Weatherford International PLC (WFRD) 2013 Q1 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 first-quarter 2013 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.

Good morning. Good morning everyone. A little change from what we've done historically. There will be two other speakers and myself. I will start off with the prepared comments of John, John Briscoe followed by prepared comments of Dharmesh Mehta and my own. Then we will open it to Q&A. John?

Thank you, Bernard. Good morning everyone. Before my prepared comments, I would like to remind listeners this call contains certain 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.

In the first quarter 2013, we recorded GAAP net income of $22 million, or adjusted net income of $117 million on a non-GAAP basis, compared to adjusted net income for the fourth quarter of 2012, of $8 million as detailed in the non-GAAP reconciliation table in our earnings release. First-quarter net income was unfavorably impacted by the excluded items detailed in our press release totaling $138 million before tax, and $95 million after tax.

We continue to isolate as an excluded item, the net losses incurred in southern Iraq on certain lump-sum turnkey drilling and early production facility contracts entered into by prior hemispheric management to clarify how our MENA/ Asia Pacific operations are performing, how they are performing and the impact of these contracts on the region. We have included details of the revenues related to the excluded contracts in a footnote to our reconciliation of GAAP to non-GAAP financial measures schedule in our press release.

First-quarter revenues of $3.8 billion were down 5% sequentially, and 7% higher than the same period last year. North American revenue was down 4% versus the first quarter of 2012, and up 1% sequentially. International revenues were up 17% versus the same quarter of 2012 and down 10% sequentially. Adjusted segment operating income at $432 million was down 23%, compared to the Q1 2012 and down $36 million, or 8% sequentially. Segment operating income margins of 11% were down 4% compared to the first quarter 2012, while declining 20 basis points sequentially.

North America operating margins for the quarter were negatively impacted by the sale of our remaining guar inventory for $24 million at a zero margin, due to carrying of the inventory at market value. If the sale is excluded, our NAM margins are flat sequentially.

International operating margins were down 50 basis points sequentially to 10%. Seasonal international margin declines in Russia, Europe and Latin America were partially offset by improvements in sub-Saharan Africa. Bernard will provide some additional color on our regional results in his commentary.

During the first quarter 2013, we generated EBITDA, defined as non-GAAP operating income plus depreciation and amortization, of $663 million, and including depreciation and amortization of $346 million, as compared to EBITDA of $699 million and depreciation and amortization of $343 million in the prior quarter. We made good progress on the tax front during the first quarter, as we were able to execute on several initiatives that resulted in one-time benefits and also reduced our structural effective tax rate. The Q1 annual effective tax rate, or ETR, came in at 28% and we estimate our Q2 ETR will come in between 28% and 32%. However, you should continue to model 2013 full-year ETR at 34%. While our tax rate will be variable during 2013, with some quarters coming in below 34% and some quarters coming in above 34%, we still have work to do to bring our long-term ETR to a normal level for a non-US domiciled company. Our objectives are clear and I'm very pleased with the tangible progress and the hard work to achieve our ETR reduction goals. Our tax processes are stable and continue to mature and I remind listeners that we cannot remediate the material weakness in accounting for income taxes before we complete our year-end 2013 processes.

In March, we retired $294 million of senior notes that matured and in order to provide short-term liquidity, we entered into a 364-day term loan facility on May 1 with a group of banks that participate in our revolving credit facility. This term loan is at the same pricing and covenants as our revolving credit facility and is intended to provide a short-term bridge until we achieve the full benefits of our capital efficiency initiatives. We continue to expect to retire debt as it matures and reductions in our leverage from positive operating cash flow remain a priority for 2013. Dharmesh will provide an update and more details on our net debt capital expenditures and overall capital efficiency in just a minute.

Subject to the risks and uncertainties regarding forward-looking statements highlighted in our press release and public filings, Q2 non-operating costs, excluding tax professional fees, are projected at about $50 million for corporate, general and administrative costs, R&D at about $70 million, depreciation and amortization at about $360 million, and interest at about $128 million. Our tax accounting and remediation costs of $18 million after tax will decline in Q2 to around half of Q1, but will then increase in Q3 and Q4 as we move full swing into our year-end tax remediation efforts. We will file our first-quarter 10-Q today and it includes additional disclosures on our quarter results as well as our outlook. I'll now turn the call over to Dharmesh.

Thank you, John, and good morning everyone. After delivering positive cash flow in the fourth quarter, we fully expected an increase in our net debt in the first quarter. Our models indicated a $200 million increase in net debt. However, net debt for the quarter increased by $308 million. There were three specific issues that resulted in approximately $150 million of cash collections being deferred to the second quarter. The most significant of these was a quarter ending on a holiday weekend in which resulted in approximately $90 million of cash collected on April 1 that otherwise would have been received in March. Although we have collected the $150 million of cash in April, it did affect our cash balances at the end of quarter one.

Our models also included four predictable seasonal factors; natural variation of interest payment across quarters, with quarter 1 having the highest cash payment of $183 million, higher payments on a worldwide basis in the quarter for items such as property taxes and VAT, the traditional building of inventory levels for consumption during the remainder of the year, and a slowing down of customer payments in the first quarter. Our DSO metric reflects an increase of 4 days, from 86 in the fourth quarter to 90 in quarter one. Our industry segment normally experiences increases in DSO and DSI in the first quarter and we are no different. Our DSO increase of four days is the lowest when compared to our peer group and is consistent with the higher international business mix. DSI increased by seven days, from 81 days in the fourth quarter to 88 days in quarter one. This is the lowest increase in the first quarter of any year for the past three years. Five of the seven days is attributable to lower revenue in quarter one.

Capital expenditures were $376 million for the quarter, net of $24 million of lost in whole revenue. This is down from $478 million, or 21%, from the fourth quarter of 2012. We now forecast our capital expenditures for the full year to be between 8% and 10% of revenues, which is lower than our previous guidance of 8% to 12% of revenues. The reduction in CapEx is a result of our improved capital allocation process to focus on areas where we have a differentiated offering and a competitive advantage. In summary, the increase in net debt in quarter one was because of two factors. One-time events that were predictable and a deferment of cash collections from quarter one to quarter two.

For 2013, we still expect to meet our full-year target of $600 million of free cash flow from operations. To be clear, this does not include cash generated from divestitures or cash payment to settle US government investigations. We are confident of achieving our goal of capital efficiency in 2013 for several reasons. Across all of our operations, we have established new billing and invoicing practices which are already impacting the timing of payments from our customers. We have also introduced new inventory management processes across all manufacturing and operations. These changes had a positive impact of lowering quarter one inventory levels than we would have traditionally experienced. Continued improvement in both of these areas will assist our working capital management throughout the rest of the year. This is made possible because more than 85% of our transactional dollars are on a single enterprise system.

We continue to forecast ending 2013 with 75 days of DSO and 77 days of DSI. We are executing our capital efficiency approach company-wide. Where we see opportunity for profitable growth we invest in our assets, our working capital and our people. Where we believe we cannot make the right returns, we do not invest. Utilizing this approach is not about a divestment program. It is simply about existing business operations where we are not as competitive and profitable as we would like to be, allowing us to redeploy our assets and people and releasing our capital intensity and operating cost.

In addition, we are looking at our cost base as a whole and are actually working on removing cost from our business. Examples of areas we are working on include reducing headcount in some areas, optimizing our procurement programs and increasing automation of business functions to improve efficiencies. We expect to see positive results from our efficiency program in the second half of this year. These areas of focus, working capital, capital allocation, business focus, and efficiency will be the building blocks that will allow us to deliver increasing free cash flow and higher earnings from 2013 onwards. I now turn the call over to Bernard.

Thank you John, thank you Dharmesh. Q1 was progress. The quarter was in line with our operational and financial expectations, given market conditions and the quarter had no noise. You should expect that to be the norm. Concurrently, we are bringing non-recurrent numbers down as fast as we can. We don't like them anymore than you do.

If there was any disappointment in Q1 operations, it would be North America's performance. We expected a rise in EBIT and margin. International operations, which go through their seasonal low in Q1, did as expected, in some instances actually better than expected. North America was flat on Q4, which was shy of our expectations. This was primarily driven by Canada. Canada entered the quarter about 10% lower than Q1 of last year market-wise and never caught up. Canada's profitability, as defined by EBIT, ended up lower than Q1 2012. As you know, this affects us more than our peers. We are very Canadian. The US couldn't help, although it will in Q2 thereon.

There's no single factor. Segments are flat at Q4 levels, except for the seasonal pullback in equipment -- equipment for us means lift and completion and the like, shipments which are always at a low in Q1. All in, North America wasn't bad, but posting only flat sequential results both dollars and margins was a little disappointing. By contrast, Latin American performance was better than expectations. The EBIT was the highest in Latin America region's history for the first-quarter, which is also a seasonal low for them, while the margin level was solidly higher than in Q1 2012 and the highest in the past four years.

The European, Russia, Caspian and SSA region were about where we expected. This is the seasonal low in the North Sea Russia and the Caspian and predictably activity in all three regions went sharply lower. SSA had a solid quarter. Middle East, North Africa, Asia Pacific performance was higher than our expectations through their seasonal low. Seasonal low is a combination of budgetary cycles in MENA and winter curtailment in China, Australia, et cetera. China was sharply lower, but as expected. Australia did well due to heavier rains than normal.

MENA, by contrast, started the beginning of a turnaround and did better than we expected. MENA has a long way to go before it recovers its former performance, but this was a first step. The losses on the legacy Iraqi contracts went from $64 million in Q4 to $8 million this quarter. We expect these losses to decline further. They may soon become a positive or profit before the legacy contracts are completed. The US government-related expenses are legal work related to settlement discussions underway. Our objective is to settle these matters before the year is over. We want no noise. Just operating and financial performance.

Second-quarter outlook. Overall performance in the quarter is likely to show a small improvement over Q1 with the following key features. The Canadian breakup impacts us more than others due to our oversized presence. It is a steep earnings decline, which could be as much as double-digit cents per share. On the other side of the ledger, the US will help. The US will show improvements over Q1. It won't be market driven. The rig count will be near flat. But, we expect improvement in our lift and formation evaluation, both volume and price. We think revenues and margins will be up sequentially for the United States.

For Russia and Europe, both will show increased activity; Russia due to the seasonal impact at the end of winter, Europe due to similar seasonal activity in the North Sea. We also have in the quarter a number of contract startups in the North Sea which will further positively impact the quarter. Asia will see activity increases for our longitudinal markets, China and Australia, as the seasonal conditions allow us to get back to work in Bohai, Queensland, et cetera, et cetera. The Middle East will show continued gradual improvements in performance around the quadrant of strength in the Gulf. Adding the forces in motion, our expectation is to deliver earnings in Q2 of between $0.16 to $0.18. Also the tax rate variations that John mentioned will be a factor.

Second-half 2013. Our outlook for the second half is broadly positive. Canada's second half looks good, driven entirely by the oil segment. The Western Canada Select differential to WTI has narrowed to something between $15 and $20. Contrast that to 150 days ago when the delta was over $40. We expect the second half of 2013 will be stronger than the first half of 2012 and quite a bit stronger than the first half of 2013. So, in essence, better in the first half and better than last year. In the US we expect a modest increase in activity in the oil basins, especially the Bakken and Permian. This will be beneficial across our portfolio, particularly to lift and multi-zone reservoir completion sales. In addition, several large lift contracts are in the middle of ramping up and will be in full flow by Q3.

Gas basin activity is likely to remain muted until late in Q3. It would appear that companies are content for now to let fundamentals play out rather than rush to add production. Part of it is the growth of crude-related associative gas as a potential supply risk, but part of it is a certain in-built portion which keeps our operators conservative on the gas side. This caution may actually be a good thing for our 2014, 2015 prognosis. Caution will not go on forever. We expect a strengthening from October thereon in the gas segment. Adding the pieces, the second half outlook for North America is positive with both revenues and margins improving.

Latin America. We see increases in second half due to contract startups and our new operations in Argentina, Brazil, Ecuador and Colombia. This will be both volume and margins as contractual terms, on average, at a positive variance to where we presently are.

Mexico has also a constructive outlook in the second half, although for that market 2014, 2015 will actually be more decisive. While advertised and for administrative reasons which have to do with lags in budgetary approvals, Chicontepec drilling activity was taken down late in Q1. At this point, our drilling activity level in this heavy oil play is marginal and we presume it will stay that way through 2013. This doesn't change our constructive outlook for our Mexico business. Chicontepec completion and lift activity is countercyclical. While drilling expenditures diminish production spending will increase. As many wells as possible will be put on production. Our production business in Mexico is at a substantially higher margin than drilling activity. For the rest of the market, activity in the south, Villahermosa, and offshore are robust while our share in both is strong and growing. Expect us to move equipment from Chicontepec to Villahermosa as we speak. We expect Mexico to show a rise in margin and profitability throughout the year.

The European, Caspian, Russian and SSA region; we see Europe and Caspian picking up across the board with Norway and Azerbaijan, a particular highlight for us, as broad-based new well construction contracts begin in the second half of the year. Sub-Sahara Africa has the same positive prognosis also, while construction-based in primarily Angola and French-speaking Africa.

Russia, other than the inevitable recovery in activity as winter and its aftereffects subside, we see strong growth in our formation evaluation business as acceptance of our technology allows us to gain a good foothold. The focus on difficult oil in their traditional fields in Western Siberia meaning horizontal well drilling in tighter reservoirs to boost recovery in production, is a positive for Weatherford, building our successes with multi-zone completion equipment for these types of wells. We are the largest provider of multi-zone completion technology in Russia.

Middle East, North Africa. Activity levels and the outlook are positive for the Gulf, with rising rig counts and fuel development activities in Saudi, Kuwait, UAE and Oman. Our traditional strength in well construction in these markets is being extended by strong uptake of our closed-loop drilling technology, with more equipment and personnel being put into countries where there is obvious long-term demand. Our lift business and sister product line production optimization are both growing rapidly in Kuwait and Oman and we expect to see continued growth of these businesses in the second half of the year. Our formation evaluation business and region continues to expand with new lab startups in Saudi and Abu Dhabi and further penetration of our wireline and drilling services businesses due to the technology differentiation offered by our product range as well as excellent execution. The Gulf will lead our recovery in MENA's second half and position the region for a much stronger 2014.

North Africa outlook remains difficult, given the unsettled political situation in many of these countries. The second half will show some modest improvements. Activity in Algeria has strengthened some throughout the year while Egypt remained steady and Libya remains effectively idle awaiting stability. Our sense is that North Africa's turn is in 2014, not this year. Following our announcement last quarter, we placed legacy contracts in southern Iraq in nonrecurring. To better reflect the underlying business, we have reviewed southern Iraq as both a business and a market. We are determined that we will make no further capital investments in the country beyond those necessary to fulfill existing contractual commitments. The country will manage its business within the confines of the existing invested capital base and strive to deliver a much improved cash return. We will not grow our balance sheet in southern Iraq.

Asia. Asia has been another traditional stronghold for our well construction business and recent contract wins in liner hanger systems, tubular running services and closed-loop drilling serve to confirm that. We have a positive outlook for our business in the second half with improved activity in China and Australia and growth in Indonesia, Malaysia and Thailand. Many of the countries in this region are beginning to benefit from the focus on our core and tight criteria on contractual commitments, which is another way of describing better pricing and higher cash returns. All in all, the international segment will improve in the second half. Part of it is of course seasonal. But part of it is structural and specific to Weatherford as we rebuild our profitability and margins in a business that had historically much higher margins. We are less than half to where we were.

In summary, I won't elaborate further on capital plans and free cash flow objectives. Dharmesh already conveyed action and direction. It would be a mistake to doubt the organization's understanding and commitment because it's now a new chapter in our history. This isn't a few quarters efforts. This is a maturation, which is truly becoming embedded in our DNA. Margin expansion and cash returns are priority. We'll continue to grow as our core business are pulled forward by our clients. We will grow at a higher margin with increasing cash returns.

This isn't a transition, but it is a phase -- this isn't a transition, but one which is willed and orchestrated by management. The change in mindset is permanent and the organization is behind us. The change in culture, values and priorities was initiated in November. That is not long ago. But be assured that it is understood and it is underway. With that, will turn the call back to the operator for Q&A.

(Operator Instructions)

Jim Crandell, Cowen.

Good morning, everyone. Bernard, can you take us through your expectations for international improvements by margin and where do you believe we can get to by the end of 2013 outside of North America?

I'll be simple. I think that you will get the most improvements out of the Eastern Hemisphere. It will be -- Eastern Hemisphere will end up double digits, I'll tell you that much. In the second half of the year it will be nicely double digits, and I will probably leave it at that. Latin America will continue to improve. The difference between first half and second half in terms of margin won't be as steep as it will be in the Eastern Hemisphere.

Okay. And my other question -- could you talk a little bit, Bernard, about timing of asset sales? I know it's difficult sometimes to judge. But do think at this point that you can accomplish a meaningful chunk of your asset sales in 2013?

Well, I certainly hope so. It is difficult to comment on it because it really takes two people to agree. I would say that if we did not sell an additional, I would say $0.5 billion worth of cash proceeds of assets in the next couple of quarters, I think we would be disappointed. It might be more than that, but that's a -- one marker. Again it is -- as I said it takes two people to agree.

Okay. Good. Thank you.

Jim Wicklund, Credit Suisse.

Good morning, everybody. We are to the point that we care as much about your cash flow statement and balance sheet as we do your income statement. So, let me ask a hypothetical question. With the sale of, say, your international land rigs have the effect of improving your capital efficiency and your balance sheet metrics and reducing CapEx? Or would that just be really no affect other than bringing cash in the door?

No. No. First of all, our land rig -- our international land rig operation is not necessarily what we are trying to sell. But, just to answer your question, if the entire land rig operation was sold, yes, everything would improve. Everything. All the things you mentioned. I can't think of a single one that would not. The cash in the door, obviously.

Okay. That's positive. And Dharmesh, your detail was fabulous, the expectation of $600 million of free cash flow from operations. We will all keep our fingers crossed. Can you give us a little bit more detail on what the capital efficiency effort involves, so we can kind of understand at a more basic level what it is your primary one or two directives are in terms of that improvement?

Sure, Jim. The capital efficiency process really is focused on four key areas. One is how we collect our cash. Second is how we invoice our customers. Third is how we manage our inventory and fourth is how we allocate and manage our capital. So, we are focusing on all these fronts in parallel with the idea of freeing up almost $1.5 billion of cash flow over the next two years. So, different things we are doing in each bucket is a well-defined program laid out. For example, for the first quarter, we trained 600 of our leaders around the world in every major geomarket, every country, on what they need to do, what changes they need to make in each of these four areas. We are also using technology. So in the second half of this year we will be watching twice as many customers electronically as we do today in the first half of the year. So it's a combination of technology, educating the organization and putting discipline and processes in place across these four areas.

Okay, gentlemen. That detail is very helpful. Thank you, Dharmesh.

Bill Herbert, Simmons & Company.

A couple questions with regard to Canada, Bernard. So, did I understand you correctly in saying that Canadian topline quarter-on-quarter Q1 versus Q4 was flat?

No. No. The overall -- North America was, obviously you can read the numbers, were flat. Canadian topline was up. It was just it wasn't up as much as we expected, Bill. This is just is our internal expectations, that's all.

Was it up as much as double-digits or was low single digits? Order of magnitude would be appreciated.

Well, I think 10%, 11%-ish.

Okay. Fine. And then with regard to the road map for the second quarter, I guess John and Bernard, do we expect the typical 35% to 40% decline in revenues with decrementals of call it 50%?

I would as far, Bill, as suggest that it would be the decrementals Q1 on Q2 could be as far as double-digit cents-per-share. So you're talking about -- so let's say $0.10 which would be $100 million decline. That's probably on the high side of where it could be. I would envision it to be somewhere between $80 million and $100 million decline in terms of operating income declined for the year, for the breakup.

As a range.

If that's helpful.

Got it. And then with regard to the third quarter, is it reasonable to expect the typical two-thirds recapture of the revenues lost Q1, Q2?

Absolutely, Bill, absolutely. I can't be any more -- we cannot provide any greater precision than that. That's very reasonable.

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

Ole Slorer, Morgan Stanley.

Just continuing on that trend, Bernard. Will you then take us into your $0.16 to $0.18 second-quarter estimate? What are the biggest deltas when it comes to the changes from the first quarter, other than Canada?

US contributes. Remember that in Q1, which is always the case, you have actually a decline in our products business or equipment business, let's call it lift, but it's not only lift. Of course it reverses itself in Q2 and so it goes up. That's the primary moving factor. So, you've got an effect there that's completional so and there's liner hangers, there's a bunch of other products, but just the same theme. That's number one. It's not market related.

Then you have some improvements in Latin America. Latin America in Q1 is also for budgetary reason, is seasonal low, there are some improvements there. Then the bulk of the improvements come from the Eastern Hemisphere. I mean, really it's everywhere. Some of it is chilly weather related, there's nothing more than that. Some of it is specific to some of the business that we have, like the European business would be materially higher. The Middle Eastern business will be materially higher. Some of the Asian business will be materially higher and so forth. So it's not so much one place that will make a big effect. I think it is a number of places that contribute a couple pennies or something like that, two, three pennies and it all adds up to overwhelm the breakup and some.

Okay. The standout thing to improve here is the Middle East margin.

It was so bad, Ole, that I think that it -- not sure it could only go -- it could only go up.

We've been saying that for a while. When do think it really will?

Well, Q1 is actually an improvement. Asia was just down dramatically. Asia always does well, but they're down dramatically seasonally. So Q1 is an improvement. I think it will improve every quarter progressively, Q2 on Q1, Q3 on Q2 and so forth. It will end the year not at all where it needs to be in 2014, but it will end the year as quite honorable territory, which it hasn't been in a long time. It's based on the business of the four markets identified. Saudi, Kuwait, UAE and Oman.

Turn back to North America again in the specific of the US. Is there anything in the US market that at this point is still heading in the wrong direction?

No. I don't think so, Ole.

Some are just not bouncing back until the gas segments bounce back, but no, there isn't. At least to our knowledge.

So the negative effects incrementally from pressure pumping leading as pricing for example, has that stopped being a headwind for you now going into the second quarter?

For us, yes. Although we're not the best people to ask questions about pressure pumping, but for us yes, it has stopped.

Are you making any money in pressure pumping at all at the moment?

Dharmesh, you want to answer that?

Sure. We turned a corner in February and March was the first profitable month for pressure pumping for us.

He used to report to Dharmesh, that's why he answers the question.

Okay. Well Dharmesh, good to have you on board, there. Thank you very much.

James West, Barclays.

Bernard, more of a big picture question from me going through a couple of years of -- obviously the tax issue, there's been a lot of restructuring internally, there's a new focus on capital efficiency, et cetera, which you've outlined in great detail. During that time period, it seemed to me at least, and in speaking with your competitors that you were a little bit less engaged with the market. Now, of course, your revenue is growing nicely so it's not clear with the numbers that that's true, but I guess one is, is that a fair statement? And as you come out of these kind of non-operational issues, which are for the most part getting behind you -- will be behind you here shortly, how do you re-engage or how do you think about re-engaging with the market in a bigger way and, as Weatherford has historically been in the past, trying to gain market share?

What did Virgil used to say in Latin, timeo danaos et dona ferentes; I fear the Greeks when they're bearing gifts. I fear my competitors when they make comments, all right? So that's the first thing, James. Consider the source. That's number one.

Number two, let us not confuse the desire to be selective in what we engage and what we grow with the fact that we are sort of less engaged. I don't think that's correct. I would tell you if I thought it was correct. It would be easy simply because we had massive distractions in the past two years.

Sure.

I think it's fair to say, if I'm going to be a bit more balanced in my views, I think it's fair to say that the stress and strain was immense in this place, certainly in 2012. So, notwithstanding my quoting Virgil and what I've just said, yes, we probably were distracted. I mean, I have to be fair. The reason I reacted the way I did, other than my love for Latin, is the fact that our clients have been remarkably, I think, disinterested in all of our administrative and tax-related problems, as if it didn't exist and have been immensely supportive. The reason is not necessarily just simply their kindness, the reason is that the sorts of things we specialize in, the sorts of things we are good at, actually a big percentage of it are things that we're just about alone in being really very good at it. And so we are quite valuable for our clients in delivering service and products where we don't really have that strong of a competition facing us. As a result, we're people that need to be supported. And they did.

So, summarizing yes, although, I always smart when I have a competitive comment. I would -- there is -- certainly we were distracted, have to be. We are not anymore. But I have to say, James, that our clients have been very supportive and I don't mean this just as a Pollyanna statement. I mean this because it's true. They have been very, very supportive, probably because what we do is sort of a -- we have a lot of niches we are strong in. That is not always clear on Wall Street, but we do. Niches are valuable.

This would be well integrity, artificial lift you're referring to?

Yes. Yes. Well integrity, artificial lift and even the source of formation evaluation capabilities we have. Okay, some of them are generic, I understand. It doesn't matter very much. Others are really not. And therein lies the value of Weatherford.

Okay. Got it. Just one follow-up for me just a detail question. With the well-publicized, as you mentioned, slowdown in Chicontepec, I think you guys did $1.2 billion, $1.3 billion or so in Mexico last year. Can you give us a level of kind of exposure to that play? Understanding that production will offset some of this, but how big are you in Chicontepec at this point?

We're not. I mean, I tried to make it clear in my notes. We were drilling in the first weeks of the first quarter in Chicontepec. It went down to zero. The Chicontepec drilling business as we suggested in Q4, for example, when it was still going on, would have been at a rate of, I don't know, approximately $75 million a quarter or something like that. It's gone much smaller. So what has happened is that that drilling, I would say about half of it, is moving to, as we speak to Villahermosa in the south.

But we have 10-strings drilling as it is, which will grow probably 14, maybe 16 strings, that's one thing. There's a larger inventory of wells that have not been completed in Chicontepec, which will be completed. This is what we will do. We won't be the only ones, but certainly we will have our share of it. And meanwhile we've grown a lot of our activity offshore and in the South. So, the prognosis for Mexico is good this year. Certainly, if this had happened three, four years ago it would've been a different story. But we have done a good job of diversifying our market share in Mexico. Which we did very quickly.

Okay. Great. Thanks, Bernard.

Waqar Syed, Goldman Sachs.

Thank you for taking my question. I just have some questions on the table and change in net debt on page 9. The two items that I want to talk about, one is the cash income taxes paid. That was a big number, $124 million. Could you talk about that? Why is it such a large number? And secondly, there's another under other items which is about $278 million. Could you provide some more color on what that line item is?

Waqar, I can give you some detail on both of those. I'll start with the other items. That's primarily comprised of, when you look at the devaluation of Venezuela, that obviously impacted our working capital in receivables and inventory. So, $100 million of that other category is the offset related to the devaluation because it's essentially a non-cash item. Then we also had the pre-payments related to property tax and VAT. It's about $90 million. Then, the last component that was significant there is just excess -- or revenues in excess of actual cash receipts related to percentage of completion contracts.

The VAT property tax is a Q1 event, typically. And it's worldwide. In other words you prepay and --

A then a couple of comments on income tax. Is if you actually extrapolate that out to four quarters, that would assume that you have a 60% cash tax rate, which is absolutely not right. So it's really a seasonal event. It happens. We pay higher taxes in first quarter. In some ways that is really the story of net debt for quarter one. Is that there's a number of things that really only happen in quarter one and that's why the model showed a $200 million dollar increase in net debt for the first quarter. It's somewhat predictable when the cash taxes are going to be, whether it's property taxes or income taxes, or realty taxes and interest payment of $183 million. All that hit us in the first quarter.

And this was not significantly higher than first quarter of last year.

Okay. That sounds good. Secondly, what is the revenue associated with the legacy contracts in Iraq? How would that revenue number change in the coming quarters?

We have the detail of that in our non-GAAP reconciliation in footnote A. But for the first quarter, is $166 million of revenue related to the legacy contracts, comparing to $177 million in the prior quarter. That will -- (multiple speakers)

The two contracts that are over that were completed. That will come out. And you're left the bigger one though, which is Zubair, will go on through the middle of next year. So, it should decline, but you'll still have a healthy number. I would say this quarter maybe $100 million or a bit more will go on through the middle of next year. Expect it, Zubair, to be completed over Q2, 3Q or next year. Okay?

Now, would you still be able to report revenue growth if you exclude these legacy contracts from the revenues?

You mean on a foregoing basis?

Across that region, yes I believe so, Waqar, because you have to remember the first quarter is seasonally down, in particular in the Asia portion of MENA Asia. So, I believe that for that region, we'll still be able to show an uptick, even with the exclusion of those contracts in Q2.

Well they existed in Q4, if that's you question. Are they listed in Q4 and in Q1, actually, it's not that different. So, whatever dollar increase you see -- whatever delta you see is actually a real delta, since that as a factor, it being the same, doesn't change anything.

No, I mean just going forward if we just have apples to apples if we take out legacy contracts from Middle East now and then take it out in the future as well, as they're declining, would we still have revenue growth?

Yes.

Underlying?

Yes. Out of the four markets, which is -- not North Africa, the four markets which Saudi, Kuwait, Abu Dhabi and Oman. Yes.

Okay. Thank you.

Robin Shoemaker, Citi.

Thank you, good morning. Bernard, I wanted to ask you about artificial lift. In light of the transaction that was recently announced, the buyer in that deal obviously believes that pricing and margins for artificial lift have quite a bit of upside. I'm just wondering, specifically with regard to rod lift, what -- why is the -- has it been kind of slow in terms of pricing and margin improvement, relative to the very strong uptake in that technology in the oil shale plays?

First, I will have Dharmesh also answer because they also used to report to him. But just a few thoughts. The lift business is a razor blade business. More so than the razor business. And so it builds up slowly as you sell more and more razors and then the razor blade business takes over, which is basically the maintenance business. The highest margin is actually are the blades, not the razor. That's the first thing. The second thing is that, notwithstanding what I've just said, if you could see the actual numbers of lift and pressure optimization, they are very good. Which sort of highlights the fact that returning to our cores, of which lift and pressure optimization is one of the three poles of our triangle, is a very easy, obvious, good idea. Because the numbers are very good. But the summary is that the margin and the volume numbers are good and they are picking up momentum. I have one last comment, which is pricing is still moving up and supply chain has a very, very important role to play in that business. With that, I'll turn it over to Dharmesh.

Two additional comments I will make. From an absolute dollar basis, we have almost doubled if not tripled our investment in R&D in artificial lift in the last two to three years. So while we have been -- what we have been doing is investing in the business for future growth. The second area of investment has been manufacturing capacity. For a number of margins last year were impacted because we were buying a fair amount of product from third party and supplying it to our customers. So we've done a number of things to actually invest in the business and actually maintain our market share. But, in terms of your absolute comment, there is no mend on margin.

Okay. Just staying on that theme, it seems like automation is a big part of selling artificial lift now, both rod lift, ESP, of course. So, how do you feel your competitively positioned on that automation offering?

That would be a Dharmesh answer. I wouldn't even dream of --

When you talk about automation a key component of automation is your software platform that customers use to collect data and optimize artificial lift system. So Weatherford software platform today has 400,000 words real time. It's the style of choice for 8 out of the 10 largest E&P customers in the US. So we are very well-positioned from both the software perspective -- the area for automation really is sensors, which is how you sense what's happening at the work site. So we are very deep portfolio when it comes to sensors.

Last but not least, really, is your service infrastructure for things such as software, and automation is different than for things such as pumping units. And for the last three to five years, we've been building an extensive service infrastructure on a global basis to make sure our clients can use this technology. So we are still a large [NOCs turner] for example, where we had the [talent] of choice for how they bring the data, how they look at the data and how they optimize artificial lift systems. Mind you that we have one of the largest number of ESPs on our software platform also. The software platform is not just specific to the pumps of artificial lift that we directly offer. It really is agnostic and it supports all the pumps of artificial lift.

Okay. Thanks for that answer. Thanks.

Mike Urban, Deutsche Bank.

Thanks. Good morning. Bernard, you talked a little bit about southern Iraq and not growing the balance sheet there. At face value the reasons for that are obvious, given the profitability. But as you look at that market going forward, is that a function of kind of the market outlook? Or, do have sufficient capacity there, as the legacy contracts wind down and therefore you don't need to invest? Or, is it a kind of a message internally and to the market, or a little bit of all those things?

I think there's a bit of all of these things, Michael. First of all, we have a well-developed infrastructure in southern Iraq. We do have, also, equipment both drilling and production in southern Iraq. The balance sheet today is somewhere around $400 million, give and take a few million. This is sizable. It's not like we don't have capabilities. We have people capabilities also in southern Iraq, which strikes me that we have a good opportunity to train them further and so that we improve both efficiency and efficacy. So, all these things. That's number one.

Number two, I think southern Iraq is obviously an extremely important reservoir play. One in which we will keep a market share. We're just going to be very, very selective on what we do both drilling and production. This is true in every single market, it's particularly true in southern Iraq. In light of our judgment on what it means for us to be selective there, it just, Michael, we just have enough equipment. We do. We have enough equipment, we have enough capabilities and although there will be some movement in and out, things moving in that market, things leaving that market, it strikes us that setting the discipline of not committing any more dollars is not only the right thing to do, but it is also very doable in light of what we see in the next few years. So it's really taking a measure of what we want to do there, what we already have there and it has everything to do with just picking our battles.

Great. Thank you. Then, the follow-up I think just a similar question but more broadly. You said you are doing similar things around the world. Are there other either markets or product lines where you might not be investing as much as in the past? I think there has been an element of trying to be all things to all people, to some extent. I know there's a focus on what you do well, well construction lift, certain formation evaluation tools. So, are there other examples of that that you might highlight to give us a sense that that indeed is going on across the Company in terms of greater focus and selectivity?

This one is different because this is a geographic market where we singled out a particular decision. In that sense, it's a little bit unique. I can't think of any other geographic market where we decided -- we're certainly not going to leave the market. We will be active, we will a have market share, but in certain segments, and the segments are predetermined, and it strikes us we have enough capital in that market, capital move will turn. It's not going to be static. But the dollars will basically remain the same. I can't think of any other region in the geographic market like that.

With respect to how we are going to lead our business product line-wise, I think you said it very well. Which is that the things that we do well, things that we've built over the past 25 years that we do well. We do them very well. Some of those things we don't have as much competition as perhaps in the other segments. Thirdly, a lot of these product lines and competencies are ones that are very useful, necessary strategic even for our clients, a number of our clients. So well construction, production, sort of centered around lift production and optimization and of course completion, and formation evaluation with the focus that we give it which is no, not all things to all people. Because that, in my opinion, is not a terribly good idea. That's what we will emphasize, by default. The other segments will not be emphasized. That's, for us, with $16 billion company, so I have a pretty good idea of what it will mean when we only focus on the core. The cores are growing very quickly. The issue there is not so much whether we can grow, the issue is how can we discipline the growth and make sure that we pace ourselves with the highest return possible. And that's how it's going to be run.

That's helpful. Thank you.

I think because we ran over the hour, I'm told this is going to be the last question. So, no offense to the people who are in the queue for more questions. But that's going to be the last question. Please.

Stephen Gengaro, Sterne Agee.

Thanks. I guess one final question, Bernard. Just in general terms, when we look at your history, and obviously we look at the restated numbers as sort of a proxy for your margin kind of capabilities over time, and given your product mix, how should we think about your ability to achieve that going forward? A, is it possible and B, kind of what timeframe should we think about as this unfolds?

You know, the most shocking numbers for us, certainly for me, are the deterioration of our international margins. Now you can talk about a lot of different margins, let's focus on that one. So, the international margins are the EBIT line, it's the one that you see, sits somewhere roughly overall 40% of what it's prior peak was. Now I'm not suggesting one has to be at one's peak, although that would be a good thing. I'm suggesting that at the time we felt the peak had further headroom. So it's really very shocking. So, analyzing why that is has a lot to do with being overextended in too many product lines in too many markets all at the same time, not very efficiently.

I would say that the focus of the company and one of the most important things that we are trying to do operationally, is to take that international margin and do what is required from a strategic standpoint, from an industrial standpoint, from an operational standpoint to move the margin back. Not to the peak. I mean, yes, hopefully. But before you get to the peak you go higher from where you are today. But move that margin up. It's the next few quarters. If we don't see progress on the international margins, it will be for us a tremendous disappointment.

The market has a role to play. But assuming the market remains benign or sort of well-behaved, that's for us the biggest marker of progress in this company. It should happen in the next few quarters and, of course, in 2014. This is not a five-year undertaking.

But, you think that your mix of products and sort of the way the accounting structure has changed and efficiency gains and improvements sort of offset anything that was maybe miscalibrated historically from a margin perspective?

I'm not entirely sure what --

Let me just say one thing. I'm not sure if this exactly answering your question. What we are doing with capital efficiency is actually going to emphasize the good parts of the organization, the high margins of the organization, and really, that will help build the resurgence of the international markets as well.

I don't think this is an accounting issue at all. I think that we made -- we overextended ourselves, I think, over the past few years. It's not just last year. We just took on too many product lines that I don't think necessarily belong with us. Also, we moved into markets where we didn't have to move into, et cetera. This really has to do with operational issues. I don't think accounting is the issue. If it is, it would be purely in a transitory manner. It isn't a foregoing basis at all. The issue is purely how well can we return -- how fast can we return to the core and how good is our core? That's going to be the issue. It's not accounting at all.

Okay. One final quick follow-up. In a similar environment you feel like your capabilities from a margin perspective should actually be higher, not lower?

It's a bit absurd for me to answer the way I will, because we are so far away, but the answer is yes. This is probably the reason why our decision is so easy and our direction is so easy. This is not complicated.

Very good. Thank you.

Thank you and that concludes the call. Thank you for your time and attention.

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