Weatherford International plc (WFT)

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Weatherford International (WFT)

Q3 2012 Earnings Call

November 13, 2012 8:00 am ET

Executives

Bernard J. Duroc-Danner - Chairman, Chief Executive Officer, and President

John H. Briscoe - Chief Financial Officer and Senior Vice President

Analysts

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

James Knowlton Wicklund - Crédit Suisse AG, Research Division

James C. West - Barclays Capital, Research Division

Angeline M. Sedita - UBS Investment Bank, Research Division

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Michael W. Urban - Deutsche Bank AG, Research Division

John Marshall - Goldman Sachs Group Inc., Research Division

Presentation

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 Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, today's call is being recorded. Thank you. I would now like to turn the conference over to Mr. Bernard Duroc-Danner, Chairman, President and Chief Executive Officer. Sir, you may begin.

Bernard J. Duroc-Danner

Thank you. Good morning, everyone. John will read his prepared comments. I will do the same immediately after. John, please.

John H. Briscoe

Okay. Thank you, Bernard, and good morning, everyone. Before my prepared comments, I would like to remind listeners that this call contains forward-looking statements within the meaning of applicable securities laws and also includes non-GAAP financial measures. A detailed disclaimer related to our forward-looking statements is included in our press release, which has been filed with the SEC and is available on our website at weatherford.com or upon request. Similarly, a reconciliation of excluded items and non-GAAP financial measures is included in our press release and also on our website.

I will start with some remarks on the third quarter operating and capital efficiency results; then focus on the exhaustive process we are completing related to the restatement of our financial statements, the results of this work and our timing to complete the process; and last, I will give some outlooks for the fourth quarter and 2013.

In the third quarter 2012, we generated earnings before income taxes of $191 million or $264 million on a non-GAAP basis compared to non-GAAP earnings before income taxes for the second quarter of 2012 of $146 million as detailed in the non-GAAP reconciliation table in our earnings release.

Third quarter earnings before income taxes were unfavorably impacted by the excluded items highlighted in our press release totaling $73 million on a pretax basis. The excluded items for the second quarter were primarily composed of $29 million for a lower cost-to-market write-down related to guar inventory; $27 million related to additional professional fees incurred in Q3 in connection with our income tax restatement efforts; $11 million for consent fees related to our senior notes; and $6 million for severance, exit and other charges.

The additional professional fees in Q3 are specific to the expanded and comprehensive procedures related to our income tax accounting restatement. These costs were higher than I expected and I am breaking them out to give a clear view to the efforts we are dedicating to this project, a true run rate for corporate expenses as we put the tax matters behind us and the savings we will realize in a post-tax material weakness situation. Q3 professional fees related to taxes of $27 million compared to $11 million in Q2 and $14 million in Q1 and is summarized in our selected statement of operations information.

In Q3, we recorded a $29 million noncash write-down of guar inventory that was purchased in anticipation of a product shortage. This inventory was purchased at prices higher than current market values and we currently plan to liquidate this position through bulk sales rather than through consumption over an extended period. As a result, in Q4, our margins will reflect market prices for guar. Also in Q3, we completed a consent solicitation with our senior noteholders to allow us an extension of time to file our restated financial statements with an earnings impact of $11 million.

Third quarter revenues of $3.8 billion were 2% higher sequentially and 13% higher than the same period last year. North American revenue was up 7% versus the third quarter of 2011 and up 4% sequentially. International revenues were up 20% versus the same quarter of 2011 and up 1% sequentially.

Segment operating income of $521 million was essentially flat when compared to the third quarter of 2011 and up $119 million or 30% sequentially. Segment operating income margins of 14% were down 1% compared to the third quarter 2011 while increasing 3% sequentially. North American operating margins for the quarter increased 330 basis points sequentially to 17%, primarily due to the Canadian seasonal uptick following a spring breakup and increasing Artificial Lift margins. This was partially offset by lower U.S. pressure pumping margins. International operating margins increased 250 basis points sequentially to 11%.

During the third quarter 2012, we generated EBITDA, defined as non-GAAP operating income plus depreciation and amortization, of $745 million with depreciation and amortization of $329 million compared to EBITDA of $606 million and depreciation and amortization of $311 million in the prior quarter.

Capital expenditures were $540 million for the quarter, net of $32 million of lost-in-hole revenue or approximately 14% of revenue. Full year 2012 CapEx is projected to be between 14% and 15% of revenue, and we expect fourth quarter CapEx to decline by about 10% from third quarter levels.

Net debt for the quarter increased $347 million, a significantly lower increase than in Q2. This was primarily due to capital expenditures and working capital metrics that were significantly improved sequentially, but still resulted in an overall increase in working capital.

Our DSO metric reflects an increase of 5 days from 87 in Q2 to 92 in Q3, and this increase can be attributed to 3 days in Venezuela due to the presidential election and well-publicized system issues with our customer in Saudi Arabia negatively impacting the timing of payments from customers and 2 days for cash received on Monday, October 1, rather than September 30 due to the quarter falling on a weekend.

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