Weatherford International PLC (WFRD) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen, thank you for joining Weatherford second quarter conference. My name is Catlin and I will be your coordinator today. At this time, you are all in listen-only mode. There will be a question-and-answer session following your presentation and you will receive instructions on how to ask questions at that time. If at any time during the call you require assistance, please key star zero and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. At this time, I would like to turn the program over to your host, the CEO of Weatherford, Dr. Bernard Duroc-Danner. Sir, please go ahead.

Thank you, good morning. Lisa, why don't you start off.

Good morning, everyone. My comments will begin with an overview of our operating results then extend to a discussion of strategic initiatives impacting our second quarter. As always my comments will focus on sequential quarterly trends. This morning we reported diluted earnings per share of 31 cents, excluding the impact of nonrecurring charges, as compared to 27 cents per share last quarter, and 31 cents per share for the same period last year. Nonrecurring charges were 10.2 million after tax for 8 cents on a diluted shares per share basis. Our operating results as a whole benefited from strong sequential improvements in Latin America and in all eastern hemisphere regions.

The most significant increases were Latin America 35% and Asia-Pacific 10%. North America was essentially flat with the prior quarter, U.S. top line gains that were experienced late in the quarter were offset by the seasonal decline in Canadian revenues which was particularly harsh for our drilling services division. Now, I'd like to look at the divisions. Drilling services revenues continue to grow at an accelerating pace despite a 23% decline in Canadian revenues. The low incremental operating income of 1 million on this higher revenue base can be attributed to the sloppy break up in Canada.

Canada experienced high decrementals due to high fixed cost, retention of the labor force in particular and high maintenance and repair expenses. Intensive maintenance and repairs occurred at a time of seasonal lower activity which is not atypical for Weatherford. Excluding the seasonal impact, this division had strong operating income incrementals of about 36%. The U.S. volume increased each month of the quarter with little impact from price increases. Our business typically lags recount by four months, thus the volume increases will continue and will accelerate over the third quarter. Production systems. This is essentially the combination of our completion systems division and our Artificial Lift divisions.

Despite the disruption that occurs during reorganizations, revenues for this division increased 12 million. International revenues increased 11%, the U.S. was up sequentially, 9%. This division typically lags recount by the 120 days as well. Sequentially, operating income declined 2 million. The lower sequential operating income to revenue relationship was a function primarily of two factors: Certainly there was a change in product mix, which happens quarter to quarter. This is not telling of any trends. Most importantly were the expenses associated with the process of reducing our cost structure.

This division was obviously the most impacted by the restructuring during this quarter. There were 300 personnel laid off from this division alone whose severance is included in the nonrecurring charge. In addition to those expenses, there were other costs that cannot be isolated and the extent of which is not easily quantifiable. For example, we experienced lower productivity, as you would expect, when you've announced that you're going to close a plant in 90 days. Absorptions were poor, and efficiencies deteriorate all the way up until the closing. These type of costs are not included in the nonrecurring line item but yet of course they impact the P&L.

Company-wide R&D was approximately 22 million, our full year R&D expenditures will be 80 million for an average of 20 million per quarter. As I've mentioned before, the R&D by nature is not linear. The third quarter will be below the average of 20 million. The 10.2 million in after tax charges were primarily related to severance expenses and our portion of the costs associated with universal compressions debt restructuring. I will speak further to the severance expenses in a moment. The debt restructuring expenses of Universal are reported within equity and earnings and are not included on the nonrecurring line. Furthermore, we do not receive a tax benefit on our portion of the Universal charge. Now, there were three important accomplishments during the quarter.

First, we completed the realignment of our three divisions to two; second, we made major strides to reducing our cost structure permanently; and third, we strengthened our balance sheet with the call of the 5% convertible debentures and the equity offering. The realignment of the divisions was completed during the quarter and the realignment was made with the sight on achieving the benefits we outlined in the last conference call, focussed customer sales across divisions, and pull-through across product lines. On the cost side, progress was made towards a lower permanent cost structure. There were 500 positions identified as redundant, the majority of these positions were closed during June, with the remainder to be closed by the end of August. Annual savings is expected to be $20 million, the full effect of which we will benefit in the fourth quarter.

At the end of the quarter, we issued 10 million common shares and subsequently called our $402.5 million 5% convertible preferred debentures. The debentures were convertible into 7.5 million shares, therefore, the net issuance on a fully diluted basis is 2.5 million shares. This transaction will be slightly accretive beginning in the fourth quarter of this year. Our cash outflow will decrease 20 million annually on an after-tax basis. Our debt to capitalization which declined 140 basis points to 47.4 as a result of second quarter operating results, will decline to 37.9 as a result of this transaction. In the third quarter, we will record the extinguishment of the convertible and will incur a 10 cent diluted earnings per share charge from the early extinguishment of debt.

Now, a summary of our cash flow from working capital, capital expenditures and acquisitions. During the second quarter, our working capital days outstanding declined five days, and generated 20 million in cash. Our DSOs declined four days with improvements in every region, including the Middle East, as we saw normal payment activity resume. Inventory continued to track exactly as we expected it for the year with increases being project-specific. We did close three acquisitions during the quarter, totaling $10 million, capital expenditures were 75 million for the quarter, and our full year 2002 capital expenditures will be approximately $270 million. Now, I will turn it over to Bernard.

Thank you. Thank you. Q2 was a very productive quarter. Our cooperating earnings of 31 cents before the two extraordinary expenses rose 4 cents from Q1. The international segment carried the quarter in top line and earnings growth. Continued progress is evident in all markets of eastern hemisphere and Latin America. Canada declined, more investor length than expected and the breakup was long and wet. Q1 on Q2 we lost 3 cents out of our Canadian drilling business. The U.S. business grew late in the quarter which is typical of our response patterns. We typically lag U.S. cyclical moves up and down by 120 days.

In summary, for this quarter, international strong, Canada seasonally very weak, weaker than expected, and U.S. as expected. The two extraordinary items, the severance charge and UCO debt repayment fee are expenses which have solid paybacks. The severance charge has a cash pay back of two quarters. UCO's prepayment their refinancing fees has a cash payback of eight quarters. How many acquisition does one find that are valued at 1/2 and two times EBITDA. The other variables to account for were higher R&D expenses and unquantifiable amount of expenses associated with the implementation of manufacturing and overhead cost initiatives.

Severance charges do not, they never do, capture all of the expenses involved in the kind of manufacturing and overhead changes we're making. There's no way around it, it is what it is. Geographic outlook. We've held the same view since last December. That U.S. recount will rise to 1100 and then pause. We still subscribe to this view. We also believe that after a few months of pause, say by this time in 2004, next year, rig activity in the U.S. will move by another 100 rigs to 1200 rigs. Although most of this move will still be on land, applications will be deeper. This is a critical distinction as the purchase power of deep rig applications is a multiple of plain vanilla drilling which is the market in the U.S. today. The Gulf will be the last market to move.

Deep and offshore is always better for full service companies, and it is especially critical to Weatherford. It's something I'm not sure is recognized by the financial community. Weatherford's [INAUDIBLE] running services, drilling tools, segmentation tools, fishing services, specialized rentals and let alone underbalance services, either knee-deep wells or offshore wells to find their application or they can really flourish with that kind of a business. Weatherford's volume and most particularly margins really thrive in a deep well and offshore U.S. markets and arguable more so than most other companies in the offshore service business. We also believe that the U.S. market can exceed the 11 to 1200 count rig level but that will take a number of quarters with high client free cash flow.

This has to do with the balance sheet of the players in the U.S., the transition of new field owners, operators and what can be best described as industry psychology. For all practical purposes, we take the view that the U.S. is definitely a harvest market and it is very mature, and it needs to be consolidated further or put another way, the capital base in the U.S. is excessive, it needs to shrink over time. There are, though, clear remaining growth areas in the U.S., specifically deep gas, deep water, coal bed methane gas and heavy oil. Individually, they are highly profitable segments and if you look in detail at our Park and Service offerings, they're ideally suited for Weatherford. Canada. Although Canada had an unusually tough second quarter for us, our prognosis for second half of '03 and '04 is strong.

Furthermore, we believe that through '05 we'll show continued strength in the Canadian market, both with it's gas, deep gas and heavy oil play. Heavy oil should exhibit in particular strong growth in '04/'05. The international drilling and completion markets are expected to grow by 5 to 7% over the next 12 months. We expect Weatherford to continuing building its top line in margins at a faster rate than the under lying markets, specifically both our eastern hemisphere and Latin America business are anticipated to grow by ay least 12% over the next 12 months, that is about a 50% higher growth rate than underlying markets. Balice, North Sea, Russia and selected areas of Latin America will lead the charge.

Technology update. On the technology front there are a number of firsts during the quarter, both in expandables and fiberoptics. The longest horizontal section ever achieved for expandable sand screens, the first double skin application internationally and the first three-phase fiberoptic installation. On the sand screen side we had 25 expandable sand screen installations in the quarter, and we are currently performing an ESS job every three days. We believe that by year-end it will be every other day. Early in the quarter we installed our 200th ESS in the central North Sea. Also noteworthy, we installed 3,700 feet of expandable sand screen or ESS in a deep water horizontal well for Petrobras in Brazil. 3700 feet is the industry's longest horizontal expandable application ever achieved.

Concurrently, we had our first combined expandable liner hangar and expandable sand screen installation, the location was in the Middle East. As a reminder, the sand control application of expandables is the first commercial application for expandable technologies, it's an important niche, we expect our share of expandables sand control market to grow over time into $200 to $250 million business. As good as ESS. expandable sand screen, is, though, the real scale future expandable is in solids. The applications for solid expandables are thought to be the largest markets by an order of magnitude. Solid expandables will be applied to either well construction or well work-over. As you may recall in Q1 we launched our first in the industry use of solids, expandable technology marketed under the brand name Metal Skin was used for the very first time in a well work over application, location was Canada.

The second quarter saw the first international Metal Skin application, specifically Middle East on one hand and the Far East on the other. In both regions the industry first was very successful. With respect to solids application for well construction, our plans for the first well construction application are unchanged. In Q4 we'll perform the first application of a 3,000 feet expandable open liner system. That would be in triple terms the half tapering of the telescopic effect of a will bore. In fiber optics we successfully installed the well's first three phase, fiberoptic down hole flow meter. A three phase-metering is a system whereupon you measure the quantity of oil, gas, or water down hole. The location was the North Sea, the client was BP.

There is no rival product of this technology in the market or in the industry. There isn't any first in underbalance to report, at this point it's becoming such a large business that it probably has passed the stage of firsts except for example the event of use of underbalance in the Gulf of Mexico. This is of course a regulatory issue, not a technology constraint. On the balance of experience, the balance of the year: Strong growth, most particularly the Middle East, the U.S., particularly tight gas reservoirs, which is another growth area for the U.S., and later in the year, Russia and onshore China. Finally as Lisa mentioned our newest $20 million in Q2, up $2 million from Q1, that's higher than Q3, Q4 will be, if you expect R&D to fluctuate on or around 20 million, an average for the year on other around 80 million. About half of the R&Ds for our core product and service line and delivers incremental technology gains.

The incremental technology gains roll up in our core business in the ensuing 24 months. But it is an evolutionary replacement of existing parts and processes more than a net gain. Basically, it's a cost of doing business. The other half of R&D, or about $14 million, is with step change technologies. And expandables and optical sensing systems take in most of the budgets. These step change investments yield, if successful, highly incremental business and as such are real different in economic value and return potential Few words on costs and ongoing initiatives. We are lowering our cost structure and doing so permanently, an 18 month effort is underway manufacturing, which we believe will permanently lower Weatherford's cost structure by about $25 million before the year is over. This is on the run rate basis..

The manufacturing profitability gains stem from a number of different changes on the way ranging from classic plant consolidation, engineering rationalizations to third-party outsourcing. The manufacturing cost savings should be realized by Q4. Concurrently we are streamlining our cross divisional overhead structure, specifically we permanently closed about 500 hundred overhead positions, cost savings will be about 20, $21 million per year. I think Lisa used the number 20, so that's the one I should use. The severance cost associated with this are specifically $10 million as the math works out, pay back is less than two quarters. The layoffs will be completed in Q3, the overhead cost savings should be realized by Q4. We concern consensus guidance to the balance of the year, with perhaps the only suggested change accounting for prepayment of our 5% convertible debenture which is in the process of being called. I think Lisa covered that also.

A few weeks ago we issued 10 million shares of common stock, the cash raised will be used, dollar for dollar, to retire the $402 million of the 5% debenture and that will roll into 7.5 million shares. Our capital base doesn't grow. This is a substitution of capital, not an increment of capital, and the transaction is expected to be accretive from Q4. In effect, there is a net issuance of 2 1/2 million shares or about 2% dilution which yields the end of a $20 million after tax cash flow disbursement and a 10% lowering of our debt-to-cap ratio. Our debt-to-cap ratio was already lowered by 120 basis points in Q2 from operations, combined with the above corporate finance event our debt to cap is currently under 38%. It is our intent to continue to bring our debt to cap ratio down to below 35%, which is for us the best compromise between low cost of capital and financial prudence.

We normally don't comment on Universal Compression, or UCO, letting management there speak for itself. We would, though, like to note that UCO has come a long way over the past nine months, specifically operating costs are lower, positive free cash flow every quarter, the balance sheet is now transparent, the debt-to-cap is lower, maturity of debt is longer, and the yield on long-term debt is lower. UCO's business furthermore is strengthening as the first half of '03 increases in gas readings feed incremental needs in gas compression services for the second half of '03 and '04. UCO has even more of a lag than we do but eventually it does impact them.

Furthermore, in international markets, UCO has significant growth potential. In those markets Weatherford will support UCO's infrastructure needs wherever and whenever needed. In closing, Weatherford's direction is made up of four concurrent steps: One, harvest the mature U.S. market; two, grow the eastern hemisphere market and due so at a faster rate than its underlying secular growth rate; three, lower our cost structure and due so permanently; four, commercialize our technology with a view to maximize our returns by intellectual property. Q2 is very productive particularly on the cost side of those objectives. This concludes our prepared comments and it opens the call to questions. Operator, if you could proceed with the question-and-answer session, please.

Thank you, sir. Ladies and gentlemen, if you wish to ask a question at this time, you may do so by keying star 1 on your touch-tone telephone. If your question has been answered or you wish to withdraw it, please key star 2. Questions will be taken in the order received. Please key star 1 to begin and please hold as we pause for the first question. Your first question comes from Aaron Charman from CSFB.

Good morning, guys. Latin America was up 35% sequentially. Could you perhaps elaborate on which product lines were strong and how the trends are playing out for the second half of the year?

Well, South America, it was actually widespread. You obviously are trying to recover some of volume that you lost in Venezuela, but I would say that Mexico, Argentina, Brazil, as much as Venezuela were up. And they were up across the board. So I wouldn't discern one particular country or one particular product or service line as being responsible for this. Looking out to the second half of the year, we do have, absent the move that took place in Q2, we do have a number of defined contracts that are due to start. Actually in Q3. And they are in South America. They're not in Venezuela, but in a number of other countries of South America or Central America, starting with Mexico and in Brazil will be the two biggest ones. So I think what you'll see in Latin America is you will see a second half of the year which will continue to grow, notwithstanding the catch-up in Q2 because of those contracts.

Okay. Can you also, Bernard, maybe quantify or talk about underbalanced Sterling, where you're at currently, and how the trends are playing out there?

It's growing very nicely, underbalanced. Underbalanced in the second quarter, as I recall, grew by something on the order of between 5 and $10 million on a quarterly basis. Bearing in mind that it pulled back out of Canada on a seasonal basis. It was very good. And the second half of the year would be strong, mostly out of the eastern hemisphere more so than Latin America or North America. Most probably by the end of the year, underbalanced will be sufficiently larger business and sufficiently mature also, organizationally, that it will start being described and incorporated as a core business more so than a technology which normally is sort of derivative intellectual property trying to find a market for itself.

Last questions for Lisa, other income was 5.6 million, can you quantify the currency gains during the quarter.

About 80% of that number is currency gains.

Thanks a lot, guys.

You're welcome.

The next question from Robert McKenzie of Friedman, Billings, Ramsey.

Good morning, guys, and Lisa, sorry.

Good morning.

A real quick question, looking at year-over-year profitability, revenues rose about $6 million a year-over-year, but EBITDA fell $5.3 million. Wondering if you can help us break out how much of that was a pricing, how much of that was a weaker than expected Canada this year, how much of that was increased costs and I know a little bit of it is R&D.

The first factor comes to mind is that the pricing decline in the U.S. took place in Q3/Q4 last year. So when you were in Q2 of last year, you hadn't experienced the brunt of the pricing decline. And you took it through the P&L, Q3/Q4. Remember the comment that we tend to lag by 120 days, up market, also down markets so we sustained ourselves a bit longer than anyone else and then we went down. So I think the first and biggest factor that comes to mind is that the price decline is about 20% or so, maybe a bit more than that, as I recall, and I think that the North American market to which it applies is roughly speaking half of our business. So I think you can sort out if our revenues are 2.4, 2.5 billion, half of that being 1.2 -- let's say one and a quarter billion, apply 20% decline on that kind of a volume and you see what it does to your EBITDA notwithstanding the revenue line. That is the biggest single moving part. Of course the volume also went down North America in Q3/4 and that also had an effect, and it was made up by some of the international volume but the biggest margin impact by far would have been the pricing.

What I'm trying to get at, you wrote up a lot of the sequential decline in terms of profitability to sluggishness in Canada. And I'm having difficulty, maybe we should look at this sequentially, how much of the sequential decline might be Canada related versus actually higher than expected costs?

I'm sorry, could you -- I'm not sure I understood the question. You want to find out whether --

Sequentially revenues rose $28 million, but the EBITDA declined by over a million dollars. In the prepared comments a lot of that was written off to A, Canada being longer and deeper than expected but also, B, some of the unquantifiable costs associated with the restructuring. I'm wondering if you could help me break out where that came from. Because I would have expected a sequential gain on such a strong 5% sequential revenue growth.

Okay, Lisa, you can break that down, the two divisions.

I can break it down. If you look at drilling services, you had a lot of -- about 9 million in revenue out of Canada, and nearly 7 million of profit. And it's not unusual for Weatherford at least, that we do a lot more repairs and maintenance during that time period. While they're slower, utilize the personnel. So I think if you look at that division, I mean, that explains as lot. There are also some higher repairs and maintenance in the U.S., mainly on the northern region, tried breaking that down, got a little granular on that. But if you look at that, it does explain, it gives you about a 36% incremental for drilling services, x-Canada, x-repairs and maintenance.

On the production side?

On the production side, we did have an impact of product mix, and if I compensate for product mix and for costs, which I can't quantify exactly, but I can tell you for sure, there are over 2 million from the ones I can quantify, and probably approach 3 million. If I account for those two, they, too, had a very healthy incremental. So on the product mix, to give you a sense of what it was, is that we had slightly lower lift revenues and higher screen revenues, screens carry a lower margin.

Okay.

Does that help you understand the principle?

That does and that also probably ties with my next question, which was we saw a strong resurgence in the rig count of Venezuela. I wonder if you could give color on your lift business in that market and how you see that recovering this past quarter and over the next couple quarters?

Well, the lift business in Venezuela is not the one that would swing the most, Robert. The one that would swing the most is the drilling and completion business. The lift business in Venezuela was disrupted during the strikes like everything else, and went down. But then it went back up again at a steady rate, it's more of a secular climb. It's operated by the foreign companies. So it's not, in many respects it is more stable than the [INAUDIBLE] business. The real issue is how quickly can the drilling and completion business which is the [INAUDIBLE] business primarily, how quickly that business can come back. And it went down to such low levels percentage wise it could be absolutely spectacular. The fact is in our own thinking, I think we hope for recovery, we don't bet on it, if you will. And most of what we plan in terms of profitability and so forth, internally has to do more with countries like Mexico, Brazil and Argentina than it does with Venezuela. Until such time at which we don't go quarter to quarter in terms of organizational and political stability in that country. So to summarize, it is not a lift issue really. The [INAUDIBLE] basin -- well, in cases of major crisis in the country, when the whole country is in up upheaval it goes down. But on average it's not disruptive, it's a secular decline, more than a cyclical up and down. The drilling and completion business was eviscerated, no doubt about that. And so I can give you spectacular percentage increasing but then, Robert, it's from a very, very low basis, and we do not speculate too too much on that particular market. It's very important market from a reservoir standpoint, but Lord, the organizational and political stability is so thin, that we take it day by day. So I always hate to tell you anything on a forward-looking statements basis. None of the things that we, I hate the word "forecast," none of the things we tried to assess in terms of earnings and so forth assume great things in Venezuela, it's not a lack of affection for the country, it's simply caution. Again, South America it is much more Mexico, Brazil, Brazil is going to be quite big for us, and Argentina which is solid. All three of them either have additional contracts that are measurable, lumpy, or a number of small contracts that are coming in in addition to [INAUDIBLE] activity. Those should be more your focal areas, as far as we are concerned, on swings at Weatherford than Venezuela. Venezuela is either the perpetual disappointment or the icing on the cake.

Great. And Lisa, a real quick follow-up for you on the tax rate. Perhaps it's the way I'm calculating it with the equity income below the tax line, but it looked like it came in a little lighter the quarter. Can you comment on tax rate guidance going forward?

It should be -- it did come in a little lighter, and it will be about 27% for the remainder of the year. And then should continue to decline next year, of course that's dependent on the mix of the geographic revenues next year.

How much of the decline this quarter was recognizing more of the full benefit of the inversion?

It wasn't recognizing more of the benefit, it was a change in the mix of our earnings.

Okay. Got it. Okay, thanks.

Your next question from James Wicklund of Banc of America Securities.

Good morning, guys.

Good morning, Jim.

When you say, Bernard, the capital base in the U.S. is excessive, what capital? And if the capital base is excessive, that would assume that if further consolidation in whatever the capital base is occurs, that people will idle some capital assets. Can you kind of talk about what you're talking about there.

When I first drafted my notes a couple of day ago, I put the sentence in, took it out, put it back in again. Now I'm sorry I put it in. But let me try and speak to it. I think there is, well, in a number of segments, including segments we're not in, it is apparent to me that there is too much equipment. It is apparent to me there are too many players. Probably the reason for it is obviously the last peak and it was so vertical, both in volume and in pricing, that it certainly set a great example of things to follow. And also it's a good story to write, the gas story in the U.S., an easy one to raise capital on, it's also an easy market to open shop in. You lead off a bunch of people and before you know it, you've got a competitor. It's a bit harder when you're going to do that, say, in I don't know, in the North Sea or in Yemen, it's harder. So what does it mean? It means that there is a very -- I think there is an available source of capital for doing things in the U.S. based on what I just said and [INAUDIBLE] are lower than anywhere else. As a result, I get the sense that you've got a lot of smaller players, middle sized, and large players, too many players. The market, I like the U.S. a lot, it's a very good market, I use the word harvest, which is my favorite word, why wouldn't it be? It's not a market where you sacrifice things, it's a market where you reap, it's a good thing but at the end of the day for us to really harvest properly, I would welcome almost generically equipment either being retired by buyouts, by consolidation, or just simply the number, a number of players exporting their equipment, which is harder, Jim, that doesn't happen very much. It happens with the very large companies, doesn't happen with the small, medium ones because they don't have an infrastructure to export it. So three consolidation. Are we going to be an agent to consolidation, no not particularly, not at this stage. So this is why I was hesitant on putting this comment. I do think it would be very useful in order to accelerate the recovery of pricing.

That would be nice.

Because again, I know you can feel it, because you follow the U.S. markets very carefully, you can feel it, there are too many people who geared up for too high a level of activity in the U.S. and that maybe throttling back the speed or the rate at which pricing recovers.

Like you say, it's real easy to raise capital uses the word North American gas markets.

Unfortunately, once you have the gentleman who runs the fed talk about gas, there isn't much more you can do to help raising capital, is there. So it is -- let me put it this way, it's much easier to raise capital there than it is to start an operation in Angola or something like that, obviously.

Lisa on FX, 80% of 5.6 for the quarter, what do we expect for the third quarter or is it too early?

When I look at the forward rates, it looks like it should be close to zero, no gain, no loss. But of course subject to change.

I understand.

It goes both ways, Jim. Below the line and above the line. Above the line we have sometimes we help, sometimes we hurt. And that you never see. Below the line, you do see it because it's a different phenomenon but caused by the same effect. We have very little control over it.

Okay. Bernard, you had in the past been talking about guidance in the $1.50 to $1.60 range, now, I think the consensus is high $1.40s and you're okay with that consensus, has anything changed in your forecast or is this just a flow through of Canada.

Actually our numbers remain the same. Probably the only thing that pollutes the numbers a bit is two things: One is that the severance, the severance charge associated with the initiative of taking some overhead people out, that I don't think was in the numbers. I think what Universal did, Universal Compression, to refinance the debt, that wasn't in the forecast.. And our taking out our 5% convert was not in the forecast. All of these things are - the severance is an operating issue but it's not operating issue that sanctions a lack of performance, it just means that we think that it's worthwhile to take out a number of people and hoping to get a fast payback. But absent these things actually the original numbers were fine.

So your outlook on activity hasn't changed?

No, actually, if anything -- no, it has not, I don't want to say anymore than that, Jim, it has not at all.

You lost 3 cents in Canada in the drilling business in the quarter. It was worse than you expected. How much did you expect to lose?

1 1/2.

Okay. Last question, you had a 4% price hike in drilling services put in, is that sticking?

I think it is. I mean, the only period I have to really observe it is the second half of June or let us say most of the month of June and we booked some business at that price increase. I'd like to see the numbers of July roll through. Incidentally, there's a 10% price increase in Canada also concurrently, which we're also waiting to see if that sticks, post breakup. So it's both 10 in Canada and 4 in the U.S., and 4 in the U.S. is across the board, meaning it varies a bit depending on the parts and service line. It's a weighted number.

Thanks.

Your next question from Terry Darling of Goldman Sachs.

Good morning, just a follow-up on a couple things here. First Lisa, could you break down the 12.4 million or so pretax hit among the components? And I'm thinking the UCO piece and how would we think about allocating the severance in more precisely between the production group and drilling group?

The Weatherford piece on the nonrecurring line net of tax is about 5.6 with about 4.6 for Universal. And if I were to split it on a dollar basis between the two divisions, it's nearly 50/50 with about, I guess, about 10% higher on the production systems side.

The 60/40?

Yes.

As we think about the third quarter, to what percentage of this 5 million per quarter or so benefit should we start to see? Is that really not going to see a lot in the third quarter, think about fourth quarter, or should we start to see some of that?

We'll see on the actual benefit from severance coming through, probably about half in the third quarter. So about 2 1/2 million. And in addition to that, the other costs that are already baked into the numbers this quarter will, that I said were 2 million for sure and probably closer to three million, those will go away in full.

Let me be sure that Terry understands because there are 2 3's that look alike here. After 5, there's two that help in Q3 that's one thing, but you're also telling Terry that it was like $3 million unquantifiable. Unverifiable expenses, lack of a better term, that's going to go away in Q3.

So you're going to be up 4 to 5 million due to the cost reduction efforts.

Okay. Then as it relates to the price increase, the 4% in the U.S., at this stage, any reason to believe that that is not going to stick? And you just don't have enough information or is there something out there that --

If I was one year older, with a much coveted systems in place, I could put you on hold and I could do something on my screen, of course I wouldn't do that on a conference call and I would come back and say to you, we are XYZ% of our service and our clients are being priced exactly where I thought it would or on the contrary, we're behind. My information tends to be dated by one week, lack transparency, and so if you allow me to be two or three weeks older, I can give you a better feel.

Okay. Third quarter outlook for the U.S. business is my next question. If we assume the rig count's flat from here, roughly your rig count will be up 4 or 5%, something like that. You mentioned that your business tends to lag. I'm wondering if you can share with us your expectations for your U.S. business in the third quarter top line?

Terry, if you look at the increase in rig count from the fourth quarter to the first quarter, it mirrored our increase in top line in the U.S. from the first quarter to the second quarter. So if you take that trend, we had a 14% increase in U.S. rig count first quarter to second quarter, which should impact our revenues about that same percent in this next quarter. So one month lag to the rig count. So I would estimate 14 or 15% volume increase for the U.S. Is that clear?

No.

Okay. Our revenue increase this quarter as compared to first quarter, was the same as the rig count increase that you saw fourth quarter to first quarter. So one quarter lag.

Yes.

So if you look at first quarter to second quarter, the rig count was about 14% up, which is consistent with what we would expect to see our increase be from second quarter to third quarter, a one-quarter lag.

Okay.

About a 14 to 15% increase.

Okay. I'm with you there. Lastly, Bernard, in terms of the technology businesses and even -- you want to take this is pieces or as a whole that's fine, can you share with us what happened in the second quarter from a profitability standpoint? I think you had mentioned some specifics on underbalance top line but are we continuing to see some improvement from the margin standpoint?

We really are, actually. We really are and I'll let Lisa give you the exact number because she looks at it very carefully. There are very few financial people who like technology, because it's a harder returns certainty than consolidation so she watches it carefully. Lisa, you might want to share with Terry.

If you exclude the R&D from the analysis, the first quarter to second quarter we saw 4% increase in operating profit on the technology. The full amount looked at them separately as a group. So excluding R&D we had a 4% increase.

Okay.

Most of that was underbalance, correct?

Yes, it was.

The thing is about underbalance is evolving to where as opposed to being exclusively run by engineering-type people we just fell in love with the process and working very hard on the software side and sort of dreaming of the world where most wells are drilled underbalanced and this is still going on, is a good thing to be encouraged, there's also the contracting side, if you will, because underbalance is different from expandable and certainly fiberoptics, ordering with casing in so far as it's got a heavy contracting aspect to it, meaning your've got a fair amount of equipment to move around. You have a lot of equipment to move around it calls for different skills. And it's the bringing of those skills to bear in how the business is run without eliminating the sort of engineering dream that is bringing about an improvement in the margins. Engineers are more missionary in their skills. Operating personnel are more P&L in their skills. You need both really, it's a bringing of the latter that creates a margin differential. You'll see probably more of that, I hope next year, we'll see how things go if underbalance can become a core business, I hope we can see it on its own and be able to track as profitability there.

And on the under balance improvement, is that primarily stronger volumes or is it mix?

No it's just execution, Terry. That's the best way I can put it. Probably the shining star in all of this would be the Middle East and the work being done in two countries of the Middle East which got started off, did extremely well downhole but extremely not so well P&L wise at least if you consider the assets that were there and the intellectual property that was being essentially marketed, and the turn around was very impressive and continues to be impressive in terms of gains. It's a question of knowing how to run thing.

Lisa, that's 4 to 5%, not 400 to 500 basis points; correct.

No and I wanted to come back after Bernard was done. It was 400 basis points.

Okay. And can you give us the top line growth for the technology business associated with that margin? Because that's pretty stunning.

Associated with the actually margin, that again is a Lisa number. I don't know. On what top line is the improvement in margin, it would be purely in underbalance, presumably, not on the other ones.

No, but that was a weighted average number and our total technology was slightly over 90 million.

I think it was 92 or something like that.

What was that sequential top one, 90 million, was that up 5%?

Roughly 85 or so in Q1 as I recall.

Great.

Which doesn't sound like a big improvement but bear in mind that there's a big section of underbalance, air drilling, but also purely under balance that was done in Canada that went away, so actually it's just right where we expected.

That's clear. Thanks very much.

Your next question is from Bill Herbert of Simmons and Company.

Good morning.

Good morning.

Lots of moving parts with respect to improvement from, or expected improvement from the second quarter to the third quarter. Lisa, if you make the adjustment for the other income line, you come up with something around 28 cents for the second quarter, consensus is 41 cents so we have a 13-cent bridge. Canada sounds like it is 3 cents at least in terms of the improvement, severance, I think you mentioned 2 cents. That takes to us 33 cents. The remaining 8 cents comes from where?

R&D and international.

You have U.S. volume.

Okay.

And international and R&D. And in the international, you will -- you benefit from the cost going away, such as the absorption issues, et cetera that we saw this quarter related to closing plants. Overhead positions just costs associated with actually doing the cutback.

Okay. Great. And then the visibility for international in general, in terms of sort of specific projects for underbalanced, expandables, that is pretty specific, right?

I think it is very specific. The only thing that can happen and does happen, I'm sure you've heard this before, Bill, is you're supposed to start, you know, August 1 and you start September 15. I mean, I'm not suggesting there is something like that going on but these things do happen and you're suppose today start October 10 and you start November 20. These sorts of issues. But no, many of the things that are due to start Q3 and Q4, and it's also Q1 '04, already into that now, are things that are being contracted for. And with a great deal of specificity because you've got to variably add, mobilize more, shift resources and so forth and so on.

Yes. And the last question: We had this latest tropical storm or hurricane in the Gulf of Mexico, you had about a third of the Gulf of Mexico working [INAUDIBLE] which is parked off-line for about four or five days, any sense as to what the impact will be with respect to your U.S. expectations for the third quarter?

Well, it's not a good -- it's never a good thing. Frankly, in general, the fact that the Gulf is in our minds the last market to turn, it's not a good thing either.

Right.

Because it is the most profitable market, certainly for us and presumably for our peers. I think probably if you asked the people who run the accounting on the U.S. side, they will tell you that the loss of business in the Gulf and so forth will cost perhaps a penny. But Bill, we give estimates out there. This is not a -- there's always some slack either way because you have things that go one way or the other. And there isn't a single quarter where you don't have a strike somewhere or a hurricane somewhere else. It's like the farming business just about.

Understood.

So I think that it is what it is. If there were like three for four more hurricanes, I think you would find the entire offshore service industry start crying that they just can't get there. If that's what it is for the quarter, I suspect we'll survive it.

Okay. I agree. Thank you very much.

You're welcome.

Thank you.

Your next question from Kurt Hallead of RBC.

Yes, good morning.

Good morning.

I just had a couple of quick questions. I just want to get some clarity, Lisa, first on you said convert would be accretive by fourth quarter on a run rate basis, assuming you're using the first call consensus numbers to get that, is that correct?

Yes, I am.

And to what extent are you looking for accretion on that convert?

It's less than a half a penny per quarter. It's slightly accretive.

I think it's more symbolic than anything else but at least it's in the right direction.

Got you. Secondly, you made a comment about the ESS getting to a 200 to $250 million run rate. From what level are we talking currently?

We're not quite half that. But I'm only chuckling because we try to keep these -- break down these numbers reasonably quiet. Evidently for competitive reasons. The 200 to $250 million is really a number where we see the ESS business steering towards. The timing on it is really a function of more an operating issue than anything else. Let us say that we are somewhere north of 40% of that number now. And I do think you'll get to that number. It's a high margin product so we can't wait for that volume to go up. It is a very significant earnings and returns maker, ESS, it really is. When it's allowed to have some volume, it's just great.

Okay. And lastly, just more to compare notes than anything else, you talk about the progress in U.S. recount and possibly getting up to 1200 rigs by midyear next year, after flattening out for a period of time. In your view, is the flattening period here a one quarter event and than a gradual increase to that 1200 or do you see a flat period for between now and year-end and then another ramp as we get into the first half of the year? And finally you say the Gulf market's going to be the last to move, is that movement in the Gulf of Mexico, in your estimation, going to occur more in '04 than it will in '03?

If you remember the order of your questions, the first question, the answer is the latter.

So more '04 than '03?

That's correct. And then the last two questions, the first is how long the hiatus, and I think fortunately we don't have to make a living being seers, otherwise we'd be out of business, but in our seer mode, I would say most definitely we see the hiatus sort of taking a bit more than a quarter. We always felt that way. That's based purely on what we see from a client standpoint. It's anecdotal more than anything else. Gulf of Mexico, it's an '04 phenomenon. It really has to do -- the reservoirs are obviously one issue but it really has to do with the level of preparation for incremental activity with our clients, the ones that control the properties in the Gulf of Mexico. When are they going to be ready, both people wise and commitment wise, to put some incremental money to work? It's a little bit like the North Sea to a degree. It's a question really of new owners, new operators and time of committment and things of that nature. We really would like to see Gulf of Mexico move earlier because it is so -- I mean, to be running services business for example for us is quintessentially Gulf of Mexico. The fishing business makes real money in the Gulf of Mexico and that can go on. But unfortunately, we see it really more as an '04 phenomenon to anything significant degree. But I do think there's more deep drilling on land that is scheduled to happen before the Gulf.

And then if I read your comment correctly or understood your comment correctly, the majority of that 100-rig increase from 1100 to 1200 will come from land based --

We really believe that and deeper wells which is almost as good as the Gulf of Mexico for us. Almost as good, it depends how deep deep is, but real deep is actually the best with -- deep water or deep land wells are the best, how -- those are the best businesses but you have to define the word "deep." But without getting caught in too much precision that I can't deliver, deeper wells carries a lot more purchasing power than what has been in the market right now. You understand that a move that took place from whatever it is, 8.25 to $8.50 to 10.75, 10.85, has been really what we call it plain vanilla drilling, for lack of a better term, has been reasonably shallow and not a high purchasing power type of rig activity. It's only a question of the rig count moving higher and constraining supply. It's also a question of just the amount of money those rigs will spend.

Great. Excellent. Thank you very much.

Thank you.

Your next question from Robin Shoemaker of Bear Stearns.

Yes, Bernard, just following up on that last thought there, if it's correct that your third quarter revenues are up 14 or 15% following the rig count trend, and given the somewhat shallow onshore nature of drilling, would you expect your incremental margins to be as high as you would historically have achieved, the 40, 45% incrementals?

No, as a matter of fact the numbers we put out there are premised on the numbers coming short of that because I think in the early stages of a recovery, Number 1, it is not unusual for the incrementals not to be as strong than sort of the middle and latter stage of an expansion, that's one. And 2, we try not to speculate too too much on the ability for the pricing increases to take hold, in full or in part. That's the swing factor. We take a view that the incrementals will be less, at least at this stage. And note that we talk about the early stages of a recovery because for us what's going on in the U.S. is as much a secular move as it is a cyclical move. That's I think often, comments like the ones we make from time to time on the U.S. rig count are viewed as cautious and things like that because we don't talk about a 1300, 1400 rig count and so forth. I think our view is that definitely activity -- you're headed for a market where the lows will be higher and higher, I cannot speak for the highs. The lows will be higher and higher as you have to maintain the base of production for natural gas in this country, the highs will take care of themselves but the lows be higher and higher, you're into a secular move up, making this into wonderful harvest market. That's a side comment, it doesn't address your question but it's a side comment.

Okay. My other question is that you've commented in previous calls on your outlook for the North Sea and I wonder if you could also share your current thoughts and do you still expect, as you did in your last commentary, that an '04/'05 recovery --

I really do, I actually hate to interrupt you, I feel very strongly about this, I really really do. I really, really do, and I think for all the reasons I mentioned then, which have to do with change of owners, operators, not totally of course, but a segment of, which I've already made the commitment, and are studying the reservoirs, these operators are in a hurry. They move faster than the majors because they have a leaner organization and also more determined to bring the incremental volume out of the ground. There's actually a very good article in JPE, a couple of issues ago, from one of the independents on the topic, a small independent that actually talks about it in very concrete terms. So no, Robin, absolutely, I think '04/'05 you will be favorably impressed.

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

Your next question from James Stone, UBS.

All of my questions have been answered thank you.

Thank you, Jamie. Operator?

Yes, sir.

Is there anyone else?

Your next question from Pierre Conner of Hibernia Southcoast Capital.

Good morning, I have to follow with Jamie, you did answer all of my questions already. I appreciate it.

Thank you.

Your next question from Bill Sanchez of Weatherford.

Good morning, Bernard, Lisa.

Good morning.

Quick question, Bernard, you talked about the Canadian price increase, you're still waiting to see the 10% increase here in the second half of the year, I was curious does that also apply to the underbalanced drilling segment as well or is that priced separately.

No, no, the numbers we gave are weighted averages otherwise you go crazy. You have a breadth of product and service lines that you would just drown in useless detail, it's a weighted average number. And there is on that one, actually if I was going to be -- I am -- a greater degree certainty on the Canadian than the U.S., perhaps because the U.S. is such a bigger market and also the price increase in the U.S. was subsequent to the price increase in Canada, the price increase in Canada. of course, had to wait until the breakup was over, but the psychology in the Canadian market is already, if you will, prepared.

Last question, at the beginning of the year, you had outlined a total technology revenue expectation for the year of about 425 to 500 million. Given what you've seen so far in the first half, I guess your exit rate's going to the third quarter. Do you still feel comfortable with that range?

The wonderful thing about the range is that as long as you're within the range, you did what you set out to do. In that respect, the answer is yes.

Okay. Thank you, Bernard.

You're welcome.

Your next question from Geoff Kieburtz of Smith Barney.

Good morning.

Good morning.

Just recap a couple of things you've talked about already, on the cost savings, you talk about fourth quarter realization of the run rate in both the manufacturing and the overhead reduction. Combined 45 million or 11 million a quarter. That would be relative to none of that being realized in the second quarter, that --

You're absolutely correct, I am glad you asked the question, Jeff. I was worried about some confusion on various numbers. That's absolutely correct.

In addition you would not have the 2 to 3 million of unidentifiable.

That's correct also.

Okay. Second question, it sounds like with the kind of 12-month U.S. rig count outlook and your other comments regarding the capital base that you would not anticipate being able to push through additional price increases in the U.S. over the next 12 months; is that correct?

Good question, Jeff. Good question. I'm check mate, I actually don't know the answer. Your reasoning is not unreasonable.

Okay.

I suppose unless one used sort of medeval techniques if the volume doesn't go up further, I think that it might be indeed difficult. But this will be actually generic comment, Jeff, the generic for the whole segment in the industry.

I understand.

But your point well-taken.

Okay. You mentioned Russia a couple times in you're comments, Bernard, can you characterize how important that market is, even a revenue kind of run?

I can give you what the second quarter revenue is which, as I recall, -- where was it? $60 million for the year, I think it was the run rate, I can't find it, so I'll give you the number I remember, $60 million for the year on a run rate, so 15 if you will for the quarter, as in our stand. It comes in different forms and fashion. From the export market to service business importing technology, but that would be different from the export market insofar as you would be on the ground with equipment and people. That would be underbalanced primarily. And of course the other business being following people like BP, BP's our largest client in the world, larger than Shell right now, actually by a large measure, the largest client. So following BP obviously. And then lastly there is becoming Russian yourself, meaning acquiring some off field service assets, which we have not done so far. We looked at it, looked at it, still looking at it, we may do it but we're very careful. But if you exclude the latter where you're just acquiring revenues, if you buy an off field service division of a LUKoil or Gazprom, if you exclude that, Jeff, we do feel that the $60 million yearly run rate, if we may be a year older, this should be something on the order of 100 million. And that's not -- that's a big percentage increase, it's not a big dollar increase, but it's not unreasonable at all based on what we have, what we see. That would be the old fashioned business, which is you export and you have service and location and that sort of thing. You don't acquire revenues. That's a different things.

Okay. And the cap ex guidance for the year that was given by Lisa is inclusive or exclusive of acquisitions?

Exclusive.

Exclusive. We haven't really done that many acquisitions and we never know if we will or not. So it's very difficult to express it that way.

Great. Thanks very much.

Your next question from Gary Russell of Stifel Nicolaus.

Good morning everyone, I believe my questions are brief. Bernard, in your prepared comments you mentioned you expected some of the international improvement to be some areas in Latin America and then you later elaborated a little bit on Brazil and Argentina. Are there other areas in Latin America that you're excited about?

Smaller markets like Bolivia, for example, is going to come back to life, Bolivia is a play on gas, pure and simple. It's a play really on the power needs of Brazil. It's one derivative away from Brazil. So Brazil goes down from the industrial activity, Brazil goes down, industrial activity in Brazil goes down, power requirements go down, Bolivia goes down. And of course the currency in Brazil goes down, the industrial activity recovers because it's got a subsidy from a foreign exchange standpoint, power needs go up, Bolivia goes up. You've got this cycle. You've got small markets like Bolivia that I think are going to do better. Probably it's best if -- but I think Mexico and Brazil obviously outweigh all the other markets in Latin America in terms of delta, the Argentina has also got good promise. I will say probably the only market in South America which was hard to get terribly excited about, other than Venezuela for obviously habitual reasons, is Columbia. Columbia's going to go through a period of time with BP not being that active over there, is going to look for other people to be active. It's unfortunate because offshore service activity in Columbia, albeit this is probably not the sort of place where you want to retire for obvious reasons, is a very good market for offshore service because it's hard drilling and, therefore, again think of the purchase -- recounts are interesting, but rigs are not equal. And yet look at the purchasing power of each rig. Purchasing power of rigs and the services associated with it are very high in Columbia, a good market. It's unfortunate that it's not promised a lot of growth in the near term as a need to find new players in the market.

Right. And in terms of longer term potential, which -- what excites you more, Venezuela or Mexico?

Mexico, I would have to say, but one always likes great turnarounds. And Venezuela is the ultimate turn around. I would also suggest that Venezuela has been forever the turnaround to come and I make sort of a sweeping judgment that if many of us did not operate in Venezuela, us included, probably all things being equal, our earnings and returns would be better across the board. It's not a very nice thing to say for Venezuelan operations but it happens to be true. I think it's true for the whole industry. However one loves a turnaround and Venezuela has great reservoirs, both oil, gas and heavy oil, great in the sense of still a lot to be done and experiencing high decline rates. So there is the need to do a lot. And the PEDAVASA engineering talent is excellent, it's really a question of organizational peace, shall we say, one always hopes it's going to turn. If you're going to be just more financial in your views, it has to be Mexico.

Right, okay. That's helpful. Lastly, Gulf of Mexico recovery, recovery, when that does happen, do you think that will be driven more by shallow water gas, deep water oil or can you distinguish at this time?

I think deep water the die is cast as to what's going to happen there, it's got to be more shallow water shelf gas, marginal improvements, marginal incremental developments and the like. It really has to do with the class of owners, operators and the level of dedication to that market and when are they ready to commit. From my talking to them, I hardly, I would say, an empirical thing you can rely on but it is at least has the merit of a lot of different data points. I just don't see it happening for a few quarters. I really believe it's going to be the last market to move, it doesn't mean it won't move, it just means it will be the last one. I do think deep drilling on land will happen, or some measure of deep drilling on land will happen before the Gulf really moves to an appreciable extent.

Got it. Thanks. That's it for me, very helpful.

You're welcome.

Your next question from Brad Handler of Blaylock & Partners.

Good morning.

Good morning.

I was hoping you'd be good enough to speak to a couple of regions in a little more detail as it relates to the third quarter versus the second quarter on an earnings impact basis. For example, Tengees, I guess I understand it started, or restarted in earnest late in the quarter?

Yes, Tengees for all intent of purposes, I think was marginal in Q2 of only because of the time the start-up. So let's just say that Tengees was there for maybe a third of the quarter. And of course in the third quarter, it will be there for three thirds of the quarter.

Right. Be good enough to share an EPS, a likely EPS impact on that?

The impact -- oh, the EPS impact of that, I have to remember what is the margin on the contract.

I don't know if it's --

It's a very good contract, it's a high-margin business, gosh, I don't -- if you were to break my arm, I'd have to spew the number 1 cent or 1 1/2 cent or something like that but I'm not sure if I'd take that to the bank because I haven't looked at that contract in quite a bit. I do remember the following because this is true in the Kaskin business anyway, in the Russian business and the leasing business, the margins are high, the margins are north of 40%, and that would be at the EBITDA line. The top line, what was the top line on that contract, $20 million or some such number involving the -- so you can now do the math. If what I said is true, that's 8 and you get 2/3rd's of 8, and you take it after tax, I'm not sure this is entirely reliable, that would be kind of arithmetic.

That range is helpful. Can you comment similarly on the Middle East were there slowdowns in activity kind of early in the quarter? Is that --

I think that there was. There still was and now it's beginning to percolate. Of course seasonally the biggest quarter for the Middle East is always Q4 and Q1. So in many respects the war in Iraq was really poor timing from that standpoint because it sort of stopped the blossoming of the Middle East. Be that as it may, that's a minor point, obviously in the realm of things. And so the Middle East now is getting organized, I think the announcement in Saudi Arabia of the agreement between Shell, total and Aramco for the developments of gas in the empty quadrant of Saudi Arabia, which is the southeast quadrant of Saudi Arabia is enormously interesting to us, as it is a very, very. very deep -- not so much deeper and very harsh drilling condition for gas, it's a wonderful business for us, and we're of course a very large presence in Saudi Arabia. But I think the overall market in the Middle East and North Africa will find a beginning of a incremental move up in Q3. The biggest one will be in Q4, really because of the reasonable aspect. If you're wondering why, I'll tell you why, it's incredibly hot right now. In fact incredibly hot does slow things down and also I think the technical personnel of our clients do tend to take vacations right now. And believe it or not that has an impact on the pace of operations, meaning that big, incremental projects don't get started until September/ October. But you will see it in Q4 and Q1 and then they're on. Because the Middle East will be -- is on a multi secular growth trend for reservoir-related reasons and Iraq of course is a different kettle of fish.

Sure. That all makes sense. Perhaps more specifically, I can just try one more in a different way, are there some export related sales that were delayed because of the war that perhaps now are still being delayed, maybe now it's --

That's correct, we used to export to - I think we look at -- let's look at Iraq per se, we used to export through the United Nations and blah, blah, blah, I think something on the order of $25 million a year, to $30 million a year worth of product.

Last year.

Last year. And so it was -- if you had to sort of look on our earlier assessment how much we expected to export in that market, if you talked to us a year ago for '03, we would have said 30, 35 million, possibly more. So that definitely has stopped. But that's just a deferral. And at some point two things will need to happen in Iraq, first phase will be reworking of the wells, which is a very large well remediation operation. And second the drilling of new wells. The first phase will come before the second, pretty much every single well in the Iraqi oil field has to be reworked, that's a very large remediation phase before you get to the drilling phase. The situation there, it is what it is and as soon as the situation is stabilized from a security standpoint, you'll find that your work -- I mean, there will be a great deal of interest in starting to work the wells because they sorely need the maintenance and then the new wells. But in the meantime, there is deferral of business, that's true.

If I could slip in one unrelated question with respect to the balance sheet, Lisa, you mentioned I think the accounts receivable days sales outstanding impact was $20 million positive to cash flow. Can you talk about it in the context of all current assets, the total working capital contribution? I think you said inventory actually went up because of projects or something, is that cash flow neutral thanks to working capital in the quarter?

It's 20 million of operating working capital, which I'm looking at AR inventory and AP. The net effect of those three was 20 million.

Okay. I thought that was just AR. Okay.

Okay?

Very good, thanks.

Thank you.

At this time, there are no further questions.

Thank you very much. And I think we'll close now.

Thank you, Catlin.

Ladies and gentlemen, this concludes your program for today. Thank you for your participation. You may now disconnect.