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Weatherford International Ltd. (NYSE:WFT)

Q1 2014 Results Earnings Conference Call

April 25, 2014 8:30 AM ET

Executives

Bernard Duroc-Danner - Chairman, President and CEO

Krishna Shivram - Chief Financial Officer

Dharmesh Mehta - Chief Operating Officer

Analysts

Jim Crandel - Cowen

James West - Barclays

Jim Wicklund - Credit Suisse

Ole Slorer - Morgan Stanley

Bill Herbert - Simmons & Company

Byron Pope - Tudor, Pickering, Holt

Robin Shoemaker - Citi

Operator

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Weatherford International First Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) We ask that you please limit yourself to one question and one follow-up then reenter the queue for any additional questions that you may.

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 will go through same structure as we did last time, which is Krishna will say few words, Dharmesh will then I will speak and then open it to questions afterward. Krishna, why don’t you get started?

Krishna Shivram

Thank you, Bernard, and good morning, everyone. I would like to remind our audience that some of our 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 statement.

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

My comments are going to address the first quarter of 2014 and then the outlook for 2014. Reported net loss on a GAAP basis for the first quarter of 2014 was $41 million or $0.05 per diluted share.

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

Non-GAAP earnings per share for the first quarter before charges was $0.13, revenue of $3.6 billion for the quarter was down 4% sequentially and 6% lower than the first quarter of 2013, reflecting mainly three issues. The impact of activity stoppages due to unusually severe winter weather conditions in Russia and on land in the United States. Normal seasonal weather related declines in the North Sea, China and Australia, and reductions in activity in Latin America driven by our capital discipline actions in Venezuela and completion of certain projects in Mexico.

Our core business revenue of $2.9 billion was down marginally by 3%, both sequentially and year-over-year. Our non-core business revenue of $678 million was down 9% sequentially and 19% lower year-over-year.

In the first quarter, our operating margin before R&D and corporate expenses was 11.2%, an improvement of 115 basis points sequentially and flat versus the first quarter of 2013. International margins improved 278 basis points sequentially, mainly in Latin America, which was up 782 basis points, reflecting the end of legacy lower margin contracts in Mexico and a more profitable activity mix in Argentina and Brazil.

Europe, Caspian, Russia, Sub-Sahara Africa margins improved 127 basis points, principally from Europe and Africa more than offsetting a weather-related deterioration in Russia.

Middle East, North Africa, Asia-Pacific margins improved by 80 basis points, with the recovering in Saudi Arabia more than offsetting seasonal weather declines in China and Australia.

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

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

Moving on to cash flow now, during the first quarter, our free cash flow from operations was a negative $439 million and our net debt increased by $673 million close to our expectation.

So on the key cash items were one-off in nature and include the payment of $253 million to settle the FCPA sanctioned countries investigation and $60 million of cash severance and restructuring costs. While we will continue to incur cash severance and restructuring costs over the next two quarters, these amounts will reduce overtime.

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

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

We expect to conclude the bulk of the cost reduction program by the end of the second quarter. In addition, actions to shutdown 20 loss making operating locations began in the first quarter with another 30 such operating locations slated for closure in the second quarter.

Now moving on to the outlook for the second quarter and the year. The second quarter of 2014 will see an increase in revenue in all regions with the exception of the seasonal slowdown in Canada.

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

We also fully expect that our management at all levels will complete the cost reduction efforts and refocus on growing the core business. Additionally, we will benefit from larger cost savings.

The combination of market activity, contract wins, cost cuts and the latest rolling forecasts gives us confidence to reaffirm our most recent earnings guidance of between $1.10 and $1.20 per share for the year.

This assumes a full year of contribution by both our core and non-core businesses, and we will change our estimates as a non-core business -- over the course of the year assuming the earnings contributions of the divested businesses are material.

This guidance includes about $0.30 from our cost savings actions which will become -- which will really become visible in our results from the second quarter onwards. $0.25 out of the $0.30 cost savings will come from the headcount reduction, while the rest coming from location shutdowns and other areas.

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

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

We have advanced well into the process of socializing with potential buyers, the second of the four non-core businesses namely the testing and production services business. The work stream for the other two business divestitures are on schedule and we expect to complete these during the second half of the year.

The work to carve out the land drilling rig business is also on going and on track for a first quarter 2013 IPO or spin. Coupled with these operating cash flow improvements and expected cash proceeds from our divestiture program, we expect net debt reduced to $7 billion by the end of 2014, resulting in an improved debt to capitalization ratio of about 45%.

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

Dharmesh Mehta

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

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

We have standardized the support origination so that we have similar support structures in small, medium and large countries. This should enable us to stay efficient as we grow again. The effort involve in eliminating 4,307 positions to-date has been significant. The benefits will come in the quarter and years ahead.

The main area of focus has been to identify location, where we do not have a competitive advantage and exit from some of the businesses in those locations, exit the business in some of these locations will not only eliminate future loses but will also allow the origination to increase intensity and focus on areas where we can grow our profitability.

After a comprehensive review of our global service footprint 50 such locations have been identified, action to shutdown 20 locations began in the first quarter, with the rest plan to be shutdown in the second quarter.

While these collective actions will be involve some one-time severance and restructuring costs, the end result will be a leaner and better company, better equipped to deliver revenue growth and better margins.

And last but not the least, at the end of the first quarter after comprehensive review we had one of the strongest pipeline of projects and contracts in recent times and this time across almost every major region of the world, resulting growth in the core segments will have material impact on the profitability as the year progresses.

Some details for each geographic area are as follows. The U.S., all core segments in the U.S. saw considerable progress in the first quarter and the March exit rate for revenue and profitability was one of the strongest in recent history.

The March exit rate was driven by an increasing activity and elimination of weather-related impact. We expect the run rate to get better as activity increases in the U.S. Our newest generation rotary-steerable system delivered well in record time for customers in three different share movements. Based on technology, performance and contracts awarded our mission to evaluation is expected to show very strong growth for the remainder of the year.

The repair of our pressure pumping business remains on track. We're more than 90% of our horsepower contracted and are on track to all available horsepower under contract by mid year. Artificial lift and completion also progressed well in the quarter and are expected to grow for the remainder of the year.

Canada had a solid quarter and performance was good despite the currency impact, completion, formation evaluation and artificial lift all did very well in Canada. Completion growth was driven by successful rollout of several new technologies for the thermal completion marketplace.

In summary, North America will have a very strong year in 2014. Latin America, 2014 will be a transition year for Latin America, the number of well known factors and the first quarter performance was indicative of these factors.

Having said that, following improvements in Latin America are worth highlighting. Margins will be better in 2014 as we replaced lower margin or loss-making contracts with more profitable contracts.

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

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

Middle East, North Africa and Asia-Pacific. Despite seasonal factors, margin improvements were good in the first quarter and we continue to improve as we move into 2014. Primary factors driving margin improvements are as follows.

Asia performance was good in the first quarter and will continue to improve as the year progresses due to new contract wins and implementation of well construction contracts one in 2013. The first quarter alone secured well construction contracts in excess of $100 million.

Middle East and North Africa improvements will be driven primarily by the performance of the Gulf countries. In the first quarter, we completed two strategic technology products in Gulf countries, the first successful commercial guideway azimuthal resistivity geosteering well and the first application of managed special drilling on a deep high pressure gas well.

These projects have resulted in good commercial contracts. Gulf countries have a strong volume of contracts in all core segments and revenues from the core segment in the fourth quarter of 2014 will be 40% higher when compared to the first quarter of 2014.

Focused effort for Middle East will also be to exit lossmaking locations, primarily North Africa and Iraq. During the first quarter, we exited 13 locations and will complete all location exits in the second quarter.

In Iraq, we finished the last turnkey drilling project and also demobilized from the Iraq’s early production facility projects during the first quarter. Our only remaining early production facility project Zubair is now 80% complete. There are $64 million in contingencies and about $250 million in potential claims from us still pending on the project.

We are in active negotiation to bring resolution to all the potential claims on the project. While Asia performance has been solid, Middle East performance has been challenged primarily due to North Africa and Iraq, that will change this year. Combination of revenue growth from core businesses and elimination of losses from -- by exiting business will deliver significant margin expansion in recent years.

Europe, Caspian, Sub-Sahara Africa and Russia. Revenue growth in this region will be driven by the following factors. Activity increases in the U.K. North Sea coupled with delayed projects coming online will result in higher revenue growth in Europe.

100% of our forecasted 2014 revenue is already contracted. Sub-Sahara Africa had the best quarter in history from revenue and margin perspective. The first quarter was also of a good quarter for new tender awards in Sub-Sahara Africa.

During the first quarter alone, we have secured contracts in excess of $300 million across several product lines. Mobilization work for some of these contracts has already started and revenues and profitability will increase as the year progresses.

Russia revenue in the first quarter was significantly impacted by weather related events and currency weakness. During the first quarter, we have seen a significant number contract wins in stimulation and formation evaluation.

Recent wins coupled with existing contracts in well construction will drive revenue growth in quarters to come. In summary, strong revenue growth in the core segment will drive profitability in the region as the year progresses.

Moving on to working capital, the first quarter working capital matrix are influenced by the seasonal trends that are typical of the first quarter of any year with one exception. Inventory balances had the smallest growth in the first quarter when compared to prior years.

As revenue increases in subsequent quarters, we will see a meaningful reduction in DSI as the year progresses. Capital efficiency remains a priority for the organization, the discipline around working capital and capital allocation will continue.

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

For the remainder of the year, the entire operational organization would be focused on delivering the contracts you’ve secured and growing the core segment. This will allow us to deliver a material improvement in margins and profitability in 2014 when compared to 2013.

I will now turn the call over to Bernard.

Bernard Duroc-Danner

Thank you Dharmesh. I had my own synthesis to the first quarter. I made the following comments. North America's quarter was lower than expected in parts where we had weather issues.

But weather wasn’t the whole story. With our own Weatherford specific dynamics, the employment reduction took place early in the quarter. This was very distracting until the process was already at quarter’s end.

Separate and distinct from weather in Weatherford dynamics, U.S. activity in January and February was a sleek for like of a better term and for no discernible reasons. The transition to March was all the more intense. Activity in our own successes rallied very strong in March and has since gone from strength to strength.

Our U.S. run rate in March exceeded all our expectations, a combination of self-help and strong market reaction. Latin America had lower revenues coming out of Mexico and Venezuela with much higher overall margins.

A large contract with thin profitability was completed lowering Mexico’s revenue by about 30% for the year. The remaining business mix in Mexico with higher margins, rising performance in Argentina is also to be credited for higher operating income.

Eastern hemisphere went to a seasonal low. It was very sharp in Russia and particularly low in the North Sea and some areas of Asia-Pacific. The sharp seasonal downturn marked positive financial developments.

As Dharmesh observed, we made progress in Sub-Sahara Africa and to a degree in MENA. In fact, Q1 showed record financial results for SSA. Sub-Sahara Africa was pretty much a factor as Weatherford is becoming one.

The sequential margins in eastern hemisphere rose from Q4 to Q1 which is encouraging. This reflects both our large head room in eastern hemisphere, given very low levels of margins coming out of ‘13, also reflects the seasonal financial turnaround in SSA and MENA.

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

If you peel through the cash movement in the quarter in Q1, what will be apparent is continued progress in capital efficiency. Given strong seasonal trends in first quarter, the relative analysis is Q1 ‘13 on Q1 ‘14. That comparison shows capital investments and inventory, the two most critical capital segments with continued improved performance year-on-year.

At the same time, we took down BPOs on payrolls which is a necessary positive operating steps in an environment to rising backlog. Our receivable rose more than in Q1 ‘13. This reflected an unusually strong billing month in March. This is healthy and receivables will turn quickly into cash.

The U.S. government settlement, severance cash payments and the funding to completion of the last EPF contract, all are also cash events in Q1. They were expected and are even behind us but have a short life remaining. Severance funding will be completed in Q2. Our EPS funding is centrally to year end, not beyond.

The last EPF contract, Zubair, has been a major distraction on the financial burden. It is a management and judgment error. It is almost over. We’re progressing towards completion. We have a specific 80% percent of project for completion.

Project on the ground in Q1 was measurable and tangibly visible. This is happening in the grindingly methodical process and it is progressing nonetheless. We expect no or only transitional P&L movements on Zubair until completion of the project and the resolution of our potential variation order claims with our clients.

We plan for quarterly cash expenditures in 2Q, Q3 and Q4 to completion similar to Q1 and followed by corresponding large cash inflow with payment of our invoices upon completion of the project. To reiterate by announcement, Zubair will be the last EPF contract at Weatherford. We have not and we will not engage in any other turnkeys of any kind in Southern Iraq. The terms of engagements for us have changed.

Adding the various considerations of above, Q1 was constructive and very busy. Our results were modestly ahead of personal estimates, much was accomplished. It was all good. The level of profitability in Q1 is still too low. We must urgently drive a step change in our profitability. Our directions objective is to accomplish this fast, to be reliable and sustainable. You know what our direction is. It is simple and all changed.

It is summarize by three words, core, cost, cash. Core, we are focused on our product lines, well construction, commercial evaluation, completion and artificial lift. We divest in our non-core. We dedicate all our resources on people selection, people training, future technology development, asset based commitments and quality of execution.

We drove our core. Our future growth will be strong but disciplined and selective. We can achieve all three. Cost, equate cost to the well efficiency. It isn’t only reduction in workforce. It’s quality of contracting and contract management, all the way through to management of procurement. To calibrate the opportunity, we buy today in excess of $8 billion of products and services.

There was also the underlying logic of having a recommended domicile move from Switzerland to Ireland. It is all cost and efficiency driven. When you add the long-term pieces, there is room for large gains. We will pursue efficiency in all aspects of our business, operational, supply chain, financial, administrative. We have low-hanging fruit to harvest. Arguably, we have feet on the ground.

Cash, equate cash with better returns. The cost of returns is central to our decisions, all our decisions. We will generate free cash flow each and every year, we will delever. Free cash flow is a key management metrics driven by rising margins and capital efficiency. As we close all legacy issues and we’ll close having done that. Performance will speak for itself.

The combination of asset divestitures and our focus on creating a stronger, leaner company will produce a powerful and positive long-lasting effect on our balance sheet, will help drive a step change in our profitability. Nothing else, the direction won’t change. The entire organization is committed.

Performance wise, I will reiterate what Krishna shared with you because we strongly believe it to be accurate. For this year of 2014, we believe the earnings outlook of the company to be in the $1.10 to a $1.20 range. Free cash flow from operations to exceed $500 million. Our term objectives are targeted between $0.5 billion to a $1 billion in divestment proceeds by year end. To delever ‘13 on ’14, we must therefore exceed $1 billion. These expectations for ‘14 won’t change.

The outlook for balance of the year is simple and straightforward. Comments will focus on our remaining call. The actually percentage in rise, percentage rise in revenues and margins for Weatherford as a whole will be also influenced by timing of the non-core divestments. Upon divestment, the arithmetic is simple. The company's revenues will decline and margins rise.

Again, we will follow (indiscernible) for remaining company’s call, Q2 to Q4. The U.S. and Eastern Hemisphere will carry the U.S. gains over ’13. Both revenues and margins are expected to rise throughout the year. Both Eastern Hemisphere and U.S. will have strong years with improved financial results quarter-after-quarter.

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

Latin America revenues, operating income and margins will close the year higher than in Q1, paving the way for ‘15 with a combination of much stronger Argentina, Brazil and Colombia, joined by resurgent Mexico. Taking in isolation, overall revenues of the core will rise year-on-year versus ‘13 on ‘14 by about 10%.

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

We have three and only three objectives in mind, delever, derisk and step change profitability. 2014 will show material progression on all three. It is our direction, commitment and focus. It will be driven. It will not change.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will comes from the line of Jim Crandell with Cowen.

Jim Crandel - Cowen

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

Bernard Duroc-Danner

I think overall, this is now referring to the core, let's assume that we are only talking about the core. The timing of the non-core is difficult to know. By Q4, the core overall should run at 19, 1-9, or there about operating margins. And by operating margins, we are clear on the numbers being used, are always before corporate and R&D. Corporate and R&D represents roughly 2% of revenues, okay. Krishna, you may want to add to that. Krishna may want to add to that.

Krishna Shivram

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

Bernard Duroc-Danner

And the comment I added in the few words that I read, 19, there is a case to be made concurrently that both Dharmesh and I look at, which is the core should be around 19%, it may test 20 but then again, we will see.

Jim Crandel - Cowen

And on the revenue improvement Q1 to Q4, Bernard?

Bernard Duroc-Danner

Sorry.

Jim Crandel - Cowen

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

Bernard Duroc-Danner

Actually, when I just gave the year-on-year for the core which is even usually simpler, which is the cost will go roughly at 10%, ’13 on ’14, the overall core which is I think reasonable given what we have.

Jim Crandel - Cowen

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

Bernard Duroc-Danner

I’ll let Krishna answer that.

Krishna Shivram

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

Bernard Duroc-Danner

Our internal forecast point towards that direction, absolutely.

Jim Crandel - Cowen

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

Bernard Duroc-Danner

Thank you, Jim.

Operator

Your next question will come from the line of James West with Barclays.

James West - Barclays

Hey. Good morning, gentlemen.

Bernard Duroc-Danner

Good morning, James.

James West - Barclays

First, Krishna, in terms of the divestiture program where we stand now, one sale or one announced sale, the second one probably coming soon. There were two businesses that you intend to divest by the end of this year. I believe and correct me if I’m wrong here but part of the gain item and gaining the assets up for sale was the completion of standalone financials for the businesses. Has that been done at this point? Are those being share (indiscernible)?

Krishna Shivram

We have not checked that publicly, but the carve-out process is ongoing for some other businesses, principally the wellheads the drilling fluids. They have already been carve-out for businesses they are divesting. Is your question more about discontinued operations? Is that what you’re asking here?

James West - Barclays

Well, I was asking -- I think the two businesses, the one you just mentioned that you’re divesting that in order to line up the buyers -- they really just -- to see the financials from those operations, the carve-out process. I guess if you’re saying that that’s already occurred?

Dharmesh Mehta

I mean, obviously, we are showing a carve-out financial set of statements to potential buyers for the businesses that we are socializing absolutely.

Bernard Duroc-Danner

The other way to answer your question James is that remember there are four businesses altogether being sold, one is sold already, which is pipeline, now well testing. Then of course the other two you mentioned is wellhead and drilling fluids which are smaller. In all four cases, the carve-outs have been done ahead of time. The one that is I think still ongoing and will be ongoing for the balance of the year together with the process of audit and so forth will be the rig business. That’s a bigger animal and will be realistically -- will not be dealt with and whether it is a spin-off or an IPO variation thereof, it will not be dealt with until sometime early next year.

James West - Barclays

Okay. Fair enough. Understood. And then on the Latin American margins, I’m surprised at least my estimates to the upside significantly I think probably others as well. It sounds like from Dharmesh’s comments and Bernard your comments as well that those margins should continue. I guess I was concerned about the winding down with the Venezuela or winding down with the lower zone operations. But it seems like that that didn’t have a material impact on margins. Was there anything and am I missing something there in LatAm that drove better quarter than we should expect it or is this a good run rate going forward?

Bernard Duroc-Danner

Well, I will give you some thoughts and Dharmesh may add to it. The biggest, biggest, biggest mover in Q1 was actually a drop revenues coming from the largest operation we have in Latin America versus Mexico. Revenue dropped by 30% in Q1 versus Q4. That 30% in simple terms, you could assume it carried very operating income. So revenue down, no operating income move, therefore margin dropped. Big factor.

Second big factor is Argentina. Argentina has grown to where it is now the second operation in Latin America after Mexico and it’s hot on the trail of in terms of size of the Mexico. It overcame not only Venezuela should come down obviously for the reasons I mentioned, but also it has for us overcome Brazil and Columbia in terms of size and margin in Argentina very good. So that is the second factor.

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

Dharmesh Mehta

And James, the only other thing I would add to Bernard’s comments is we own extensive manufacturing footprint in Latin America and there is a lot of work on optimizing manufacturing footprint and that’s also contributing because you don’t have, I guess, the overhang of having inefficient manufacturing.

Bernard Duroc-Danner

Which is actually cost driven for some margins.

James West - Barclays

All right. Got it. Okay. Thanks gentlemen.

Bernard Duroc-Danner

Thank you, James.

Dharmesh Mehta

Thank you, James.

Operator

Your next question will come from the line of Jim Wicklund with Credit Suisse.

Jim Wicklund - Credit Suisse

Good morning, guys.

Bernard Duroc-Danner

Good morning, Jim.

Jim Wicklund - Credit Suisse

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

Bernard Duroc-Danner

No. There was no -- I wish on there was any catch-up payments from Venezuela, I am afraid not. I think maybe Kris now you want to address the process ongoing with PDVSA. But the answer to your question is no and you will find the margins in Latin America will bump around where they are today throughout the year and they probably end up a little bit higher towards the end of the year, simply because the start-up to well construction contracts in Brazil and the fact that Colombia will occur in the second half of the year and that kind of stuff, so you won’t done, to start, speak to at least (indiscernible) when you comment on Venezuela.

Jim Wicklund - Credit Suisse

And Krishna while you do outlook -- the catch up on Venezuela, can you tell us what the currency translation is being used and how that impacts everything?

Krishna Shivram

So on Venezuela, we are still using on the currency side, Jim, the official rate of 6.3 like our peers because we don’t have any -- we don’t intend to access any of the other avenues of exchange rate regimes that are being put in place by the Venezuelan government. But on progress with PDVSA, we are in active dialogue with that customer to engage in a constructive payment program, which will allow us to work on a more concrete footing with the customer going forward. This hasn’t concluded yet, but the signs are quite encouraging.

Jim Wicklund - Credit Suisse

Okay. And thank you, Krishna. And as my follow-up, I will ask both you gentlemen, what is the thing that you worry about most that could derail all these over the next 12 months everything you are doing? What’s the thing that you lose sleepover on a Tuesday night?

Bernard Duroc-Danner

I would say Jim if we were not public, we would not worry as that. What I mean by that is that everything has to work very, very well, so we keep both the credibility and basically what we are doing and so that would be our biggest worry. If we were private which I am not, if there is anything we will be private of course. If we were private, I think what we are doing is so simple and the drive to explain to communicate what we are going has been so intense for the organization. Never mind Walls Streets of the organization that I think that people are aligned and this is organization that can perform and the people really want the company to do well. It’s purely a question of time, it’s not a question of weather. Dharmesh, do you want to add to it?

Dharmesh Mehta

Sure. Couple of things, I would say, I would start with the U.S., it’s no longer about having sufficient contracts in our pipelines. We have the workers secure the work and most of it is core products that we do very well everything on date. So this is not exotic stuff. So we are not having to do any massive project integration or any of those things to deliver the revenue and the profitability they are targeting. The risk really is U.S. activity. It is really -- does it stay on this current pace in terms of as strong as Q2 levels selected today or does it stay down in Q4. The last two years that’s been an unknown event in terms of what happens in Q4. This year it doesn’t look likely, but you know the U.S. as well as I do. But if you take the U.S. activity out of the equation, you could have projects started delayed, but there is nothing that significant or the one project is that significant that would have a material movement when they have that done.

Jim Wicklund - Credit Suisse

Perfect. Gentlemen, thank you very much.

Bernard Duroc-Danner

And Jim, I would like to add of course the ever present geopolitical risk that exist, right. So this is the only thing out there which can cause everybody...

Dharmesh Mehta

So to summarize the geopolitics U.S. and the generic needs for us to be reliable, you have now the triagle of worry.

Jim Wicklund - Credit Suisse

Thank you, guys.

Operator

Your next question will come from the line of Ole Slorer with Morgan Stanley.

Ole Slorer - Morgan Stanley

Thanks a lot. It’s very rare to see companies take up this kind of headcount and cost whereas having some kind of major impairments on the execution capabilities. So, could you talk a little bit about the 20 locations that you are already using, the need for all these, how much of your headcount reduction is to do with this location reductions and how do you feel confident that this isn’t impacting the ability of the court to execute?

Bernard Duroc-Danner

Yes. On the headcount reduction, we have clearly identified by name over 6600 employees and the execution to-date has been very, very strong. Over 4300 employees have already been intimated and they are out of the company which leaves another 2300 to do. We have a week by week count of who is going to be intimated and which week and by the end of the second quarter, the rest of the employees will be off our payroll. So we have a very high degree of confidence in the execution of the headcount reduction, which will give us significant savings.

Now, on the location closures, basically we’re targeting locations which do have any significant revenue attributes. They are locations, which have -- we've kind of been hanging on to them with the cost base in place, hoping for more work or trying to get more work, trying to bid ourselves into such markets and with certain product line.

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

Dharmesh Mehta

Sure. So one more comment I would make is generally the cost cuts support positions. What we have done is that we basically come up with the template structure for we want the small country to look like, medium country to look like and a large country to look like. We analyze what support functions existed in these countries. Based upon the template, what is the headcount we needed and then we identified the appropriate measures that need to be taken to get to the right support structure level.

In many ways, you are not touching, but I would call the revenue generating assets of your organization as part of the headcount organization unless like Krishna talked about earlier you happened to be exiting wireline in the country of Norway because you don’t believe it has a right future or in the short term, you may let go the wireline people in Norway. But a lot of the focus has been around exiting the support structure. And in many ways, that is one of the reasons why we don’t anticipate a very strong negative impact at all or any impact on the revenue and the ability to deliver the core products and services.

Bernard Duroc-Danner

All right. I’ll give you the last overall view to add to what Krishna and Dharmesh said. So your point is well taken. What you’re really saying is that this business of laying off so many people leaves scars and always does some collateral damage. I don’t think anyone of us is saying that is not true. I would also say this, the notion that one can at the same time grow the core and so forth is have to come across is difficult because what we’re really saying is that we’re going to retreat and attack at the same time.

So I would say they were clear on that. I think the first of the thing is the reason why we wanted the curtailment to happen with massive internal communication and I really mean massive Ole and fast. It's precisely to get the retreat bit out of the way, so we could move into next phase, this is number one. Number two, as Dharmesh has identified, most of the position, I mean, no disrespect to the positions concerned, but most of the positions being curtailed. That will be described as redundant layers that grew particularly in the very high aggressive growth years. If anything, they probably were an obstacle to good functioning of operations and so I think we have more than unleashed operations rather than the constraint operation.

With respect to the locations, look we have rough numbers, over 1,100 locations. We’re talking about reducing 50. So you do the math, it is not, I’m using simplistic numbers here. We talked about 4% reduction, it is not a big number and you have by and large the candidates for shutdown have not been to my knowledge ever mandated from the Houston or Geneva, no. The logic of the turnaround and that’s going to be my last point Ole, the whole notion of turnaround. Logically, the turnaround made it compelling for the regions to identify within that mix a number of locations and business propositions that they knew so well but not sensible, were never sensible, they were overly aggressive.

And so really the list and the rationale if anything has been held back as we do not take too much risk at the Houston or Geneva level. So lastly, remember what Weatherford is. A step back for a minute. After all these years of growth etcetera, etcetera, etcetera, and probably, overly successful, went through some very hard times. The very hard time is not only felt by the shareholders, they were also felt by the entire organization. An organization that has stood at Weatherford all these years also understands that now we have to now that much of it is behind us will what caused the elements behind us.

Now we must perform. The people in the state understand the need for a turnaround and to the logic of what we’re doing and the fact that we are in a hurry to do it well is completely understood. And so the great endorsement on the part of the organizations what we’re doing, this is not a punishing mandate, it is actually something that the organization almost welcomes because it is what needs to get done. Sorry for the long answer.

Ole Slorer - Morgan Stanley

Nice, very comprehensive and thanks gents for helping shed some light on what must be after all a pretty difficult process. So I’ll hand it back.

Operator

Your next question will come from the line of Bill Herbert with Simmons & Company.

Bill Herbert - Simmons & Company

Thanks. Good morning.

Bernard Duroc-Danner

Good morning, Bill.

Bill Herbert - Simmons & Company

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

Bernard Duroc-Danner

Krishna, I want you to give the margins if you can by core segments Q1.

Krishna Shivram

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

Bill Herbert - Simmons & Company

Got it.

Krishna Shivram

Our production margin was 17.4% for Q1. Formation evaluation was quite low in Q1 because of some headwinds we had in the few countries, 5.5%. Well construction was 23.8%, completions was 23.6%, and stimulation will continue to be negative at minus 3.6%. That gives you (indiscernible) now.

As we go forward, we expect overall core margins to grow nicely. We will maintain our own on well construction and completions, in fact grow them marginally. Production will be pretty solid. Stimulation margins will turn around, obviously with the market conditions and the continuous repair we’re doing on the businesses going into the second, third and fourth quarters. And formation evaluation will also improve as we go forward to reach the 19% kind of margin in the fourth quarter.

Bernard Duroc-Danner

So, let me put it in perspective for you, Bill. I think, Krishna is reluctant to give you our internal forecast on future margins which I can understand although, it is all modeled. The biggest movers is obviously well constructions and completion of production on well, we’ll continue do well and there are some improvement for that plan. They are not very high, the improvements, the deltas are very high. The biggest delta comes in formation and evaluation. And then of course, because stimulation is still negative, it turns positive and there is also a delta.

Bill Herbert - Simmons & Company

Okay.

Dharmesh Mehta

Stimulation had the biggest impact on the weather, both Russia and U.S.

Bill Herbert - Simmons & Company

So Q1 is difficult.

Dharmesh Mehta

It’s important to know from a stimulation perspective color.

Bernard Duroc-Danner

But at the same time, also that the -- you understand that we are not. And I think, Bill understands that we are not head of the pressure pumping companies. It is not revenue wise, the biggest mover. I know Bill understands that.

Bill Herbert - Simmons & Company

Right. Got that. Thanks very much. And then more of a conceptual question going-forward here. In a world in which you’re generating very attractive margins on your best core businesses, you expect to witness any possible and well supported improvement in your underperforming core businesses. And that’s an overall margin which is going to be pretty to earn impressive. And then the world in which sort of global E&P CapEx is witnessing sort of methodical that’s hardly prosodic growth. Walk us through detention between trying to realize growth and preserving your normalized margins going forward.

Bernard Duroc-Danner

That’s a fair question. So it is more of a macro or whether what the IOCs are doing is tenable from the supply of hydrocarbons standpoint. I’m referring to the liquid segment, not the gas segment which is a different story. So step out side, this is a topic for a different day. I think that we’re very, very aware that we cannot have too high of an expectation of growth internally here because of the underlying market. What -- we get some competent is a function of two things, three things really.

And one is the fact that we have in our core’s leadership and segments of the business which are very specific, which are not ones that Wall Street is particularly focused in. They're not very large segments of the industry but still the one in which we excel. The reasons are, they will have to do with the situations of reservoirs around the world, are going to do quite well from a speculative standpoint. For example, there is business of well integrity. There is business in mature field place. In general, we'll see a more generous allocation of capital than we did in the past, obviously potential of the pie, this is one issue.

The second is, again, remember who you are, who you are speaking with. We have, with the exception of North America, we have in rest of the world, how would you characterize our market penetration? It’s rather low. We have a very low share of the underlying pie. In fact by any measurement you take analytically, you'll find that roughly speaking, where we are in North America versus where we are internationally globally, there are differences. About one-third in rest of the world where we are as a participation of the E&P pie than we are in North America and there is no reason for that fundamentally.

Yeah, there are differences where you deal with a Brazil or whether you deal with a Saudi or you deal with a Russia. I’m clear. But overall, Bill, there is no reason why we only have the third internationally of what we have in North America in terms of share participation. That doesn't mean at all, we are in the function of crusades to gain share. But yes, it just means that we have more headroom.

If you asked about my comments, I don’t want to detail too much for competitive reasons. I love the segments that we're in, not all. But lot of times we are in, we are specialist or we are -- so for the matter of our destiny and segments where we pretty much on our own versus our competitors and we have been excellent. And so I would put forward to you that your point is actually correct and we are moderating our views on what we should be thriving to get done.

You don't hear us talk about 20% plan, that sort of stuff anymore. We are much more reasonable. We also want to go down the road of doing things too aggressively with core quality and core capital efficiency, completely clear on this. At the same time I understand that on the virtues of being smaller, on the virtues of being focused, on the virtues of having infrastructure is that actually, it’s a little bit easier for us to grow than other people.

Bill Herbert - Simmons & Company

Yes, all fair points. Thanks very much.

Operator

Your next question will come from the line of Byron Pope with Tudor, Pickering, Holt.

Byron Pope - Tudor, Pickering, Holt

Good morning. Bernard, you mentioned that in the Middle East, North Africa and Asia Pacific, growth was led by the Gulf countries. Just was wondering if you could share a little bit about which geo market within that region, do you think drive the growth? I mean, there seems to be a lot of excitement about Saudi, so wondering if you could size for us, which of those geo markets were being most impactful to your growth over the next couple of years?

Bernard Duroc-Danner

Byron, an easy question. But I'll try to make it a bit more comprehensive of an answer. The kingdom is obviously the place to quote Saudi Arabia. Why? Not only because the intense work on and around maintaining the oil production capacity from the development of -- continued development of their excellent reservoirs which are showing age, which is a one site of issue.

The other side of issue is the development of unconventional Shell gas resources in the Northwest part of the country, which is a second sort of the development in Saudi Arabia. Combined both those plans executed large increases in drilling this year and next year. There is a biggest play by far in terms of delta. This is number one. I do not want to also forget and talking about Saudi Arabia, the other two large markets and now the third one which is Kuwait, Abu Dhabi and even Oman.

All three of them for their only idiosyncratic reasons have some very serious expansion plans. The number in isolation because the size of their respective markets are not as large in isolation as Saudi collectively they are, so that the other move up. And I think to end up with the tale of two cities when you look at the Gulf coast which is on the one hand you have the market as was described where I think competitive intensity is high but growth is also promising, the quality of business is very high in terms of the types of technological requirements and operational requirements but at the same time, margins are good and it is quite stable, it's reliable. As reliable as anything could be in industry.

Then you have the other markets which I think are more difficult simply because of the nature of the market and there will be Southern Iraq. And so it is understandable that's not for this company, of which Weatherford is one, choose to deemphasize Southern Iraq and then on the contrary emphasize the other one, which had really an attractive outlook. Always subject to geopolitical risk, attractive outlook and reliable buyer through the end of next year possibly the following -- possibly into 16, it shouldn’t take time.

Byron Pope - Tudor, Pickering, Holt

Thank you.

Bernard Duroc-Danner

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

Operator

Our final question will come from the line of Robin Shoemaker with Citi.

Robin Shoemaker - Citi

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

Dharmesh Mehta

All Right. I know that the common things you are hearing, everybody is talking about is, there are some more artificial lift we have bought which is ESPs and how ESPs are being used for the steel rods. I mean, simply, if you look at the efficiency of what's been publicized and what’s publicly available, the efficiency of that system are 20% at 50 barrels a day, the running value up to 40% something less, and around that system, we have 60% efficiency.

If you look at the cost of changing an ESP, the fact that there were compass fundamental down hole, the fact that there was production changes from 1,000 barrels a day to 20 barrels a day over a span of a year. And then number of times you would have to change the pumps out and the cost, the electrical cost required, there are many, many factors that make it highly unlikely that you’ll have a large-scale replacement of RRPs with ESPs going. And I would say for only one customer that you talk about doing something like that, we also have several customers in our backlog of artificial lift the U.S. where they are moving away from the ESPs and moving to RRPs.

So this battle of ESP, is it a new twist on ESP, is it a new twist on RRP, I think that battle will raise on as time will decide. But if you look at the fundamentals of what the ESPs are all about, look at the fundamentally economies that are running large scale works, if you look at the workover and the well servicing costs, it's hard to define what really the basics are, what is the right thing from a business perspective, from artificial lift perspective.

Bernard Duroc-Danner

A closing comment, Robin, this is fun question, because this is our very first business that we developed 27 years ago in this company. What is wonderful about ESPs that they have a motor downhole because that gives them essentially tremendous, tremendous power to move fluids.

What is terrible about ESP is they have a motor downhole because it’s vulnerable to break. Now I would just say that I think it is -- could be endearing to find now the humble field of artificial getting so much press after all these years. So in a way, it makes me happy. We take the competitive pressures certainly from GE very seriously because we should because it is a very, very good company and obviously a very large company et cetera so we take it very seriously. As we should assume that this is something that with make all of us more competitive.

With respect to the replacement of this form of pump by that form pump, time will tell. I think a smaller diameter ESP in the horizontal section of a shale well is not a bad idea. Small diameter ESP in the horizontal section of a shale well has challenging economics and what I’ve just told you has been true, is true, will be true. Having said this, there will horses for courses. There will be applications where it does well. And I wish the company that developed it good fortune in getting the product up to market. And I’ll leave it at that.

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

Operator

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

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