Weatherford International Ltd. ( WFT)

Q3 2011 Earnings Conference Call

October 24, 2011 8:00 AM ET


Bernard Duroc-Danner – Chairman, President and Chief Executive Officer

Andrew Becnel – Chief Financial Officer


Jim Crandell - Dahlman Rose & Company, LLC

Ole Slorer - Morgan Stanley

Angie Sedita – UBS

Brad Handler – Credit Suisse

Bill Herbert – Simmons & Company

Joe Hill – Tudor, Pickering, Holt & Company

Mike Urban – Deutsche Bank

James West – Barclays Capital



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 Third Quarter 2011 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.

Bernard Duroc-Danner

Thank you. Good morning everyone. As usual Andy will read his prepared comments and I will do the same. Andy, please.

Andrew Becnel

Good morning. Before moving on to our prepared comments on and Q&A, I would like to remind listeners that this call will contain forward-looking statements within the meaning of applicable securities laws, and will also include non-GAAP financial measures. A detailed disclaimer related to our forward-looking statements is included in our press release which has been filed with the SEC and is available on our website at or upon request. Similarly a reconciliation of excluded items and non-GAAP financial measures is also included in our press release and on our website.

Moving on to our prepared comments. With the third quarter of 2011, we reported fully diluted non-GAAP EPS of $0.26 before excluded items, and fully diluted EPS of $0.25 on a GAAP basis. The non-GAAP results is a $0.09 improvement over the prior quarter and at the top end of our guidance. Items excluded were $ 7 million after tax or a penny made up of $6 million of after tax severance and exit charges and approximately $1 million of after tax expenses related to investigations. Sequentially the field accounted for the entire earnings uplift, growing the operating income line by $104 million or $0.10. The field contribution would have been $0.11 but for an $8 million, negative FX impact, we had to absorb from Barrett, as a result of their currency related book losses on their outstanding debts. Below the line cost were flat sequentially despite $20 million of our own FX losses due a strengthening of the US dollar. In total FX related book losses were $28 million for the quarter.

In increase in effective tax rate which came in at 29.6% cost of penny compared to the prior quarter, primarily due to a change in mix where we generated income. On a consolidated basis, revenue increased $321 million sequentially or 10.5%. An advanced $843 million or 33% compared to Q3, 2010. Consolidated EBIT before Corporate and R&D was $525 million, with operating margins at 15.6%. This was a 180-basis point improvement compared to Q2. Incremental margins company-wide were 32.4%.

Operating profit in North America improved $109 million sequentially as revenue grew 20.5% or $275million. Margins expanded 360-basis points to 21.7% on incrementals of 39%. This North American performance was partially offset by a $5 million retreat in operating income internationally. While Latin America delivered better than expected results, it was not enough to entirely offset the $8 million negative FX impact related to Barrett’s and declines in the Middle East, North Africa, Asia Pacific region. The strongest international region performance came from Latin America, where operating income advanced $20 million on $94 million of revenue growth. Mexico, Brazil and Venezuela all posted improvement while product line participation in the optic was widespread.

Europe, Sub-Saharan Africa, FSU posted a relatively flat performance, excluding the negative $8 million FX impact from Barrett’s. Barrett’s has debt denominated US dollars on which they recorded a $20 million loss due to strengthening of the dollar against our functional currency, the ruble. We picked up approximately 40% of this book loss on our operating income results for the region.

In the Middle East, North Africa, Asia Pacific region, revenue declined $45 million. The deconsolidation of three joint ventures in the region made up $25 million of the revenue decline. For the balance, Algeria declined due to the expiration of contracts, lower mobilization of equipment out of the country pending addition tenders weighed on margins, as did the negative swing in the rock profitability and continued operating losses in Libya.

During Q3, we generated EBITDA of $713 million with D&A running at $288 million. This is the third highest quarterly EBITDA performance in our history. The only better quarters being in the second half of 2008.

Capital expenditures were $349 million for the quarter net of $28 million of lost in whole revenue. Year-to-date capital expenditure were $1 billion, net of lost in whole revenue or 11% of annualized revenue.

Net debt increased approximately $301 million this quarter to $7.3 billion. Operating working in capital metrics improved across the board with DSO’s dropping from 89 days in Q2 to 85 days at the end of Q3. DSI improved five days from last quarter to 82 days. Our internal targets for yearend remain at 78 days and sales outstanding and 73 days of sales and inventory. With respect to inventory, we believe that achieving our internal goal would be difficult given our strong market prognosis for 2012. However, we still expect progress on inventory metrics during Q4.

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