Weatherford International PLC (WFRD) 2012 Q2 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 second-quarter 2012 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 Mr. Bernard Duroc-Danner, Chairman, President, and Chief Executive Officer. Sir, you may begin your conference.

Thank you. Good morning, everyone. John will start with his comments and followed by mine.

Thank you, Bernard, and good morning, everyone. Before my prepared comments I would like to remind listeners that this call contains forward-looking statements within the meaning of applicable securities laws and also includes 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 and non-GAAP financial measures is included in our press release and also on our website.

Finally, in order to allow more callers to ask questions, I ask each caller in the Q&A to limit their questions to one initial question and one follow-up question.

I will start my comments with some brief remarks on the operating results, but these will be much briefer than normal, as I will defer more to Bernard. I will then focus the majority of my comments on the restatement of our previously issued results due to additional adjustments to our income taxes.

In the second-quarter 2012, before income taxes we generated earnings before income taxes of $205 million or $276 million on a non-GAAP basis, compared to non-GAAP earnings before income taxes for the first quarter of 2012 of $296 million, as detailed in the non-GAAP reconciliation table in our earnings release. Second-quarter earnings before income taxes was unfavorably impacted by certain excluded items highlighted in our press release totaling $71 million on a pretax basis.

The excluded items for the second quarter were primarily composed of a $100 million accrual for the potential settlement of the sanctioned countries investigation; $24 million for severance, exit, and other charges; and $53 million gain associated with the sale of our subsea controls business.

Second-quarter revenues of $3.8 billion were 5% higher sequentially and 24% higher than the same period last year. North America revenue was up 25% versus the second quarter of 2011 and down 4% sequentially. International revenues were up 23% versus the same quarter of 2011 and up 14% sequentially.

Segment operating income of $539 million improved 29% over second-quarter 2011, while declining $15 million or 3% sequentially. Segment operating income margins of 14% were flat compared to second-quarter 2011 while declining 1 point sequentially.

North America operating margins for the quarter declined 430 basis points sequentially to 16%, primarily due to the impact of the extended Canadian spring breakup. International operating margins improved 210 basis points sequentially to 13%.

Corporate, general, and administrative expenses of $53 million declined $11 million compared to the prior quarter, but continues to run at elevated levels due to additional professional service fees incurred in the quarter related to the income tax remediation.

During the second-quarter 2012 we generated EBITDA, defined as non-GAAP operating income plus depreciation and amortization, of $731 million with depreciation and amortization of $310 million, compared to EBITDA of $729 million and depreciation and amortization of $301 million in the prior quarter.

Capital expenditures were $554 million for the quarter, net of $30 million of lost-in-hole revenue or approximately 15% of revenue. Full-year 2012 CapEx is projected to be between 10% and 15% of revenue. Actual CapEx in the second half of the year will be driven primarily by how we see our incremental growth developing in 2013.

Net debt for the quarter increased $641 million, primarily due to increases in capital expenditures and working capital metrics for accounts receivable, while inventory metrics improved. We continue to target 76 days and 75 days for receivables and inventory, respectively, by the end of 2012, as we continue our focus on working capital improvements and work to improve our CapEx returns.

Subject to the risk and uncertainties regarding forward-looking statements highlighted in our press release and public filings, we expect North America should have significant revenue and margin improvement in Q3 compared to Q2 due in large part to Canadian seasonality, but also to improving margins in the US. International should show modest top-line growth and continued margin improvement.

Q3 non-operating costs are projected at about $60 million for corporate, general, and administrative costs; depreciation and amortization at $310 million; interest at $127 million; and R&D at about $72 million a quarter. Increases in corporate, general, and administrative costs are for planned additional procedures related to the tax remediation.

We have not closed our books for the second quarter as our review of tax accounting is ongoing. However, I currently estimate an annual effective tax rate of approximately 37% to 39%, although the actual rate without excluded items may vary from quarter to quarter. The increase in my guidance for the 2012 effective tax rate is primarily due to changes in the mix of earnings, as we project lower earnings in deemed profit jurisdictions and the impact of a tax law change. This should yield non-GAAP quarter numbers excluding items in the range of $0.30 to $0.32 per fully diluted share on an after-tax basis for Q3 2012.

Turning my attention to our tax remediation, we are reporting our results on a pretax basis because we have identified additional income tax items during 2012 that are related to prior periods -- $36 million in the first quarter and now an additional $56 million in the second quarter, totaling $92 million. Due to the materiality of these income tax items to 2012, we must record them in the prior years; and we will therefore restate our prior-year financial statements.

We will not issue restated financial statements until we have completed additional procedures and reviews of our accounting for income taxes. In plain terms, we do not intend to reissue financial statements for prior years until we have completed additional procedures related to income tax accounting and performed, at a minimum, our third-quarter tax provision review process.

I want to emphasize that, while I recognize this announcement is disappointing, I believe that we are making progress on the path to resolving the income tax accounting material weakness. And I point to these factors related to these additional second-quarter income tax items as clear indicators of progress.

First, these additional income tax items were identified by our additional procedures and improvements implemented during 2012 to existing procedures, or procedures implemented during 2011. These changes and enhancements were part of our income tax remediation work plan.

Second, we identified the additional income tax items by executing the above procedures. We believe this indicates our processes and procedures are yielding the incremental improvements in the quality of the Company's income tax accounting. This supports our remediation at the income tax material weakness.

Of the $92 million of additional income tax items, $28 million resulted from the normal process of filing tax returns and adjusting the prior-period accrual to the actual taxes as filed on the return. Year to date, we have filed about 250 tax returns; so the error average is about $100,000 per return.

These returns have been reviewed in the period in which the returns were filed, as the process is designed to work.

$67 million of the additional income tax items relate to accruals for uncertain tax positions. Other tax items are an offset of $5 million. The income tax items identified do not appear to indicate a pervasive issue related to these income tax exposures.

During the third quarter, as part of our 2012 tax calendar, we intend to perform significant procedures related to our annual tax provision process. These procedures, tax basis balance sheets and tax payable roll-forwards, will now be expanded beyond our original planned actions. This expansion should either identify additional prior-year income tax items or give us greater comfort in the progress of our income tax remediation efforts.

We have also decided to perform other procedures and accelerate other planned activities during the third quarter. If the results of these planned activities and the normal third-quarter tax provision process are positive, then we would expect to file our restated financials and catch up on quarterly filings in early November.

If we identify additional out-of-period items or other issues that cause us to conclude we cannot file our second-quarter, third-quarter, and restated financial statements with reasonable assurance they are correct, then we expect to again report pretax earnings and operating results for the third quarter and provide an update on our tax remediation progress. If this occurs, we will still expect to complete all filings by the 2012 Form 10-K filing due date.

I want to provide full transparency with our income tax remediation process. To that effect, we have included a presentation titled Material Weakness Remediation Update in the Form 8-K filed yesterday that included our earnings release. This presentation clearly states our goal of eliminating the income tax material weakness by year-end, provides specific actions we have completed, the status of organizational changes within tax, and continuing remedial actions.

Our remediation process has moved from strategic objective to a tactical plan that is pragmatic, action-oriented, aligned across the business, and expressly designed to provide a sustainable tax function designed for Weatherford. Above all, me and my team will dedicate ourselves to resolve the income tax material weakness by year-end.

I also believe these efforts will drive the effective tax rate lower in the future for Weatherford. While we expect our tax rate to move lower after 2012, it should move lower at a measured pace, and it will take a number of years to achieve optimum tax performance.

Long-term, our tax structure will also be more efficient in addition to being more effective. These two go together by design.

I will now turn the call over to Bernard.

Thank you, John. My comments will be split into two sections.

As someone who could not possibly care more deeply about the Company and has his net worth in our Company stock, I watch the same pain as our shareholders, the travails involved in straightening our income tax management and income tax accounting practices. There are a few things to keep in mind.

The material weakness and the corrective measures underway of our income tax accounting, not the Company's accounting as a general statement. Put another way, there never were any issues on and around pretax earnings then or now. It should be clear, but bears repeating.

Second, it does not involve cash.

Third, as long and grueling of a process as it may seem, we are making progress to remediate our income tax weakness and place this issue behind us.

The latest decision to adjourn filing revised Ks and Qs is necessary to avoid endless wasteful loops of finding more past errors in accounting and income taxes, which yield more restatements, which monopolize more resources in what is ultimately a sterile iteration until the final historical income tax numbers are set.

We have and we are looking with stern [farness] for any and all possible past income tax accounting errors. We want to correct them all and build from a sound base.

We are making progress. Since the self-diagnosed errors spotted in February 2011 by our own internal audits the scope and scale of historical errors has steadily decreased, and the numbers are becoming smaller. Our hope is that we found during Q2 the last errors out there, but we cannot be certain yet.

Our plan, therefore, between now and year-end has three steps. First, find and correct all remaining income tax accounting historical errors if any are left. There may be none to be found, or there may be some. We don't know. We will find out by year-end.

Two, complete the income tax remediation of our material weakness in income tax accounting to the satisfaction of our auditors. This is also by year-end. The remediation process is by definition a year-end event, if successful.

Last, rebuild our tax planning and implementation group under the leadership of Jim Parent, our newly appointed VP of Taxes. By year-end we will be moving towards intelligently using our multinational tax structure for what it was designed, lowering our long-term income tax rates worldwide, both cash and book.

On that last issue, as John mentioned, the effective income tax rate for year '12 is in the range of 37% to 39%, up from 35%, an early estimate. It is a high tax rate by any measure. We will gradually lower our overall tax rate effective '13 through '16.

The mix of business and regional distribution of profitability will have, always does, a role to play as to where tax rates end up. But the rigor, effectiveness, and efficiency with which we intend to manage our income tax planning and execution will minimize future tax rates; and we'll have seen the last of our income tax accounting errors.

The second section of my comments will focus on Q2 operating results and the outlook for the balance of the year. Q2's operating results were essentially flat on Q1. The numbers were very close at the EBIT line and almost identical at pretax earnings line.

Q2 revenues rose 5% or just under $200 million in spite of a sharp Canadian breakup, suggesting a healthy revenue uplift in the second half of the year. Specifically, Q1 on Q2, Canada fell sharply; Latin America, the European, Caspian, SSA, Russia region, and to a degree the US had strong quarters and made up for it.

MENA was weak as expected. No better, no worse. MENA is finishing its recovery process.

North America was the net of a well-behaved US and a worse Canadian breakup; that was anticipated. The US had a good quarter. Revenues and operating income were up on Q1, driven primarily by Lift and Well Construction. Stimulation weakened further, but at a much smaller rate than in prior quarters.

Canada Q2 was all breakup. The weather issues in Western Canada have been well reported; I won't belabor the point.

The effect on NAM results were very significant in part because we are by legacy very Canadian in exposure. Canada's seasonal drop in EBIT Q1 on Q2 was the highest decline in absolute dollars terms in Company history. It affected all product lines across the board. The US performance softened the blow.

Latin America had a strong quarter with revenues and EBIT up substantially over Q1. Latin America's EBIT of $104 million was the highest Q2 on record and second-highest EBIT ever.

Mexico was the single biggest mover, but the overall region also did well. Incrementals were modest at 15%, partly because of the winding down by year-end of the existing POC contracts in Mexico and partly because of a number of startups in the region. Latin America is laying the foundation for further strong performance in the second half of the year and 2013.

The European, Caspian, SSA, Russia had a very strong quarter and was the quarter's stellar performer. Revenues were up sequentially $83 million or 15%, and EBIT rose $60 million to $120 million for the quarter. The incrementals were a strong 70%, partly reflecting good seasonal pickup, partly driven by stellar performance in Russia and SSA.

It was the highest EBIT ever reached by this region in the Company's history; that is an absolute dollars. The EBIT margins, though, at 18.4% remained low. The historical peak was in 2007 when it averaged just under 25% -- 24.5% to be exact.

MENA was exactly as expected. Asia Pacific had another good quarter, progressing over Q1 both revenues and EBIT. MENA continued to be seriously hurt by the winding down of unfavorable contracts primarily in Iraq and Turkmenistan -- primarily Iraq.

Iraq was an issue of poor pricing, terms and conditions on three large prior contracts. Turkmenistan was an issue of client performance on one large prior contract; that contract is now closed.

All in all, NAM's EBIT dropped by $88 million because of Canada. This was made up by international, which shows $73 million -- if you want to squint to see how the quarter ended up.

Q2's nonoperating or corporate numbers were marked by continued high overhead associated with the quarter's intense work on and around income tax accounting. Expenses were lower than Q1 but remained materially higher than historically and higher than they will be once the income tax remediation work is completed.

From an operating standpoint, the quarter was a good performance and a number of regions laying the groundwork for a strong second half and 2013, which brings me to my forward views. The prognosis is positive and pretty much across the board.

We remain constructive on NAM, both top line and market. Believe Canada will have a strong second half. With a market predominantly oil-based and for us a naturally high market share in Canada, we expect to do well as the year progresses.

In the United States, we remain of the view that notwithstanding a sharp drop in gas-related activity, the oil and hybrid market segments and our product mix focus will secure a constructive second half of '12.

To provide the same context as I did in Q1, this quarter pressure pumping accounted for about 9% of NAM's EBIT, down from 10% of NAM's EBIT in Q1, while Lift accounted for 33% of EBIT, up from 25%. As expected, we did not see much further downside for our NAM pressure pumping; by contrast, we see further volume, pricing, and absorption led margin improvements in Lift, of course, the balance of the year. We also expect profit is positive improvements in Formation Evaluation, Well Construction, and Completion.

Latin America should have a strong second half with broad-based, continuous progress across the region. It is of course Mexico, Colombia, Brazil, and Argentina, and the foreign segment of Venezuela; but it is also a number of smaller, high-margin markets such as Ecuador, Bolivia, Peru, and Trinidad. We have a solid backlog of business at improved pricing, and traditionally the second half is seasonally the strongest in Latin America.

The European, Caspian, SSA, Russian region should remain strong throughout the second half with incremental margin improvements.

For all of the above regions that I just described, this is the same or consistent outlook we have had for some time. There are no changes, just a greater sense of reliability.

MENA is the obvious turnaround, at least the MENA segment. We expect MENA to improve in the second half of '12 from both a top-line and margin standpoint.

Although we are still completing some of the unfavorable contracts, this is at a diminished rate. While most startups in Saudi, Kuwait, Iraq, etc., have been successfully initiated, there are more startups underway still in Saudi, Algeria, and Northern Iraq. But the denominator of healthy contracts now running is larger and building, exceeding the unabsorbed startup costs. This suggests an improved level of profitability the second half of the year.

A few added comments on what have been two difficult markets. Algeria from a contractual standpoint has turned around for us, suggesting a better, more constructive outlook for that country in the second half of '12 and 2013. Iraq will evolve into an operation of improving profit as the year unfolds both in Southern and in Northern Iraq.

Iraq used to be a country of high profitability for us in years past. It should return now to reasonable profitability and returns commensurate with the risk and difficulties undertaken in that country.

To summarize, profitability and margins in MENA will commence a process of positive adjustments and correction in Q3 and build from there. Asia has strong backlog over all. We expect Asia to continue to showing good improvements in second half of the year for all its financial metrics.

To summarize our international outlook for the second half of '12, it is a good progress. We feel confident of this. We expect the second half of the year to show continuous improvements in international volume and margins in every region.

All-in, second-half 2012 should have strong operating performance and show financial progression on all markers. North America should hold its own and remain positive in revenue, EBIT, and margin trends. But clearly the International segments should drive the numbers.

We also showed progress on returns. Capital-wise, we expect to commit our internally generated cash flow this year to funding what we anticipate will be a circa-20% top-line growth when the year is counted '11 on '12. We target our capital intensity to be about $0.75 to $0.80 of incremental CapEx and working capital per dollar of revenue growth. If you want to get to the net CapEx number all you have to do is add back -- add to that number about $500 million worth of maintenance CapEx for the Company as a whole, and that gives you the CapEx number as a whole.

Given the incremental margins we set as yardsticks, our returns should improve throughout this year and the next. Improving our returns and managing our capital more efficiently are imperatives for this Company. We expect to achieve this without losing traditional growth and entrepreneurial strengths we are known for.

A mark of the capital efficiency, CapEx, maintenance and growth combined, should remain in the range of 10% to 15% of revenues. It averaged 11% in 2011.

Our target for year-end DSO and DSI are, respectively, 76 and 75 days or better. DSI, inventories, offers the most opportunity further down the road for capital efficiency. We are also pressing with tightening objectives receivables as in DSOs.

Assuming a comparable level of organic revenue growth in 2013 as we had in '12, we should finance the growth and still have solid free cash flow in '13 in excess of internal growth needs. Delevering will be a likely use of proceeds then.

Other issues. We have slowed the pace of divestments due to the very low valuations prevailing in the financial markets. We still do expect the sale of the second non-core asset between now and year-end.

The Company this quarter set aside $100 million accrual for settlement with the Justice of Department on issues relating to alleged violations of sanctioned country laws -- or sanctioned countries' laws. The settlement and the terms are not a certainty, but they now appear probable.

Lastly, just to repeat what John mentioned, assuming a midpoint 38% tax rate, midpoint of 37%, 39%, Q3 should be therefore in a $0.30 to $0.32 range or the pretax earnings equivalent. With that, I will return the call for our Q&A session. Thank you.

(Operator Instructions) Bill Herbert, Simmons & Company.

Hi there. Good morning. A couple of modeling questions for you guys here. John, was the breakup, in line with last year, worse or more, I guess, benign?

It was worse than last year.

It was?

Longer. Started earlier. And then the rains that came in June caused it to hang on longer than anyone expected.

Okay. So then if that is the case and revs down something like 40% and US revs went up close to 5% quarter-on-quarter, something like that?

You are directionally correct. That's reasonable, Bill.

Okay. And Latin America was the big surprise, frankly, in terms of the strength of the revenue generation. Coming out of Q1 I think you guys were thinking that Q2 through Q4 was going to be roughly flat with Q1, distilling in up 20% year-over-year. But Q2 was step change higher up almost 20% quarter on quarter.

What are we thinking here now in terms -- and it sounds like your commentary imparts additional growth for Q3 and Q4. Are we up something close to 40% year-over-year?

That might be a little bit high, Bill, but maybe between 30% and 40% for the year.

Okay. I am struck by the fact that the visibility has improved so dramatically within the space of a quarter. Or did you have the growth in your hip pocket? I mean, what was the evolution there?

I think we thought that it might unfold this way. I think this was a case of pacing ourselves a little bit in promising what we could see coming, and rather just focus on execution more than anything else, Bill.

Got it.

The market positions evolved the way we thought they would. But then again we have been wrong in the past, so we are a bit more cautious.

Got it. The disappointment operationally in the quarter was the MENA margin progression. We knew it was not going to be sterling, but it was weaker quarter on quarter.

But how should we think about the rate of improvement in the second half, is what I am getting to, Bernard. Sorry about that. Are we looking at a doubling in margins?

Well, unfortunately you don't see the MENA margins. But what I can tell you is that the doubling in margins of MENA, given where they were in Q2 wouldn't give you much. So let me put it this way -- mathematically, let me put you this way.

I think you would be looking at a material change in margins in MENA in Q3. But then again, Bill, in MENA it is Asia Pacific which is driving the profitability numbers. It is not MENA through Q2.

I think in Q3, Asia Pacific will continue to do very much the same for the good execution, good progression you see in Latin America, and in the European/Russian region. But just MENA will go from essentially nothing to something. The something will remain single digit, but therein lies the progress. Okay?

Got it. Then last one for me, promise. Tax rate, John, 37% to 39% or something along those lines for the guidance. Should we be incorporating something like a 40% tax rate for the second half of this year?

No. You should be modeling to get to 38% as the midpoint of that range for the full year. So, wherever you have your numbers in your model, just have the end of the year for the full year, the rate, at the -- picking the midpoint for the full year.

There will be some variability, though. There is always variability quarter-to-quarter.

Assuming you did 33% to 34% in Q1, though, then that implies a 39% to 40% tax rate Q2 through Q4, correct?

When you look at the catch-up that we had to do in the second quarter, because of the rate being lower in the first quarter, that is true. When you look at where we will be for the full year and what the average rate will be for a full year's worth of income and taxes, then you should be at about that midpoint.

Okay. Thanks a lot. Take care.

Jim Crandell, Dahlman Rose.

Good morning. Bernard, you've described Artificial Lift as a backlog-driven business, and certainly it's been a powerful driver of North America. In a flat -- if there were to be a flattish outlook in North America that were to continue, let's just say through 2013 for the sake of argument, can Artificial Lift still drive overall revenues and margins higher in a meaningful way, given its growing importance to Weatherford?

For North America? In a flat drilling environment, Artificial Lift has about, I would say, a two-year capital goods to consumable good cycle to go through. Meaning that when -- there is a number of wells that have not been placed on Artificial Lift yet. That is one issue, catch-up.

Then beyond that, there is the first cycle of maintenance of all the wells that have been placed on capital equipment with Artificial Lift recently. So you have that sort of inbred growth coming in Lift, assuming again a flag liquid market, because it is not a gas market at all for Artificial Lift.

With respect to the visibility on it, the backlog in Lift -- and it is not only in Lift. But the backlog in Lift is such that unless there is a substantially unfavorable evolution of the market in North America, meaning a pullback in the liquids segment, a significant pullback in liquids segment, you will find that we have quite a bit of visibility to what will happen to that particular business through the first half of next year.

So we actually know, unless there is a [grand] change in the business. We actually know the volumes and so forth and the margins on a forthcoming basis, assuming also that supply chain functions properly.

Okay. This should, given your visibility on the backlog, would you anticipate -- is this a business that you think you can put more price increases through?

Yes, in moderation. Because you have to be careful not to, I think, push the envelope too far just in general. Or are put another way, I wouldn't want to talk about it too much.

The other side of the equation is -- can you lower your manufacturing supply chain cost structure? Can you lower your delivery cost structure? Can you absorb better with more volume?

You know, the Artificial Lift product line, with all that it entails in 2013, worldwide these numbers are sort of -- will change some -- will represent worldwide something now between 20% to 25% of the Company as a whole. This is worldwide. We normally give North America numbers.

That is excluding, of course, the interest we have in the ESP company Borets. So, I think the play on Artificial Lift will quickly become also an international play, is what I am trying to tell you. And you have to look at that also as something that will contribute a lot to how well we do next year.

Okay, Bernard, good. My follow-up question is two related questions about Iraq. Number one, are you confident at this point that the MOC/SOC contracts which are holding back results here -- or at least detrimental to results -- will all roll off in the third quarter?

Then secondly, you went out of your way to talk about Northern Iraq also being maybe a significant contributor to improved results going forward. Can you talk about the outlook for Kurdistan and Northern Iraq, particularly in light of Chevron's purchase there recently?

A lot of questions, Jim. First, shamefully two years ago we took on more than just the particular contract you're alluding to, which is in the [mid-sand], the [Bourjordan] play. That one is declining just in terms of the impact on the Company, meaning that the quantity of work being done there will either be finished in Q3 or declining to the point where in Q4 it will present just a much reduced impact. So it is either over with in Q3 or predominantly over with in Q3.

I will also point out to you there were two other large contracts in Iraq in the South also which were not -- which were done on unfavorable terms. They also are either going to be finished in Q3 or will essentially become, in terms of impact on MENA, have a much smaller, much smaller effect. So that's [stressing].

I think the second question you asked is I think the outlook for Iraq in general for us. I think we are signing -- we have signed contracts on different terms and conditions, different segments of the business in Southern Iraq. That's one.

Staying away from some of the large turnkey projects. We are in turnkey projects on the basis that the risk/return strikes us, at lease for our side of the equation, as being unfavorable. So we have signed contracts in exposure in Southern Iraq more in the production side of the business, the workover side of the business, and [resource effects].

We have had a number of startups and we are doing a number of startups in Southern Iraq, again on contractual terms that are far better than what we had. I will also say that in Southern Iraq it is hard to have the same kind of profitability and returns that you have perhaps in Saudi Arabia and Kuwaiti, etc.

In the North, where we have a similarly sized operation in the North, you are absolutely correct that the commitment of Chevron by buying out the geological plays of Reliance is a very important move for that market. I also point out the prior move by Exxon was even more momentous and important. And there are other moves that are likely to come forward in that particular play.

So it is going to become as important of a market as Southern Iraq. Hopefully will remain a play with economics and returns that are more akin to what you find in some of the other Middle Eastern markets other than Southern Iraq, which again is a very, very tough market. I think that sums up your questions, Jim.

It does. Thank you, Bernard.

Ole Slorer, Morgan Stanley.

Thank you. Again, Bernard, back to the problematic contracts in Iraq. You previously guided that these would exit from your mix in the second quarter. Are these now slipping into the third quarter as well?

They are. They are, Ole. I think it's a fair criticism that we haven't finished them all in Q2.

I think we finished some. There is more than just one. We finished some.

I have alluded to one, Turkmenistan, being over. Also the rate at which they are going in Southern Iraq has diminished. We haven't finished them all in Q2 as I hoped we would.

But I will say, though, that simply because some are gone and the ones that are remaining have a lower level of needed activity, all-in the impact in Q3 will not be zero, as I hoped, but it will be less, materially less than it was in the past. Which is why you will see MENA go from essentially no margins to beginning its clawback to what it normally was and should be. I'll remind you that MENA was, with North America, our highest-margin market in the past.

Exactly. As you exit the year, what would you expect MENA margins to be? You can give a fairly wide range if you want to.

Double-digit. Double-digit is probably all I would responsibly say. You will say -- that is not saying much, Bernard. You have to understand, without giving you too much information, there is no digit.

So as per the information from one of your colleagues early on, which is to expect a doubling -- I think it was one of the questions on Q2/Q3 of MENA margins. That was a question like that, which mathematically is fun when you have (inaudible). So in a way it is a -- yes, the multiples are not material.

But you go from no digit to double digit, it is as much as I can tell you, Ole, in Q4 for MENA.

Excluding the lossmaking contracts and looking at the business that you have signed recently, would it be unreasonable to think that it could be -- exit 2012 margins in the mid high teens?

No, that would be very reasonable.

When it comes to the margin picture in general on international, showing progress. But what do you think that the year could exit?

Well, just to give you a little bit more granularity, you notice that the margins in the European and so forth region are sort of bumping on 20% now.

Absolutely.

[Should] expect anything dramatic there. There is seasonality also that plays, which [requiring] that is a slow march in that particular set of regions, Europe, Caspian, etc., towards going back to the low 20%s and so forth which were -- and maybe at some point be able to return to their prior high.

It's a slow, gradual path, and it is credible insofar as we demonstrated we are able to do that. That's why.

Then turn your attention to Latin America. Now Latin America there are -- this is obviously a region that has been well managed, good execution both in terms of growth and in terms of also just margins. There is one giant market there -- there are many giant markets. There is one particularly important to us, which is Mexico.

So Mexico comes out from an election, and normally what happens is a cycle of investments over the next two years. I'm not saying this is a guarantee, but this is not an unreasonable assumption to make given the normal rhythm of politics and the implication in terms of how countries are run.

Within Mexico, we have a very good infrastructure, very good organization which we have built over the years. What you ought to know is that -- nothing right or wrong about it; it is just the way it is. We have a number of POC contracts which represents a very large chunk of what we do in Mexico, which are -- naturally, their life is over -- expiring at year-end.

To the extent that the POC margins -- and they are what they are; no one is arguing anything either way -- extend these POC margins when they come that at the end, perhaps are in sort of economic operating reality higher than what the POC margins are reflecting, since that reflects the margins in the overall life of the contract.

Such is the logic of POC. When these contracts come to end at year-end, it is not unreasonable to expect in 2013, all things remaining equal, margins will rise in that particular region. That is another factor, aside from the fact -- very much like the European etc. etc., region -- it is well managed and progressing on all cylinders beyond Mexico in all the markets I identified.

The primary ones being Colombia, Brazil, Argentina, Venezuela, the foreign segment, which is the Orinoco play. And of course some of the smaller markets which I think should get some recognition because in the aggregate they're rather important for us. Ones I mentioned, which is Bolivia, Peru, and Trinidad and Ecuador and so forth and so on, which in the aggregate are rather significant and very high margin.

So progressing on that. Obviously an uptick on Mexico. And of course, just the natural end -- and this is not an issue of us being sort of -- can we complete these POC contracts by year-end or is it going to slip one quarter like it did in Iraq?

No. Because POC just -- the contract ends at that point in time. It is a matter of just timing of the contract. That's all. (multiple speakers)

(multiple speakers) on the percentage of completion contract in Iraq, when -- can you remind us, when did you sign those contracts?

Which ones, in Mexico or in Iraq?

Yes, the POC contracts in Mexico.

Oh, my goodness. I think 2 years ago, 2.5 years ago. It will be 3. It is a 3-year contract. Something like -- close enough.

Okay, so they were signed at the opposite trough of the international margin cycle.

That's correct, and there was nothing -- look, it is easy enough for us to criticize ourselves, let alone for you to criticize us that we shouldn't have had these contracts. But times were what they were.

So, the other side of the trough, they are taking longer to complete. So assuming (multiple speakers)

No, I said they are taking the time they were supposed to. You cannot go any faster. They won't allow you to.

You have a certain amount of equipment on it, and it is not a -- you can't really accelerate them. You have to do -- follow the program as set, in this particular instance by PEMEX.

Except we are doing them very efficiently and so they are actually quite profitable, but less than the actual margins reflect. Because you follow the overall history of the contract, including the absorption of all the startup costs and blah, blah, blah, that took place the first 6 to 9 months, because that is the proper logic of POC contracts.

Anyway, international you are bidding at this point at below 20% margins?

No. We are very, very careful on what we take on in international markets. We do not need to load up our wagon in terms of more volume or business. We are not growth driven.

If you see a vibrant growth going on at Weatherford it is probably the animal spirits that is alive and well in spite of all of our travails. First legal and now in tax and accounting, which hopefully will be behind us. But the animal spirits is still there.

But we are far more focused in what we go after, and we turn down business which we would never have turned down in the past before. Having said this, I don't know how 2013 will be; but if there are no major changes in the way the world is, meaning it remains mediocre, it looks very similar in terms of growth outlook to what 2012 will end up being. Which is, when the full year is counted you will be 20% or growth year on year or something like that. We have to wait till the quarters are accounted.

Okay. Thanks, Bernard.

James West, Barclays.

Hey, good morning, Bernard. Good morning, John. Quick question on the Artificial Lift side in North America. You obviously articulated pretty strong demand.

Is pricing now for Lift above prior-cycle peak levels? I think we started the year maybe 10% below peak. Are we now back above or at peak levels?

We are close to prior-peak level; I would say about 3%, 4% below. But be careful, James. This particular pricing I am defining hasn't flowed through the P&L at all, and it probably will not flow into our P&L given the size of the backlog, until the first half of next year.

Okay. Then can you remind us --?

You cannot change your pricing in your existing backlog. At least we don't, in fact. It is -- so you go through basically layers upon layers of work until you get to the higher-pricing one.

Okay, but where you are bidding now is pretty close to prior peak?

Yes, it depends again -- it's a consultative thing, because you've got such a broad offering. But if you want to have a sense that you are, I would say, within 5% overall of what would have been some measure of the prior peak.

Okay, okay. Fair enough. Then could you remind us your expansion, your capacity expansion plans for that business, particularly in North America, given the strong demand?

It's actually a fair amount of the CapEx is on or around that. And I would say it's above -- overall again, because you've got different product lines, it's about a third. A third volume expansion across the board.

Okay. Got it. That's helpful. Then one last question from me, still on North America, but on Canada. Your prognosis for the second half in Canada, are you looking at year-over-year growth in activity?

I think there has been at least some controversy around that, given the declining commodity prices. Or is this -- your growth more a mix function for your product lines?

Well, there is always, there is always, there is always an issue of the market in a particular [country]. In our particular case, our assessment year-on-year is that in spite of the breakup in Q2, which was lasted 3 months as opposed to basically 2 months. That is the issue, and it just happens. For the year we still expect growth in Canada, which is, I would say, somewhere midpoint between 10% and 20%, so year-on-year, or something like that.

Okay, okay. Very helpful. Thanks, Bernard.

(Operator Instructions) Angie Sedita, UBS.

Thanks. Good morning, guys. On the international margins, obviously a positive commentary on the international margin as far as contract awards and moving into the second half. So, Bernard, based on what you are seeing and what you have said, I would assume it is fair to assume that international margins should be at least in the mid teens, not at the low teens, as far as their exit rate for 2012. Is that fair?

That's absolutely correct, Angie. Absolutely correct.

Yes, you are correct.

Okay, so that's that. Then on the E&I production contract that you won, could you give us some timing and details on the timing? Start dates, when it will kick into full gear, and margin expectations, or generally margin expectations?

Three things. It should be kicking in -- it should be basically started up now in Q3. So we will see a little bit of it in Q3, and full effect in Q4. That is item one.

Item two are the margins on at are not high, 20%.

Item three, it is pre-funded. In other words, this is -- in terms of returns, there is no capital outlay. Pre-funded by the client.

And it will last about, I would say, 18 months, something like that, maybe 19, 20. I can't exactly remember, Angie, but something like that, from the time you start.

Okay.

In other words you will go through throughout next year. To make it simple, it will start -- let's say it starts this quarter, but you can stop the clock on October 1, okay? And it will go through, roughly speaking, through Q1 of 2014 or something like that, if that's helpful.

Very helpful. So, then finally, you obviously took the charge on the -- your belief of what that number could be for the involvement in the sanctioned countries. Do you have any more clarity from where you were at the beginning of the year on the FCPA side? I believe you may have restarted conversations with the Department of Justice. And then also on the Oil for Food Program, that is the smallest of the factors, correct?

Actually, there are only two. There are only two; Oil for Food is included in one of them. There's only two, if you will, set of issues.

Sanctioned countries and Oil for Food is one. And then FCPA is the other.

What you ought to know, Angie, is that the issues at Weatherford, which may not have been handled as well as they should have been handled in terms of the whole speed and efficiency of the legal process -- I'm not sure we're terribly good at it. The whole set of issues started and were primarily sanctioned countries.

What has been referred to so often in the Street as the FCPA -- perhaps because the word FCPA is a well-known word on Wall Street -- is also there. It grew out of it, which happens actually quite often also.

But I mean the original core issues, other ones that we have taken a provisional charge for of $100 million, because the settlement looks not certain at all, but probable.

So, one, models that we use therefore should our assumption that it is probable prove out to be correct, and the settlement be signed around sanctioned countries, then our attention will move on to settling and closing the FCPA issue, which is the [only] remaining.

Okay, so then I should infer, based on what you just said, that the FCPA would be a lesser amount than the $100 million you just took on the sanctioned countries?

I can tell you that, Angie. Even if I knew I couldn't tell you that either on a conference call or in private.

But what I will tell you again is that the scope -- I am not a lawyer, you understand, so I am just listening to what I am told and using common sense. The scope and scale of the issues on and around sanctioned countries I think it is fair to say were certainly as -- most likely more -- significant than they were on what is referred to as FCPA. I will leave it at that.

Okay, perfect. Thank you.

Kurt Hallead, RBC.

Hey, good morning. Just wondering if you might be able to provide us a little bit of a bridge on the North American and international progressions, to get you from the second-quarter earnings number to the third-quarter. Just want to make sure I understand the magnitudes of the changes that you guys are referencing by the different regions.

That is a modeling question which I will let John summarize. If you want to do it on the call, John, do it. That's up to you.

Yes, I can give you just a couple of comments; and, Kurt, we can spend more time after the call. But Canada is always low margins in the second quarter, and so we see the margins coming back up significantly in Q3 and Q4.

Q1, though, is always the biggest quarter for Canada from a margin as well as a top-line standpoint. But as Bernard mentioned, we see the full year exiting very constructive, up at the top line for Canada and also up at the total dollar amount of margin, with consistent margins to prior year. Consistent margin percent.

Internationally, you will see Latin America continue to improve throughout Q3 and Q4, roughly -- I am being simplistic -- versus a very good at Q2. You will find the European, Russian, so on and so on, improves some in Q3; and then you start having seasonality. So that will stop in Q4.

Of course MENA will drop. Why am I using a word like drop? Because essentially they are so low, so they will have a correction and claw their way back to what is a more normal level of profitability in Q3 and probably in Q4.

Those are your moving parts. So progression -- strong progression in Latin America, though leveling off. But it's near-term. You'll see just seasonality coming out of Europe.

And a positive move forward coming out of MENA. In North America, US continues to be certainly not a race horse, but continues to be plowing in a positive way. Canada turns. That's it.

And then specific numbers I think would be too long on a conference call. But those are the moving parts. It is not complicated.

Got it; great. I appreciate that. Appreciate that color as for the outlook for the remainder of the year.

I was also just generally curious as you look at the $0.10 or so improvement sequentially into the third quarter, how would you characterize that? 60% North America, given Canada; and 40% international, so on and so on? What is the mix of improvement?

I would say, well, I think that's probably not -- well, I would say probably half and half, probably. But Kurt, it's hard to know with -- get overly precise on what is ultimately nothing but our best-effort forecast.

Clearly, for people that are very Canadian, the swing is material. It is what it is. So a lot of it will be that, just simple weather-related issues as you think about it; nothing else.

Also you have [higher] (inaudible) and maintenance expenses always when you're down during the breakup. Which -- so all these things.

Then again, there is a fair amount coming out of Latin America and MENA. So maybe 60/40 is reasonable. You're close.

And frankly, we don't know, because (multiple speakers) is in the pudding.

Okay. Fair enough. Appreciate the answers. Thanks.

Mike Urban, Deutsche Bank.

Thanks. Good morning. Most of my questions have been answered. Did want to follow up on Artificial Lift a little bit. Obviously that has been a focus for you and doing quite well.

We've heard a little bit, especially I think in some of the emerging plays in North America, about a shift to using more ESPs in North America, which you haven't traditionally seen onshore. One, is that something that you are seeing? And two, is that a market you are prepared to address, if so?

I always smile when I hear these stories, because invariably -- consider the source. The ESP manufacturers.

Look, I like ESPs. We have a large business in optimizing ESP fields. This [brush] optimization business is in Lift, and I think probably optimize -- in the field we optimize probably as much ESP fields as we optimize in the world, which is very good business because there are other forms of Lift.

The reality I think is simple, Michael. Is that operators use ESPs really in only one situation, when there absolutely is no other choice.

They start using ESPs. They very quickly switch out of it if they have a choice.

Why? Consumes more power, item one. Item two, you have sensitive [sub] parts down the wellbore, which means they tend to break. And sensitive means expensive which means that your repair costs are much higher.

And furthermore because there are sensitive parts down the wellbore, that means you've got shutdowns more often. Net-net, unless you have -- need to lift more than 1,000 barrels a day at 10,000 feet, you would be crazy to use ESPs. But I am not going to say (inaudible) about ESPs. I don't care.

But the net answer, Michael, is no. We don't see that trend; and if we did we would be very happy about it. How's that?

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

Thank you. I think that -- probably take one last question if there is one left, because we have moved beyond the hour. So, operator, one last question if there is one.

Scott Gruber, Bernstein.

Yes, thanks for squeezing me in. I wanted some clarity on the tax rate guidance if you could. I was surprised that it's going to step up a little bit more to basically in line with a peer US company.

John, are you having to basically wipe the slate clean with the international substructure and rebuild? Is that why it's so high and why it's going to take some time to optimize?

Well, I don't want to say wipe the slate clean, because that is not a true characterization. But when we went through the restatement last year, we did learn a lot of things that are causing our rate to be higher. Some of this is through some withholding taxes that, based on how things were structured and how things were being executed, it was triggering additional withholding taxes in jurisdictions where we in some cases may generate low income, or it may even be a deemed profit jurisdiction.

So that is having a negative impact on our overall rate and makes it appear that we are at a US rate. So withholding taxes is an issue that we are going to focus on.

And we have other opportunities to optimize our effective tax rate that, to be honest with you, this year we are just not going to be able to focus on those to the extent that we will in future periods. We are very focused on the remediation and making sure that we get the accounting processes working effectively.

We have significant opportunities around planning and structuring. But we really need to start ramping those up and they don't -- if you do something in the third or fourth quarter, you don't see a benefit during the current period.

Got it. Then if you could quickly, if you could just restate the overhead expense you expect for the third quarter, and how much the excess accounting fees you are incurring right now and the legal fees, how much those account for in that number.

The increase in my guidance or the increase from the second quarter to the third quarter is all related to additional fees on the income tax work. There is not a significant increment related to legal. It is all income tax work.

Okay, but how much could we see come out, say, in '13 when some of these things should be rolling off?

Well, it's difficult for me to project that when we are very focused on the task at hand right now. But you would see -- once we get the remediation behind us, you will see a decline. But that decline will, I think, pick up speed as we move forward.

So you shouldn't expect that there is just the big step change. When we have things working smoothly, then you will begin to see that decline rate -- and it will run over about a year, where we continue to decline, maybe 18 months as we continue to get more efficient. So I think there is a good, long-term opportunity for cost improvements as we are executing the way we should.

Okay, thanks.

But it's fair to say in closing that the entire focus right now is just on having no more tax accounting issues, putting all behind us quickly as we can, and never mention it ever again. And the issue becoming [efficient] on around that becomes then the second issue. The first one is closing this up.

With this, I think we will close the conference call. Thank you for your time.

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