Weatherford International PLC (WFRD) 2011 Q4 法說會逐字稿

Good morning. My name is Regina, and I will be your conference operator today. At this time I would like to welcome everyone to the Weatherford International fourth-quarter 2011 earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session. (Operator instructions). As a reminder ladies and gentlemen, today's call is being recorded.

Thank you. I would now like to turn the conference over to Bernard Duroc-Danner, Chairman, President and Chief Executive Officer. Sir, you may begin your conference.

Thank you, good morning. Before Andy makes his -- reads his prepared comments, and I'd remind I would like to add that John Briscoe, who is our Chief Accounting Officer will -- is also with us in the conference room. With that, Andy, why don't you read your prepared comments?

Good morning. Before moving onto our prepared comments and Q&A, I would like to remind listeners that this call will contain forward-looking statements within the meaning of applicable securities laws, and will also include non-GAAP financial measures. A detailed disclaimer related to our forward-looking statements is included in our press release, which has been filed with the SEC and is available on our website at Weatherford.com, or upon request. Similarly, a reconciliation of excluded items in non-GAAP financial measures is also included in our press release and on our website.

The Company is reporting our fourth-quarter results on a pretax basis due to the following factors. One, Management has concluded that the Company has not remediated its previously disclosed material weakness in internal controls over financial reporting for income taxes relating to current taxes payable, certain deferred tax assets and abilities, reserves for uncertain tax positions, and current and deferred income tax expense.

Second, as a result of a continued material weakness over the accounting for income taxes, significant incremental work has been performed by Weatherford employees and external advisors during 2011 and early 2012, which Management expects to result in roughly $225 million to $250 million of aggregate net adjustments to previously reported financial results for the years 2010 and prior relating to the correction of errors identified with respect to the Company's accounting for income taxes.

Of this total amount, we currently estimate that roughly two-thirds is attributable to fiscal years ending on or prior to December 31, 2008, although Management's analysis is not complete. None of the adjustments is expected to affect the Company's historically reported net debt balances.

Based upon additional analysis and other post-closing procedures designed to ensure that the Company's consolidated financial statements will be presented in accordance with GAAP, the Company believes the review of the Company's historical tax accounts has been comprehensive and that the process undertaken has been thorough. Until we have concluded work on the above-mentioned adjustments, we will not finalize the Company's tax accounts for the year ended December 31, 2011.

However, we currently estimate that our income tax expense for the 2011 fiscal year will be between $490 million and $520 million, including credits and charges. This is for 2011 only and does not include the estimated impact of adjustments for 2010 and prior years mentioned above.

Our actual cash taxes paid in 2011 were approximately $300 million or 33% of non-GAAP earnings before tax. The review of the income tax accounts is ongoing among the Company, its advisors and the Company's auditors. Once finalized, we expect to record the adjustment in the proper historical periods and the audited financial statements be filed with our 10-K for the year ended December 31, 2011. We plan to file this as soon as practicable.

A few important points I would like to make about our perspective on the income tax issues and the benefits of the process. The process undertaken and the conclusions, once finalized, are progress. As mentioned above, the process has been both comprehensive and thorough.

Approximately two-thirds of the estimated adjustments in terms of dollar value relate to periods ending on or prior to December 31, 2008. A meaningful portion of the total estimated adjustments relates to reserves for uncertain tax positions that had not been identified or considered prior to us undertaking this process. There are not historical tax cash implications as a result of the adjustments. The Company will continue to actively manage its worldwide tax risk to minimize cash tax outlays.

The process has produced a better understanding of the value and value drivers of our multinational tax structure. It's a good structure. We'll apply these learnings as we move forward to harvest the structure's value to the Company and its shareholders. The results will not be immediate. We expect them to take time, but we also expect them to materialize.

Moving onto our fourth-quarter operational results, today we reported preliminary fourth-quarter 2011 pretax income of $254 million, or $352 million after excluding pretax losses of $98 million. The excluded items were composed of a $67 million charge for assets, principally in Libya, as well as a $31 million charge for exit, restructuring, investigation and other costs.

Fourth-quarter revenues of $3.7 billion were the highest in the Company's history. Revenues were 10% higher sequentially and up 27% versus the same period last year.

North America revenue was up 5% sequentially and up 34% versus the fourth quarter of 2010. International revenues outshined North America, up 15% sequentially and up 21% versus the same quarter of 2010. Artificial Lift, Drilling Services, Integrated Drilling, and Stimulation and Chemicals all posted strong sequential growth.

Segment operating income of $619 million improved 44% year-over-year and $93 million or 18% sequentially.

Margins improved to 17%. The Company's operations delivered 28% incremental margins sequentially and 37% incremental to North America, balanced by 25% incrementals internationally. Internationally, both Latin America and the Middle East/North Africa/Asia region posted strong profit improvements of $42 million and $27 million respectively.

A $28 million aggregate increase in corporate R&D and other expense, primarily attributable to higher professional service fees and foreign exchange losses, partially offset our operating improvements. During Q4 we generated EBITDA of approximately $790 million with D&A running at $289 million. This is an all-time high quarterly EBITDA performance for Weatherford.

Capital expenditures were [$369 million] for the quarter, net of $34 million of lost in hole revenue, with full year CapEx net of lost in hole, finishing at just under $1.4 billion or approximately 11% of revenue. Net debt for the quarter decreased $112 million with improvements in operating working capital metrics for both accounts receivable and inventory sequentially and compared to Q4 of 2010.

DSO's dropped from 85 days in Q3 to 79 days at the end of Q4. Days sales in inventory improved five days from last quarter to 77 days. We plan to continue improvement on these capital metrics in 2012.

Subject to the risks regarding forward-looking statements highlighted in our press release and public filings, we expect fully diluted earnings per share of approximately $0.30 before excluded items in the first quarter of 2012. Seasonal increases in Canada should be offset by seasonal declines in Russia, the North Sea, Asia-Pacific, and areas of the central region of the United States. For 2012 we currently estimate an effective tax rate of approximately 35%, although the actual rate may vary. We currently estimate our cash tax rate for 2012 to be below 30%.

I will now turn the call over to Bernard.

Thank you, Andy. There are two aspects to Q4. One, the impact of a comprehensive and thorough review of our historical tax accounting; two, a very strong operating performance building on Q2 and Q3.

At one end, the tax piece makes it a messy quarter with, to boot, a punitive 2011 estimated tax rate. We believe that once our 2011 and prior-year audited restated financials are filed, we will have secured a level of historical tax accounting accuracy which at a minimum can be characterized as very reliable and a good foundation. This is progress.

On a forward-going basis, our efforts will be on two fronts. First, improving process to permanently remediate internal control over tax financial accounting. And two, extracting greater economic value from the multinational tax structure we worked so hard to build is fundamentally good.

As Andy said, our expectations of business mix in 2012, we estimate a 2012 tax rate at 35%. We also expect tax rates to trend lower over time as dividends from this process yield better management or exploitation of our structure.

From the more fundamental standpoint, Q4 was a strong operating performance showing maturation of our operating bench. Our growth was up 10%, reaching for the first time in many quarters double-digit quarter-on-quarter performance, but with solid 27.6% or 28% incrementals. In the quarter we skirted just under $15 billion in run rate. 2010 on 2011 gained over 27% in topline growth.

North America reported revenue growth of 5%, strong incrementals of 37%, and a rise in EBIT margins of 72 basis points to 22.6%. The performance was almost entirely earned in the United States. All product lines showed progression. Canada was flat on Q3, reflecting a long holiday season in December from the middle of the month.

Latin America had an excellent quarter, one of its best in years. Revenues grew by 22.9%, incrementals were a solid 31%, and EBIT margins grew by 360 basis points to 15.4%. All countries in Latin America showed progress. Mexico and Colombia were the top performers. The Western Hemisphere closed the year as the clear leader in financial performance.

In Eastern Hemisphere, the European and FSU and Sub-Saharan region showed typical flat performance whilst Europe and FSU were entering seasonally low quarters. Sub-Saharan Africa grew strongly to make up much of the region's normal seasonality. Middle East, North Africa, and Asia Pacific showed excellent quarterly revenue growth of 17.9%, good incremental to 26%, and improving margins of [350] basis points to 6.5%.

Of course this is a very low margin for a region that peaked at 25% as recently as '08. That region's margins continued to struggle with the accelerating completion of punitive contracts in Iraq and low levels of activities in Libya and Algeria.

Extensive start-ups in Saudi and Kuwait are beginning to reverse themselves. Saudi performance, for example, turned the corner in the quarter even though Kuwait was still overwhelmed with start-up costs.

In Asia, the region performed very well with strong performance in incrementals led by China.

All the operating numbers, taking all the regions together, added up to what should've been an outstanding earnings quarter. The progression was stopped by combination of high corporate overhead expenses detailed by Andy, and mostly a much higher 2011 tax rate than both expected and estimated for future quarters.

Lastly, the quarter closed to what has been a year of capital discipline. The Company financed 27% of growth to a $1.4 billion in CapEx and [$940 million] in incremental operating working capital.

Setting aside about $500 million of maintenance capital, which is our best estimate, we grew $2.8 billion in revenues utilizing $1.8 billion in capital, or roughly $0.67 of incremental capital for each dollar of incremental revenue. For us, that is good performance and consistent with our long-term focus on capital discipline without loss of growth drivers.

Forward views -- we remain constructive on North America, both topline and margin. We believe Canada will have a very strong year, with a market that's about 80% oil-based, and for us, a naturally high market share in Canada, we expect to do very well year on year.

The US is a bifurcated market with oil rising from strength to strength, and gas in [full retrenchment]. We have built a strong position on or around the oil plays. As a result, we expect our US business to show year-on-year growth topline and operating profit.

Adding the NAM pieces together, when the full year is counted our NAM margins should also be up. They should be up year-on-year and they should be a Q4 on Q4. To put it in perspective, we ran NAM in Q4 at 22.6% EBIT margins. Our prior historical peak was just at 30%.

Latin America should have an excellent year grounded on continuous progress in Mexico, Columbia, Venezuela and Argentina. We have a solid backlog of business and improved pricing. Execution will be the determining factor for financial performance.

The European SSA FSU region has two levels of prognosis. Europe and Sub-Saharan Africa expects solid growth centered primarily around the UK, Central Europe and Eastern Africa. Russia should go further. We expect stronger growth and margin improvements in that market. Russian progression is fueled by particularly strong backlog in drilling formation evaluation, completion and Artificial Lift.

MENA North Africa, Asia Pacific is the obvious turnaround, at least in the MENA segment. We expect MENA to improve in the second half, H2 '12, from both a topline and margin standpoint. We believe punitive Iraqi contracts will be completed by the end of H1 '12, while most startups in Saudi, Kuwait, etc. will be successfully initiated.

We do not anticipate at this time an improvement in North Africa, Libya and Algeria until late in the year. But the two prior factors should be enough to fuel a significant improvement in MENA's financial performance.

Asia is entering the year with a very strong backlog in China and Australia, to name its two largest markets. We expect Asia to show good improvement in all of its financial metrics for the year after Q1, which is traditionally the seasonal low. Unconventionals in Asia will drive most of our profits.

Finally, we incurred heavy expenses in corporate in Q4. We expect Q1 to show similar levels. But they should be tapering off in the balance of figure to a more reasonable level. All in, 2012 should be a year financial progression with strong topline growth and further improved margins as well as (inaudible) to secure high ground performance.

Capital-wise, we expect to commit our internally generated cash to funding an organic 15% to 20% topline growth in the year. We also believe we'll continue to show progress on all markets of capital efficiency.

CapEx will remain comfortably in the range of 10% to 15% of revenues. It averaged 11% in 2011. Our targets for year-end DSO and DSI are expectedly 76 and 75.

Looking out further and assuming a comparable level of organic growth in 2013, as we expected in 2012 we should have solid free cash flow in 2013 net of internal growth needs.

The Company has a strategic direction of just set around three interrelated industry trends -- preserving well integrity, the rising unconventionals and accelerating decline rates. These are strong industry secular growth trends. This should help carry our development.

Finally, I understand how repeated setbacks on administrative issues are painful. But in this instance, I would characterize this quarter's events in income tax accounting as also constructive.

Because we understand so much better our structure, it will make us exploit that structure far, far more thoroughly and from healthy foundations. And to close, and what ultimately matters the most, we'll remain focused on operations and execution, and we'll get results.

I will now turn the call to the operator for Q&A.

(Operator instructions) Jim Crandell, Dahlman Rose.

My questions have to do with taxes and currency going forward. You've been having currency losses for, I don't know, $20 million, $30 million a quarter it seems to me for the last several quarters. Should we model that in? Or should we, or do we have the prospect that those could be reduced or disappear going forward?

And a 35% ongoing tax rate seems like a high tax rate. Is this you being conservative? Or are you optimistic that you can bring that down maybe even materially over the next 12 to 18 months?

Let me answer the second question first. I will try to, and I will have my friends help here. 35% is our best estimate today.

If you put yourself in our shoes, I suspect that we'd characterize us as more conservative than aggressive when it comes to tax accounting. And surely you can understand that. That's one thing.

Do we expect that rate to go down? There or two things. One is that we will manage the process far better than we ever did, simply because we understand it far better than we ever did. So you should expect us to manage the tax accounting, taxes in general and tax accounting in particular, far better than we ever did. Therefore we should make progress in exploiting the structure that we have.

The second thing you have to remember is that to a degree, it depends on business mix. To the extent our international business will grow and prosper, you will have a natural force or factor that will tend to push our rate down. The structure we have is designed to blossom when the international business is doing well. And in fact, the better the international business does, the more productive the tax structure is in yielding a low rate.

With respect to the first question on foreign exchange, it is a high level. It is too high of a level of losses. For the most part, it's not a cash loss as perhaps you understand. It is a level that needs to be brought down and it will be brought down.

I don't know what to suggest in terms of modeling. Be more cautious today than certainly a few months ago. I would say modeling still, R&D can give you a further directive on it, but it is a level that should come down. It is unnecessarily high.

Jim, one thing to add on that; given the volatility in the currency markets, the cost of hedging exposures are -- is significantly higher now than what we have seen historically. In addition, with the growth of the Company your net monetary asset exposures are also higher, and so both of those things drive costs.

Each quarter, so that you understand in terms of what we model, is about $15 million of cost. And I think that would be the best guidance I can give, although obviously the final number can vary significantly from that.

This is an area we are focused on. We realize that it is too expensive. We realize that it is punitive in terms of looking at losses in the $30 million range.

And so our focus is really on, as always, reducing the exposure itself. And there are things that we can do internally to manage that, and then also trying to find the most cost-effective hedging strategies to be able to manage that exposure.

Two questions about the Middle East, Bernard. One is the runoff of unprofitable contracts, and the other is the ramp up -- maybe even significant ramp up of revenues and profitability in Kuwait and Saudi. Those are two of the bigger items driving profits higher in 2012 by your comments.

Will those be -- will the real benefits of both of those items be delayed until the second half of the year? Or should we actually see some good improvement in either one of those in regards to the first or second quarter?

I think the start-ups and things like that, they are not -- when you have many of them happening at the same time, they gradually get better, such as improvements in the quarters between now and the second half of the year, the margins in MENA essentially as some of the startups have turned to profitability. So that is one thing.

Trying to run off large contracts which were bid too low a couple of years ago, we're trying to do them as fast as we can. My sense, our sense, is that they will be finished, let's just say in second quarter, safely, so that the minute they're finished, what is ultimately a nonproductive use of assets and people and financial resources stop. So, automatically, your margins go up.

My understanding is on newer contracts you are seeing more signs of actual pricing improvements in some regions. (multiple speakers) Could you elaborate on that?

That's not new, Jim. That's been going on for the past nine months or so. A lot of the contracts that -- not a lot of the contracts, all the contracts that we've taken on in the Middle East, but not only in the Middle East, we've been very, very careful to take on commitments only at terms that are materially improved over what we have in the past. Otherwise we just walked away.

As many of the businesses that we're in, [amongst the 30] businesses that compete with very large competitors. It depends which one. We're able to do that I think quite successfully. So a lot of the start-ups and projects and contracts that we're working are on -- have pricing that is materially above what they used to be two years or three years ago, was it varies (multiple speakers)

And last one, Bernard. The better results in North America, am I right that they only reflect the very early stages of pricing improvement in Artificial Lift, and most of that is still yet to come?

That's correct. It is also volume. It is also volume. (multiple speakers)

But on the pricing side in particular?

Yes, that is also true. That is also correct, yes.

And would you expect to see that largely in the first quarter? Or it's going to be something that is going to (multiple speakers)

These are backlogged businesses. And it is not only Artificial Lift, although Artificial Lift suddenly has a key position. You should see a progression coming out of the United States.

And that seasonality in Canada comes to play of course. I see progression carrying out of the United States and North America just about every quarter gradually.

Okay, good. Thank you.

Waqar Syed, Goldman Sachs.

My question relates to international land rig counts. Obviously we're seeing the pickup on the offshore side. What is your prognosis for the land rig count growing globally, and if you would talk about different regions?

I think the land rig count, which is something we don't really particularly look at, because we tend to be just about as much in completion and production as we are in drilling.

But the land rig count, our impression is that you should expect a high single digit sort of progression in the land markets around the globe. Probably a little bit stouter in Latin America, a bit more subdued in sort of the European play because things take time; and I think also at midpoint sort of level in Russia, at least as of today. Middle East, same thing, because North Africa is still, I think, slow to take off.

It's not -- so if you just squint, you would say that the actual drilling, land drilling activity in the international market should be a little bit above single digit in Latin America, a little bit below single digit -- high single digit in the rest of the markets in simple terms. Again, this is not something we necessarily obsess about, as a lot of what we do has to do also with intervention existing well bores and ore, typically for completion and production activity.

Okay. Could you also talk about the pricing? You mentioned in some areas you start to see the second half and you being more disciplined, but generally could you talk about the competitive landscape still on the international side, and especially in the areas that you compete aggressively?

Well, I think it's a broad question. I will just say that we have skirted, I think, reasonably well some of the difficult competitive pressures that have arisen let's say in the past nine, six, three months. How? Essentially by trying not to participate in the pursuit of contracts and things like that, where we felt that there was too high a level of competition, and I would say an unnecessary level of competition given the prize.

We just were pragmatic. And remember also, which I'm not sure a conference call is the best place to do it, but remember also that if you look at the service and product mix that we have, in many respects I would say that we are probably more complementary than we are competitive with the other three large players.

Or put another way, I would sketch probably about two-thirds or something like that of our business as being ones where either we do not compete with our three larger peers, or we compete with one of them or perhaps sometimes two, but very seldom three. So we're not really -- or by size we might almost be comparable to some of them, by competitive exposure we can be. But it is actually more the minority than it is the majority of what we do.

So, all the other businesses that we're in, the competitive dynamics are a bit different.

And then finally, Andy, with regards to the 10-K, do you think you will be able to get it done before the end of the quarter?

Before the end of Q2, absolutely. At this point, we don't have any reason to believe that we will not be able to complete that filing by March 15.

Said Q2; Q1 you meant.

I'm sorry, that's right. Yes, by March 15.

That's good. That's all for me. Thank you very much.

Ole Slorer, Morgan Stanley.

Thank you very much. Bernard, did I hear you correct in guiding a roughly 15% to 20% revenue growth in 2012?

I don't think I said that. I think I said Russia would have a very strong year in 2012, and I -- let the year happen to see how far it can grow.

I will say this to be more optimistically than I have in my prior pronouncements. It is true that the level of backlog that we have in Russia compares in terms of -- from a historical standpoint with the one that we have in Latin America, for example. Actually also in areas of Asia, very, very strong, and it covers Drilling, it covers Completion, it covers Artificial Lift also Formation Evaluation.

We've been quite successful in our ability to exploit, deploy the assets we acquired from TNK three years ago, or four years ago, I forget. And a very successful introduction of our technologies, and they seem to be doing well in Russia. So, all this to say I don't know if it's going to be 20%, if it's going to be 10%, if it's going to be 30%; I don't know. I have an opinion, but I'd just rather have the numbers speak for themselves. But it does look very promising.

Okay, well thanks a lot for clarifying that. Maybe one follow-up question on Russia. Russia was a bit of a drag on the Europe, CIS, West Africa, geomarket in the fourth quarter according to your press release. I was a little surprised by that. Typically Russia does okay the fourth quarter, so what triggered that?

Purely seasonal (inaudible) there is nothing else. I can't point to anything else. Granularity in numbers is useful and there comes a point where they don't tell you anything, unless it's always a repeat of a few quarters. And Russia had a seasonal low in Q1.

I think Russia will do very, very well in 2012. There's nothing else in that. If you knew all the details like we do, you would come to the same conclusion.

No, no, I think Russia is looking great. I agree with you there. Just one final question to clarify on Artificial Lift. It's more of a backlog business than some of your other businesses, and we can all see what is going on in the oil rig count and the lag at which this business kicks in.

Can you help us a little bit with where does the margin stand in Artificial Lift in this last quarter, relative to where pricing would dictate if you were to re-price everything today, and where things are relative to prior peaks? Are we past prior peaks at this point or is there still room to go?

No, no, we're not, I don't think. There are two things. There is pricing and there is volume. I mentioned volume earlier on with one of your colleagues.

The reason is that with volume rising, the manufacturing economics become just terrific in terms of (inaudible). We are expanding capacity but at the same time we are able to expand capacity in a manner that is very efficient. We should see manufacturing-driven absorption also drive margins. And often, one tends to forget that. One tends to focus solely on pricing.

With respect to pricing, you've got pricing effects to percolate through our P&L in Q1. Pricing effects have been put in place to percolate through our P&L in Q1 and Q2, and some still in Q3. And then the various pricing effects that we put through will be entirely through our P&L. So we will say in full in Q3, much of it in Q2 and some of it in Q1.

The market is, as you would expect it, exceedingly strong on and around anything that is particular to oil. Lifting is a classic example, but not the only example. So it is not unreasonable to expect, with so much volume, to expect pricing to have some life in it, further price increases. I'll give you that much.

With respect to whether -- it will cross peak margins and everything else, very much like the question on the Russian volume, I'd just rather for us to show it through our NAM P&L and other P&L in terms of internationally. That's all anticipated.

And finally on the Middle East, and notably on Iraq and the problem contracts that you been working off there, particularly in the south, is that behind us now in the first quarter (multiple speakers)

No, no. The contract will be over I would say reliably in Q2. I would be happy for it to be over in Q1, but I would say in Q2 it will not go beyond. And it was a very large contract and it was not a good contract.

I would also add, and even though I suspect you won't agree with it, I will also add that even though Iraq is a lower-margin market than Saudi and Kuwait and places like that, clearly, there are businesses to be done in Iraq that are legitimate in terms of financial returns and risk. You really have to pick and choose.

If you do pick and choose carefully, which we obviously did not do two years ago, but we have done in the past nine months, you can do very well in Iraq albeit, as I said, not as well as in neighboring countries Saudi and Kuwaiti. What I'm trying to tell you is, although I completely understand the skepticism about Iraq, too many people, too much money, too much haste, too low a set of pricing across the board, and this is in the south, not in the north. Clear, and I understand.

And we clearly also are showing some financial difficulties on and around existing contracts in Iraq, clear. We have described it. We have made it very transparent, so it is what it is.

I would also say do not write it off as a place to -- of oilfield service business because, as I said, there are pickings that are legitimate. You just have to be very careful.

So with all of that, Bernard, because Artificial Lift and oil being strong in North America and US, clearly seeing international markets recover, should we expect international or domestic to be the biggest revenue growth contributor in 2012? (multiple speakers) But I mean North America.

International will have a higher topline growth rate than North America. North America will be up (multiple speakers)

How about earnings contribution?

The delta will -- that's an interesting question. North America (inaudible) such a large base. I still think international will have a larger delta in earnings contribution than North America. But we are not -- because we are different in terms of exposure, we're not expecting North America to be a drag. On the contrary, North America will contribute to earnings expansion also, but less than international.

Angie Sedita, UBS.

Andy or Bernard, or maybe even John, the adjustment from 2011 from $300 million in taxes to potentially $490 million to $520 million, obviously significant. And then you mention it does not reflect prior years. Could you give us some color there? How much is tax? How much is in charges? I mean, obviously it's a complicated issue, but briefly.

It's Andy. I'll cover that.

So, if you pick the $490 million to $520 million, let's just for simplicity purposes and just for discussion work with $500 million as a starting point. Included in that $500 million are what we would typically categorize as tax effects of nonrecurring costs. So for instance, the write-off in Libya, $67 million, there's no tax benefit for that write-off.

Also included in that would be taxes that we've triggered on restructuring transactions. That was approximately $20 million.

And if you lump those together with changes in terms of accounting for uncertain tax provisions, or positions, you really get down to what we would look at as a recurring number for 2011 of about $400 million of income tax expense. Now, that is still about $130 million different than what we would have expected. And that $130 million difference, again, roughly speaking about half of it has to do with withholding taxes and the proper accounting treatment of withholding taxes.

And the other half has to do with stranded costs or the inability to use foreign losses.

Both of those issues are things that we have learned about the structure that have come to light as a result of the thorough process that we have undertaken, and are things that we can influence and have an impact on going forward. And I think it is reasonable for you to assume that those will be our areas of attack in terms of being able to extract better economic value out of our international tax structure, which is a good structure. I cannot emphasize that enough.

What hasn't been good about it is our lack of understanding and fully appreciating how that structure performs through different economic cycles, and the sensitivity of our tax expense to how we manage certain costs in that structure, and how we document our tax positions.

Okay. Very, very helpful, Andy. And then, obviously goes without saying, but I'm still going to say it anyway. To be clear, the internal control issue solely focuses around taxes, not -- and the restatement we will have would still be regarding your tax obligations, not regarding your operational results. Is that correct?

That is absolutely correct and I will let John add anything that he would like to that.

Yes, Angie. Everything that we're focused on is -- I will call below the line on income taxes. We're very confident about our above-the-line numbers and our controls in that area.

Okay, perfect.

It has always been about taxes and tax accounting. It's bad enough as it is, but this is nothing more than the second of the last chapter of the dismal event of last February, except this one is a studious chapter, if you will, one that has gone through the possible understanding of what we have. And I think it's -- I'll call it progress because at the end, now, (technical difficulty) we're reporting something that was wrong, we're also reporting things that were wrong, but from a position of knowledge. Knowledge on the process and knowledge on the history of what we have, which goes back many, many years actually, and it's only taxes; nothing else. (multiple speakers)

No, no thank you. I obviously assumed that it was, but I wanted to make the statement very clear on this conference call and I appreciate that. And then finally, on international margins in 2012, you exited Q4 2011 about 12%. Thoughts on your exit rate for 2012 -- comfortable with the high teens or thoughts to the midteens?

I think the trend, as much as I would like to help you, I don't want to help you. The trend is positive, without a doubt, across the board. And so, it will be where it ends up being.

I don't think it is helpful for me to guide you on the upper side of the ledger. I just think it's very healthy. I can't think of a single international market we're in, and I will -- I'll include in this the Middle East, which is normally an area of strength.

I can't think of a single international market where we are not operationally, marketshare-wise, contractually, contractually in terms of terms as well as in terms of volume of contracts, where we haven't made a lot of progress. So, I have some idea where we might (inaudible) All I can say is the midteens are safe.

Thank you for the color, I will turn it over.

Joe Hill, Tudor, Pickering, Holt.

I hate to beat a horse that is looking pretty dead here, but the tax guidance for '12 essentially implies zero benefit for the redomestication in Switzerland. And I'm trying to comprehend mechanically why that's the case. And then how we have leveraged the tax structure going forward a little bit better in order to get that rate down, because essentially you look like you have a US tax rate right now.

Understood, Joe. It's Andy. And I think it's a very fair question and a fair observation. Number one, remember that the cash tax rate that we're forecasting for 2012 is meaningfully lower than the book tax rate of 35% that we're providing as approximate guidance.

We do, in many respects, try to run ourselves as a private company in terms of feeling that we're owners. So, cash taxes get a lot of focus. It's very important to us. Getting our book taxes right is also important to us.

Without getting into all the nuances and too many discussions about how to utilize a multinational tax structure, given the process that we have undergone with earnings and the understanding of what savings we can generate by using the structure differently than we have in the past, and paying attention to different types of things, again through different economic cycles, we can generate and we're confident we can generate incremental savings. And as Bernard mentioned, we can progressively and gradually do that over time. But it will take time.

We do not have solutions available to us that we can instantaneously switch and immediately begin to get a better rate in a material way that will materially affect the rate. So the implementation of the planning throughout the year is what is reflected in the 35% estimated rate. And perhaps we can do better than that, perhaps not.

I will also tell you that the estimated rate does not include any potential charges or credits with respect to reversals of prior reserves that we will have set up at the end of 2011 for uncertain tax revisions. So, it will take time, Joe. It's a very fair comment, but we think the long-term rate should continue to trend lower.

And if we look at other companies that have multinational tax structures, and we look at rates that come out of there, of in general 15% to 25%, probably in our industry more like 25%, do understand that we acknowledge it. We see that. We look at it as a goal, but it will take us time to get there.

Okay. Andy, what do you know today about how the tax rate is calculated for book purposes relative to what you guys thought six months ago?

A lot more. I would say we're light-years ahead in terms of understanding the pieces and what goes into the calculation, globally, of the effective rate. More importantly, we're aware of -- and what the process uncovered for us, a significant piece of it was discovering uncertain tax positions that we were not aware of 12 months ago. And so, on the grass-roots, bottoms-up effort (multiple speakers)

Can you explain what uncertain tax positions means because --

Sure. So for instance, Joe, an uncertain tax provision could be -- did you file this paper properly and get the document filled out properly in XYZ jurisdiction? If you technically did not get that done correctly, you may have a potential exposure.

You have to assume that the taxing authorities know all the relevant facts and that is how you judge it. It doesn't mean that they end up having all of those facts. But you say, is my deduction or is my benefit in this case at risk because I didn't technically get something done.

There are curatives, or I would say remedial actions that can be taken, and so you put up a reserve for that. But there are remedial actions that could be taken subsequently, for instance in 2012 or future periods, such that you eliminate or reduce that exposure.

Okay. The way you frame that suggests to me that there might potentially be a cash tax exposure as opposed to just a book tax exposure in the future. Is that correct?

No.

What he was trying to hint at, Joe, is that depending on how well we document, correctively, past problems which have been reserved upon, it is possible that those reserves are not needed anymore. And that would actually, just as a point of fact, lower your book taxes. That's what he was trying to get to.

Okay, okay; thank you Bernard. (multiple speakers)

You have to actually take corrective measures to reserve for it as it's appropriate, is what we're doing. And then if corrective measures are taken and if indeed the tax authorities of particular countries don't pursue the case or are convinced by our corrective measures as the case may be and similar findings, then at that point a particular reserve is not necessary. And it will result in a lower book tax. That is what Andy was trying to explain.

And switching gears real quickly to Canada, Bernard you mentioned that -- I think it was the second half of the month of December you had holiday impact, which I know we'd seen in some other companies in the States. I hadn't realized it had extended itself to Canada. Has that reversed in the first quarter?

Yes, yes, sure has. It's not unusual. When times are -- times are very, very good in Western Canada now. I think the unemployment, if that was possible, is in negative terms, meaning they could use some more labor, some more skills.

And under those circumstances the people are working in overtime and everything else. When holidays come around there isn't this hunger to continue working and make more money. There's hunger for free time.

And so, as a result, it is not unusual for clients to actually lay down the activity for a good period of time, give a break to their workforce and to gear back up again very quickly towards the end of January. When times are quite good, invariably holidays are respected. When times are not so good, people are just happy to have a job and they work through the holidays. That's kind of the rule of thumb.

And what happened in Q4 is, I could've almost predicted it. But of course Q1, I will try to make up for it. It wasn't bad, Canada, in Q4. It didn't -- for us it didn't grow topline or margin-wise, Q3 on Q4. So whatever you see in North America is really the result of the United States. That's all.

Okay. I just wanted to make sure. I will turn it over. Thanks guys.

Kurt Hallead, RBC Capital Markets.

Just wanted to get a general sense as we head out in 2012, you look at the improvements and margins in your international business. Given what you know that you have in backlog and the contracts that are rolling off in your MENA region in total, what would one be -- what would be a reasonable expectation in terms of an exit rate for fourth-quarter 2012 margins in that region? So 2011 was 6.5% in the fourth quarter. What do you see that approaching in the fourth quarter 2012?

Double-digit for sure, and I would probably leave it at that.

Okay, fair enough. And just the other follow-up I had for you was on the North American front. When you think about incrementals on a year-on-year basis, predicated on your comments about improvement in North America, what kind of incrementals would you be looking at for 2012?

Incrementals the rest of this year or --?

Yes. If you look at 2012 incremental margins for North America, what kind of general range would you be looking at, based on what you know is in the backlog right now?

I would say year-on-year north of 30%.

Fair. And just one last thing just on the tax rate for the fourth quarter, and if I understand that correctly, Andy, is the effective tax rate then based on what you have provided us, $300 million cash tax for the year, that doesn't match up with the book tax. The book tax is that $500 million that you kind of referenced for the year. Am I understanding that correctly for 2011, cash tax $300 million, book tax closer to $500 million? Is that correct?

That's correct.

That's correct.

Mike Urban, Deutsche Bank.

I had a follow-up on Joe's question a little bit. You have referenced repeatedly and pretty emphatically that you think the tax structure you have is a good one. What gives you that level of confidence? Obviously we have not seen that to date.

And I guess maybe looked at another way, have you been able to back test that in a way that says, on a normalized basis, this is the benefit that we will get? You don't have to define when that is, but if you could give us some sense of what that is or what that might look like.

It's Andy. I'm going to let John address that one.

Mike, it's John. As part of this process we've brought in outside advisors to assist us not only with remediation work, but also the additional testing that we did to get comfortable that our numbers were right and would be on a GAAP basis.

But part of that work that we had them do was to give us additional insight and to do some, I'll call it stress-testing of our structure. And we believe based on not only our work, but also input from our outside advisors that we have a very good structure that is built for strong international performance. And when we have very strong domestic performance, then that affects us negatively.

So the direction we are headed with our operations, as well as the additional knowledge we have with our income taxes and the drivers of our book tax rate, we think actually give us an opportunity here to maximize and leverage that structure, as well as pull the levers that we can pull to help optimize it.

I think the tax organization over the past six, seven years did two things quite well. They designed a tax structure which, as John described, from not only our opinion but outside opinion also is very good.

Yes, it is dedicated for certain business environments. All tax structures always are, (inaudible) tax structures optimizes any business environment. There's always a business environment where you will do better. In our case, it's a strong international market, which is not unusual for a tax structure like that.

So they designed over the years what appears to be a well-thought-out, of course complex, it's a complex multinational tax structure. The second thing is over the past six, seven years they also did a decent job, not perfect, but decent job managing the cash tax aspects of our business. Meaning, if you if you analyze the cash taxes in this Company they were reasonable. They could've been lower, but they were reasonable.

The problem, and I will try to summarize it in sort of mild terms; I'm not an accountant. The problem has been in the discipline in documentation, the follow-through of procedures that needed to happen, so that from I think a tax accounting standpoint on book taxes, you are qualified for certain credits in the way you ran your taxes. We didn't have that kind of discipline.

So I think the organization broke down there. I think in simple terms therein lies the problem. That doesn't take away the fact the structure itself is a very good one. Not one that we need to sort of revolutionize in any way or form. We just need to utilize it properly.

Okay, makes sense. And shifting gears over to the operating site, you had mentioned that North Africa is probably a latter part of the year recovery, which makes some sense as a whole. I think I might've missed your comments on Algeria. Were you including Algeria in that as well?

North Africa is only two markets. No offense to Egypt or Tunisia, or even Mauritania or Morocco, they are all interesting markets. But in terms of oomph, there is Libya and Algeria.

Libya is -- I normally characterize it by saying that it's a no-low sort of market; no being Libya and low being Algeria for the time being, not forever. Libya is in a state I think of controlled confusion, and I don't think that you are in a position to start oilfield service operations on the wide scale yet.

Will you be, later on in the year? I hope so. I certainly think the reservoir is needed. So it's a fair, fair assumption to expect that at some point of time, middle of the year or so, there will be some measure of organization, so progress from controlled confusion to something that is better. And then the international operators as well as the Libyans NOC will start being active. I expect that to happen, but if it does, certainly not included in our thinking financially for the year, I expect it to happen later in the year.

Algeria is an entirely different problem. Algeria is just slow; slow for a lot of reasons which probably go beyond what a conference call can help with, but it is slow. And it will not be slow forever, but I expect it will remain slow for the balance of the year.

In fact, I said something earlier on that I couldn't think of any part of our international organization that would not do materially better in '12 than we did '11 and so forth. Perhaps Libya -- Libya will not be material anything this year and Algeria will not do particularly better this year than in the prior year. Perhaps a little bit at the end of the year. These two will be the two exceptions to my comments. But (multiple speakers) But overall, what I said stands.

In Algeria those -- some contracts that are maybe specific to you, it seems like we're generally hearing not a great environment in Algeria, but one that has been improving. I know you have some friction if you will in terms of contract rollovers and a change in the bidding processes. Is that still an issue on your particular work?

Very much so. Very much so. And there will be noise, and honest noise from one company to the next. For example some of our comments on certain markets may be viewed as more positive than others, and this reflects the idiosyncrasies of a particular company. So that is certainly fair.

So I guess in this instance, when it comes to Algeria I would say that we are more cautious than maybe some of the other companies. Fair point.

Okay. That is all for me. Thank you.

One last question because I am told that we ran a little bit beyond one hour. One last question please, operator.

Doug Becker, BofA Merrill Lynch.

Okay, thanks. Maybe switching from tax to two other topics that may be difficult to give too much color on. Just an update on FCPA and what the outlook is for asset sales as we go through 2012.

What was the other question, Doug? (inaudible) understand what was the other question?

Asset sales. Just potential asset sales in 2012.

Disposition, I beg your (inaudible) yes, yes. Well, there's not a lot to say about, that I can say, about the DOJ process. To a degree, I think it fell off the screen as it were.

For us it moves slowly, that's all I can tell you. So, I don't have much of an update that I can tell you. And actually even if I could, I wouldn't have much of an update period.

The second thing is the asset sale. Well, I think we are progressing. We hope to have a report on a first asset sale I would say in the next few days or something like that. Maybe we will wait until Q1 to give you that report, depending.

So it's progressing. It's slow. As I described it when we initiated it, it would be a long process and it would be sort of an increment, slice by slice I think. So, again, the first slice should come out, if it works of course, it has to be completed, in the next 60 days or so.

Makes sense. And then on Latin America, nice bump in margins in the fourth quarter. Just any color on the first quarter transition, just any seasonality or something? How sustainable are those 16%, 17% margins?

There's always seasonality. There's always seasonality. So you should expect some of that to impact Q1. I do think that Latin America will have a very good year.

I do think that we will be disappointed if Latin America completed the year 2012 without being not only strongly our topline, but also show continued margin improvements, again year on year, or Q4 on Q4.

Okay, thank you very much.

Thank you. Thank you and that completes our call. Thank you very much for your time.

Ladies and gentlemen this does conclude today's conference call. Thank you all for participating and you may now disconnect.