margins of fluid controls, repair and replacement, and that will hurt us going forward. In the fourth quarter, our revenue from fluid control actually included some CapEx that was in backlog, and that goes away in the first quarter. So we'll actually see a little more deterioration because the fluid control mix will go down in the first quarter. Now as we said in the remarks, we're -- we don't see any improvement in the CapEx happening in the first half. We're hopeful that there might be some of that in the second half. Robert MacKenzie - FBR Capital Markets & Co., Research Division: Okay. And apologies if I missed it earlier. In terms of your subsea margin guidance for this year, how much is the recovery, I guess, or increase later in the year coming out of 1Q is the -- is related to finishing up Laggan-Tormore and, perhaps, CLOV by midyear versus just greater cost absorption?

Yes, Rob, it's Maryann. We certainly have some CLOV revenues coming through in 2013. We're close to about 70% complete on that project, but CLOV revenues will come through but will be completed. On Laggan-Tormore, we're essentially complete on that project. So the percentage of our lower-margin projects in 2013 is reduced from the revenue contribution of those lower-margin projects in '12. But as I mentioned, I think you should expect to see the margin progression more toward the back half of the year than you would in Q1 and Q2 just based on the distribution as we see it today. Robert MacKenzie - FBR Capital Markets & Co., Research Division: Okay. And my final question is centered around other comments you made on subsea, about the service business potentially being down in 1Q. Can you give us a feel for the magnitude of that, and is it just seasonality you see there?

Yes, it's just seasonality. We are expecting growth in our services business from '12 to '13. Typically, our first quarter in any given year tends to be our lightest quarter with respect to the service contribution. So nothing abnormal there yet. We go through recertification of our units, and that happens typically in the first quarter just given the weather and the ability for us to get it done in that quarter. So nothing abnormal.

Our next question comes from Doug Becker from Bank of America.

Just wanted to hone in on the revenue growth in a little more detail. Taking a look at the $4.6 billion in backlog for subsea historical conversion rates, it seems like something 10% or certainly higher than that revenue growth in '13 is reasonable, but I appreciate that there's a large pre-salt Petrobras contract in there as well. Is 10% reasonable as we look at '13?

Doug, I'll let Maryann get into the details and how we calculate it. But sure, I do want to point out, which you already pointed out, and that is where in the backlog is sitting there with this big multiyear Petrobras project that will not flow -- the whole amount won't flow through a normal S curve through the 2013 P&L, so thanks for taking that into consideration. The other thing is just the timing of these big awards. We get them early in the year, and then we've got a chance of getting further down that expense curve. If they get pushed to the right, there's less that we can book. And so that's the part that's a little bit tough to calculate. But I'll let Maryann walk you through how we can calculate subsea revenue.

Right. And as you correctly stated, because of that $1 billion, the conversion rate that we're expecting or estimating, if you will, for 2013 is in the neighborhood of about 60%. And that's obviously because we've got some large projects awards in there that are multiyear in delivery in nature. So we're expecting around 60% conversion from that backlog. The other element of that, as you know, is service, and as I just mentioned, we're expecting service to grow. So that's somewhere in the range of about $1.2 billion. And then the key element here is the timing of when we see the project awards in 2013 for us to be able to get revenue, if you will, from that what we call book-in-turn [ph]. So again, just to summarize, roughly 60% coming out of the backlog, about $1.2 billion from our services business, and then the balance will be from book-in-turn [ph] based on how we're successful inbounding projects this year.

And just for perspective, what did book-in-turn [ph] run in 2012?

Yes, it was approximately about $500 million in 2012.

Okay. And then switching to surface. I know there's a lot of moving parts there between international and the U.S. and fluid control but also adding in the Pure acquisition, is it reasonable that revenue is pretty flat in '13 versus '12?

In subsea -- excuse me, in Surface Technologies, as you know, we've sort of got a range depending on what happens to us in North America. But when we look at the contribution of Pure year-on-year, at the bottom end of our guidance, even with the increase that's contributed from a full year of Pure completion services, our revenues could be flattish. At the top end of our guidance, depending on how quickly we can see the strength of the international market and whether or not we see recovery in North America, then we could see revenues above 2012, but again, driven by the strength of Pure given that we've got a full year versus just one quarter in 2012.

Our next question comes from Brian Uhlmer from Global Hunter.

I had a couple of quick questions about the balance sheet. I was curious how -- number one, we've had a pretty sizable working cap build over the last 7 quarters or so. Moving forward, do we expect that build to continue? And the second question is along those lines, if it continues at the same rate, we're still going to generate about $200 million of cash in 2013. How are you looking at spending that cash? And that's a number post-CapEx on the buybacks and/or possibly -- considering that the topic du jour has been dividends in our space.

Yes, you're right. Over the last couple of quarters, as it looks at our working capital performance, we probably could have done a better job. We are projecting for 2013 for a couple of reasons -- and part of that, actually, has to do with, if you will, the pace at which we were executing our projects. We are seeing some growth in the services business, so keep in mind that'll have a different impact on our business going forward. But as we're looking at 2013, we are projecting a fairly significant improvement coming from working capital improvement, as well as from the inbound of project awards in the subsea business. So we are not expecting to see the continuation, if you will, of past couple of quarters. But again, as the service business grows, that will have some of an impact. As we look at 2013 in terms of uses of cash, obviously, we're projecting another $400 million. We continue to see opportunities to reinvest that cash flow in the businesses to generate the kinds of returns that we have, and we'll continue to do that as appropriate. We're always, obviously, looking for opportunities to do acquisitions, to fill out the niche technologies that we're looking for. And then we've got an active share repurchase program, and we'll continue to use that share repurchase program. So again, investing in the businesses through the capital expansions that we talked about and then using share repurchase for now.

Okay. And so dividends are clearly not on the table?

Not for 2013.

Got it. Second, you've talked about Mad Dog. At some point you -- previously we've discussed that that may get awarded in phases, and I just was wondering -- a little bit clarity on how big this phase was. Maybe if you can provide us with number of tress or range of value, either/or.

We -- first of all, there has been a press release with all those details, so I won't give those details now. But I think what's significant is the potential for Mad Dog project has some 30-plus trees over time. It's really the first big project that we've been awarded under our frame agreement, so that's clearly a positive and the fact that BP is now moving out to start the development of their very large subsea portfolio. So we're really encouraged by that. But this call-off will be -- it'll be just a piece of it. Not insignificant, but it won't be the whole amount. They'll do it in call-offs and pieces, and that will come out in the details later.

Okay, I'll look for the PR. I had one kind of question on the overall market, your thoughts. The original, I guess, forecast was for 560-ish trees to be awarded in '12, and you said that 414 was the total. If you look at that 143 gap, do you think that that was -- I mean, we can quantify probably half of that was project shifted to the right, and the rest aren't as easily tangible or quantifiable. Can you give us some thoughts on that and whether it was project shifting or projects that just aren't getting done or change of plans? Or just how do you make up in that delta and then on '12, on the actual results versus the initial forecast? And I know that's not your forecast, so...

No, that's fine. It's fine. We support that kind of growth. So it may not be our forecast, but that kind of growth is what we believe in. And you already pointed out, Brian, first, those big projects in West Africa. We didn't have significant project awards in West Africa like we originally envisioned. So that took a whole bunch of trees out of 2012. The other thing is Petrobras. Petrobras was talking -- their big pre-salt tender had a lot of trees on it. We were fortunate that we won the big award. There was one other much smaller award that was made last year but nothing else. And I think there's some new Petrobras rules now, and maybe the pace at which Petrobras starts releasing some of those requirements may be spread out over time, and that probably contributed -- well, I know it contributed to some of the difference between 2012 and the tree forecast, lower Petrobras awards.

Our last question comes from Bill Sanchez from Howard Weil.

Maryann, just one question for you. I know you discussed Surface Tech expectations here. I still did not hear, though, what do you look for in terms of the average margin for 2013 in that business?

You're right, Bill. You didn't hear me give an average margin. As you know, fluid control is a large component of Surface Technologies. We're dealing with a lot of variables, none the least of which is rig count, timing of recovery from capital expansion coming back. Pricing is clearly another variable and then intensity. So if you look at kind of the margins that we generated in the fourth quarter and as John mentioned, in fluid control, we're likely to see a decline in Q1 given the fact that we had backlog that we don't have. So in the first half of the year, I would think margins in Surface Technologies in total might be below what you saw in the fourth quarter. As we continue to ramp up on the the international side, we might be able to see some recovery on the international side, which should help us improve margins. So we've got a bit of a range here depending on how quickly we can get recovery coming out of North America and the pace at which those variables change. But at least for the first half of the year, the margins that you saw in Q4 on average for total surface are likely to be below that. And then we'd hope, obviously, that we can improve that in the back half.

Okay. And you -- still, you said earlier, 2Q low point due to Canada.

You got it. That's right. And that's in Surface Tech, yes.

Got you. John, I guess just one follow-up for you as it relates just back on the subsea order outlook here. I know you didn't necessarily give an emphatic endorsement on a number by any means on your earlier -- in an earlier question, but you made a comment -- I think you expected the industry to see 30% to 40% growth year-over-year. I mean, is that a reasonable number to assign to your orders here in terms of growth '13 versus '12? It just seems like there's an awful lot out there with a higher baseline here that the numbers should be substantially up '13 versus '12.

Yes, we just -- Bill, we just want to be careful because for that to happen, the 30% to 40%, we have to have these big project in West Africa land in 2013. And as we saw in 2012, this big projects have a tendency to move to the right. So I think they can't move to the right to get that sort of 30% increase that we're talking about. So that's why -- that's clearly why I want to be a little bit careful in putting some big number out there so early in the year, when these projects, they have to show up. So is the potential to be there? Absolutely. Let's get some of these big projects to land in the year before we start picking a really big number like that.

Okay. And just so I'm clear, just on the fourth quarter subsea margin performance, it doesn't sound like it was anything -- I know, John, maybe one of your concerns had been you guys have been aggressive on the hiring front, bringing in a lot of new people and having costs associated with that. And then clearly, with the orders getting pushed to the right, that maybe from a timing standpoint, you might see some under-absorption from quarter-to-quarter, making margins a bit lumpy in subsea. Was there any impact to that at all in 4Q in terms of the margin performance we saw?

No, but you bring up a good point. That wasn't the case in Q4, but in Q1, you might see some of that. There's, like I mentioned, a big project that we were expecting in 2012 that moved to 2013. So we could see that, that lumpiness that you described, in the first and second quarter while this new inbound shows up and starts to match up with the capacity work that we've done over the last year or so.

I'll turn it back to you, Brad, for your closing remarks.

This concludes our fourth 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 first quarter 2013 conference call on April 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. John, you may end the call.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.