Weatherford International PLC (WFRD) 2013 Q3 法說會逐字稿

Good morning. My name is Brent and I will be your conference operator today. At this time, I'd like to welcome everyone to the Weatherford International third 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.

Thank you. Good morning. Today I have, we have a little bit more people than we normally do. We have prepared comments by, from Doug Mills. Doug Mills is our Chief Accounting Officer and has been with the Company for 11 years and he'll speak instead of our Chief Financial Officer; Krishna Shivram is here also in attendance. His official first day is tomorrow so you can say hello to him but after Doug, there will be prepared comment from Dharmesh, and then my own before the Q&A session.

With that, I'd like to turn the call over to Doug for the prepared comments.

Thank you, Bernard and good morning, everyone. Before my prepared comments, I would like to remind listeners 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. A reconciliation of excluded items and non-GAAP financial measures is included in our press release and on our website.

In the third quarter of 2013, we recorded GAAP net income of $22 million. Adjusted net income, excluding certain charges, was $177 million, or $0.23 per diluted share, on a non-GAAP basis compared to adjusted net income for the second quarter of $116 million, as detailed in the non-GAAP reconciliation table in our earnings release. Third quarter excluded charges totaling $155 million after-tax are detailed in our press release and in my comments that follow.

Third quarter revenues of $3.8 billion were flat, both sequentially and versus the same quarter of 2012. North American revenue was up 4% sequentially and down 7% versus the third quarter of 2012. The sequential improvement in North American revenue was primarily due to recovery from spring breakup in Canada and stronger artificial lift results. International revenues were down 5% sequentially and up 6% versus the same quarter of 2012. Sequential declines in Latin America and the Middle East North Africa and Asia Pacific were partially offset by improvements in Europe, Sub-Sahara Africa and Russia. On a product line basis, the lower sequential revenues were primarily from declines in our early production facility projects in Iraq, which were partially offset by increases in Well Construction.

Segment operating income of [$503 million] (corrected by company after the call) was a 24% improvement sequentially and down 3% compared to Q3 2012. Segment operating income margins of 13% were up 270 basis points sequentially while declining 40 basis points compared with the third quarter of 2012. North American operating margins for the quarter improved sequentially with a recovery from the Canadian spring breakup. International operating margins were up 270 basis points sequentially to nearly 13% as all international segments showed operating income margin improvements during the third quarter and were led by Latin America and Europe, Sub-Sahara Africa and Russia. On a product line basis, the sequential margin improvement came primarily from Formation Evaluation.

Consistent with prior quarters, we continued to isolate as an excluded item, net losses incurred in Southern Iraq primarily related to early production facility contracts and certain lump sum turnkey drilling projects. During the third quarter, losses on these contracts totaled $113 million net of tax as we recorded charges primarily related to $55 million of liquidated damages and $52 million from increased costs, each resulting from delays on the Zubair early production facility construction project. This project was approximately 60% complete at the end of the third quarter with an anticipated project completion date of Q3 2014. As these contracts are accounted for on a percentage of completion basis, all known and expected losses through to the end of the contract next year have been provided for.

Other excluded charges for the third quarter net of tax include $25 million for severance and exit charges and $17 million in professional fees for the US government investigation and tax. We have also reached an agreement with the US government to settle our FCPA Oil-for-Food and Sanctioned countries investigation. The $253 million of accruals we recorded for these matters in the second quarters of 2012 and 2013 remain unchanged with the settlement agreement.

During the third quarter of 2013, we generated EBITDA defined as non-GAAP operating income plus depreciation and amortization of $744 million, up $117 million sequentially, and depreciation and amortization expense of $352 million for the quarter was up $11 million sequentially. Foreign exchange losses were $27 million for the quarter, an increase of $12 million, or $0.01 per share over the second quarter. We continued to make progress on income taxes on two fronts during the third quarter. First, executing on tax planning projects that help lower our projected annual effective tax rate, or ETR and second, the execution of key processes required for the remediation of our income tax material weakness.

The Q3 annual effective tax rate was 20% and continues to demonstrate the progress we are making to reduce our ETR. Our tax processes are stable and continue to mature; however, we note that our tax rate may be variable from quarter to quarter as we continue to take actions to reduce our long-term structural tax rate. We estimate our Q4 ETR will be between 26% and 28% and that our full-year ETR will be below 24%. In the third quarter, we completed our annual tax basis balance sheet reconciliation process. This is the second consecutive year that we have performed a complete tax basis balance sheet reconciliation for effectively every legal entity in the organization. We believe we remain on target to complete the material weakness remediation once our year-end 2013 tax processes are completed and when we file our 10K in late February.

Q4 non-operating costs, excluding tax professional fees, are projected at about $46 million for corporate, general and administrative costs; R&D at about $67 million; other expenses at about $18 million; depreciation and amortization expense at about $366 million; and interest at $128 million. Our professional fees associated with our tax accounting and remediation costs of $7 million in Q3 2013 were flat compared to the second quarter and will remain at about the same level in Q4.

I'll now turn the call over to Dharmesh.

Thank you, Doug and good morning, everyone.

First, some commentary on product segments. All core product segments showed improvements in the third quarter. Some of the highlights for each of the segments are as follows. Over the past 12 months, the Production Group has been targeting a new market, wells that produced within 600- and 1000-barrels of oil per day that are on ESP systems. There has been a focused effort to convert these wells to other forms of artificial lift such as RRP. The primary reasons for our customers to convert are improved energy efficiency and cost savings. Our focus campaign is now starting to produce positive results in the Middle East, Latin America and North American markets. We currently estimate that there are approximately 25,000 ESP wells in the world that are candidates for replacement and the size of the replacement market is around $3 billion. Besides the growth of unconventional resources, this represents one of the larger market opportunities for growth for our artificial lift business.

Our Well Construction businesses continued to grow in the third quarter, with record revenues generated amongst several of the Well Construction product lines. The third quarter also showed a number of contract wins in deep water markets in Russia, West Africa, Brazil, and the Gulf of Mexico. The Formation Evaluation segment had a strong performance in the third quarter. Within Formation Evaluation, Drilling Services had a record quarter, with a 12% increase in sequential revenues. This was driven by record performances in the Logging While Drilling and Rotary Steerable service lines.

In the quarter, key new technology rollouts of Guidewave, azimuthal resistivity for Geosteering, and Sinewave, electric imager tools into the North American and Middle East markets have shown excellent performance and will further extend our technology capabilities in this product line. And last, but not the least, in Well Completion, growth in the application of zonal isolation for fracturing unconventional reservoirs rose 7% sequentially and was highlighted by gains in our ZoneSelect sleeves and FracGuard Micro composite plug sales in the North American market.

Some comments on cash. While our third quarter 2013 results continued to demonstrate progress, they were a little short of our internal expectations. While cash flow improved by $155 million sequentially over the second quarter of 2013, net debt for the quarter increased by $39 million. Our internal projections had predicted a reduction in net debt of $100 million and the entire shortfall is due to deferment of $150 million of collections in Latin America from the third quarter of 2013 to the fourth quarter. The results for the third quarter do not include the $370 million of cash generated from the Borets transaction, which closed in early October.

The significant capital metrics for the quarter are as follows. Capital expenditures, net of lost-in-hole, totaled $328 million in the second quarter, a 39% reduction over the third quarter of 2012 and a 20% reduction from the second quarter of 2013. DSI decreased by one day sequentially and three days from the third quarter of 2012. DSO increased by five days sequentially, primarily due to the deferment of cash collections into the fourth quarter.

In closing, free cash flow through the first 9 months of 2013 showed a $510 million improvement when compared to the first 9 months of 2012. The drive for capital efficiency continues in the organization and all our internal metrics point to continued improvement in the fourth quarter and beyond. For example, DSO in all regions, except Latin America, is now 70 days which is a seven day improvement year on year. Inventory is down in absolute dollars for two consecutive quarters and we expect that trend to continue in the fourth quarter. Automated controls for inventory management are in place in many regions and will be implemented in all regions by year end. Capital approval trends also show very good discipline. In addition, higher capital is being allocated to our most profitable businesses. Purchase commitments for inventory and new capital assets in Q3 were lower than any of the prior quarters in 2013. This indicates that cash consumption will continue to decrease in the quarters ahead.

Some comments on Iraq. During the third quarter, we recorded a $113 million charge on our legacy contracts in Iraq. The majority of the charge was related to the Zubair Project and is non-cash in nature for the third quarter. The third quarter was the first full quarter of on-site construction and assembly work and we are now forecasting the first oil to be delivered in the second quarter of 2014. The project is 60% complete but engineering and procurement are more than 90% complete. We still have in excess of $40 million of contingencies in our cost estimates and have more than $100 million of potential recoveries still remaining on the project. We have also accrued for the maximum penalties associated with the project delays. The combination of these contingencies, potential recoveries and the accrual for maximum penalties minimizes any further downside on the Zubair Project.

We completed the other two drilling projects in the second quarter and the Gharraf early production facility project came online in the third quarter of 2013. We are working on the last two wells of the only remaining turnkey project in Iraq and expect to substantially complete them before the end of the year. The charges on Zubair and the closure of the other four contracts will bring to an end all the noise around our legacy contracts in Iraq by the end of 2013.

Moving on to tax. As Doug indicated, we completed a major milestone on the remediation of our material weakness in the third quarter. We are on track to remediate our material weakness at the end of the year. The 2013 tax rate has benefited from the systematic focus on removing accruals through planning activities or expiration of audit statutes. During the third quarter, we also started focusing on tax planning activities which will reduce our tax rate in 2014 and beyond. We have made considerable progress and remain on track to have a tax rate in the mid to high 20%s in 2014.

Divestiture program. During the third quarter, we also made good progress on our overall divestiture program. The following four businesses will be divested in a traditional auction model -- Drilling Fluids, Wellhead's, Pipelines and Specialty Services and Well Testing. The four businesses will have combined revenues of approximately $1.2 billion in 2014 and an EBITDA range of $130 million to $170 million. The divestment teams are in place and we expect the data rooms to be complete in the fourth quarter of 2013. The auction process will start in the first quarter of 2014 with the intention of completing the divestment's in the third quarter of 2014. Bernard will describe the plans for the rig separation. There is an additional schedule posted on our website which provides further details of our divestment program and timeline.

Some comments on the outlook. Our forecast shows a positive cash flow of $500 million in the fourth quarter of 2013. Combined with the $400 million of cash from the divestitures, our net debt should decrease by approximately $900 million in the fourth quarter. In the last call, I indicated that collections were the primary factor that will drive our cash performance in the second half. The difference with the forecast now and our earlier projection of $400 million to $600 million of free cash flow is primarily due to the deferment of about $350 million of cash collections from the fourth quarter of 2013 to the first half of 2014.

Operational performance in the fourth quarter will be better when compared to the third quarter. Our operational forecast for fourth quarter earnings is $0.27 to $0.29 per share. Fourth quarter performance will also be dependent on seasonal factors, such as activity levels during holidays and winter weather in certain parts of the world. These factors could positively or negatively impact our overall earnings performance for the fourth quarter. The focus on cost compression continues throughout the organization. We are looking at both fixed and variable costs and taking steps in a proactive manner to reduce our cost structure. Reduction in fixed costs was a contributor to our margin expansion in the third quarter. We expect to raise our variable costs by $150 million. We will see the full benefit of this reduction in variable costs in 2014.

In summary, the Company is focused on executing projects that will reduce our debt and deliver earnings growth. The investment in our capital efficiency program, coupled with the divestiture program, will help in reducing our leverage. All four core segments are doing well and have good growth potential. The higher margins associated with the core, combined with the focus and cost compression, point to a higher revenue growth and sequential margin improvements in 2014 and beyond.

I will now turn the call over to Bernard.

Thank you, Dharmesh.

The synthesis of Q2 and Q3 is straightforward. Canada, up by $0.05; US, flat; Latin America up by $0.03; Eastern Hemisphere up by $0.02; higher taxes reduced the whole thing by $0.02; foreign exchange losses added up to $0.03 of penalty in Q3, which was an extraordinary high number for us. Q3 was shaped by the seasonal turn in Canada and margin recovery internationally. Canada had its seasonal turnaround. It wasn't strong. Q3 '13 is lower than Q3 '12. This is in spite of this year's very weak Q2 which you will remember was the worst breakup in years.

Canada has been slow grinding up activity. Part of it was weather related, of course, but the primary factor was cautious client expenditures. Gas activity is at a bare minimum. Oil activity is healthy and accounts for 80% to 85% of the expenditures. The oil segment will and should rise further but it will be only step up in activity as refinery throughput for heavy oil increases and/or oil transportation methods expand, that would be rail or pipelines. Canada heavy oil is an attractive long-term expansion place, but it is a slow process.

The US stabilized; margins went up but by a marginal 30 basis points, 3-0. The US is in consolidation mode, waiting on gas. The shales and tight reservoir plays, whether liquid or hybrid, are on a double quest - operating and technological efficiency and characterizing the sweet spot for exploitation. Both will define levels of activity. Some places will expand such as the Permian. Others may stall such as the Granite Wash and Mississippi Line. The US market between now and year-end is moving sideways. The gains will go to fit for purpose technology, whether formation valuation, frac, completion and lift and will go to operating efficiency; integration will be an advantage for the latter.

Latin America in the quarter did very well in spite of the sharp drop in Mexico revenues and profitability. The increase in 400 basis points came from across the region with the strongest performance in Argentina. This was achieved without the support of the largest single country operation - Mexico. European, SSA and Russian margins improved by 280 basis points. Gains were across the board but it was strongest in Russia, reflecting seasonal uptake in that market. Middle East and the Asia Pacific were the only regions to be essentially flat at the EBIT level. Margins rose but only because of slightly declining revenues. The numbers mask a first sign of progression in MENA.

Q3's results marked progress in all regions. North American margins reflected essentially the turn in Canada; margins internationally reflected a combination of better execution and cost cuts implemented in prior quarters. It also reflected the first return for single-minded focus on our core product lines. Q2 and Q3 revenues were largely up in the Well Construction and Formation Valuation and down in non-core business and pressure pumping. The margin arbitrage between the slowly changing mix was powerful and a sign of a developing trend at Weatherford.

Forward views. The prognosis for Q4 is simple -- a further progression in all regions except Latin America. Not a large progression but overall, trending up. North America will be modestly up in both revenues and margins. This will apply to US and Canada. The driver will be the same process of gradual improving business mix. Formation Evaluation and Production, that would be lift, will do particularly well. Latin America will be flat, Q3 on Q4. The two declining operations in Q3, Mexico and Colombia will not turn around until 2014.

The Eastern Hemisphere will be up in both revenues and margins. The performance will be at cross currents with the beginning of the cold season in Russia and China. MENA, SSA, Caspian and North Sea will drive the gains, together, with improving overall business mix. For MENA, it is the beginning of a turnaround.

The focus on Eastern Hemisphere is beginning to pay dividends. Q3 EBIT margins rose to 11.4% in Q3, which is a 215 -- 211 basis point rise. This is obviously progress. But we are far from what we have to recover, it was less than four years ago, our Eastern Hemisphere margins were at 22%. They had peaked in prior years at 25%. Today, we are less than half where we were. Recovering our Eastern Hemisphere margin is a priority. Part of it will be carefully avoiding unattractive contractual commitments. That, in of itself, will get us part of the way back on the margin curve.

This is a good segue for comments on Iraq. With respect to the legacy Iraqi problem contracts, Dharmesh summarized both operations and accounting positions taken. We have tried to largely de-risk Iraq until completion of the last contract, which is Zubair. This is the best we can do for ending lingering losses from legacy contracts, in addition to obviously to finishing the contracts efficiently and well. We will not engage in any further EPF contracts. On the rest of our Iraqi operations, we will curtail involvement in Southern Iraq to only contractual commitments that have attractive margins and low risk, even if this means shrinking our presence and moving equipment out of that market.

2014 outlook. The year looks positive, both top line and continued margin recovery. We have specific visibility for some regions. Latin America. Latin America will benefit from a restart of Mexican operations, some time in Q1 and likely recovery of activity in Colombia some time after mid-year. Brazil will steadily strengthen throughout the year with a commissioning of Well Construction incremental contracts one by one. Brazil should have an excellent 2015 after all the start-ups for '14 are done. Argentina will continue to strengthen further from a good performance in '13. Venezuela remains a wild card. The prognosis for our operation is entirely a function of local liquidity issues; it could go either way.

North Sea and Russia should have improving margins and revenues. North Sea is a function of contract start-ups, primarily in Well Construction for Norway. Russia is market driven. The effects of the recent changes in tax policy implemented by the government will affect positively low permeability plays and secondary recovery efforts. This plays to our strength in that market. MENA will have the first year of its turnaround with the rising margins centered around the Gulf countries in all four of our cores. SSA has a strong prognosis built on contracts in Well Construction. SSA will become increasingly important to Weatherford in '14 and '15. This is the first time SSA will be a Company mover for Weatherford.

These are the main moving parts in the international markets that appear tangible for us in '14. North America in '14 is expected to be stronger in the US, both revenues and margins driven by Well Construction and Formation Evaluations, specifically, technology targeting unconventional plays. Canada will get progressively stronger year on year with slowly rising heavy oil expenditures. It all makes for an improving year-on-year comparison but not a large progression.

The NAM assessment for '14 does not factor in a change in gas pricing. From where it is, it was a $4.50 zone, which would most likely follow a cold winter. Absent a cold winter, gas is unlikely to strengthen much until the latter part of '14. We do not have specific earnings guidance for '14 yet. We haven't finalized our plans. Based on our preliminary analysis of regional trends and the cost compression identified by Dharmesh, we would suggest keeping the present Street estimates for '14 as reasonable.

US government. As we announced, we reached definitive agreements with the various agencies of the US government to settle the long standing investigations of the Company. The agreements are subject to final approval by the Commission of the SEC and US District Court for the Southern District of Texas. Should the approvals be given, public filings will render official the settlement and close what has been a long and very expensive process. The terms and conditions are what we described in our public filings, including the financial penalty. Timing, if approvals are given, is likely to be four to six weeks from now.

Material weakness for tax accounting. I will reiterate what both Doug and Dharmesh have stated. We expect to complete the remediation of our material weakness in tax accounting as part of the year-end closing process and our auditors' review and approval. This will close this issue. We will never allow ourselves to be caught with less than stellar tax accounting processes.

Divestment's and spin-offs. We are working diligently in preparing the assets and product lines for selected divestment's. The auction process will commence in Q1. We hope to have all auctions completed in Q3.

The rigs. The rigs of Weatherford have been in earlier times extremely helpful when we were developing our international market presence and infrastructure. Today, we have the product lines and the technological breadth and depth in the areas we specialize in that command client interest and attention. We do not need rigs as a door opener. Furthermore, in the past 10 years and at great capital costs, we have developed the infrastructure which, with over almost 1,100 bases worldwide, is probably one of the most extensive in reach and versatile in the industry. We do not need to make the same kind of investment and commitment to develop our infrastructure any more. This is done and it can now act as a service delivery support and distribution network for years to come. This will also facilitate our development in the international markets. All this means, rigs as a product line aren't a required component of our strategy any more.

The rigs have tremendous potential in their own rights. The product line is by assessment the largest international land rig operation in our industry. It has strong presence in all of the key markets of the Eastern Hemisphere where activity over the next 10 years will thrive -- Middle East, Russia, and SSA. It needs to develop itself further as a rig pure play with strong operating and financial management. To that effect, we'll prepare the rig business for a standalone future, both from an accounting, financial, administrative and operating standpoint. If all goes according to plan, we would target an IPO of a fraction of the business in a product offering in Q4 of next year.

We did something similar in the form of a spin-off with our then subsidiary Grant Prideco years ago. It was highly successful for our shareholders. We intend to follow the same sort of path here. Weatherford will be smaller, leaner, and very disciplined but from a shareholder value generation, we should be more rewarding. In the end,, that is the only metric that matters. You have the description of the four product lines to be divested in our rig operation placed on our website. It may provide better clarity.

Organizational news. We're very happy to report Krishna Shivram is joining us as Chief Financial Officer. He has exactly the range of industry knowledge, financial skills, experience, including international assignments and maturity this Company needs in that role. He also has a wonderful affinity for operations. This will make for a symbiosis between the all important financial functions and operations, something that has been lacking at Weatherford. The symbiosis will be helped further, with Dharmesh Mehta stepping into the position of Chief Operating Officer.

Dharmesh knows our product lines and operations. He has the respect and following of the entire organization. This is a natural evolution. His objectives are simple, clear, and immediate -- increase operating and capital efficiency, disciplined growth and focus on the core. He, like Krishna and myself, are long-term in his objectives. This Company will perform like never has. This Company will matter in our industry. One word of heartfelt appreciation to Peter Fontana, who is retiring as Chief Operating Officer after 45 years of very distinguished service in the industry. All of us at Weatherford wish him and his family the very best. Peter will stay as a consultant to the Company.

Balance sheet objectives. I won't elaborate further on Q3 and Q4 free cash flow metrics, which Dharmesh detailed. In time, Krishna will provide metrics and guidance of '14 free cash flow. What I can share here is our two year objective. Our objective is paramount to the Company and it won't change. It is our first priority. As a combination of free cash flow earned in '14 and '15, divestment proceeds and rig contracting IPO, we intend to pay down total debt between $3 billion to $5 billion by year-end '15. Our debt-to-book capitalization ratio will close that year, that will be end of '15 between 25% to 35%. 25% is our long-term comfort zone. We want to operate the Company long-term at a 25% level.

In closing, I used the word core a number of times. Weatherford has four core areas -- Well Construction, Formation Evaluation, Completion and Production; that is it. We can carve out a path of high growth, much better margins and high returns around our core. This is what we will focus on with the support of our vast infrastructure and a deep inventory of technology, both applied and base. Separating the non-core from our Company is just a question of time and methodical execution. The financial objectives are clear. It is delevering and disciplined growth. The path is focused on the core, margins and return on capital. We are the inflection point. The past problems are closed or closing. The direction is clear, the team is assembled; now it is all execution.

With that, I will turn the call back to the operator for Q&A.

(Operator Instructions)

Jim Wicklund from Credit Suisse.

Congratulations to Dharmesh, and Peter, I'm sure you're listening on the call somewhere. Thank you for doing our alma mater proud. Bernard, the bad debt expense in Latin America. We keep seeing these companies, including you guys, do work for companies and not get paid. When do we get to the point where we only do work for people that we -- who pay us?

Well, I think there are very, very few cases where this is a real legitimate problem. When I look at the situation we have in Latin America, in one instance, we have a large client where purely for budgetary approval reasons, everything is deferred to the first half of next year. The liquidity, our balance sheet and so forth of the client and the country involved are actually better than the ones in the United States and the EU combined so this is not an issue. The other half the problem is obviously in another country and I think as both Dharmesh and Krishna can attest, Krishna with past experience and Dharmesh with present experience, we are well advanced in discussions on how to find a reasonable settlement between our client and ourselves that we don't have to answer that sort of question for ourselves or for you. Put another way, we're working on the problem in the other country. The first one is not a problem.

Okay, because the biggest issue with investors is going to be the shortfall in expected free cash flow this year. And while I understand the excellent reasons for it, our shortfall is still a shortfall and so everybody is going to harp on the execution going forward. My second question if I could, I had kind of expected last quarter when you talked about divestitures, that your pressure pumping business might be something that you would part with and now it's core to unconventional. Has that been a change of thinking? Has that been the plan all along and if you're going to keep it, what's the likelihood that you become a consolidator of a fragmented industry?

You're right, Jim. It was something we gave a lot of thought to. The real definition for us was how could we be better at running it? And second issue, more importantly long term, how could we be different from the others? I don't want to discuss it too much on the call now but I think we've answered both questions to our satisfaction. It acts very much like an adjunct to the other competencies for unconventionals that are so important to us, Formation Evaluation and Completion and Lift for the liquid ones so it sort of acts a little bit like a cement to all three.

So to the extent we can run it very efficiently and secondly, we can bring in technology to bear, then it's a keeper. That's a conclusion we came to. I don't think we'll be a consolidator. I don't believe in consolidation in pressure pumping Jim because the barriers to entry are too low. Put another way, when you consolidate, you get deconsolidated immediately, a little bit like the rental tools business. This is at least our view.

Jim Crandell with Cowen Securities.

Congratulations Krishna on your appointment, Dharmesh, on your promotion and Peter, your retirement at age 66, despite what Bernard said about how old you are. First question is margins in North America. It seems to me that pressure pumping is probably around breakeven and the rest of your businesses is at least in the mid to high teens or better so that your biggest opportunity for improving margins in North America might be getting pressure pumping operations up. Is it possible that you can get margins up to the double digit area by internal things in that business? And am I looking at things the right way?

No, you are Jim. I think -- I'll also Dharmesh comment on it also. I think, first of all, your assessment of margins of pressure pumping is on mark. At the other level, it's a breakeven business, no better, so clearly, it's at a disadvantage to the rest of the businesses. I think the more business we book on and around Well Construction, and Production and Completion, actual Formation Evaluation also, there is just a -- we are raising the bar for the overall business simply because the margins in those businesses are much higher, in North America, too. So for us, it's a question of time on the pressure pumping side and on the mix improving. Dharmesh, do you want to add to that?

Yes, Jim. I think we said this before. Q2 was the bottom, from a margin perspective, on pressure pumping. We did see improvements in Q3 from a margin perspective and we expect to see that -- those going forward. So from an inflection perspective, we are there; however, I would say this, which is pricing is soft and really, from a prognosis perspective, we are more focused on growing our core. And we continue to heal] and repair pressure pumping to the best of our abilities and we expect to see positive progress on that, but the focus is on growing the core businesses in North America.

Okay, and my follow-up is based on the internal cost cutting you're doing, Dharmesh, or Bernard, where do you see your Eastern Hemisphere margins reaching by, let's say, 12 months out or by the end of 2014?

I don't think we know exactly, Jim. Obviously higher, and as a function not only of cost cuts, the $150 million applies to all of the international markets, including Latin America and the function of the business mix as it rises. I would not want to give you a percentage yet. I think when we look at the P&L overall for '14 and the high/low, we find the estimates as they now are to be sort of middle of the range of what we have. That's why we -- the best we can give today seems reasonable but then we haven't decided what is the most reasonable target for margins and so forth. We will provide that, certainly by Q4.

Bill Herbert with Simmons & Company.

A comment with regard to international growth prospects for '14. Is '14 flat, up, or down in terms of rate of growth relative to '13?

That's a good question. I would say, again, we're giving us the credit that we haven't finalized all of our plans. I would say the rate of growth in '14 internationally will be greater than in 2013.

(multiple speakers) Okay, so we're talking double digit? Along those lines, you expressed some optimism with regard to a reboot in Mexico into Q1. Is that driven by the tenders and if so, the spud date there for those contracts was March. The reasonable expectation that, that probably slips. How comfortable are you with regard to kind of a Q1 inflection for Mexico?

I don't -- I think the assessment in Latin America is much more broad-based than just Mexico.

Got it.

Putting Venezuela on the side as an echo to the question that was asked initially because it all depends on coming to a reasonable understanding of how does one get paid by clients. So setting that aside, because it could go either way, as I tried to explain in my comments, the growth in Latin America is broad-based. It is continued in Argentina. It is the term in Colombia until the second half of the year. Until the elections in Colombia, you will not see much of a turn. I'm sure you've noticed that Colombia is extraordinarily weak. Ecopetrol is extraordinarily weak today, so this most likely turns the second half of the year, let's say, from July thereon. Brazil, which is not characteristically a strong area for us, actually has some good progression for us just based on contracts in Well Construction that we have and they're gradual so we'll build out throughout the year. I talk about a strong '15 because by the end of the year, they will presumably all be started up. So that factors in also and then you turn your attention of all of that to Mexico.

Mexico, I don't know, and your point is well taken whether activity, subsequent to tenders in Chicontepec and to the degree in [Ala Muzein] in the South is ramped up for all of us, Not only for us in March -- or was it April, May, I don't know. Point is well taken. It depends. It depends on what the client will decide, but I do know for the whole year, regardless of how much one wins tenders, I think for the whole year because our other contractual activity beyond the tenders in Mexico, I think for the whole year, you should expect Mexico to be up versus 2013. That much I'm quite certain of.

Right, and two more quick ones for me. Single fastest growth for 2014 in terms of a region would be what in 2014?

For growth in terms of margins or in terms of profit?

Top line.

In terms of top line. Let me think for a minute. You ask me hard questions, Bill. I would say SSA. (multiple speakers)

Okay, got it and then last one for me, US in the second quarter. Top line, was that actually down in the third quarter? I recognize that margins were up for frac but was the top line down in the third quarter?

For frac?

No, no, no for US in total.

For US in total? I would say it was flat, almost flat. There was a movement up or down, what was fairly insequential. Frac was down and the rest of the core product lines were up.

No, no, no, but US as a whole, just as a region, was the top line flat, up, or down sequentially?

It was -- I remember it being essentially flat.

James West with Barclays.

Bernard, on 2014, you made the comment that the consensus seems about right in here. What are the biggest swing factors in your mind on either hitting, beating, or coming in below the consensus somewhere?

I think well the consensus on the Street right now, as I said, is in the mid -- sort of middle of the range that we look at in terms of most probable events. I would say purely execution. There's always climatic issues, you hear about this all the time but it's really I think it is just execution. We do have activity going up contractually in the North Sea. We do also in the Caspian, which I did not mention, we have an SSA for ourselves contractually committed. We have some increasing activity in the Gulf countries in the Middle East, not in North Africa, in the Gulf countries. Russia is much more of a short-term business as opposed to long-term contracts.

Companies are renewed all the time but the market is moving up for the sorts of things that we specialize in, so I think I will have to say, James, is that just like everything at Weatherford, it is all execution. It's not a matter now of resolving problems that have plagued us. I think we have -- we're giving both evidence and indication that problems in the past are being either closed or closing; I think that's fair. I think also that the team of leaders has been assembled and below that, the ranks have been filled with internally selected talents and also talents coming from outside. I think it's all about execution, James. It's more that, plus or minus, in the inevitable, unpredictable issues where there's -- and of course, the other thing which I am almost reluctant to mention is, do you have a stronger North America than we anticipate, because in our numbers, it is actually not a poor North America.

It's just a sort of slowly, sideways, slowly moving, crawling forward North America, stronger in Canada in terms of improvements but not much than the US. In my judgment, waiting on gas. The oil segment, good, possibly moving up a little bit, but mostly a reward on technology and operating efficiency on the oil side. They're waiting on gas. Now waiting on gas, should we wait until '15? Should we wait -- this is for us a matter really of the demand side which is, which you understand. I don't need to say this, you understand.

Sure, so you would say it's mostly not market related (multiple speakers) -- in your control?

Yes, very much so. That's how we feel.

Okay, okay, and then just one follow-up for me that's unrelated here on the land rig side. In your release last night, you talked about a spin or an IPO plus spin or a IPO in secondaries but in the call, you mentioned an IPO in 4Q. Has that decision been finalized that you would go the IPO route and the question of whether you spin the rest or just secondary?

I think step by step. I think we're preparing, firstly, the operation very much the way we did with Grant Prideco years ago to do a -- to be a very, very good, strong, well-managed independent Company. This is step one. This is an accounting, financial, administrative issue. It's an operating issue; this is step one. If the markets are welcoming, we will perform an IPO in Q4. I think we already envisioned that the sort of business, the rig businesses cannot take much leverage so therefore, we do an IPO in order to generate, one, liquidity in the stock and, two, also some liquidity for Weatherford. What we do afterwards, James, we do have a clear choice and I don't know yet but we don't have to make that decision today. We don't because it's the same path.

Matt Conlan with Wells Fargo.

I just wanted to dig into North America and your overall guidance a little bit deeper. Last quarter, I got the sense that you're looking for more than 30 basis points of improvement in your third quarter US operations for margins. Is that just the timing of the cost cuttings that you're pushing through your system?

I think the answer is that Canada was not as strong in Q3 as we had anticipated; it will be the simplest answer I can give you more than anything else. After the breakup we had in Q2, certainly, Canada rebounded but it seemed that it took longer to rebound and it did not move quite as far as we had anticipated and most analysts of our Canadian markets had anticipated.

Okay, so there wasn't any disappointment in the US side of the margins?

No, not particularly, no. But either way, I don't think so. Dharmesh, do you want --?

No, there's no disappointment on the US side.

Okay, and an unrelated follow-up. Where do you stand on the financial break outs of your land rigs? I understand that can take quite a lot of time to get those financials audited for an IPO process.

Well, that's actually a question probably that we should let Doug answer, and in time, Krishna will answer but not today. What do you think, Doug, in terms of timing to get the audited numbers for the rigs and historically prepared and everything? What's your sense?

Yes, we're starting the carve-out process that would be acquired for this type of transaction. We are, I'd say in the early stages of that today, but we're looking to have that carve-out process done in the second quarter next year with an audit going concurrently as well.

So the answer would be that, let's just say that we hope by the end of the second quarter to have the carve-out ready to be filed and so forth, something like that. Plus or minus a few weeks, because these are harder times.

Right and is management for the public Company currently in place or will you be looking to hire from the outside?

Both.

Byron Pope with Tudor, Pickering, Holt.

With regard to the Latin America region and the sequential improvement in margins there, aside from the guidance of those margins being flattish in Q4 and the typical Q1 seasonality with product sales, I didn't hear anything that would suggest that the margin level that you posted in Q3 for Latin America wouldn't be sustainable, if not steadily improving, as we move through 2014. Is there a reasonable way to think about the margin progression for Latin America?

Yes, there's only, no, you're correct. I did not mean to suggest that it was either one-time or not at all. I think I made the point that Eastern Hemisphere has a lot of catch up to do since the Eastern Hemisphere is bumping around 11% and it used to be 25% so progress in the Eastern Hemisphere is great. We've got a long way to go. I didn't mean to suggest by that, that a 16% in Latin America, we were done. Not at all. Seasonality is one issue, of course, and Mexico timing is an issue, of course, as one of your colleagues asked. All of these are an issue but when the whole year 2014 will be finished, I suspect the margins in Latin America will be higher than 16%. It is progression there also. I didn't mean to belittle that.

Okay, and then with regard to Middle East, North Africa, Asia region, it's a little bit difficult to think through that the top line growth dynamics with the legacy Iraq contracts rolling off over the -- in subsequent quarters, could you help us frame how you're thinking about --?

Well, it is frustrating but of course, it's our fault. We -- the contracts that were taken in Southern Iraq were ill thought out and all I can say is no more. First, and I say this with some anticipation because I don't want to confuse anyone that you understand the revenues of the legacy contracts in Southern Iraq are flushing through the regional revenues for Middle East and Asia Pacific so that -- because they carry no margin whatsoever, ipso facto, they depress the margins of the region. When Zubair is over, let's say, some time end of Q2, or let's just say from Q3, you are sort of free from it or something like that, and that's it. It's the last. If everything stays the same, there will be recovery margins in that region simply because the revenues will go down and of course, if everything stays the same, the margins will be the same and look higher. This is one thing.

Separate and distinct from this, Middle East is healing. We can see it at the country level and at the region level and most of the questions that I was asked was which is the region with the fastest growth? I asked was it top line or would it be revenues? If I had been asked which one would be up the most on a potential basis by -- in terms of margins or just absolute dollars of EBIT, I would have said MENA. Okay?

So MENA is really engaging to a turnaround; part of it is cosmetic, with the revenues of Zubair going away upon completion of the contract and understand something also about these EPF contracts. There's terrible economics and there's no hiding the fact that we're responsible for that, period. That would mean I'm responsible for that at the end of the day, period, but at the same time, the engineering work that was done where the contract is over with today which is Garraf, a Petronas is good. There is -- it is functioning, it's good engineering and hopefully, we'll do the same thing on Zubair, then that's it. We'll be out of that business and then cosmetically, the numbers will be better but also the underlying business in the Middle East is fueling a rise in profitability. Dharmesh, add something.

Sure, so when it comes to Asia, Middle East, Europe and SSA, the market tends to be multi-year tender markets and to some extent, between the projects we have already won and the projects that are starting up in the second half of this year, the prognosis for next year is very good based on the work we've already won. Like Bernard said, it's down to execution in those markets. From a margin perspective, the focus this year has been on the core areas which is Well Construction, Formation Evaluation and Lift and Completions and those contracts tend to have better margins. So you have a good story growing, both from a growth perspective of revenues and margin expansion in those geo markets because the predictability of the market, the meaning that they're multi-year tenders. And if you win them, you know that the revenues and the profitability will be there.

Rob MacKenzie with Iberia Capital Partners.

Bernard, wanted to come back to your comments on North America, specifically your guidance that you expect it to kind of grind slowly higher, to paraphrase your language, next year. We've heard some fairly bullish comments out of a number of folks, particularly those heavy in the Permian but also out of the Eagle Ford and some of the other oily plays. Are your comments more of a function of your geographic mix in the US or do you think there's a difference of opinion here that we're hearing?

I don't think either one of the above. I think that absolutely, you find some plays which have some very strong outlooks depending on who the operators are there. I think when you add up all of the budgets that will be approved and spent to the United States in 2014 by all of the operators and whether it's in the Permian, Eagle Ford, Bakken, you name it, you will find that the numbers are positive year on year but it's not a very high number. We are, as you can imagine, with our oil and with our lift footprint, we're on every single unconventional play you can think of and we're very large. If you look at the size in North America of the Weatherford and you isolate Canada, we are very large in the United States so we participate in every single play to the fullest, so it's not so much that we're here, we're not there.

There's some judgment here overall. Overall, the numbers will be positive in expenditures. It is not going to be a very big number. That's my only observation. Therefore, the -- what you will find is within that play, some particular reservoirs will get more activity, others less depending on the perception of the attractiveness of the play and that will depend on the operator. That's all.

It's not a negative year at all. It's just isolating just a particular sub-segment of the United States and to say this, we'll do great, may very well be true but when you are someone of our size or our peer size, you will be everywhere. Therefore, your comments are going to, will basically apply to the overall market. Okay?

Sure enough. Thank you and my follow-up question comes back to the DSO question. I think it was Dharmesh that said DSOs, excluding Latin America, were 70 days. You also mentioned that the large receivable you expect to collect from Q4 to first half of next year of about $150 million, once we get that collected where should we expect DSOs to be?

Dharmesh will answer the question. Dharmesh, why don't you just go through the metrics again? But --

Sure, so first of all, $150 million in the department from Q3 to Q4 and then total deferment from Q4 to the next year is $350 million.

So $150 million for Q3 to Q4, $350 million from Q4 to first half of next year. All things -- everything else remaining equal, okay?

And if you -- if we had collected those amounts this year, our DSO would have been right around what we had forecasted, which is 75 days for the full year at the end of the year, so that should give you just round figures about $40 million a day. You can do the math yourself but that's what it ends up being.

I think we have one last question and then I will bring the call to an end since we're running out of time.

Marshall Adkins with Raymond James.

Let's stay on North America, if we could. You gave us some good overview of pressure pumping, it's down but stabilizing. On the artificial lift side in North America, is the shift from vertical to horizontal hurting you or helping you?

I have a novice view. Dharmesh, would you answer it?

It's definitely helping us. What you have in unconventional is that you shift from verticals to horizontals is bigger sizes of pumping in it, more -- the dollar spend per well is higher. So it helps you both in terms of the absolute dollar amount per well that is spent and also the kind of technology, it requires better technology that we have that fits our footprint. So for example, the Rotaflex pumping unit which we have which is very, very good for horizontal wells, we have seen a 3X increase in the total amount of Rotaflex sales in the last three years, as horizontal market has -- also been more horizontal over the last three years.

Marshall, Rotaflex is a very long-stroke, reciprocating pumping. As a result in horizontal wellbores, you'll have accumulation at the heel of the wellbore and then the long stroke allows you to lift more per unit of time at a lower cost, much lower cost, and very low maintenance cost. Okay?

Right, so maybe fewer pumps but the pumps you're selling are a lot higher margin?

Yes, they are for sure and actually, better business for our clients. We have to reduce the cost structure for our clients.

Right. A follow-up question. It sounds like you're gaining share in the Formation Evaluation directional drilling market and that's certainly is the hottest area that it appears you're in North America. Is that a fair assessment? Am I reading that right?

Yes, you are. We are getting market share in that segment.

It has to do with the -- it's not execution really more. It's actually the technological choices we made some years ago. It's -- we have a proprietary method of delivery on the one hand. We have a proprietary set of sensing on the other. Sensing as in relevant for the types of reservoirs that are now being exploited.

And the other thing that I was saying besides drilling services, we don't talk about it on the call, is much of our [Lifts] business is also doing very well in North America.

Thank you very much. Thank you, and this will close the call and thank you everyone for your time and attention.

Thank you. This concludes today's conference call. You may now disconnect.