Forum Energy Technologies Inc (FET) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2012 Forum Energy Technologies Inc earnings conference call. My name is Chris and I'll be your conference moderator for today. Presently, all participants in a listen-only mode. Later we will facilitate a question-and-answer session.

(Operator Instructions)

And at this time, I will now like to turn the conference over to your presenter for today, Mr. Patrick Connelly, Vice President of Strategic Development and Investor Relations. Sir you may proceed.

Thank you, Chris. Good morning and welcome to Forum Energy Technologies quarterly earnings conference call for the second quarter 2012. With us today to present former remarks as Cris Gaut, Forum's Chairman, President and Chief Executive Officer; as well as Jim Harris, Senior Vice President and Chief Financial Officer. Also with us today are Forum's two division Presidents, Charlie Jones, President of Drilling and Subsea Division; and Wendell Brooks, President of our Production and Infrastructure Division.

We issued our earnings release last night and it is available on our website at www.f-e-t.com. The statements made during this conference call, including the answers to your questions, include information that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materials from those expressed or implied in such statements. Those risks include, among other things, matters that we have described in our earnings release and in our filing with the Securities & Exchange Commission. We do not undertake any other ongoing obligation other than that imposed by law to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after this call.

In addition, this conference call contains time-sensitive information that reflects management's best judgment only as of the day of the live call. This call is being recorded and will be available online for replay for 30 days following the call. Management statements may include nonGAAP financial measures. For reconciliation of these measures refer to our earnings news release available on our website.

I am now pleased to turn over the call to Cris Gaut, our CEO.

Thanks, Patrick. Good morning. I will start with some highlights from the quarter, offer a few thoughts on outlook of our business and then turn it over to Jim who will provide greater detail on our financial performance.

As a reminder for those of you who are just getting to know Forum, allow me to take a minute and orient you. We're organized into two divisions, Drilling and Subsea, managed by Charlie Jones and Production and Infrastructure, run by Wendell Brooks. Each division has three product lines oriented to their perspective markets. The product lines within Drilling and Subsea include Subsea Technologies, Drilling Technologies and Downhole Tools. Production and infrastructure includes Production Equipment, Valve Solutions and Flow Equipment.

I am pleased to report that on the second quarter 2012 we've generated $83 million of EBITDA on $374 million of revenue, producing EBITDA margins greater than 22%. Diluted earnings per share was $0.49 in the second quarter, more than double diluted earnings per share in the second quarter of 2011. Please keep in mind our share count increased after the completion of our IPO which occurred in the second quarter of 2012.

We had a strong second quarter of the year, generating good organic revenue growth across most of our product lines despite the obvious headwinds in North America. The Drilling and Subsea segment led the Company with 5% sequential revenue growth over the first quarter 2012 with Subsea Technologies alone generating 14% revenue growth over the first quarter 2012. Two of the three product lines in our Production and Infrastructure segment generated good sequential growth in the second quarter, Production equipment and Valve Solutions.

Total orders over the second quarter were $326 million. Although that is a 20% reduction from the first quarter, most of the change was due to subsea technologies. Our Subsea Technologies order intake tends to be lumpy and product line had achieved very high order levels in each of the prior two quarters. It is important to know we are having unprecedented levels of quotation activity and we anticipate record bookings in the second half of the year for Subsea Technologies relating to the upturn in deep water activity in 2013 and beyond.

Additionally, we are experiencing lower orders from our pressure pumping customers as they have found they are carrying unnecessarily large inventory levels of consumable products, given their current activity levels.

Our Subsea Technologies product line performed exceptionally well this quarter, generating the highest sequential revenue growth rate among our six product lines. Demand for our Perry work class remotely operated vehicles is strong. We are pleased that the Perry XT 1200 trencher we mentioned last quarter was delivered during the second quarter. And due to its excellent field performance, we anticipate additional orders.

Another driver of Subsea Technologies' out-performance this quarter was our customs products offerings, which includes highly engineered subsea products that we design and manufacture to solve unique customer challenges in deep water. Our Production Equipment product line also produced strong sequential growth this quarter over the first quarter 2012, generating all-time record quarterly revenue and earnings. Demand for well site separation, processing and storage systems has benefited from the growth in oil-directed activity and we remain positive about the outlook for this product line.

Much of the margin improvement in the second quarter 2012 for Production Equipment was attributable to our investments in manufacturing process and technology as well as higher volumes through our production facilities.

Valve Solutions is experiencing broad based growth across several markets, including heavy oil activity in Canada, pipeline integrity and petrochemical work. Second quarter revenue for the product line grew more than 7% sequentially over first quarter 2012 while also improving operating margin percentage. Given our strength in the mid and downstream valve markets, our outlook for this product line is quite positive.

The weakness in the pressure pumping service sector is impacting our Flow Equipment product line. When the pressure pumping service market was tight, many of our customers elected to accumulate their own large stock of critical consumable products such as fluid ends, treating iron and spare parts in order to avoid shortages and down time. With a decline in the utilization in their pumping equipment, they have found they are now holding a surplus of inventory. As our customers face pricing and utilization headwinds, we anticipate they will be focused on destocking these high inventory levels of consumable products. We have assumed in our guidance this destocking process will continue for the remainder of the year, resulting in a significant reduction in revenue for Flow Equipment.

During the quarter, we introduced a number of new product technologies. Our newest Wrangler Iron Roughneck, the WR80, has successfully drilled a multi-well program for major land drilling contractor. We also began field testing a new drill floor instrumentation system that incorporates the proprietary controlled software technology used in our subsea vehicles. Last quarter, Valve Solutions introduced new products in the upstream market which generated strong revenue growth this quarter and contributed to the product lines operating income outperformance.

Our revised 2012 EPF guidance of $1.85 to $2.00 that we provided in our earnings release reflects our lowered expectations for the pressure pumping market and for the US land rig count. However, we are encouraged by the long-term demand trends we are seeing, especially as related to deep water activity, valve intensive infrastructure projects and completion activity oily basins.

Our CFO, Jim Harris, will now discuss our financial results in greater detail. Jim?

Thank you, Cris. Good morning.

We continued our growth trend in the second quarter 2012 with consolidated revenues of $374 million, up 45% year-over-year. On a pro forma basis, organic revenue growth for the second quarter 2012 was up 22% over last year. Sequentially, consolidated revenue increased 3% to a record level in the face of some challenging market conditions for one of our product lines. International revenue was particularly strong this quarter, compensating for softness in North American revenue.

Our consolidated earnings for the second quarter 2012 were $0.49 per diluted share, compared to $0.22 for the second quarter 2011, an increase of 123% year-over-year. Sequentially, net income increased 4% in the second quarter; however, earnings per share is less than the $0.57 for the first quarter 2012 due to the impact of the additional 16.6 million shares issued in the IPO and the concurrent private placement in mid-April.

Our consolidated EBITDA margins for the second quarter remained relatively consistent at 22.2% compared to 22.6% for the first quarter 2012. The second quarter includes a $3.2 million net benefit resulting from the reduction in the amount accrued for contingent consideration related to a 2011 acquisition, partially offset by the write off of intangible assets associated with a discontinued service line and transaction expenses incurred during the quarter. EBITDA for the quarter was $83 million, up 142% over the same period last year and up slightly from the first quarter.

I will now review our segment results comparing the second quarter 2012 with the first quarter of 2012.

Our Drilling and Subsea segment contributed the majority of our revenue growth while our production and infrastructure segment remain consistent overall with the strong first quarter. The Drilling and Subsea segment revenue of $223 million in the second quarter increased 5% over the first quarter of 2012. The highest revenue growth in the quarter was, again, achieved by our Subsea Technologies product line, up 14%. As Cris mentioned, this growth came primarily from the sale of custom ed subsea products and particularly strong performance by our OJS brand subsea pipeline products. Drilling also posted strong results for the quarter with record shipments of hydrologic catwalks.

The Production and Infrastructure segment revenue of $151 million in the second quarter was flat with the first quarter 2012. As Cris mentioned, Flow Equipment experienced a fall off in shipments in the quarter after a strong first quarter that was a record in terms of both shipments and margins. Production Equipment achieved record shipments and margins in the quarter and Valve Solutions also delivered strong top-line growth over first quarter. We continue to see strong demands for both of these product lines.

I will now explain our expectations for the third quarter and provide guidance for the full-year results. We now expect operating income for the third quarter to come in between $60 million and $70 million and for the year, in the range of $260 million and $280 million. This estimate includes depreciation and amortization charges of approximately $13 million for the third quarter and $52 million for the year. The Company estimates fully diluted earnings per share to be between $0.40 and $0.47 for the third quarter and for the year between $1.85 and $2.00.

In the second quarter, Drilling and Subsea contributed approximately 60% of revenue and, on the year, is expected to be at just over 60%.

Net debt at the end of the second quarter was approximately $352 million and interest expense for the quarter was $3.6 million. Both the debt and interest expense amounts are down significantly from the first quarter due to the payment of debt with proceeds from the IPO and concurrent private placement. Interest expense for the year, excluding any additional debt incurred for possible acquisitions could be approximately $15 million.

We are watching the bond market and evaluating the possibility of adding longer-term fixed rate debt to our capital structure to replace the current $300 million amortizing term loan in our credit facility.

Our tax rate for the quarter was 33% and we expect the effective tax rate for the full year to be approximately 33.5%.

Our diluted share count for the second quarter was approximately 89.8 million shares, accounting for the proration of the 16.6 million shares issued in the IPO and concurrent private placement in mid-April. We anticipate our diluted share count for the third quarter 2012 to be approximately 92.9 million shares, while diluted shares for the full-year should be approximately 87.5 million.

Cash flow from operations, excluding the payment of contingent consideration related to a 2011 acquisition, was $32.2 million for the six month ended June 30, 2012 and $11.3 million for the second quarter. Both the first and second quarters included a continued investment in net working capital.

While we increased inventories in the quarter, we still expect operating cash-flows to improve significantly for the rest of the year as incremental investments and inventories are expected to decline going forward. We now expect CAPEX for the year will be approximately $55 million. For more information of our financial results please review the earnings release on our website.

I will now turn the call back over to Cris for concluding remarks and to moderate Q&A.

Thanks, Jim.

I think the benefit of Forum's portfolio business is becoming evident. Currently, our Flow Equipment product line is facing an adverse market during this period of customer destocking, but we believe in the long term attractiveness of the frac flow equipment market once this surplus inventory is absorbed. Our Drilling and Downhole product lines are benefiting from increased international and offshore activity and we see excellent performance and prospects for our Subsea, Valves and Production Equipment product lines. Our growth will be enhanced from our pipeline of new product developments and we are working on some interesting acquisition prospects. I'm pleased with the progress Forum has made over the quarter and I want to recognize and thank our employees for their good work.

Thanks for your interest and at this point, we will open the line for questions.

(Operator Instructions) Our first question comes from the line of David Anderson, JPMorgan.

Thanks. Good morning, Cris. I just want to drill down a little bit just on the margins and P&I this quarter. Sounds to me like it was basically completely isolated to flow iron. Is that true, in terms of where the market fell this quarter?

Yes, that's correct.

Now, as we think about it, your [highlight] isn't to simply just an inventory correction, so it sounds like it's a couple of quarters at best, it's going to take. Can you talk to us a little bit in terms of how the cost structure works? Is the cost structure -- are you able to adjust it, or is this going to be so brief that you're just going to have to take your lumps for a couple of quarters, and the margin will start picking up again?

The primary issue here is one of orders and revenue. We've got a certain level of fixed cost, of course. And during this period when our customers will be working off the inventory that they built up, the orders will be low and our -- due to the operating leverage impacts, margins will be depressed in that product line.

Okay. That product line -- can you just remind us again how big of your business, overall, it is?

Yes, it was, in 2011, about 11% or 12%. It was higher in the first quarter, but it's going to be regressing to the low teens there.

Okay. So, it's pretty isolated. I guess that's what I was trying to get at. If you think about -- and if we just kind of factor in, say, a flat rate count from here -- really through the end of the year -- how long do you think this inventory correction takes?

It depends by customer, but we think, and we're trying to be cautious here, David, but we think that by the end of the year it will be complete. Maybe it works through sooner, but we're trying to be cautious at this point.

Okay. And let me just shift a little bit on, in terms of your subsea business. We're certainly seeing a lot of positive talk. You had commented very positively about the deep water market and orders that you're potentially seeing the second half of the year. Where are you right now in terms of your subsea technologies business in terms of utilization? Is that the way we should think about it? Is that the proper way to think about the utilization? Because I guess what I'm also trying to get at is -- if we're seeing this big ramp-up happening in activity, how are you addressing that? Are you putting capital in that business to build up? How does that work, if you can just help us understand that?

Right. We are seeing a significant increase in -- as I mentioned orders from the past quarters -- not so much this quarter, but certainly quotation and discussions and negotiation, which will be turning to orders shortly. So, we have, over the past year, significantly increased our capacity to produce work class ROVs. We are working hard on our supply chain. We're looking again at further expansion. There are some further things we can do, and we're also looking at a roof line there, too. But that is something we are focused on, given the prospects that we see for that business.

But right now, are you effectively fully utilized? I guess I'm just trying to understand how the business itself works. Are you building these specifically for jobs, and so, therefore, they're always going to be utilized? It's not really a business that we look at too closely in some of the other companies.

Yes. So, we build these and sell them to the usher construction companies. We're building these and selling them -- customers such as Technip and Canyon and DOF and some of the leading subsea construction companies, Subsea 7. They own and operate these vehicles, and we are a leading manufacturer of these for that market.

Okay. So, as their business goes, your business goes right along with it.

Yes.

Okay. That's all for me, Cris. Thanks.

Thanks, David.

Doug Becker, Bank of America.

Thanks. Cris, I want to get a little more color on the guidance range. What type of industry backdrop would take earnings toward the $1.85 versus the high end at $2? Obviously, flow iron is going to be an important aspect of that, but just maybe some of the other variables as well.

Yes. So, it's partly how severe this overstocking is. And I'm not even sure all of our customers understand how much that is at this point, and how long it will take to work off. But we -- at the low end of that range, we'll be looking, I think, at a reduction in US land rig count from here, and low utilization of pressure pumping.

And so, a flat rig count -- would something be in the middle of that range, just generically speaking?

Yes.

All right. Interesting that you were able to sell several -- seven pipe-handling packages in a modestly declining rig count. I just want to get a sense for the repeatability of that in this type of environment.

Yes, we're very pleased with that order. Charlie, do you want to talk about that a bit?

We're particularly pleased because, as you know, we've been working to get ourselves in a position to be able to bid some of these packages. And for us to do this and to sell it to an international customer, really opened the door for us in the long term. So, very good about the prospects going forward.

Okay. And then --

Yes, it uses a pretty wide range of our tubular handling capital equipment technology all in this package. So, it demonstrates our capability.

That's definitely encouraging. And then, Jim, just one housekeeping item. You highlighted the $3.3 million, I guess, other income related to the contingent compensation. What's the thought process on that going forward?

So, Doug, that contingent consideration is related to one of the acquisitions in the flow equipment business that Cris described. So, consistent with that outlook -- this destocking period that Cris talked about, we have reduced the accrual for that contingent consideration based on our current estimates. And that -- we're required under current accounting rules to reflect that in operating income. That's come through as a credit in the current period.

So it's -- cash impact this year. It's kind of like adjusting your accrual for bonus payments, right, in a way.

And I guess what I'm getting at is -- if we see the rig count decline a little bit, would we see another credit along those lines?

We've tried to be pretty conservative here, Doug.

Okay. And we've seen some other equipment companies being pretty aggressive on the M&A front. If you could just generally speak about the M&A opportunities you see in this environment.

Right. So, we are working on a number of deals, and our focus in our acquisition effort, currently, is more in the subsea international or downhole areas. And we see good prospects. I think the key is seeing -- a coming together of [stellers] expectations and in our own outlook. But I think in those markets, I think we can make good progress.

Thank you.

Brian Uhlmer, Global Hunter.

Hi, good morning.

Hi, Brian.

Just wanted to dig in a little bit on how you look at the balance sheet -- and we were talking about looking at the debt markets. They're pretty free and open for good-performing businesses right now -- if you think it's a good time to add on a little bit of extra capital or if you just want to pay down the current revolver. How you look at -- how leveraged you want to get in the short run in order to take advantage of the current debt markets.

Brian, we're not talking about increasing our debt at this point, but rather replacing our five-year term loan, bank term loan, with public debt with no amortization and no covenants and that kind of thing. Looking at that is a possibility, and so just flagging that is something we're looking at, and we'll be opportunistic in the market.

Okay. So, you view the current debt level as the peak that you would want to take on, or if there's an opportunity, you'd consider more? But at this point, you don't want to expand and just put some extra cash on the books. Is that what I'm hearing?

We're modestly leveraged here. And we're less than 1 times EBITDA. And we would take on additional debt to do acquisitions, but we view the level of debt -- the modest level of debt we have now as kind of our base level of debt in our capital structure that we think would be efficient for the long term. And we just want to make sure we have the best possible structure for that portion of our capital.

Okay. Sounds good. Second kind of unrelated follow-up -- as we look at the puts and takes with some of the drilling products versus subsea. Is there factoring flow-through that you can use, and equipment machinists and personnel that you can use as the subsea portion ramps up and the ROV business ramps up and the other businesses ramp down? Or will there be merger degradation in one, as you don't have flow-through as much through the factories? How do you look at those two offsetting each other, with one business going one direction and the other going the other?

There are synergies that we think we can get from our manufacturing facilities, right, Charlie? And it's driven mostly by, I think, geographic efficiencies. The design and engineering expertise on our subsea business is in the UK, but we have, I think, very efficient fabrication facilities in Mexico, in Singapore. We're also looking longer term at other markets closer to customers as well.

Okay. Thank you. I'll turn it back over.

Robin Shoemaker, you may proceed.

Thank you. Good morning.

Hi, Robin.

Just going back to the flow equipment for a minute -- you had initially thought you'd have a pretty good increase in sales '12 versus '11. Is it likely that '12 will be above '11 in terms of low equipment sales?

Yes, Robin, we do expect, on a full-year basis, we will see an increase over 2011, but we are experiencing sequential declines from that record level in the first quarter.

Yes. Okay. So the first quarter was peak. Understood. And so, just the way that breaks out, as I understand, is roughly 80% related to consumable replacement, 10% to refit existing spreads with new flow iron, and 10% flow iron for construction of new fracturing spreads. Is that -- anything within that mix changing?

Obviously, I think the number of new spreads that's being ordered is coming to a halt, right? That for us was, as you point out, not a big part of our market at any rate. But for us it's -- we're mostly consumable products related to activity and, as I mentioned, what we've seen is our customers really were concerned about possible downtime. And at a number of different lines in their chain there, they found that they have stocked up a lot of inventory.

Kind of the mindset there, maybe, I think it can be indicated by maybe one of the big pressure pumping companies that bought ahead and made a big commitment on [guar], right, in anticipation of shortages. And that's a company that has about as sophisticated a supply chain as one can have. But I think it's indicative of the mindset there, that -- gosh, things were so hot. We need to avoid downtime. We need to look at where we could possibly have shortages, and buy those consumable products so we don't have a problem. And I think that mindset is applied all along -- the different procurement parts of the cycle, and it's got to get worked through.

Yes. I understand. So, my other question had to do with drilling technologies and the order that you received -- that you highlighted, was that in the international market or US?

Yes, that's -- for the international market, I believe those rigs will be going to the Middle East.

Right. So, that kind of was my question was -- we hear some generally positive commentary on the international land rig market, in contrast to what's going on in the US, at least for now. So, how does that work for you? Do you need in any way to increase your manufacturing footprint for -- internationally, for those opportunities or any of your other divisions?

I think we, at this point in that business, feel we have adequate manufacturing capability between the US, Mexico, Asia. I think we're seeing the benefit of our sales and distribution that we can get more of these international sales. Clearly what we are seeing is the -- the international or the customers in the international land rig market are looking for upgraded equipment -- the kind of land drilling equipment that has become so popular and efficient in North America. And that is what is driving demand for this improved efficient pipe-handling equipment that we're putting on these international rigs.

Yes. Right. Just one final quick question. At the time of the IPO, you had indicated that you were kind of looking very close to perhaps another transaction, and haven't. Is that still possible, or are you kind of more broadly just pulled back slightly from the market for M&A.

We haven't pulled back from the market in M&A. But that was the deal we had under letter of intent at the time. We had only disclosed it just because those are the rules, right? And we had a letter of intent. But before moving ahead with any deal to conclusion, we have to make an assessment of whether it's the right thing at that time, and what the prospects are for that business. And that is something we chose not to move forward with due to changes in our view of the market for any of these products.

I see. Okay. Thank you, Cris.

Okay.

Mike Urban with Deutsche Bank.

Thanks. Good morning, guys. I apologize if I'm repeating anything here. I got dropped from the call for a little bit there. But don't mean to parse the guidance too much, but it sounded like kind of at, let's say, the midpoint of the range here, the primary, I guess, difference has been this whole destocking concept in the flow equipment business. And is that the -- your assumption, again, at the midpoint is just that you work through the destocking and, assuming we still have current levels of activity, you'll get back to the levels of throughput that you've been experiencing previously or expected previously?

Yes. I think that's right, Mike. And we are taking a conservative view on the North America land market in general here going forward. Probably more conservative than we had three or six months ago, right, for obvious reasons. But we think it's prudent to take a conservative view on that.

Yes, I would agree. That makes sense. And is there anything about the shift in the mix of activity that we've seen in the US, whether that's commodity, basin, whatever the case may be, that changes your view on the intensity or the consumption intensity of the industry relative to your business and your products?

It varies a bit. When you say that in the flow equipment pressure pumping market the -- although the increased activity in some of these oily basins is probably more stages, it's lower pressure, right?

That's right, Cris. There's actually less equipment required [four-star wise] on these oily basins. We see perhaps more underutilization of equipment than we saw in the first quarter. The operators also are being more cautious about operating the equipment, trying to extend the life of the products. So, the oily move, I think, has resulted in less equipment usage, and probably better maintenance of the equipment.

Yes, and they're clearly looking to keep their costs low. On the other hand, in our production equipment business, this move to oily basins has increased the per-well investment, the per-well purchases from us for the production equipment on a per-well basis. Because of just the larger pressure vessels and more tanks that are needed for the liquids. And that's one of the things that's benefiting our production equipment business.

Okay, makes sense. And shifting over to the rig equipment piece -- get to see that business holding up pretty well including from a order standpoint, and it sounds like you're benefiting from -- benefit is from some orders internationally. Given your expectations, and ours as well, frankly, for a more cautious US land outlook, do you think there is enough interest and ability to migrate that business internationally to offset any decline that you might see in the US?

Yes, Mike. We think so, and you're right. We're benefiting from the international, particularly on the capital side, and that's offsetting the activity and consumable sales nature on the domestic side.

Great. That's all for me. Thank you.

Thanks, Mike.

John Lawrence with Tudor Pickering Holt.

Hi. Good morning, guys. Just another question on flow equipment -- is it just volume driven, or is price coming down as well?

Well, volume is certainly coming down. Let's see, I would say on the fluid ends, pricing is quite competitive because you have these pump manufacturers who also make fluid ends -- not having much to do on the complete pump side. And that's the primary area of price competition at this point that we're seeing -- mostly a volume issue.

Is there any way to quantify that from the peak, as far as price coming down, just in rough terms?

It's, I'd say, in the -- less than 20%. In the 10% range, and we're not seeing, in this space, huge moves in price.

Okay. Great. And then, Cris, I guess is it safe to say that you're not seeing any softness in the US levered production equipment business? It all seems pretty good there.

Yes. Right.

Okay.

One other point -- some of the growth in production equipment is we've been awarded several large contracts with major oil companies to develop larger production separation systems from multi-wells. And that's a prospect we see growing going forward.

We're very pleased with how our business there in production equipment is competing.

Yes.

Great. Thanks a lot, guys.

Blake Hutchinson, Howard Weil.

Good morning, guys.

Hi, Blake.

Just one of the subsegments that kind of hasn't been explored here. Sorry if I missed this in the earlier commentary. If we think about the downhole business within drilling and subsea, did we kind of take a step back in top line sequentially here? And is it just kind of leveraged to the pace of completion activity in the Gulf of Mexico? And maybe in the 3Q, 4Q periods you start to resume what is probably a higher year-over-year growth rate here? Maybe somewhere in the 15% to 20% range? How should we think about the downhole business? Seems like the -- thematically it should be pretty good tailwinds here, but maybe just a bit of a setback quarter-to-quarter.

Yes, they had a modest increase [over] Q1. But we think that they will have a better improvement moving ahead due to the international orders, and to the offshore side getting stronger. So, I think I'm agreeing with you, Blake.

And is it -- and just to be clear, the offshore side is more levered to the Gulf or international, in general?

Mostly Gulf of Mexico. But yes.

Okay. And then just kind of following up on some of the commentary so far, some recent -- some of the recent comments point to the intensity and certainly size of the process equipment market growing here. Understanding it's a fab business at its heart, is there ever a point where the volume is just so good that the -- we introduce margin improvement as well, as an element to the story?

Yes. Yes, there is, Blake. We're introducing more automated equipment, and we think that will help our efficiency and, certainly, the operating leverage of the greater volume is going through our facilities as well. Yes.

And we can see this near term?

We're working on it.

Good.

That is our goal.

Good. I'm thinking about subsea -- I mean, you made some comments with regard to kind of a higher level of margins here. I'm trying to get -- gauge whether that's sticky because we have a higher level of unit manufacturing throughput, or that was more one-time in nature because of the custom product mix. So, does that kind of stick around and set a new kind of baseline for your outlook?

I think the second quarter did have a big lump of custom work, but the baseline of work-class ROVs is looking very good. And then we have other elements of the subsidy business as well that helped to balance our offering. But the general trend is an upward trend. But it was a great second quarter.

Okay. So, maybe give some of the margin success back, but certainly we're operating at a higher level than maybe we would have thought coming into the year?

I don't know that we'll give them margin percentage back. But it might be a little bit higher volume in that it was an exceptional second quarter from a volume standpoint.

Okay. Great. And just -- I wanted to follow up on the drilling business because you are taking a conservative view to North America. But I think with the line of questioning and some of the commentary, it didn't sound like within the drilling business we're throwing in the towel at all in terms of sequential top line growth there, despite the fact that we have a flattening view -- maybe a flat to down view on North American rig count.

Yes, that's right. I think we are not at all saying that. We are saying that we think we can continue to grow our drilling business, and it's largely driven by these international and [capital] equipment side. Right, Charlie?

That's correct.

Great. I just wanted to differentiate that from the flow control commentary in the US -- commentary around that. Great. Appreciate it, and I'll turn it back. Thanks, guys.

Very good, Blake.

Joe Gibney with Capital One.

Thanks. Good morning. Just a quick clarification on your pipe-handling package award. Is this for new-build or a retrofit situation?

These are seven new-build rigs.

Okay. And, Cris or Charlie, could you just maybe comment then about -- as we think about order inquiry levels maybe perhaps on the retrofit side of drilling capital equipment versus new-build? Obviously, you see some headwinds on the new-build front, but some stickiness probably still applies on the retrofit side. I'm just kind of curious your perspective there -- how order increases have trended, certainly, quarter-over-quarter.

Definitely, Joe. Charlie?

Yes, Joe. The capital that we're providing into that retrofit market is still improving rig efficiency and speed, and it's very sticky, and the outlook still remains strong for that equipment.

Okay. Helpful. And just circling back to some of Blake's questions on downhole. You reference in your prepared remarks about some strength in international and offshore orders ramping up. How big is international as a component of downhole technologies as it stands today? It would be helpful.

I'm not sure I have that at my fingertips, Joe. 20%, 20%s.

20%s? Okay. Helpful. And then last one for me. Cris, could you talk a little bit about valves? It's picking up a little bit more. It certainly seems like the outlook is a little bit more robust, even since the time of your IPO. I mean, some of that is pipeline oriented in North America, but you referenced some new products in the upstream market -- fair amount of tailwinds here. You saw this out of CAM as well. I'm just curious if you can comment on the valve market overall -- sounds like things picking up perhaps a little bit more than anticipated.

Sure. And let me amend the answer on downhole -- the international is a bit higher than that -- more in the 30%s, 30% range currently and growing.

And on valves -- I think our valve story is a very good one, and we feel good about the momentum here. That may be because we have more of a midstream and downstream mix there than the other company you mentioned. But the order flow, the margins, all look very good. And, again, we're looking at our capacity and making sure that we don't run into constraints there, and adding equipment and growing that business because we think the outlook is quite good.

All right, helpful for me. So, one last modeling, housekeeping question for Jim, and I'll turn it back. Just on CAPE, materially the same -- I think you were at $60 million. Last quarter you referenced, I believe, $55 million. It would be helpful if you could parse out the subsegment allocation of that $55 million.

Yes, the reduction had to do with the [intense] production and infrastructure we're pushing off some of the projects into 2013. So, that was the cause of delay. But in the DNS business, our DNS division, the CapEx for the full year will be right at $40 million, and the balance is for P&I.

Helpful. Thank you, gentlemen. I'll turn it back.

David Smith with Johnson Rice.

Thanks, good morning, guys.

Hi, David.

Apologies for missing this. What was the inbound figure for the quarter?

$326 million. $326 million and -- the change from prior quarter was due to a lag in subsea orders, but we think those orders are coming. That's the short version there.

It makes sense that would be a lumpy business.

Yes.

Most of my questions were asked already, so I'll ask about working capital requirements, which consumed a good portion of the first-half operating cash flow. I wanted to ask if this was anything particular to the first half, and whether we should expect this pace to continue until revenue growth moderates?

No. We did build working capital in the first half, and we don't expect that to be the case in the second half. Right, Jim?

Yes. We expect, David, to see a nice turn in cash flow in the second half of the year.

Perfect. Thanks, guys.

We'll take one more question.

Rob Mackenzie, FBR.

Thanks, guys. We're deep into minutiae territory here, but I will -- I have one final question. Cris, I believe you guys have said in the past that the Davis-Lynch product line -- you saw some opportunity to gain some market share there. Can you update us on how that might be playing out?

Well, that is what we're doing with these -- this increase in our international business and the offshore side that we're seeing. And as we look at that business, I don't think our greatest constraint on growth is the market. I think it's more internal and capacity and process and things that we're working on. But I think we're upgrading our customer accounts, and to be good prospects there, still. But a lot of internal work to do.

Great. And how would you kind of rank the magnitude of what you think you can achieve and the timing you might expect to see that?

Well, we see that as a growing business -- prospect's good. And we see -- it will be part of our -- very much a part of our growth picture next year and into the future.

All right. Thanks. That's all I had left.

Well, thanks, folks. I appreciate your interest, and we'll look forward to talking with you again next quarter. And in the interim, if you have any questions, please don't hesitate to give us a follow-up.

Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you so much for your participation. You may now disconnect. Have a great day.