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Executives

Bernard Duroc-Danner - Chairman, President and CEO

Krishna Shivram - Chief Financial Officer

Dharmesh Mehta - Chief Operating Officer

Analysts

James Crandell - Cowen

Jim Wicklund - Credit Suisse

James West - Barclays

Byron Pope - Tudor, Pickering Holt

Kurt Hallead - RBC

Angie Sedita - UBS

Weatherford International Ltd. (WFT) Q4 2013 Results Earnings Conference Call February 26, 2014 8:30 AM ET

Operator

Good morning. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Weatherford International Fourth Quarter 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator instructions)

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

Bernard Duroc-Danner

Thank you. Good morning, everyone. We have three speakers today. Krishna will have prepared comments, then Dharmesh and then myself. Then I’ll turn it to Q&A afterwards. Krishna?

Krishna Shivram

Thank you, Bernard, and good morning, everybody. I would like to remind our audience that some of today’s comments may include forward-looking statements reflecting Weatherford views about future event and the potential impact on performance.

These matters involve risk and uncertainties that could impact operations and financial results and cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Weatherford’s Form 10-K for the year ended December 31, 2013 filed yesterday February 25, 2014.

Our comments include non-GAAP financial measures. A reconciliations to the most directly comparable GAAP measures are included in our fourth quarter press release.

With that out of the way, the first thing, I wanted to announce is that the long standing material weakness on our tax accounting has been remediated. This was an enormous burden on the company whose impact in prior years cannot be overstated. It is history now.

Moving on to specifics, non-GAAP earnings per share for the fourth quarter before charges was $0.07. After-tax charges for the fourth quarter of $324 million included $171 million associated with the legacy lump sum contracts in Iraq, principally for the Zubair EPF contract, $96 million were charges related to losses on monetizing 2026 bond issued by PDVSA in Venezuela to settle part of our receivable and other accounts receivable write-offs and $57 million in severance, exit and other charges.

My comments are going to address the fourth quarter of 2013 then the full year 2013 and then finally, the outlook for 2014. Starting with the fourth quarter, our operating margin before research and development costs and corporate expenses was 10.1%, down 310 basis points sequentially.

The fourth quarter was a perfect storm with several factors collapsing to pressure our margins. These included activity shortages in North America, the North Sea and Russia, due to severe weather and operational disruptions in the Middle East, adding to these with sluggish activity in Mexico and the self-imposed activity reductions in Venezuela.

The tax rate in the fourth quarter was high at 45%, including one item of tax planning, which we accelerated into 2013 to benefit the tax rate of future years. Without this item our tax rate for the quarter would have been 27%.

Moving on to cash flow now, during the fourth quarter, we generated free cash flow of $298 million, a sequential improvement of $337 million from Q3, which was driven primarily by reduction in working capital.

Net debt reduced by $687 million in the fourth quarter, reflecting the strong free cash flow and the monetization of the sale of our equity investment in Borets for $400 million against which we collected $359 million with $11 million settled against trade payables outstanding to Borets and the remaining $30 million in the form of a three note.

Now moving on to the full year, for the full year 2013, operating margins were 11.2%. The operating margin for our core businesses came in at 16.3%, while our non-core businesses had a negative operating margin of minus 6.9%. This is the first time we are commenting on our core business margins versus the margins for the non-core businesses.

This analysis clearly indicates that our core businesses do make attractive margins and predict an overall improvement in company margins once the non-core businesses have been divested. Bernard will comment on the core business margins in more detail later as this touches on our future strategic direction.

The tax rate for 2013 was 25%, free cash flow for all of the year 2013 was the consumption of $346 million, which is an improvement of $610 million versus 2012.

As a result of running a focused capital disciplined program right through 2013, we have reduced working capital by 14 days across the year, seven days coming from DSO and seven days from reduced inventories. In total, working capital balance has declined by $563 million during the year.

Capital expenditure dipped to 10.3% of revenue in 2013 versus 14.3% in 2012. Given Weatherford’s poor historical free cash flow performance, 2013 was a year in which to focus on capital discipline has been instilled in the organization. This is a real shift in Weatherford’s D&A. Net debt reduced $43 million in 2013 to end the year with $8.3 billion.

Now moving onto 2014. Our immediate focus is on reducing our cost base. We have already identified 6192 positions for termination which is expected to realize $466 million of savings on an annualized basis. These reductions will start immediately.

The entire organization will work intensely to reduce cost in the first two quarters of this year. The first quarter of 2014 will see a seasonal weather related dip in Russia, China and the North Sea. Additionally, we expect weak activity in Latin America.

In Venezuela, our determination to run our business in a more cash focused manner will curtail activity. And in Mexico, we expect sluggish activity levels as we enter the New Year. This means we will have a slow start to the year and focus on our cost reduction efforts.

We expect to see a significant pickup in the second half of the year and benefit from larger cost savings. As such, we reiterate 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 businesses get divested over the course of the year. This guidance includes about $0.30 from our cost savings action which will really begin showing 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 in other areas. Our tax rate for 2014 will range between 25% and 35% but more likely between 27% and 33% and will be dependent on the geographic mix of earnings.

In 2014, we will continue the good work in capital discipline and expect to generate $500 million in free cash flow with further improvements in working capital days and reduce capital expenditure which is budgeted at $1.25 billion to $1.3 billion or between 7.5% and 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. We have advanced well into the process of selling the first of the four non-core businesses.

The work stream for the other three business divestitures are on schedule and we expect to complete these by the end of the third quarter. The work to carve out the land drilling rig business is also ongoing and on track for a year end or 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 approach $7 billion by the end of 2014, resulting in an improved debt-to-cap ratio of about 45%.

One word on the timings of future earnings call, we expect to hold out earnings releases and calls in about the fourth week of each quarter of the month following the end of each quarter.

With that, I now turn the call over to Dharmesh Mehta to comment on operations.

Dharmesh Mehta

Thank you Krishna and good morning everyone. I will provide an operations outlook for 2014. U.S., activity in the U.S. continues to be robust. Rig and well counts in oil-rich business such as the Permian point to a healthy market.

Weatherford has one of the best industry portfolios for unconventional development and our footprint combined with market activity will play to our strengths in 2014. All five core segments will benefit with the increase in U.S. activity.

Stimulation continues to show improvements and we enter 2014 with 85% of our available horsepower under some contract. Based on current activity, we expect to reach 100% utilization by mid year.

Canada, traditional Canadian activity remains steady and is projected to be modestly up versus last year. An area in Canada that is seeing growth is the heavy oil and thermal market. Weatherford has a industry-leading thermal completion solutions and will benefit from the growth of the thermal market.

Three technologies that will drive the improvement in North America performance are the following: Completion technologies such as i-ball, TruFrac and INVISIBALL. Successful three trials were completed for these technologies in the second half of 2013. They will drive customers with the best option for maximizing production from unconventional wells.

Ongoing testing of our newest generation rotary-steerable system in the fourth quarter were successful. Commercial launch in 2014 to U.S. and other markets is progressing according to plan. New artificial lift capabilities such as guided sucker rods, rod rotators and others that target the growing horizontal oil market were successfully introduced in the second half of 2013.

Combination of market activity contracted horsepower stimulation, commercialization of these technologies and the lower cost structure will ensure the North American performance in 2014 was significantly better when compared to 2013.

Latin America, 2014 will be a transition year for Latin America. Due to delays in implementation of the energy reform in Mexico, uncertainty in Venezuela was politically and with respect to getting paid, elections in Colombia and the currency devaluation in Argentina.

The E&P spend in Mexico will be delayed until benefit is done with the assessment of what fees they will retain and passing of additional local legislation. In Venezuela, we have scaled back activity in all product lines and now primarily provide products and services while we are getting paid. We continue to work with PDVSA management on payment arrangements and will resume work only after we have mutually satisfactory solution in place.

Colombia is projected to be flat until after the election period late in the second quarter. Work stoppages due to union and other local disputes remain a continued risk in Argentina and other Latin American countries. Weatherford has historically had and continues to have a very strong Latin American operational team that will continue to work through the challenges we face today.

MENA and Asia Pacific, Asia will continue to show steady progress in 2014 driven by Well Construction awards during the second half of 2013. There were two material developments in MENA that were completed in 2013. They are as follows. Number one, establishment of MENA Gulf, Kuwait, Oman, UAE and Saudi Arabia now make up almost 45% of Weatherford revenues in the Middle East region.

Key long-term contracts in core segments will restore MENA profitability by year end to what is used to be before the Arab strength. In 2010, four countries Algeria, Libya, Yemen and Iraq made up almost 50% of the region’s profitability. In 2014, the same countries will generate less than 5% of the regional profitability.

In summary, MENA profitability impacted by the Arab strength and other events will have into place with the more reliable revenue stream from the MENA Gulf countries.

Mitigation of risk in Iraq; during the first quarter of conference call last year Bernard announced that we will not be deploying any additional capital into southern Iraq. During 2013, we have methodolically brought to closure most of the legacy contracts in Iraq. Iraq status is as follows. Four of the five turnkey drilling projects are complete.

We are still on the last two wells of the last contract and are expected to finish all work in the next couple of weeks. This will bring an end to all the turnkey drilling contracts in Iraq and we will maintain our policy of not entering into any more turnkey drilling contracts in Iraq.

The graph integrated production facility project has been completed and we are demobilizing from the site. Zubair is the last of the legacy EPF contracts and it continues through the end of the year. At the end of January 2014, this project was 75% complete. As of today, we have reserved for $80 million of contingencies and also for the maximum penalty of $65 million associated with potential project delays. We have moved back to engineering of procurement phase of the project. Substantially all of the project activities are now on site and center around assembly of equipment as it is delivered to the project site.

We also have over $150 million in claims that have been submitted to the client. We are actually working with our clients on the resolution of all the claims that have been submitted.

To summarize, the emergence of MENA Gulf accompanied with the mitigation of risk in Iraq allowed the MENA/Asia Pacific regions to exit 2014 at the same profitability levels that we had before Arab strength.

Europe, Caspian, SSA and Russia, North Sea, primarily UK and Norway will benefit from the increased rig count. More than 80% of the forecasted revenue for the region is already contracted. Angola will be the key country of focus for growth in SSA. Well construction and formation evaluation are the two key product lines that will drive the growth in this region. Prognosis for Russia is positive. Horizontal drilling is growing by 15% and formation evaluation will benefit from their growth. The land rig business in Russia is also showing good progress. New projects in Caspian, Sakhalin and the Black Sea will drive growth of the well construction business in this region.

In summary, our outlook for 2014 is generally positive for all regions with exception of Latin America. New technologies that are being rolled out, backlog of contracts that have been secured in 2013, combined with North American activity, paint a positive picture for 2014.

The first quarter will be the weakest quarter of the year primarily due to the intense focus on cost cuts. However, combination of activity and cost cuts will result in the second half of the year in substantially better than the first half.

Besides cash, the operational organization also focused on improvements in safety and service quality. Total recordable incident rate reduced by 17% in 2013 and the lost time incident rate reduced by 12%. There is always more to be done to improve safety and service quality and these areas will continue to get focus in 2014.

A sign of a mature organization is one that focuses all the key metrics that define a good business. We have discussed core segment, cash, safety and service quality. In addition to these two areas, 2014 will be the year that operations will deliver on two additional metrics, operating margins and improved revenue or headcount.

The following key items have been completed to ensure that we show a step change in improvements in both these metrics. They are; operations have completed a thorough strategy review of every country and each support function in those countries. As a result of these exercises, we have identified 6,192 positions for terminations, most of which comes from the support organization.

As part of this process, we’re also standardizing the support structure in each country. Standardizing the organization will result in increased efficiencies as we grow the business. Total cost savings as a result of these terminations is estimated to be $466 million on an annualized basis.

The other component of the reprocess has been to identify locations where performance is poor and we do not have a competitive advantage. We will exit these locations once the review process is complete. We are also reviewing our manufacturing locations globally and now identified potential sites for consolidation. Further details of the exit locations and manufacturing consolidations will be provided in the next conference call.

I will now turn the call over to Bernard.

Bernard Duroc-Danner

Thank you, Dharmesh. We entered 2014 with four very constructive accomplishments, settlement of the 6-year running U.S. government agency’s investigation, remediation of the material weakness in tax accounting which was uncovered in 2011, a newly minted culture of cash and returns as guiding principle and value system, and a strong management team at the leadership level and across operating and support functions. These were achieved in 2013 a year of serious fundamental progress.

Profitability in ’13 wasn’t enough as operations played with poor contractual commitments and unfavorable dilution of business mix. Two factors were responsible for this, a legacy culture of growth which became excessive and obsessive level of internal distraction of legal and accounting issues. It’s easy to forget our legacy of growth was born in 1987. The company and its core was built from nothing over 21 years.

Growth in building defined who we were and what was for a very long time a very good thing. In spite of poor stock performance from 2009 to date, the shares of Weatherford and its predecessor company, EVI, delivered from inception in May ’87 to date in 2014, a CAGR compound annual growth rate of about 18.5% per annum over almost 27 years.

Growth and relentless industrially focused building were good, were rewarding to shareholders, clients and employees for a long time. It went on to too long. We lost our industrial bearings while implications of scale were not managed well. If we lose our direction, it was just simply a lack of attention, the strategic clarity combined with insufficiency stemming from rapid growth. It’s probably a combination of both.

I have been responsible for this company from inception in ’87, this is my responsibility. The turnaround in reengineering of the company on a long-term financially rewarding path is the only way I know to make up for this. We will make money and shareholders will be rewarded. We are finally free to focus on strategic, tactical and shareholder value issues without any overruling distraction. The company is redirected and set on a course which although is different from the original building years, we believe will not only catch up the lost shareholder returns of 2009 to 2012, particularly the two catastrophic years of ’11 and ’12, but beyond that we will carve out of path of long-term attractive returns. Returns, which shall be reliable with consistent direction and prudent guidance quarter-to-quarter, year-to-year.

What is our direction? Core, cash, cost. Core, focus on our essential product lines, well construction, formation, evaluation, completion, stimulation and artificial lift, which will also include concentrating on people, technology, sales and quality, grow our core, divestment on core.

Cost, this will include all administrative support and operational aspects of our business. Lowering cost is a way of life given single event of today over the next four months. Rising support functions and operations with lower costs is a key management metric.

Cash, the cost over returns is a way of life. We will generate free cash flow each and ever year. Free cash flow is a key management metric, together with a rising margins, efficient working capital and the lowest capital intensity compatible with growing the core, nothing else.

You know the core. The core is made of five segments, adding up in 2013 to just about $12 billion. The operating margins expressed here that I was about to share with you are all inclusive except for R&D and corporate, which is about $466 million in total for Weatherford as a whole in ‘13. Therefore, on the same basis as a regional operating income results because that gives a same basis as a regional result.

Well construction 2013 revenues were $4.6 billion, is the largest with operating income margins of 24.9% or 25%. We are market share technology leaders. Completion 2013 revenues were $1 billion even. The 2013 operating income margins of 23.9% or just about 24%. This is a specialized play, technologically focused on well completion.

Artificial lift 2013 revenues were $2.6 billion with operating income margin of 16.4%. We are market share technology leaders. Formation evaluation 2013 revenues of $2.4 million with operating income margin of 9.9% or just about 10%. This is an early play with proprietary sensing technology. It requires better market selection and sales support.

Follows the last segment that requires near-term profitability focus, stimulation 2013 revenues were $1.3 billion and negative operating income margins of 7.8% or just about 8%. Stimulation wasn’t a core competency until recently its operating performance reflected its uncertainty. Today, there is a focus on operating efficiency in the U.S. and chemical base stimulation technology, which has confirmed our commitment to this product line.

In 2013, the core has an operating income margin of 16.3% and excluding U.S. stimulation of operating income margin of 18.9%. 18.9%, compared to an overall Weatherford operating margin of 11.2%. The contrast is obvious. Direction on all five core segments is underway. Well construction, completion and artificial lift focused on high incremental margin growth with attractive tax returns. As much and as effective from a quality execution standpoint we can take on.

Formation evaluations margins will expire with sales and marketing of its proprietary sensing technology and the immediate pruning of market positions on all attractive long-term. U.S. stimulation is already healing with focus on operating performance, costs, quality of service and development of proprietary chemical solutions.

We have a broad engineering chemical bench anchored in production and our industry leading managed pressure drilling product lines. The lowering of the cost structure, which both, Dharmesh and Krishna discussed in terms of the core, it does not concern the divested assets except for some scaling down of corporate expenses as divestments occur.

The effect on margins is simple. We target as you know $500 million with lower cost structure, getting close to it already in Q1. The completion of our cost drive allowed over 400 basis points to the core’s operating income margins. The joint effect of divesting in the non-core and lowering the cost structure is simple but powerful. Of course, this relies on the successful completion of the cost and divestment initiatives. They are the immediate priorities of the entire management team.

There is much to get done and we are moving very quickly. The first half of the year will be intensity business. Three other comments relevant for our near-term, cost reductions are difficult and stressful for the organization. We will implement ours as fast as we can to close the uncertainty.

We have designed and communicated a compensation plan, which should help the retention, morale and placing the emphasis and metrics where it matters. We’ve done the same with offices. Part of the turnaround is a completion and closure of all unfavorable contracts.

Southern Iraq is by far the most egregious and intuitive case. On completion of Zubair, our primary remaining contracts will exit the EPF client. And as a matter of policy, we will not engage in turnkey projects at anytime in Iraq. More broadly, contractual policy has been tightened for all product lines. Margins and cash returns are the key metrics with terms and conditions seeking to minimize risk.

The objectives for us is derisk the company as well as delever. Despite of the heavy operational work in process in the first half of the year, 2014 as a whole will see disciplined growth around the core. As a synthesis of 2014 regional outlook, one of the eastern hemispheres have a stronger year and of higher margins. North Sea, Sub-Sahara Africa, Russia and Middle East will show improvement throughout the year, particularly in second half, while construction and formation evaluation will be a driving force.

Weatherford North America should have a better prognosis than most expect. Part of it is self help, which is our cost and operating measures of our stimulation and formulation evaluation, the part of it is the market. The prognosis activity again, particularly in the second half is stronger than generally anticipated.

Latin America is the exception. Primary markets are either at a standstill. Mexico, Colombia and Brazil were challenged by severe liquidity issues, Venezuela. Although, prognosis in Latin America is excellent long-term, Mexico in particular, ‘14 is expected to be a dull year.

I think the pieces together, ‘14 should be from an operating and financial standpoint. The financial turnaround, building on the achievements of ’13, the year will start slowly for both traditional, seasonal issues and the intense internal cost and divestment initiatives.

The second half will demonstrate the financial standards, when it is being sought by management and sought out the credibility for ’15 and beyond. The ’14 objectives, of a $1.10 to $1.20 in earnings, free cash flow of $0.5 billion and net debt reduction in excess of $1 billion, a reasonable and grounded on careful assessment. We are mindful of past guidance, which has not been reliable. There is a concerted effort to change this.

Because of our newly established operational and administrative management, we expect our future guidance to be consistent and reliable. Again, we have three objectives in mind and only three, delever, derisk and step-change profitability. We want 2014 to show clear progression on all three.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from a line of James Crandell with Cowen. Please go ahead with your question.

James Crandell - Cowen

Good morning, everyone.

Bernard Duroc-Danner

Good morning, Jim.

James Crandell - Cowen

Bernard, given your more selective strategy on pursuing growth, what do you think a reasonable target for a topline growth for Weatherford is for the full year? And can you comment giving your cost cutting and taking the growth into account, what’s a reasonable target for overall margin improvement for the product lines that you’re keeping?

Bernard Duroc-Danner

I think, 2014 being a year, which we’ll see a lot of internal work, I would say the core growth should probably be constrained to about 10%, not more. I think beyond the target, if all goes well, 15%, 15% thereon. With respect to the margin improvement, I will turn to Krishna to see what, how he would like to express that.

Krishna Shivram

So, just the core businesses, this year as we said earlier, the core businesses made an operating income margin of 16.3%. Going into 2014, with the revenue growth that Bernard just put out there, it should definitely be very high teens, just pushing 20% in the fourth quarter on the exit rate with that kind of growth.

James Crandell - Cowen

Okay. I had a question about the cost reduction efforts that you’re making. I mean, 7,000 heads, I realized on a 49,000 basis, a lot of people. But it made great progress so far. I guess two questions around this. Number one, does this put your -- and I understand most of this people are in non-revenue generating areas. Does this put your ratio of sort of non-revenue generating employees to revenue generating employees, where you want it to be? And if not, should we view this as maybe there’s another, shoe to drop or another step to take in terms of the cost reduction process?

Bernard Duroc-Danner

I will let, Dharmesh give you some substance on that. But I will say this Jim. I think the heavy lifting in terms of finding the positions to close is happening now. We will try and get it done very quickly. Afterwards, there is pruning, pruning is not heavy lifting. With that, I’ll turn it to Dharmesh.

Dharmesh Mehta

Sure. So first of all Jim, there is no second phase of cost cuts planned. The push out we have taken is a very intense effort, scrubbing it country-by-country, function-by-function. We don’t have to go second best. So from a perspective of how we will run the whole program, it has taken up a lot of time, lot of focus of our management in the last five to six weeks to scrub everything. Now, the only thing that we have not finished is the location that we will exit and consolidation of manufacturing locations and those two will be identified on the next call. So from your answer perspective, the cost cuts really is a one cash process.

The second question you ask, which is the ratio of indirect to direct. One thing we are not at all stopping is the hiring of people for locations where we are contracted with. So, a large percentage of our revenue because of the contracts we won in the second half of the last year, we are hiring people, we are hiring direct headcounts in our regions and almost every part of the world to support the contracts we have. So the combination of hiring from a revenue generating position with the prospects will get our ratio pretty much in line to where we wanted to be by the end of the year.

Bernard Duroc-Danner

I will add one last thing, which is very focused on R&D and technology. The R&D spend on the core or R&D spend in general, even after there non-cores are gone, we will not drop, our commitments and technology will remain the same.

James Crandell - Cowen

Okay. But one last quick question. Are you in your asset divestiture program, are you keeping the international pieces of fluids in testing?

Krishna Shivram

So, Jim, this is Krishna. First, I’d like to answer the earlier question you had on the ratio…

James Crandell - Cowen

Okay.

Krishna Shivram

…from non-revenue earning employees to revenue earning employees. For the longest time in an international oil and gas services company, the standard ratios for this sort of business with our international exposure should be between 30% and 35%, which is non-revenue generating employees divided by revenue generating. So the 7,000 cut that we are talking about will bring us in-line with that range.

Now, on the divestments, right now, we’re working on the assumption that the testing and production of course, we will sell the old local business. And on the drilling fluids business, we are considering whether to sell the U.S. piece separately and retain the international piece as it is quite embedded with our project revenue, our integrated project management efforts.

James Crandell - Cowen

Okay. Good answer. Thank you and great rundown.

Operator

Your next question comes from the line of Jim Wicklund with Credit Suisse. Please go ahead with your question.

Jim Wicklund - Credit Suisse

Good morning, guys.

Krishna Shivram

Good morning, Jim.

Bernard Duroc-Danner

Good morning, Jim.

Jim Wicklund - Credit Suisse

That was so incredibly extensive and thorough and detailed that we’re all scrambling to come up with the good question. So that’s a compliment by the way.

Krishna Shivram

Thank you.

Jim Wicklund - Credit Suisse

And if I recall was in the acknowledgment of what’s went gone wrong in the past and what’s going to fix this is good. The question that leads to mind is and I don’t mean to rude with this, but what makes you think you can affect all these changes now and you haven’t been able to for the last couple of years?

Bernard Duroc-Danner

Well, I think to give you an answer and then Dharmesh will fill it. I think in the prior years, I am referring to ’11 and ’12, not ’13 well, already a lot of what we’re doing now and the seeds were placed. ‘11 and ’12, I think the company was, to say was distracted as to put it mildly. So I will leave it at that. It was unable to handle anything and such thing a lot. This is our number one. Two, with respect to making the changes that we need to make, it’s simple, divest the court, change the cost structure, that is on core, change the cost structure. Dharmesh will give you some more detail.

Dharmesh Mehta

Jim, two parts to my answer. I remember a wise young man asking Bernard the question that’s implementing a culture of cash is very difficult. How do you expect to do it so quickly? And Bernard had answered that question with a very simple answer, which is the character of the organization. Weatherford has a history of when it makes its mind up to do something, it will do it well. If you look at the cash and implementation of the culture of cash and the 14 days of working capital in one year, by any standard for a company that never generated free cash flow, working capital, that’s a various staggering achievement.

Jim Wicklund - Credit Suisse

No argument.

Dharmesh Mehta

The second one I will say is the following which is that you cannot underestimate the distraction of the tax and the lawyers and the freeing up of that by an organization from the distraction. So the combination of no distractions, the character of the organization and to some extent the groundwork that has been laid in ’13 makes us very optimistic about getting what we need to get done in ’14.

Jim Wicklund - Credit Suisse

Okay, guys. I was married to a lawyer once I know they can’t be distracting. There was the comment you made Bernard, when you’re talking about completing the strategic view and understanding guidance in the past hadn’t been good. And you mentioned measures have been put in place to ensure that you’re good at it, and this is also to Krishna, because Krishna, you’re new there and you’ve got credibility to earn. Are there any things in place that carrots and sticks that give us confidence that future guidance and statements made get done?

Bernard Duroc-Danner

Well, the first thing I would say is that the forecasting process within Weatherford certainly can do with some improvement and we’re working in all the building blocks to improve the forecasting process, so that we can hold our field managers much more accountable than they have been in the past.

The second thing on the guidance, I'd like to say here is that when you look at the separation of the core business and the non-core business and the granularity that we have not only provided on this call but also the granularity of the cost production efforts that we have exposed today, can give us quite a lot of confidence.

In three or four weeks to identify 6,200 thereabout positions for termination, galvanizing the whole organization to participate in this mammoth effort in such a short space of time speaks volumes for itself. So I think the confidence with which we are approaching the strategic directions to the company is very, very heartening to see, given the efforts of the field managers.

So I think we can execute on what you're saying and the guidance that they have given for us, given where we are today based on the costs cuts and the speed of divestitures. We think it's a pretty good guidance, pretty solid.

Jim Wicklund - Credit Suisse

Okay, gentlemen impressive. Thank you very much.

Bernard Duroc-Danner

Thank you.

Operator

Your next question comes from the line of James West with Barclays. Please go ahead with your question.

James West - Barclays

Good morning, guys.

Bernard Duroc-Danner

Good morning, James

Dharmesh Mehta

Good morning.

James West - Barclays

Quick one for me and then a couple follow-ups. It was great to see the core margins broken out. I think a lot of people were surprised that how hard those margins actually were. Do you intend to as we go through this year why are you doing the divestures to report that those numbers each quarter so we can track progress?

Krishna Shivram

Yes, certainly James. This is Krishna. Of course, the idea was to open this call with those margins and then to keep it going right through every quarter to give you run down and how that progresses during the year. You will see that as we divest the non-core businesses, the core profitability will emerge in the total company profitability as well. But we will give the breakdown every quarter.

James West - Barclays

Right, okay, great. And then as we go through divesture process here, what are the accounting triggers which need to meet before you can start putting these businesses into discontinued operations?

Krishna Shivram

It’s the usual accounting triggers. We would have to have a data pack ready, had bankers, start showing the data sets to buyers and had offers in -- indicative offers from buyers and extended level of due diligence should be ongoing before we get confidence of taking this out as difficult. So we will look to that as they go forward.

James West - Barclays

Okay.

Krishna Shivram

Usual -- that's a base treatments.

James West - Barclays

Right. And that would imply than the first half that package that you're closes to selling or even close to -- that were pretty close to seeing that going to discounted ops. Is that a fair statement?

Bernard Duroc-Danner

Yes, that's a fair statement in the first quarter. You most likely see that business going out in discontinued events.

James West - Barclays

Okay, okay. And has there been any change -- last one from me, is there any change to the senior management compensation structure linked more to the divestitures and the cost reduction effort to this point?

Bernard Duroc-Danner

Yeah there has been throughout the company, but the office of compensation plan is probably not a bad one to look at. Simply because of this the company is not the same but it has the same sort of philosophy. I will turn again to Krishna to give you details but it is made up of bonus plan It is made up of four different metrics plus safety which remains -- it remains something which is in our DNA.

This is one area we've done well safety but never well enough. It matters a great deal in all the respects. The four metrics are either going to be profitability based or they're going to be return based. And they are very, very specific. Do you understand one of the offices?

Krishna Shivram

Yes, the one -- the four metrics for the offices are split between earnings as one of the four, the second one is cost reduction.

Bernard Duroc-Danner

Specifically cost reductions for math.

Krishna Shivram

Yes, the third one is free cash flow generation and the fourth one is reduction in net debt, which is of course completely relied on divestitures. So there is a double accounting free cash flow reliance on debt except the other components are net debt, divestments and also there are some exogenous uses of cash, the U.S. government payments and/or we're trying to bring down as much as possible the non-recurrent expenses and/or uses of cash that's actually one area where cash can leak out, we are trying to stop that. That's one of the measurements therefore, net debt addresses that also.

Bernard Duroc-Danner

So the management and the plan is completely in line with the strategy that we spoke about and then safety is the fifth component which remains.

James West - Barclays

Right, right, perfect. Okay, thanks guys.

Krishna Shivram

Thank you, James.

Operator

Your next question comes from the line of Byron Pope with Tudor, Pickering Holt. Please go ahead with your question.

Byron Pope - Tudor, Pickering Holt

Good morning.

Bernard Duroc-Danner

Good morning, Byron.

Krishna Shivram

Good morning, Byron.

Byron Pope - Tudor, Pickering Holt

I appreciate the color on the core product and service lines. Bernard, as you think about the opportunities there across your geo markets over the next couple of years. Just curious as to which of those core product service line do you see driving -- really driving the top line growth. You commented earlier about the 10% top line growth in 2014 for your core but I am just wondering for those areas of businesses in the core which ones do you see have been particularly robust in 2014?

Bernard Duroc-Danner

Well construction, well construction for sure. It’s an easy pick. It being the largest one but it’s one construction based on the contracts. Remember that when one looks at the year in the international markets, North America is different. You should enter the year with 80% or 90% typically if things are running well or your revenue is booked already. And you can see the weight of the various product lines, well construction has the disproportionate portion of weight in terms of delta in 2014. I am not saying the others ones won’t do well also but disproportionately so at the revenue line. Dharmesh, do you want to add to that?

Dharmesh Mehta

Sure. Byron, there are already three secular teams that drive our growth. The mature field and reservoirs has done as large, unconventional and really what I call well integrity across all types of wells. So if you look at the nature of the wells, artificial lift, completion, well construction, they all benefit. And so Latin America and North America, those product lines will be driving the growth in those geo market.

As we start going east, those wells are aging. The wells are more complex sometimes. Deep water activity is higher. Well construction has bigger role to play and formation, evaluation has a bigger role to play. So it is relevantly driven by each of the more dominant secular team and each of the geo markets will drive each product line the time they contributed to growth in that geo market.

Byron Pope - Tudor, Pickering Holt

Okay. That’s it from me. Thanks, I appreciate it.

Operator

Your next question comes from the line of Kurt Hallead with RBC. Please go ahead with your question.

Kurt Hallead - RBC

Hey, good morning.

Bernard Duroc-Danner

Good morning, Kurt.

Krishna Shivram

Good morning.

Kurt Hallead - RBC

Good morning. Well done, well done, congratulations on the turnaround, sounds to be very impressive. The question that I have as we move forward here is the -- can you guys identify the specific product line areas with explicit detail. I am just kind of looking at the stimulation where you mentioned the 2013 operating margin was negative 7.8%. I would like to get a handle on what that exit rate was in the fourth quarter. And as you look at into 2014, where do you see that stimulation margin for the year.

Bernard Duroc-Danner

This is actually a question which I will gladly hand over to Dharmesh. He will be more specific than I will be and I know it directionally not specifically.

Dharmesh Mehta

So Q4 2013 was a best quarter from a margin perspective for stimulation. Q1 and Q2 were the worst and as the year progress the margin started doing better. From EBITDA perspective, we ended almost had a breakeven EBITDA in the fourth quarter of last year and the expectation would be in the high single digit sometimes by the third quarter of this year.

Kurt Hallead - RBC

Okay. Then what, that’s really helpful and when you think about that, if you are going to be high single digits by the third quarter then fairly you are not going to have average high digits for the full year, obviously, right?

Krishna Shivram

That’s correct.

Kurt Hallead - RBC

Okay. Now when we look at the regional the geo-market dynamics you provided an overall revenue growth for your core businesses and how do you think about, right, trying to make it a little bit easier for us to following, I appreciate the fact, you are providing updates throughout each quarter? But at this point, what do you think non-core revenue growth and what are you thinking about core margin dynamics in non-core, excuse me, non-core revenue, non-core margin dynamics for 2014?

Bernard Duroc-Danner

Well (inaudible)

Kurt Hallead - RBC

Yeah. Yeah.

Bernard Duroc-Danner

On the core, Kurt, I think the growth for year actually be around 10%...

Kurt Hallead - RBC

Right.

Bernard Duroc-Danner

… rather not the, I think, you have to assume there will be some measure of distraction earlier in the year and so the growth will be little bit less and it would, I would anticipate it being beyond that or just to get the secular demand. On the margin side, I’ll let Krishna, what would you like to share for the core?

Krishna Shivram

Well, the core margins, as I said earlier was 16.3% operating income margin for 2013 and it will start climbing upwards with the growth that Bernard has spoken about to approach close to 20% by the end of Q4 of 2014.

Now the non-core businesses which you asked about, they will grow at the much slower rate then the core businesses, although some parts of it like testing are growing nicely, the testing and production business is growing pretty strongly.

Bernard Duroc-Danner

The margins on non-core are likely to heal to some degree, you saw some of it clearly not enough on the U.S. stimulation but it is going in the right direction. You should have a non-core that the margins would be significant going from seriously negative to not so negative and positive in some case.

Krishna Shivram

That’s right. I mean, for the year 2014, the non-core business is, if they were not divested at all on that assumption which makes up our $1.10 to $1.20 guidance the non-core businesses are expected to make a single -- low single-digit operating income margin for 2014, which implies a growth rate of some measure and the repairing of the business is the non-core business is which will continue relentlessly through this year.

Kurt Hallead - RBC

Yeah. That’s fantastic and helpful. And maybe if I just could round up that discussion and because, I think everybody, some of already probably done the math, but the, if you take the non-core out and you look at 2014 on a pro forma basis, what’s the earnings, the core earnings power in 2014 for Weatherford?

Bernard Duroc-Danner

So I said touch on it…

Kurt Hallead - RBC

It’s a bucks 10 or bucks 20, and a bucks 10 to bucks 20 is your guidance, you take out the non-core, what are we looking at?

Bernard Duroc-Danner

As oppose to, I am not going through the numbers I shared with you when I read my comments on the, what happens to the margins and the core, you take out U.S. stimulation, because it’s a bit of an outlier and you add the cost cuts, which end up giving you operating income margin which are in excess of 20% the core. Let me, Krishna, what we would like to share on that?

Krishna Shivram

Well, I would say, the vast majority of the $1.10 to $1.20 will come from the core businesses.

Bernard Duroc-Danner

Yeah.

Krishna Shivram

Right. Just as a data point, just for 2013, the year just passed, we made, we declared earnings of $0.60 for the year. The breakup of that between the core and the non-core is $0.85 of earnings for the core business and a negative $0.25 for the non-core.

So, from what I have said just now, what we have been saying about the non-core, repairing the non-core, we can assume that you know, we are going to bring that back to breakeven to slightly positive in 2014. So the bulk of the earnings will come from the core.

Kurt Hallead - RBC

Yeah. That’s extremely helpful and congrats again on structuring this turnaround.

Krishna Shivram

Thank you.

Dharmesh Mehta

Thank you, Kurt.

Bernard Duroc-Danner

Thank you, Kurt. I think we have been call is 10 minutes overdue, we will take one last question if there is one Operator and then we will close down the call.

Operator

Your next question comes from the line of Angie Sedita with UBS. Please go ahead with your question.

Angie Sedita - UBS

Great. Good morning, guys.

Bernard Duroc-Danner

Good morning, Angie.

Angie Sedita - UBS

Could you talk a little bit about where you stand in the active sale and clearly, we have seen other players in the service sectors try to sell assets have unsuccessfully done so, given what they are selling and who the buyers are, and what the prices are? So can you just talk through the four tranches of assets that you are looking to sale and where you stand in the process of each of those group, what do you think as far as interest and do you have a minimum sales size you would like to sale those assets for, let’s start there?

Bernard Duroc-Danner

Okay. I would say first, Angie, that we are organized, very particular and a lot of the management data, whatever process is necessary is already set and behind us and ready to go to auction.

Out of the four, because the rig company is which is going to be around the balance of the year, we are comparing the audits and then spin-off IPO, build an IPO in Q4 and Q1 which is separate issue.

Of the four, the first of the four is, under discussion now with interested bidders now, so the process is well engage and it will work or it won’t, indications are that the bidders obviously are quite a few are interested and they are serious, that much I can tell you.

Krishna Shivram

Yeah. Thanks, Bernard. I would like to add that, Angie, there are a numbers of interest buyers for each one of these businesses. We are actually holding them back to be perfectly honest till we get ready for each package, data package for each of the businesses which is ongoing.

So the first data package began to be socialized with buyers on January the 17th and we are in an advance stage of discussion today on that business. So in a very rapid space of time we are coming close to one of the business divestitures.

The others, one will come online on the 1st of April and the other two will come online roughly around the beginning of the third quarter. And if, the long list of bidders that we have is that is any indication of the interest that we are seeing, I have no doubt in my mind that we will be able to execute on most of these sales at a fairly reasonable price.

Bernard Duroc-Danner

Only the comment I would add Angie is, one of the hottest spot of selling business, is the extraction of business, and one of the thing we are doing very well upfront is making sure every buyer understands what the extraction issues are by location, by country, by area, by personal, by support function, so that is not an issue for -- that doesn’t delay the process.

Bernard Duroc-Danner

What I was trying to allude to when I said we are organized, the identification of what we are trying to sell, Angie, is actually other simple matter when you have 1,100 basis, et cetera, et cetera operating so many countries and you operate in a commingle manner. So identification of assets, identification of people is actually something that we have done and by when I mentioned we were organize that’s what I was referring to.

Angie Sedita - UBS

All right. And then as far as the assets sales, and obviously, you are bidders that bidding could be obviously range of prices? So do we have minimum that you expect or you need to have in each of these tranches of assets sale for us to execute, or are you more focus on getting the assets out of the company, number one?

And then finally, number two, is on the land IPO spin when we will have more clarity on how that data will be structured as far as IPO versus spin, potentially spin, potentially over 100% of spend and just little clarity there?

Krishna Shivram

So let me take the first part, Angie, we have a good range of evaluation that we are willing to accept for each one of the four businesses, excluding the land drilling rig business which we’ll come to separately. And we are not in a fire-sale mode. We think these businesses are pretty solid businesses but better owned by other owners who -- for whom these businesses will be core. So that’s the first part. The second part, I’m going to refer to Bernard.

Bernard Duroc-Danner

Whether it is a full spin-off or partial spin-off with IPO or an IPO followed by secondary, Angie, it is the same, same, same process between now and then. So I don’t think the Board has decided which of the three will be the final option. My particular guess is that when the time comes, we’ll probably do an IPO followed by the spin-off of the rest of the shareholders but again do not hold me to that.

Remember it is exactly the same process. Between now and the time of whether it’s spin, IPO, then spin or IPO and then secondary, you are going to organize independent company with independent management, audited statements. If you remember more than 10 years ago, we did the same with grand cycle that was a full spin-off. This is the same process except that was a spin-off. That could have been an IPO there. It would have been the same process.

So in many respects, we don’t have to decide now and the Board doesn’t have to decide now but we will. And the decision will be made probably towards the second half of the year.

Angie Sedita - UBS

Okay, thanks. I do appreciate the granularity on the rest of the call and I’ll turn it over.

Bernard Duroc-Danner

Thank you very much. I think this concludes our call and thank you every one for your time and attention.

Operator

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

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