Matthew Seinsheimer - Director, IR Doug Pferdehirt - President and CEO Maryann Mannen - CFO

Bill Sanchez - Howard Weil Angie Sedita - UBS Kurt Hallead - RBC Ole Slorer - Morgan Stanley David Anderson - Barclays Jim Wicklund - Credit Suisse Bill Herbert - Simmons Sean Meakim - JP Morgan

Good morning. My name is Kelly and I will be your conference operator today. At this time, I would like to welcome everyone to the FMC Technologies' Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Matthew Seinsheimer, you may begin your conference.

Good morning, and welcome to FMC Technologies' third quarter 2016 earnings conference call. Our news release and financial statements issued yesterday can be found on our website. I'd like to caution you with respect to any forward-looking statements made during this call. Although these forward-looking statements are based on our current expectations, beliefs and assumptions regarding future developments and business conditions, they are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements. Known material factors that could cause our actual results to differ from our projected results are described in our 10-K, 10-Q and other filings with the SEC. We wish to caution you not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any of our forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. I will now turn the call over to Doug Pferdehirt, FMC Technologies’ President and CEO.

Good morning. Welcome to our third quarter 2016 earnings conference call. With me today is Maryann Mannen, our Chief Financial Officer. I'll begin my remarks with a review of our operational results for the quarter, then comment on the market outlook and will conclude with a discussion of the company's current areas of focus. Maryann will follow with specifics on our financial performance and updates to our financial outlook for the remainder of 2016. We will then open the call for questions. Our operational performance in the quarter gives us confidence that the work we have been doing to reduce both our structural and product costs is paying off. Operating results in the quarter were highlighted by strong operational performance in our subsea technology segment. Our surface technology segment benefited from notable sequential improvement, while only partially capturing the benefits of the additional actions we took in the quarter. Subsea technologies achieved operating margins of 15.7% when excluding charges. These strong results reflect further progression in the transformation of our operating model, supported by strong execution, despite a 27% revenue decline from the prior year quarter. Importantly, these changes will provide sustainable benefits. 2017 will be a more challenging year for our operating results. Revenues will be down for a third consecutive year. Superior execution is a function of both people and process and we are committed to protecting and maintaining the core competencies that we have developed to deliver these solid results. This will not only benefit our execution through the downturn, but it will ensure that we have the capacity and capabilities needed to respond to the market recovery. This strategic investment will protect our execution capabilities and ensure that we are ready to serve our partners as the market recovers. Even with lower revenues and the strategic investment, we remain confident in our ability to meet our profitability targets in both 2016 and 2017, given the structural changes and operational momentum we have delivered thus far. Surface technologies’ operating results were much improved over the second quarter, despite only a modest increase in revenues. Although North America is not yet profitable, the previously executed restructuring actions favorably impacted the quarter. Additionally, we took a series of targeted actions in our North American surface wellhead business to address the profitability of specific product lines in specific basins using the same disciplined approach that led to the sale of our wireline business in the second quarter. These businesses all had similar characteristics. The markets they serve are challenged with excess capacity that will spend little time in balance over the course of a market cycle. And the markets are highly fragmented, with limited differentiation and are currently experiencing unsustainable returns. Given this new market reality, we will no longer invest capital or deploy assets, where we cannot earn a reasonable return. Instead, we will redeploy our assets to support clients in basins which benefit most from our new integrated delivery model. This is how we create differentiation and add value. Our integrated model continues to penetrate the North American market and has been endorsed by leading operators. These actions demonstrate how we intend to manage our global operations. The potential revenue loss that results from these actions is not material to our North American operations and further, they did not impact our fluid control business. Turning to orders, total company inbound orders for the quarter were $692 million, including $401 million in subsea technologies. Subsea orders showed improvement over the first half order run rate driven by an increase in equipment orders, a trend we expect to continue in the fourth quarter. Third quarter results included the previously announced award of a subsea multiphase boosting pump for ENI’s Block 1506 West hub development. This was the second such award over the last 12 months, clearly demonstrating our capabilities in this attractive growth segment. From our perspective, operators remain focused on several key items. There is a need for greater confidence in commodity price resiliency, strengthening balance sheets and protecting dividends and they remain focused on maintaining a disciplined approach towards the allocation of capital resources. In the near term, we have further confidence small equipment orders will improve in the coming quarters. Activity remains centered around two key themes, subsea tiebacks and subsea boosting as enablers to move incremental barrels through existing facilities in a timely and capital efficient manner. The slow pace of project sanctioning has put increased operator focus on production levels beyond 2017. Operators can leverage existing infrastructure with short cycle subsea tiebacks making smaller investments in fields that do not require an additional host facility. The use of standardized equipment for a fully integrated offering can provide further economic benefit by significantly accelerating time to first oil. Subsea processing offers similar advantages, allowing the operator to gain incremental production from legacy assets with only a modest capital spend. The fundamental question facing the subsea market remains what is required to unlock the investment decision for large project awards. Operators are looking for real structural change in project economics and we are seeing this happen today across many deep water cost inputs. Our customers are taking aggressive internal actions to lower their own cost and we continue to improve project economics through standardization, technology innovation and integrated business models. These actions are generating significant tangible savings that will move some larger projects forward, giving us great confidence that 2016 will likely mark the trough in orders for the current cycle. Our company continues to focus on those things we can control by becoming the best cost provider, developing differentiated technologies and delivering value to our customers. These are not just talking points, we are making it real today. It starts by reinventing products where we are looking to significantly reduce product complexity and focus more on product deliverability and install ability. We recently talked about one such case with our subsea manifold. A manifold is a primary component of a subsea development, its function is simple. It aggregates the flow of multiple wells into a single flow line, but the industry has added significant complexity in both design and build, leading to excessive manufacturing costs, extended lead times and costly installation. Our approach is different. By addressing complexity with new proprietary technology, we have created a unique product that is much simpler. We've reduced the park-out by over 50%, much lighter, more than a 50% reduction in weight and can be installed much quicker, 50% faster than a confessional manifold. Reinventing products is just the first step. Through our alliance and Forsys Subsea joint venture with Technip, we are integrating proprietary technologies from both companies to enable simplified build design and installation. In our alliance, we are thinking about our products and technologies as part of the complete subsea production system, including trees, controls, manifolds, umbilicals, risers and flow lines, completely redesigned with less complexity, reduced hardware requirements that results in shorter delivery schedules, faster installation, lower execution risk and savings of 25% to 30% on the combined scope. Working with Technip, we are creating a sustainable differentiation that will make us uniquely positioned in the marketplace. Customer interest in the integrated model continues to grow. In early September, we indicated that our Forsys Subsea joint venture had been awarded 16 integrated feed studies in the 14 months that it passed since the JV was formed, a strong endorsement of the integrated approach. Our proposed business combination with Technip further alleviates the concern of having multiple providers deliver a complex integrated EPCI project. The merged company will address this by providing a single contracting entity fully responsible for executing the integrated EPCI project. We are confident that our first integrated project award is imminent. Finally, I want to comment on our planned merger with Technip. Integration planning is moving forward at a brisk space. We have achieved major milestones and continue to be on track with remaining legal and regulatory approvals, providing greater confidence for a first-quarter 2017 close. As the days go by, we are even more confident in the shared vision, culture and strategic alignment of our two companies. We look forward to unlocking the tremendous potential we see of the combine Technip FMC. I will now turn the call over to Maryann.

Thanks, Doug. Our third quarter diluted earnings per share from continuing operations were $0.35 when excluding certain pre-tax charges of $43 million, or $0.15 per diluted share. In the quarter, we also reported an income tax benefit of $9.5 million. When compared to the midpoint of our full-year tax rate guidance of 21 to 23% expense, quarterly results were favorably impacted by approximately $18 million or $0.08 per diluted share. Included in our reported results were the following total pre-tax charges. Restructuring and other severance charges of $28 million, of which $20 million was reported in the segment results. Merger transaction and integration cost of $12 million, facility consolidation costs of $4 million and impairment and other charges of 1 million. When combined, these pre-tax charges totaling $ 43 million, we have provided a schedule in our press release issued last evening to show the quarterly impact of net income on all costs incurred. Also in the quarter, we recorded a tax expense in discontinued operations of $14 million, or $0.06 per diluted share, following negotiations pertaining to an outstanding tax dispute in Algeria. The charge relates to a business that was sold in 2006, and we believe that we have fully reserved for any potential tax costs that may arise. Moving to segment results, Subsea technologies reported solid operating results in the quarter. Revenues were $798 million in the period. Quarter-over-quarter revenue comparisons were negatively impacted by lower project activity and lower service revenues. Subsea technologies’ operating profit was $125 million in the quarter, with a margin of 15.7%, excluding charges of $5 million. Decremental margins were just 21% quarter-over-quarter when excluding charges as our restructuring initiatives and product cost reductions substantially mitigated the 27% revenue decline. Given the progress to date as well as the structural nature of the charges we are making to the business, we remain confident in our ability to meet our margin targets, both in 2016 and 2017. For the current year, we now expect margins to exceed 13%, when excluding charges. Segment backlog exiting the quarter was $2.5 billion, which compares to prior year backlog of $4.3 billion. Moving to our surface technology results, surface technologies revenue for the quarter were $218 million, down 40% quarter-over-quarter. Revenues were lower in all major geographies with North America accounting for a significant component of the decline. The US rig count average fell 45% from the prior year quarter, a steeper decline and a 30% reduction reported for the worldwide rig counts over the same period. Surface technologies’ operating loss for the quarter was $5 million, when excluding charges of $14 million. We demonstrated good progress in reducing the losses reported in the second quarter. Operating results improved $12 million when excluding charges, despite posting flat revenue on a sequential basis. The current quarter benefited from aggressive restructuring undertaken in the period, the strategic decision to reduce or curtail activity in certain unprofitable segments of the North American market, as well as the absence of operating losses related to the wireline business sold in the second quarter. Segment backlog exiting the quarter stands at $379 million. This is predominantly related to our wellhead business outside of North America. Moving to our energy infrastructure results, revenue for the quarter was $77 million, down 21% from the prior year quarter, primarily due to lower product sales in both our measurement solutions and loading systems businesses. Energy infrastructure operating profit for the quarter was $4 million when excluding restructuring charges of $1 million. Let's turn to the corporate items. Corporate expense in the quarter was $14 million, down slightly from the prior year quarter. We expect spending of approximately $14 million to $15 million in the quarter, fourth quarter of 2016. Other revenue and expense, net reflects an expense of $44 million. Quarterly results were impacted by the following charges. Merger transaction and integration of $12 million, restructuring and impairment charges of 8 million and $4 million related to facility consolidation cost. For the fourth quarter of 2016, we expect that other revenue and expense will be an expense of approximately $30 million, which includes approximately $15 million of transaction and integration costs related to the merger. The quarterly estimate remains subject to foreign currency fluctuations. We reported a tax benefit in the quarter of $9.5 million. The benefit reflects the quarterly impact from the change in the full year estimated earnings mix. Our outlook for North America results has been reduced by a combination of lower operating results, restructuring charges and merger related expenses. We now anticipate our 2016 tax rate to be between 12% and 15% for the full year, given that mix of earnings. Capital spending this quarter was $26 million, primarily directed towards Subsea technologies. We now expect capital spending in 2016 to be approximately $120 million. Depreciation and amortization this quarter was $57.3 million, a decrease of $3 million sequentially. At the end of the third quarter, we had net debt of $190 million. It is comprised of $1.1 billion of cash, and $1.3 billion of debt. In accordance with the business combination agreement related to the proposed merger with Technip, we have suspended share repurchase activity under our share repurchase program until the completion of the proposed merger. Accordingly, the company did not repurchase any stock in the quarter. We remain at an average of 228 million diluted shares outstanding in the quarter. Looking forward, full-year revenue for Subsea technologies is expected to approximate $3.3 billion, which includes the year-to-date impact of $73 million in headwinds from the strength of the US dollar. With another quarter of solid execution, we now expect full-year Subsea margins to exceed 13%, excluding charges. While we will continue to see further headcount reductions in the fourth quarter, charges related to these actions or reserved for in prior period, we do not anticipate any material restructuring charges for Subsea in the fourth quarter. Surface technologies year-over-year revenue is forecasted to be down near the high end of our previously guided range of 30% to 35% versus 2015. We currently expect surface technologies to be modestly profitable in the fourth quarter, excluding charges. In energy infrastructure, we now expect revenue in the fourth quarter to look much like Q3. We expect profitability to be down modestly in the quarter. In closing, we showed good sequential improvement this quarter in both our subsea and surface segment. When excluding charges, we reported one of the highest operating margins we have ever recorded in subsea, leaving us well-positioned to deliver double-digit margins in a more operationally challenged 2017. Currently, we are assuming that 2017 inbound orders will exceed 2016. We see several large subsea projects that we believe are ready for award, although they are more likely to come in the latter part of next year. But should we face even greater challenges than anticipated, we have consistently demonstrated that we will take appropriate actions. Look to our surface business as an example where after taking a series of significant restructuring actions over the past two years, we acted again in response to the more aggressive, competitive behavior in the North American market. We remain confident in our integrated surface business model for North America and believe we will be well-positioned from both a market standpoint as well as a cost position to excel in the recovery. These actions which were taken across all of our business segments should give you confidence that we remain committed to delivering both lower cost solutions to our customers, and strong financial returns to our investors. Operator, you may now open up the call for questions.

[Operator Instructions] Your first question comes from the line of Bill Sanchez of Howard Weil. Your line is open.

Thanks and good morning. Maryann, just a question. Once again, very commendable subsea margin performance. The guide here for full-year, just north of 13%, granted, it seems like that suggests you guys are still thinking margins actually could come down here in 4Q. I'm just trying to understand as we think about the way you all have managed the business here and the cost reductions, the product mix that we've seen flowing through revenue here with more aftermarket, I mean, it seems like the worst frankly would probably be behind you in terms of margin challenges in the subsea business. Are we worried about under-absorption here as we go into 2017 -- is the way we thought about a potential 2017 target here for margins? I mean, what is really the risk right now in terms of lower margins in subsea if any?

Yeah. Bill, so a couple of things. First of all, probably three key components that we are focused on for subsea margins. Project execution, cost reduction and product cost reduction. So to your first question, Q4, as you know, Q4 for subsea traditionally is always a faster quarter for us that really stems from the fact that subsea services is softer and that is largely North Sea. We wouldn't expect that to look any different. Having said that, our project execution has been very strong. The cost reductions in terms of the headcount, we've been very aggressive as you have seen throughout the last several quarters, and as I mentioned in my comments, we've got more to go obviously in the fourth quarter. And now, we are beginning to see the benefit of all of our own product cost reductions. So we certainly believe we will exceed 13% in Q4. Your second question was around 2017, we believe obviously we will take another step down in subsea revenues. That’s probably somewhere in the neighborhood of 15%. What we will have the benefit of going forward in ‘17 obviously is the work that is left to be done on our manufacturing footprint. That is allowing us to lower the cost of the footprint, while being able to remain to deliver on that throughput. We will take any necessary actions that we need to in 2017, but as you heard Doug say, and I also we believe, that 16 is the trough. So we are expecting to see order intake in 2017 and we want to be sure that we've got the strategic assets that we need to be able to deliver in that recovery. Having said that, we do remain committed to double-digit margins in 2017.

Right. So even -- and I agree with the comment on the orders -- better in subsea '17 versus '16. Let's just say that is led by bigger projects here that arguably giving the competitive nature of that work, perhaps it is at lower margin than what is currently embedded in backlog. My view would be, though, is that the book in turn coming from that in 2017 would be relatively low. So you still have a pretty good revenue mix here in terms of backlog -- margin and backlog and then just the service aftermarket revenue component being a much larger percentage of total revenue in '17, even though in aggregate, you are down in Subsea. You've got a better mix here. So it just seems like a fair amount of margin resiliency is still to come.

Yes. So first of all, let me just be sure I was clear. My comment around margins in excess of 13% were meant to be full-year 2016, just for the sake of clarity. But back to your 2017 comment, yes, I think you make a lot of very fair statements. So as we think about subsea service in 2017, our objective is to hold subsea revenue levels in and about the same. So as a percent of the total, we would expect subsea services revenues to grow. Those margins should continue to be resilient. As you think about the turn from backlog, those margins as you have seen continue to be very solid margins from which we can execute from and we would expect to turn a significant portion of that backlog. Obviously, that which is not Petrobras. So yes, I think you make some very valid points in terms of the resiliency of subsea margins going into 2017.

Okay, thanks. If I could just ask one more, and maybe I missed it. On a service order increase, 2Q to 3Q, I know the comment was made that backlog is primarily non-North America. I was just curious, that $100 million, did we finally start seeing some -- more majority of North America works coming through in the quarter.

Billy, the majority of that came from international, again, reflecting the strength of our international business, particularly geographically where we are focused with our international business, although we did see a recovery in orders in our surface wellhead North American business as well.

Alright, thanks. I will turn it back.

Your next question comes from the line of Angie Sedita of UBS. Your line is open.

Thanks. Good morning, guys, and indeed, a very good quarter. I will follow up -- well, I'll start on the fourth [indiscernible] 16 feed studies that you are working on, and clearly you are still on track potentially to win another award this year. But any thoughts, Doug, on how many of those feed studies could come to the market in 2017?

Thanks, Angie. In terms of the 16 integrated feed studies and we’ve talked about one integrated EPCI project, so the execution phase of the project versus the front-end engineering phase. So we are beyond the 16 now. I mean, it’s really become, if you will, a way that we're doing business. So we continue to bring in the intercepted feed studies. Regarding the integrated when do they convert and how quickly can they convert to a project, I think, is the question. So an integrated feed steady depending upon the scope of the study will typically run between 9 and 12 months. After that feed steady is completed, then the company goes through an investment decision and that can typically take 3 to 6 months on average. So if we just take kind of an average between the 12 and the 18 months, that's kind of the range that we are looking at in terms of when we would expect to convert an integrated feed award to an integrated EPCI execution project. So, as I mentioned, we are confident that we will receive our first award very soon and that would be a reflection of when we really started these integrated projects, which is now around that 18 month mark. So we're starting to see the flow of some of those projects move from the front-end engineering into an actual sanction project and we expect one to occur very soon. Regarding 2017, we would expect additional projects. That is obviously a function of all the things I said earlier in terms of our customers, areas of focus and strengthening their balance sheets, protecting their dividends, but also looking for projects, real projects with real, tangible savings that they can move forward. So we would expect some additional projects to convert in 2017 as well.

Okay, that's very helpful. And then -- so when you think about subsea tree orders in '17, clearly it's up from ‘16. But is it fair to assume that that could be around 150 to 175 mark for trees in '17? And would you expect that to ratchet up in 2018 to 200 trees to 300 trees? Is that reasonable to you?

Well, Angie, I just like to point out if you even look at our quarter this quarter, our largest award was a subsea processing award with our multiphase boosting pump. So using trees as the indicator for the growth and the recovery of the market, given the fact that as syndicated, we believe that the earlier projects that will be sanctioned will be tieback projects to host facility, so these are smaller tree count, but can't have a much larger surface scope by the way in terms of umbilicals, risers and flow lines, because of typically a long distance from the host facility. So the portion of the revenue that would go to the serve contractor could be quite significant in those projects, but in terms of, for an SPS contractor, such as FMC Technologies, it's a smaller scope. When we look forward to the merged company of Technip-FMC, we really see that as an opportunity for us to create a significant amount of value by driving standardization, short lead times to help our customers be able to bring those projects on very quickly. So with that caveat, I think when we look at 2017, we expect the tree count to indeed increase. It could be in the range that you are indicating and that certainly is in line with some of the other industry benchmarks that are available. I would tend to maybe beyond, little bit of the lower end of that range from what we can see right now, but again that will really be the result of 2 or 3 large major projects moving forward.

Okay. That's very helpful. If I could slip quick one for Maryann on the margin side on subsea, so based on your commentary, I think it's fair to assume that margins are going to get down or is it fair to assume that margins are going to dip down early 2017, closer to that low double-digit mark before starting to move higher in the back half? And then on surface margins, is mid- to high single-digit margins by potentially mid-2017 reasonable to you?

Yes. Angie, our pattern in subsea margins probably won't be different. As I was trying to indicate here, we've got a lot of momentum with respect to subsea margins for 2017. We will continue to look when those projects come in, obviously, to the extent that they come in earlier in the year, that will help us with any of the kind of absorption issues that we have. We certainly are very confident in our ability to deliver double-digit margins for 2017. Your question was with respect to surface. I think it's very reasonable to think that as we get into 2017, that will see surface margins in that single digit arena for 2017 and probably sooner rather than later in the back half.

Great, thank you. I will turn it over.

And your next question comes from the line of Kurt Hallead of RBC. Your line is open.

Good morning. Sounds good. Recovery -- we always like recoveries. So, the dynamic as we move forward, you guys have given a lot of good information here. The -- on the subsea front, the role through -- did you talk about the service and aftermarket in the quarter and if you did, I didn't quite catch it. And then I think last quarter, you indicated that for full-year, service revenues would be about $1.2 billion to $1.4 billion and do you have an update on that?

Kurt, our service revenue and service activity was very strong in the quarter, Maryann indicated that in the fourth quarter, that would be softer and that's mainly due to the winter season in the North Sea where there is much less, particularly vessel-based activity. And Maryann, did you want to cover the last part of the question?

Yeah. Kurt, so for 2017, there is subsea services revenue that we are estimating is right in around that 1 billion to 1.1 billion for 2017, is what I said earlier. Yeah. 2017.

Thanks for repeating that. Now, in terms of the order -- potential order increase for next year on Subsea, in calibrating the different data points that have been provided and that we can kind of gather, would you be looking at something on the order of magnitude of potentially a 20% increase in orders for Subsea? Is that how you're thinking about the world for next year?

Kurt, we expect our subsea services inbound to remain resilient and we've talked about that and the reasons why that would remain resilient. As indicated, we are seeing more activity around subsea tiebacks and subsea processing. We expect that to continue in 2017, and as we track some of the larger projects from the list of projects that we provide to the market, if I look at that, that list of projects, there are eight of those projects that are currently in active stage of negotiation that would result in a tree count of over 100 trees if indeed they were awarded. That being said, I am not indicating that all eight of those are going to be sanctioned in 2017, but they are being actively tendered, reviewed and evaluated at this time. If we look back just 12 months ago, there were zero projects, so there has definitely been an uptick in the level of activity under active review and evaluation at this point in time?

Your next question comes from the line of Ole Slorer of Morgan Stanley. Your line is open.

Doug, given your background in the North America pressure pumping, what seems to be kind of the [indiscernible] I guess to be the hottest thing on the planet over the next few years. I wonder whether you could kind of compare and contrast your views for your North American surface leverage, which is quite considerable and also in the shape of your outlook for pumping equipment and treating iron et cetera. On one hand and all of your offshore opportunities on the other hand. When you take these two opportunity sets in your compare them, how if at all do you think your view is different to that of consensus? Or is there any way that you are - think that people are missing something because you are to positive or because indeed you might be a little bit more cautious than you think kind of the consensus view on the market right now.

Well let's start with the pressure pumping activity and as indicated, our fluid control business, we sell the consumables to the pressure pumpers to ensure that they can operate in a safe and efficient manner with their services. We have seen an increase in activity in that business but it's been relatively modest at this time although we have not seen any large capital orders starting to flow through the system, although we are receiving tenders and being asked for pricing and availability of equipment. And I think this is the result of some of our customers contemplating bringing some of their current fleets back up to a level of readiness that they could be put into service based upon their own metrics for when they would want to bring that additional capacity into that market. So we're having those discussions and we will be prepared to serve our customers when they are ready to move forward with that investment decision. So what we're seeing now is an increase just level of total throughput, I think a lot of that is – a lot of the fleets are going from operating daylight hours to operating 24 hours a day and obviously will drive more consumable product sales and we’re seeing the benefit of that. But again no major significant changes in terms of capital orders at this time. We anticipate those but we don't anticipate those until 2017. In regards to subsea I think we’re largely in agreement with the consensus view of activity and I don't think necessarily that anything is being missed in that area, Ole, to the question.

That's interesting. So, early 2017 or late 2017, you think, before we need to retool the pumping fleets that is currently stacked?

Well, it's just the question of when those new - when they decide to make the investment decision to bring those new assets into the market, which clearly will be a function of when they believe they can find the right price point in which to bring those assets back into the market. So that’s difficult for us to say is that’s really going to be an internal investment decision based upon their own internal metrics. So when they would move forward with that additional capacity.

Okay. So you are having increased conversations, but not yet any orders. On the boosting side, [indiscernible] by the way, with the second contract there. I've been surprised that this technology hasn't been adopted more widely given the kind of production increase you can get out of $150 million investment. So I wonder whether you could reflect a little bit on - there's been one company dominating this, and I think that many customers have a problem always - we have the technology regardless of how good it is if it's only supplied by one vendor. So how is your thought about the potential to expand the size of the overall market now that you have two alternative solutions?

I think a lot of it is - I'm not sure although it’s been so much a result of not having a second supplier, I think it's really been a result of the customers focus and for several years the customers were focused on large new greenfield developments. And that's where the resources were being spent that's where the engineering was being done and as they started to shift their focus and as they started to look at some of the potential reduction of forecast beyond 2017, they are shorter cycle ways to accelerate that production - potential production decrease either through subsea boosting as you pointed out or through subsea tiebacks. So I think coming into the market and the timing that we did, we will be able to help our customers make that decision and provide an alternative, but I think both are very viable solutions and we just look forward to participating in the market and very excited to have our second order in just 12 months.

Your next question comes from the line of David Anderson of Barclays. Your line is open.

Doug, you talked about restructuring of the surface business in your remarks. I know getting a more vertically integrated package has been one of the means to regain share. Can you just tell us where you are in that process? Is that done? Is that in the rearview mirror? And do you have all the pieces that you need to fully compete and regain share, and have you gained any share? It's kind of hard for us to tell in the results.

Yeah David, so our surface integrated service offering in North America, we have the components, we talked about a year ago that we were organizing so that we could deliver our services in this new integrated model, but that then would have to go through the process of basically introducing this new commercial model. We completed that, the market acceptance has been quite robust it has resulted in market share increases. What we’ve realized now looking back with this new view of the market is that we want to basically concentrate our assets so where we can generate the highest return through this new integrated model which is indeed creating value for our customers and for ourselves. But in order to be able to do that we had to make some difficult decisions in terms of pulling back from certain markets and concentrating resources in other markets and that's the decision that we made because some of those markets are just not suitable for the integrated approach and because of that are continuing to offer discrete products into those marketplaces where there is an abundance of available assets today we don't think is a very good or sustainable investment decision for our company. So we're going through the process now of basically the redistribution reallocation, which will help us to even drive our integrated offering to the next level by being able to ensure that we have the right resources in the right areas. Then over time as a larger portion of the market begins to show optionality to be able to move into in and provide integrated offerings in other parts of the market, we’ll do that as well. But that’s a decision that we made this past quarter and we’re undertaking those actions as speak today and I'm very confident that they will yield benefits in terms of the operating performance of service technology.

That kind of displacement or reallocating equipment, is that also a function of the customer - kind of predominant customers? Is there a certain type of customer that is more receptive of this model than others?

Not in particular but there are certain geographies where there is just again it is mainly due to the availability or abundance of resources that are available today or capacity that’s in the market today that is really driving that decision more so than I would say the actual customer.

And different question on the subsea margins. Maryann had mentioned lower product costs in there. I'm just wondering how much that contributed to the margins this quarter. You guys booked revenue on percentage completion accounting. So I'm just wondering if maybe the costs came in lower, there's almost sort of like a profit catch-up towards the end of the project because of this. Was that a component of the higher margins this quarter?

No David, I mean we’ve been able to do some product substitution but I mean it's once you're involved in a project particularly now many of these in the later stage of these products, will be very difficult to do a product substitution. What we are - to the benefit of the focus on product cost and significant progress that we made as a company is really when we are tendering new projects and the leverage that will give us in those new projects.

Okay. And just one last quick question. Obviously, the Technip - the deal with Technip hasn't closed yet. I'm just wondering are you able to talk to customers about this new offering that would involve the top bundling - all major components of the top side and the subsea? Is that a conversation you can have today, or do you need to close the deal? I'm just kind of curious what the reaction has been if you can give us any sense as to what customers are saying about this model.

Yeah, so bear in mind, we have an exclusive alliance with Technip for the area of integrated subsea developments and we have our joint venture Forsys Subsea. So because of that indeed we have been talking to our customers and that’s what’s given us great confidence in their understanding and the way that they’re embracing and accepting this new way of doing business. What we’ve done by coming together as - our intention to come together as a single entity is just remove some of the barriers that they have indicated to us over the course of having these discussions, one of which was, okay we'll do an integrated feed study through the joint venture but we’re not comfortable putting a large integrated CPCI project through a loosely - a group of loosely affiliated companies be it some sort of a project specific commercial vehicle. We want to know that we’re working with a single contracting entity and that we have confidence that that company or that entity will be able to deliver such a project. So as a result of the announcement of our intent to merge back on 19th of May, we’ve receive significant positive feedback from our customers in terms of the fact that this further reduces any concern that they had about moving forward with this type of an integrated model and we believe it will help us accelerate some of these projects into the execution phase.

Your next question comes from Jim Wicklund of Credit Suisse. Your line is open.

Not only a good quarter but a very good conference call. You guys are doing a great job. Doug, you talked about operating efficiencies, execution, structural changes and operational momentum. Can you - you are a manufacturing business. Can you give us some detail, as boring as it may seem - what does all that mean? You have got - I have been to [indiscernible] facilities. Can you talk a little bit more granular on what you have done speed-wise, efficiency-wise? You have already got cell manufacturing. You are already terribly efficient. Can you talk to us about what brought about the 15.7? A level down, if you would?

Well Jim, I’ll answer the 15.7 but I’d like to take the opportunity first to talk a bit beyond the 15.7 or if you will beyond the current quarter. So Jim, as you know we are more than a manufacturing company and we are manufacturing services company and we provide a great amount of support for our customers both in the front-end engineering all the way through the Leica field. What’s really making a difference for us Jim is as we - it all starts at the engineering phase, you have to go back and you have to look at the product and you have to ask the simple question is, can I remove complexity without affecting functionality and if I can remove complexity without affecting functionality then that’s something that's going to have a sustainable cost advantage for our company going forward and create leverage and create leverage for our company. And that's really what we're talking about going as we’ve gone all the way back to the engineering of each and every one of our products and talked about what we could do how we could do it differently. I gave the example of the subsea manifold, if you want to now take the subsea manifold and think of it in terms of a manufacturing company that conventional manifold is not something that is manufactured, it’s something that’s basically assembled. You have to do it a large fabrication yard, it involves thousands and thousands of resources and it's mostly subcontracted activity, if we can take something like that and move it to being more of a standard product that we can put through in your words our highly efficient manufacturing structure then that's significantly, significantly increases…

Yes, Doug, but that is stuff you're going to sell in the future. I'm talking about what your throughput was - and I hope you sold a lot of these manifolds, but that kind of sounds like future sales and development work. I'm more interested in what went through the facilities - both manufacturing assembly and service - in the second and third and what's going to happen in the fourth quarter that you are able to wring such efficiencies out.

Well, a lot of that just has to do with good solid execution on our projects, our ability to be able to need to make the milestones in the projects and reduce any sort of risk on the final execution of the project and those have been going very well and it hasn't been something that we’ve necessarily changed as you know we've been working for several years and putting in place more of a global manufacturing footprint than a regional manufacturing footprint and we’re seeing the leverage of that today in our 15.7 and we’ll see much more of that in the future with the example I gave with the manifold.

Impressive. My second follow-up, if I could, and I guess this is to both of you or anybody - just generally what is the likelihood or probability that 2018 subsea margins could be below 2017?

Hey Jim, look, part of that will also depend on the strength of the inbound in 2017 and obviously the pricing. So to the extend as Doug mentioned the trough, we’re fairly confident that we are going to see a really solid handful from a market standpoint, a really solid handful of projects Doug talked about, eight projects that are really ready for award, they are somewhere in excess of 100 trees. If we can get that volume in 2017 early enough and begin to see the change in the curve with respect to margins then we have a good shot at ‘18 at least being stable to ’17. The challenge that we’ll have coming forward there is just what is the pricing in that inbound. But all of the work that we're doing, you mentioned and Doug was walking through kind of the manufacturing benefit, none of that really came through so to speak in our last couple of quarters, this is largely, as Doug said, solid execution as we complete the manufacturing footprint and we get the product cost that we've been working on slowing through those projects, there has been a tremendous amount of product cost work. We would hope very much so that could be offsetting to ‘18. It really does depend as you well know Jim at the strength of 2017 and again we are very optimistic about inbound in ‘17.

Your next question comes from the line of Bill Herbert of Simmons. You are line is open.

I could address the subsea questions in a slightly different vein here - and I recognize that your business is becoming much more complex and interesting than just subsea trees. But if I look at what your historic inbound has been for the last several years, going back to 2004 with exception of the great financial recession years, you were garnering anywhere from 125 to 225 trees per annum. And obviously, we're in a different environment now than you did the 50 in 2015 and you will do a lot less than 2016. So, I'm just curious, while there is considerably increased breadth to your business, thinking about it from a tree standpoint, for what level of inbound in activity is your subsea business presently sized? And what I'm getting at is what kind of contraction have we seen in your manufacturing footprint? And are you done with that, or are you continuing to right-size, notwithstanding the fact that we expect a revival in orders next year from the depth of the lows that we've seen this year?

So Bill, we have been working on in terms of our manufacturing footprint is to greatly reduce any excess capacity in terms of redundancy across our organization. And that was the key move from moving from a regional focus to moving to a global focus. We've gone one step further than that which we’re implementing now, which is even at the subcomponent level not at the finished assembly level. So we want to be able to make a subcomponent at one place around the world to service the world in a very cost effective manner that we can get a lot of leverage both in terms of volume leverage but also in terms of cost leverage. And when we do that, we’ll be able to further reduce our manufacturing footprint, which is underway today without eliminating our ability to go back to those demonstrated levels of capacity that we’ve delivered in the past. And it sounds like a bit of a herculean feet, but we’ve demonstrated it now. And we've demonstrated it first with two of our products, so where we went to a single, if you will, global organization, providing those products for the world. And it’s been very effective for our organization without reducing our capacity. So the trick here is we need to lower our operating costs, but we need to maintain our capacity as we do expect to return to those levels of capacity in the coming years. And that’s the activity that we've been going on, that's the retooling, that’s the restructuring of our company, which has largely been completed and will be fully completed by the end of 2017.

So when you anticipate that peak to optimal kind of footprint in 2017, that reduction will have encompassed a contraction of what, 50%, 60%, 40%, what is the number?

I think it would be fair to put in kind of a 40% to 50% number, but again I don’t want that to be misinterpreted, because that doesn’t affect our throughput. That's just in terms of roofline.

Okay. That is helpful, Doug. Thank you. And then the second question is, relating to your fluid control business, you talked about the fact that you haven't seen necessarily any orders for new builds, but you are getting tenders. I’m curious, Doug, with regard to your thoughts about the rebuild opportunity for the fleet. I mean, this is becoming an increasingly relentlessly capital-intensive business, given the increased horsepower intensity per completions and a massive uptake in sand, and what that is doing to the frac fleet, and the fact that basically the fleet really hasn't been repaired and maintained all that diligently over the past two years. Do you see a big wave of rebuild CapEx opportunities for the existing workable viable fleet, not necessarily new-builds?

Yes, we do, but we have not experienced that yet.

And our last question comes from the line of Sean Meakim of JP Morgan. Your line is open.

Hi, good morning. Maybe I could ask a couple kind of cleanup questions around 2017. On subsea orders, I was curious how much does the 2017 year-over-year increase in your guidance reflect larger projects coming through in the second half? In other words, in 2017, orders will be up, do we think, on just smaller tieback and boosting opportunities alone, or do we need some of those projects in the second half?

Indeed we believe that on some of the just subsea processing and the tiebacks, it could be upwards of 16, but we are looking and anticipating some major awards or larger awards if you will towards the second half of 2016 in addition.

Got it. Okay, that makes sense. And then just thinking about the revenue cadence for next year, do you expect the second half to be better than the first half? Just curious on how you see that unfolding sequentially throughout the year.

Yes Sean, it really depends on sort of when we see the inbound that Doug just reflected. We’ve got backlog as you know, some of that backlog obviously is Petrobras, so we won't have the ability for all of that backlog to turn, but backlog ex Petrobras will probably be somewhere in the neighborhood of 60+ percent turn on that backlog. And depending on when these projects come in, if we have a stronger fourth quarter that moves into the first quarter, but you know we could be looking at somewhere in the neighborhood of about $400 million or $500 million of revenue coming from what we call booking turn, right. So that's the inbound that we get in it in a given year. But you know we’re hopeful we'll begin to see some of that in the first quarter, but it's more likely that those larger projects that we refer to will be a back half of the year inbound.

And this concludes the Q&A portion of the program. I’ll now turn the call over to Mr. Seinsheimer for closing remarks.

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

And this concludes today's conference call. You may now disconnect.