Weatherford International plc (WFT)

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Weatherford International (WFT)

Q1 2011 Earnings Call

April 21 2011 9:00 a.m. ET

Executives

Bernard Duroc-Danner – Chairman, President, CEO

Andy Becnel – SVP, CFO

Analysts

Dan Boyd – Goldman Sachs &Company

Brad Handler – Credit Suisse

Angie Sedita – UBS

Bill Herbert – Simmons & Company

Robert MacKenzie – FBR Capital Markets

Kurt Hallead – RBC Capital Markets

Michael Urban – Deutsche Bank Securities

Ole Slorer – Morgan Stanely

Stephen Gengaro – Jefferies

Geoffrey Kieburtz – Weeden & Co.

Presentation

Operator

Good morning. My name is Karli, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2011 Weatherford International earnings conference call. All lines have been places on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session. (Operator Instructions).

Thank you. I would now like to turn the call over to Mr. Duroc-Danner, Chairman, President and Chief Executive Officer of Weatherford International Limited. Sir, go ahead.

Bernard Duroc-Danner

Good morning. Andy will start with his prepared comments. I will follow as usual. Andy, please?

Andy Becnel

Good morning. For the first quarter of 2011 we report non-GAAP EPS of $0.10 before excluded items of $18 million after-tax. GAAP EPS was $0.08. My notes will address the non-GAAP $0.10 number. Sequential and year-on-year comparisons are to our non-GAAP 2010 results, which have been restated.

The excluded items include $8 million of after-tax severance charges and a $9 million after-tax charge incurred in connection with the termination of the corporate consulting contract. Both of these items relate to efforts to improve our cost structure. They are expected to benefit future periods.

We also had approximately $1 million of after-tax expense related investigations. A reconciliation of these items can be found on our website at weatherford.com.

Sequentially, the field declined at the operating income line by approximately $75 million or $0.06 while below-the-line costs came in approximately 18 million or $0.02 higher. Lower minority interest and taxes added $0.02 as a recognition of discrete tax benefits pushed this quarter’s effective tax rate down to 21.4%.

Of the $75 million drop in the field, there was a 97 million drop internationally, offset in part by a 22 million improvement in North America. Approximately $16 million of the international drop related to a charge due to a new equity-based wealth packs in Columbia. Although the amount is payable over a four-year period, we determined that the appropriate treatment was to recognize the entire amount in the first quarter.

The 18 million sequential flux in below-the-line cost were driven principally by a corporate expense, which at 56 million was approximately 13 million higher than the prior quarter; due principally to increase professional fees and employee cost.

R&D expense was approximately 7 million higher than the prior quarter, principally due to write-off of prototypes.

Other came in at 19 million, 1 million higher than Q4. FX loses were 17 million for the quarter compared to 10 million in the prior quarter. Interest expense declined 3 million sequentially.

On a consolidated basis, revenue decreased $67 million sequentially or 2%, and advanced 525 million or 23% compared to Q1 2010. Consolidated EBIT before corporate and R&D was 353 million, down 75 million sequentially with operating margins at 12.4%; a 220 basis-point decline compared to Q4.

International margins dropped approximately 540 basis points including the effect of the Columbian equity tax.

North America revenue climbed 8% sequentially and 53% compared to Q1 2010. Canadian activity was strong while colder weather temperatures subdued progress in the U.S.

Operating income of 284 million stepped up 22 million sequentially and margins climbed 20 basis points to 20.9%.

Middle East, North Africa, Asia-Pacific revenue fell 109 million sequentially or 16% as political disruptions in Middle East/North Africa, and challenging weather events in Australia and China took a heavy toll accounting for approximately two thirds of the drop.

Operating income declined 38 million on decrementals of 35%.

Europe, West Africa, FSU revenue declined 18 million or 3% but was up 12% compared to the same quarter in the prior year. The winter effect in the North Sea, Russia, and Caspian were primarily responsible for the decline.

Operating income declined 27 million. Contributing to the severe decrementals were increased employee-related cost as well as higher fuel and transportation cost in Russia.

Latin America revenue decreased 8% or 36 million on a sequential basis and declined 4% or 17 million compared to Q1 2010. Mexico and Venezuela led the declines.

Operating income fell 32 million. As mentioned earlier, approximately 16 million of the decline was due to the charge for the Columbian equity tax. Adjusting for this effect, decrementals were approximately 44%.

During Q1, we generated EBITDA of 510 million with D&A running at 277 million. Capital expenditures were 308 million for the quarter net of 48 million of lost and whole revenue.

Approximately 75% of CapEx was either for assets managed on a global basis or for specific countries outside of North America.

Net debt increased approximately 547 million this quarter to 6.9 billion. Operating working capital increased 365 million, of which approximately 50 million was due to a book-FX impact of a weakening U.S. dollar, with growth in both receivables and inventory.

Our DSO target for yearend remains at 78 versus 92 currently, and our DSI target for yearend remains at 73 versus 87 currently.

Cash interest payments were $64 million higher than book expense due principally to the timing of coupon payments on outstanding debt.

As of quarter end, a ratio of net debt to net capitalizations stood at 41.5%.

I have the following guidance for you for 2011. D&A 1.5 billion; corporate expense, 195 million; R&D expense 255 million; net interest expense, 450 million; other expense, 50 million; minority interest expense, 20 million, and capital expenditures 1.6 billion.

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