Weatherford International PLC (WFRD) 2014 Q2 法說會逐字稿

Good morning, my name is Lori and I will be your conference operator today. At this time, I would like to welcome everyone to the Weatherford International second-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. Three prepared comments, starting off with Krishna, Dharmesh and then myself, then the Q&A session. Krishna?

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 and non-GAAP financial measures. Please refer to our second quarter press release for the customary caution on forward-looking statements and the reconciliation of non-GAAP to GAAP financial measures.

My comments are going to address the second quarter of 2014 and then the outlook for the rest of the year. Earnings per share for the second quarter before charges was $0.24. This represents an 85% sequential improvement and a 60% improvement compared with the second quarter of last year.

Revenue of $3.7 billion for the quarter increased 3% sequentially and 8% excluding the seasonal impact in Canada while operating income margins before R&D and corporate expenses improved 280 basis points sequentially to 14% and rose 350 basis points versus the second quarter of last year. Eastern hemisphere margins improved 576 basis points sequentially.

North America margins increased 271 basis points to 15.2%, reflecting very strong activity in the US on land, more than offsetting the spring breakup impact in Canada. US margins improved 75% sequentially on a 15% revenue increase.

The Europe/Caspian/sub-Sahara Africa/Russia region margins increased by 873 basis points to 16.8%, reflecting a strong seasonal recovery in Russia activity, increased market share in West Africa and a record quarter for Europe.

Middle East/North Africa/Asia region margins increased 273 basis points to 9.7% with improvements in the Gulf countries. These improvements were only partly offset by a reduction in Latin America margins which were down 488 basis points to 12.4% reflecting lower margins in Mexico with depressed activity levels at the impact of strikes and pay increases in Argentina.

Our core business revenue of $3 billion was up by 3% sequentially and up 1% year over year. Excluding the impact of the seasonality in Canada, our core business revenue grew 8% sequentially. Our non-core business revenue of $718 million increased 6% sequentially, but was 21% lower year over year.

Underlying the overall margin of 14%, our 16.5% margin for the core businesses versus 15.1% in the first quarter and a 3.5% margin for the non-core businesses versus a negative margin of minus 5.8% in the first quarter. I will now state the sequential progress of our core business margins for the second quarter. Formation evaluation margins improved 292 basis points to 8.4%. Well construction margins improved 149 basis points to 25.3%. Completions margins declined 148 basis points to 22.1%, artificial lift margins improved 16 basis points to 17.6%, while stimulation margins registered a 643 basis point improvement to 2.8%. Both completions and artificial lift margins were adversely affected by the seasonality in Canada.

Our non-core business margins also recorded improvements in the land drilling rig, pipeline and specialty services, drilling fluids and testing businesses.

The beneficial impact of cost reductions on the results for the second quarter was $0.07 versus $0.01 in the first quarter.

The tax rate in the second quarter was 22% reflecting improved profitability in certain revenue-based tax countries and net favorable settlements in discrete items that happened to coincide in the second quarter. The impact of the lower tax rate was offset dollar for dollar by higher R&D spend this quarter and increased foreign exchange losses.

Moving on to cash flow now, during the second quarter, our free cash flow from operations was a positive $59 million, and our net debt decreased by $101 million. This included the payment of $60 million of cash severance and restructuring costs associated with our downsizing program. Working capital balances reduced by $91 million, driven mainly by strong customer collections.

Cap Ex of $344 million, net of lost-in-hole, reflected the investments needed for new incremental core business contract wins around the world, principally in North America, Latin America, sub-Sahara Africa, Europe and Asia. These investments will show up in terms of increased revenue and profitability in the coming year -- coming quarters and well into 2015.

Moving on to the cost reduction efforts now, there has been tremendous progress on reducing our cost base. We have trimmed the RIF program down by 608 to 6,024 positions, which is expected to realize $430 million of pretax savings on a annualized basis. This reduction in the RIF program recognizes and anticipates the expected activity increases across Latin America, West Africa and the US in the second half of the year.

Of this number, 5,430 positions, or 90%, have been eliminated to date. In addition, 60 operating locations have now been identified for closure and 26 were shut down before the end of the second quarter with the bulk of the remaining closures to be concluded in the third quarter. The combined savings from the slightly reduced RIF program and the location clean up exercise will yield $500 million in pretax annualized savings.

Now, moving on to the outlook for the third and fourth quarters. Before I go further, let me mention that the outlook comments include all of the businesses, core and non-core, as we are not sure of the exact closing dates of the divestment transactions. As these transactions close, we will seek to provide revised guidance, although the impact of the divestitures on our earnings per share is not expected to be material.

The third quarter of 2014 will see an increase in revenue in all regions led by North America, where Canada's recovery from the spring breakup will augment continuing increased activity in the US. Latin America, where our operations in Argentina, Brazil, Mexico and Venezuela will improve. Middle East/North Africa/Asia-Pacific, where we expect to gain traction in the Gulf countries, China and Indonesia and Europe/Caspian /Africa/Russia where our principal growth will come from offshore Russia and West Africa. Overall, our revenue growth will be driven by market activity and contract wins in our core businesses. Aided further by our cost reduction efforts, our third quarter earnings per share should range between $0.33 and $0.36.

In the fourth quarter, the combination of increased market activity, contract wins, incremental cost savings and our latest internal rolling forecast, gives us enough confidence to offer guidance for the fourth quarter at between $0.43 and $0.47, giving us a full-year earnings expectation of between $1.13 and $1.20 per share. Our tax rate for the second half of the year will range between 25% and 30% with the full-year tax rate converging to between 25% and 28%. This will be dependent on the geographic mix of earnings.

Moving on to free cash flow now. In 2014, we expect to generate $500 million in free cash flow from operations. Excluding the fine that we paid in January, $253 million, our first half free cash flow from operations was a negative $380 million, which is consistent with seasonal patterns. This means we would need to generate a positive $880 million of free cash flow from operations in the second half of the year. We expect this to happen with improved earnings and the recovery in working capital days after a seasonally challenged first half with strong customer collections across Latin America, more than offsetting capital expenditure which is forecasted to be $100 million higher at $1.35 billion for the whole year, reflecting additional investments in our core businesses that address new contract wins.

Finally, let me give you an update on the status of our divestiture program. The sale of the pipeline of specialty services business is expected to close in the third quarter. We also expect the recently announced sale of our rigs in Russia and Venezuela to Rosneft for $500 million to conclude in the third quarter. As a result of this transaction, we recorded a non-cash charge for the impairment of the carrying value of the rigs in Russia and Venezuela of $121 million net of tax. The combined EBITDA of these rig operations in 2013 was $56 million on a revenue of $699 million.

For the first half of 2014, the combined revenue and EBITDA were $305 million and $7 million respectively. Given these financial results, and more importantly, the geopolitical risk attached to relatively immovable assets in these countries, we believe this is a reasonable value for the sale of these rigs. This transaction has also made the remaining drilling rig business more attractive to investors as the geographical footprint and the average age of the remaining fleet, which is 7.7 years, make it potentially the newest international land drilling rig fleet on the market. The work to carve out the remaining land drilling rig business is also ongoing and on track for a 2015 IPO or spin.

We continue to make progress on the divestment of the testing and production services business, and we expect to be able to announce the transaction before the end of the third quarter. The US drilling fluids business is expected to be marketed in the third quarter, and we should be able to conclude the sale before year end.

Given all of this, we believe we can achieve the target of $1 billion in divestment proceeds and cash during 2014. Coupled with operating cash flow improvements in the second half, we expect net debt to reduce to $7 billion by the end of this year, resulting in an improved debt to capitalization ratio of about 45%. With that, I will now turn the call over to Dharmesh to comment on operations.

Thank you, Krishna, and good morning, everyone. Second-quarter performance shows initial progress of the core, cash and cost program outlined earlier this year. Operational accomplishments in each of the three areas for the quarter are as follows:

Cost. Reduction in force is 90% complete and will be substantially complete by the end of the third quarter. Once concluded, we will have achieved our objective of a ratio of three revenue generating employees for each support employee in the organization. We remain on track to deliver a step change in revenue and profits generated on per employee basis by the end of the year.

We have completed identification of all the exit locations where we are not competitive and will continue to work diligently to complete the exits in the next 90 days. From this point forward, operations will focus on areas where we provide differentiated products and services to our clients. The net result will be a continued improvement in margins in the quarters ahead.

Some relevant comments on the five core segments:

Artificial lift. The second quarter saw continued operational improvement in artificial lift product line. Demand increased across all the different forms of lift as witnessed by incoming orders in manufacturing. Highlights for the second quarter are: a continued increase in demand for the high-volume Rotaflex pumping unit. Demand increase is due to activity in unconventional wells and also the previously discussed ESP replacement program. Manufacturing capacity will increase by 100% during the third quarter to meet the increase in demand. A 25% increase in our rod guiding capacity during the second quarter includes the demand caused by the shift to horizontal wells.

Over the past year, volume has increased by 450%. The patented automated rod rotator has followed the same path of growth. Integrated with Weatherford's comprehensive software packages of Well Pilot and Field Office, it will now offer a comprehensive production optimization solution.

Well count on our industry-leading software platform, Field Office, now stands at more than 480,000 wells. To put this in perspective, there are approximately one million artificially lifted wells in the world. Field Office is now the industry standard for monitoring and optimization of artificially lifted wells.

Weatherford has also launched a comprehensive production optimization consulting service and is now actively engaged with our customers to help optimize their production from unconventional wells.

Weatherford has invested over $300 million in new plants over the past two years. Manufacturing capacity, coupled with lift and production optimization technology and ever-increasing demand for lift optimization will drive growth in artificial lift in the quarters and years ahead.

Completions. While completions is the smallest of the five segments, it is one the most profitable and also has the largest growth potential. The second quarter saw progress on two important fronts. In the US, we started advanced field trials and commercialization of the TruFrac composite bridge plug. The product is distinguished by the virtual absence of any metal parts, resulting in a 50% reduction of mill up times.

In addition, the TruFrac can handle deployment speeds in excess of 500 feet per minute, an improvement of 70%, further reducing the total completion time of the well. After successful field trials in the second quarter, we were able to secure a significant commitment from one of the larger operators in the Permian Basin. We will be rolling out this advanced plug technology in other basins during the remainder of the year.

In the eastern hemisphere, the focus is on commercialization of game-changing technology for offshore completions. These leading technologies reduce rig time and operational risk associated with wireline interventions. Using radio frequency identification, also known as RFID, we created a platform for intervention-free offshore completions. We have launched the technology and are currently conducting commercial field trials with several customers. We deployed this technology back to back on multiple wells for a major operator, resulting in installation saving times of three days, or in excess of $1 million per well. The system also accelerates time to first oil while increasing the safety and reliability at the same time.

Formation evaluation. Margin improvement was driven primarily by increased market share gains in the US, coupled with increased global technology uptake. We have seen strong demand from our client base for answer products associated with their reservoirs that allow for collaboration in addressing the industry challenges of improving production and tight economics in unconventional reservoirs.

On the drilling side, we have seen strong demand for our Revolution Rotary Steerable technology as we continue to deliver real results to our customer base. We recently delivered the fastest well for one of our leading clients in the Eagle Ford with our Rotary Steerable and LWD technology.

Utilizing unique answer products such as FracAdvisor, a decision making software that helps plan placement of wells and optimize the fracturing program, Weatherford is collaborating with our clients to build a roadmap for intelligent completion design and optimal use of stages and fracturing horsepower to improve production. We have combined our LWD Wave suite of technology with FracAdvisor in the Eagle Ford and the Bakken to drive overall reservoir effectiveness. Multiple 10,000 foot horizontal sections have been drilled with advanced LWD sensors and then used as inputs to FracAdvisor. Our clients have reported significant production improvements and reduced completion and fracturing costs utilizing these technologies.

Stimulation. Stimulation margins in the second quarter improved significantly by over 640 basis points over the first quarter. Profitability improvement was driven by overall market activity and the results of the efforts we made to repair our pressure pumping business. We have deployed all horsepower, and 80% of that is now in 24 hour operation. At the end of the quarter, we have 200,000 more horsepower working today compared to the beginning of the year.

Industry challenges relating to the availability and transportation of proppant also impacted Weatherford in the second quarter, but we have been able to minimize the effects on our operations. The international pressure pumping business is healthy, and we will continue to grow by pursuing and investing in the right opportunities.

Well Construction. The second quarter saw a continuation of contract awards and increased activity. In the first half of 2014, we have increased the deep-water market share of several of the product lines such as liner hangers and tubular running services in our well construction portfolio. Margin growth in the second quarter in Europe, Caspian, Russia and Africa was driven by seasonal factors and the continued contribution of the high profit margins of the well construction product portfolio.

As for offshore developments, nothing is more crucial than the ability to maintain the integrity of the well throughout its lifecycle. The stability of the well bore is not only important to maximizing recovery, but also to ensure reliability and safety of the system. Weatherford's well construction portfolio has an industry-leading market share in deep-water and will continue to benefit from both activity and market share growth in this segment.

There are significant projects in the startup phase in different parts of the world. The growth attributes of this segment will shine in the quarters ahead. In summary, all five core segments have a very good prognosis for revenue growth, margin improvement, or both.

In non-core businesses, rigs showed very good margin improvement in the second quarter over the first quarter. Improvement was driven by seasonal factors and the completion of startups. During the first half of the year, operations has completed 10 new startups.

Once the divestiture is completed, we will have a young, modern rig fleet. Excluding Mexico, the primary work that remains is getting 11 rigs on contract. Demand is robust, and we anticipate getting these few idle rigs contracted and working in the quarters ahead.

Cash. Improvements in operational cash flow remain a key focus area for operations. Almost 84% of our global inventory is now under automated controls for replenishment. As the revenue grows, inventory management will become more effective and efficient. Improvement in asset utilization is a priority area for operations. All aspects of invoicing, technology, timeliness, accuracy and standardization continue to get focus and attention from the leadership team. Capital efficiency will continue to be a focus area until we reach our long-term target of 100 days of working capital.

The entire organization is aligned and committed to future progress on core, cash and costs. Specific areas of focus for the operational organization are a step change in service quality and technology commercialization. We are starting to engage with our customers by completing structured quality reviews on a regular basis. Feedback has been positive so far, and I am confident that it will lead to improved business results in the quarters ahead.

Through acquisitions and organic development, we have a huge technology portfolio that has not been commercially developed and that will be a focus area for operations in the quarters to come.

Thank you, Dharmesh. The quarter was progress, the quarter was solid. We had the highest -- the Company's highest increase of operating income in recent history. That's exceptional in of itself, particularly a second quarter which is traditionally weak at Weatherford.

The quarter was all about operations. Operating income increased by $0.11 Q1 to Q2. Corporate and Interest were near identical from one quarter to the next. R&D and other, which are essentially non-cash foreign exchange fluctuations, were $0.015 higher. Taxes were $0.015 lower, a just about perfect offset.

Q2 was earned at the operating level. Within operating performance, North America was up $0.05, eastern hemisphere up $0.09, and only Latin America took a step back, down $0.03.

We expected a little more activity in Latin America and a little less in Canada. In the aggregate, they both netted themselves. The quarter otherwise went as planned.

Canada matters a lot to us. It represents, on average, about 20% of North America. In Q2, Canada went through its seasonal breakup. It wasn't as sharp as in the prior year. The weather patterns were normal for a change, and also, and this makes for the bright side of the Canadian moon, Q1 hadn't been as strong as in prior years. As a result, Q1 on Q2 comparisons were not punitive. Revenues declined sequentially by 35% in Canada, and earnings declined by about $0.05. The region held decrementals at 34%, which is good performance.

The US had a very strong quarter, one of which we believe will become a pattern of continuous improvements over the next 18 months. On 15%, 1-5, increase in revenues, and with over 50%, 5-0 percentage point, incrementals, the US delivered close to a $0.10 increase over Q1. The improvement was across the board with formation evaluation showing the greatest incremental margins. With all the core product lines contributing, none were left behind.

The eastern hemisphere did also better across the board. All of its regions contributed with no exception. I would particularly recognized sub-Sahara Africa and Europe as high performers.

Margin improvement was the quarter's highlight. Seasonality had its role in Europe, Russia and parts of Asia. But also contractual discipline, cost cuts and operating focus paid early dividends. As you know, we are closing unprofitable commitments and de-emphasizing uneconomic plays. We are focusing on what is the most competitively attractive.

All is driven by our core and the natural markets where they can play the best. The eastern hemisphere has a long runway of improvements ahead. Our strategic and operating plan is well defined.

Latin America was the only sequential decline. Revenues were flat, but product and service mix wasn't favorable. Much of the issue was adjournment of business from Q2 to the second half. Some of it happened in Argentina, Colombia, Brazil and Ecuador for either local idiosyncratic reasons, for example, Colombia's elections, or related events.

Mexico deteriorated further. We are -- in Q2 we are at half of last year's activity levels and barely break even. We believe Q2 will be the low point for us in Mexico. This also matters. Mexico is an all-important play and a natural focused market for us. The prognosis for Latin America in general and Mexico in particular is better for Q3 and Q4 and even more so in 2015.

You've heard comments on the global reduction in employment from both Krishna and Dharmesh. I won't add to it. All I will point out is all regions benefited. In simple terms, the cost reductions more than made up for the Canadian breakup, you ought to look at it that way.

If you peel through the cash movement, what will be apparent is continuous progress in capital efficiency. Given seasonal trends in typical first half of the year, the relevant analysis is Q2 2013 on Q2 2014 year on year. That comparison shows a swing of almost $400 million. We consumed about $300 million in Q2 of 2013, we generated over $100 million in Q2 of 2014.

CapEx was as expected, disciplined and focused. Inventories and DSI increased seasonally, but did so modestly. Receivables DSO improved. Combination of managed capital intensity and improved profitability, we turned free cash flow positive in the second quarter which historically never happens.

Also, and this is a purposeful use of cash, we took down DPO on payables, which is a necessary step in an environment of rising activity. Our payables are the lowest they have been in many years. This ties with cost initiatives for procurement.

In summary, as I said at the beginning, Q2 was progress. With an operating income of 14%, we have both headroom and momentum. Our core operating income margins for the quarter was 16.5%. These margins should move to 20% before the year is over to accomplish the progress we seek this year.

We are wedded to our direction. It is simple and summarized by the three words core, cost, cash.

Core, we focus on our product lines, nothing else.

Cost, equate cost with the word efficiency, all manners of efficiency. Cash, equate cash with the word returns, all aspects of returns.

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

The outlook for the balance of the year is healthy. There are no regional exceptions. All regions will progress, albeit at differential rates. The US and eastern hemisphere will continue to improve strongly in the second half of the year. In both cases, revenues and margins are expected to rise. In the US, we expect particular strength for us in the Permian and the Rocky Mountains. The other reservoir plays are also constructive in their outlook. Amongst the core, lift, completion and formation evaluation will shine.

In the eastern hemisphere, we expect the Gulf countries in the Middle East, the North Sea for Europe, Indonesia and Malaysia for Asia and much of the offshore and deep-water plays of sub-Sahara Africa to show the greatest gains. Within the core, well construction will show the most progress.

Canada will recover seasonally. The improvements will be solid and still very much around the oil segment.

Latin America will be stronger in the second half with the start up of contracts in Brazil, recovery in Colombia and renewed gains in Argentina. Mexico will start a slow process of resurgence from what amounts to very low levels in Q2.

Latin America revenues, operating income and margins will close the year materially higher than in Q1, paving the way for 2015 with the combination of a much stronger Argentina, Brazil and Columbia, joined by a rapidly strengthening Mexico. Latin America will not be a laggard in second half of 2014 and even less so in 2015.

In the prior conference call, we suggested Q1 on Q4 operating income margins would likely rise by about 400 basis points. We have a 280 basis point move from Q1 to Q2. We expect to exceed the original 400 basis point target Q1 to Q4. Operating income should close the year out close to same 400 basis point improvement, but from a Q2 base rather than Q1 as originally anticipated.

Our leverage will come down. By year end, out net debt should be at $7 billion or less, a combination of free cash flow and asset sales. We view in 2015 next year as a year in which we delever substantially more.

Focus on the core and emphasis on returns do not forsake organic growth; quite the contrary. The core has very strong secular growth attributes and is blessed with low capital intensity. Based on our industrial and technological position together with a full grown infrastructure, we are in a position of harvest. We needed unencumbered focus and clear direction. We have this. The priority is now execution.

Operating execution will match technological capabilities. This is our focus. Although growth rates will accelerate in the second half of 2014, the absolute numbers initially won't tell the whole story on what the core can do. Aside from the gradual peeling off from our total revenues, the non-core businesses as they are methodically divested, there is also a purposeful shift in our core revenues. You can call it an upgrading of revenues or just picking selective markets and applications we want to focus on and harvesting those. The net result will be a significantly higher level of operating margin and a sustained strong growth rate in revenues to follow. That is what we are building for this year, 2015 and the next five years.

2014 is a year of financial turnaround. It will be followed by years of industrial and financial harvest. Our operating direction serves two immediate objectives, delever and step change in profitability. 2014 has and will show material progression on both. Performance in Q3 and Q4 will pave the way for 2015. After a year of clear financial turnaround, we view 2015 as the year we deliver the capabilities of an unencumbered focus on what we do best and only what we do best.

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

(Operator Instructions)

Your first question comes from the line of Jim Crandell of Cowen Securities, your line is open.

Good morning, and congratulations on a good quarter.

Thank you

My question revolves around just getting a bit more granular on the revenue growth in the margin improvement over the second half of the year. Do you think it's reasonable to be looking in at Q3 and Q4? First of all, Q3 is high single-digit overall revenue growth quarter to quarter and then in Q4, outside of North America, which might flatten out seeing that similar growth in Q4 on the revenue side?

I think so, yes.

Okay, so and then could you look at your margins. You had talked about in the release I think of margins approaching 20%. Is that after R&D and corporate expenses and could you -- that's before

No, no. That's before. We expressed the regional operating income before R&D and corporate. R&D and corporate, you see it anyway, so you can adjust it. It's 14% of before R&D incorporated, it's just under 11% after, this is in Q2. Presume that R&D and corporate stays the same, you can adjust easily what 20% would give you.

Okay, and could you give some rough commentary on your margin expectations by region by as an exit rate for 2014?

Well, actually, they are what is in simple terms -- the modeling could be done offline, but they are remarkably similar. I think eastern hemisphere, Latin America and North America, the active rate actually would tend to -- with a few differences, will tend to coalesce at about the same leave. I'll leave it at that. Given the fact that as to differences today, you can understand which ones are going to move the most between now and Q4. But in Q4, they are coalescing at the same level. I would also point out that in happier times the last big (inaudible) for us on a -- the margins, eastern hemisphere, Latin America and North America were about the same. They all peaked around 24%, 25%. Again, on the same basis, pre-corporate and R&D

Okay, and just one last follow-up Bernard, is there any risk of not closing the Rosneft deal? Or any concern over sanctions and how that might affect your business with them?

I think there is -- until things are closed, there is always concern on any deals. There isn't a specific concern on Rosneft at all on closing the deal. It is rather straightforward, it's procedural. This is the first statement, I think it should happen this quarter, this is the first thing. Sanctions I think are relevant for all of us. So, we abide by sanctions very carefully, both the content and the spirit of the sanctions. They do not affect the transaction. It is a cash transaction, so it basically -- it is held harmless when it comes to sanctions. Future sanctions, look, I cannot speculate on that. I think it would affect the whole industry. In summary, we expected close the Rosneft and pipeline as a normal course of action

Okay, that's great, thank you

Your next question comes from the line of Jim Wicklund of CSFB, your line is open

Good morning, gentlemen

Morning Jim

It was clearly an impressive quarter, and the guidance for the rest of the year is probably even more impressive. The one thing that struck me, Bernard, is you're talking about the eastern hemisphere has a long runway of improvement ahead, and most of the large-cap companies are operating at record revenues and record income already. I'm tying that is to something, Krishna, you said a while back that when you came to Weatherford there was more technology here than you had expected. And Dharmesh Mehta, went to a nice little litany, going through the world and the market segments, and I swear you guys talk more about cool technology that I've heard you talk about before. Is a lot of the improvement over the next year or two, especially in the eastern hemisphere, going to be the result of aggressive bidding or improved technology at good margins?

Look, I think first of all, the longer the timeframe you take, the more technology becomes relevant. Right? This is the first thing. Second, just looking at absolute numbers, so at the operating income level, eastern hemisphere is around 13% or something like that in Q2, right? I -- when you peel back in 2008, our operations were not as good as they are today. The [standard] technology was not as deep as it is today. Our infrastructure is better today than it was then, our focus is better today than it was then. I would argue our management is better today than it was then.

We were at 24% in eastern hemisphere (inaudible) 13% minus 24% is 11 differential. I'm not suggesting we will go from 13% to 24% overnight, I'm suggesting there's a lot of self help to get done in eastern hemisphere. This is the first simple financial perspective. With respect to the exploitation of technology and what we intend to do over a period of time, I will turn to Dharmesh for his comments.

I think, Jim, I would say that the technology portfolio definitely has a very strong role to play as when I said in the growth in the quarters ahead. What is really driving the growth is a combination of applying the right technology in the right geomarkets in a very structured and methodical way. Simply put, I would say the execution efficiency on a broad front that will drive the growth in eastern hemisphere. There's some significant markets, like Angola that's just now getting back into it. That will also have a role to play. We are underrepresented in some markets, that will be a factor. And methodical execution on a broad front will be another factor that would drive long-term growth

And I'll close with philosophical comments, If you think, Jim, what -- and I don't want to belabor this, I'm told I should not belabor it because people are tired of hearing it. But if you go through the process four, five years of self-destruction, the whole business of commercializing technology goes away. The happy news about us is that in that period of time of self-destruction, we never stopped the technology train, ever. We continue to develop, acquire, develop and spend money on technology without commercializing it, and we also didn't go after a number of different markets precisely because we were highly distracted.

When I use the word unencumbered focus, what I'm referring to, specifically what Dharmesh is describing is the freedom, the ability the focus on essentially harvesting what we have. We're not talking about acquiring anything, we're talking about harvesting what we have. We have too much. The reason why Krishna said when he said when he joined is specifically because he was amazed by what we have, and we are not actually commercializing. Which in part you can say is awful, but it's part of the functioning of the -- that period of time which I refer to too often of self-destruction, okay?

That's very helpful, thank you, Bernard, thanks, guy,

Thank you, Jim

Your next question comes from a line of Ole Slorer of Morgan Stanley, your line is open

Yes, congratulations, you gave it a good quarter. And no point in belaboring the guidance for the second half, it's very clear, it's very crisp. But the -- I suppose the only Achilles' heel left in your product offering is pressure pumping, although the improvement sequentially was impressive. Specifically, do you see a scenario where this division catches up with your overall margins?

I think first, for us, pressure pumping is not our specialty, everyone knows this on the call. Our specialty is lift, our specialty is well construction. I would argue our specialty is also completion of formation evaluation. It doesn't mean pressure pumping doesn't belong, it just means that this is not what we're known for. This is number one.

I would have to say that the emphasis on the domestic pressure pumping is not so much the grow it; it's to become far more efficient at high-quality. To the degree that we are successful there, without perhaps the handicap of startup costs and so forth and so on that are peers may have, actually the domestic side should do increasingly well. When you focus on execution and quality and efficiency, you keep the clients happy. That's item 1. Item 2, you don't have any distractions, you tend to do really rather well. And as the margins on the domestic pressure pumping around the low, although they're much improved, as Dharmesh highlighted, we should actually pick up some nice numbers there.

Internationally, Ole, we intend to grow that. International is doing well now. But the short answer is that we see no reason why the international margin should not be held in good standing versus the rest, midpoint of the margins of our core internationally. Domestically, they're clearly not. Krishna gave you the numbers, we are not positive operating income is about all you can say. It's not bad, it's an improvement. That one's going to go up because of our focus, and so not going to be aggressive at all on the expansion. But we are committed to the quality and the operating execution. So, you should expect the domestic side to rise a little bit with the market and probably rise easier for us than others because we have no distractions. Indeed, it will never represent a large part of what we do, fair point, but it will not be also a handicap

Backing into the margin guidance of 20% that you're giving and adding back R&D and G&A and the all the rest of it, it looks like it translates to about a 15% overall EBIT margin.

16% is actually a better number, but let's not quibble on it because you should knock off about 3% to 4% in between. But let's not quibble on it, 15%, 16%, yes.

When we look out to 2015, the improvements this year have been easy to identify, extremely -- I'm not saying they've been easy to execute, but they've certainly been easy to identify, next year maybe less so. Let's say in a flat to pricing environment internationally and with the kind of disciplined growth that you're now targeting, where geographically and by product line do you see margins lagging and leading in 2015?

That's a difficult question, particularly on a conference call. But I would say that if you remember the few comments I gave on eastern hemisphere, we're 13%. We were for, not only -- not just one day, and we're not as good of a Company then as we are today. I really do want to underline that point. We're at 24%. We're at 24% Latin America also at that point in time, incidentally. The progress that we can make, both in eastern hemisphere and Latin America, which Latin America was around 12% or so, but it was a tough quarter for them in Q2. But they both have a lot of move up, not because of pricing particularly, simply because we are -- we -- it's hard to believe you can do so much with self-help. But you really can, and the first phase of what we harvest is all about self-help.

Dharmesh mentioned Angola, for example. Not to pick on one country, but there have a country where we essentially did not exist for a variety of reasons. It's a natural market for us in terms of the well construction offering offshore and deep-water. This is a fast example. I could say the same thing about Malaysia, I could say the same about Indonesia, I could say the same thing about lot of markets around the world, and that's pulling out of places where honestly, although one could have a vision of doing better over the very long term et cetera, et cetera, et cetera. It was too much work for too little return.

When I talk about the notion of returns, I'm not talking only about return on capital employed, I'm talking about return on time, return on risk, all these sorts of things. We are very religious about this, and as we pick our fights in different markets, you will get actually results that are differentiated from market movements. That's the self-help bit, and Krishna wants to add to this.

[Fuller] you can end the stage of future without the non-core business once we get them the vested. If you look at the margins that we are already making on our core businesses and the trajectory of improvements in the core business margins which we said we would approach to about 20%. And that's what we are left with around the world, it's not a big stretch to imagine that the entire Company would be at that margin going forward into 2015. This is going to be an overall improvement, but certainly where the non-core business are heavily represented and they get divested, being low-margin, the resulting core businesses you'll see the margin guidance quite rise quite genetically

Would it be possible to see the fourth quarter exit margins represent the overall annual margins for '15, or would that be too bold, given the seasonality?

No, Ole, that would not be a good conclusion because we would still -- in the fourth quarter, we would still be carrying some non-core businesses

I'm talking about excluding non-core

No, I think there is some more growth attributes going on into '15. Our prognosis is that as we get additional growth in international markets where we are underrepresented, given our efficient cost base, we should see margin expansion right across the eastern hemisphere going to the '15 (multiple speakers).

This is not the same kind of growth that we used to talk about many years ago, this is very selective growth

Thank you, Bernard, okay (laughter) (multiple speakers).

Thank you

Your next question comes from line of Angie Sedita of UBS, your line is open

Thanks, good morning, guys, and I echo the congrats on the quarter.

Thank you.

Could you talk about your business lines and what you're seeing in pricing across your business lines, and along with that specifically, artificial lift? I'm sure you've seen that Schlumberger has acquired roughly 12 rod-lift companies, and both Baker and Schlumberger are developing new lift technologies for the US shale market. Clearly a core market for Weatherford. Could you talk about your long-term strategies for artificial lift? How you're going to protect market share and where you are seeing pricing across your product lines?

First, I -- we are not seeing much pricing uplift in artificial lift, that has nothing to do with movements of new players in and out of the marketplace. There are some movements, pricing that are selective, particularly around rod-lift positive, but it is not a big factor. It hasn't been a very big factor in some quarters, this is the first thing. Second, this is a question that deserves a much longer answer, but I would just say this; we are at this point represented from an automation standpoint in just about one well out of two worldwide in the lift world. That means we command a position of being able to be the brains of lift on one well out of two in the world. Which means that frankly, whether we are talking this form of lift or that form of lift where enormous amount of intelligence, which is a position which is normally held by our larger competitor in other fields.

There's one that we build over the years and one that we intend to harvest. It is -- we are moving really fast -- very fast ahead in this business of being more of a provider of production efficiency than just a provider of mechanical tools. And we are uniquely ahead to be able to get that done. We do not underestimate the capability strength of not only Schlumberger, but also GE (inaudible) which are formidable competitors. No doubt about that.

With respect to developing forms of lift that will displace this and displace that, I think everything that is being developed is interesting and useful, and they all have that place. Lift was the first (inaudible) developed almost 100 years ago at what was then EDI and now Weatherford, I can tell you that the day when rod-lift will eliminate ESP is not about to come. The day where ESP will eliminate the rod-lift is not about to come. Both of them together with gas lift and hydraulic lift and so forth have that place. And the evolution of the technology will continuously mean that some of them are better dedicated in certain reservoirs, and that's that. They will tend to take share here and they lose share somewhere else, which is what I've seen forever.

I think you have to be pretty much in all forms of lift at above all in automation. And artificial intelligence, to be able to really understand what can make a difference for your clients in order to really have an impact. Most of them, in particular mechanical widgets that do this and will do that. And I'd like Dharmesh may want to add to it

The one additional complexity in lift now is really addressing the challenges that are being posed by the unconventional reservoirs. The production decline rates are significant enough in the first 12 to 24 months that with other proper automation and sophistication optimization solution, any particular lift form will not last a very long time. There's some additional challenges besides just what was historically the challenge in artificial lift. Position and optimization puts us in a good shape here.

That's very helpful, I appreciate the long answer. And then as an unrelated follow-up, can you talk about the land rigs that are left in your portfolio and what the options are? It would seem that it's too small to spin off as a separate entity, point number one. And then number two, given what's happening in Iraq, is it fair to say that nothing can occur until that situation improves?

No, not really. I think -- first of all, I think I saw the fleet is 115 or so, which is, I think, the largest international land rig fleet, I think. So, no, it's large enough, and in revenues and so forth and so on, it's large enough to be on its own without -- I think that's a fair statement. Although stuff with capital markets is inside that, but I suspect it's large enough by far. And then most of the rigs are very large rigs and also very young rigs. The fleet is less -- between seven and eight years old on average, which is remarkably young. So, this is the first thing. It's a very high quality fleet.

I think with respect to Iraq, we have seven land rigs in Iraq which, if things don't stabilize, we will export out of Iraq. And definitely the exporting and the reassignment to different markets will be a positive. So, you're right to highlight that, but it doesn't really have any -- it doesn't stop in any way or form the divestment of the land rig operation. It would not be for anyone in that situation, by the way. But so yes, we have to do that depending on what happens in Iraq definitely, but it's just a piece of the puzzle. I would also say the land rig market internationally in general is becoming stronger. And I think there is a developing shortage of equipment, which all this makes it for an interesting situation.

Okay, fair enough. So, the profitability of those rigs is high enough to justify as a standalone today.

It will be, Angie it will be by the time -- the time of divestment is conditioned by two things, one is having a full year of audited statements and so forth and so on so that on a calendar year basis, that we can properly have this particular business be presented to the investing public, this is item 1. At the same time working diligently in order to improve the efficiency and profitability. Equipment is in fine shape, so that's basically it.

Great, thanks so much, turn it over

I think given the time, we will take one last question if there is one, and we will close the call. One last question, please

Your next question comes from the line of Jim Crandell of Cowen, your line is open.

Thank you. Bernard, over the past year, you've signed a couple of very interesting agreements with [sign a pact] and Rosneft. And they're, of course, different. But to what extent do you think that alliances with major NOCs could be a key driver of your international business going forward?

I think -- well, I think in general NOCs are more likely to expand the level of expenditures over the next three to five years. It doesn't mean the IOCs are not important, they will always be important as many independents are important. Particularly in North America they're all-important. But the Eastern hemisphere in Latin America the NOCs are the most important, therefore, being particularly useful and recognized as such by any NOC is a positive for oil field service company, particular people like us. Doesn't have to be (inaudible) doesn't have to be Rosneft. But any NOC, particularly the ones that have large budgets, I see (inaudible) as a large budge, Rosneft as a large budget, I could come up with half a dozen others where we seem to have a privileged relationship. Not a monopoly, but privileged relationship, I think it's a very useful position, I would say strategic position to have, yes. Very important

Just a quick follow-up. Bernard, when do you see the delta, the meaningful move upward in Mexican business for Weatherford?

I think the second half of the year will be better than the first, simply because the first was so difficult. For no other reason than our client is holding back on expenditures while the central chapters of the reform are being legislated, which is understandable. So, I expect the second half to be materially better than the first from a client perspective and therefore, for us. Expect '15 to be far better than '14, and then '16 to be far better than '15 I'm not being Pollyanna-ish, I'm just being actually -- this is an informed view.

So, it's not a -- you hit a spot and then you see a dramatic acceleration, it's more steady growth (multiple speakers)?

It is that but it is also the -- from a Pemex perspective, I think the rate of increase '14 on '15 and '15 on '16 will be very healthy. Very healthy. And it is purely a question of knowing what one can work on and be able to then deploy the budget, which will be considerable. It is a very, very, very interesting situation. It is one which is a long-term play, but a very strong long-term play. And I won't even go into the issue of international capital coming to Mexico, which is a separate issue, very encouraging

Quick last question, Bernard. You were hurt in sub-Sahara Africa for a period of time because of FCPA, and it seems you are now regaining market share in addition to the growth in the market. Do you still have a ways to go in the regaining market share (multiple speakers) part of it so that you will see strong -- stronger than -- well above, let's say, industry growth in that market?

I think that's a fair statement. Also think we're not regaining market share, we were never allowed to have market share. So, it's actually worse than that. Or put another way, we have more to gain than people realize. It is a natural market for us, absolutely natural market. Given our work construction and the strength, think, where do we have well construction and applications that matter offshore the border? What's our strength? Well construction. Are we present there? No. Why not? Variety of reasons, including the one that you mentioned. That's it. End of story.

So, you're talking mainly about PRF and managed pressure drilling?

All of the above.

Okay, good, okay (inaudible) Bernard.

Thank you to everyone, and we will close a call now, thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.