Weatherford International PLC (WFRD) 2002 Q4 法說會逐字稿

Good Morning and welcome to Weatherford's Conference Call. All participants will be able to listen only until the question and answer session of today's conference call. At that time you will be instructed on how to ask a question. This conference is being recorded at the request of Weatherford International Incorporated, if there are any objections you may disconnect at this time and now I would like to introduce your moderator for today, Mr. Bernard Duroc-Danner. Sir, you may begin.

Thank you. Good morning. I am going to turn it right away over to Lisa, who is going to give you comments on the quarter and I'll give you comments that are perspective in nature afterwards.

Good morning. As always my comments will focus on sequential quarterly trends. Consistent with our pre-announced guidance of $0.24 to $0.26 per share, we reported diluted earnings per share of $0.25, as compared to third quarter's results of $0.28 per share, excluding our non-recurring charge. For the year 2002, diluted earnings per share was a $1.20 again excluding the non-recurring charge. Let me begin with an overview of the quarter. The fourth quarter reflected an activity led decline in Europe, a sloppy US market and an event led decline, including the strike in Venezuela as well as the demobilization in the Tengiz project. Research and Development expenses were higher than normal, as we experienced the high rate of prototype testing, all of which were successful. We also recognized a gain on a divestiture of a small distribution business. With that backdrop, let me provide insights to our results. Our fourth quarter revenues at $582m represented a decrease of $3m from the prior quarter. Fourth quarter EBITDA was a $113.4m as compared to a $125.7m in the third quarter, excluding our non-recurring charge. The lower EBITDA margin stems from the aforementioned quarterly event, lower US activity, impact of the Venezuelan strike, disruptions in the Tengiz project and higher R&D prototype expenses.

I will address each of these further, in my discussion of our segments. First, Drilling and Intervention services, revenues were 2% higher than the third quarter. The increase is primarily due to an 11% increase in this division's middle-east region. The increase stems from low margin rebillable pass through expenses. Excluding these rebillable pass through expenses, which are - they are highly infrequent in nature, the Mid-east North Africa region would have been down and a consolidated divisional revenues would have been essentially flat with the prior quarter. Canada, as you would expect, posted a significant improvement of 21%, which was offset by a 4% decline in the US. Europe declined several percent in the fourth quarter; this was driven by the bottoming out of the UK sector at the North Sea and the abrupt interruption of a large contract in the Tengiz field (ph). As a reminder, the UK comprises approximately 10% of this division's top line, a year ago. Revenue fluctuations in Latin America and Asia Pacific were not significant and essentially offset each other.

Excluding the impact of the mid-east pass through sale, EBITDA margins were down 240 basis points. The combined impact of the UK North Sea, the Tengiz [Inaudible] and a strike in Venezuela accounted for more than half of the decline. The reminder of the decrementals can be explained by a sloppy US market and product mix. Completion Systems as was the case with Drilling and Intervention services experienced a decline in revenues in both the Europe and the United States. Much of what impacted Drilling & Intervention Services also affected Completion with the exception of Tengiz and the rebillable pass through expenses. Remember, Completion System's revenues are over 60% international and therefore the revenues are more project driven, resulting in an uneven revenue stream. Decremental EBITDA margins for this division were 44%. Artificial Lift revenue [Gap In Audio] had a very strong quarter in spite of the impact of Venezuela on this division, the revenue level was maintained at essentially the third quarter level. EBITDA margin improved 180 basis points. A record level of production optimization sales healed the strong revenue and the high margin. Technology sales were as we anticipated, just slightly higher than the third quarter at $75m. R&D expenditures increased $4.8m, the increase, as I mentioned, is primarily a result of a high level of prototype expenses, in expandables and intelligent world technology.

As a reminder, the supplemental schedule has these expenses divided by segment to reflect where we manage these efforts. But in reality, the benefit of the expandable products will be far greater in well construction and remediation than it is in completion. This quarter's R&D spend of $24m is above our 2003 budgeted run rate. R&D will be in the $82 to $84m range for 2003. But the timing of prototype expenses may make it, so that it's not flat throughout the quarters. The impact of the higher R&D on earnings per share is offset by a $6m pre-tax gain on the sale of a small distribution business.

Now turning to the balance sheet, as of December 31st, total debt, includes of a $943m of convertibles was approximately $1.9b. Fourth quarter cash flow from operations funded acquisitions of $24m and repaid $31m of debt. Our debt to capitalization ratio decreased 155 basis points. During the fourth quarter we continued to realize the benefits of our working capital initiatives. We experienced an overall inflow of cash related to working capital of approximately $20m. Over the last three quarters working capital days outstanding declined by seven days, in spite of a shift of the mix of operations to higher working capital intensive international regions. Capital expenditures were $70m for the quarter. Our full year 2002 capital expenditures were approximately $265m. The fourth quarter capital expenditures included a $10m investment in our enterprise-wide JD Edwards software implementation. We have spent $50m on this project to date. This project is progressing on plan with successful implementations of the Artificial Lift and Completion, US region. These divisions are already benefiting from the increased visibility to consolidated supplier and logistics data. We continue to implement at locations worldwide with nearly all regions projected to be on JD Edwards within the next 12 months. Now I will turn it over to Bernard.

Thank you, Lisa. The fourth quarter was obviously tough. We were very fortunate to have an offset the large prototype costs on top of very high R&D in the gain on sale of assets. But, we couldn't overcome the combination of the UK, Tengiz, Venezuela, and US market, which started off with a hurricane and remained sloppy. Perspectively the prognosis is better across the board. The US markets are in the early stages of coming alive. The level of inquiry and contractual bidding started rising in mid January, if historical [Inaudible] hold true, we expect a rise in our US business some time in May, June. It is difficult to calibrate how much of volume increase is forthcoming, we estimate it to be about 10% to 15%. Pricing, which was done in '02 in excess of 10% through Q4 has begun to firm. Should our market prognosis prove to be correct, pricing will raise the business volume. A 10% rise in volume should be enough of a momentum to trigger such pricing increase. As further reference, US pricing in Q3, '01 was about 15% higher than our present pricing level. The variation is depending on product or service line. Canada, which I remind you is 15% of our revenue base is currently very strong. Early in '02, we consolidated some of our Canadian drilling segments, which would benefit us in this coming cycle.

Turning my attention to the international segment, the prognosis is also positive. We see the international markets growing overall for the industry by 4% year-on-year and in that environment Weatherford expects a 10% growth year-on-year, exhibiting the same or higher rising intensity of dollar sales per rig employed as shown historically. Much of that perspective performance would be sealed by our technology segment as well as the facilitating effect of our footprint. The largest expected increases in '03 over '02 are in North Africa, Far East and the Brazil, Mexico markets. Of the three declining segments in late '02 the UK - North Sea and Kazakhstan are not likely to deteriorate further, will most probably improve but more detail on those three markets - Venezuela, UK, and Kazakhstan. Venezuela from a P&L standpoint will deteriorate in Q1 - this Q1 but should recover for the balance of the year as a degree of normalcy returns to operations. The UK, which was about 9% of our top line in '02 weakened further in Q4. Activity though has, in our view, bottomed out, should remain flat through '03 unless and until the UK Government and North Sea operators come to an agreement on taxation. When and if they do, UK activity will surge within six months of such agreement. I think that fact is well known. The timing of such agreement though is unknown.

In the meantime, two additional factors will have an impact, a positive impact, on our North Sea performance. One is the change in field ownership, specifically the recent sale of [Inaudible] to Apache (ph). These types of transactions are highly desirable for the North Sea, make complete sets as a match reservoir to operative preferences and most importantly will result in a rise in down hold activity of a type that is particularly suited to Weatherford's UK operation.

Two, the second factor in 01, 02, we effected a major consolidation of a number of our business segments in UK North Sea. We are now positioned to take on incremental volume at higher incremental margins when the UK cycle reverses itself. Kazakhstan, more specifically Chevron Tengiz project, significantly it impacted our Q4 profitability as the project was abruptly interrupted. Aside from the rig contractor, Weatherford is one of two service companies with a greatest exposure to Tengiz. The Tengiz project was officially restarted a few days ago, meaning our operations will be back on within 90 days. Tengiz alone represents $20 million worth of yearly service business with very high returns.

Turning my attention to R&D, as Lisa noted expenditures of R&D increased by $4.8 million obtaining a little over 4% revenue, 4.2% to be specific, which is the one of the industry's highest level of R&D expenditure and almost three times as much as that all core project service lines would normally require.

As a comparison historically going back to a few years ago but not much further, Weatherford would invest in R&D in somewhere in the $20 to $30 million range, which adjusting for size is somewhere between 1% to 2% of revenues. We anticipate that R&D will flatten in '03 at a level which is midway between Q3 and Q4 to reach an annualized $80 to $84 million or about 3.5% revenues. That level of dollar expenditures will not rise further in '04 and therefore fall in relative terms. The rise in R&D throughout the year make this fiscal year '02 predictably difficult from a earnings and returns standpoint. In many respects Q4 and generally '02 were the hardest of times for us. Looking forward into '03 and '04 R&D would be a lesser burden, what was the burden would become a factor of incremental earnings and returns. Indeed R&D has to deliver earnings and returns. The first factor of earnings is the rising top line for Weatherford’s technology segment. Technology is defined at Weatherford as strictly industry step changes or primarily expandables, underbalanced, intelligent wells or optical sensing system. It does not include in any way of form the continuous technological changes taking place in our core products and service lines. These continuous changes are true technological achievements, by the shear incremental nature, our competitive necessity. Now remotely the same shareholder value creates our step changed technologies. As evident by the scope and scale of our R&D, we are pursuing aggressively the development and commercialization of our step change technologies and we will continue to do so in '03 with the same determination.

In '02, our technology segment was just about $275 million in top line for the year. The '02 level of 275 million compares with 215 for '01 or about a 30% increase. As discussed below, the rate of growth of '03 over '02 is expected to be significantly higher.

Follows highlights of events related to step change technologies. R&D in Q4 included, amongst other things, two prototypes, the solid expandables in well intervention applications. The other major prototype test was a low channel seismic fiber optics. Both expandables prototype tests were successful. Concurrently, expandables of the same expandable application for well remediation will become an economic reality this quarter.

In Q1, we will commercialize our first expandable solids for well remediation. [Inaudible] stem size as applicable in all spectrum of metallurgy. In the quarter there will be eight solid expandable well remediation drills, all of first the respective clients. Five are in North America, three in the Eastern hemisphere. Work continues very actively on other sizers and metallurgies for well remediation expandables. Well remediation is thought to be the second-largest fuel application of expandables.

On a separate note, R&D work continues on solid expandables for well construction, that is a mono-bore well, which will be the most important market. As previously stated, we plan to perform our first mono-bore application in Q4 of this year.

Concurrently, the expandable sand-screen market has resumed its deep growth on the back of a $55m two-year contract with Shell, Malaysia, we'd signed two weeks ago - we will announce shortly a $34m two-year expandable sand-screen contract with Petrobras offshore projects for '03 and '04. The intelligent well portline has also momentous events to celebrate, which is the successful installation of its all-hydraulic intelligent partition system in Brunei, [Inaudible] field. The [Inaudible] installation was remarkable, in that it was at the high-end of spectrum of technical challenges. Now, this is particularly interesting because one of its intelligent hydraulic system is distinguished by its simple design, very high reliability and substantially lower cost than its rival systems. The fact that the successful installation was in such a high-end [Inaudible] application, opens up a whole market for intelligent, zonal isolation at an affordable cost. And, we really think cost and reliability as being the biggest threshold to overcome, to spread our intelligent completion market further.

On the optical sensing system side of internal wells, we recently reported a successful prototype testing for low channel count seismic applications. At the same time, by year-end, we will close in over 58 optical sensing installations, this is a very much a seating process going on, which equates to about almost half of the in seat of the optical cables down-hole. On the balance, after two years of seating, we are seeing the emergence of repeat business, which is very encouraging. From a technology standpoint, the emphasis is primarily on fluid chemicals, down-hole tools, automation systems, and well engineering.

For '03, the proposed incremental growth in underbalance are likely to be the Middle East, Latin America, and US pipe gas reservoirs. Looking ahead, we feel that '04 and '05 will see further acceleration of utilization of underbalance in our industry, akin to our experience in '00 and '01.

Back to an overall perspective, we calibrate our technology segments top line in the range of $425 to $500m for '03 versus 275 in '02. This represents year-on-year 55% growth in the low end of the range. I think if one asked our shareholder and our institutional investors in general, what is Weatherford's culture and direction, the answer would be growth. Growth achieved historically through consolidation and more recently growth pursued organically through technology. Weatherford's management is traditionally perceived as being growth people. There is no denying this, it has been true and it is true. We pursue growth relentlessly because it creates wealth. There seems to be a common perception though, that the pursuit of aggressive growth is incompatible with improving returns on capital employed. That is incorrect. We strive for a balance in aggressive pursuit to growth and the rig of capital returns disciplined. The numbers are already barried out.

To prevent traumatic discussion you should be aware I will discuss strength on returns excluding the ups and down of our Universal Compression or UCO stock valuation. The fluctuation has been clearly down so far, hence the asset impairment charge and non-cash charge taken in '02. The next fluctuation value may be up skewing our returns in an equally adjunct manner. Bear in mind we haven't sold a single UCO share and not inclined to do so. Fluctuations in UCO stock valuations are obviously very important to us. They operate completely outside of Weatherford's business and organization. Skews returns down and potentially up and masks underlying credit.

Back to announce the return. Our return on capital employed declined in '02 for obvious [Inaudible] core reasons to about 6.3% down from 9.9% in '01, but almost at par with '00 at 6.7%, despite record levels of R&D. Fact adjusting for comparable R&D intensity, meaning placing '02 R&D at in '00 level, '02 would actually be at 7.2% returns significantly ahead of '00's 6.7% return. And '02 actually would not be far from our cost to capital.

Our returns are on an upward secular trend, without sacrificing our intense technology drive. Our return target for '03 expects a rise of 110-150 basis points above '02 levels and on an up trend throughout the year. Two other comments on returns, '03 will be the end of the 3-year installation at JD Edwards, our company wide information system. The magnitude of the cost and disruption is associated with installation of JD Edwards will be behind us, setting the stage for a phase of returns.

Use of capital for capital investment and working capital will improve, so will the pricing intelligence and efficiency to name just two of the major benefits. Technology returns, and I am talking about purchase technology returns. On the balance, the returns on capital employed would exceed our cost of capital in '03. Expendables return of capital employed would exceed our cost of capital early in '04 on the run rate basis. Intelligent completion and optical sensing system, return on capital employed would exceed our cost of capital early in '05 on a run rate basis. These are rigorous internal targets. These technologies will do more than just return in excess of their cost of capital. They will accomplish that early in their deployment life and then deliver sustained high-secured growth rates.

Before closing as I said in the beginning of our comments, the prognosis for Weatherford is better across the board for both cyclical and secular reasons. Weatherford is better positioned, better prepared, and its technologies are gaining fraction.

As a final note our guidance for '03, our guidance is in a range of $1.50 to $1.60 of earnings per share. Our guidance for 1Q is in the range of $0.26 to $0.28. And to summarize, we see incrementals coming for more reasons across the board with a single exception of a bottoming out in 1Q for Venezuela. This concludes our prepared remarks and I will now turn the call back to the operator for questions please.

Thank you. If you would like to ask a question, please press star one on your touchtone phone and you'll be announced prior to asking your question. Once again, if you would like to ask a question, please press star one on your touchtone phone at this time.

Thank you. And our first question comes from Mike Urban with Deutsche Banc. You may go ahead sir.

Thanks. Good morning. Yes, first question would be, I don't know if you can provide this, but may be some of the assumptions underlying some of the returns, they can just laid out either in terms of capital, you intend to have deployed in the various technologies or some of the assumptions for, you know, income or revenue for the [Inaudible] technologies?

Certainly, can do it on simplistically now, we can give you more detail later on. But it's straightforward. First, you take the amount of capital you have employed today, take expandables for example, roughly, we have something on the order of between $125-$160m are invested in the expandables. Then you add the working capital segment, and then you apply to the equation a percentage of revenue, which is the future working capital intensity of the business, when you look at the R&D and you split the R&D basically into two segments, one segment which is R&D which is more D than R. And that one, you placed it against the operating income of expandables. The sort of pure R expandables you do not, because that really support expandable business, which as we look at a year or two years later, so it's been artificial. Once you set that, you ask yourself, what's the top line and what total margin you are likely to receive over the next 24 months based on client budget etc., and you just basically do [Inaudible] charge and you see when the curves cost. It's very straightforward. And if you apply, you apply the same reasoning on the other technologies. I think probably, if you want some detail on that, do that offline. But that's, I mean the principle should be clear or how this is done, its not very complicated.

Okay. I will follow up on that. I was wondering if you could give us some update or some guidance in terms of some of the cost savings initiatives that you either completed in terms of the I guess the North Sea and the North American consolidations and what else we might be looking forward, going forward.

The North Sea and so forth you are trying to cyclical cut backs that were done from Sept. through Oct. and Nov., I think these are the best count I can give you is that at year end that we had about 300 people, that were taken out of our US operations in about 300 people were taken out or the combination of the North Sea and Venezuela. May be in about 100 people to be taken out of the UK, these things take a while always when we say you know reductions, by the time we put the reduction in place depending on the country could be 60 days, it could be 120 days or depending on the co-regulations at times it can be even more than that. But all together it's about 700 people from the beginning to end. That's a cyclical cut back and we tried very hard to be a little bit more intelligent about how we do cyclical cutbacks then may be historically the industry and ourselves have been, meaning we tried to also go at the issue of productivity most of the [Inaudible] reducing people off the payroll, which brings me to the whole topic of productivity. While I will tell you about what we do on productivity today is that the biggest emphasis today is on manufacturing that is not going be the only emphasis. But it's the first emphasis and the work being done on procurement on supply chain management or manufacturing will yield let's call it secular cost differentials at Weatherford in increasing numbers as the quarters go by.

In other words, this would be -- our productivity savings will be small in 1Q and they will be large in Q4. How large will they be in Q4, well part of me wants me to just wait until show you what they are when they occur. But let me just say that we had targeted as an objective over the next 24 months between 5% to 10% of our cash cost structure to be taken out permanently from a productivity standpoint not all auto manufacturing, of course not, but about a third of it coming out of manufacturing. And I think that we hope to show some measurable, tangible, visible results as of Q4, of this year, does that help you?

Yes it does. That's great. That's all from me.

Thank you.

Thank you, our next question comes from Terry Darling with Goldman Sachs, you may go ahead.

Thanks, good morning.

Good morning.

Wanted to just follow up on the last question there in the cost savings? Bernard, did we see in Q4 numbers any benefit from any of your cost cutting efforts?

All right, Lisa. I will answer that one. My particular viewpoint is not really going to answer it more.

It was really not material in 4Q, because the benefits were coming in primarily in December. We have seen on the payroll side, it's about a million a month, beginning in Jan. some of the other cost reductions that we have referenced in the Sept. call were due to, you know, consolidating a couple of manufacturing facilities, those are still in progress but will be completed by the end of the first quarter.

Okay and Lisa on the guidance that you gave on the pre-announcement 24 to 26. Were you contemplating this gain in the next year, and if not what deteriorated, you know, incrementally vs. where your expectations were when you put the 24 to 26 out assuming that was still an operating number in your mind at that time?

At that time when I put that out we had already completed the transaction on the sale of the distribution company. It wasn't in the numbers.

Okay, and then on the R&D which was, I believe, a little bit higher than you had thought and I presume that was the higher prototypes. Assuming that that statement checks out, can you help us with where you see this sequential pattern progressing through 2003 on the R&D, I understand again your point about the prototypes being lumpy. But any sense you can give us there would be helpful.

I have talked to about when they are anticipating the prototype for, you know, kick in at higher level again and it's not in Q1. So, I would anticipate 1Q to be around 20m and then the timing of them after that, there is some in Q2, some in Q3. But that's hard and I am not clear which quarter they will end up falling in.

May be you should see R&D per quarter between 20-21m, it may spike at times to 22 and back down to 19. It will average for the year between 20-21 per quarter, not more than that, not less. Also, different differential between 4Q on a forward going basis, the difference between R&D in 4Q and in 1Q will be close to $5m, which is almost a perfect offset for the gain on the small distributions that reaches about 6.

Okay.

So, let me know, this is for the clarity sake.

Great, you are in, you have just actually answered part of my next question which was to try to understand the guidance here a little bit better, I think the, you know, in terms of the sequential improvement in Canada in the Q1, that's probably a bunch of it. But, may be you can talk about what else you are seeing there part one and part two is, taking into account the fact that Canada is pretty big part of your business, and that you get a seasonal down tick in the second quarter, if we look at your full year earnings guidance, but now it does suggest a sharper ramp in the 2H of the year. I think then many of your peers. I am just wondering if you can perhaps step us through some of the Weatherrford's specific issues here, some of which you have already mentioned. But let me get a little bit deeper into that in terms of what's going to be driving a stronger ramp in the 2H of the year for you or then some others assuming we will all get the cyclical backdrop here.

Yeah I - Terry, this is first half of the second quarter, and Lisa you sort of [Inaudible] as you said, in the second quarter, it's true that Canada goes down, our presumption is that the US ramps up to a degree that is an estimate based on what we see, the more measurable is that we have a number of international incremental contracts that start in April. Where are they? South America, Caspian Sea, North Africa, countries of the far East-Pacific rim. And so, I mean they don't start out conveniently to offset the Canadian seasonal decline, this just happens to be the case.

So, I think that supports the second quarter notwithstanding your point in Canada, which is actually correct. So, that's the second quarter. With respect to the full year, kind of the, if I can sort of give you and again on the phone it's not that easy, but it's simple bridge. If you think in terms of $0.25 in Q4, you think that, well they sold some business but they have some - some high R&D and just bear with me that it is sort of like a wash. And there is always noise at the end of the year on, in any company on any quarter. So, okay, be that as it may, so let's take 25 as a reasonable base starting point. If the guidance is $1.50 to $1.60, let's take the mid point, that's $0.55 incremental. $0.55 incremental and if you run through the math, it gives you a certain amount of incremental pre-tax income. Then you pull us from it and you look at the top line, we have made basically three statements on the top line. The first one is that, well, is that we have acknowledged the strength of Canada and we indicated that it seems that there is movement in the US.

Is the movement in the US going to result in the 10% to 15% volume increase? That's what we think is reasonable. I will agree with you if that is coming to weak part - the part of the argument because what if we are wrong, what if the movement we are seeing with our clients stops next week, as it has in the past, possible. But, if that doesn't happen, I think the rest of your argument is reasonably strong in so far as we also make the statement that - the international business will go top line-wise by 10%. And with the 4% underlying market improvements and that ratio, 4 versus 10 is actually historically what has been the case at Weatherford. We actually do have enough commitment in hand to make that a reasonable number and relate also that particular 10% increase internationally with the comment made on technology, which is; it is our thought on the low end of the range that will go from 280 to 425. Take 425 minus 280 and relate that to the impressive growth highlighted in the international market, let alone in the US. And you'll see that you have enough top line highlighted there to support roughly I would say 65% to 70% of the incremental in earnings. Then you are left with about 30% of incremental in earnings that cannot be explained by those top line assumptions alone. And then I would turn your attention over to our changes in the cost structure because I think if you can see through and ignoring the effect of pricing and ignoring the effect of absorption, volume dividend absorption, just look on the cost side, there is about a 100 basis point. And we think that, you will get simply on the cost side whether cyclical or the productivity discussions I had with Mike just a few minutes ago. If you are willing to believe a 100 basis point improvement in margins, just paid out of costs, ignoring pricing and the absorption effect of volume, there are no guarantees in this world, but, you know, the guidance strikes us as being reasonable aside from the fact it's based actually on internal numbers.

Can you also, just pass through with, what we were assuming on tax rates and also for Venezuela in terms of the Q1 sequential impact and for full year?

I will answer Venezuela, Lisa on tax rate. Venezuela is about a penny in negative in Q1, in addition to, in other words, on top of what it was in Q4. Then Lisa on the tax rate, I will let you answer that.

Yeah and a further comment on Venezuela is that may seem-, seem like it is actually light, but we have done several steps in Venezuela to cut our cost structure, place some people on a government approved [Inaudible] which brought the excess out etc. So I am very comfortable with a $0.01 decremental in Q1 on Venezuela.

As for the tax rate, we had fourth quarter tax rate of 30%. It will fall in the first quarter of our estimate for next year to 27% to 29%, that is going to depend on our mix geographically of earnings. But I would be comfortable using 28 in your model.

Okay. Great. That's a helpful summary on the guidance Bernard, I appreciate that and I'll pass it on to Tania. Thanks.

Thank you.

Thank you. Our next question is from Bill Herbert and he is with Simmons & Company International, you may go ahead sir.

Good Morning.

Good Morning Bill.

Good Morning.

Bernard, could you walk us through some of the components of the technology contribution in 2003, we go for-, you know, we are going from 275 to 280, roughly to 425m to 500m. In what, sort of, roughly are the components on a percentage basis of the technology revenue in '03 expandables, under balance and sort of fiber optics and other? How do you [Inaudible] pie up?

Sure. First, I mean, there are really four components to that number, we tend to talk, well I talked a bit more today about, in terms of completions, but, we tend to talk mostly about expandables under balance, because they are the biggest and so forth. But there are really four, just to make for clarity sake, which is expandables under balance, intelligent wells, which is predominantly optical sensing systems and a hydraulic operating systems, and of course drilling with casing or casing with drilling however you want to express it.

Okay.

Now, I think the two biggest chunks and just focusing on the low end of the range.

Okay.

It was 425, I had been known over the years as being too optimistic, so I am not focused on the low ends of ranges. I think that the number 270-280 on under balanced appears to us to be very solid, I think the number of 100-120 on expandables still I mean, I think, predominantly, I mean 90% of it are being screened and expandables also appears to be reasonable. So, we should add 270-280 to 100-120, you get to low end of the range quite easily. Let alone the nascent business in intelligent completion and optical sensing system which tends to be discounted but should not, because it will have its day in the sun and we actually talked very little about it, as there is still much more in [Inaudible] , than it is indeed.

Okay, and then with respect to what we did in '02, for expandables and underbalanced; can you share that with us, please?

I couldn't help you along. I think that expandables are in '02, you should not think of it much more than 60. I think that underbalanced, you should not think of it in much more than just under 200, 190-195 or something like that.

Okay, great. And then -

[Inaudible] expandables lost basically a quarter, that's why it is simple as that.

Got you and then I assumed that with respect to the delta from 60 to, it is like a 100-120, that is pretty much fully contracted, right?

It seems that way.

Okay and underbalanced -

Also let me add something else on expandables, really the work on expandables is bifurcated now. You've got, if you look at the R&D efforts, you basically are in two completely - two teams or in two teams, two cost centers and the rest of it. With the screen people, which are truly completion people and then the well remediation and then the well construction people, who are solids expandables people. And I will refer back to the comment that Lisa made about R&D and where it is accounted for, it has been traditionally accounted for in the locus of where the work is being done, that is, what division is managing it. Really expandables at this point, particularly with this bifurcation is becoming increasing clear that the solid part of expandable is not at all a completion product, it's only a drilling product. So, I mean as a backdrop, it explains why we are more and more inclined to pull R&D out and show it on its own, otherwise it is misleading. It makes certain divisions look better and others look worse, which is not really fair.

Right, so what I am trying to get at is, because it's sounds like you have a fair degree of confidence here with respect to the 425, sounds like it's pretty visible, you talked about several international contracts kicking-in in April, we know about the press announcements with respect to expandables in -

In Malaysia and the one in Brazil - Petrobas will be out as soon as we are authorized to put it out. The contract is signed, mind you, but then you can't put press releases out without mentioning clients and the client reads the press release and agrees to it. And that takes normally a few weeks, but this time the contract is signed effective a few days ago.

Right. So switching gears from expandables, how visible is underbalanced in '03?

As visible as any other business we have. In other words if there is an explosion of business it will go higher. If there is, you know, if business in our industry is crushed for some exogenesis reasons it will obviously suffer. But I think that is true with everything. So it is about visible as anything we have. I wish the rest of our businesses were as visible as that one.

Okay. And then in the second subject here, I was intrigued by your comment that you are looking for a mono bore well installation in Q4. How mono bore is that well going to be is the question. I mean, is the entire well bore going to be a single diameter, and have we reached the point we really sort of a true mono bore well is the technical viability?

Well, let me first say that a true mono bore (ph) well is very close to being technically viable. And I will actually differ on that to industry peers and venture with [Inaudible] because the other one was the most ahead in mono bore solids type work. I think they have shown, demonstrated to my understanding its viability. We certainly feel the same way. With respect to, traditionally we are ahead in screens and remediation they are ahead in construction. With respect to what we plan on doing in the fourth quarter, it is not a whole well that will be a mono bore, it is a section of a well, say 5000 feet, of mono bore expansion. In that section it will be mono diameter. And if you can do it further type wise and therefore commercially on that sort of a stretch of steel, you can do it top to bottom.

Okay.

Then other words leveraging which you will do in Q4, over mono bore (ph) wells in '04, in not of a big of a stretch. You are squarely in D and you are not in R any more.

Okay. And the last question, sort of following up on the question with respect to guidance not so much focusing on the bridge between '02 and '03. They are really to trying to get comfortable between Q4 and Q1. Venezuela down, we talked about that, Canada and US up. Caspian I assume is flat, is that yes or no?

Caspian is flat, nothing happened in Caspian's Q2.

And North Sea is flat?

Flat also.

R&D expense is lower?

Correct.

The technology contribution higher, were there any delayed shipments in Q4 that will spill over into Q1 that will help Q1?

I have natural aversion to the whole story of delayed shipments. I got to tell you. I really, really do, because in the life [Inaudible] service there isn't a single quarter without delayed shipments. Having said that my opinion is not shared by everyone. So, yes there are some delayed shipments in Q1. But I will bet with anyone that [Inaudible] delayed shipments into Q2. But there is true some delayed shipments. It is not unusual at the end of the year. I will say this, at the end of any year, because people stop working around Christmas, pretty much around the world, even in the Northern countries for that matter. Okay, so it has happened more than anywhere else. No, I think, so okay, I will grant some delayed shipments if you want to. But the, first of all, the one thing I would guide you is that please start from 25. Don't start from low base, because you would be making a mistake. Not only is reportedly R&D versus sale of our business, but I think Q4 had enough, you know, things happened to it that I think 25 is the right number. But, if you start lower than that you just be making it - - it is just wrong.

Okay, and from a regional?

No. I was just going to tell you, what you will see is the following. You lose a penny; lets say you lose two pennies. Penny because of Venezuela, and you lose a penny which is a differential. Okay, I will grant you that, differential between sale of asset and lower R&D. In other words the gain on sale assets was greater than the low R&D in Q1. Fair enough. So you are down to a 23 starting point, if you will. So how do you get to - - so how do you pick up $0.05 or something like that. Okay. One, volume in Canada. Two, small volume in the US. Three, you have incremental business volume in North Africa and in the Pacifica rim. That are no measurable and actually on the way. End of story.

Okay.

And also the last thing, I would say that you have some basis improvement, that are coming out of the early discussion we had with Mike at beginning of the call are cyclical, when did the people so forth and when leaving and would it impact - -

On the cost cutting (ph) .

Yeah, that's right. This is cyclical, not to be confused with the sort of secular costs.

I understand, thank you very much.

You are welcome.

Thank you our next question comes from Stephen Gengaro with Jeffries and Company. You may go ahead.

Thank you. Good morning.

Good morning.

Two questions really, the first, if we go back to the last quarters conference call, when I talked about the expectation this year, a surge in the rate count of 300 to 400 rigs which you thought was being held back by just sort of a general weak economic outlook by your customers, has that changed at all as far as your prospective as to why we are seeing sort of low activity and hike in market prices?

For me it is simply the passing of time. I think if you look at - - this was a comment directed to North America, if I recall. If you look at who are the players that are in North America, with a few exceptions they are medium size independents, and down. Large independents play a role, but in certain pockets of business, and the majors play a role, those are also certain pockets of business also. So the bread and butter is the mid-size independence.

If you take a look at that balance sheet, its sparingly available information. The debt capitalization ratios show that, well, that they are popping around 60%. And you take a look also at what they did through the nine months into '02, which is when I made that comment, it was also pretty clear that they were spending pretty much what they were making. So what has changed now, we are four months older and we have had fourth months of very robust cash flow. So two things happen and I also think the window on the equity markets from E&P has, I would say its wide open, besides you guys will know this better than I, but it strikes as being sort of beginning to open. So the combination of what, of more months of strong cash flow, a window that's beginning to squeak open and just feeling better about life in general because of that leaves and of course the well, well, well reported quarter-on-quarter decline rates in gas in North America. There comes a point where people are willing to spend that cash flow and/or leverage more and/or sell equity to a degree, hence, you know, the budget strings begin to loosen up. So I think that's why we are seeing now something that I mean we don't - it always harder to be analytical about the US than the international markets because the international markets have a longer lead time 10% to 15%. We are not, sure, but it strike us from regional indications that's reasonable and this will be sort of a halfway, along the path to the 200 to 300 rig rate statement made back in October.

Thank you. And then the second question just quickly, the North Sea was obviously tough in the third quarter and you saw it decline in the fourth quarter, can you, can you put that around sort of an apples-to-apples basis assuming that third quarter was bit more typical for expandables?

You want to relate them? Okay. The source of the - - the evolusive expandable and the North Sea, I mean they do, there's a bearing on one another but expandable are, whether it's screens or solids don't have a particularly North Sea focus. I mean that they, North Sea is a great place for it. But I mean it's a much more of a worldwide thing. The North Sea, and I'll say this about the North Sea [Inaudible]; just like I mentioned that in the case [Inaudible] , aside from the rig contractor, we are one of two service companies, by far the most exposure there. I also say that, I haven't done the analysis, I can't, I guess you guys can. But I would suspect that in terms of exposure to the UK North Sea, we probably one of the largest on a percentage basis in the industry. I don't want to say we are the largest, I don't know that. But I suspect, that we are one of the largest, just like in the case of R&D, I think, one of the highest spenders. What does that mean? I mean that we are the ones who fell the most when the UK basically decided to grind to a halt, which is why we are so thrilled by the beginning of the process of the change of ownership of fields in the North Sea. Because we have such a big stake there. And incidentally, on a geographic stand point, when you analyze returns, even though in the past 3-4 months it has been hard there, and returns have been down. Europe North Sea is for us, a mid teen returns on capital employed. That's not a bad place at all for returns, not in the past few months, because everything was basically down periodically, but on a true cycle basis it’s a healthy region.

So, let me see if I have answered your question. I think that in UK, North Sea is obviously terribly important to us. I think the number given by Lisa was 10% of the drilling division, and I mentioned 9% of the company overall. Obviously, both she and I picked different time frames, but it's a very important part of our business. And Q3 was hard; Q4 was harder in the UK North Sea. Q1 won't, if anything it will be a positive because after the people leave the payrolls then. But we are highly confident that in the medium term, the UK North Sea will be a vibrant area for business. It's not at all the Dead Sea. Or else put this way, most of the Dead Sea as the Gulf of Mexico, was a Dead Sea back in 1982-83. With respect to expandable, no, there is not, I mean, you know, good regional markets help expandable. The expandable basically is such a new and young technology that, you know the biggest class expandable is the R&D work and the success is commercializing it and prototype your successes with necessary regional trends, It sort of beats, within its own drum.

Okay. Thank you.

Thank you. Our next question comes from James H. Stone with UBS Warburg. You may go ahead.

I just have one question remaining. Bernard, you talked about how strong Canada has been in the numbers of rig count. You talked about pricing up in Canada. Have you done anything to raise prices or is it premature?

Well, if you had asked me this question a week ago it would have been premature, but fortunately it is a week old and pricing is moving up by about 6% for us in Canada as of the week ago.

And when will those prices go into effect, I mean, how long it would take to get your run rate where you are 6% higher?

Well, that is a, let me see if I can answer it. When we say that pricing goes up by that amount that means business is being booked as of a week ago is more expensive and then you ripple through the overall business in Canada but depending on the contractive blah, blah, blah its the timing is not linear, it is not the same for everyone. So we would eventually guess Lisa, what a 120 days?

For the full impact.

For the full impact plus or minus 30 days. I do not know enough, I mean analytically I do not know enough about the spreading but 120 especially strikes me as not being unreasonable.

No, [Inaudible] 30 to 60 days, you will start seeing the impact.

And are you seeing any - are you in conversations with any of your customers in Canada regarding working into or through breakup season or for booking projects post breakup yet?

Working through breakup seasons we are, yes. Our post breakup, I do not know. As a matter of factor, if there wasn't a conference call this week, I would have been in Canada. This week - if we had a conference call a week from today actually I would have known even more. I could have answered that question better. I can't be in two places at the same time. So I don't know of any post breakup discussion but through breakup I do know, yes.

Okay and did that change - is that something that featured that kind of changed in the last four weeks?

Yes, although historically you go back in the past there had been years where this has happened, but this is again something which has surfaced, I would say, about four weeks ago.

Great. That's all I have. Thank you.

You are welcome.

Thank you. Our next question comes from Robin Shoemaker with Bear Stearns. You may go ahead.

Yes Bernard, I just had one question and that is if you could, on the last conference call you described some problems with a five and a half inch expandable sand screen, which you were addressing and want to know if that has been fixed, the problem. If there is any recent applications were you've had successful deployment and whether you, in terms of next year this revenue opportunity and technology continues to have the pull through revenues for other businesses that it has had in the past. I think you talked about that in the last conference call as well?

Okay. Yes, I mean, I think what I mentioned in October actually it had been addressed from an engineering standpoint. It had to do with the connection device, I say device because it's on slotted material, it's quite different than on solids. The connection device on five and a half was not strong enough to sustain expansion and it's not in all cases. By the time we reported on it in October it had been changed already and from October till date we have had 28, if I recall installations of the five and a half inch. It's a non issue. I will also say that, these things will happen from time to time in all expandables. This is just on screen, but in all expandables until it becomes truly a mature technology with a large market. I hope it does not happen to us but, it does happen. With respect to the pull through, yes absolutely Robin, the pull through is there and it's awful when you have both running up the market, its helpful when you back off.

Great. Thank you.

Thank you. Our next question comes from Wesley Maat with CFA Fulcrum Global Partners, LLC. You may go ahead.

Hi. First question, Lisa, I just want to make sure that going into the first quarter, we understand, with this [Inaudible] imbedded the number and the other income, I mean obviously you knew at the time of the pre-release that there was the gain on the distribution business. You know typically the item swings negative, a little bit of positive. Are there any assumptions?

I forecasted this could be well, we don't have anything that is known. There's usually a few hundred thousand to half million of sale of assets, excess assets that we've put down in other. This one now is that we may move gain or loss on sale of assets to operating income due to some recent SEC rules, but will ensure that we keep it separate, on a separate line, so we can treat it, you know, the same way as you have in the past.

Okay. Fair enough. Bernard in terms of the international markets growing by 4%, in terms of your opening statements, it struck me as being a little bit optimistic when I compared that to a key competitor of yours recently, trying to get the sense of, you know, what you think the basis of this is? You talked about improvement in the UK sector and Weatherford's specific, you know, issues about, you know, technology impacts, the expandables, and opticals and the like, but could you potentially, you know, give us an idea about why you're more optimistic?

Well, I think probably the more controversial of the two statements I made is that if it grows by 4, we will grow by 10. But if you're going to take issue with the 4, the 4, Wes is about 25 to 30 rigs. We have a wide range of estimates out there. We look at all the estimates. We know, you know, little about the various markets and what the intentions are. I think it's not unreasonable that in '03 you have about 25 to 30 more international rigs drilling. I'd take actually take more issue with the other number that I've used, which is 10, if full growth, which is 2.5 times, you know the rate of growth of the underlying market.

Okay. In terms of formulating the 4% increase, is it something that you know you at corporate did or did you survey the budgets, you know, of your field people, your marketing people?

The top line of the budgeted top line for the international regions is at or higher 10%, growth rate.

Okay.

Okay, that's one. Now, they themselves individually going back down to every single country, we operated this, more than 100 countries. They themselves look at activity within the country. They themselves look at activity as defined by normally number of wells drilled, the number of intervention jobs, number of re-entry jobs, etc., and the buildup is done that way. And so you know what is, ultimately given in the conference call, it's obviously highly simplified but it's not a corporate thing. I should be so lucky, no it's not, it's a - it's really much more sort of gruted in the geography of our footprint.

Okay. One of those regions is the Middle East. What kind of disruptions are you assuming, you know, potentially with a little bit of a war coming in the first quarter?

Well, what kind of disruptions are we assuming? We're are not assuming any disruptions particularly because it's - I think it's - you can't factor that in. I'm not sure how you do that. If there is a conflict in Iraq, then I think for a couple of weeks, operations on and around Iraq will be slowed down and then there will be a catch up afterwards. I think surely if that happens the capital markets will be able to anticipate it. We can't - we can't budget for wars. It's a difficult one but I will tell you operationally this has been something that one can see coming for a long time and Middle East is a very important part of Weatherford, both in size and in returns, and I suppose the only thing that I can say about preparation there is that - we have had traditionally an organization which has been almost without any expatriates in part because we believe in basically local management through and through. And I might actually also add that the top three levels of our senior management in the Middle East are all Iraqis coming to think of it but not of the present regime. And so - anyway, Wes, if there is a conflict, it will be what it will be. But, no we can't budget for that.

Could you remind us about how much percent of your revenues at DIS in completion systems come from the Middle East?

I can give you an estimate, but she can give you the exact number. It'll take a second.

Middle East and North Africa are about 17%.

I would say 15 or 17.

Overall?

Yes.

Okay and then the final question. Looking at completion systems - the EBITDA margins went down to about 1% in the fourth quarter, that is after R&D, if you look sequentially about 4m of the decline was R&D expense. It seemed a little bit low compared to, what I was at least looking at -- wanted to get a sense of, you know, you talked about the markets but, is there anything particular about specific product lines that impacted it to go so well?

I think, we have two factors, one is the fact that I mentioned -- it is an uneven revenue stream. So, you have the lower revenues in this quarter, which impacted absorption. We did see more expenses coming through the manufacturing facilities due to absorption.

Okay. So, under-absorption of overhead?

Yeah.

Okay. Thank you very much.

You are welcome.

Our next question comes from Pierre Connor from Hibernia South Coast Capital. You may go ahead.

Good morning. But, that was close. A couple of quick questions. Firstly, to just reconcile back your early comments on the margin declines. On the pass through, I am assuming that's all drilling into intervention and that what you gave would explain everything at about 75 basis points. Is that what would attribute to the impact of the low margin pass through?

Yes. If you look at the remainder after you take out the pass through cost, it was more than half of it. It can be attributed to Venezuela, the UK, and Tengiz and then after that it was in US and then product mix, had about a $1.5m impact on product mix.

And that product mix impact you said - all on this completion or is that between the two?

Well, that was between the two, but primarily DIF.

Okay, thank you. And then, Bernard, on kind of along that line though going forward, you know, in terms of -- I think you gave us some ideas on where you are going to get that incremental margins - that is in 100 basis points in cost savings. We can run the numbers through on the top line to come in, that leaves pricing and I am assuming that -- your early comments there is some assumption of some pricing increase in the US and here in the, maybe the question is in what kind of range and then, what is that in terms of impact in margins doing - your assumptions, if you could give that much detail?

This is for the year, I presume?

Correct.

Well, the way we think of the bridge between 2002 and 2003, we don't give ourselves any particular pricing - it is safer to do it that way. The way we look at it is, the bridge is in rough terms a little over two-thirds of volume driven and it's based on judgment, Canada is what it is, US is what we think it is going to be, and International is what we think it's going to be, and technology is what we think it's going to be. You add these pieces, and you think what you will of them, but if you take them for what they are, it takes you 65% or there-abouts or may be 70% of the way bridging from one to the other, and incidentally we -- normally when you do this sort of build up we take -- we don't take traditional incrementals or the results for decrementals if you will. We take basically 25% EBITDA contribution, because that is kind of the EBITDA of the company as a whole excluding corporate overhead. In other words, $1 of incremental business volume would yield basically $0.25, incremental pre-tax income. I am not sure that, if one could get more rest of that, but obviously that's how we do it. That takes you about two thirds of the way, the balance basically is an improvement in our margin and on top of head I forget what is the present improvement in margin that we have, may be a 100-150 basis point, I forgot, I think it is something like that in 2003 versus 2002, and that essentially for us are cost driven, and the cost driven would be in, I would say a chunk of the cost would be just cyclical lay offs and so forth that were performed and surgically as we could -- not easy to be surgical. And the other aspect of the cost is productivity lead, which is much more secular in nature, and we are sure will happen over the course of the year, which is essentially manufacturing at this point. So, that's how we bridge it. It's much more, there is price in it. It's in the form of, I suppose a hedge, in the event that we don't -- that we somehow don't perform in the other areas that we feel we will.

Okay, that was very helpful. And then one broader question Bernard. If you were to artificial lift, my assumption would be as this would be a place where - it give current price environment, it would go first, [Inaudible] a quick pay off to see some growth in market share first and then secondly in your [Inaudible] are you gaining some of that market? What do you, can you explain a little bit on artificial lift and talk?

I think it is yes and yes. One thing you have to understand with artificial lift is that on the production optimization class of service we have has really acted as a magnet for pull through additional business. It has originated with us, as in a real optimization. It is not becoming a field optimization. And the optimization business per se, which I think the billings were acknowledge around $65-75m or so as a service. It is a good business, but much more importantly what it drives with it, fuels are - share gains. Well, the smaller share gains - no, we don't gain share spectacularly without a lot of time unless you want to disrupt the pricing structure. So, you have fueled our share gains and I think also that the artificial lift business will have some price elasticity on the way up. It will come out of Canada initially and then certain areas of the US and then filter through certain areas of - some close funds of the foreign markets, excluding Venezuela, which is right now in the [Inaudible] .

I think what you, your statement is absolutely correct.

So, in terms of the timing of the recovery in the optimization demand for that service - is it some thing that you have already seen, or is it only on the fringes of?

I think you already saw it. It is one of the reasons why artificial lift has been three divisions. They have been very commendable in their performance and their returns and yet they have suffered also some of the setbacks, regional setbacks - for example think that that artificial lift has become very large business in the heavy oil markets of Venezuela, which have been shut down. I mean unlike everything else, now they are also coming back on like everything else. But I think the Artificial Lift Division must have something on the order of a 75-80% market share for artificial lift and released it - services in the heavy oil segments in Venezuela. So, they got a black eye in Q4 and they managed to overcome it. And that is simply because of the gains in other markets and again production optimization lead. Talking from the well optimization service and now fuel optimization service.

Okay. Very helpful and very interesting. Thank you now, I'll turn it back.

Thank you.

Thank you. Our next question comes from Rob McKenzie with FBR. You may go ahead.

Good morning all.

Hi Rob.

Questions for you Bernard, I wondered if you could update us on your thinking and/or your client thinking on the ultimate market size of expandable, I guess split into ESF and/or [Inaudible] ?

That's very very simple because - our opinion may be different so I will tell you what the thinking is, the thinking is that on screen, the market on the ESS is something in the order of $500m. A well remediation the thinking is the market is on the order of $1b. Well construction - it is very wide range. Well construction is anywhere from $1b to $3 or $4b, and I realize that billion sounds silly, throwing numbers around like that, but our clients actually are more aggressive - the ones I have spent analytical time on it, than the service companies are - on the assessment of size. So I will tell you again - $500 m on the time control, we have always said this is the smallest. The billion on the well remediation, that is the installation of the expansion of casing in order to repair sections of the well or shut off reservoir zones or plug unwanted water, which is normally done today with squeeze jobs using cementation processes. The well construction which is centrally changing the geometry of the well from inception - $500m for sand screen, $1b for well remediation and anywhere from 1-4b of well construction, that is the service portion of the business only - it is not the steel in another words - it does not include or try to include the cost of the steel that you are expanding as there is no value, I mean there is no technology in steel expanding. Okay?

Now given - I mean if you step out little farther here, given your current state of the industry that the development of the technologies, what kind of timeframe is being battered around for realization of this market size?

I think for that you have look at who the leaders are in terms of being missionaries and moving that business along. Clearly, the leaders in well construction are Enventure, which is the joint venture of Shell and Halliburton. I will say with self-appointed leaders I suppose on the sand control in the well remediation. That is not to say that Enventure is not interested in sand control in the well remediation is not to say interested in sad control of course we are. I think the whole spectrum would be covered by both entities. But the leaders being missionaries are the ones developing the market. The question is how fast will they go, I can speak for Shell and Halliburton I will say that they have done very well on the solid side of well constructions and they are showing the way. Technically and in terms of downhole experience they are already showing the way. I would argue that we have done similarly for the sand control in the well remediation. Albeit we talked about prototypes, about further introduction, so this is in infancy, having the combined revenues of [Inaudible] Enventure probably don't right now, In '03 it will probably a quarter with billion dollars in two months is nothing [Inaudible] infancy. So I think you have to look at I mean if in '04 and '05 if we look at defining years in terms of showing the potential of this technology. You don't think you have to look at '06 and '07 or something like that. It is in '04 and '05 that I think expandables will have significant economic impact on the industry and of course on the missionaries who are bringing it along, the two missionaries.

Great, One of you could provide some similar comments may be not as much details on the under balanced services, particularly under balanced drilling market. I know [Inaudible] for a long time in the industry, I was wondering what you are seeing is making that have more potential now than it has in the past?

That's a long topic. I'll take this, under balanced, as an idea has been around for a very long time. But the idea was never engineered into something that has the reliability and the productivity success that it has today. And that has to do with, not only, mixed efforts of, not only separation technology and pressure control technology, but also down hole tool technology and drilling technology, the engineering technology, to understand what you are doing.

In '03 most probably, something on the order of 2% of the wells have been drilled, will be drilled in part or in full on the balance. And that's coming from, you know, a number which was like, three or four years ago less than 1%. We are okay with this. This is 1% little bit not much. Again, you say they are early is its life. What is driving it, is sort of, I say two things. Recognition that you have now so many fields that have depleted zones, that the ease of drilling with under balance shows it, or put in another way, absence of under balance makes it very difficult to drill these wells, soon depleted zones. So, it's just basically the question of feasibility. And the second issue that has been relevant for the spending of under balance has been the productivity aspect, which is the unskinning of the well for to speak, doing away with skin, meaning, with formation damage, which again is much more affection in the aging or bruising formations than anything else. So, those are two factors that have been sort of, leadings on the selling for under balance. Bearing in mind that, pretty much everyone else in the industry that I can think of, finds under balance to be unattractive, meaning that, from a service company standpoint, very much like expandables, very unpopular, and so far it does not bring good news to any other class of service, fact its a destroyer of a lot businesses. In that regard there is strong marketing being done the other way, trying to convince the clients that none of this makes sense [Inaudible] , perfectly normal. But the two big benefits which is the ability to drill, which is pretty fundamental and the well productivity which is equally fundamental, at the end of the day are the ones that are carrying the day.

Great. Thanks very much, I'll turn it over.

Thank you. Our next question comes from Gary Russell with Stifel Nicolaus, you may go ahead.

Good morning everyone. I think everything has been addressed pretty thoroughly. I will come back later offline if I have to. Thanks very much.

Thanks Gary.

Thank you sir, our next question comes from Geoff Kieburtz of Solomon Smith Barney. You may go ahead.

Thanks, I'll try to be brief as well. Bernard, I ought to appreciate that you can't budget a war but if you look at that international outlook, you have budgeted for, what are the two markets that present to you the greatest degree of uncertainty?

Well in the assessment for '03 we actually clipped pretty much all of the increases that was there originally from the regions, from all that were in the Persian Gulf. I mean in a way we didn't budget for that in a sense whatever was planned in Saudi Arabia and Abu Dhabi and so forth, we just clipped it.

Okay.

We did away with it, that doesn't mean it won't happen, it just means that we presumed that nothing is going to happen until there's some clarity there. The other reason is basically is that our earmarked Caspian Sea, North Africa, Pacific Rim, Geoff, I don't know what the implication of Iraq is on them. So I suppose I didn't answer the question that well early on and so far as no cost account budgets for war, no one can, but we really did de facto and so far as any assumption I gave you that we sanitized it or pasteurize it if you will.

Okay. For the Middle East?

For the Persian Gulf.

Right. And that really represents the biggest source of uncertainty in terms of your budget?

What is the biggest source of uncertainty, the extent of the US recovery?

Right. Okay.

Canada is a -- one more thing about Canada is it is what it is, the international size of 4% and the 10%, Geoff, we need to have cancellations written how to happen. So I guess the burden of proof is on our clients I suppose at this point in time because it is what it is. To the US, you know, we talked about, you know, something in April, May and indications are what they are now and it is encouraging -- you know as much about the US market dynamics as we do, that can change, that's the most perspective I think.

Okay. And shifting over to lines of business, you expressed a high degree of confidence in the technology revenue forecast, is it getting to the point where you can even conceptually talk about a backlog or contracts or something that we might track on a sequential basis that you would basically give us, is that added confidence?

I think you could think of it in terms of the screen size of expandables bearing in mind it is really a niche business and expandables and so far as if you see in -- evident and I suppose press release will be the way to go -- lumpy 2 or 3 year contracts and you add the numbers - It's not a backlog Geoff and so far as it's a commitment by the client to buy X amount over -- let us just take the most recent one, it was signed a few days ago with Petrobras, it is $35m over 2 years, for expandable sand screen. What does it mean? It means over the next 2 years or the next 24 months from the time of signing which was a few days ago, they will buy $35m worth of expandable sand screen. Can they cancel that contract? Well they postpone it, which is the same thing I suppose, If the wells that they are planning on drilling do not get drilled and it is in those wells that ESS would be installed. Is that a backlog? I suppose it is because all backlogs are dependent on whether the clients go and get the work done or not, otherwise it will get cancelled as I remember for well in my drill pipe days. So I think maybe as it matures on the sand screen side maybe in '04 -- we can start looking at that, but in the meantime I would just point to you the publicly available sort of lumpy contracts as indication of, you know, backlog or close enough.

Is a larger percentage of your business in these technology businesses, a larger percentage of revenue in these technology businesses coming as a result of these contracts than it has been in the past?

No, it is really sand screens, I think again, we have to stop for a minute because, in expandables, the well remediation and the well construction business doesn't exist Geoff.

Right.

I mean, we have, we are very proud to say that we have, you know, 8 jobs this quarter, well remediation 9 in 5 [Inaudible] , basically in two hemispheres, trying out what is essentially displacing squeezed jobs.

Okay.

This is not a business yet, it's just a service business anyway, and so okay, that we don't know what form it's going to take, if we are going to sign some major alliances and so forth, it'll take along time before we get there because you have to compete with (ph) various sizes, well remediation expandable etc. So, the contract really has more of an impact on products business when it is technology and the two products business, when it's technology there, I can point you to would be the optical sensing systems and expandables sand screens, well we both know optical sensing systems is still too young to be there, that leaves you only with ESS as a contract type business, because it's products.

Okay, that's helpful, and '03 CAPEX plan and outlook for working capital given your current budgeted activity levels?

On the capital expenditures, we have budgeted 250 million and on working capital, considering the up tick in activity levels, our objective is to keep that flat -

And up for two terms [Inaudible] .

And up for two terms yes.

Okay.

So, we do not, we plan on reducing our usage of working capitals to offset the increased activity.

Okay, and the comment about targeting a 5 to 10% reduction in cash cost structure, just so we are on the same page here, what is your cash cost structure that you are trying to reduce by 5 to 10?

Geoff again, for the given the medium of communication here, I have to be simple. Let's [Inaudible]. If one ascertains $2.4b in revenues and this number is not correct but just for the sake of argument, and if the EBITDA pre-corporate expenses because let's look at the operations, we were 25%, take 75% of $2.4b, which, if I take my calculator should be $1.6-1.7b. Right?

Right.

1.8, actually I am wrong.

I think $1.8b. Yeah.

$1.8b, I am wrong. Obviously, I should go back to school and tick a $100m off round numbers. For R&D it is a different bucket. So we are up a $1.7b, right. Well, the, what we are trying to do, operative word is trying, is to on a secular basis, productivity wise, using productivity, not just brute force, cyclical brute force. We are trying to operate the business at 5% or 10% lower structural costs, meaning we are trying to take out, if our top line remain static, we are trying to take out 5% and 10% of $1.7b. It would not be done over night. This is a 24-month type endeavor. We just have set the specific target by year-end and we are the first, I mean as you analyze this further and you divide the pie of Weatherford into manufacturing services and just call it overhead. You know, divide your cost structure into three categories, simple, Services, Manufacturing and Overhead and Overhead being not attached to services. The first one we are working on, is on the manufacturing side, which is upstream to services. Services will come next. And so between now and year-end we are hoping to achieve a fraction of that 5% to 10%. Geoff, I do not know that we can get to 10%, targets are there to be, you have to strive for them, and I think if we got the five we would declare, that we did something worth your while. So, that's what we are trying to do it. It's not - productivity is not, we are actually trying to be clever of this, lastingly clever, not just for couple of quarters.

Very good, thank you.

Our next question comes from Cindy Chou with J.P. Morgan.

Hi, it's actually Michael LaMotte. Quick question for you Lisa, and I apologize if this was addressed earlier in call. CAPEX plans for 2003?

250 million.

250, okay. And then on the, your comment about the DSOs and the reduction there, how was the securitization of receivables backing that number if at all?

I would put back in when I calculate the DSO.

Okay.

Was that your question?

Yeah, so it's exclusive of that impact?

Yes.

Okay. Great. And then a question Bernard about your comments on returns. If I look at ROCE being flat with 2000, you had an excessive 25% revenue growth in '02 versus 2000. EBITDA growth an excessive 35%, which means that your capital account grew at least as much as the underlying business and as we go looking forward to next two years, an improvement clearly comes from growth in the business and a trickling or less growth in the capital side of the business for the secular improvement on returns. My question is this. Historically, the company hasn't generated a lot of free cash flow because of the growth trajectory that you have been on and under the scenario that you outlined theoretically you will. What are the plans for the use of free cash flow in that scenario?

First Michael, you are absolutely right, it is part and parcel of an up trend in returns has to do with a more efficient utilization of capital. You are absolutely right and I highlighted in some of my comments, worked on and around J.D. Edwards and also another thing I did not mention, which is that - when we talk about returns on technology, step change technologies, upstream of those returns one or two years before we invest rather massively in intellectual property, which is burdened then to your capital base. There is no way around it. You get, you know, sort of - it may become independent and you are not sure if you have lost your R&D with strange returns further and then you start going through the threshold of returns. So you have to go through the history of what we did to understand in the past two to three years. On a forward going basis you are absolutely correct, the part and parcel of what we want to do is more efficient use of capital.

What the working capital was a big part of our emphasis and also CAPEX. With respect to free cash flow, now that is a little bit tricky because it all depends, Michael, on what is your view as to what will be the top line growth of the step change technologies and the pull through they carry with them. We have ignored the pull through. You know what is today $200-$300m ends up being, you know, at the end in two to three years' time or may be five-year time if you take a very long time frame, ends up being $800-$900m, then free cash flow there will be and I can discuss this with you now but if it is materially more than that, there are two things you have got to support. One is the fixed assets that go with the expansion of step change technologies about $0.15 give and take, $0.15 to it depends on the mix, $0.15 of capital - fixed asset capital, the high need dollar step change technology incremental dollar that it depends on the mix. Because some are more fixed asset intensive than others. There is also about $0.25 to $0.30 of working capital behind each dollar of incremental step change technology.

So you know if you do the math, it is somewhere around $0.40 to $0.45 of capital behind each dollar of incremental step change technology revenue. So you see it really depends on how you either aggressive or skeptical you are as to the size of these businesses. Understanding that we really believe that, you know that we will go through the cost of capital on these technologies. So there shouldn't be a return issue on these things. But it may become a user free cash flow to support that depending on how aggressive you are. If you are not as aggressive you are more skeptical saying that these things will be just niche applications or they will take forever, than the free cash flow, how will it be utilized? I think it is traditionally being utilized to acquire things to typically for consolidation purposes as the quantity of things required for consolidation purposes dies down because of the majority of the industry, then the two applications will be dividends or buy back of the stock and on that one it really depends Michael, if indeed, you know, the scenario that I just described really depends one on, what is the fiscal treatment for dividend payment, which is obviously relevant and two where our stock is at that point in time.

That's helpful Bernard. Thanks.

You are more than welcome.

Thank you. Our next question comes from Erik Jerome (ph) with Credit Suisse First Boston. You may go ahead.

On your customer mix during the quarter? Bernard?

Question on the customer mix.

Did you see any changes between [Inaudible] independent measures.

I am trying to think through, there is actually no. Canada. I can report that majors have by and large emotionally and economically, emotionally have exited the US and emotionally seems to be want to exit the US. There has been a return of the some of the majors in the type gas place in the US at least on a forward-looking basis. But in the quarter itself, no I cannot report other than that.

Okay secondly, completion margins were down lower than we had as you look at your first quarter forecast. Are you looking for an up tick there sequentially?

I think Lisa tried to touch on it before, I think what Lisa said is lumpy and you got absorption that affects the global place, so the answer is yes.

Okay, thanks a lot guys.

Thank you and at this time I am showing no further questions.

Well, thank you very much and it's been a long conference call, so I think we will end it here. Thank you very much.

Thank you. That concludes today's conference call, you may disconnect at this time.