Weatherford International's (WFT) CEO Bernard Duroc-Danner on Q2 2014 Results - Earnings Call Transcript

Weatherford International Ltd. (NYSE:WFT)

Q2 2014 Earnings Conference Call

July 24, 2014 08:30 AM ET

Executives

Bernard Duroc-Danner - Chairman, President and CEO

Krishna Shivram - CFO

Dharmesh Mehta - COO

Analysts

Jim Crandell - Cowen Securities

Jim Wicklund - CSSB

Ole Slorer - Morgan Stanley

Angie Sedita - UBS

Operator

Good morning. My name is Laurie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Weatherford International Second Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator instructions) 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 have

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. With two prepared comments following up with Krishna and Dharmesh and then myself in the Q&A session. Krishna?

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

My comments are going to address the second quarter of 2014 and then the outlook for the rest of the year. Earnings per share for the second quarter the whole charges was $0.24, this represents an 85% sequential improvement and a 60% improvement compared with the second quarter of last year. Revenue of $3.7 billion for the quarter increased 3% sequentially and 8% excluding the seasonal impact in Canada while operating income margins before R&D and corporate expenses improved 280 basis points sequentially to 14% and rose 350 basis points versus the second quarter of last year. Operating income margins before R&D and corporate expenses improved 280 basis points sequentially to 14% and rose 350 basis points versus the second quarter of last year. Eastern Hemisphere margins improved 576 basis points sequentially. North America margins increased 271 basis points to 15.2% reflecting very strong activity in the U.S. online more than offsetting the spring breakup effects in Canada. The U.S. margins improved 75% sequentially on 15% revenue increased.

The Europe, Caspian, Sub-Sahara Africa and Russia region margins increased by 873 basis points to 16.8% reflecting the strong seasonal recovery in Russia activity increased market sale in West Africa and the record quarter for Europe. Middle East, North Africa, Asia region margins increased 273 basis points to 9.7% with improvements from the gulf countries.

These improvements were only partly offset by a reduction in Latin America margins which were down 488 basis points to 12.4% reflecting lower margins in Mexico with depressed activity levels and the impact of strike and pay increases in Argentina.

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

Underlying the overall margin of 14%, our 16.5% margin for the core businesses versus 15.1% in the first quarter and the 3.5% margin for the non-core businesses was to the negative margin of minus 5.8% in the first quarter.

I will now state the sequential progress of our core business margins for the second quarter. Formation evaluation margins improved 292 basis points to 8.4%. Well construction margins improved 149 basis points to 25.3%. Completions modules declined 148 basis points to 22.1% artificial lift margins improved 16 basis points to 17.6% while stimulation margins registered a 643 basis point improvement to 2.8%.

Both completions and artificial lift margins were adversely affected by the seasonality in Canada. Our non-core business margins also recorded improvements in the land drilling rig, pipeline and specialty services, drilling fluids and testing businesses.

The beneficial impact of cost reductions on the results for the second quarter was $0.07 versus $0.01 in the first quarter. The tax rate in the second quarter was 22% reflecting improved profitability in certain revenue-based tax countries and net favorable settlement in discrete items that happen to go inside in the second quarter. The impact of the lower tax rate was offset dollar for dollar by higher R&D spend this quarter and increased foreign exchange losses.

Moving on to cash flow now. During the second quarter our free cash flow from operations was a positive $59 million and our net debt decreased by $101 million. This included the payment of $60 million of cash severence and restructuring costs associated with a downsizing program. Working capital balances reduced by $91 million driven mainly by strong customer collections. CapEx of $344 million net of lost-in-hole reflected the investments needed or new incremental core business contracts wins around the world principally North America, Latin America, Sub-Sahara Africa, Europe and Asia. These investments will show up in terms of increased revenue and profitability in the coming quarters and well into 2015.

Moving on to the cost reduction efforts now, there has been tremendous progress on reducing our cost base. We have trimmed the risk programs down by 608 to 6024 positions which is expected to realize $430 million of pre-tax savings on an annualized basis. This reduction in the risk program recognizes and anticipate the expected activity increases across Latin America West Africa and the U.S. in the second half of the year; of this number 5430 positions or 90% have been eliminated to date. In addition, 60 operating locations have now been indentified for closure and 26 for shutdown before the end of the second quarter with the bulk of the remaining closures will be concluded in the third quarter. The combined savings from the slightly reduced risk program and the location clean up exercise will yield $500 million in pre-tax annualized savings.

Now, moving on to the outlook for the third and fourth quarters. Before I go further let me mention that the outlook comments include all of the businesses core and non-core as we are not sure of the exact closing dates of the divestment transactions. As these transactions closed we will seek to provide revised guidance although the impact of the divestitures on our earnings per share is not expected to be material. The third quarter of 2014 will see an increase in revenue in all regions led by North America while Canada’s recovery from the spring breakup will augment continuing increase activity in the U.S. Latin America, where our operations in Argentina, Brazil, Mexico and Venezuela will improve. Middle East, North Africa, Asia-Pacific; where we expect to gain traction in the Gulf countries, China and Indonesia and Europe, Caspian, Africa, Russia where our principal growth will come from offshore Russia and West Africa.

Overall, our revenue growth will be driven by market activity and contract wins in our core businesses. Aided further by a cost reduction effort, our third quarter earnings per share should range between $0.33 and $0.36. In the fourth quarter, the combination of increased market activity, contract wins, incremental cost savings and our latest internal rolling forecast gives us enough confidence to offer guidance for the fourth quarter at between $0.43 and $0.47, giving us the full-year earnings expectation of between $1.13 and $1.20 per share. Our tax rate for the second half of the year will range between 25% and 30%, with the full-year tax rate converging to between 25% and 28%. This will be dependent on the geographic mix of earnings.

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

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

The combined EBITDA of these rig operations in 2013 was $56 million on revenue of $699 million. For the first half of 2014, the combined revenue on EBITDA was $305 million and $7 million respectively. Given these financial results and more importantly the geopolitical risks attached to relatively immovable assets in these countries, we believe this is a reasonable value for the sale of these rigs. This transaction has also made the remaining drilling rig business more attractive to investors as the geographical footprint and the average age of the remaining fleet which is 7.7 years make it potentially the newest international land drilling rig fleet in the market.

The work to carve out the remaining land drilling rig business is also on going and on track for our 2015 IPO or spin. We continue to make progress on the divestments of the testing and production services business and we expect to be able to announce the transaction before the end of the third quarter. The U.S. drilling fluids business is expected to be marketed in the third quarter and we should be able to control the sale before year end.

Given all of this, we believe we can achieve the target of $1 billion in divestment proceeds in cash during 2014. Coupled with operating cash flow improvements in the second half, we expect net debt to reduce to $7 billion by the end of this year, resulting in an improved debt-to-capitalization ratio of about 45%.

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

Dharmesh Mehta

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

Cost; reduction in force is 90% complete, and will be substantially complete by the end of third quarter. Once concluded we will achieve our objective of a ratio of three revenue generating employees for each support employee in the organization. We remain on track to deliver a step change in revenue and profits generated on a per employee basis by the end of the year. We have completed identification of all the exit locations where we are not competitive, and we will continue to work diligently to complete the exits in the next 90 days.

From this point forward, operations will focus on areas where we provide differentiated products and services to our clients. The net result would be continued improvement in margins in the quarters ahead.

Some relevant comments on the five core segments; artificial lift, the second quarter saw continued operational improvement in artificial lift product line. Demand increased across all the different forms of lift has witnessed by incoming orders in manufacturing. Highlights for the second quarter are: a continued increase in demand for the high volume Rotaflex pumping unit. Demand increases due to activity in unconventional world and also the previously discussed ESP replacement program. Manufacturing capacity will increase by 100% during the third quarter to meet the increasing demand.

A 25% increase in our rod (ph) bearing capacity during the second quarter to meet the increasing demand caused by the shift to horizontal wells. Over the past year, volume has increased by a 450%. The patented automated rod rotator has followed the same path of growth. Integrated Weatherford’s comprehensive software packages of Well Pilot and Field Office, we know offer a comprehensive production optimization solution.

Welcoming our industry leading platform Field Office now stands at more than 480,000 wells. To put this in perspective, there are approximately 1 million artificially lifted wells in the world. Field Office is now the industry standard for monitoring and optimization of artificially lifted wells.

Weatherford has also launched a comprehensive production optimization consulting service and is now actively engaged with our customers to help optimize their production from unconventional wells. Weatherford has invested over $300 million in new plants over the past three years. Manufacturing capacity coupled with lift in production optimization technology and ever increasing demand for lift optimization will drive growth in artificial lift in the quarters and years ahead.

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

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

In the Eastern Hemisphere, the focus on commercialization of game changing technology for offshore completion. These leading technologies reduce rig time and operational risks associated with wire line intervention. Using radio frequency identification also known as RFID, we’ve created a platform for intervention free offshore completion. We’ve launched a technology and are currently conducting commercial field trials with several customers. We’ve deployed this technology back-to-back on multiples wells for a major operator, resulting in an installation saving times of three days or in excess of a $1 million spud well. The system also accelerates time to first oil while the increasing the safety and reliability at the same time.

Commercial evaluation. Margin improvement was driven primarily by increased market share gains in the U.S. coupled with increased global technology uptake. We have seen strong demand from our client base for answer (ph) products associated with the reservoirs that allow for collaboration in addressing the industry challenges of improving production and tight economics in unconventional reservoirs. On the drilling side, we have seen strong demand for our revolution rotary steerable technology as we continue to deliver real results to our customer base. We recently delivered the fastest well for one of our leading clients in the Eagle Ford with our rotary steerable and LWD technology.

Utilizing unique answer products such as FracAdvisor, a decision making software that helps plant placement of wells and optimize a fashioning program. Weatherford is collaborating with our clients to build a roadmap for intelligent completion design and optimal use of stages and fractioning horsepower to improve production. We’ve combined our LWD well suite of technology with FracAdvisor in the Eagle Ford and the Bakken to drive overall reservoir effectiveness.

Multiple 10,000 foot horizontal sections have been drilled with advanced LWD sensors and then used inputs of FracAdvisor. Our clients have reported significant production improvement and reduced completion and fractioning cost utilizing these technologies.

Stimulation. Stimulation margins in the second quarter improved significantly by over 650 basis points over the first quarter. Profitability improvement was driven by overall market activity as a result of the efforts we made to repair our pressure pumping business. We have deployed all horsepower and 80% of that is now in 24 hour operations.

At the end of the quarter, we have 200,000 more horsepower working today compared to the beginning of the year. Industry challenges relating to the availability and transportation of proppant also impacted Weatherford in the second quarter, but we have been able to minimize the effect on our operations. The international pressure pumping business is healthy and we will continue to grow by pursuing and investing in the right opportunities.

Well construction. The second quarter saw continuation of contract awards and increased activity. In the first half of 2014, we have increased the deepwater market share of several of the product lines such as liner hangers and tubular running services in our well construction portfolio.

Margin growth in the second quarter in Europe, Caspian, Russian and Africa was driven by seasonal factors and the continued contribution of the high profit margins of the construction product portfolio.

As for offshore developments, nothing is more crucial than the ability to maintain the integrity of well throughout its lifecycle. The stability of the well bore is not only important maximizing recovery but also to ensure reliability and safety of the system.

Weatherford well construction portfolio, as an industry leading market share in deepwater and we will continue to benefit from both activity and market share growth in this segment. There are significant startups -- there are significant projects in the startup phase in difference parts of the world, the growth activity of this segment will shine in their quarters ahead.

In summary, all five core segment have very good prognosis for revenue growth, margin improvement or both. The non-core businesses has ensured very good margin improvement in the second quarter or the first quarter. Improvement was driven by our seasonal factors and the completion of startups. In the first half of the year, operations has completed 10 years startups, once the diversification is completed we will have a young, modern rig fleet. Excluding Mexico, the primary work that remains is getting another rig’s on contract. Demand is robust and we anticipate getting these few idle rigs contracted and working in the quarters ahead.

Cash; improvement in operation of cash flow remain a key focus area for operations. Out of 84% of our global inventories now under automated controls for replenishment, as the revenue growth inventory management will become more effective and efficient.

Improvement in asset utilization is a priority area for operations. All access of invoicing, technology, timeliness, accuracy and summarization continue with their focus and attention for the leadership team. Capital efficiency will continue to be a focus area until we reach our long term target of 100 days of working capitals.

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

The acquisition in organic development, there were huge technology portfolio that has not been commercially developed and that will be a focus area for operations in the quarters to come.

Bernard Duroc-Danner

Thank you, Dharmesh. So the quarter was progressed, the quarter was solid. We have the highest -- company’s highest exhibition of operating income in recent history. That’s exceptional in of itself, particularly a second quarter which is traditionally weak at Weatherford. The quarter was all about operations. Operating income increased by $0.11 Q1 to Q2. Corporate interests were near identical for one quarter to the next. R&D and other which are essentially non-cash foreign exchange fluctuations or $1.5 higher.

Taxes were $1.5 lower or just about perfect offset, Q2 was earned at the operating level. In our operating performance, North America was up $0.05; Eastern hemisphere was up $0.09 and only Latin America to push that back down $0.03.

We expected little more to the Latin America, little less in Canada. In the aggregate, they both netted themselves. The quarter otherwise went as timed. Canada matters a lot to us, it represents on average about 20% of North America. In Q2, Canada went through its seasonal break up it wasn’t as sharp as in the prior year.

The weather pattern was normal for a change and also and this makes the bright side of the Canadian moon Q1 hadn’t been as strong as in prior years. As a result, Q1 and Q2 comparison were not punitive. Revenues declined sequentially by 35% in Canada and earnings declined by about $0.05. The region held detrimental of 34% which is good performance.

The U.S. had a very strong quarter, one of which we believe will become a pattern of continuous improvements over the next 18 months. On 15% increase in revenues and where there were 50 percentage point incremental. The U.S. delivered closer to $0.10 increase over Q1. The improvement was across the board with formation and valuation creating greatest incremental margins with all the core product lines contributing none with us behind.

The Eastern Hemisphere did also better across the board, all of these regions contributed with no exception. I was particular recognized Sub-Sahara Africa and Europe as high performance. Margin improvement was a quarter’s highlight. Seasonality at it fall in Europe, Russia and parts of Asia, but also contractual discipline, cost cuts and operating focus paid early dividend.

As you know we’re closing out profitable commitments and emphasizing our economic place. We’re focusing on what is the most competitively attractive. All is driven by our core and the natural markets where they can play the best. Eastern Hemisphere has a long runway of improvement ahead; our strategic and operating plan is well defined.

Latin America was the only sequential decline. Revenues were flat both products and service mix wasn’t favorable. Much of the issue was adjourned with the business in Q2 to the second half, so if it happen in Argentina, Columbia, Brazil and Ecuador for either local idiosyncratic reasons, for example Columbia’s actions or related events.

Mexico deteriorated further. In Q2; we were at half of our activity levels and barely breakeven. We believe Q2 will be below point for us in Mexico, this also matters, Mexico is an all important play as a national focus market for us. The prognosis for Latin America in general and Mexico in particular is better opportunity in Q4 and even more so ‘15. You heard comments on the global reduction in the employment from both Krishna and Dharmesh I want to add to it all our point out is all regions benefitted in simple terms a cost reductions more they made up for the Canadian breakup don’t look at it that way.

If you deal through the cash movements, what we apparent is continued progress and capital efficiency. Given season trends and typical first half of the year, the relevant analysis is Q2 ’13 on Q2 ’14 year-on-year. That comparison shows us swings of multiple is almost $400 million. We consumed about $300 million in Q2 of 2013. We generated over $100 million in Q2 of ’14. CapEx was as expected, disciplined and focused. Inventories and DSI increased seasonally but did so modestly.

Receivable DSO improved. Combination of the managed capital intensity and improved profitability returned free cash flow positive in the second quarter which historically never happens. Also, and it is a purpose for use of cash, we took down BPO on payables which is necessary step in the environment of rising activity. Our payables are the lowest they have been in many years. This type of cost initiatives for procurement.

In summary, as I said in the beginning, Q2 was progress. With an operating income of 14% we have both headroom and momentum. Our core operating income this quarter was 16.5%, these margins were moved to 20% before the year is over the company should progress we see this year. We all went into our direction; it is simple and summarizes a free well core cost cash. Core was always our product line nothing else. Cost, equate cost for the word efficiency, all matters is efficiency.

Cash, equate cash to the word of returns all aspects to returns, nothing else. The direction unchanged, the entire organization is committed the entire management is committed. The outlook for the balance of the year is healthy, there are no regional exceptions. All regions are progressed albeit the different rates. The U.S. and eastern hemisphere will continue to improve strongly in the second half of the year.

In both cases, revenues and margins are expected to rise. In the U.S., we expect particular strength for us in the Permian and the Rocky mountains. The other reservoir phase is also constructive in their outlook. Amongst the core, lift, completion and formation evaluation will shine. In eastern hemisphere, we expect the Gulf countries in Middle East and I will see for Europe, Indonesia, Malaysia for Asia and much of the offshore and deep water phase of Sub-Sahara Africa to show the greater escape.

Within the call, well construction will show the most progress. Canada will recover seasonally, the improvements will be solid and still very much around the oil segment. Latin America will be stronger in the second half for the start up of contracts in Brazil, recovery in Columbia, our renewed dates in Argentina. Mexico, Mexico was started slow process resurgent for what amounts to very level in Q2. Latin America revenues, operating income and margins will closed yet materially higher than in Q1. Phasing the ways for ’15 with the combination of the much stronger Argentina, Brazil and Columbia joined by a rapidly strengthening Mexico. Latin America will not be alike at second half of ’14 and even less so in ’15. In the prior conference call, we suggested Q1 on Q4; operating income margins would likely arise by about 400 basis points. We have a 280 basis point move from Q1 to Q2. We expect to exceed the original 400 basis point target Q1 to Q4.

Operating income closed to same 400 basis point improvements but from a Q2 base rather than Q1 as originally anticipated. Our leverage will come down by year-end our net debt to be at $7 billion or less, a combination of free cash flow and after sales. We viewed in 2015 next year, as a year which would deliver substantially more. Focus on the core, an emphasis on returns do not fall safe organic growth quite contrarily. The core has very second secure growth attributes and is led to low capital intensity. Based on our industrial and technological position, together with a full grown infrastructure, we are in a position of harvest.

We needed unencumbered focus and clear direction, we have this. The priority is our execution, operating execution will mash technological capabilities, this is our focus. Although growth rates will accelerate in the second half of ’14, the absolute numbers initially won’t tell a whole story of about the care can do. Aside from the gradual peeling off from our total revenues the non-core business is as modestly divested, there is also a popular shifts in our core revenues, you can call it an upgrading revenue or just picking selective markets and applications we want to focus on and harvesting those.

The net results would be significantly higher level of operating margin and a sustained strong growth rate in revenues to follow, that is what we are building for this ’15 and the next five years. 2014 is a year of financial turnaround; you will be followed by years of industrial and financial harvest. Our operating directions serves two immediate objectives; delever and step change in profitability. 2014 have that will show material progress on both. Performance in Q3 and Q4 will pave the way for 2015.

After a year of clear financial turnaround at 2015, as the year we deliver the capabilities when unencumbered focus of what we do best and only what we do best.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will comes from the line of Jim Crandell of Cowen Securities. Your line is open.

Jim Crandell - Cowen Securities

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

Krishna Shivram

I think so, yes.

Jim Crandell - Cowen Securities

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

Bernard Duroc-Danner

Yes, it’s before. We expressed the regional operating income before R&D and corporate. R&D and corporate, you see it anyways, you can adjust it. And it is 14% before R&D and corporate. It’s just under 11% after. This is in Q2. So to presume that R&D and corporate stays the same, you can adjusted easily, so 20%, it would give you.

Jim Crandell - Cowen Securities

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

Bernard Duroc-Danner

Actually they are -- in simple terms, the modeling to be done offline, but they are remarkably similar. I think Eastern Hemisphere, Latin America and North America, the exit rate actually will tend to -- with a few differences, will tend to coalesce at about the same level. I will leave you with that. So given the fact that there are some differences today, you can understand we’re finally on to move more -- the most between now and Q4. But in Q4, they are coalescing at the same level. I will also point out that in happier times, the last peak, biggest from the four off -- the margin of the Eastern Hemisphere, Latin America and North America were about the same. They all peak around 24% to 25%; again, on the same basis, pre-corporate and R&D.

Jim Crandell - Cowen Securities

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

Bernard Duroc-Danner

I think there is, until things are closer, it’s always concern on any deal. There is no specific concern on Rosneft at all on closing the deal, it is rather again straightforward. This is procedural. This is the first segment and I think it should happen this quarter. This is the first thing. Sanctions, I think are relevant to all of us. We abide by sanctions very carefully, both the content and the spirit of the sanctions. They do not affect the transaction. It is a cash transaction, so basically it is held harmless, when it comes to sanction. Future sanctions, but I cannot speculate on that. I think it would affect the whole of the industry. So in summary we expect to close Rosneft and pipeline as in normal course of action.

Operator

Your next question comes from the line of Jim Wicklund of CSSB. Your line is open.

Jim Wicklund - CSSB

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

Bernard Duroc-Danner

Look, I think first of all, the longer the timeframe you take the more technology that comes relevant, right? This is the first thing. Second, just looking in absolute numbers; so you know at the operating income level, Eastern Hemisphere is around 13% or something like that in Q2, right? When you peel back, in 2008, our operations were not as good as they’re today. The stopper technology was not as deep as it is today. Our infrastructure is better today than it was then. I would argue our management is better today than it.

Right, 24% in economic sale 13-24 is 11 differential I’m not suggesting we’ll go from 13 to 24 over right I’m suggesting there is a lot doubts how to get done in Easter Hemisphere. This is the first of a simple financial perspective. With respect to the expectation of technology and will reason to do over a period of time I’ll send it to Dharmesh’s comment.

Dharmesh Mehta

I think Jim I would say that the technology portfolio definitely has a very strong role to play when I said growth in the corners ahead. What is really driving the growth is the combination of applying the right technology in the right geo markets in a very structural and methodical way. Simply put out the execution efficiency on the broad front that will drive the growth in Eastern Hemisphere. There are some significant markets, like Angola we’re just now getting back into. So that will also have a role to play.

So unless I presented in some markets that will a factor and historical execution on a broad front will be other factors and we’ll drive a long-term growth.

Bernard Duroc-Danner

And I’ll close the philosophical comment. If you think Jim, I don’t want to belabor this I’m told I should not belabor it because people are tired of hearing it. But if you go through the process four or five years of self-destruction the whole business commercializing technology goes away.

The happy news about that is that in that period time of self-destruction we never the technology train, ever. So we continue to develop acquire, develop and spend money on technology without commercializing and we also didn’t go after a number of different markets precisely because we’re highly distracted. When I use the word unencumbered focus what I’m referring to specifically what Dharmesh was describing is the freedom, the ability, the focus on essentially harvesting what we have not acquiring it’s about a harvesting what we have, we have too much the reason why Krishna said when he said when he joined specifically because he was amazed by what we have and we are not actually commercializing. Which in part you can say is awful but it’s part of the functioning of the -- that period of time which I refer to too often as self -destruction.

Operator

Your next question comes from the line of Ole Slorer of Morgan Stanley. Your line is open.

Ole Slorer - Morgan Stanley

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

Bernard Duroc-Danner

I think first - pleasure pumping is not our specialty I mean as every knows on the call. Our specialty is lift; specialty in well construction, all specialty is also completion and formation evaluation. It doesn’t mean pressure pumping doesn’t belong, it just means that this is not what we’re known for.

Krishna Shivram

I would have to say that the emphasis on the domestic pressure company is not much to grow it’s become far more efficient and high quality. So to the degree that we are successful there without perhaps the handicap of startup costs and so forth and so on as our peers may have. Actually the domestic side should do increasingly well when we focus on execution quality and efficiency we keep the clients happy. That’s item 2. Item 2, you don’t have any distractions; you tend to do pretty well. And as the margin on the domestic pressure pumping are lot below although it much improve as Dharmesh highlighted. We should actually pick up some nice numbers there internationally we intend to grow that, and internationally is doing well.

But the short answer is that we see no reason why the international margin should not be held in good standing versus the rest all the midpoint to the margins for our internationally, domestically that clearly not, we think we give the number we are not positive operating income I know you can say it’s not bad improvement that’s going to go up because of our focus, they’re not going to be aggressive a total on the expansion but we are committed to the quality in the operating execution.

We should expect the domestic size to rise a little within market and probably right year for us than others who have destruction, indeed the level represent a large part of what we do that point. But it will not be also a handicap.

Ole Slorer - Morgan Stanley

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

Krishna Shivram

15% is a better number, but let’s not quibble on it because you should lock up about 3% to 4% in between so let’s not quibble on it, 15-16, yes.

Ole Slorer - Morgan Stanley

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

Bernard Duroc-Danner

That’s a difficult question speaking in our conference call, but I would say that if you remember the few comments I gave on Eastern Hemisphere, were 13%. We were not only, not just one day, we were not as good of a company than we are today. I really do want to underline that point. We were 24% in Latin America also at that point in time incidentally. So the progress that we can make both in Eastern Hemisphere and Latin American, which Latin America was around 12% or so, that was tough quarter for them in Q2. So but they both have a lot of move up, not because of pricing particularly, simply because we are -- it’s hard to believe, you could do so much with self help, but you really can and the first phase of what we have it is all about self help. So Dharmesh mentioned Angola for example, not to pick on one country. Today you have country where we essentially did not exist for a variety of reasons.

That’s a natural market for us in terms of the well construction offering offshore and deep-water. This is a fast example. So I could say the same thing about Malaysia, I could say the same thing about Indonesia. I could say the same thing about lot of markets around the world and the at the same time we’re pulling out of places where honestly although one could have a sort of vision of doing better over the very long term et cetera, et cetera, it was too much work with too little return.

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

Krishna Shivram

You can envisage a future without the non-core business as once we get them divested. If you look at the margins that we are already making on our core businesses and the trajectory of improvements in the core business margins which we said we would approach to about 20% and that’s what we are left with around the world it’s not a big stretch to imagine that the entire company would be at that margin going forward into 2015. So this is going to be an overall improvement, but certainly where the non-core businesses are heavily represented and they get divested being a low margin, the resulting core businesses you will see the margin drives quite dramatically.

Ole Slorer - Morgan Stanley

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

Krishna Shivram

Ola, that would not be good conclusion because we would still in the fourth quarter, we would still be carrying some non-core businesses.

Ole Slorer - Morgan Stanley

No, I am talking about excluding non-core.

Krishna Shivram

No I think there is some more growth attributes going on into ’15. Our prognosis is that as we get additional growth in international markets, where we are underrepresented, given our efficient cost base, we should see margin expansion right across this atmosphere going into ’15.

Bernard Duroc-Danner

This is not the same common growth that we used to talk about many years ago. This is very selective growth.

Ole Slorer - Morgan Stanley

Thank you, Bernard. Okay.

Bernard Duroc-Danner

We both agree.

Operator

Your next question comes from the line of Angie Sedita of UBS. Your line is open.

Angie Sedita - UBS

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

Bernard Duroc-Danner

First, we are not seeing much pricing uplift and official lift. I mean -- and that has nothing to do with movements of new players in and out of the marketplace. So there are some movements, pricing that are selective, particularly around rod-lift positive, but it’s not a big factor. It hasn’t been let’s say a big factor in some quarters. This is the first thing.

Second of this is a question that deserves a much longer answer, but I would just say this. We are at this point represented from an automation standpoint in just about 1 well out of 2 worldwide in the lift world. That means we command a position of being able to be the brains of lift on 1 well out of 2 in the world, which means that frankly whether we are talking of this form of lift or that form of lift where enormous amount of intelligence it is a position which is normally held by our larger competitor in other fields. It is one that we’ve build over the years and one that we intend to harvest. It is we are moving really fast and very fast ahead and this business being more of a provider of production efficiency is a sub provider of mechanical tools. And we’re uniquely ahead to be able to get that done. We do not underestimate the capability and strength of not only Schlumberger but also GE [indiscernible] which are formidable competitors, no doubt about that. With respect to developing forms of lift that will this business will stay flat. I think everything that is being developed is interesting and useful and they all have that place. Lift was the first business have developed almost a 100 years ago at what was then EDI and now Weatherford. I can tell you that the day when rod-lift will eliminate ESP is not about to come. Today when ESP will eliminate around this is not about to come.

Both of them together with gas lift and hydraulic lift and so forth have that place and the evolution of the technology will continuously mean that some of them are better dedicated in certain reservoirs and that fact. So they will tend to take share here and as of share somewhere else which is what I have seen forever. I think it has to be pretty much in all forms of lift and above all that is automation and our specially intelligence to be able to really understand what could make the difference to your plans in order to really have an impact and also then in particularly category which is that will do this, will do that.

And I would like Dharmesh may want to add to.

Dharmesh Mehta

The one additional complexity in lift now is really addressing the challenges that have been post by the unconventional reservoirs. The production decline rate significant enough in the first 12 to 24 months that without a proper automation and sophistication authorization solution I mean particular lift forms and not last a very long time. So that, some additional challenges reside just what was historically the challenge in our official lift. Position and optimization which is in a good shape there.

Bernard Duroc-Danner

Long answer [indiscernible].

Angie Sedita - UBS

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

Krishna Shivram

No, not really I think that’s all the fleet of 115 or so which is part of that gives the largest international land rig fleet I think. So, really slightly it’s large enough in revenues and so far and so long it’s large enough to be on its own without -- I think that’s type of statement although stop the capital markets is inside that, but I suspect its large enough by as far. And then most of the rigs are very large rigs and also very young rigs I mean the fleet is less than being seven and eight years old on an average this is remarkably young, this is the first thing, very high quality fleet.

I think with respect to Iraq, we have seven land rigs in Iraq which if things don’t stabilize we will export out of Iraq and definitely the exporting and the reassignment to different markets will be a positive. So, you are right to highlight that but it doesn’t really have any it doesn’t stop or in many way I will form the divestment of the land rig operation without being really one in that situation by the way but so, yeah we have to do that depending on what happens in Iraq definitely but just piece of deposit.

I would also say the land rig market internationally general is becoming stronger and I think there is a developing shortage of equipment which always an exit for interesting situation.

Angie Sedita - UBS

Alright, fair enough. So the profitability of those rigs is high enough to justify the standalone today?

Bernard Duroc-Danner

It will be Angie, it will be by the time -- the time of divestment is conditioned by two things. One is having a full year of audited statements and so forth and so long so that we are well accounted that we can properly have this particular business can be presented to the investing companies this is item one. At the same time working diligently in order to improve the efficiency and profitability equivalence is in fine shape, so that makes it clear.

Bernard Duroc-Danner

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

Operator

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

Jim Crandell - Cowen Securities

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

Bernard Duroc-Danner

Well, I think in general NOCs are more likely to expand the level of expenditures over the next three to five years, it doesn’t mean the IOCs are not important, they will always be important as many independents are important. Particularly in North America they are all important. But the eastern hemisphere and Latin America the NOCs are the most important therefore being particularly useful and recognized as such by any NOC is a positive for Oil Company particularly people like us.

Doesn’t have to be seasonal type of having to be Rosneft. But any NOC, particularly the ones that have large budgets, I see [Indiscernible] as a last budge, Rosneft as a large budget I could come up with half a dozen others where we seem to have a privileged relationship not monopoly but privileged relationship I think it’s a very useful position, out a strategic position to have, very important.

Jim Crandell - Cowen Securities

Alright, and just a quick follow up Bernard, when do you see the sort of dealt of the meaningful move upward in Mexican business

Bernard Duroc-Danner

I think the second half of the year will be doesn’t affect complete because that’s so difficult. And for no other reason than our client is holding back on expenditures while the essential chapters of the reform are being legislative which is on understandable.

So, expect the second half to be materially better than the first from a client perspective that’s all for us expect ’15 to be far better than ’14 and then ’16 to be far better than ’15. I’m not being Pollyannaish I’m just being actually this is an inform to you.

Jim Crandell - Cowen Securities

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

Bernard Duroc-Danner

Steady, but I’m…

Jim Crandell - Cowen Securities

[Indiscernible]

Bernard Duroc-Danner

Yeah, yeah it is that but it is also the from a Pemex perspective I think the rate of increase ’14 on ’15 and ’15 on ’16 will be very healthy, I mean it’s purely a question of knowing what one can work on and be able to then deploy the budget which will be considerable. So, it is a very very interesting situation, it is one that, which is a long term play but a very stronger to play and I won’t even go into the issue of international capital coming to Mexico which is separate issue, very important.

Jim Crandell - Cowen Securities

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

Bernard Duroc-Danner

I think that’s a fair statement. Also think we are not regaining marketed share we will now rely to have market share. So, I mean such a worth in that or pushing that away we have more to gain and people realize an international market for us. After the international market given our well construction thing, where do we have well construction that applications that matter offshore deep water. Once off strain well construction, are we present to that? No. why not? Variety of reasons which means the one that you mentioned that’s it in the start.

Jim Crandell - Cowen Securities

See you talking mainly about PRF and managed pressure drilling?

Bernard Duroc-Danner

All of the above.

Jim Crandell - Cowen Securities

Okay, good. Okay, that’s it for me, thanks Bernard.

Bernard Duroc-Danner

Thank you very much Jim. Thank you to everyone, I will close the call now. Thank you.

Operator

Ladies and gentlemen this concludes today’s conference call, you may now disconnect.

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