Weatherford International PLC (WFRD) 2014 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 2014 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

As a reminder, ladies and gentlemen, today's call is being recorded. Thank you. I would now like to turn the conference over to Mr. Bernard Duroc-Danner, Chairman, President, and Chief Executive Officer. Sir, you may begin your conference.

Thank you. Good morning, everyone. We will go through the same structure as we did last time, which is Krishna will say a few words, Dharmesh will, and then I will speak and then we'll open it to questions afterwards. Krishna, why don't you get started?

Thank you, Bernard, and good morning, everyone. I would like to remind our audience that some of today's comments may include forward-looking statements, reflecting Weatherford's views about future events and the potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to materially differ from our forward-looking statements.

Our comments include non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures, are included in our first-quarter press release. My comments are going to address the first quarter of 2014 and then the outlook for 2014. The reported net loss on a GAAP basis for the first quarter of 2014 was $41 million, or $0.05 per diluted share.

After-tax charges for the first quarter were $140 million, which included $71 million of severance and exit costs related to our workforce reduction and the shutdown of loss making operations operating locations in certain markets; $47 million associated with our legacy lump sum contracts in Iraq, principally the Zubair EPF contract; $22 million of professional fees and other costs, largely associated with our divestiture program, year-end income tax material weakness remediation, and our previously announced redomestication activities.

This is the last quarter we will incur cost for the remediation of income tax material weakness. Non-GAAP earnings per share for the first quarter before charges was $0.13. Revenue of $3.6 billion for the quarter was down 4% sequentially and 6% lower than the first quarter of 2013.

Reflecting mainly three issues, the impact of activity stoppages due to unusually severe winter weather conditions in Russia and on land in the United States, normal seasonal weather-related declines in the North Sea, China, and Australia; and reductions in activity in Latin America, driven by our capital discipline actions in Venezuela and completion of certain projects in Mexico.

Our core business revenue of $2.9 billion was down marginally by 3%, both sequentially and year over year. Our non-core business revenue of $678 million was down 9% sequentially and 19% lower year over year. In the first quarter, our operating margin before R&D and corporate expenses was 11.2%, an improvement of 115 basis points sequentially and flat versus the first quarter of 2013.

International margins improved 278 basis points sequentially, mainly in Latin America, which was up 782 basis points, reflecting the end of legacy lower margin contracts in Mexico and a more profitable activity mix in Argentina and Brazil.

Europe/Caspian/Russia/Sub-Sahara Africa margins improved 127 basis points, principally from Europe and Africa, more than offsetting a weather-related deterioration in Russia. Middle East, North America, Asia Pacific margins improved by [91 basis points] (corrected by company after the call), with the recovery in Saudi Arabia more than offsetting seasonal weather declines in China and Australia.

North America margins declined 129 basis points reflecting serious winter weather-related stoppages in the US on land, more than offsetting a seasonal improvement in Canada. Underlying this overall margin of 11.2% for the quarter, out of 15.1% margin for the core business and a negative 5.8% margin for the non-core businesses.

The unusually severe winter weather conditions in Russia and the US impacted first-quarter earnings per share by approximately $0.04. Added to that, was the impact of currency movements of $0.01. The beneficial impact of cost reductions on the quarter was $0.01. The tax rate in the first quarter was 28%. This was in line with expectations.

Moving onto cash flow now. During the first quarter, our free cash flow from operations was a negative $439 million, and our net debt increased by $673 million, close to our expectations. Some of the key cash items were one-off in nature and include the payment of $253 million to settle the FCPA/Sanctioned countries' investigations and [$132 million] (corrected by company after the call) of cash severance and restructuring costs. While we will continue to incur cash severance and restructuring costs over the next two quarters, these amounts will reduce over time.

Working capital balances rose seasonally by $284 million with reasonable increases in both accounts receivable and inventory balances, reflecting higher revenues in March, with DSO up four days and days sales inventory up two days, coupled with a reduction in accounts payable to secure better terms from suppliers. CapEx was contained at $286 million or just under 8% of revenue, in line with our previous guidance.

Moving onto the cost reduction efforts. There has been an impressive focus on reducing our cost base. To date, we have already identified 6,632 positions for elimination, which is expected to realize $456 million of pre-tax savings on an annualized basis. Of this number, 4,307 positions, or 65%, have been eliminated already.

We expect to conclude the bulk of the cost reduction program by the end of the second quarter. In addition, actions to shut down 20 loss making operating locations began in the first quarter, with another 30 such operating locations slated for closure in the second quarter [and third quarter] (corrected by company after the call).

Now moving onto the outlook for the second quarter and the year. The second quarter of 2014 will see an increase in revenue in all regions, with the exception of the seasonal slowdown in Canada. Revenue growth will be driven by market activity and contract wins.

Coupled with our cost reduction efforts, these improvements should allow us to improve our reported second quarter earnings per share between $0.21 and $0.23 per share. We expect to see a significant pickup in activity in the second half of the year based on contractual wins and Dharmesh will provide additional color in this regard later.

We also fully expect that our management, at all levels, will complete the cost reduction efforts and refocused on growing the core business. Additionally we will benefit from larger cost savings, the combination of market activity, contract wins, cost cuts and the latest rolling forecast gives us confidence to reaffirm our most recent earnings guidance of between $1.10 and $1.20 per share for the year.

This assumes a full year of contribution by both our core and non-core businesses and we will change our estimates as the non-core business over the course of the year assuming the earnings contributions of the divested businesses are material. This guidance includes about $0.30 from our cost savings actions, which will become -- which will really become visible in our results from the second quarter onwards. $0.25 out of the $0.30 cost savings will come from the headcount reduction, with the rest coming from location shutdowns and other areas.

Our tax rate for 2014 will range between 25% and 30% and will be dependent on the geographic mix of earnings. In 2014, we will continue the good work on capital discipline that began in 2013 and expect to generate $500 million in free cash flow from operations, with the recovery in working capital days after a seasonally challenged first quarter, and contain capital expenditure, which is forecasted to be $1.3 billion, or approximately 8% of revenue.

Finally, let me give you an update on the status of our divestiture program. We have focused divestiture teams working on preparing data packages for each business. In March, we announced the signing of definitive agreements to sell the first of our non-core businesses, Pipeline and Specialty Services, for a total consideration of $250 million, including $241 million in cash and $9 million in retained working capital. We expect to close this transaction as soon as we obtain regulatory approvals.

We have advanced well into the process of socializing with potential buyers, the second of the four non-core businesses, namely the testing and production services businesses. The work stream for the other two business divestitures are on schedule and we expect to complete these during the second half of the year. The work to carve out the land drilling rig business is also ongoing and on track for a first quarter 2015 IPO or spin.

Coupled with these operating cash flow improvements, and expected cash proceeds from our divestiture program, we expect net debt to reduce to $7 billion by the end of 2014, resulting in an improved debt to capitalization ratio of about 45%. With that, I'll now turn the call over to Dharmesh to comment on operations.

Thank you, Krishna. And good morning, everyone. The first quarter was a very constructive quarter and established a solid foundation that will drive revenue and earnings growth for the remainder of the year.

Accomplishments for the quarter are as follows: significant progress was made on the cost reduction initiative during the quarter. From an operational perspective, the focus was to increase efficiencies and reduce costs at the same time.

We have found out we support our workforce reduction through similar support structures in small, medium and large countries. This [allows Weatherford] to stay efficient as we grow again. [Weatherford's plan of] eliminating 4,307 positions to date has been significant. The benefits will come in the quarters and the years ahead.

The main area of focus has been to identify locations where we do not have a competitive advantage and then we exit from some of the businesses in those locations. The [underperforming operations] in some of those locations. They will mark an imminent future losses but it will also allow the organization to incur intensity and focus on areas where we can grow our profitability.

After a comprehensive review of our global sales footprint, 50 such locations have been identified. Action to shut down 20 locations began in the first quarter, with the rest planned to be shut down in the second quarter. While this restructuring actions will involve some one-time severance and restructuring costs, the end result will be a leaner and fitter company better equipped to deliver revenue growth and better margins.

And last but not the least, Weatherford's first quarter, after a comprehensive review, we had one of the strongest pipelines of projects and contracts in recent times, and they span across almost every major region of the world. The resulting growth in the core segments will have a material impact with profitability as the year progresses.

Some details for each geographic area are as follows: The US. All core segments in the US, while it continued to progress in the first quarter and the March exit rate for revenue and profitability was one of the strongest in recent history. The margins were driven by an increase in activity and elimination of weather-related impact. We expect the run rate to get better as activity increases in the US.

Our newest generation Rotary Steerable systems delivered well in record time for customers in three different share movements. based on technology, performance and contracts awarded, our mission to evaluation is expected to show very strong growth for the remainder of the year.

The Pressure Pumping business remains on track. We have more than 90% of our horsepower contracted and higher on track go all the way into horsepower under contract by midyear. Artificial lift and completions also progressed well in the quarter and are expected to grow for the remainder of the year.

Canada had a solid quarter. The performance was good despite the currency impacts. Completions, formation evaluation and artificial lift all did very well in Canada. Completions growth was driven by a successful rollout of several new technologies for the thermal completions marketplace. In summary, North America will have a very strong year in 2014.

Latin America. 2014 will be a transition year for Latin America. There are a number of many factors. The first quarter performance was indicative of those factors. Having said that, the following improvements in Latin America are worth highlighting. Margins will be better in 2014 as we replace lower margin or loss making contracts with more profitable contracts.

The total volume of work in existing contracts is in excess of $3.5 billion, well construction and formulation evaluation will have the best growth during 2014. Venezuela activity will continue but at reduced levels as we are getting paid for products and services from the Venezuela joint ventures.

Weatherford also has an extensive footprint in Argentina and will benefit from the increase in unconventional activity in Argentina. On the revenue lag, when compared to 2013, Latin America margins will continue to be better than what we had originally planned.

Middle East, North Africa and the Asia Pacific. Despite seasonal factors, margin improvements were good in the first quarter and will continue to improve as we move into 2014. Primary factors driving margin improvements are as follows: Asia performance was good in the first quarter and will continue to improve as the year progresses due to new contract wins and implementation of well construction contracts won in 2013. The first quarter alone, well construction contracts were in excess of $100 million.

Middle East, North Africa improvements will be driven primarily by the performance of the Gulf Countries. In the first quarter, we completed the first strategic technology products in those countries. The first successful commission guide with has been opened with a geosteering well and the first application of managed pressure drilling on a deep high pressure gas well.

With these projects, we have lined up good commercial contracts. Gulf countries have a small volume of contracts in all core segments and revenues from the core segments in the fourth quarter of 2014 will be 40% higher when compared to the first quarter of 2014.

Focused effort for Middle East. We will also be able to exit loss making locations primarily North Africa and Iraq. During the first quarter, we exited 30 locations and will complete all location exits in the second quarter. In Iraq, we have finished the last of the two drilling projects. We also delivered gas on the early production facility project during the first quarter.

Our only remaining early production facility project, Zubair, is now 80% complete. There are $64 million in contingencies and there are $250 million in potential claims from us still pending on the project. We are in active negotiations to bring resolution to all the potential claims for the project.

While Asia performance has been solid, business performance has been challenged primarily due to North Africa and Iraq. That will change this year. The combination of revenue growth from core businesses and elimination or losses by exiting businesses will deliver a significant margin expansion in recent years.

Europe/Caspian/Sub-Sahara Africa/and Russia. The only growth in this region will be driven by the following factors: activity increases in the UK/North Sea, coupled with delay projects coming online will result in higher revenue growth in Europe. 100% of our forecasted 2014 revenue is already contracted.

Sub-Sahara Africa had the best quarter in history from revenue and margin perspective. The first quarter was also a good quarter for new tenant awards for Sub-Sahara Africa. During the first quarter alone, we have secured contracts in excess of $300 million across several product lines.

While we are rushing the work for some of these contracts, it has already started and revenues and profitability will increase as the year progresses. Russia revenue in the first quarter was significantly impacted by weather-related activities and currency weakness.

During the first quarter we are seeing a significant number of contract wins in stimulation and formation evaluation. Recent wins, coupled with existing contracts and well constructions, will drive revenue growth in quarters to come. In summary, strong revenue growth in the core segments will drive profitability in the region as the year progresses.

Moving onto working capital. The first quarter of working capital metrics indicate seasonal trends that are typical of the first quarter of any year with one exception. Inventory balances had the smallest growth in the first quarter when compared to prior years. As inventory increase in subsequent quarters, we will see a meaningful reduction in DSI as the year progresses. Capital efficiency remains a priority for the organization and discipline around working capital and capital allocation will continue.

What we accomplished in the first quarter is reflective of the Weatherford's culture and is indicative of what the organization can and will accomplish. Most of the heavy lifting related to cost cuts and exit of business locations is now behind us.

For the remainder of the year, the entire operational will be focused on delivering the contracts to US and Canada and growing the core segments. This will allow us to deliver a material improvement in the margins and profitability in 2014 when compared to 2013. I will now turn the call over to Bernard.

Thank you, Dharmesh. I had my own synthesis to the first quarter. I'd make the following comments:

North America's quarter was lower than expected in parts for weather issues. But weather wasn't the whole story. In our own Weatherford-specific dynamics, the employment reduction took place early in the quarter. This was very distracting until the process was over at quarter's end.

Separate and distinct from weather and Weatherford dynamics, US activity in January and February was asleep, for lack of a better term, and for no discernible reasons. The transition to March was all the more intense. Activity in our own successes rallied very strongly in March and that's since gone from strength to strength. Our US run rates in March exceeded all our expectations, a combination of self-help and strong market reaction.

Latin America had lower revenues coming out of Mexico and Venezuela but much higher overall margins. A large contract with thin profitability was completed, lowering Mexico's revenue by about 30% for the year. The remaining business mix in Mexico at higher margins. Rising performance in Argentina, also to be credited for higher operating income.

Eastern Hemisphere went through a seasonal low although very sharp in Russia and particularly low in the North Sea and some areas of Asia Pacific. The sharp seasonal downturn masked positive financial developments. As Dharmesh observed, we made progress in Sub-Sahara Africa and to a degree in MENA. In fact Q1 showed record financial results for SSA. Sub-Sahara Africa was never much a factor for Weatherford. It is becoming one.

Sequential margins to the Eastern Hemisphere rose from Q4 to Q1 which is encouraging. This was ex both our large headroom in the Eastern Hemisphere given very low levels of margins coming out of 2013, but it also reflects the seas of the financial turnaround in SSA and MENA.

The global reduction in employment was implemented companywide. Two-thirds of the reductions were done to date. By the end of Q2, this quarter we're in right now, essentially all employment reductions will be completed. And the process will be brought to a close. This will be in record time.

If you peel through the cash movement, in the quarter in Q1, there will be apparent is continued progress in capital efficiency. Given strong seasonal trends in first quarters, the Weatherford analysis is Q1 2013 on Q1 2014. That comparison shows capital investments and inventories are two most critical capital segments with continued and improved performance year on year.

At the same time, we took down DPOs on payables which is a necessary positive operating steps in environmental rising backlog, our receivables rose more than in Q1 2013, which reflected an unusually strong month in mid-March. This is healthy and we'll see a return quickly into cash.

The US government settlement, severance costs payments and the funding to completion of the last EPF contracts, all are also cash events in Q1. They were expected and are either behind us or have a short life remaining. Severance funding will be completed in Q2.

Our EPF funding is essentially to year end, not beyond. The last EPF contract in Zubair has been a major distraction and a financial burden. It is a management and judgment error. It is almost over. We are progressing towards completion.

We are at a specific 80% of project for completion. Projects on the ground in Q1 were measurable and tangibly visible. This is happening in a grindingly methodical process but it is progressing nonetheless. We expect no or only transitional EPF movements on Zubair until completion of the project and the resolution of our potential variation order claims with our clients.

We plan the quarterly cash in cash expenditures in Q2, Q3, and Q4 to completion similar to Q1 and followed by corresponding large cash inflow with payment of our invoices upon completion of the project. To reiterate prior announcements, Zubair will be the last EPF contract out of Weatherford. We have not and we will not engage in any other turnkeys of any kind in southern Iraq. The terms of engagements for us have changed.

Adding to the various considerations above, Q1 was constructive and very busy. Our results were modestly ahead of us First Call estimates. Much was accomplished. This is all good. The level of profitability in Q1 is still too low. We must urgently drive a step change in our profitability. Our direction objective is to accomplish this fasts, be reliable and sustainable.

You know what our direction is. It's simple and won't change. But to summarize by three words: core, cost, cash.

Core: we focus on our product lines: well construction, formation evaluation, completion, artificial lift. We divest of our non core. We dedicate all our resources on people selecting, people training, future technology development, asset-based commitment, and quality of execution. If we grow our core, our future growth will be strong and disciplined and selective. We can achieve all three.

Cost: We equate cost with efficiency., It isn't only the reduction in the workforce. It's quality of contracting and contract management all the way through to management for procurement. We calibrate the opportunity we buy today in excess of $8 billion products and services. There is also the underlying logic behind the recommended domicile move from Switzerland to Ireland; it is all cost and efficiency driven.

When you add the long-term pieces, there is room for large gains. We will pursue efficiency in all aspects of our business, operational, supply chain, financial, and administrative. We have lower hanging fruit to harvest; arguably, we have fruit on the ground.

Cash: Equate cash with the word returns. The culture of returns is central to our decisions, all our decisions. We will generate free cash flow each and every year. We delever. Free cash flow is a key management metric driven by rising margins and capital efficiency.

As we close all legacy issues, and we are close to having done that, performance will speak for itself. The combination of asset divestiture is our own focus on creating a stronger and leaner company. It will produce a powerful and positive long-lasting effect on our balance sheet. It will help drive a step change in our profitability.

Nothing else. The direction won't change. The entire organization is committed.

Performance-wise, I will reiterate what Krishna shared with you because we strongly believe it to be accurate. For this year, 2014, we believe the earnings outlook for the Company to be in the $1.10 to $1.20 range.

Free cash flow from operation is to exceed $500 million. Our internal objectives targeted between $0.5 billion to $1 billion in divestment proceeds by year end. The delevering 2013 on 2014 must therefore exceed $1 billion. These expectations for 2014 will not change.

The outlook for the balance of the year is simple and straightforward. Comments will focus on our remaining core. The actual percentage in rise -- percentage rise in revenues, or margins for Weatherford as a whole, will all be also influenced by timing of the non-core divestments.

Upon divestments, the arithmetic is simple: The company's revenues will decline and margins rise. Again what follows here is the prognosis for the remaining Company's core Q2 through Q4. The US and Eastern Hemisphere will carry the year of gains over 2013. Both revenues and margins are expected to rise throughout the year. Both Eastern Hemisphere and US will have strong years, with improved financial results quarter after quarter.

Although we modeled Eastern Hemisphere as having the strongest performance through Q4, I myself do not know which of the two will be on top. Latin America will be relatively flat at the operating income line until sometime in the second half with a start up of contracts in Brazil, recovery in Colombia and more gain in Argentina.

Latin American revenues, operating income and margins will close the year higher than in Q1, paving the way for 2015 with a combination of much stronger Argentina, Brazil, and Colombia joined by a resurgent Mexico. Taken in isolation, overall revenues for the core will rise year on year, this is 2013 on 2014, by about 10%.

Q1 on Q4 operating income margins will likely rise by about 400 basis points. Core operating income margins should close the year set at 19% and may test 20%. Performance in Q3 and Q4 will pave the way for 2015 profitability. 2014 will be the first year of financial and operating turnaround. It won't be the last.

We have three and only three objectives in mind: delever, derisk, and step change profitability. 2014 will show material progression on all three. We have our direction, commitment and focus. It will be driven. It will not change. With that, I will turn the call back to the operator for the Q&A session.

(Operator Instructions)

Jim Crandell, Cowen.

Thank you. And thanks for all the information. Bernard, I missed some of your comments there toward the end. I didn't get them. But what is your expectation now for run rate for operating margins by the end of the year? And how would that vary between the different geographies?

I think overall, this is now referring to the call, let's assume that we're only talking about the core. The timing of the non-core is difficult to know. By the -- by Q4, the core overall should go to 19% -- 19% or thereabouts operating margin and by operating margin so that we are clear on the numbers being used, are always before corporate and R&D. Corporate and R&D represents roughly 3% of revenues. Okay? Krishna, do want to add to that? Krishna may want to add to that.

Yes. Thanks, Bernard. Overall margins for the business, including non-core businesses, we're forecasting to reach between 16% and 17% in the second half of the year, which includes that -- the 19% for the core businesses that Bernard --

I think the comment that I added in my -- in the few words that I read -- 19 days, a case to be made internally, that both Dharmesh and I look at which is the core will be around 19%. It may test 20% but then again, we'll see.

And I'm looking at the revenue improvement Q1 to Q4, Bernard?

Sorry?

I said -- and you also commented on I think the revenue improvement for the core businesses Q1 through Q4?

Actually on that one, I just gave a year on year for the call, which is even simpler which is the core will grow roughly at 10%, 2013 onto 2014, year over year overall, which is reasonable given what we have.

It seems, Bernard, that by the taking into account cost cutting, your margin expectations, the increase in revenue, that it's reasonable to think you could be at a $2 a share run rate by the fourth quarter?

I'll let Krishna answer that.

I think we will be in good shape to get close to that. Yes.

But our internal forecast points towards that direction. Absolutely.

Great. Great news. Okay. Thank you very much.

Thank you Jim.

James West, Barclays.

Hello. Good morning, gentlemen.

Good morning, James.

First, Krishna, in terms of the divestiture program and where we stand now obviously, one sale or one announced sale, it sounds like it's going to be probably coming soon. For the two businesses that you intend to do best of by the end of this year, I believe and correct me if I'm wrong here, but probably gain assets for sale was the completion of standard one financials for the businesses, as that been done at this point? Or have those been shared with potential buyers?

What we have not shared that publicly but the comment process is ongoing for some of the businesses, principally the wellheads and the drilling fluid. They've already been carved out for businesses we are divesting. Is your question more about the discontinued operation? Is that what you're asking here?

Well, you guys -- I think it to be there in two businesses like the ones that you just mentioned that you're divesting that in order to line up the buyers, they want to see the financials from those operations, the carve out process. So I guess -- what I guess that you're saying is that, that's already occurred.

Yes, yes, I mean, obviously, we are showing a carved-out financial set of statements to potential buyers for the business that we are socializing, absolutely.

The only way to answer your question, James, is that remember there are four businesses altogether being sold and one is sold already which is pipeline. Now well testing. Then, of course, the other two you mentioned, which is wellhead and drilling fluids which are smaller.

In all four cases, the carve outs have been done ahead of time. The one that is, I think, still ongoing and will be ongoing for the balance of the year, together with the process of audit and so forth, will be the rig business. That's a bigger animal and will be realistically -- will not be dealt with and whether it is a spin-off, an IPO or a variation thereof, it will not be dealt with until sometime early next year.

Okay, okay. Fair enough. Understood. And on the Latin American margins, I'm surprised at least my estimate showed the upside significantly; I think probably others as well. It sounds like from Dharmesh's comments and your comments as well that, that should -- that those margins should continue.

I guess I was concerned about the one being down in Venezuela or with the lower operations. But it seems like that didn't have a material impact on margins. Is there anything -- am I missing anything in LatAm that drove a better core and we should expect it or is this a good run rate going forward?

Well, I'll give you some thoughts and Dharmesh may add to it. The biggest, biggest, biggest mover in Q1 was actually a drop in revenues coming from the largest operation we have in Latin America, which is Mexico. Revenue dropped by 30% in Q1 versus Q4. That 30% in simple terms -- you couldn't assume it carries very little operating income so revenue down, no operating income moved therefore margins up, big factor.

Second big factor is Argentina. Argentina has grown to where it is now the second operations in Latin America after Mexico. And it's the on the [popular] trail over, in terms of size of Mexico. It overcame not only Venezuela, which has come down, obviously, for the reasons as you mentioned but also it has, for us, overcome Brazil and Colombia in terms of size and margins in Argentina are very good. So that is a second factor.

But thirdly, we have not -- we did not have the headwind of negative contracts in Brazil which some of our peers have and we are in different businesses. And so at the end of the day, the only headwinds we faced in Latin America was the drop off in revenues in Mexico and the fact that Mexico is on a standstill all year and then second, the self-imposed reduction of activity in Venezuela. So as I just told you, it was overcome by all the things that I described and Dharmesh will add some further comments.

Just the other thing I'd like to -- one last comment is, we have an extensive manufacturing footprint in Latin America. And there's been a lot of work in optimizing our manufacturing footprint and that's also contributing because you don't have some negative overhangs of having inefficient manufacturing.

Which is also -- which is actually a cost-driven portion of margins.

Right. Got it. Okay. Thanks, gentlemen.

Thank you, James.

Jim Wicklund, Credit Suisse.

Good morning.

Good morning, Jim.

I don't mean to harp on Latin America, but were there any catch-up payments from Venezuela and Mexico or reversals from reserves in the quarter?

No, no, no. There was no -- I wish there was any catch-up -- I'm afraid not. I think maybe Krishna, you want to address the process of ongoing with PDVSA, but the answer to your question is no. And you will find the margins in Latin America will bop around where they are today throughout the year and it will probably end up a little higher toward the end of the year simply because of the -- we had sought out to well construction contracts there in Brazil.

And the fact that Colombia will return on the second half of the year and that kind of stuff. But then the focus -- it is peak to valley syndrome at all. Krishna, want to comment on Venezuela --

And Krishna, while you do, I'd love to get a catch up on Venezuela, can you tell us what currency translation is being used and how that impacts everything?

So on Venezuela, we are still using on the currency side, Jim, the official rate of VEF6.3 like our peers, because we don't have any -- we don't intend to access any of the other avenues of exchange rate regimes that have been put in place by the Venezuelan government.

But on progress with PDVSA, we're in active dialogue with our customer to engage in a constructive payment program, which will allow us to work on a more concrete footing with the customer going forward. This hasn't concluded yet but the signs are quite encouraging.

Okay. Thank you, Krishna. And as my follow-up, I'll ask both of you gentlemen, what is the thing that you worry about most that could derail all of this over the next 12 months with everything you're doing. What's the thing that you lose sleep over on a Tuesday night?

Well, I would say, Jim, if we were not public, we would not worry as much. What I mean by that is that everything has to work very, very well, so we keep both the credibility and the basically in what we're doing and so that it -- so that would be our biggest worry. If we were private, which I'm not suggesting we will be private, of course, but if we were private, I think day to day is so simple and the drive to explain, to communicate what we are doing has been so intense for the organization.

Never mind Wall Street, it's just the organization, but I think that when people are aligned and this is an organization that can perform, the people who really want the company to do well, it's purely a question of time. It's not a question of whether. Dharmesh, do you want to add to it?

Sure. Jim, a couple of things. I would say it's -- outside the US, there's not a lot of enough sufficient contracts in our pipeline. We had the workers secure their work and most of the core products that we do very well every single day so this is not exotic stuff.

So we're not having to do any massive project integration or any of those things to deliver the revenue and profitability we are targeting. The risk really is the activity -- it's really that we'd stay on this current pace in terms of as strong as Q2 levels, left up to there, or whether it will taper down into Q4. In the last two years, that's been a [runaround]; what happens in Q4.

This year it doesn't look likely but you know the US as well as I do. But If you take US activity out of the equation, you could have project standard delays but there is nothing that's significant or the one project is that significant that it will have material movement one way or the other.

Perfect. Gentlemen, thank you very much.

So Jim, I'd like to add, of course (multiple speakers) -- The ever present geopolitical risk being this large. So this is the only thing out there which can cause everybody -- so to summarize, geopolitics, US and the generic need for us to be reliable. There you have now the triangle of worry.

Thank you guys.

Ole Slorer, Morgan Stanley.

Yes. Thanks a lot. It's very rare to see companies take up this kind of headcount and costs without having some kind of major impairment on the execution capabilities. So could you talk a little bit about the 20 locations that you are reducing, the nature of this, how much of your headcount reduction is to do with this location reductions? And how do you feel confident that this isn't somehow impacting the ability of the core to execute?

Krishna, you want to address that?

Yes. Ole, on the headcount reduction, we have clearly identified by name over 6,600 employees and the execution to date has been very, very strong. Over 4,300 employees have already been integrated and they're out of the Company, which leaves another 2,300 to do.

We have a week by week count of who's going to be intimated in which week and by the end of the second quarter, the rest of the employees will be off our payroll. So we have a very high degree of confidence in the execution of the headcount reduction, Which will give us the perfect incentive.

Now, on the locations, closures, basically, we are targeting locations which do not have any significant revenue attributes. There are locations which have -- we've kind of been hanging onto them with the cost base in place, hoping for more work or trying to get more work, trying to put ourselves into certain markets and with certain product lines.

And what we're doing now is to [fend] those down, consolidate our bases and focus our efforts in the right direction. So there will be some impact of write-downs certainly on the severance and on the closure cost, no question about that. But our margins will improve there substantially because we eliminate losses. Dharmesh?

Sure. So one comment I would make is the majority of the cost cuts are support positions. What we have done is -- and I already basically come up with a template structure for what we want a small country to look like, a medium country to look like, and a large country to look like.

And we analyze what support functions existed in these countries based upon the template, what are the headcount we needed, and then we identified the appropriate measures that need to be taken to get to the right support structure level.

In many ways we are not touching what I would call the revenue generating aspect of the organization as part of the headcount reduction unless like Krishna talked about earlier, he said we are exiting the outlying country of Norway because we don't believe it has a right future in the short term. We would rather go to Ireland than focus on Norway.

But a lot of the focus has been around exiting the support structure and in many ways, I guess that is one of the reasons why we don't anticipate a very strong negative impact or any impact on the revenue or the ability to deliver the core products and services.

I'll give you a last overview, Ole, to add to what Krishna and Dharmesh said. So your point is well taken. But you're really saying is that this business of laying off so many people leaves scars and always does some collateral damage. I don't think anyone of us is saying that is not true.

I would also say this so you have the notion that one can, at the same time, grow the core and so forth is has to come across as difficult because what we're really saying is we're going to retreat and attack the same time. So to be very clear on that, I think the first thing is the reason why we wanted the curtailment to happen with massive internal communication and I do mean massive, Ole, and fast. It's precisely to get the retreat bit out of the way so we can move into next phase. This is number one.

Number two, as Dharmesh has identified, most of the positions, and I mean no disrespect to the positions concerned but most of the positions being curtailed that will be described are as redundant, are layers that grew particularly in the very high, aggressive growth years.

And they, if anything, they probably were an obstacle to the good functioning of operations and so I think we've more than unleashed operation rather than constrained operation.

With respect to the locations, look, we have rough numbers, over 1,100 locations. We're talking about reducing 50. So you do the math. It is this not -- I'm using simplistic numbers here. We're talking about 4% reduction. This is not a big number and these are, by and large, the candidates for shutdown had not been, to my knowledge, ever mandated from the Houston or Geneva.

No. The logic of the turnaround and that's going to be my last point, Ole, the whole notion of turnaround. The logic of the turnaround made it compelling for the regions who identified within their midst a number of locations and business propositions that they knew full well were not sensible, were never sensible. They were overly aggressive. So really, the list and the rationale, if anything, has been held back as we do not take too much risks by -- at the Houston and the Geneva level.

So lastly remember what Weatherford is. I'll step back for a moment. After all these years of growth, et cetera, et cetera, et cetera, and probably overly successful, went through some very hard times. The very hard times is not only felt by the shareholders, they were also felt by the entire organization. In that organization that has stood by Weatherford all these years also understands that now we have to -- now the much of it is behind us; what caused the ailments behind us. Now we must perform.

So people in the state understand the need for a turnaround and for the logic of what we're doing and the fact that we're in a hurry to do it well is completely understood. And so the great endorsement on the part of the organization of what we're doing.

This is not a punishing mandate. It is actually something that the within the organization almost welcomes because it is what needs to get done. Sorry for the long answer.

No. Very comprehensive. And thanks again for helping shed some light on what must be, after all, a pretty difficult process so I'll hand it back.

Bill Herbert, Simmons & Company.

Thanks. Good morning.

Good morning.

Do you guys have handy your core margins by sub-segment and then also contemplating your 19% to 20% exit rate margin, what margin does that imply for each of the core sub-segments? So where are we today with regard to the sub-segments, and where do we get to?

Krishna, if you could give the margins if you can by core segments for Q1?

So Bill, overall margins for the quarter, all the core segments, as we said, was 15.1%.

Got it.

Our production margin was 17.4% for Q1. Formation evaluation was quite low in Q1 because of some headwinds we had in a few countries, 5.5%.

Okay.

Well construction was 23.8%. Completions was 23.6%, and stimulation continued to be negative at minus 3.6%. That gives you (multiple speakers) like one now. As we go forward, we expect overall core margins to grow nicely. We will maintain our own on well construction and completions, in fact, grow them marginally. Production will be pretty solid; stimulation margins will turnaround.

Obviously, with the market conditions and the continuous repair we are doing on the business is growing into the second, third, and fourth quarters. And formation evaluation will also improve as we go forward. The 19% kind of margin --

So let me put it in perspective for you, Bill. Although I think Krishna is reluctant to give you our internal forecast of future margins, which I can understand, although it is all models.

The biggest movers is obviously well construction and completion of production and continue to do well and there are certain improvements that are planned. They're not very high improvements; they're not very, very high. The biggest Delta comes in formation evaluations. And then to -- and then, of course, because stimulation is still negative, it turns positive as there's also a Delta.

Okay.

Unless, I'd say stimulation biggest impact on the weather. More Dharmesh?

Yes.

So Q1 is typical.

(multiple speakers) Q1 is technically low from a stimulation perspective part of it --

But at the same time, just so that he understands that we're not -- I think Bill understands this, we're not Halliburton. We're a pressure pumping Company. It is not revenue wise, the biggest mover, so which -- I know Bill understands that.

No, no, right. Got that. Thanks for -- very much and then more of a conceptual question going forward here, in a world in which you're generating very attractive margins on your best core businesses. You expect to witness any plausible, well-supported improvement in your underperforming core businesses?

And does the overall margin, which is going to be pretty darn impressive, and in a world in which global E&P CapEx is witnessing methodical but hardly cathartic growth? Walk us through the tension between trying to realize growth and preserving your normalized margins going forward.

So a fair question. I'll tell you a little more of the macro of whether -- what the IOC's are doing is tenable from a supply hydrocarbon standpoint. I'm afraid your liquid segment and not the gas segment, which is a different story so set that aside. This is a topic for a different day.

I think that we're very, very aware that we cannot have too high of an expectations of growth internally here because of the underlying market. What we get some comfort in is a function of two things, three things really.

And one is the fact that we have, in our core's leadership and segments of the business, which are very specific which are not one that Wall Street is particularly focused in, and they're not very large segments of the industry but still ones in which we excel and for reasons that have to do with the situations of reservoirs around the world are going to do quite well from the secular standpoint. For example, this business is well integrated, this business is in mature field plays, in general, will see a more generous style allocation of capital then we did in the past, as you could potentially have the pie This is one issue.

The second is, again, remember who you are -- who you are speaking with. We have with the exception of North America, we have the rest of the world highly characterized by market penetration. It's rather low.

We have a very low share of the underlying pie. In fact, by any measurement you take analytically, you will find that roughly speaking, we are where we are in North America, versus where we are internationally, globally our differences. But by one-third in rest of the world, they way we are as a participation of the E&P pie, that we are in North America and there is no reason for that fundamentally.

Yes, there are differences whether you deal with Brazil or whether you deal with a Saudi or whether you deal with Russia, I'm clear the overall bill, there is no reason why we only have a third internationally of what we have in North America in terms of share gain -- share participation. That doesn't mean at all we are in some sort of crusade to gain share of anything else; it just means that we have more headroom.

If you add to that my comments which I don't want to detail too much for competitive reasons, a lot of the segments that we're in, not all, but a lot of the segments that we are in where actually specialist or we are such masters of our destiny and segments where we are pretty much on our own versus large competitors. And this is not an accident.

And so I would put forth to you that your point is absolutely correct. And we are moderating our views on whether we should be striving to get done. You don't hear us talk about 20% per annum and that sort of stuff anymore. We're much more reasonable. W e also don't want to go down the road of doing things to aggressively with poor quality and poor capital efficiency.

Completely clear on this. At the same time, understand that one of the virtues of being smaller and the virtues of being focused that one of the virtues of having infrastructure is that actually it's a little bit easier for us to grow than other people.

Yes. All fair points. Thanks very much.

Byron Pope, Tudor Pickering Holt.

Good morning. Bernard, you mentioned that the Middle East/North Africa, the Asia-Pacific growth was led by the Gulf Countries. Just was wondering if you could share a little bit about which geo markets within that region you think drives the growth? It seems to be a lot of excitement about Saudi and so wondering if you could size through which of those markets will be most impactful to your growth over the next couple of years.

So Byron, it's an easy question. But I'll try to make it a bit more comprehensive of an answer. The kingdom is obviously the place to, quote, Saudi Arabia. Why?

Not only because the intense work on and around maintaining the oil production capacity from the development, the continued development of their excellent reservoirs, as we were showing you showing the run set of issue.

The other set of issues is the development of unconventional shale gas resources in the northwest part of the country, which is a second sort of development in Saudi Arabia. Combined both, there is planned and executed large increases in drilling this year and next year. It is -- so it's a biggest play by far in terms of Delta. This is number one.

I do not want to also forget in talking about Saudi Arabia, the other two large markets and now the third one, which is Kuwait, Abu Dhabi, and even Oman. All three of them for their own idiosyncratic reasons have some very serious expansion plans. The numbers -- in isolation, because of the size of the respective markets, are not as large, in isolation, as Saudi collectively they are.

So that's the other mover. And I think you end up with a tale of two cities when you look at the Gulf Coast which is on the one hand, you have the markets I just described where I think competitive intensity is high, but the growth is also promising.

The quality of business is very high in terms of the types of technological requirements on an operational required requirements but at the same time, margins are good. And it's really quite stable. It's reliable, as reliable as anything could be in our industry.

Then you have the other markets, which I think are more difficult simply because of the nature of the market and that would be Southern Iraq. So it's understandable if some oil service company, in which Weatherford is one, choose to deemphasize Southern Iraq and then on the contrary, emphasize the other ones, which have really an attractive outlook over risk. I've always had good trajectory for risk, so attractive outlook and there's other, Byron, through the end of next year, possibly the following -- possibly into 2016. These things take time.

Thank you.

I think for one last question and then we'll have to close the call because we're a little above the hour.

Robin Shoemaker, Citi.

Thanks, Bernard, or maybe Dharmesh, I wanted to ask if you could give us an update on artificial lift in that -- as a product line in terms of growth and margins? We've been hearing a lot on recent conference calls about some solutions that other companies have come up with for low productivity wells, which clearly is one of your core areas. So I wonder if you could comment on that and also if there's any changes in the business since the ownership of one of your largest competitors in rod lift has changed hands.

All right. So I think one of the common themes we are hearing and we're talking about is the one part of artificial lift we are not doing which is ESP. This is how ESP is not being used for the surety lines. If you listen to the -- if you look at the efficiency of what's been publicized and what's publicly available, the efficiencies of that system at 20% at $50 a day, barrels a day, and they're running by the 40% at the (inaudible).

In a lot of the systems, it's at 60% efficiency. If you look at the cost of savings in ESP, it depends on this fundamental downhole, the fact that the wells production changes from 20 barrels a day over the year and then it may astonish that we change the pumps out and the cost -- the electrical cost required

There are many, many factors that make it highly unlikely that you'll have a large-scale replacement of RFPs with ESPs going on. And I will say if I really one customer that you talking about moving something like that, we also have several customers in our backlog of artificial lift in the US, but the moving over from ESPs, the more drawn out it is.

So this a battle of ESPs, is it a new twist on ESP? Is it a new twist on RFP? I think that battle will rage on and we'll finally decide but if you look at the fundamentals of what ESPs are all about, look at the fundamental economics of running large-scale wells. You look at the work order and the wells servicing costs, it's hard to define what really the basic style starts you off, on what I think is the right thing from a business perspective and all artificial lift perspective.

I have a closing comment and Robin, this is a fun question because this is the very first business that we developed 27 years ago in this Company. What is wonderful about ESPs is that they have a motor downhole, because they can essentially a tremendous power to move through it but what's terrible about ESP is they have a motor downhole because it's vulnerable and breaks.

Now I will just say this. I think it is to a degree and during to find now the humble field of artificial is getting so much press after all these years. So in a way, it makes me happy. We take the competitive pressures certainly from GE very seriously because we should.

Because they're a very, very good company and obviously, and a very large company, et cetera. So we take it very seriously as we should assume that this is something that will make all of us more competitive. Respectfully, it could be a replacement of this somewhat pump by that somewhat pump. Time will tell. I would -- I think the smaller diameter ESP in the horizontal section of a shale well is not a bad idea.

Smaller diameter ESP in a whole northern section of a shale well has challenging economics and with what I've just told you, has been true, is true, will be true. Having said this, there will be horses or courses; there will be applications where it does work. And I wish the company that developed it good fortune in getting that product out to market. And I'll leave it at that. That's --

Thank you, Robin. With that, I think we'll close the call because we are a little bit over the hour. Thank you everyone for your time.

Thank you.

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