Weatherford International PLC (WFRD) 2003 Q1 法說會逐字稿

Welcome to the Weatherford conference call. All participants will be able to listen only throughout the conference until the question and answer session of the call, at which time you'll be instructed on how to ask a question.

Today's conference call is being recorded. If anyone has any objections, please disconnect at this time.

I'll now turn the call over to your host Bernard Duroc-Danner. Please begin when ready.

Good morning. I want to start with your comments Lisa and I'll follow up.

Good morning, as always my comments will focus on the sequential quarterly trends. This morning we reported diluted earnings per share of 27 cents, as compared to 25 cents per share last quarter. As a reminder, last quarter included eight million or four cents per share of other non-operating income, primarily gain on asset sales.

Therefore, operating income is a better indicator of the sequential trend, our operating income increased 13 million, or 23 percent, as compared to last quarter.

Incremental operating income as a percent of incremental revenue was more than 170 percent.

Excluding the benefit of the lower R&D spend, the incrementals were still over 110 percent.

North American incrementals were approximately 45 percent, with cost reductions made at the end of last year enhancing the benefits of volume. North American did not materially benefit from pricing increases.

International operating income decrementals were held to 10 percent O a geographic basis the quarter unfolded as we expected, both Canada and the United States reported strong sequential increases. International results were adversely impacted by turmoil in Venezuela and Nigeria which each resulted impacts by approximately one cent per share or two cents in the aggregate.

Additionally, military actions interrupted activity in the middle east, we estimate that the interruption in the middle east delayed at least eight million in revenue.

Before I discuss the quarterly divisional results, let me mention as a part of our productivity initiative we have changed our divisional structure from three to two divisions, as mentioned in a separate press release this morning. Bernard will discuss the benefits we're pursuing in his comments.

The results in today's earnings release are presented on the new basis. Drilling services and production systems. And we have also restated prior year's quarters for comparative purposes.

For those that would like to look at the first quarter and the historical three division format, it will be available in our form 10-Q, which will be filed in a couple of days. I will also be glad to help you off line.

The divisional results; Drilling services is defined as the historical drilling and intervention services less the specialty product lines, plus completion systems liner hangars. Drilling services reported incremental operating income of 11 million on essentially flat revenues. The higher profitability levels can be evenly attributed to three factors: Initial impact of our cost reduction initiative, volume increases, but not pricing in North America, and the mix of products and services.

Production systems is comprised of the former artificial list division, our specialty chemicals product line and the completions systems division, including liner hangars.

Revenues increased 11 million with a two million dollar decline in operating income. This division did not benefit from the recent increases in North American activity to the extent our drilling services division did. Since production activity typically likes recount movements to a greater extent. The lower sequential operating income to revenue relationships is primarily a function of product line mix.

Company-wide R&D expenditures were approximately 20 million and will stabilize at that rate for the remainder of the year. Equity and earnings declined approximately one million, primarily due to a lower contribution from our Saudi joint venture. This was an initially impact from the military action in the middle east.

Now a few comments on the balance sheet and cash flows. As of March 31st, total debt, inclusive of 950 million of convertibles, was approximately 1.9 billion.

Our debt to capitalization ratio decreased approximately 50 basis points.

During the first quarter, our working capital days outstanding rose, primarily as a function of accounts payable and accounts receivable.

The days sales outstanding rose due to a delay of payments in the middle east and Venezuela.

Provided middle east activity continues to return to a level of normalcy, we expect days working capital to be below December levels by the end of the second quarter.

Inventory is tracking as we expected for the year, with increases being project-specific.

Our enterprise wide JD Edwards software implementation, which is instrumental in realizing our working capital objectives, is progressing on plan. International implementations are ongoing.

We will complete the worldwide implementation by the first quarter of next year. This will be a welcome conclusion to a four-year rationalization of our information systems.

Acquisitions completed during the quarter totaled less than five million. Capital expenditures were 70 million for the quarter, and our full year 2003 capital expenditures will be approximately 250 million.

Now I will turn it over to Bernard

Thank you, Lisa.

The first quarter was obviously very good at Weatherford. Setting aside the Q4 eight million dollars gain in sales of outside, our earnings rose from 20.6 cents in Q4 to 27 cents, or 30 percent rise. More importantly, earnings grew in spite of a number of regional events, which suppressed performance or exogenous reasons. One a decline in the business Q4 Q1 due to the military events in Iraq. This hurts as the middle east Weatherford's highest margin and return business. Two a bottom of north sea activity foresee son al reasons, following a year of oil recession in the north sea. Three a strike in Nigeria. Ordering factors lowered top line on Q4 on Q1 by 19, one nine, 19 million dollars of traditionally higher margin business. As a fourth factor that is well low in the Latin America top line Q1 and Q4 by nine million dollars all in all international dropped by 28 million dollars Q4 and Q1.

In spite of all the above, operating income for the company grew by close to 30 million dollars sequentially.

What is equally impressive for us is that, one, the international segment held its operating income decline to 2.7 million, Q4 and Q1, on 28 million dollars decline, which suggests a 10 percent decrement al this particularly remarkable for the eastern hemisphere given the high margin carried by the deferred business. Two the U.S. and Canada showed very strong incrementals with no pricing in the U.S. and only very marginal effect of February pricing changes in Canada.

In both circumstances we believe this to be the first dividend of Weatherford's focus on its costs which was issued in 2002.

The cost effort is ongoing, we're engaged now in a two-year structural cost reduction program. The key word is structural. We're looking for permanent changes in our cost structure akin to productivity savings. Not just habitual cut back, cyclical or circumstantial FI want to move now to prospective comment and first geographically. Prospectively we anticipate a continued rise in U.S. range to reach 1,100 rigs by year-end. As a side comment I think if you go back to our quarterly comments of last quarter, you'll find, which is back in late January, you'll find we were probably the most bullish on U.S. of any of our peers.

We expect our U.S. business to follow recall activity with 60 to 120 day lag. The 601divide difference is production, they respond with a different timing. Furthermore we expect a rise in our drilling division's top line to exceed a percentage increase in recount in the U.S. led by our technology product service lines.

Pricing is not as -- is on its upward move. The U.S. region implemented its first price increase April 1st. Pricing was raised by net four percent. This is weighted average, covering all of our products and services.

Canadian pricing you will recall was raised 10 percent for extreme services division back if February. We expect much of that to take hold shortly after breakup.

Mexico will also be very strong. In the second half of 2003 and 2004. Underbalanced services leading with incremental contracts and bundled Weatherford parts and services. [Inaudible] recovery at least to a degree. Eastern Venezuela operations are least lick toy he be resumed in four. We expect the rest of the Latin America to be mixed eastern hemisphere business is expected to grow top line by 11 percent from Q1 levels through year-end with middle east and north sea to lead the charge.

An update on technology. Four progress reports to make. One, we had more ESS, expandable sand screens installations in Q1 than any quarter in our history. We're currently performing an expandable sand screen by every three days by year-end it will be everyday. The same control application expands to the commercial expansion for expandable technologies and it's an important niche. We expect it to grow over time into 200 to 250 million dollar business, our share of it.

As good as ESS is, though, the large scale future for expandables is in solid. Solid expandables will be applied to either well construction or well remediation.

In Q1 we launched a first in the industry's use of solids expandable technology was used for the very first time in a well remediation application. The instance was four sequential repair drops in Canada declined Imperial oil using technology to repair section of damaged and/or leaking casing. This is an industry milestone and the first step to the well working markets for solid expandables.

As indicated earlier the application for solid expandables are thought to be the largest market by order of magnitude. Engineering challenge however solid expandables as opposed to slotted in the case of ESS is also on the order of magnitude greater which makes Q1's accomplishment an important Keystone. The first four Canadian wells truly marked the beginning of a sod lids well remediation market. On the well construction side, as expected, as planned, we will have our first solids commercial application in Q4, with an expandable open liner system.

On the balance, under balance was experienced for the balance of the year strong growth in the middle east, the U.S. particularly in tight gas reservoirs, Mexico and late in the year Russia and China.

Actually, the growth in [inaudible] balance is so geographically widespread that it's hard to pick a particular region.

Given the breadth of applications and increasing amount of underbalanced R&D is focusing on engineering software.

On the fiber optic, prototype testing of Weatherford's revolutionary fiber optic low channel count, seismic systems, have been very successful. In fact, beyond our expectations.

That together with faster stronger market acceptance of our pressure temperature and flow metering systems suggests our optical censoring system will come close to operating capital late 2004 early 2005 was the date.

Fiber sensing optic business in 2004 could add up to 4.05 million in top line. We covered the cost of capital in this young technology somewhere between 50 to 60 million dollars as the product line carries very high margins.

Finally R&D. R&D was at 20 million from Q1 to Q4. Should fluctuate between 20 million quarter average per year at or around 80 million. R&D for core products and service lines and delivers incremental technology gains.

These incremental or evolutionary technology gains find their way in a large percentage of our core business over the ensuing 24 months.

This evolutionary replacement of all the technologies is more, just stay in place. They're a net top line gain it's essentially the cost of doing business.

The other half of the R&D, actually a little over half, is sort of step change technologies with expandables and optical sensing systems taking in over two-thirds of that amount.

These step change investments yield, if successful, a new business that concurrently high organic growth, such as fundamentally different in what generation potential and return potential than incremental variety.

A few words on cost and ongoing initiatives.

As advertised earlier, we are determined to lower our cost structure and to do so without compromising our quality, safety and above all our service culture.

The current objective is internal objective is to take five percent, or roughly 85 million dollars annually out of our cost structure permanently.

We'll give ourselves until Q4 of next year, '04, to get there. An 18 month effort is under way in manufacturing which we believe will permanently lower what this cost structure by about 25 million dollars per annum before the year is over. That would be on a run rate basis.

The manufacturing productivity gains stem from a number of different changes underway ranging from classic pipe consolidation, engineering rationalization that would be product engineering, to third party outsourcing. The targeted 25 million dollars are down payment for an 85 million dollar goal.

A second existing step in our cost initiative is the divisional change announced today. On the surface the changes are very minor. The two largest divisions, DIS, duty intervention services and ALS artificial services absorb the smaller division plus or minus small line movies.

[Inaudible] stay in similar senior managerial roles. Apparently not much change.

There are though two distinct benefits in the organizational change, one of which is directly a cost issue. One, we believe that the new divisional structure offers a better bundling capability in client focus on the one divisional operating and regional management.

Two, it will be concurrent with a streamlining of our cross divisional overhead structure. Specifically, we expect between 180 and 190 overhead positions to be permanently closed.

The timing is within 90 days. Cost savings will be about 21 million dollars per year. This should be realized in full by Q4 of this year.

The severance costs associated with this should be about six million dollars. As the math works out, pay back is in one quarter.

The second benefit is clearly cost related and has been in preparation since early fall of last year.

As a closing comment, we confirm consensus guidance for the balance of the year. Perhaps the only change would be the accounting for the severance costing in Q2 and reflect for the benefits of such for Q3 and Q4 thereon. This concludes the comments. You may operator ask for questions.

We'll wait a moment for questions to queue up. Our first question comes from Terry Darling of Goldman Sachs.

Good morning, all.

Good morning.

I wanted to try to reconcile the way you're reporting now to the way we were following you previously from the standpoint of margin performance.

I guess if we think through the way you've rearranged the components of the business here and try to compare that to the way we were looking at it before, it looks like the production segment margins were probably a little weaker than we thought and the drilling group was probably a little stronger than we thought. And I'm wondering, as it relates to the old lift business and the old completions business, if you might comment on what happened with margins on a sequential basis. If you're looking at them in those -- if you can pull them out in that context and if not just any general comments you can make about how you felt about the profitability of the completions in the lift business sequentially

I'll give a little bit of an answer and then Lisa can give.

I think when you look at the detail, you have a sort of product mix is one thing. Second, you've got the impact of Venezuela. And third of all, in the case of lift, did you have an industrial screen business which was soft in the first quarter.

Now let me give you oil field. We at this point have no oil field business that this would be the exception. Roughly speaking 100 million dollars if that much, screen business and expansion of the sand screen not expandable sand screen business but sand screen business that was soft in the quarter really for overall geo political reasons. Especially oil. There's nothing remarkable in that. Lag oil market activity by drilling always to be lag six months when it really lags 60 days.

Do you want to add anything to that Lisa.

Terry when you look at each division on an individual basis on the historical manner we split them, product line, product service mix was the main driver on the margins on both of them.

You want to get into a little more detail for us, Lisa, in terms what was stronger for you what was weaker so we understand more specifically what you mean there.

One thing is in the fourth quarter I mentioned that pour production optimization sales were extremely strong. Those carry very high margins. Those were a little lower and the first quarter. And similarly we had a shift in the completion division from liner hangars were down slightly, but that switched over to DIS. But if I was looking at it on an individual basis, that was down slightly with, actually it was spread fairly evenly among the other product lines, but it was quite -- every movement was a little, but adding up to a product line mix issue on that one

Picking up on what Lisa said [inaudible] if you put E prom, product optimization which I forgot has high margins and Q4 it was higher 10 Q1 significantly. And that's why, the industrial screen, it is what it is, and the rest is -- it's just too many little things, Terry.

That's helpful.

Then on the drilling side Lisa I think in your comments you mentioned did you some benefit from cost cutting here in the first quarter. And I'm wondering if you're able to quantify that for us at all?.

Yes, it was approximately three million dollars.

Lastly, here, just looking for your expectations for the second quarter comparisons here for Venezuela and the middle east. Are you already starting to see those businesses come back? I think you made that comment with regards to the middle east, but I think if you would be more specific there that would be helpful as well

Yes. Middle East was nothing more than work interruptions for about two to three weeks and delayed shipments and that's all it was T shipments are now being delivered and the work went back as soon as military operations settled down. So the Middle East effort will lead Venezuela also.

We made the comment that one feels better about the Eastern side of the market if only because you've got majors and foreign operators that are in joint venture with PEDVISA (ph) and all things being equal it's a little bit easier for those operations to go on instead of the PEDVISA operations as that. But notwithstanding Venezuela are is coming back definitely. It's definitely a Middle East and a cautious yes to Venezuela.

Venezuela I think you mentioned nine million sequential revenue deterioration do we get it all back in the second quarter or half that back or where would you go

I would carry half that back would be our best guess.

That's very reasonable since March was by far the strongest month of the I remember in Venezuela.

Actually try to sneak one more in here real quick. Bernard I know it's early but I wonder if you have any thoughts on R&D spending for 2004 at this point. Is it obvious that number should be coming down or does it really depend on how the product development moves during 2003? It's more the latter than the former. But I think that it's probably a caution statement we can say that R&D certainly should not exceed 80 million dollars in '04. Perhaps it can go down to 70. That's the only range I would give right now. In any case down on a percentage relative basis?

Relative basis, no doubt about that.

Thanks very much.

The next question is from James Stone of UBS.

Good morning, guys. Almost all my questions were just asked but no, just kidding. The first quarter, can you just give us a little bit of detail as to what kind of backlog you might be looking at on the sand screen and the remediation side now and given that you had those four successful wells, do you see an immediate set of follow on business or do you think the customers going back to the drawing board and evaluating the performance and might not see another insulation for three or four months.

I think it's a little bit of both. I think we have today two things. One is that we have more clients are who are interested in remediation triangulation applications than we know how to man right now. So one of our limitations is simply that we have to go out and train some of our people into using this technology in remediation mode. That's more than the choke than anything else.

Also, we have to design in a hurry expandable compliant expandable systems for a smaller diameter application than the one that was used.

Five and a half inch being the application versus seven inch. Three undeniably, clients that did not try expandable remediation yet are going to have to be looking at what the Imperial oil Exxon is likely to say about it or find out for themselves. And that always takes a big time. There is a big choke, which is normal, Jamie but it's a great thing to have this success particularly the types of oil we had to deal with, were issued hard, but then spreading knowledge in enough people so that we have a number of different crews and putting out a smaller diameter expansion tools are the biggest thresholds we want to overcome so we make this into the beginning of a new business, which will be larger, in time will be larger than the sand control business, obviously.

How long do you think it will take for those to cross over for solids to be a bigger business than --

My gosh, I don't know, Jamie, I would have to guess that, I really would. And my guesses are dangerous. So forgive me. They will cross. That I'm certain of.

Secondly, given the tone of what you had to say, particularly on underbalance, seemed even more upbeat or more visible than the last couple of quarters, certainly the breadth of where you're working. I'm just wondering if that has led you to increase your overall kind of new technology revenue expectations for this year or at least increase the underbalanced portion of that or is that basically how you thought it was going to play out?

That's how I thought it was going to play out. We're happy with the evolution. Frankly on the under balance is becoming of a size where some time, I suppose in '04, the balance would be treated as just a core products and service, because it's getting to be a bit silly. We talk about a young or sort of NASCENT (ph) technology where you'll be in the range of 300 million dollars a business or something like that by year-end. It's sort of too big, sort of middle mouth that grew into not an elephant but something between. A little bison or something like that.

So that's the first thing, so it's evolving the way we hoped to evolve it. You understand what we call underbalance is a lot of different things. There's a lot of different top segments there with varying degrees of true underbalanced technology and sort of the all pulling in the same direction, which is all helping one another. And this has a long ways to go. Long ways to go. And by the way the most gratifying of all I suppose more so than whether the top line is, it could be 290 or 325 for underbalance, whatever number it ends up being far more gratifying without it two things, the comment that the geographic spread is just so varied. I mean it's everywhere. So the seating is accelerating which [inaudible] the second thing is it's a difficult business on the balance to grow organically because you're missing and blending, a lot of people, equipment, training, and so as you grow you find your margins are strained. And when you're able to locate people you trained to new projects, your margins go up which is gratifying which is what we saw later in the quarter. Most definitely. So I think it's progressing as well and as strongly as we would have hoped. And in a broad geographic basis, the best I can tell you.

How do the margins right now in that business compare rest to the overall drilling services margins?

I think it's the same but they were not. They used to be higher than they fell now they're the same. And I'm giving you sort of a historical overview. The reason for simply has to do with the organic nature of the growth process, which is that something for which is a complex operationally as underbalanced, you need a lot of people. And that's addressed a lot of training.

By comparison, we just talked briefly about the remediation business through expandables. I must say that it's easy operational there because you need very few people and very not much in the way of equipment. Equipment is, looks very complex and impressive when you look at it. But in quantity of equipment it's far less than underbalance. So less equipment, less people. So much easier for an operational standpoint, all be it the technology content and expandables is greater. That's the challenge expandables being underbalanced.

Thanks very much.

Operator.

Operator, we would like to follow up with the next question.

The next question comes from Jim Crandell of Lehman Brothers.

Operator you might want to move these questions a bit faster if you can.

Two quick questions. Number one, when we talked about the potential cost savings you were aiming for on a secular basis being between five and 10 percent now you're talking about five percent, is this kind of aimed low and hope you overachieve or is there some rethinking of what the cost savings could be on a secular basis

No we just moved from something that, a target that we internally sort of self created for ourselves. Which is five to 10 percent to one on which we intend to provide deliverables, another five percent.

To put it another way we'll get you five percent and that now becomes a rigorous internal objective.

And if we get you more, that's great. But [inaudible] the extent of the rigor of the objective was a stage, Jim. One was the intentions of getting some permanently lower costs by five to ten or now he's become I'll give you two five. There's business in total.

The next question comes from Michael Urban of Deutsche Bank.

Good morning. On the north sea, you've certainly been more optimistic than a lot of your competitors. I was wondering, one, what is driving the optimism there and where does it show up and there what order of magnitude

Well, we are -- first of all, by way of reminder, the north sea is a big business at Weatherford. The UK, which is the biggest market in the north sea is still nine penitentiary of our top line or something like that. It used to be 12 percent before the decline that took place the past 12 or 18 months. So it is a big business. It was an even bigger business and of course it was not a positive to have as big as an exposure in the north sea. Which made '02 Q1 more difficult. We're optimistic about the north sea for the following reasons. One, we feel that the large historical players, be it shell, BP, Chevron Texaco, et cetera, are likely to work off bottom now in order to rest the decline rate they're experiencing.

Two, the independent dents who are participating in the business through acquisitions of reservoirs will start to replumb, for lack of a better term, the reservoirs, and three although the changes in tax structure was devastating in the north sea, I think the trend is now moving in the this direction, which is an attempt to provide tax relief. What is being proposed is not perfect but it's good and there's more to come. You add all three actors together. We believe the north sea will have a good second half of the year we also believe 2004/2005 will be strong in the north sea. In many respects we view the north sea as a little bit one would view the Gulf of Mexico in the late 80s. I think a lot of the market watchers at the time had Chris tend the Gulf of Mexico then as a dead sea and they were terribly wrong.

The north sea is 20 years younger than the Gulf of Mexico at least in terms of development. It's got years of great work to come.

Now, the way you measure the work in the north sea is as much platform work as rig work which makes it harder for people on the outside to determine whether the work is increasing or not.

We view that our share of the business will grow from the present basis between 25 plus percentage point up to 50 percent depending on the time frame. And this is exactly the kind of work we like it's a lot of reentry work, replumbing work and it's also very high margin work.

So yes we're very positive on the north sea. Certainly not on an historical basis going back in Q1 in 2002. Going forward basis.

Next question comes from Bill Herbert (ph) from Simmons and Company.

I'll ask my question up front because I think the operator is giving people the guillotine. The number of reduction in cost cash is the 21 million dollars per year recently aligned, announced with the realignment of the businesses, is that part of the 85 million?

Second question is, you reaffirmed essentially the outlook for the full year as a buck 49 for the consensus estimate. We got six million dollars worth of severances expenses in the second quarter F how does that if I am packet the second quarter consensus number of 32 cents, and then the third question is in version, we've just passed April 15th, how do we feel about that and where is the tax rate going? Thanks

Okay. Bill, notwithstanding the guillotine. Twenty-one is part of the 85. In our mind we assume that if everything goes according to plan by this quarter, by fourth quarter this year kind of half of what we wanted to do will be in the P&L. And in our company, leaving the other half for the following year.

Two, the earnings side, well, it's very, I guess it's very simple. Six million dollars or thereabouts in Q2, that amount leaves us what, three cents?

Approximately three cents.

Three cents severances in Q2. 21 million dollars divided by four is about six million dollars, five and a half. So three cents up in Q4. I guess. And there on. So I suppose what it really means is that on an all things being equal, I suppose that from Q4 thereon the run rate at Weatherford in terms of guidance should be up by three cents per quarter in '04 I guess is what it means also. We're trying to be logical. I hope that answers your questions. Although you can't respond.

In the version I'll let Lisa answer that question. I think as a matter of style we've tried to remain conservative on our tax rate. Meaning that we obviously as time goes on and as the important days like April 15th come and go, the probability that the multi national status that we strive for will be sustained is obviously higher and higher. It's very high right now. But still as a matter of style we'll still remain conservative, which is we'll use a book tax rate which is as conservative as we can get away with. With that I'll --.

With respect to our rate, it will remain between 27 and 28 percent throughout this year. And then next year, depending on the geographical mix of our earnings in 2004, it should decline to anywhere between 24 and 26 percent.

Hopefully that answers your question.

Next question comes from Derrick Wagner with Jefferies and Company.

I was dropped off the call after five minutes. Can you comment on capital expenditures for the quarter and yearly outlook.

Yes, capital expenditures for the quarter were 70 million and the full year capital expenditures will be approximately 250 million related to that I also mentioned that acquisitions completed during the quarter were less than five million.

When do you file a 10-Q?

We will file it on Wednesday.

Okay. Thank you.

The next question comes from Kevin Simpson of Miller Tavac (ph).

Kevin.

I'll move on to the next question, from Stephen Gengaro of Jefferies.

Good morning. Could you help us out with pricing a bit more. You made some initial comments. Could you give us a better sense for sort of where the higher pricing increases are coming and what product lines and what geographic regions, that would be helpful

Sure, first let's talk Canada. Canada, that was back in February, moved pricing up by 10 percent. That is on the drilling side of the business. Not on the production. So that's one. And the 10 percent is a weighted average of the various products and services concerned. So I would just use 10 percent for the Canadian business for the drilling division.

The U.S. is much simpler it's four percent for company-wide net. Again, without dragging you through books and discounts and this and that it's just too complicated, particularly on a conference call. But the information is meant to be, this emphasis is meant to be meaningful. Four percent company wide. So 10 percent in Canada. Drilling only four percent. U.S. net. This is about what was expected to be realized company wide. Does that help?

I guess I'll never know.

The next question comes from Aaron Jarem (ph) from Credit Suisse First Boston.

A couple of regional questions. Could you elaborate on what you're seeing in the Gulf of Mexico in Q1 versus Q4 and have you seen any pick up in the current quarter?

The answer is we didn't see much in Q4. We're seeing it now.

Okay. Secondly, could you talk about some of the strength in Canada in terms of drilling versus production.

You mean one is stronger than the other or.

Where do you see the pick up in terms of the Canadian business?

It has been drilling. Production is much slower, slower to rise and slower to fall.

The lift business is remaining constant.

It is moving up. This is actually quite normal. Without making any, with no pun intended it's like the business [inaudible] moves more slower.

Bernard, could you talk about how big of a business you have in Mexico and what your expectations are going forward?

The expectations are very strong in Mexico for us. Across the board there is a particular emphasis for underbalance, because we have I think in total in Mexico we will be running my goodness close to 14 million dollars of business in Mexico, not quite, actually, 35 on an annualized basis by year-end. We've had a number of different business but [inaudible] products and services. So the overall company. So let me specifically go on to your question because as I'm looking at the numbers, okay, when you go back in Q1, it would have had about $10 million worth of Mexican business company wide. If what I've told you correct they will run around 35 in underbalanced by year-end. Mexican businesses likely to about double for us.

[Inaudible] business. That's a big contract and underbalanced. Business will just about double between now and year-end. Very important. [Inaudible] mix up of Latin America is so so. Venezuela is recovering. The rest is so so.

The next question comes from Bill Dezellmen (ph) of Davidson Investment Advisors.

Two questions, first of all would you bring us up-to-date with the Ken Geesefield what is happening there and secondarily I apologize for ignorance here but when you're talking about solid expandables, that's a concept that I'm not able to get my arms around. Would you walk us through how a solid can be expandable?

These are the people being remobilized equipment is being remobilized and so forth and so operations that P&L should be back, leases -- June or something like that.

Beginning of June.

So the beginning of June. So I think probably you can expect one month out of three or perhaps three weeks of the second quarter with the operations back on and from there on back on as if nothing had happened.

Solid expandables, well, whether you are expanding solids or whether expanding nonsolids you're doing the same thing, you're taking a piece of steel and you're expanding the diameter of that piece of steel to serve a particular purpose.

The reason why the industry segregates the two applications between solids and nonsolids is because metallurgical challenges expanding solids predictably are far greater than the metallurgical challenges of expanding nonsolid material. What's a nonsolid material. Depending on your patent it's either slotted material or perforated material. Without dragging you through a lot of detail those slotted or perforated materials are used essentially for screening applications, screening applications would be sand control. [Gap in audio] try doing it in a well and see how difficult it is. So it's an enormous challenge from a technology standpoint. It is where the bulk of the intellectual property resides. Now, what are the applications of solids? Well, think about what is a solid? Solid is casing from well construction purposes. When you drill a well and you set the casing and that defines the geometry of the well. The first solid application is changing the geometry of the well that you do away with the telescopic effect of drilling, tapering effect of drilling for the purpose of dramatically reducing the cost of well construction. And the word dramatically does not overstate what is expected since the elimination of the tapering or the telescopic effect of the well can, will, should reduce the cost of drilling the well and constructing the well by numbers in a range of 30 to 50 percent which are extraordinary numbers.

That's the first application. We cover that first as well construction solid application.

The other application is taking joint casing of various types and attempting to repair a well during the life of the well. What kind of problems does the well have during its life? Two categories. Either the well has sand problems, tool problems, paraffin problems and the like. That's one set of issues, or a well has, casing integrity problems. That comes in a form of leaking joint, collapse joint, union desirable water penetration or gas penetration in the well vault. Problems traditionally are handled in a variety of ways none are terribly good either using cementation or using things like straddles.

To remediate that well the expandable application is taking very simply pieces of casing and expanding them in front of the problem to reline the well as needed.

That would be the well remediation application of solids.

I hope that answers your question.

That's very helpful. Thank you.

The next question comes from Kurt Hallead from RBC.

Just a question on the pricing changes, both in Canada and U.S.. I wanted to get a sense if you could provide some earnings sensitivity what a one percent change in pricing or U.S. or Canada if you want to lump them together that's fine means from a bottom loin on an annualized run rate basis and a follow-up to that was I'm not exactly clear with respect to the if you will decline in revenue first quarter versus fourth, how you're not going to catch that up but in full in the second quarter and given the margin intensity of that, how you can't be or how you're not being a little bit more positive as we head forward.

I thought I was being positive, Kurt. But okay your first question is the impact of pricing. Lisa I'll let you confuse it.

About half of our business in North America so one.2 billion on an annual basis, take one percent per pricing.

Want to say it again to make sure --.

Curt, can you basically look at half of our business about being in basically North America. So a pricing 1.2 billion revenue.

Okay. --

How much pricing, I mean there's ten in Canada and we should provide cover the weighted of the average of the two, but Canada intends, applies on drilling. Can we do it off line for you so she can give you will more thoughtful number as opposed to rounding them off now.

With respect to the other question, of course you're right. Some of the deferred business is going to move forward and we will benefit from it. This is why we're very confident on our numbers I'm not sure what to add because I didn't think we were being anything but confident on our number. Did you have anything specific in mind?

Can you (inaudible) me?

Yes we can.

I think I'll just follow up on line both with the earnings sensitivity and the others. I'm not suggesting that you weren't being confident with respect to the outlook. I was just trying to get dig down a little bit deeper. I'll follow up off line .

The final question comes from Geoff Kieburtz from Salomon Smith Barney.

Good morning. Actually, I have a couple of questions. If I understood Lisa correctly earlier that the bulk of the sequential margin expansion and drilling systems came because of mix; is that correct?

It would be evenly split. Between three factors. One mix. The second was volume in North America, and the third were the cost reductions initiatives that we undertook in the fourth quarter.

It very evenly split between those three factors.

If I ask you to compare the margins in that segment with a year ago, they're down about 300 basis points. What can you --

It's price, Jeff.

That is all price?

It's price. It's really price. All together from peak to trough we had about 25 percent price reductions. Given that, I don't know, with the time period of considering it was probably less than that, more like 15 or 15 to 20. But no in total it was 25. So price would be -- I didn't mean to jump in but that was it.

It was price, pricing in North America. If you look at it, you actually can and analyze it you can actually see an uptick in international both volume and somewhat price. But definitely we're impacted severely last year in North American pricing.

And with the price increases you talked about earlier, it would appear that you're recovering a fraction of that price decline.

Yes we are, Jeff. And it's a process. It's a process. It's a gradual process and the only thing I can say is that we are starting earlier than in any other prior cycles.

Do you want to venture a guess as to how long it might take you to get back to the pricing levels that were seen in the first quarter of last year?

Gosh, no, Geoff I'd be afraid to do that.

Kind on of on a related part of the question is you offered the forecast of 11 hundred rigs working in the U.S. by the end of the year, which I guess was interesting. Last week we had a thousand rigs working already. Are you essentially seeing a plateauing here or a much more modest rise in the U.S. rig count for the remaining three-quarters of the year?

That's actually correct, Jeff. We were actually very bullish back in January. And I am only mentioning this because I think it was less fashionably bullish than on the U.S.. We still are. I just think the rise from where we are to 11 hundred we can see pit based on client budgets, indications. It's not something that you could model, Jeff. It's heuristic. It makes enough noise that you get a comfortable level. We don't see it above that yet.

It's not so much that we think it's not going to happen, is that there is some degree of analytical back-up if heuristic in nature on the 1100 comments, just beyond that we don't have anything other than that than wishful thinking.

At the level you're thinking there, would that be enough to continue the momentum on pricing or would you --

I believe so, yes. I believe so, Geoff.

Okay. Great. Thanks very much

You're welcome

Operator, any other questions?

Thank you everyone for participating

Thank you very much.